When Governor McCrory appointed Judge Gregory McGuire to the Business Court, I doubt that he had any concern whether Judge McGuire had any expertise in the area of trusts and estates. After all, that area of law is not enumerated in the types of case that warrant designation to the Business Court, contained in G.S. §75A-45.4.
But yesterday’s decision in Davis v. Davis, 2015 NCBC 95 required exactly that type of expertise. In particular, expertise on the validity of restrictions on the alienation of a life estate.
But why would such a case be in the Business Court in the first place? It was designated to the Business Court on the basis that it concerned the operation of an LLC, and the Court previously issued an (unpublished) Opinion in the case which concerned the standing of the Plaintiffs, members of an out-of-state (Virginia) LLC, to bring a derivative action in North Carolina.
Having resolved that issue in favor of the Plaintiffs in November 2014, all that remained to decide was the interpretation of a restriction on a life estate.
If you are thinking of clicking away, don’t. Keep reading. This gets interesting, I promise.
Family Battle Over An Outer Banks Beach House
The Plaintiffs, Melvin and J. Rex Davis, were suing their own mother, Dorothy Davis, over an Outer Banks beach house which the children owned through an LLC (MKR) in which Melvin, J. Rex, and their sister, Kaye, were the sole members.
Mrs. Davis and her late husband had acquired the beach house in the 1980’s, and gifted the beach house to MKR in 2009. In connection with their grant of the property, the parents retained a life estate in the property with a restriction. It said that:
said life estate [was] to be personal to the use of the Grantors . . . and may not be utilized by any other person, nor may it be reduced to a cash value for the benefit of the Grantors, or the survivor thereof, but must remain always during the lifetime of said Grantors, or the survivor thereof, available for their individual and personal use without interference from either the remainderrmen or any other person.
The children were offended that their mother had been renting out the house after the death of her husband. The attorney who had drafted the deed testified that he had included that language with the intention that Mr. and Mrs. Davis would not be able to rent the house during their life tenancy. Op. ¶15. And when I read that provision, I interpret it to mean that the parents could not rent the house.
So you think that would be the end to this unhappy family squabble. Mom has to stop renting, right? (We all know that renters destroy vacation homes.)
Life Estates And Restrictions On Them
But if you are thinking that Mrs,. Davis was barred from renting the beach house in which she had a life estate, you are wrong. Judge McGuire started by running through a short dissertation on life estates and restrictions on their alienation (conveyance). He observed:
- ‘[A] life estate is an estate in land, vesting the holder with the right to use and possess the property during his lifetime.” Op. ¶27.
- "An unlimited restraint on alienation of a life estate is against public policy, and therefore, void." Op. ¶28
- "This principle favoring alienability . . .l conflicts with another common law tenet — that one who has an interest in property should be able to convey that interest subject to whatever condition he or she desires to impose on the conveyance. Op. ¶29.
- "Faced with this conflict, the law has developed so that ‘some direct restraints on alienation are permissible where the goal justifies the limit on the freedom to alienate or where the interference with alienation is so negligible that the major policies furthered by freedom of alienation are not materially hampered.’" Op. ¶29 (quoting 4 Restatement of the Law of Property, Introductory Note to Part II at 2380).
All of that led to the conclusion that "North Carolina has recognized some limited restraints on alienation of life estates as being permissible." Op. ¶29.
So what about the restriction on Mrs. Davis’ life estate? Permissible or impermissible?
The Plaintiffs took a run at a creative argument: "since Mra. Davis is both the grantor and the life tenant and imposed the restrictions upon her own use of the life estate, the restriction in the Deed does not implicate the public policy reasons underlying the prohibition on alienation.." Op. ¶30.
Judge McGuire didn’t buy that argument. He concluded that the deed provisions "create a disabling restraint on the alienation of Mrs. Davis’ life estate, which is against public policy; thus, such provisions found in the Deed are void." Opp. ¶34.
Maybe you are worried for Mrs. Davis that the invalidation of the restriction voids the entire life estate. Judge McGuire said it did not. Op. ¶34 & n.39.