The California Supreme Court recently ruled in Donkin v. Donkin (December 26, 2013), that a challenge to the terms of a trust, in which beneficiaries were seeking interpretation and claiming fiduciary misconduct by trustees, cannot be barred by a no-contest clause because the clause, in such an instance, was unenforceable.
In 1988, Mary and Rodney Donkin, Sr., created the Donkin Family Trust specifying how their assets were to be distributed among their children following their deaths. The trust contained a no-contest clause stating that any beneficiary who contested the trust would forfeit their right to any inheritance. The trust also gave trustees “complete discretion” whether to keep the assets of the trust intact or to manage and distribute them for the benefit of the beneficiaries.
Following the deaths of Rodney Sr. in 2002 and Mary in 2005, Rodney Donkin Jr. and his wife Vicki Donkin (“Trustees”) became Trustees. In 2008, the two other beneficiaries, Annemarie Donkin and Lisa Donkin Kim (“Beneficiaries”), filed suit under the "safe harbor" provisions, then in effect. The Beneficiaries wanted to determine if a motion to compel a proper accounting from the Trustees, to remove Rodney Jr. and Vicki as Trustees, and to compel distribution of assets would constitute a contest that would violate the trust’s no contest clause. On January 1, 2010, changes to Probate Code Section 21320 removed the safe harbor provisions pursuant to which a party could obtain a declaration from the court regarding whether a challenge to a trust would violate a no-contest clause before making the actual challenge.
In this case, the probate court ruled that the Beneficiaries’ challenge would not constitute a contest that would violate the no-contest clause. Trustees appealed and the court of appeal reversed the probate court and ruled that the Beneficiaries' challenge did constitute a challenge. Beneficiaries appealed that ruling to the California Supreme Court.
In reversing the court of appeal, the Supreme Court first ruled that the 2010 changes to the safe harbor law did not render the Beneficiaries' challenge subject to dismissal. "Nothing in the current law suggests that safe harbor applications pending when the current law became operative were subject to dismissal," the Court explained. The matter was properly before the probate court upon the time of the law change.
The Supreme Court then ruled that the no-contest clause in the trust was unenforceable both under the old law and the current law. Current Probate Code Section 21311 allows no-contest clauses to be enforced only if they expressly provide for three specific circumstances: 1) a direct contest brought without probable cause; 2) a challenge to a transfer of property; or 3) the filing of a creditor's claim. Only the second circumstance was alleged here by the Trustees.
The Court found that the terms of the no-contest clause did not expressly provide that it applied to the transfer of property and therefore, deemed it was not enforceable. Instead, the Court said, the Beneficiaries were seeking a ruling on the "probable intent" of the trust and whether Trustees were complying with that intent. The remainder of the Beneficiaries' claims consisted of challenges to fiduciary misconduct and also did not violate the no-contest clause of the trust. In fact, the Court said, the Legislature's purpose in sharply restricting no-contest clauses was "in furtherance of the public policy of eliminating errant fiduciaries," and protecting the rights of beneficiaries to bring alleged misconduct to the court's attention without fear of being disinherited.
The judgment was reversed.