Rachal v. Reitz, 403 S.W.3d 840 (Tex. 2013).

Trusts

Arbitration

 

A beneficiary brought suit asserting that the trustee misappropriated trust property and failed to provide a proper accounting.  Because the settlor included a provision in his inter vivos trust requiring the beneficiaries to arbitrate any dispute with the trustees, the trustee moved to compel arbitration.  Both the trial and intermediate appellate courts held that this provision was unenforceable.  The appellate court explained that a person cannot be compelled to arbitrate a dispute if the person did not agree to relinquish the person’s ordinary right to litigate.  The beneficiary is merely a recipient of equitable title to property and not a party to the trust instrument.  A trust is a conveyance of property coupled with a split of legal and equitable title and the imposition of fiduciary duties on the trustee.  A trust is an not agreement or contract.

 

The Texas Supreme Court reversed, holding that the arbitration provision is enforceable against the beneficiaries for two reasons.  First, the court will enforce conditions the settlor attached to the gifts to carry out the settlor’s intent.  The settlor included a clear statement that he wanted all disputes to be arbitrated and thus the court will give effect to that provision.

 

Second, the Texas Arbitration Act requires the enforcement of agreements to arbitrate.  Even though the beneficiaries did not expressly agree, they are deemed to have agreed through the doctrine of “direct benefits estoppel” because they accepted benefits of the trust and filed suit to enforce the terms of the trust.  These actions are the assent required to form an enforceable arbitration agreement.  If a beneficiary is unhappy with the arbitration provision, the beneficiary may disclaim under Trust Code § 112.010.  The court stated that “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 535.

 

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