Rafalko v. Georgiadis

• Decision Date: 05 November 2015
• Docket Number: Record No. 141533.
• Citation: 777 S.E.2d 870,290 Va. 384
• Court: Virginia Supreme Court
• Parties: Celia A. RAFALKO, as Trustee of the Dimitri Georgiadis Trust v. Paul D. GEORGIADIS, et al.

290 Va. 384

777 S.E.2d 870

Celia A. RAFALKO, as Trustee of the Dimitri Georgiadis Trust

v.Paul D. GEORGIADIS, et al.

Record No. 141533.

Supreme Court of Virginia.

Nov. 5, 2015.

David D. Hopper (Cook, Heyward, Lee, Hopper & Feehan, on briefs), Glen Allen, for appellant.

John P. O'Herron (Hugh T. Antrim ; Michael G. Matheson ; ThompsonMcMullan, on

brief), Richmond, for appellees Paul D. Georgiadis and Basil D. Georgiadis.

No brief filed by appellees Margaret R. Georgiadis or Kenneth T. Cuccinelli, Richmond.

Present: LEMONS, C.J., GOODWYN, MIMS, McCLANAHAN, KELSEY and ROUSH, JJ., and LACY, S.J.

Opinion

Opinion by Justice S. BERNARD GOODWYN.

In this appeal, we consider whether the circuit court erred in denying a demurrer and holding that letters written to an attorney and a beneficiary did not violate a trust's no contest clause.

Background

Dimitri B. Georgiadis (Dimitri) established a revocable trust on December 21, 1989 that designated his new wife, Margaret Georgiadis (Margaret), and his only children, two sons from a previous marriage, Paul Georgiadis (Paul) and Basil Georgiadis (Basil) (collectively, the sons), as beneficiaries. The sons were named co-trustees of that trust.

On August 27, 2012, Dimitri amended and restated the trust (August trust). The August trust removed the sons as co-trustees and appointed Dimitri as the trustee with Celia Rafalko (Rafalko or trustee) as the successor trustee after his death. Further, the August trust eliminated the previously required distribution to the sons upon Dimitri's death. Instead, Margaret was made the income beneficiary of those funds, thus deferring any distribution to the sons or other descendants until after Margaret's death.¹

The sons complained to Dimitri about the changes to the trust and they exchanged several emails. The sons expressed their displeasure with their father not providing for them or their families during Margaret's lifetime. They also questioned the appointment of Celia Rafalko, whom they believed to be a close friend of their stepmother, as the contingent trustee of the trust.

Dimitri died on December 3, 2012. Paul wrote a letter dated January 3, 2013 to Timothy H. Guare (Guare), the attorney who drafted the August trust, asking him to preserve documents relating to Dimitri's estate plan, and stating that “the testamentary documents purportedly executed in your office on or about August 27, 2012 by my father shortly before his death will be the subject of a contest.” On January 4, 2013, Paul wrote a letter to Margaret asking her to agree with the sons to terminate the August trust and distribute its assets with one-third going to her and one-third to each of the sons, claiming it would be in their mutual best interests to do so. The letter also warned that “[s]hould we be forced to contest the August 27, 2012 will and trust and file suit to set them aside,” Basil and Paul would assert that there was undue influence upon Dimitri and challenge Dimitri's testamentary capacity when the changes were made.

Soon after Paul had sent the letters to Guare and Margaret, Paul and Basil received separate letters from Rafalko, sent pursuant to Code § 64.2–775, which provided a copy of Dimitri's will and trust. Unbeknownst to the sons, the testamentary documents executed by Dimitri on August 27, 2012 had been superseded; Dimitri amended, ratified and reconfirmed the August trust on September 21, 2012 (September trust). The September amendments added a provision allowing the trustee to distribute the trust assets to a charity of his or her choosing if Margaret and Dimitri died and no beneficiaries remained. Further, the September amendments added Article VII(L), which provided as follows in relevant part:

L. No Contest Clause and Release of Claims. I intend to eliminate the possibility that any beneficiary of mine will challenge the decisions that I have made concerning the disposition of my assets during my lifetime or at my death, and my Trustee shall take all appropriate steps to carry out this intent. Accordingly, I direct the following:

1. Absent proof of fraud, dishonesty, or bad faith on the part of my Trustee, if any beneficiary or potential beneficiary under this trust agreement shall directly or indirectly, by legal proceedings or otherwise, challenge or contest this trust agreement or any of its provisions, or shall attempt in any way to interfere with the administration of this trust according to its express terms, any provision I have made in this trust agreement for the benefit of such beneficiary shall be revoked and the property that is the subject of such provision shall be disposed of as if that contesting beneficiary and all of his or her descendants had predeceased me. Absent proof of fraud, dishonesty, or bad faith on the part of my Trustee, the decision of my Trustee that a beneficiary or potential beneficiary is not qualified to take a share of the trust assets under this provision shall be final.

2. My Trustee shall obtain from each then living adult child and adult grandchild of mine a written release of any and all legal claims that such child or grandchild might make against the personal representative of my estate, my Trustee, any person who acted as my attorney-in-fact under a power of attorney executed by me, or any beneficiary under this trust agreement, relating to the conduct of any financial affairs prior to my death and the disposition of assets passing pursuant to my will, this trust agreement, any beneficiary designation that I may have executed during my lifetime, or my decision to cause assets to be titled in joint names with rights of survivorship with myself and another individual as joint owners.

On January 7, 2013, Basil sent a letter to Margaret disavowing himself from the January 4 letter written by his brother. Neither Basil nor Paul were aware of the September amendments to the trust until after Paul had sent the letters.²

In a letter dated January 31, 2013, Rafalko informed the sons that she was considering whether the letters sent by Paul violated the no contest clause and asked them for any information “you believe might bear on my decision,” in writing on or before February 15, 2013. As required by the September trust, she also sent releases to be signed by the sons. She gave them thirty days to execute and return the releases. Rafalko acknowledges receiving the releases, which were signed on February 19, 2013 by both sons, and by which they released all claims concerning any challenge to the will or the trust or to their administration.

In providing information solicited by Rafalko, Paul's counsel informed her counsel that Paul was unaware of the no contest clause when he wrote the letters, would not be challenging or interfering with the administration of the trust in any way and that the “clear import” of the January 4 letter was “to introduce the concept of a non-judicial settlement agreement,” expressly authorized by statute. He also claimed that the specter raised concerning challenging the August trust was at most a threat which did not constitute a challenge, contest or interference with the administration of the September trust. However, her counsel noted in his memorandum that he had been told that if Rafalko decided that Paul had violated the no contest clause, Rafalko would “be in for a dog fight.” Basil's explanation admitted that he “was aware of Paul's January 4 letter when he wrote it, but thereafter immediately disavowed it.”

In a letter dated May 28, 2013, Rafalko notified the sons that she had decided that the letters sent by Paul violated the no contest provision. Rafalko stated: “I have concluded that both of you have violated the No Contest Provision of the Trust. Therefore, neither of you is qualified to take a share of the Trust assets, and the descendants of each of you are also barred from taking a share of the Trust assets.” Rafalko attached a memorandum drafted by her attorney. The memorandum concluded that the letters written by Paul were “an attempt” to “interfere” with the administration of the trust “according to its express terms,” which justified disqualifying Dimitri's descendants as beneficiaries to the trust and that ignorance of the “no contest” clause was irrelevant.

On June 24, 2013, the sons filed suit in the Henrico County Circuit Court seeking a declaratory judgment that the sons' conduct did not trigger the no contest clause and that they and their descendants are rightful beneficiaries of the trust. They alleged that Rafalko's interpretation of the no contest clause was arbitrary and capricious, contrary to law and public policy, and contrary to Dimitri's intent. They also argued that neither of them had taken any legal steps to contest the trust or interfere with its administration and that the letters they sent to Guare and Margaret did not violate the terms of the no contest clause.

Rafalko demurred, arguing that the sons failed to allege that her decision was a product of bad faith, dishonesty or fraud and to plead any facts supporting a finding of bad faith, dishonesty or fraud. In response, the sons argued that Virginia law provided the court authority to review Rafalko's decision to ensure she was abiding by the terms of the trust even if she was not acting in bad faith. Alternatively, the sons argued that they had alleged in their complaint that Rafalko's decision was arbitrary and capricious, and that this allegation was enough to allege bad faith. The circuit court overruled the demurrer, finding that the complaint alleged that Rafalko did not act in conformity with the trust language, so there were sufficient grounds alleged for the action to go forward.

After hearing evidence, upon trial of the matter, the circuit court issued a letter opinion that construed the no contest provision. The circuit court ruled that the language of the no contest clause limited its applicability to challenges directed at the September 21, 2012 trust documents. The circuit court ruled...