Hannam v. Brown

• Decision Date: 09 April 1998
• Docket Number: No. 28655,28655
• Citation: 114 Nev. 350,956 P.2d 794
• Parties: Robert S. HANNAM, Co-Trustee of the Family Share of the Hannam Family Trust, and Trustee of the Sherwood R. Hannam Living Trust, Appellant/Cross-Respondent, v. Dennis BROWN, Co-Trustee of the Hannam Family Trust, Respondent/Cross-Appellant.
• Court: Nevada Supreme Court

Page 794

956 P.2d 794

114 Nev. 350

Robert S. HANNAM, Co-Trustee of the Family Share of the Hannam Family Trust, and Trustee of the Sherwood R. Hannam Living Trust, Appellant/Cross-Respondent, v. Dennis BROWN, Co-Trustee of the Hannam Family Trust Respondent/Cross-Appellant.

No. 28655.

Supreme Court of Nevada.

April 9, 1998.

Thomas F. Riley, Reno, for Appellant/Cross-Respondent.

Law Office of Richard C. Blower, Sparks, for Respondent/Cross-Appellant.

OPINION

PER CURIAM:

This case involves disagreement between trust beneficiaries concerning the distribution of an inter vivos trust. Sherwood R. Hannam and Cleo M. Hannam, husband and wife, created the Hannam Family Trust Agreement on May 22, 1991. The trust was of the "A-B" variety, splitting the trust assets evenly into a "Family Trust Share" and a "Survivor's Trust Share" upon the death of either spouse. Sherwood and Cleo subsequently placed most of their assets into the trust, creating approximately $1,000,000.00 in trust assets. Cleo died on January 13, 1992; however, Sherwood did not immediately divide the trust into the family and survivor's shares specified in the trust. No division occurred until the district court ordered, on September 7, 1993, that the trust be retroactively divided into two equal shares.

The trust provided that the family share was to be divided evenly between Robert S. Hannam, Sherwood's son from a previous marriage, David S. Hannam, Robert's son, Dennis Brown, Cleo's nephew, and Lance Brown, another of Cleo's nephews. The same parties were to serve as co-trustees of the family share. Lance died on January 10, 1992, three days before Cleo's death. The district court determined that Lance's one-fourth of the family share lapsed because he predeceased Cleo, and ordered that the family share be divided equally among the remaining three beneficiaries.

The trust provided that the survivor (Sherwood or Cleo) would be the sole trustee of the survivor's share, and could distribute the survivor's share either by a probated will or by doing nothing, which would cause the survivor's share to be added to the family share upon the death of the survivor. The trust specified that Robert, David, Dennis and Lance were to take over as trustees of the survivor's share if the survivor became incapacitated. Sherwood did create a "pour-over" will, which provided that, upon Sherwood's death, the survivor's share would pour over into the Hannam Family Trust.

Robert contacted Dennis in April 1993, to advise him that Robert, David and Dennis were the surviving named trustees of the family share. Dennis travelled to Nevada to discuss the matter with Robert and David. Sherwood had developed some serious health problems, and there was some confusion and disagreement between the parties and their attorneys regarding Sherwood's mental capacity to serve as trustee of the survivor's share. Dennis claims to have discovered that Robert had been issuing checks to himself and paying for Sherwood's health care, support, and maintenance from the family share without consulting the other co-trustees. Robert claims that, on July 4 or 5, 1993, Dennis contacted nearly all of the banks where Sherwood's funds were held and advised them that Sherwood was "possibly incompetent." Robert further claims that, as a result of these letters, Sherwood's accounts were frozen, and Sherwood was unable to pay his personal expenses.

Following Dennis' assertion that Sherwood was incompetent, Sherwood replaced his existing will with a second will that poured the survivor's share over to a new trust. The new trust, entitled the "Sherwood R. Hannam Trust" and dated July 13, 1993, was for the benefit of Robert and David only. Sherwood was the sole trustee of the Sherwood R. Hannam Trust during his lifetime, and provided that Robert and David would serve as co-trustees after Sherwood's death.

Dennis claims that Sherwood was determined to be incapacitated in August of 1993, and that Robert, David and Dennis took over as co-trustees of the survivor's share thereafter. The trust fund was split into the survivor's and family shares in September, 1993. The co-trustees were unable to agree on the number of co-trustee votes required to administer either trust share, so the district court ordered that a unanimous vote would be required for actions involving the family trust share while only a majority vote would be necessary for actions involving the survivor's share.

Sherwood died on November 24, 1993, after which Dennis filed an opposition to Sherwood's will, arguing that Sherwood lacked capacity at the time the will was executed, that the proper formalities for a valid will were not followed, and that Robert may have exercised undue influence over Sherwood. A trial on the will contest was held on June 9 and 10, 1994. The trial ended when the district court concluded that Dennis had failed to make a prima facie showing that Sherwood lacked capacity. Dennis agreed to an order dismissing the will contest with prejudice and requiring him to reimburse Sherwood's estate $16,000.00 in out-of-pocket costs. The will was subsequently probated, and the survivor's share assets were transferred to the Sherwood R. Hannam Trust.

In May 1995, Robert and David filed joint motions for partial summary judgment, asking the district court to enforce the Hannam Family Trust's no-contest clause against Dennis. This clause provided, in pertinent part, that any beneficiary contesting "either creator's Estate or Will" would forfeit his or her interest in the trust and co-trustee status. Dennis filed a request for an order for payment of fees and costs shortly thereafter. Robert filed an alternative motion for partial summary judgment in October 1995, asking for a determination that Lance's portion of the family share lapsed when he predeceased Cleo.

On February 23, 1996, the district court denied Robert and David's requests for partial summary judgment on the no-contest clause issue, granted Robert's motion for partial summary judgment on the lapsing of Lance's portion of the family share, and denied Dennis' request for payment of trustee's fees and reimbursement expenses. Robert now appeals the denial of his motions for partial summary judgment on the no-contest clause issue and Dennis cross-appeals the court's partial summary judgment on the lapsing of Lance's portion of the family share, denial of his request for payment of fees and costs, and several other claimed errors.

The no-contest clause

Robert appeals the district court's denial of his partial motions for summary judgment relating to the no-contest clause of the trust. Robert argues that Dennis' opposition to Sherwood's will invoked the forfeiture provision of the no-contest clause, thereby preventing Dennis from receiving any benefit under the trust or serving as co-trustee. The no-contest clause provides, in pertinent part,

[I]f any beneficiary herein asserts any claim ... or interest against or in either Creator's Estate or Will or any properties of this Trust, other than pursuant to the express terms hereof or of said Will, directly or indirectly contests, disputes, or calls into question before any court, the validity of this declaration of trust or of said Will or the validity of any provisions of this Declaration of Trust or of said Will, then;

A. Such beneficiary shall thereby absolutely forfeit any and all beneficial interests of whatsoever kind and nature which such beneficiary might otherwise have under this Declaration of Trust.

....

C. If then acting as a Trustee, such claiming, electing or contesting beneficiary shall automatically cease to be a Trustee.

Dennis does not dispute Robert's assertion that Dennis' challenge to Sherwood's will falls under the facial provisions of the no-contest clause, and Dennis also does not deny that the no-contest clause is generally enforceable. Instead, Dennis relies on the district court's conclusion that "a forfeiture clause in a will or trust is subject to an exception when the contest is made in good faith and with probable cause." Accordingly, the disposition of Robert's appeal turns on this court's determination of whether such a good faith exception exists and, if such an exception is recognized, on whether the district court erred in finding that Dennis' contest of Sherwood's will was in good faith and based on probable cause.

The question of whether a court may recognize an exception to no-contest clauses in wills or trust instruments for good faith challenges based on probable cause is an issue of first impression in Nevada. The district court relied on an American Law Reports annotation discussing the approach of other states to this issue, electing to follow the line of cases recognizing a good faith challenge exception. See Annotation, Validity and Enforceability of Provision of Will or Trust Instrument for Forfeiture or Reduction of Share of Contesting Beneficiary, 23 A.L.R.4th 369 (1983). After consideration of the cases relied upon by the district court and various other materials, we recognize a clear trend favoring an exception for good faith challenges based on probable cause.

Robert addresses this trend by arguing that the majority of cases recognizing an exception for good faith challenges arose in states that have also adopted the Uniform Probate Code, section 3-905, which provides, in pertinent part, that "a provision in a will purporting to penalize any interested person for contesting the will or instituting other proceedings relating to the estate is unenforceable if probable cause exists for instituting proceedings." Robert suggests that the courts' allowance of a good faith challenge exception in those cases is "based primarily on" these legislative enactments. He contends that, because the Nevada Legislature rejected Uniform Probate Code, section 3-905, in 1995, recognition of an exception for good faith challenges would contravene expressed legislative intent.

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