By Lynda Chung
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| Lynda Chung |
Over the years some arbitration clauses in different contracts have withstood the litigants’ challenges. Some arbitration clauses have not. In a recent California Court of Appeal cases, McArthur v. McArthur (2014) 2014 S.O.S. A137133, the trustee attempted to enforce the arbitration clause in the amended trust document (the “Amended Trust”) created by her mother against the beneficiary who was the trustee’s sister. The Amended Trust required mediation, and if necessary, arbitration of “any claim or dispute arising from or related to the Trust as amended.” The Court of Appeal held that the arbitration clause in the challenged the Amended Trust is not enforceable against the beneficiary who was not a party to the Amended Trust.
In McArthur, in 2001, the settlor (the mother of the plaintiff and the defendant) created a trust which purported to distribute her assets upon death to her three daughters equally. In January, 2011, the mother amended the Trust, giving a greater portion of the trust property to Kristi, the respondent, and also naming Kristi the trustee of the Trust. The mother died in August, 2011. Thereafter, Pamela, another daughter, filed a petition to invalidate the Amendment on the grounds that her mother lacked capacity when she executed the Amendment and that Kristi committed financial elder abuse against their mother. The trustee moved to compel arbitration of Pamela’s claims pursuant to the arbitration provision in the 2011 Trust, and Pamela objected to the motion on the grounds that she was not a party to the Amended Trust. The trial court agreed with Pamela, and the trustee appealed.
Noting two inconsistent cases from Arizona (holding that the arbitration clause is unenforceable against the beneficiary who was not a party to the trust agreement) and Texas (holding that the arbitration clause was enforceable), the California Court of Appeal held that the arbitration clause in a trust instrument is not binding on a beneficiary who never agreed to it. “It is illogical to suggest that Pamela’s claim of entitlement to benefits under ‘the trust’ as it existed before the 2011 amendment amounts to acceptance of an arbitration clause first appearing in the 2011 amendment, a document she specifically challenges as invalid.” (Emphasis in original.)
It should be noted that the holding of this case was obviously limited to the beneficiary who was not a party to the Trust and who challenged the very instrument containing an arbitration clause. If the disputes were of a different nature, for example, a fee dispute between the beneficiaries and the trustee who accepted her fiduciary position upon review of the terms of the trust, the result would have been different because the trustee’s acceptance of the trusteeship implies her acceptance of the terms of the trust, including the arbitration clause.
In McArthur, in 2001, the settlor (the mother of the plaintiff and the defendant) created a trust which purported to distribute her assets upon death to her three daughters equally. In January, 2011, the mother amended the Trust, giving a greater portion of the trust property to Kristi, the respondent, and also naming Kristi the trustee of the Trust. The mother died in August, 2011. Thereafter, Pamela, another daughter, filed a petition to invalidate the Amendment on the grounds that her mother lacked capacity when she executed the Amendment and that Kristi committed financial elder abuse against their mother. The trustee moved to compel arbitration of Pamela’s claims pursuant to the arbitration provision in the 2011 Trust, and Pamela objected to the motion on the grounds that she was not a party to the Amended Trust. The trial court agreed with Pamela, and the trustee appealed.
Noting two inconsistent cases from Arizona (holding that the arbitration clause is unenforceable against the beneficiary who was not a party to the trust agreement) and Texas (holding that the arbitration clause was enforceable), the California Court of Appeal held that the arbitration clause in a trust instrument is not binding on a beneficiary who never agreed to it. “It is illogical to suggest that Pamela’s claim of entitlement to benefits under ‘the trust’ as it existed before the 2011 amendment amounts to acceptance of an arbitration clause first appearing in the 2011 amendment, a document she specifically challenges as invalid.” (Emphasis in original.)
It should be noted that the holding of this case was obviously limited to the beneficiary who was not a party to the Trust and who challenged the very instrument containing an arbitration clause. If the disputes were of a different nature, for example, a fee dispute between the beneficiaries and the trustee who accepted her fiduciary position upon review of the terms of the trust, the result would have been different because the trustee’s acceptance of the trusteeship implies her acceptance of the terms of the trust, including the arbitration clause.
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