IN TERROREM PROVISIONS

Texas Enforceability of No Contest & Forfeiture Provisions

         The barrier to contest is an intentional remnant of the Grantor, or is presumed to be the remain of the Grantor due to its inclusion in that certain instrument conveying the Grantor’s interest.  The Clause is intended to restrict an interest holder’s possession and disposition of interests subject of the Deviser.  However, as the trust subject of this inquiry concerns remainder interests, we must be reminded that “vestment” is an instantaneous creation of the Deviser instrument, and not a measure of the temporal placement of its “enjoyment or possession.” Shearrer v. Holley, 952 S.W.2d 74, 75 (Tex. App. San Antonio 1997).

         The existence of this barrier first and foremost concerns the alleged right of an individual to own property.  Thereafter, it concerns the right of the interest holder to direct the path by which property is subjected to outside influence.

         Therefore, any judicial consideration of the “validity” of a No Contest Clause is an inquiry into the rightful determinations of the Grantor.  If the Grantor intends to enact a No Contest provision, its application is a question of property disposition.  “It is the right of every citizen of this State to dispose of his property by will as he may desire, regardless of the ties of nature or relationship.” Green v. Dickson, 208 S.W.2d 119, 124 (Tex. Civ. App. 1948).

         While we may be tempted to challenge the competency of the Devisor, or the wisdom of the distribution form and method, Texas has spoken to its aversion for substituting its own judgments over those of the owner.

Nature is partial and niggardly in dispensing the gifts of genius and extraordinary talent, but she is generous in giving to most human beings the capability of attending to the ordinary affairs of life, and for these, the great majority of mankind, laws are enacted and systems of jurisprudence erected, and their contracts, their disposition of their property by will, deed, or other conveyance, freely and voluntarily made, uninfluenced by fraud, deceit, or mistake, will be respected and enforced by the courts of the country. The test is not whether the person who has made testamentary disposition of his property was of a high order of intelligence, but the humbler test is applied, Did he know what he was doing with the property which he knew he owned when he executed his will, and did he perform the act of his own free volition, and because he desired to do so? He may be old and infirm, weakened in energy, and impaired in the senses, but, if he responds to the test which is applied to all human beings alike, his disposition of his property will be respected and upheld by the courts of the country.

Salinas v. Garcia, 135 S.W. 588, 590 (Tex. Civ. App. 1911).

It is not for juries nor courts to say how property should be passed by will. They can do no more than see that the testator's mentality meets the law's tests.

Green v. Dickson, 208 S.W.2d 119, 124 (Tex. Civ. App. 1948).

Interpreting Movant Action

         Texas has recognized that the median of actions concerning trusts do not likely “contest” the governance structures of the trust, but instead seek to clarify its limitations and/or distributions.  Therefore, certain actions have been construed as “declaratory” in nature, rather than dispositive of a trust term or restriction.

In view of the strictness of the rule against declaring forfeitures, we do not think a suit, brought in good faith and upon probable cause, to ascertain the real purpose and intention of the testator and to then enforce such purpose and intention, should be considered as an effort to vary the purpose and intention of the will. Hence, no forfeiture resulted. We do not intend to declare whether a forfeiture would result from a suit merely to ascertain the intent of a testator, regardless of the contestant's good faith and regardless of the existence of probable cause for the institution of the suit. No such case is before us.

Calvery v. Calvery, 122 Tex. 204, 213 (Tex. 1932)(emphasis added).

Along this same line of thinking, Texas therefore applies an interpretive analysis to judicial actions subject to “no contest forfeiture” provisions.  If the moving party intends to “harass or challenge” the trust provisions, then the prior vestment of the movant is subject to execution and/or reversion.  While the primary locus of the Clause is always respected, the court intends to evaluate the intentions of the movant before enforcing Forfeiture application.

In First Methodist Episcopal Church South v. Anderson, 110 S.W.2d 1177 (Tex.Civ.App. -- Dallas 1937, writ dism'd), the Court said that, in view of the rule against declaring forfeitures, they did not think that a suit brought in good faith and upon probable cause to ascertain the intent of the testator should be considered an effort to vary the intent of the will. In the final analysis, however, they held that the plaintiff's suit was brought for the purpose of interpreting the testator's will, rather than to thwart the will of the testator. In Hodge v. Ellis, 268 S.W.2d 275 (Tex.Civ.App. -- Fort Worth), rev'd on other grounds, 154 Tex. 341, 277 S.W.2d 900 (1954), the court there held that a suit brought in good faith and upon probable cause would not constitute ground for forfeiture of any delivery made to plaintiff in the will.

Gunter v. Pogue, 672 S.W.2d 840, 843 (Tex. App. Corpus Christi 1984).

Express Terms Applied

As a general rule, forfeiture provisions, or in terrorem clauses, in a will are to be construed strictly, and a breach of such clause should be declared only when the acts of the parties come within the express terms of the clause. Sheffield v. Scott, 662 S.W.2d 674 (Tex.App. -- Houston [14th Dist.] 1983, writ ref'd n.r.e.); Gunter v. Pogue, 672 S.W.2d 840, 842 (Tex. App. Corpus Christi 1984).

“As a condition to taking, vesting, receiving or enjoying of any property, benefit or thing whatsoever under or by virtue of this Trust Agreement or any trust created under this Trust Agreement, each distribute shall accept and agree to all the provisions of the Trust Agreement and that the provisions of this In Terrorem Clause are made an essential part of each and every benefit in and under this Trust Agreement. If any distributee hereunder, directly or indirectly, individually or with another, shall contest the validity of any portion of this Trust Agreement, or the probate or validity of any Will which requires distribution of property to this Trust; or shall institute or join in (except as a party defendant) any proceeding to contest the validity of this Trust Agreement or to prevent any provision hereof from being carried out in accordance with its terms or shall acquiesce therein; or shall fail or refuse to defend this Trust Agreement or any provision herein;

…

or shall in any manner question or dispute any statement or declaration herein; or shall in any manner aid, assist, or encourage in any such contest or questioning; or shall contest, question or oppose in any legal proceeding the performance by the Trustee of any duty, act or discretion granted to or incumbent upon him or her under the terms of this Trust Agreement or by law; or shall in any manner institute or participate in (except in support of the Trustee) any construction or any provision of this Trust Agreement by means of any declaratory judgment proceeding; or shall in any manner institute or participate in any proceeding, except in support of the Trustee, to contest or in any manner question any accounting prepared by or on behalf of the Trustee; or shall institute any cause of action (including, but not limited to, any cause of action for tortuous interference with inheritance rights) against any person which is based in any way on the proposition that the Settlor was not of sound mind, lacked testamentary capacity, was unduly influenced, or failed to comply with any applicable law at the time that Settlor executed any legal instrument (any of the acts described above are herein referred to as “Prohibited Acts”); then, in any such contingency, all benefits provided for such distribute are revoked and such benefits shall pass to the residuary distributes under this Trust Agreement (other than such distributee), or if applicable the residuary distributes of any trust in the proportion that the share of each such residuary distribute bears to the aggregate of the effective shares of the residuary. If any distribution has been made to any distribute prior to the time he or she engages in a Prohibited Act, then such distribute shall repay to the trustee, the amount of any such distribution plus simple interest at a rate of six percent per annum and all attorney fees and expenses incurred in collecting this distribution. To the greatest extent permitted by Texas law this provision of the Trust Agreement shall apply to any distributee regardless of whether or not any Prohibited Acts were taken in good faith and with probable cause.

An examination of the foregoing “express terms” reveals that the provision attempts to construct an impenetrable wall in favor of the trust.  This “TRUMP” provision appears to be grandiose in its application, but in reality cedes its own authority to the foregoing precedent of the Texas judiciary.  This No Contest and Forfeiture provision is better described as a “filler” which withstands all challenges except those which are deemed necessary for public protection.

Finally, this “ceding” of authority is not solely the creation of the Texas judiciary, but an “express” provision of the Trust language, and therefore also “not subject to challenge.”  This linguistic construction is ultimately circular, and could be considered akin to a “ring of marriage” which intends to draw sacrosanctity toward the survival of the Trust.

Such a circular construction fails to meet recent rulings calling for a “clear” violation of express language.  “Whether a forfeiture clause is triggered is a question of law. A breach of a forfeiture clause will be found only when the beneficiary's or devisee's actions fall clearly within the express terms of the clause.” Ard v. Hudson, 2015 Tex. App. LEXIS 8727, *1 (Tex. App. Fort Worth Aug. 20, 2015)(emphasis added).  How can it be “clear” as to the express violation of a prohibition when the prohibition is subject to that limitation expressed by an entity outside the trust instrument?

Texas Public Policy Considerations

There are public policy considerations both favoring and disfavoring enforcement of no-contest clauses in wills. Gunter v. Pogue, 672 S.W.2d 840, 842 (Tex. App. Corpus Christi 1984).

Favoring Enforcement.  The view favoring enforcement of these clauses is that they allow the intent of the testator to be given full effect and avoid vexatious litigation, often among members of the same family. Such contests often result in considerable waste of the estates and hard feelings that can never be repaired. Gunter v. Pogue, 672 S.W.2d 840, 842-843 (Tex. App. Corpus Christi 1984).

Disfavoring Enforcement.  On the other hand, those who are attempting, in good faith, to determine the true intent of the testator should not be punished upon a showing that they brought a contest in good faith and had probable cause for bringing such contest. It may be said that enforcement of in terrorem clauses under certain circumstances may be tantamount to a denial of access to the courts. Some jurisdictions allow the good faith and probable cause exception to defeat a forfeiture clause in a will. E.g. South Norwalk Trust Co. v. St. John , 92 Conn. 168, 101 A. 961 (1917); In re Cocklin's Estate, 236 Iowa 98, 17 N.W.2d 129 (1945); Haynes v. First National State Bank of New Jersey, 87 N.J. 163, 432 A.2d 890 (1981); In re Friend's Estate, 209 Pa. 442, 58 A. 853 (1904).

However, there are other jurisdictions declining to follow such rule. E.g. In Re Hite's Estate, 155 Cal. 436, 101 P. 443 (1909); Rudd v. Searles, 262 Mass. 490, 160 N.E. 882 (1928); Commerce Trust Co. v. Weed, 318 S.W.2d 289 (Mo.Sup.Ct. 1958); Elder v. Elder, 84 R.I. 13, 120 A.2d 815 (1956).

Texas courts have, in two instances, upheld the validity of forfeiture clauses. Massie v. Massie, 54 Tex. Civ. App. 617, 118 S.W. 219 (Tex.Civ.App. -- 1909, no writ); Perry v. Rogers, 52 Tex. Civ. App. 594, 114 S.W. 897 (Tex.Civ.App. -- 1908, no writ). Both of these cases held that the forfeiture clauses were valid. They did not refer to any exception for good faith and probable cause. Gunter v. Pogue, 672 S.W.2d 840, 843 (Tex. App. Corpus Christi 1984).

The Thirteenth Court of Appeals, in Gunter v. Pogue 1984, set forth the foregoing jurisdictional rulings on this issue.  Upon closer examination, one can see that the underlying cases rely upon early twentieth century interpretations of “access to justice.”  672 S.W.2d 840 (Tex. App. Corpus Christi 1984).

For example[1]:

Where the contest has not been made in good faith, and upon probable cause and reasonable justification, the forfeiture should be given full operative effect. Where the contrary appears, the legatee ought not to forfeit his legacy. He has been engaged in helping the court to ascertain whether the instrument purporting to be the will of the testator is such. The contest will not defeat the valid will, but it may, as it ought, the invalid will. The effect of broadly interpreting a forfeiture clause as barring all contests on penalty of forfeiture, whether made on probable cause or not, will furnish those who would profit by a will procured by undue influence, or made by one lacking testamentary capacity, with a helpful cover for their wrongful designs. South Norwalk Trust Co. v. St. John, 92 Conn. 168, 177 (Conn. 1917).

As so defined, a Texas court could be “aided” by a moving party to declare the true “limitations” of Texas law, which are seemingly the guiding principal necessary in the final Clause limitations.  Therefore, the “rational” of introducing public policy defeating forfeiture is initially the impetus giving direction to the public policy application.  To rule that the provision prohibiting challenge defeats public challenges would reverse a century of judicial application.

“Not-Dispositive” is rarely a valid descriptor, although in this instance, the alternative “full and complete application” of the provision would exceed the final admission by the author that Texas law intends to apply limitations to its own enforcement.  It can be argued that the provision limiting the “extent” of application under Texas law is a ceding of authority to the right of declaratory challenge, and that any such action in a Texas court may ultimately result in a declaration that the prohibition against declaration is intended to cede its own authority to Texas prohibitions against the prohibition of declarations. 

Elsewise it may also be argued that while certain jurisdictions have allowed probable cause to defeat forfeiture, the “limits” of Texas law also include the totality of the state jurisdiction which has failed to fully ban such prohibitions on declaration.  The “upper ceiling” interpretation appears to be valid in this instance, although it would simultaneously overturn the jurisprudence of all competing jurisdictions.  When given a choice between ratification of a newly introduced principle and a simple refusal to enforce an older principal, the likely outcome in modern jurisprudence is the incorporation of the newly limiting factor.

An Interpretation of “Then”

       “[W]ho are the beneficiaries that make up the group, ‘who might then be entitled to receive a distribution’”?

         The word “then,” in legal context, is supposed to mean “at that time,” referring to a time specified, either past or future.  “It has no power in itself to fix a time.  It simply refers to a time already fixed.” See www.thelawdictionary.org/then/.  However, the word “then,” in legal context is ALSO supposed to alternatively denote a contingency, and be the equivalent to “in that event.” www.thelawdictionary.org/then/.  Therefore, in application, the legal phrase may be interpreted equally in its connotation: “who might [at that time] be entitled?; or who might [therefore] be entitled?

In order to distinguish as to the possible dual meaning of this otherwise “plain language,” I assume a competent court would refer first to: Express language context; and then to Implied linguistic context; and finally to the equitable structure of the trust construction.  Without the full text of the various agreements, the context of the removal provision is only implied and without full clarity.

However, the interpretation that “then” refers to the time of vote, and not a “contingent” factor of future possession in interest, appears to be in alignment with the law governing “vestment” in the State of Texas.  The “then” is not contingent, but is a pre-determined outcome of the trust instrument.

While a trust deed may provide that title would vest in a particular person upon the death of the grantors, the courts have interpreted such language to delay only the time of enjoyment or possession, not the time of vestment. For example, a devise by A to B for life with remainder at his death to C creates a vested remainder in C upon the death of A, subject to B's life estate, and the words "at his death" refer to the time when the right of possession begins, not when the remainder vests. Likewise, the words "at the death of so and so" refers only to the time of enjoyment or possession, rather than vestment. The cases establish that delayed-vesting language does not necessarily create a contingent remainder.

Shearrer v. Holley, 952 S.W.2d 74, 75 (Tex. App. San Antonio 1997).

         This same ruling goes to point out that while “equitable” title vests immediately, actual “ownership” is distinguishable from “title.”  A “presently” existing right to receive distributions seems facially different than a “contingent” right to receive future distributions.

It is basic trust law that for a trust to be a trust, the legal title of the trust property must immediately pass to the trustee, and beneficial or equitable interest to the beneficiaries. During the duration of the trust, neither the beneficiaries nor the trustee own the property. It is not until the legal and equitable interests merge in the beneficiaries that the beneficiaries acquire a full ownership interest in the property.

Shearrer v. Holley, 952 S.W.2d 74, 75 (Tex. App. San Antonio 1997).

Specific Precedent

         Timely and diligent searches did not reveal precedent of removal of USAA as trustee.  However, the following case reveals specific rulings governing the fiduciary standards of trustees in self-dealing: Steves v. United Services Auto. Asso., 459 S.W.2d 930 (Tex. Civ. App. Beaumont 1970).

General Precedent

         A court's discretion to remove a trustee for such a breach is not subject to a statutory limitations period running from a specified period after the breach. Instead, the removal decision turns on the special status of the trustee as a fiduciary and the ongoing relationship between trustee and beneficiary, not on any particular or discrete act of the trustee. Ditta v. Conte, 298 S.W.3d 187, 188 (Tex. 2009).

A court is permitted to modify the terms of a trust if, due to circumstances not known to or anticipated by the settler, compliance with the terms of the trust would defeat or substantially impair accomplishment of the purposes of the trust. Tex. Prop. Code Ann. § 112.054(a)(2) (2007). The court, however, does not have unfettered discretion to modify the trust in any way it chooses. If the court finds that modification is proper, the court must exercise its discretion to modify in the manner that conforms as nearly as possible to the intention of the settlor. Tex. Prop. Code Ann. § 112.054(b). Conte v. Ditta, 312 S.W.3d 951, 953 (Tex. App. Houston 1st Dist. 2010).

         A court may, in its discretion, remove a trustee on the petition of an interested person and after hearing if the trustee materially violated or attempted to violate the terms of the trust and the violation or attempted violation results in a material financial loss to the trust or in the discretion of the court, for other cause. Tex. Prop. Code Ann. § 113.082(a) (2007); Conte v. Ditta, 312 S.W.3d 951, 953 (Tex. App. Houston 1st Dist. 2010).

[1] As was cited by the Thirteenth Court of Appeals of Texas in 1984, our more esteemed colleagues in Iowa certainly have used a “bald” approach to interpreting the vexatious litigation issue.  “A provision in a will forbidding any contest thereof under penalty of forfeiture of all legacies therein is contrary to public policy, unless it be limited in its application to those contests wherein an element of bad faith enters. Under the law, no will can become effective in any of its provisions until it shall have been admitted to probate by the court. Before admitting it to probate, it is the duty of the court to investigate the facts and circumstances attending its execution and bearing upon its validity, and to find judicially therefrom that such will was executed in due form, voluntarily, and understandingly by the purported testator. If the court should find otherwise, it must reject the will and refuse its probate.” In re Estate of Cocklin, 236 Iowa 98, 99 (Iowa 1945).