United States: Navigating In Terrorem Clauses: Guidance From Hallett v. Hallett

Published in NH Bar News
(3/20/2017)

Testamentary in terrorem provisions, which compel forfeiture by a legatee upon unsuccessful challenge to the validity of an estate plan and/or its administration, have a rich history, with antecedents in the ancient world, and in English and American case law, as far back as 1674 and 1898, respectively.

In New Hampshire, "[t]he general rule is well established that a beneficiary who contests the will will forfeit his share in accordance with a provision in the will therefore," according to Burtman v. Butman (NH, 1952). In often identical language, RSA 564-B:10-1014 for trusts and RSA 551:22 for wills mandate the enforcement of the intent "as reflected in a no-contest provision... to the greatest extent possible," and "without regard to the presence or absence of probable cause for, or the beneficiary's good or bad faith."

Those statutes exempt from enforcement: "[a]ny action to determine whether a proposed or pending motion, petition, or other proceeding constitutes a contest within the meaning of a no-contest provision," and "[a]ny action brought by a beneficiary or on behalf of any such beneficiary for a construction or interpretation of the terms of the trust [or will]."

In the case of an action contesting the validity of a will or trust, "[a] no-contest provision shall be unenforceable to the extent that the [instrument] is [determined to be] invalid... [and] [i]n the case of an action... to challenge the acts of the [fiduciary]..., a no-contest provision shall be unenforceable to the extent that the [fiduciary]... has committed a breach of fiduciary duties or breach of trust," according to state statutes.

Counsel representing a beneficiary contemplating an action to contest the validity or the fiduciary's administration of a trust or will needs to advise the client carefully about in terrorem risks. The decisions of Judge Gary Cassavechia in Hallett v. Hallett provide important guidance on:

  1. The extent to which the Court will provide instruction as to whether an action constitutes a "contest" under an in terrorem clause;
  2. Whether the Court will provide guidance as to the risks of forfeiture if the beneficiary succeeds on less than all claims;
  3. Whether conducting discovery irrevocably commits a beneficiary to having engaged in a contest.

In Hallett, children of the settlor, as beneficiaries of family and marital sub-trusts (the "Beneficiaries"), contended that the two trustees (the settlor's surviving spouse and settlor's former counsel), (the "Trustees"), committed various breaches in the administration of the trusts. The trust contained the following broad in terrorem clause:

"Contest of Will or Trust. It is the Grantor's will and direction that if any beneficiary under this Trust... or any other person, shall, directly or indirectly institute, conduct or in any manner whatsoever take part in or aid in any proceeding to oppose the... administration of this Trust, or any amendment hereto, or impair, invalidate or set aside the same, or any of their provisions, then, in such event, the provision herein made for the benefit of such person or persons shall thereupon be revoked. Such person or persons shall thereafter be excluded from any participation in this Trust and shall, thenceforth, have no right, title or interest in the assets of this Trust. Any property, devise, bequest or distribution to such person or persons shall thereafter pass as if such person or persons did not survive the Grantor." (Emphasis added.)

Thus, the trust mandates forfeiture in the event a beneficiary "shall, directly or indirectly institute, conduct or in any manner whatsoever take part in or aid in any proceeding to oppose the... administration of this Trust." As the Court stated in its Jan. 15, 2014 order (the "First Safe Harbor Order"), "[t]his language manifests an intention of the settlor to discourage provocations impugning even mere acts of or, presumably inclusively, omissions in administration."

Mindful of this prohibition, the Beneficiaries in count I of their 11-count petition and a "Motion for a Ruling on the Safe Harbor Provision of NH RSA 564-B:10-1014" sought a ruling that the filing of their action did not constitute a contest in violation of the in terrorem clause. In a supplemental filing, the Beneficiaries sought "additional court orders that the no-contest provision... is unenforceable: 1) 'to the extent... the trust is invalid because of fraud [or] violates public policy;' [and] 2) 'because the fundamentals of [their] action solely challenge the acts of the Trustees as... breach[es] of [their] fiduciary duties...,'" according to the order.

"Given that the Co-Trustees have seasonably objected and indicated an intent to disprove the allegations," the Court held that it could give guidance under RSA 564-B:10-1014c)(3) as to which claims in the petition were contests within the meaning of the in terrorem provision, but could not give guidance until after a trial as to whether forfeiture would be imposed if the contests were pursued. "Put another way, the Hallett Beneficiaries may only find statutory sanctuary from the no-contest provision after they successfully prove, to the measure needed, what they have alleged." The Court went on to recognize "that the journey to these safe harbors is necessarily fraught with risk for a litigant, as actual invalidity of the trust, or breach of duty by a trustee cannot be determined in advance of completed litigation."

Reviewing the petition, the Court held that all of the counts, other than the request for the advisory order, amounted to in terrorem contests, including those which were wholly remedial and sought modification of the trust, enforcement of the no-contest provision against the surviving spouse as beneficiary, and an award of attorneys' fees and costs, reasoning that to the extent that these claims sought limitations on the Trustees' discretion, they sought to interfere with the administration of the trust and were contests under the in terrorem clause. The Court granted the Beneficiaries leave to amend their petition in light of the Court's rulings.

As set forth in the Court's March 31, 2015 order (the "Second Safe Harbor Order"), the Beneficiaries filed an amended petition and motion asking the Court to rule: "(a) that successful prosecution of one 'contest'... makes the no-contest clause unenforceable against the entire action; (b) the no-contest clause [does not apply]... because [the] an action seek[s] construction of the terms of the... Trust...; and (c) none of the allegations contained in the Amended Petition constitutes a 'contest' within the terms of [the in terrorem clause]." (Second Safe Harbor Order)

Noting that "the Court has [not] been able to find case law on point" with regard to whether a single favorable ruling on the beneficiaries' breach of fiduciary claims would be enough to protect them from forfeiture if they lost on their other claims, Cassavechia considered the purpose of the statute and the reasonable expectations of the settlor and ruled that this determination may be made only after a trial.

The Court rejected the Beneficiaries' attempt to characterize their action as falling under RSA 564-B:10-1014(c)(4), which exempts from in terrorem enforcement "[a]ny action brought by a beneficiary... for a construction or interpretation of the terms of the trust," reasoning that trust interpretation was not in fact the purpose of their claims.

Consistent with its rulings on the original petition, the Court found that all claims in the amended petition were contests, including a remedial claim for attorneys' fees. At the request of the Trustees, the Court ruled that it would not permit further amendments to the petition and that it would not entertain any further pre-trial requests for in terrorem guidance.

Citing that the Beneficiaries had engaged in discovery, including interrogatories, document requests, and expert disclosures, the Trustees urged the Court to find that the Beneficiaries had pressed the litigation sufficiently to constitute an in terrorem contest, which the Beneficiaries could not escape by withdrawing the action. In evaluating the issue, the Court balanced the plain meaning of the trust in terrorem clause and RSA 564-B:10-104, which it noted "arguably" supported the Trustee's request, against the fact that the underlying intent of the in terrorem clause would be furthered by encouraging the Beneficiaries to drop claims upon conducting discovery that reveals their lack of merit, and New Hampshire's public policy favoring "open and complete discovery." (citing NH Ball Bearings v. Jackson (2009)).

In light of these competing considerations, the Court adopted the approach of the New York Surrogate's Court "allowing limited discovery, based on the facts of each case, that would provide a beneficiary with 'information of potential value or relevance' in order to make a determination that the trust is being administered in accordance with a settlor's intent." (citing In re Baugher (Surrogate's Ct. Nassau Cty. 2010)). Finding that the "Hallet Beneficiaries' discovery activities to date have remained, on balance, within the realm of acceptable inquiry consistent with determination whether the R.S. Hallett Trust had been administered in a manner intended by the Settlor," the Court "decline[d] the Co-trustee's invitation, at this time, to find the Hallett Beneficiaries in violation of Article 13 [of the Trust]."

After these extensive preliminary proceedings, the Beneficiaries proceeded with their claims and ultimately prevailed at trial before Judge Cassavechia, as Referee, whose June 16, 2016 "Recommendation" was approved by Judge Robert Foley by a June 17, 2016 order. In that order, the Court found that the Trustees breached their duty to timely fund sub-trusts, their duties of impartiality and loyalty by managing trust investments to favor the interests of the lifetime beneficiary (the widow Trustee) over the interests of the residuary beneficiaries, and the duty to segregate trust assets. While the petitioners successfully proved multiple breaches of duty and obtained removal of the Trustees, the monetary relief awarded was modest. The Court found that it could not reasonably ascertain fair compensable damages based on the evidence presented. In view of the success on the merits of their claims, the Court found that the petitioners were entitled to safe harbor from enforcement of the trust's in terrorem provision under RSA 564-B:10-1014(b).

In terrorem provisions are increasingly common in estate plans and pose a significant risk for any beneficiary contestant who is to receive interests of value under the estate plan. Although decided under RSA 564-B:10-1014, which governs trusts, Hallett is likely to be followed by the Probate Court in considering an in terrorem provision in a will. Hallett offers the following lessons:

  1. The Probate Court will give guidance as to whether a proposed action constitutes an in terrorem "contest," but will likely decline to offer any guidance until after trial as to the extent to which a contestant's claims must be proved in order to avoid forfeiture, including whether success on any single claim may be enough.
  2. While the Court is likely to permit at least one amendment of a proposed action in light of the Court's preliminary guidance as to whether it constitutes a contest, the Court is unlikely to permit serial amendments.
  3. The mere fact that resolution of a claim may require the Court to construe the will or trust will not exempt the action from being a contest under RSA 564-B:10-1014(c)(4) or RSA 551:22, III(d); rather, the Court will look to the substance of the claim in light of the meaning of the in terrorem clause and the applicable statute.
  4. The Court is likely to permit some preliminary discovery before finding that an in terrorem contest has been irrevocably begun, but how much is too much discovery will depend on the facts of a given case.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.