Compelling Trust Beneficiaries to Arbitrate in Texas
By Christine Nowak and Mark Sales
Texas recently became one of a handful of states to directly address whether a trust beneficiary, pursuant to the terms of a trust that he or she never reviewed, signed, or otherwise agreed to, can be compelled to submit any claims or disputes involving the trust (or the trustee) to arbitration. In a case of first impression in the state, the Texas Supreme Court joined Arizona and Florida (via legislation–Ariz. Rev. Stat. §14-10205; Fla. Stat. §731.401) when it held on May 3, 2013 in Rachal v. Reitz, - S.W.3d - , 2013 WL 1859249 (Tex. 2013) that an arbitration provision contained in an inter vivos trust was valid and could, in fact, be enforced against a trust beneficiary.
In Rachal, A.F. Reitz created a trust for the benefit of his two sons, James and John, appointing himself as initial trustee and his lawyer, Hal Rachal, Jr., as successor trustee. Following A.F. Rietz’s death (making the trust irrevocable), one son—who was not a signatory to the trust—sued the successor trustee for breach of fiduciary duties as trustee because the successor trusteel had allegedly misappropriated trust assets and refused to provide an accounting. The successor trustee moved to compel arbitration based on an arbitration provision contained in the trust. The provision specified that it was applicable “to any dispute of any kind involving the Trust or any of the parties or persons concerned herewith (e.g., beneficiaries, Trustees)” and was “binding on any and all persons who may have an interest in Grantor’s estate or any trust of Grantor…”
The Probate Court No. 2 of Dallas County, Texas denied the successor trustee’s motion to compel arbitration. The successor trustee filed an interlocutory appeal. After an en banc decision of the Dallas Court of Appeals affirmed the trial court’s refusal to compel arbitration because the son, the trust beneficiary, had not contracted and agreed to arbitrate his claims (347 S.W.3d 305 (Tex. App. – Dallas 2011, pet. granted), the successor trustee appealed to the Texas Supreme Court. The Texas Supreme Court reversed on the grounds that: (1) the settlor unequivocally stated his intent—within the four corners of the trust agreement—that all disputes be arbitrated, and (2) the issue of mutual assent (required to form an enforceable agreement to arbitrate) was satisfied by the doctrine of direct benefits estoppel (i.e., a beneficiary’s acceptance of the benefits of a trust constitutes consent to the arbitration provision in that same trust). Id.at *3-6
In arriving at its decision, the Texas Supreme Court pointed out that both federal and Texas law strongly favor the validity and enforceability of arbitration clauses. It rationalized that while arbitration clauses are generally only enforceable against those who sign a contract containing an arbitration clause, in this instance, the doctrine of direct benefits estoppel bound the trust beneficiaries to the clause:
[A] beneficiary who attempts to enforce rights that would not exist without the trust manifests her assent to the trust’s arbitration clause. For example, a beneficiary who brings a claim for breach of fiduciary duty seeks to hold the trustee to her obligations under the instrument and thus has acquiesced to its other provisions, including its arbitration clause. In such circumstances, it would be incongruent to allow a beneficiary to hold a trustee to the terms of the trust but not hold the beneficiary to those same terms. Id. at *6.
Nonetheless, the Texas Supreme Court, in establishing the general rule, explained that acceptance of trust benefits will not mandate arbitration in all circumstances, carving out exceptions to the rule where a trust beneficiary executes a disclaimer and/or is contesting the validity of the trust (as opposed to seeking to enforce it) and leaving open the question of whether the doctrine of unclean hands could be used to bar enforcement of an arbitration provision. Id. at *6-7.
In the wake of the Rachal decision, estate planners will need to consider the inclusion of arbitration clauses in their clients’ trust agreements. Arbitration in the context of trust disputes may have many benefits, such as confidentiality (i.e. keeping confidential personal family information and information regarding the exact quantity or type of trust assets) as well as providing a more cost effective and efficient alternative to the public forum of our court system. Furthermore, although the Rachal case involved trusts, given the parallels and analogous situations which often arise with wills, it may be just a matter of time before the reasoning of the Texas Supreme Court’s opinion is extended to and applied to disputes involving wills and executors.