In re Weekley Homes, L.P., 180 S.W.3d 127 (Tex. 2005).
Settlor signed a contract for the purchase of a home which contained
an arbitration clause. After closing, Settlor transferred the house to a
previously existing revocable inter vivos trust for the benefit of
Daughter. Settlor and Daughter were co-trustees of this trust. Settlor
explained that the only reason he signed the purchase contract
individually was that he had forgotten to place the home into the trust.
Problems later arose with the house. Settlor, Daughter, and the Trust
sued the builder who then moved to compel arbitration. The lower court
compelled Settlor and Trust to arbitrate but not Daughter under the
theory that she was not bound by the arbitration clause because she did
not sign the contract.
The Supreme Court of Texas decided that Daughter was bound. Included in
its discussion of the arbitration issue, the court explained that “a
suit involving a trust generally must be brought by or against the
trustee, and can be binding on the beneficiaries whether they join or
not.” Id. at 133-34. Even though Daughter did not purport to sue either
as a trustee or as a beneficiary of the trust, she was in reality both.
Thus, any recovery will directly benefit her as the sole beneficiary of
the trust. The court noted that “if a trustee’s agreement to arbitrate
can be avoided by simply having the beneficiaries bring suit, ‘the
strong state policy favoring arbitration would be effectively
thwarted.’” Id. at 134, citing Merrill Lynch, Pierce, Fenner & Smith v.
Eddings, 838 S.W.2d 874, 879 (Tex. App.—Waco 1992, writ denied).
Moral: The rights of beneficiaries may be impacted by arbitration
clauses contained in contracts signed by the trustee.