Appeal from Rooks District Court; EDWARD E. BOUKER, judge.
SYLLABUS BY THE COURT 1. When a district court or an appellate court is called upon to interpret a trust, the court's primary function is to ascertain the intent of the settlor by reading the trust in its entirety. If the settlor's intent can be ascertained from the express terms of the trust, the court must give effect to those terms unless they are contrary to law or public policy. 2. The interpretation and legal effect of a written instrument is a matter of law over which an appellate court exercises unlimited review. 3. As a general rule, a trust terminates to the extent the trust is revoked or expires pursuant to its terms, no purpose of the trust remains to be achieved, or the purposes of the trust have become unlawful, contrary to public policy, or impossible to achieve. 4. An in terrorem clause is a clause in a will in which a testator imposes upon a devisee or legatee a condition that he or she shall not dispute the provisions of the will or the gift shall be void. 5. In terrorem, or no-contest, clauses in wills are valid and enforceable against a beneficiary who attacks the validity of the will, or provisions therein, unless the beneficiary had probable cause to challenge the will or its provisions. 6. A no-contest clause in a trust serves the same purpose as such a clause in a will and is construed according to the same rules applied to wills. 7. Courts apply a two-part analysis to determine whether a no-contest clause should be enforced against a beneficiary. First, the court determines whether the beneficiary's action or actions violated the express terms of the no-contest clause. Second, the court determines whether the beneficiary had probable cause to take the action or actions that violated the no-contest clause. 8. In determining whether a beneficiary has probable cause to challenge the provisions of a will or trust, the term "probable cause" means the existence, at the time of the initiation of the proceeding, of evidence which would lead a reasonable person, properly informed and advised, to conclude there is a substantial likelihood that the contest or attack will be successful.
9. Under K.S.A. 58a-1004, in a judicial proceeding involving the administration of a trust, the district court, as justice and equity may require, may award costs and expenses, including reasonable attorney fees, to any party, to be paid by another party or from the trust that is the subject of the controversy.
The opinion of the court was delivered by: Moritz, J
Affirmed in part, reversed in part, and remanded with directions.
The opinion of the court was delivered by MORITZ, J.:
This appeal arises from a dispute over the administration of a trust between a beneficiary of the trust, Lawrence Hamel (Lawrence), and the trustees of that trust, Dennis Hamel (Dennis) and Leona Newell (collectively Trustees).
Lawrence sought termination of his deceased father's trust, the Arthur L. Hamel Living Trust, dated February 7, 2003, and the First Amendment to the Arthur L. Hamel Living Trust, dated February 17, 2003, (collectively Trust) and immediate distribution of Trust assets based on the Trustees' alleged failure to properly administer the Trust. Lawrence later moved to set aside a contract for deed executed between Dennis and his wife, as buyers, and the Trustees, as sellers, for the sale of farmland owned by the Trust.
Lawrence also sought to remove the Trustees, alleging they engaged in self-dealing and breached their fiduciary duties.
Lawrence appeals from the district court's conclusions that (1) Arthur did not intend the Trust to terminate immediately upon his death; (2) the Trust permitted the Trustees to finance the sale of the farmland to Dennis under the terms set forth in the contract for deed; (3) Lawrence violated the Trust's no-contest clause by challenging, without probable cause, the Trustees' sale of the farmland to Dennis; (4) Lawrence's violation of the no-contest clause required his disinheritance; and (5) Lawrence was not entitled to attorney fees and costs under K.S.A. 58a-1004.
The Trustees cross-appeal from the district court's determination of the effective date of Lawrence's disinheritance and from the court's conclusion that they acted in bad faith by failing to provide Lawrence with an adequate accounting before being ordered to do so by the court.
We hold the district court reasonably interpreted ambiguous Trust provisions as not requiring the Trust's immediate termination upon Arthur's death. However, we conclude the Trustees lacked authority to sell the farm to Dennis under a contract for deed that exceeded the 3-year period expressly provided by the Trust. But for reasons discussed herein, we decline to set aside the sale. Instead, because the Trustees' execution of the contract for deed violated the terms of the Trust, we hold that Lawrence had probable cause to challenge the Trustees' sale of the farm to Dennis under the terms set forth in that contract. Thus, we reverse both the district court's ruling regarding the Trustees' authority to finance the sale of the farm as well as its enforcement of the no-contest clause against Lawrence. We remand to the district court for further proceedings necessary, if any, to effectuate our rulings and for consideration of Lawrence's claim for attorney fees and costs.
Additionally, while the Trustees cross-appealed the district court's determination as to the date of Lawrence's disinheritance, our reversal of the district court's enforcement of the no-contest clause renders that issue moot. Finally, in light of Lawrence's abandonment of any issue regarding the district court's denial of his motion to remove the Trustees, the Trustees' challenge to the district court's conclusion that the Trustees breached their duty to provide an accounting also is moot.
FACTUAL AND PROCEDURAL BACKGROUND
In 2003, Arthur established a revocable living trust naming himself and his son Dennis as Trustees. Arthur named as beneficiaries all of his surviving children (Dennis, Lawrence, Leona Newell, Elaine Befort, and Linda Leiker) and the children of Arthur's deceased son (Lisa Riebel and John Hamel). Arthur included a no-contest clause in the Trust itemizing several actions that, if taken by a beneficiary, could result in that beneficiary's disinheritance.
After preparation of the Trust documents, Arthur, Elaine, Lawrence, Dennis, Leona, and Linda met with an attorney to discuss the terms of the Trust. Arthur asked each of the siblings if they had any interest in buying the family farm. After Dennis expressed an interest, the family decided Arthur would give Dennis a first option to buy the farm. The family also discussed naming an additional person to serve as a trustee after Arthur's death.
A few days after the meeting, Arthur amended the Trust to name Dennis and Leona as Trustees upon Arthur's death. Additionally, Arthur amended Article Eight, Section One of the Trust, to include an option for Dennis to purchase the farm:
"It is my intention that my son, DENNIS HAMEL, have the first option to purchase any or all of the farmland (including cultivated and pasture) owned by my trust and/or by me individually. Upon my death, my Trustees shall have the farmland appraised. Based upon that appraisal, DENNIS HAMEL has the option to purchase any or all of the farmland for three years immediately following my death at the appraised price. During such time period, the trust shall continue to hold the farmland not yet purchased by DENNIS HAMEL. All net income from the farmland shall be distributed annually to the beneficiaries in accordance with the above listed beneficiary's fractional share of the trust. If DENNIS HAMEL has not purchased the farmland within the allotted time period, then it shall be divided in accordance with the above beneficiary's fractional shares."
Arthur died on June 14, 2004. Thereafter, Elaine, Lawrence, Dennis, and Leona met on several occasions to discuss funeral arrangements, the sale of Arthur's personal property, and administration of the Trust. Lawrence obtained a copy of the Trust in July 2004. In August 2004, Elaine, Lawrence, Dennis, and Leona met to discuss the third-party appraisal of the farmland and Dennis' intent to purchase the farm on a 6-year contract at 5 percent interest. At the meeting, Lawrence did not object to the method or terms of Dennis' purchase, but Lawrence later told his children he did not like the concept of Dennis buying the farm on contract.
In October 2004, Dennis executed a contract for deed between himself and his wife, as buyers, and the Trustees, as sellers, to purchase the farmland for $244,000 to be paid over 6 years with 5 percent interest and a down payment of $10,000. Over the next several months, the beneficiaries, including Lawrence, received distributions based in part on Trust income from Dennis' purchase of the farm.
In May 2005, Lawrence hired attorney Joseph Jeter to assist in acquiring information from the Trustees "regarding certain financial matters." Jeter advised Lawrence that under the Trust's provisions, Lawrence could request copies of the third- party appraisals of farmland and farm equipment purchased by Dennis, an inventory of Trust assets, and an accounting, including all receipts and disbursements from the Trust. Jeter explained that Lawrence's request would not violate the Trust's no-contest clause because the Uniform Trust Code of Kansas entitled Lawrence to this information.
Between May 2005 and March 2006, Jeter corresponded with the Trustees' attorneys, requesting specific information about Trust activity, including bank statements, canceled checks, and copies of deeds related to Trust assets. In this correspondence, Jeter made at least three requests for an accounting or a trust report pursuant to K.S.A. 2012 Supp. 58a-813. In response, the Trustees provided an inventory and appraisement, bank statements, canceled checks, printouts of Trust account activity, a list of Trust assets including the value of the assets, copies of appraisals, and a copy of the contract for deed for the sale of the farm.
In May 2006, Jeter filed a petition in district court seeking a formal accounting, termination of the Trust and immediate distribution of Trust assets, and attorney fees; asking the court to compel the Trustees to perform their duties; and alleging Dennis breached his duty of loyalty by purchasing and selling Trust property without notice to Lawrence.
Several months later, Jeter withdrew as Lawrence's counsel, and Lawrence retained the services of attorney Leslie Hess. After meeting with Jeter, Hess agreed with Jeter's assessment that the Trustees had failed to provide an adequate accounting. In letters to the Trustees' attorneys, Hess questioned whether Dennis' purchase of the farm had generated Lawrence's distribution checks, and Hess suggested that Dennis "should obtain a loan and pay the purchase price in full rather than over a period of years." Hess also asked the Trustees' attorneys to identify and provide a copy of any Trust provisions or statutory authority permitting Dennis to purchase the farm on contract.
In January and February 2007, Hess corresponded with the Trustees' attorney and again sought a copy of the contract for deed, other information about Trust activity, and identification of the provisions of the Trust authorizing the Trustees to sell the farm on contract. Hess specifically inquired: "How do you believe the Trustees have the authority to enter into a contact [sic] which is in violation of the trust provisions?" In response, the Trustees' attorney provided the requested information and directed Hess to specific sections of the Trust providing the Trustees with the same authority as an absolute owner regarding the sale of real estate owned by the Trust.
Hess filed a "Motion to Set Aside Contract for Deed," on March 12, 2007, alleging the contract for deed violated the Trust by allowing Dennis to purchase the farm over 6 years instead of the 3 years expressly permitted by the Trust. The motion further contended the Trust did not authorize either the financing of the sale of the real estate or the 5 percent interest rate. Hess sought an order setting aside the contract and requesting the farm property revert back to the Trust beneficiaries unless Dennis paid the full contract price on or before June 14, 2007, and paid to the Trust the income derived from the real estate "until the entire purchase price is paid in full."
On March 26, 2007, the district court ordered the Trustees to file a formal accounting within 30 days. The Trust's accountant prepared formal accountings for the years 2004, 2005, and 2006. After the Trustees timely filed the formal accountings in the district court and provided copies to the Trust beneficiaries, Lawrence objected to the accountings. Hess also sought to remove the Trustees, alleging several instances of self-dealing by the Trustees, particularly Dennis, and alleging the Trustees had breached their fiduciary duties.
The District Court's Decisions
In a July 2007 memorandum decision, the district court determined the Trustees had authority to sell the farm to Dennis under the terms of the contract for deed. In support of its conclusion, the court cited specific Trust provisions giving the Trustees the powers of an individual with "absolute ownership and control of property" and the power "to lend money to . . . any beneficiary under [the] Trust . . . as may be agreed upon between my Trustee and such parties, provided, however, that any such loan shall be adequately secured and shall bear a reasonable rate of interest."
The district court further found that although the Trust contained ambiguous provisions regarding when Arthur intended the Trust to terminate, Arthur did not intend for the Trust to terminate immediately upon his death.
The court subsequently appointed a Master to consider the adequacy of accountings provided by the Trustees. The Master's report concluded the Trustees had a duty to provide an accounting upon a request by a beneficiary and the Trustees failed to do so until required by the court. The Master's report further determined the court-ordered accountings were inadequate only because they failed to adhere to the promptness and reasonableness requirements of the Trust and the Uniform Trust Code of Kansas.
In February 2009, the district court conducted an evidentiary hearing on two issues: (1) removal of the Trustees, and (2) enforcement of the no-contest clause. Further, Lawrence's counsel asked the court to consider Lawrence's entitlement to attorney fees.
In a May 2009 memorandum decision, the district court concluded the Trustees breached their duty to provide an accounting but found no evidence to support the remaining allegations of misconduct on the part of the Trustees. Further, the district court held Lawrence lacked standing to seek the Trustees' removal because he lost ...