Ct. App. 2/6 B198228 San Luis Obispo County Super. Ct. No. PR050017. Judge: Martin J. Tangeman.
The opinion of the court was delivered by: Corrigan, J.
Here we conclude that a challenge to a surviving spouse‟s mental capacity to transfer trust assets and appoint a successor trustee did not violate the no contest clause in a family trust. A proceeding contesting a settlor‟s mental competence to exercise rights under a trust does not amount to an attack on the trust itself, unless it seeks to thwart the estate plan established by the trust.
Spouses Walter and Florence Warren created the Warren Family Trust in 1993. Walter, Florence, and their children William Warren and Kathryn Greenelsh (Greenelsh) were named co-trustees. Walter died in 1996. The terms of the trust called for the creation of three subtrusts: a survivor‟s trust, including Florence‟s interest in the community estate; a QTIP (qualified terminable interest property) trust, calculated to qualify for the federal estate tax marital deduction and minimize estate taxes; and a residual trust consisting of the balance of the trust estate. William Warrren and Greenelsh were remainder beneficiaries, as was Florence‟s son by a previous marriage, Robert Johnson.
William died on July 17, 2003, leaving Florence and Greenelsh as the co-trustees. On July 22, 2003, Florence signed a document naming Johnson as her successor cotrustee. The trust provides for such an appointment if a trustee "becomes unable or unwilling to act as Trustee." Johnson executed an "Acceptance of Appointment" on August 30, 2003. On September 5, 2003, Florence signed a memorandum to the trustees declaring that she had exercised her right under the trust to withdraw all the property in the survivor‟s trust for distribution to herself. The memorandum was also signed by one Forrest Warren as special trustee.*fn1 On September 18, 2003, Florence executed a document by which she resigned as cotrustee and confirmed Johnson as her successor.
The trust includes a no contest clause, barring any distribution to a beneficiary who "seeks to obtain in any proceeding in any court or before any arbitrator an adjudication that this Trust or any of its provisions is void, or seeks otherwise to void, nullify, [or] set aside this Trust or any of its provisions, . . . or to change provisions which are clearly and unambiguously expressed herein, . . . or through other means endeavors to secure or take any part of the Trust Estate in any manner other than as set forth herein." In January 2005, Greenelsh filed an application under Probate Code section 21320 to determine whether a proposed petition to compel arbitration would violate the no contest clause.*fn2 Under the arbitration clause in the trust, Greenelsh sought to resolve "various disputes . . . between petitioner and Robert Johnson regarding his erroneous claims of authority as a trustee or co-trustee of the Warren Family Trust." She also referred to "disputes as to whether or not Florence Warren made a withdrawal of trust assets to place them into her own personal ownership; cooperation in making decisions affecting the Warren Family Trust property; and other disputes . . . ."*fn3
In her reply to Johnson‟s opposition, Greenelsh made it clear that her challenge to his authority as cotrustee was based on Florence‟s alleged lack of capacity. Greenelsh attached letters from two neurologists, one dated October 8, 2001, opining that Florence "is incompetent to handle her own affairs at this time," and one dated August 19, 2004, with an assessment of "[a]mnesic dementia, likely Alzheimer‟s disease, moderate in severity, in a pleasant, well-supported, 90-year old female, with evolving neurobehavioral disorder including hallucinosis and generalized anxiety disorder."
The court denied Greenelsh‟s application without prejudice. It noted that "[t]he petition relates to a mix of disputes that may or may not trigger the no contest clause. [¶] A dispute concerning Florence Warren‟s capacity to withdraw funds from the survivor‟s trust and appoint Robert Johnson as a successor trustee could be identified as a direct contest . . . . [¶] In any subsequent petition, Petitioner should clearly identify all claims and relief that is sought so that the court can make an informed determination of whether the no contest provision is triggered."
Greenelsh filed a second section 21320 application in June 2006. This time, she proposed to seek a declaratory judgment that she was sole trustee of the Warren Family Trust. She attached a power of attorney signed by Florence in 1995, naming Greenelsh and William Warren as successor attorneys-in-fact to her husband Walter, and a document entitled "Consent to Act as Co-Attorneys-in-Fact for Florence Warren" signed by Greenelsh and William on July 26, 2001. Greenelsh also relied on a trust provision stating that if a trustee is unable to participate in trust activities due to illness or disability, the other trustee or trustees "may act as Trustee and make any and all decisions regarding the Trust Estate as if he or she were the sole Trustee." Her proposed petition alleged that after Florence‟s incapacity and the deaths of Walter and William, Greenelsh was left as the sole trustee. Johnson responded that the proposed petition violated the no contest clause by seeking to invalidate the provisions in the trust giving the surviving settlor the right to appoint a successor trustee.
The court agreed with Johnson and denied Greenelsh‟s application.*fn4
Nevertheless, in November 2006 Greenelsh served a notice of arbitration on Johnson, alleging disputes over a range of matters including Johnson‟s status as successor trustee and Florence‟s transfer of trust property into her personal ownership. Greenelsh claimed Florence lacked the capacity to take these steps. She also challenged various actions taken by Johnson with respect to trust property. Furthermore, she contended he should have no rights as a trust beneficiary, apparently on the ground that he had filed court proceedings in violation of the no contest clause. Johnson then sought to enforce the no contest clause against Greenelsh, arguing that she had violated the clause by initiating arbitration to set aside his appointment as cotrustee and Florence‟s withdrawal of survivor‟s trust assets. Johnson‟s petition did not raise any other claims in the arbitration demand as grounds for enforcing the no contest clause.
Greenelsh responded by withdrawing her notice of arbitration and arguing that Johnson‟s petition was therefore moot. She also contended that in any event, the arbitration notice did not violate the no contest clause because the proposed arbitration was consistent with the provisions of the trust. The trial court granted Johnson‟s petition.
The Court of Appeal affirmed, holding that "[t]he arbitration initiated by Greenelsh directly attacks provisions of the Trust in an attempt to change Walter and Florence‟s testamentary plan and, accordingly, directly contravenes the express language of the no contest clause." The court reasoned that Greenelsh had "sought to nullify the unambiguous right given to a settlor by the Trust agreement to appoint a successor trustee when he or she chooses, and to nullify the unambiguous right given to a surviving settlor to transfer assets in the survivor‟s trust from the Trust to the survivor individually." She had also, according to the court, sought to " "secure or take‟ " part of the trust estate in a manner contrary to the terms of the trust, as forbidden by the no contest clause.
Greenelsh argued that her arbitration petition did not meet the statutory definition of a "direct contest" because it did not allege "the invalidity of an instrument." (§ 21300, subd. (b).) Section 45 defines "instrument" as "a will, trust, deed, or other writing ...