Court Issues Opinion Holding That Parties Can Enforce Arbitration Clauses In Trust Documents

by Winstead PC
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Parties may want to resolve trust disputes in arbitration. There are perceived cost savings associated with arbitration, and arbitration can be quicker than normal litigation. But one of the main benefits is that the proceeding is confidential. A settlor of trust may genuinely not want the world to know about the trust, its assets, or the trustee’s actions in administering the trust. Should the settlor’s desire that all trust disputes be resolved in arbitration be enforced?

Historically, other jurisdictions have not enforced these agreements. But recently, the Texas Supreme Court held that arbitration clauses in trust documents are enforceable in Texas.

In Rachal v. Reitz, a beneficiary sued a trustee for failing to provide an accounting and otherwise breaching fiduciary duties. 347 S.W.3d 305 (Tex. App.—Dallas 2011, pet. granted). The trustee filed a motion to compel arbitration of those claims due to an arbitration provision in the trust instrument. After the trial court denied that motion, the trustee appealed.

The court of appeals affirmed the trial court’s refusal to compel arbitration. The court of appeals held that arbitration is a matter of contract law, and that the trustee had the burden to establish the existence of an enforceable arbitration agreement. The court noted that it was undisputed that neither the trustee nor the beneficiary signed the trust document. Further, the court held that the trust document solely expressed the settlor’s intent and not the intent of the trustee or beneficiary. The court stated: “Rachal did not establish how the settlor's expression of intent satisfied all of the required elements of a contract or how this expression of the settlor's intent transformed the trust provision into an agreement to arbitrate between Rachal and Reitz.” Id. at 309-10.

The Texas Supreme Court reversed the court of appeals and held that the arbitration clause was enforceable. See Rachel v. Reitz, No. 11-0708, 2013 Tex. App. LEXIS 348 (May 3, 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. See id.

The Court stated that generally in 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 following language: “Despite anything herein to the contrary, the sole and exclusive remedy” for “any dispute of any kind involving this Trust or any of the parties or persons connected herewith (e.g., beneficiaries, Trustees)” was arbitration. 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)). The Court noted that the statute also uses the term “contract” in another provision, and that the Legislature intended for the terms 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.

Texas now takes the minority position that arbitration clauses in trust documents are enforceable. The reasoning of the Texas Supreme Court’s opinion would seem to apply to estate disputes as well. A beneficiary of a will may be compelled to arbitrate disputes with an estate representative if the beneficiary accepts any benefits from the estate or sues to enforce a provision of the will where the will contains a sufficiently broad arbitration provision.

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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