Court Enforced Forum-Selection Clause In Trust Document

by Winstead PC
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In In re JP Morgan Chase Bank, N.A., trust beneficiaries sued the trustee for alleged breaches of fiduciary duty in Dallas, Texas. No. 05-17-01174-CV, 2018 Tex. App. LEXIS 1883 (Tex. App.—Dallas March 14, 2018, original proceeding). The settlor executed the trust agreement in New York, and it included the following forum-selection clause: “The validity and effect of the provisions of this Agreement shall be determined by the laws of the State of New York, and the Trustee shall not be required to account in any court other than one of the courts of that state.” Id. The trustee filed a motion to dismiss the Texas suit due to the forum-selection clause, alleging that the beneficiaries had to file suit in New York. The trial court denied the motion, and the trustee filed a petition for writ of mandamus with the court of appeals.

In the court of appeals, the beneficiaries argued that the language of the forum-selection clause applied only to a claim for an accounting and did not apply to their breach-of-fiduciary-duty claim. The court of appeals disagreed, holding that the phrase “to account” was broader. After reviewing several definitions of the phrase, the court stated: “[W]e conclude ‘required to account in’ is used as a broad, unrestricted phrase and means relators may not be sued or otherwise required to explain alleged wrongdoing regarding the Trust or its administration in any state other than New York.” Id. The court also found support for its conclusion from the trust document in that “account” was used broadly in other portions of the trust. The court concluded the scope of the forum-selection clause included the beneficiaries’ claims for breach of fiduciary duty.

The beneficiaries also argued that trial court correctly denied the motion to dismiss because the mandatory venue statute in Texas Property Code Section 115.002(c) showed a strong public policy to keep the action in Texas. The court of appeals held that, although a venue-selection clause that was contrary to Section 115.002 would be unenforceable, the same was not true of a forum-selection clause. Id. (citing Liu v. Cici Enters., LP, No. 14-05-00827-CV, 2007 Tex. App. LEXIS 81, 2007 WL 43816, at *2 (Tex. App.—Houston [14th Dist.] Jan. 9, 2007, no pet.) (mem. op.) (“The distinction between a forum-selection clause and a venue-selection clause is critical. Under Texas law, forum-selection clauses are enforceable unless shown to be unreasonable, and may be enforced through a motion to dismiss. In contrast, venue selection cannot be the subject of private contract unless otherwise provided by statute.”)). Further, although the beneficiaries contended that proceeding in New York would be unreasonable and seriously inconvenient, they failed to present any evidence to support those contentions. The court held that the trial court abused its discretion in denying the motion to dismiss and granted mandamus relief.

Interesting Note: This is the first case in Texas to enforce a forum-selection clause contained in a trust document. “A forum-selection clause is a creature of contract.” Phoenix Network Techs. (Europe) Ltd. v. Neon Sys., Inc., 177 S.W.3d 605, 611 (Tex. App.—Houston [1st Dist.] 2005, no pet.). Interestingly, the court of appeals in In re JPMorgan Chase Bank, N.A., did not address an argument that the forum-selection clause should not be enforced because a trust is not a contract between the trustee and the beneficiary.

In 2013, the Texas Supreme Court enforced an arbitration clause that was contained in a trust document. Rachel v. Reitz, 403 S.W.3d 840 (Tex. 2013). The Court did so for two primary reasons: 1) the settlor determines the conditions attached to her gifts, which should be enforced on the basis of the settlor’s intent; and 2) the issue of mutual assent can be satisfied by the theory of direct-benefits estoppel, so that a beneficiary’s acceptance of the benefits of a trust constitutes the assent required to form an enforceable agreement to arbitrate. Id. The Court stated that generally Texas courts strive to enforce trusts according to the settlor’s intent, which courts should divine from the four corners of unambiguous trusts.  The Court noted that the settlor intended for all disputes to be arbitrated via the trust language. Id. The Court then looked to the Texas Arbitration Act, which provides that a “written agreement to arbitrate is valid and enforceable if the agreement is to arbitrate a controversy that: (1) exists at the time of the agreement; or (2) arises between the parties after the date of the agreement.” Id. (citing Tex. Civ. Prac. & Rem. Code 171.001(a) (emphasis added)). The Court noted that the statute uses the term “contract” in another provision, and that the Legislature intended for the terms “agreement” and “contract” to be different.  As the statute does not define the term “agreement,” the Court defined it as “a mutual assent by two or more persons.” Id. Thus, a formal contract is not required to have a binding “agreement” to arbitrate. The Court resolved the issue of mutual assent by looking to the theory of direct-benefits estoppel. Because the plaintiff had accepted the benefits of the trust for years and affirmatively sued to enforce certain provisions of the trust, the Court held that the plaintiff had accepted the benefits of the trust such that it indicated the plaintiff’s assent to the arbitration agreement. The Court ordered the trial court to grant the trustee’s motion to compel arbitration.

There is not a comparable statute that requires the enforcement of “agreements” for forum-selection. There could be an issue of whether the Rachel v. Reitz/arbitration-clause analysis should apply to forum-selection clauses. However, there is precedent in Texas that arbitration clauses are a type of forum-selection clause. St. Clair v. Brooke Franchise Corp., No. 2-06-216-CV, 2007 Tex. App. LEXIS 2805, 2007 WL 1095554, at *4 (Tex. App.—Fort Worth Apr. 12, 2007, no pet.) (mem. op.). See generally Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528, 534, 115 S. Ct. 2322, 2326, 132 L. Ed. 2d 462 (1995) (recognizing arbitration provisions are a subset of forum-selection clauses).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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