TN Trust Code Authorizes Pre-Dispute Arbitration Agreement: Not Per Se Breach of Duty, but May Not Bind Non-Signatory Beneficiary

by Burr & Forman

Burr & Forman

The Tennessee Supreme Court recently held that Tennessee’s Trust Code and broad trust-instruments authorize a Trustee’s execution of a pre-dispute arbitration clause.  That isn’t a per se breach of fiduciary duty, but the Court left that door slightly ajar.  Moreover, a third-party relying on it will have to litigate whether it binds a non-signatory beneficiary.

The Guardian of tragically injured minor child sued the Trustees and financial advisors (and their firms) for breach of fiduciary and other duties in depletion of the child’s personal-injury-proceeds Trust.  The investment firms moved to compel arbitration, based on the Trust’s account agreements as executed by the Trustee.

The trial court compelled arbitration, but the Court of Appeals reversed.  The Supreme Court granted review to determine:  (1) Whether the Trustee could bind the Trust to a predispute arbitration agreement? (2) Whether a Trustee’s execution of a pre-dispute arbitration agreement was a breach of fiduciary duty? And (3) Whether the Trust’s arbitration agreement was binding as to the Beneficiary?

First, the Court held that the broad powers granted by the Tennessee Trust Code (TCA § § 35-15-815, -816) encompass arbitration.  Indeed, Section 35-15-816 (23) specifically authorizes a Trustee to “resolve a dispute … by mediation, arbitration or [other ADR].”  Moreover, the Trust Instrument granted broad powers, including specific authority to compromise claims by arbitration.  The Guardian argued that because the powers did not specifically refer to pre-dispute agreements, they were limited only to post-dispute arbitration agreements.  But the Court held such a constrained interpretation contrary to the broad grant of authority under both the Trust Code and the Trust Instrument.  Moreover, the Court noted that limitation simply would be impractical, given broad legal support for, and financial-industry usage of, arbitration agreements.

Second, the Court held that a Trustee’s execution of a pre-dispute arbitration agreement was not per se a breach of fiduciary duty.  Troublingly, though, the Court did not preclude the argument that it could be under another set of circumstances not alleged in this case.  Slip Op. at 25, n. 34.

Third, Trustees were not merely agents of the Beneficiary, but her fiduciaries.  The Court framed the question, then, as whether a non-signatory third-party beneficiary could be bound to arbitrate under a contract she did not sign. The Court held the arbitration agreement would bind the Beneficiary where the claims brought on her behalf seek to enforce the contract or benefits under it.  Slip Op. at 33.  The Beneficiary’s status as a minor did not matter (under the same reasoning). Similarly, any attempt to use the 1932 Tennessee Code § 29-5-101 to avoid arbitration was preempted by the FAA (it purports to exempt minors from arbitration).

The opinion in Harvey, ex rel. Gladden v. Cumberland Trust & Inv. Co., No. E2015-00941-SC-R110CV (Tenn. S. Ct. Oct. 20, 2017) is here.

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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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