March 25, 2014
Authored by: Luke Lantta
Mandatory arbitration provisions in trusts are a relatively new concept, and only now are courts really beginning to weigh in on their enforceability. In McArthur v. McArthur, add the First District Court of Appeal of California to the list of courts that have now considered the issue. It determined that an arbitration provision in the inter vivos trust of Frances E. McArthur was unenforceable as against a trust beneficiary who brought suit to invalidate an amendment to the trust based on undue influence and lack of testamentary capacity.
Let’s start with the provision. In 2011, Frances amended her 2001 trust to give a greater portion of the property to one of her daughters and to add a “Christian Dispute Resolution” provision that required mediation and, if necessary, arbitration of “any claim or dispute arising from or related to the Trust as amended.”
This was a question of first impression in California: whether an arbitration agreement in a trust can bind a beneficiary.
The daughter who brought suit was not a signatory to the arbitration provision in the trust agreement, and the appellate court began its analysis by noting that there are circumstances in which nonsignatories to an agreement containing an arbitration clause can be compelled to arbitrate under the agreement.
Because the issue was one of first impression, the court looked to other states and noted that there was not a “great deal of case law on the subject from other jurisdictions.” But there were two cases to look at. First, in Arizona, in Schoneberger v. Oelze (superseded by Arizona Revised Statutes section 14-10205 which now permits arbitration provisions in trust agreements), the Arizona Court of Appeal held that, although a trust instrument required arbitration, the beneficiaries were not bound to arbitrate because the trust document was not a “contract” subject to the state’s general arbitration statute. On the other hand, in Rachal v. Reitz, the Texas Supreme Court held that, based on the wording of Texas’s arbitration law, a trust beneficiary can be bound to arbitrate whether or not the trust document is considered to be a contract. So, with a split in other jurisdictions, where did that leave California?
First, the doctrine of direct benefits estoppel did not apply. Under this doctrine, a beneficiary who attempts to enforce rights that would not exist without the trust manifests her assent to the trust’s arbitration clause. Because the plaintiff was challenging the validity of the trust amendment, she had not accepted benefits under the trust amendment or attempted to enforce rights under the amended trust instrument. Challenging the validity of a trust is conduct incompatible with the idea that the plaintiff consented to the instrument.
Second, the doctrine of delegated authority to consent did not apply. Under this doctrine, a legislature can provide for reasonable delegation of authority to consent to an arbitration clause. California’s Probate Code does not contain specific legislative authorization for pre-dispute trust arbitration provisions, despite otherwise establishing specific remedies and procedures for trust beneficiaries. Therefore, the doctrine did not apply.
Third, the arbitration clause in the trust was not enforceable against the trust beneficiaries as third party beneficiaries of the trust. For a third party to be bound by an arbitration clause in a contract, the third party must claim benefits or rights under the contract before he or she is bound to arbitrate. As the Court noted, the plaintiff had not claimed rights or benefits under the disputed trust amendment.
Thus, because the plaintiff had not either expressly or implicitly sought the benefits of a trust instrument containing an arbitration provision, the plaintiff could not be compelled to arbitrate the dispute.