February 18, 2013
Authored by: Luke Lantta
We’ve previously looked at the question of who needs to be joined as a party to trust litigation. In blogging about a petition for accounting in Illinois in which all trust beneficiaries were not named as parties, we said:
Failure to Join Necessary Parties. Not all of the contingent trust beneficiaries were parties to the lawsuit. If they were all joined to the lawsuit, the federal court would lack jurisdiction to hear the case because there would not have been diversity jurisdiction insofar as the suit wouldn’t have been between citizens of different states. The Court, therefore, had to determine whether all trust beneficiaries were required to be parties to a lawsuit for an accounting. By the very nature of the claim for an accounting, the other trust beneficiaries were not necessary parties. First, complete relief could be accorded among the plaintiffs and the trustee without joinder of the other beneficiaries. Second, the other beneficiaries’ ability to protect their interests would not have been impaired by their absence from the case.
We intentionally distinguished that situation from one where trust beneficiaries are seeking to remove a trustee. In that type of case, all beneficiaries likely would need to be joined as parties because removal of a trustee affects everyone.
What about deciding whether a no-contest clause in a trust was triggered? Do all trust beneficiaries need to be joined as parties to that type of litigation?
In Graves v. Vitu, a federal court in Virginia weighed in on that question when it tossed from federal court the latest chapter in multi-generational litigation between the descendants of Colonel Theodore Clay Northcott, founder of the famous Luray Caverns tourist attraction.
The details of the case are far too long and complicated to lay out here though the court provides a helpful, but short, overview of the litigation. This most recent spat between the Northcott descendants concerned whether two of Northcott’s great-grandchildren violated a no contest clause in a trust when they opposed the appointment of certain successor co-trustees of the trust.
A lawsuit was filed in federal court and the plaintiffs did not add one of the beneficiaries of the trust – Rebecca Hudson – as a party to the litigation. Had they joined her as a party, the federal court would not have diversity jurisdiction over the case because Rebecca and the plaintiffs were all residents of Virginia.
The court decided that Rebecca was a necessary and indispensible party to the litigation. Her joinder would destroy the court’s diversity jurisdiction over the case, and, therefore, the court dismissed the action. Here’s why:
Rebecca was required to be a party to the litigation because permitting the action to proceed without her may impair her ability to protect her interests. Rebecca had historically sided with her two sisters who were accused of violating the no contest provision. Rebecca, therefore, “perhaps” would be in jeopardy of losing her interest in the trusts if discovery revealed that she provided support to her sisters’ challenge to the successor co-trustee nominations. Sound familiar?
The plaintiffs tried to get around Rebecca’s obvious interests in the litigation through a very clever move – stipulating that they would not seek to enforce the no-contest clause against Rebecca. The court found, however, that the stipulation still would not render Rebecca a mere “disinterested bystander” to the litigation. If the plaintiffs were successful against Rebecca’s sisters, Rebecca would lose two of her allies in the ongoing fight over control of the family business. While it is true that Rebecca’s financial interest would increase if her sisters forfeited their interests in the trust, the incremental financial gain “pales in comparison” to the increased control the plaintiffs would gain over the family business.
Also, if Rebecca wasn’t a party to the action, she wouldn’t be bound by any judgment entered in the case. If she so desired, she could re-litigate the whole thing over again in state court and potentially reach an inconsistent result. Courts really try to avoid that.
Therefore, all trust beneficiaries needed to be joined as parties to litigation over the no contest provision in the trust.