Is a trust provision requiring that the trustee and beneficiaries submit to binding arbitration enforceable on the beneficiaries? Not in California, held the California Court of Appeals in Diaz v. Bukey, 125 Cal.Rptr.3d 610 (Ca. App. Ct. 2011). The court followed an Arizona decision which it summarized as follows:
In Schoneberger v. Oelze (2004) 208 Ariz. 591, 96 P.3d 1078, the court construed an arbitration provision in a trust substantially similar to that involved here. We find its reasoning persuasive. In Schoneberger, two trust beneficiaries filed separate, but similar, lawsuits against the settlors and trustees of the trusts asserting claims of breach of trust, conversion and fraudulent concealment, mismanagement and dissipating trust assets. Among other relief, each beneficiary demanded an accounting.
Defendants answered, denied the allegations of wrongdoing and alleged that the beneficiaries’ claims were subject to mandatory arbitration under the Arizona arbitration statute. The defendants asserted the arbitration clauses in the trust documents constituted provisions in a written contract requiring arbitration, and although the beneficiaries were not signatories to the trusts, they were nevertheless obligated to arbitrate as third party beneficiaries. Alternatively, they contended the beneficiaries were equitably estopped from objecting to arbitration as they were affirmatively seeking benefits under the trusts. The beneficiaries opposed defendants’ motion to compel arbitration. They argued the arbitration provisions in the trusts were unenforceable because the trusts were not contractual agreements. They also asserted that, as nonsignatories to the trust documents, they had never agreed to arbitrate their claims against the defendants.
In Schmitz v. Merrill Lynch, 939 N.E.2d 40 (Ill. App. 2010) the trustee entered into a “client relationship agreement” with an investment advisor that contained an arbitration provision. The provision did not bind the beneficiaries because the beneficiaries were not contractually bound to the investment advisor.
In Rachal v. Reitz, 2013 Tex. LEXIS 348 (2013), the could held that an arbitration clause in trust was enforceable against non-signatory beneficiaries. A.F. Reitz established a trust for the benefit of his son, John, and appointed himself as initial trustee and Hal Rachal Jr. as successor trustee. After A.F. Reitz died, Rachal became trustee of the trust. John sued Rachal as trustee alleging breach of fiduciary duty by failure to account and looting of the trust for personal gain. The trustee moved to compel arbitration of the suit under the arbitration provision in the trust. The trial court denied the motion and the trustee appealed.
On appeal, the Texas Court of Appeals sitting en banc (with four dissenting justices) affirmed on the grounds that: (1) the trust document did not satisfy the requirement for a valid contract; and (2) the settlor’s intent does not transform the trust into a contract to arbitrate between the successor trustee and the beneficiary.
The Texas Supreme Court reversed the Court of Appeals and held that the arbitration clause was enforceable, on the grounds that: (a) Texas courts enforce the settlor’s intent over the objections of the beneficiaries that disagree with the trust terms; (b) The Texas Arbitration Act applies to written “agreements”, and the Texas legislature could have limited the Act to “contracts” and did not do so, therefore the legislature intended to include all agreements and not just contracts; (c) the Act does not define “agreements”, but the common definition is a manifestation of mutual assent; (d) mutual assets to an arbitration provision exists where a non-signatory party has obtained or is seeking substantial benefit under an agreement through the doctrine of “direct benefits estoppels”; (e) deemed assent exists here through direct benefits estoppels because the trust beneficiary did not disclaim his interest in the trust, did not challenge the validity of the trust, and attempted to enforce his rights under the trust and sought the benefits provided to him under the terms; (f) a valid underlying contract is not required to apply direct benefits estoppel; (g) the claims in this case were within the scope of the arbitration provision, which required arbitration of “any dispute of any kind involving this Trust or any of the parties or persons connected herewith”; and (h) the other trust provisions that exonerate the trustee from liability do not defeat the arbitration provision which applies “notwithstanding anything herein to the contrary” and could apply where a claim is filed in court and the direct benefits estoppel doctrine does not apply (which presumably would mean only claims by non-beneficiaries under the court’s reasoning).