East v. Larson (In re Matthew Larson Trust Agreement Dated May 1)

• Citation: 831 N.W.2d 388,2013 ND 85
• Decision Date: 28 May 2013
• Docket Number: No. 20120319.,20120319.
• Parties: In re MATTHEW LARSON TRUST AGREEMENT DATED MAY 1, 1996 and In re Matthew J. Larson Irrevocable Retirement Trust II Agreement Dated December 1, 2009. William E. and Patricia A. Clairmont, Petitioners and Appellants v. Greg Larson, parent and guardian of N.J.L. and L.M.L., Respondent and Appellee and Sean Smith as Trustee of the Elizabeth H. Larson Trust Agreement Dated May 1, 1996; Jared D. Larson Trust Agreement Dated May 1, 1996; and Samuel G. Larson Trust Agreement Dated May 1, 1996, Respondents.
• Court: United States State Supreme Court of North Dakota

831 N.W.2d 388

2013 ND 85

In re MATTHEW LARSON TRUST AGREEMENT DATED MAY 1, 1996andIn re Matthew J. Larson Irrevocable Retirement Trust II Agreement Dated December 1, 2009.William E. and Patricia A. Clairmont, Petitioners and Appellants

v. Greg Larson, parent and guardian of N.J.L. and L.M.L., Respondent and AppelleeandSean Smith as Trustee of the Elizabeth H. Larson Trust Agreement Dated May 1, 1996; Jared D. Larson Trust Agreement Dated May 1, 1996; and Samuel G. Larson Trust Agreement Dated May 1, 1996, Respondents.

No. 20120319.

Supreme Court of North Dakota.

May 28, 2013.

Ronald H. McLean (argued), Timothy G. Richard (appeared) and Peter W. Zuger (on brief), Fargo, N.D., for petitioners and appellants.

Rebecca L. Binstock (argued) and Paul R. Sanderson (appeared), Bismarck, N.D., for respondent and appellee.

CROTHERS, Justice.

[¶ 1] William and Patricia Clairmont appeal from a judgment interpreting two trusts the Clairmonts created for the benefit of their grandson, Matthew Larson, and dismissing the Clairmonts' petition to reform the trusts. The Clairmonts argue the district court erred in denying their petition to reform the trusts because there was clear and convincing evidence of a mistake of law that affected their intent and the terms of the trusts. We conclude the court misapplied the law construing trusts involving a mistake of law and the correct application of the law to the court's findings requires reformation of the trusts. We affirm in part, reverse in part and remand for reformation of the trusts in accordance with this decision.

I

[¶ 2] The Clairmonts have four children. In 1975, the Clairmonts' daughter, Cindy Larson, married Greg Larson. Cindy and Greg Larson have four children together, including a son, Matthew Larson. Cindy and Greg Larson were divorced in 2001. Greg Larson remarried and in 2004 had two children, N.J.L. and L.M.L., with his second wife.

[¶ 3] Since 1991, the Clairmonts have created various trusts to benefit their grandchildren using different attorneys to draft each set of trusts. In 1996, the Clairmonts created a separate trust for each grandchild. The Clairmonts' son-in-law, Greg Larson, drafted the trust documents. At the time, Greg Larson still was married to Cindy Larson. An irrevocable trust was created for Matthew Larson, the Matthew Larson Trust Agreement (“Trust I”), which specified mandatory distributions would start when Matthew Larson was 40 years old. The trust also included a provision stating how the trust would be distributed if Matthew Larson died:

“If the Beneficiary shall die before receiving complete distribution of the trust, the Trustee shall distribute the balance of the trust as the Beneficiary designates under his or her Last Will and Testament or under any other instrument exercising this general power of appointment. In the event that the Beneficiary does not exercise this general power of appointment, the Trustee shall distribute the balance of the trust to the Beneficiary's surviving issue by right of representation ... and if Beneficiary leaves no surviving issue, then equally to Beneficiary's brothers and sisters and the issue of a deceased brother or sister by right of representation.”

[¶ 4] In 1998, the Clairmonts created irrevocable retirement trusts for each grandchild, including Matthew Larson. William Guy III drafted the trust documents. Matthew Larson's retirement trust specified that distributions of the trust would begin when Matthew Larson was 65 years old and included a provision for distribution in the event of his death.

[¶ 5] In 2009, the Clairmonts created the Matthew J. Larson Irrevocable Retirement Trust II Agreement (“Trust II”), which was drafted by Brian Bergeson. Trust II replaced the 1998 retirement trust and included terms very similar to the 1998 retirement trust. The trust specified Matthew Larson would receive an annual distribution upon reaching age 65 and included a provision for the distribution of the assets upon Matthew Larson's death:

“Upon the death of Matthew, the then remaining trust estate shall be handled as follows:

(1) As Matthew may direct in his valid testamentary instrument expressly referring to this general power of appointment.

(a) Matthew may appoint to the creditors of his estate.

(b) The power of appointment shall be exercisable by Matthew alone and in all events.

(2) To the extent that Matthew shall not have exercised the foregoing power of appointment, then as follows:

(a) if Matthew is survived by descendants, then to, or for the benefit of, those descendants as provided in Paragraph 2 of this Article; or,

(b) if Matthew is not survived by descendants, then:

i. if Matthew is survived by a wife and his wife has attained age sixty (60) as of the date of Matthew's death, then for the benefit of his wife pursuant to Paragraph 3 of this Article; ii. if Matthew is not survived by a wife or if he is survived by a wife who has not attained age sixty (60) as of the date of Matthew's death, then one (1) collective share for the brothers and sisters of Matthew then living to be handled as provided in Paragraph 2 of this Article as if Matthew's brothers and sisters were children of Matthew[.]”

[¶ 6] Matthew Larson died in March 2011. Matthew Larson was not married and did not have any children. No evidence exists he had a will. The Clairmonts petitioned the district court to interpret the trust agreements to include only Matthew Larson's brothers and sisters who are lineal descendants of the Clairmonts as beneficiaries of the trusts or to reform the trusts. The Clairmonts argued they intended the trusts to benefit their grandchildren and did not intend for Greg Larson's children from his second marriage to benefit from the trusts. They argued a mistake was made in drafting the trusts if the phrase “brothers and sisters” is interpreted to include Matthew Larson's siblings who are not lineal descendants of the Clairmonts.

[¶ 7] After an evidentiary hearing, the district court declared that the children of Greg Larson's second marriage are beneficiaries of both trusts because the trusts state Matthew Larson's “brothers and sisters” are beneficiaries and N.D.C.C. § 30.1–04–07 states “[r]elatives of the half blood inherit the same share they would inherit if they were of the whole blood.” The court also dismissed the Clairmonts' petition to reform the trusts, ruling the Clairmonts failed to establish a mistake of fact or law sufficient to reform either trust.

II

[¶ 8] The Clairmonts argue the district court erred in dismissing their petition to reform the trusts. They contend they met the requirements for reformation of a trust under N.D.C.C. § 59–12–15 because clear and convincing evidence established they made a mistake of law when the trusts were created and because their intent and the terms of the trusts were affected by the mistake. They claim they intended for only their lineal descendants to benefit from the trusts, they believed the term “brothers and sisters” would ensure the trust assets were only distributed to their lineal descendants and they were mistaken about the legal effect of the term “brothers and sisters.”

[¶ 9] The interpretation and application of a statute is a question of law, which is fully reviewable on appeal. In re Estate of Samuelson, 2008 ND 190, ¶ 11, 757 N.W.2d 44. Determining a party's intent and whether a mistake of fact or law exists are questions of fact, which are subject to the clearly erroneous standard of review. See Agnes M. Gassmann Revocable Living Trust v. Reichert, 2011 ND 169, ¶ 14, 802 N.W.2d 889. A finding of fact is clearly erroneous if it is induced by an erroneous view of the law, “there is no evidence to support it, or when, although there is some evidence to support it, the reviewing court, on the entire evidence, is left with a definite and firm conviction that a mistake has been made.” American Bank Center v. Wiest, 2010 ND 251, ¶ 13, 793 N.W.2d 172 (quoting Sargent Cnty. Bank v. Wentworth, 500 N.W.2d 862, 874 (N.D.1993)).

[¶ 10] Reformation of a trust is an equitable remedy designed to correct an error or defect in a trust document so it reflects the settlor's actual intent. SeeN.D.C.C. § 59–12–15; cf. Spitzer v. Bartelson, 2009 ND 179, ¶ 22, 773 N.W.2d 798 (reformation of a contract is an equitable remedy to rewrite a contract to accurately reflect the parties' intent). Section 59–12–15, N.D.C.C., authorizes a district court to reform the terms of a trust to conform to a settlor's intent:

“The court may reform the terms of a trust, even if unambiguous, to conform the terms to the settlor's intention if it is proved by clear and convincing evidence that both the settlor's intent and the terms of the trust were affected by a mistake of fact or law, whether in expression or inducement.”

Clear and convincing evidence leads to a firm belief or conviction that the allegations are true. In re Disciplinary Action Against McGuire, 2004 ND 171, ¶ 8, 685 N.W.2d 748. “Although it is a higher standard of proof than proof by the greater weight of the evidence, the evidence presented need not be undisputed to be clear and convincing.” Id.

[¶ 11] The district court denied the Clairmonts' petition for reformation, finding the Clairmonts failed to establish a mistake of law or fact exists:

“The Clairmonts, not being aware of N.D. Cent.Code § 30.1–04–07 or its applicability to trust instruments, is not a grounds for reforming the trust agreements. This is because of the ‘time-honored principle that all persons are presumed to know the law.’ State v. Carpenter, 301 N.W.2d 106, 110 (N.D.1980). ‘Not all mistakes of law will justify reformation of a contract. Ignorance of law must be distinguished from misapprehension of law with which both parties are familiar.’ Hovden v. Lind, 301 N.W.2d 374, 379 n. 2 [ (N.D.1981) ].

....

“At the time Trust I was written, Greg and Cindy were still married. When Trust II was written, however, Greg and Cindy were...