Penalty Clauses – ‘Another Proceeding Relating to the Trust’

Take-Away: A no-contest clause in a trust is valid in Michigan, unless the challenger possesses probable cause to file the contest. Michigan’s statute refers to the enforcement of such a penalty clause if the contest is to the trust or instituting another proceeding relating to the trust. Only now are courts starting to grapple with what constitutes another proceeding relating to the trust that can cause the forfeiture of an interest in the trust. A recent case from Wyoming found that a beneficiary’s effort to decant the trust triggered that trust’s no-contest provision.

Background: Michigan’s Trust Code provides that a provision in a trust that purports to penalize an interested person for contesting the trust or instituting another proceeding relating to the trust shall not be given effect if probable cause exists for instituting a proceeding contesting the trust or another proceeding relating to the trust. [MCL 700.7113.] ‘Another proceeding’ is not defined in the statute, leaving that decision up to the trial judge. An interesting case from Wyoming found that a request to decant the trust’s assets caused that trust’s no-contest clause to be applied, disinheriting the beneficiary

Reported Decision: Gowdy v. Cook, Wyoming Supreme Court, January 8, 2020.

Facts: There was a lot going on in this litigation, including claims of legal malpractice and breach of fiduciary duty. The short version is that Marian hired the Cook law firm to prepare her estate planning documents. Marian adopted a trust that was periodically amended by her prior to her death in 2015. In Marian’s trust she made provision for her friend Mr. Gowdy (boyfriend? Companion? –the court does not say) in her trust. Mr. Gowdy was the primary trust beneficiary after Marian’s death. On Mr. Gowdy’s death, part of the trust estate was to then be distributed to Marian’s children, with the balance of the trust estate distributed to Mr. Gowdy’s heirs, if he did not exercise a testamentary power of appointment.

One of the Cook lawyers was named the successor trustee. Another of the Cook lawyers was named as the trust protector. After Marian’s death, Mr. Gowdy became disenchanted with the performance of the trustee and asked him to step down; he refused. Mr. Gowdy then pressured the other Cook who was named as trust protector to remove the trustee- he found it more sensible to resign from that role. Later on, apparently after the litigation ramped up, the other Cook resigned as trustee and a corporate trustee took his place. All of which led, ultimately, to a lawsuit brought by Mr. Gowdy against Cook and Cook, attorneys for legal malpractice in drafting the trust, breach of fiduciary duties, conflict of interest (they were also his estate planning attorneys), unreasonable fiduciary fees, etc.

Trust Provision: The no-contest provision in Marian’s trust provided:

“The right of a beneficiary to take any interest given to him or her under this trust or any trust created under this trust instrument will be determined as if the beneficiary predeceased [Marian] without leaving any surviving descendants if that beneficiary, alone or in conjunction with any other person, engages in any of these actions:…. Seeks to obtain adjudication in any court proceeding that the trust or any of its provision is void, or otherwise seeks to void, nullify, or set aside the trust or any of its provisions….My trustee may defend any violation of this section at the expense of the trust estate.”

Mr. Gowdy’s Claim: As noted, Mr. Gowdy had plenty of claims against the lawyers and their administration of Marian’s trust, including conflicts of interest, drafting errors, and even about the no-contest provision. The lawyers were also Mr. Gowdy’s attorneys, or more accurately they had been his lawyers before he sued them for legal malpractice. Mr. Gowdy’s claims also challenged the self-serving fiduciary exculpatory provisions the lawyers had included in Marian’s trust.

Decanting Relief Sought: Along with his complaint, Mr. Gowdy also sought declaratory relief from the trial court that it enter a ‘decanted trust’ that Mr. Gowdy had attached to his complaint, essentially asking the court, in effect, to compel a decanting instigated by the trust beneficiary. Mr. Gowdy claimed that the ‘decanted trust’ would ‘repair issues’ contained in Marian’s trust, and also fix the Cooks’ drafting errors. One of the specific trust provisions that Mr. Gowdy had sought to eliminate with his proposed ‘decanted trust’ was a requirement that any successor corporate trustee of Marian’s trust had to have assets or insurance coverage of at least $100 million. He apparently found it a challenge to find a bank in Wyoming that could meet that minimum asset requirement under the terms of Marian’s trust. Another provision that he sought to change in the ‘decanted trust’ was to alter a couple of words; apparently the trust provided that Mr. Gowdy was to have a tenancy for lifetime in the home that he had occupied with Marian and he wanted to change the trust to read “a life estate” in the home.

Trustees’ Response: The trustee claimed that Mr. Gowdy’s complaint for declaratory relief invoked the trust’s no-contest clause and therefore caused him to forfeit his entire interest in Marian’s trust. The proposed change- with regard to the qualification of a successor corporate trustee- was an attempt to void, nullify, or set aside a provision of Marian’s trust.

Trial Court: The trial judge found that Mr. Gowdy’s request that Marian’s trust assets be decanted to the ‘new’ trust that he had prepared violated the trust’s no-contest clause. The trial judge observed that Wyoming’s decanting statute [much like Michigan’s two decanting statutes] contemplates that only trustees can initiate a trust decanting. Therefore, Mr. Gowdy forfeited all interests in Marian’s trust.

Wyoming Supreme Court: This Court initially noted that no-contest clauses are valid in Wyoming. There was no mention of any probable cause exception in any of the Court’s decision, so it is unclear if that exception is part of Wyoming law or not. With regard to Marian’s trust’s no-contest clause itself, the Court noted:

Marian plainly intended that any beneficiary who attempts to obtain a court ruling voiding, nullifying or setting aside any of the trust provisions forfeits his rights under the trust.
Gowdy claims he was not attempting to change the trust in violation of the no-contest provision. Instead, he was only bringing the action to ‘correct the breaches of fiduciary duties, breaches of contract, malpractice, and other issues not allowed by Wyoming law, and to clarify provisions unclear to the successor trustee and sole income beneficiary. “His requests to the district court went beyond correcting improprieties committed by the trustee and/or trust protector. He sought to change the qualifications for a corporate fiduciary to serve as successor trustee.”
“Mr. Gowdy does not point to any evidence that the provision was unclear to the successor trustee or present any argument showing his action was brought on behalf of the successor trustee. He did not request clarification of the provision stating the corporate trustee qualifications; he sought to nullify it.”
In response to Mr. Gowdy’s argument that a no-contest provision should only be enforced if a beneficiary is attempting to change the asset distribution, the Court noted that “the clear language of Marian’s no-contest provision was not limited to contests that involve changes to the distribution scheme, it applies to any court proceeding seeking to void, nullify or set aside the trust or any of its provisions.” To dispense with Mr. Gowdy’s argument the Court resorted to contract interpretation principles, noting that a party’s subjective intent is not admissible in a contract interpretation.

Conclusion: A couple of thoughts with regard to this decision:

Probable Cause: I wonder if a Michigan court would have reached such a harsh result. It seems that the changes that Mr. Gowdy sought through his misguided effort to decant the trust might be better described as administrative in nature. While the court spent a lot of time claiming that Marian’s intent controlled the choice of successor trustee and their qualifications, I seriously doubt if Marian gave second thought to what is normally a common boilerplate provision in the trust regarding a corporate trustee’s qualifications with a minimum assets under its management. No doubt Mr. Gowdy had trouble finding all that many trust companies in Wyoming that could satisfy the minimum asset qualifications that Marian imposed in her trust. Mr. Gowdy’s efforts to make a practical change to an administrative provision caused him to forfeit his entire interest in the trust. In Michigan, if those were the grounds on which a change was sought to a trust’s administrative provision, I wonder if a probate judge might find that the beneficiary actually had probable cause to seek the change to that administrative provision.
Attorneys: While Cook and Cook escaped this nightmare pretty much unscathed, just reading the Court’s opinion should give any estate planning attorney second thoughts about serving either as a trustee or trust protector of a client’s trust. While the court did not mention it, I wonder if the same lawyers who represented Mr. Gowdy in his estate planning, disclosed to him the presence of the no-contest provision in Marian’s trust that was to provide to him a home and support the rest of his life. No doubt that was the conflict of interest that Mr. Gowdy complained about when he filed his complaint against Cook and Cook. At the tail end of its decision the Court did note: “ It appears Mr. Gowdy’s strategy in this case was to simply point out multiple possible ethical violations committed by the Cooks. A violation of the rules of professional conduct does not, on its own, give rise to a cause of action against a lawyer.“
Decanting: I could see a Michigan court simply dismissing that Mr. Gowdy’s petition on the grounds that he did not have standing to seek a trust decanting, as he was not the trustee, and leave it at that.