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Wednesday, May 29, 2013

North Dakota: Settlor's Mistake of Law Requires Trust Reformation

The North Dakota Supreme Court yesterday issued a decision applying mistake of law doctrine to reform a trust.  The case is In Re: Matthew Larson Trust Agreement, 2013 WL 2302304, No. 20120319 (N.D., May 28, 2013).

The case centers around trusts created by Matthew Larson's maternal grandparents, the Clairmonts.  After the trusts were created, Matthew's parents divorced and his father remarried.  That marraige produced other children who became Matthew's half-siblings.

Matthew died intestate, without spouse or descendants, in 2011.  At issue in the case is the provision for distribution of the trust in the even of Matthew Larson's death.  The provision in the first trust read (with emphasis added):

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.

The distribution terms in the second trust includes similar conditional language, providing for possible distribution to Matthew's "brothers and sisters of Matthew then living."  Because Matthew died with no will and no spouse, without issue and without otherwise appointing surviving beneficiaries, the provision in the trusts distributing trust corpus to his "brothers and sisters" became operative.

The question before the court is whether or not the phrase "Beneficiary's brothers and sisters" includes Greg Larson's children by the second marraige - Matthew's half-siblings.  The Clairmonts argued the trusts should be interpreted to include only Matthew Larson's brothers and sisters who are lineal descendants of the Clairmonts and not the children of Greg Larson by a marraige to someone other than their daughter.  The Clairmonts lost their claim for reformation at trial.

The North Dakota Supreme Court reversed. The Court first noted that North Dakota law allows trusts to be reformed to conform to the settlor's intentions, "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."  North Dakota adopted this statute from section 415 of the Uniform Trust Code, which itself mirrors Restatement (Third) of Prop.: Donative Transfers ยง 12.1 (Tentative Draft No. 1, 1995).  Trust law authorizes reformation in part to prevent unjust enrichment to unintended beneficiaries.

The Court further observed that mistake of law supporting trust reformation differs from mistake of law supporting contract reformation.  The court noted that, "[r]eformation of a contract generally requires a mutual mistake between the parties.'  Contract reformation normally requires mutuality to prevent courts from imposing a reformed contract upon the non-mistaken party that the non-mistaken party did not bargin for. On the other hand, the courts require no such mutuality to reform a trust because the settlor typically does not receive consideration in exchange for creating the trust. Only the settlor's intent is involved in creating the trust.  The Court's comments on the mutuality requirement in the two contexts is particularly instructive.

The Clairmonts testified they were mistakened as to the meaning of "brothers and sisters" and believed the terms meant full-blooded siblings.  Both Clairmonts and the attorney that drafted the second trust testified they believed the term "brothers and sisters" meant siblings that were lineal descendants of the Clairmonts.  They also testified that the Clairmonts did not intend to benefit Greg Larson's children by his second wife in establishing the trust.  The Court determined no evidence existed to dispute this testimony.  The Court concluded that applying the trial court's conclusions correctly to the law requires reformation providing, "that only Matthew Larson's brothers and sisters who are descendants of the Clairmonts may benefit from the trusts."

Craig Estlinbaum

http://lawprofessors.typepad.com/adjunctprofs/2013/05/north-dakota-supreme-court-on-mistake-of-law.html

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