In the recent appellate case, Key v. Tyler[1], the California Court of Appeal, Second District held that a beneficiary’s defense of a trust amendment without probable cause that the amendment was valid, triggered the original trust’s no contest clause, resulting in the beneficiary’s disinheritance.[2] In so doing, the Court relied upon the plain language in the statutory definitions of both “Pleading” and “Direct Contest” as set forth in Probate Code sections 21310 et seq., to apply a no contest clause to a defense of an invalid trust amendment without probable cause. Because courts had previously limited the applicability of no contest clauses to a party who initiates litigation, this holding marks a significant shift. Thus, because the case has profound implications for trustees, beneficiaries and practitioners alike, it is important to understand the exact parameters of the Court’s ruling and how it might impact a client’s case.
No Contest Clause
A no contest clause is a provision in an otherwise valid estate planning instrument that, if enforced, would disinherit a beneficiary for filing a “direct contest”[3] of that document without probable cause in any court.[4] Generally, no contest clauses are included in wills and trusts to discourage beneficiaries who may be frustrated by the settlor’s donative intent, from challenging the validity of the document post-death. No contest clauses are valid in California (with some limitations, discussed below) and are favored by the public policies of discouraging litigation and giving effect to the testator’s expressed purposes.[5]
However, because disinheritance is such a harsh penalty, in 2008 the California Legislature enacted Probate Code sections 21310 – 21315. These new provisions sought to clarify and drastically limit the types of contests that trigger enforcement of a no contest clause.[6] While Probate Code section 21311 provides for three different types of actions that could trigger a contest[7], the Court in Key v. Tyler focused on subsection (a)(1) (which is much more widely used) relating to a “direct contest brought without probable cause.”
Key v. Tyler
In Key v. Tyler, Sarah Key (“Key”), Elizabeth Tyler (“Tyler”), and Jennifer Potz (“Potz”) were daughters of Thomas and Elizabeth Plott.[8] Thomas and Elizabeth created a trust (the “Original Trust”) in 1999, and amended it in 2002 and 2003.[9]
Article Fourteen of the Original Trust contains a “Disinheritance and No Contest Clause” that provides, in pertinent part that: “if any devisee, legatee or beneficiary under this Trust … directly or indirectly (a) contests either Trustor’s Will, this Trust, any other trust created by a Trustor, or in any manner attacks or seeks to impair or invalidate any of their provisions, … then in that event Trustors specifically disinherit each such person…”[10]
While the sisters were each equal beneficiaries under the 2003 Trust Amendment, in 2007 the Original Trust was again amended (the “2007 Amendment”) in Tyler’s favor, with new distributions of 65% of the Trust’s business assets to Tyler, and 35% to Potz, with Key taking a lump sum gift of $1 million, along with other provisions benefiting Tyler.[11] The reduction of Key’s share to $1 million was significant, as the total trust assets as of 2006 were worth over $72 million.
Key filed a Trust Contest Petition challenging the validity of the 2007 Amendment on undue influence grounds, and Tyler (who was both trustee and beneficiary) filed a response and objections in which she argued that her mother was not susceptible to any undue influence and that the 2007 Amendment reflected her mother’s true testamentary wishes.[12] After a trial was held, judgment was granted in favor of Key and the 2017 Amendment was invalidated, and the Appellate Court affirmed. Following remand, Key filed a No Contest Petition seeking to invoke the Original Trust’s no contest clause to disinherit Tyler due to her defense without probable cause of the invalid 2007 Amendment.[13]
Tyler responded with an anti-SLAPP motion, contending that her defense of the 2007 Amendment arose from protected litigation, that Key could not show a probability of success on the No Contest Petition, and that Key could not enforce the no contest clause because Tyler herself had not initiated the underlying litigation.[14] The trial court ruled that the anti-SLAPP procedure applies to no contest clause enforcement actions, and found that Key could not enforce the Trust’s no contest clause because Tyler did not file a direct contest, but rather defended against a petition filed by Key, and that Key had not shown that Tyler lacked probable cause to defend the 2007 Amendment.[15]
The appellate court reversed and remanded, finding that Tyler’s objection to Key’s Trust Contest Petition clearly fell within the scope of the Original Trust’s no contest clause.[16] The court engaged in a three-part analysis to find that the no contest clause could be enforced against Tyler’s defense of the 2007 amendment.
Step One: Does the Contest Fall Within the Scope of the No Contest Clause?
First, the court looked to the specific language of the no contest clause in determining that Tyler’s defense fell within the scope of the clause. Specifically, the court looked to the language: “if any … beneficiary under this Trust … directly or indirectly (a) contests … this Trust … or in any manner attacks or seeks to impair or invalidate any of their provisions … then in that event Trustors specifically disinherit each such person.”[17] The court found that by obtaining the 2007 Amendment through undue influence and then defending that amendment in court, Tyler sought to “impair” and “invalidate” the provisions of the valid Original Trust, which distributed the trust assets in equal parts to all three children.[18] Thus, by seeking to impair or invalidate a provision of the Original Trust, Tyler’s defense fell within the scope of the no contest clause.
Step Two: Does the Contest Fall Within Any of the Enumerated Categories of Probate Code § 21311?
Second, after finding that the defense of the 2007 Amendment fell within the scope of the specific no contest clause at issue in this action, the court turned to the issue of whether Tyler’s objection constituted a “direct contest” of the Original Trust pursuant to Probate Code sections 21310 and 21311.[19] The court found that the objection did amount to a direct contest pursuant to Section 21311(b)(5) which defines a direct contest as a contest alleging the invalidity of a trust based on “revocation of a trust.”
The court looked at the effect Tyler’s defense of the 2007 Amendment would have had on the Original Trust and found that had she been successful, Tyler would have revoked the provisions of the Original Trust which the 2007 Amendment purported to replace. The court was not moved by the argument that Tyler had not initiated the contest, as Probate Code section 21310 specifically defines “pleadings” for purposes of the enforcement a no contest clause to include responsive pleadings such as a “cross-complaint, objection, answer [or] response.”
Step Three: Was there Probable Cause to Defend the Trust Contest Petition?
Finally, because a no contest clause is only enforceable against a direct contest if the direct contest is brought without probable cause, the court considered whether Tyler had probable cause to defend Key’s Trust Contest Petition.[20] Pursuant to Probate Code section 21311: “Probable cause exists if, at the time of filing a contest, the facts known to the contestant would cause a reasonable person to believe that there is a reasonable likelihood that the requested relief will be granted after an opportunity for further investigation or discovery.”
After determining that Key, as the party seeking enforcement of the no contest clause, bore the burden of proving that Tyler lacked probable cause in defending Key’s Trust Contest Petition, the court considered at length whether Tyler had probable cause to defend herself against Key’s claims.[21] The court found that Tyler would have had probable cause to defend the 2007 Amendment if, at the time Key had brought her Trust Contest Petition, Tyler knew facts that would cause a reasonable person to believe that the 2007 Amendment would be deemed valid after the opportunity for further investigation or discovery. The court found that Key satisfied her burden of proving Tyler lacked probable cause by referring to the probate court’s Statement of Decision, which detailed Tyler’s lack of probable cause to maintain a good faith defense of this contest. Key argued that, after the trial court’s finding that Tyler unduly influenced her mother to execute the 2007 Amendment, Tyler was estopped from denying her exercise of undue influence or claiming she had any good faith basis to believe her defense of Key’s Trust Contest Petition had any chance of success.[22] The court noted that while the factual findings of the Probate Court’s Statement of Decisions were not binding, the established facts were sufficient to establish at least a prima facie case that Tyler lacked probable cause.[23]
* * *
The holding in Key v. Tyler underscores the importance of ensuring that whenever there is a potentially applicable no contest clause, all litigants – including defensive litigants – must consider the effect and consequences of the no contest clauses in the settlor’s trust instruments, even in the ones that were superseded by later amendments.
___________________________________________________________
[1] Key v. Tyler (2019) 34 Cal.App.5th 505.
[2] Id. at 509-510.
[3] Probate Code section 21311 also sets forth several specific exceptions whereby a “No Contest” clause may be triggered without the filing of a “direct contest.” Prob. C. § 21311(a)(2-3).
[4] Prob. C. § 21310(c); Key, supra, at 515.
[5] Cory v. Toscano (2009) 174 Cal. App. 4th 1039, 1043.
[6] California Bill Analysis, S.B. 1264 Sen., 4/8/2008.
[7] “A no contest clause shall only be enforced against the following types of contests:
(1) A direct contest that is brought without probable cause.
(2) A pleading to challenge a transfer of property on the grounds that it was not the transferor’s property at the time of the transfer. A no contest clause shall only be enforced under this paragraph if the no contest clause expressly provides for that application.
(3) The filing of a creditor’s claim or prosecution of an action based on it. A no contest clause shall only be enforced under this paragraph if the no contest clause expressly provides for that application.
(b) For the purposes of this section, probable cause exists if, at the time of filing a contest, the facts known to the contestant would cause a reasonable person to believe that there is a reasonable likelihood that the requested relief will be granted after an opportunity for further investigation or discovery.” Prob. C. § 21311.
[8] Key, supra, at 511.
[9] Id.
[10] Id.
[11] Id. at 511, 512.
[12] Id. at 513.
[13] Id. at 517.
[14] Key, supra, at 513. Tyler’s anti-SLAPP motion, and its relationship to a no contest petition, is discussed at length in Key, but for purposes of this article we will focus on the no contest clause.
[15] Id.
[16] Id. at 523.
[17] Id.
[18] Id.
[19] A “direct contest” is a “pleading” that alleges the invalidity of a “protected instrument” on one or more of its terms, based on one or more of the following grounds: (1) forgery, (2) lack of due execution, (3) lack of capacity, (4) menace, (5) duress, fraud, or undue influence; (6) revocation of a will, trust or other instrument, or; (6) a petition to disqualify a beneficiary. Prob. C. § 21310(b)(1-6).
[20] Prob. C. § 21311(a)(1).
[21] Key, supra, at 514.
[22] Id., at 532. The court engages in a lengthy analysis of the res judicata and collateral estoppel issues surrounding Key’s reliance on the Statement of Decision and Appellate Court’s decision to support her claim that Tyler lacked probable cause. That discussion is not discussed here but is important when considering the burden on the party seeking to enforce a no contest clause.
[23] Id., at 539.
