Texas Supreme Court Holds Trust Dispute Must be Arbitrated

Last week, the Supreme Court of Texas ordered that a trust dispute must be submitted to arbitration. In Rachal v. Reitz, 11-0708, (Tex. May 3, 2013), a trust beneficiary, John Reitz, sued a successor trustee who was also the attorney who drafted the trust, Hal Rachal, Jr., for breach of fiduciary duty, misappropriation of trust assets, and failure to provide an accounting as required by state law. In addition, Reitz sought a temporary injunction against Rachal, his removal as trustee, and damages.

Rachal moved to compel the dispute to arbitration pursuant to the Texas Arbitration Act (“TAA”) based upon a provision in the trust documents. The arbitration provision specified that it was “binding upon the Grantor, Trustees, and beneficiaries hereto and on their respective heirs, executors, administrators, legal representatives, and successors.” The trial court denied Rachal’s motion and he filed an interlocutory appeal. After an en banc Court of Appeals affirmed the trial court’s decision, Rachal appealed the matter to the Supreme Court of Texas.

First, the Supreme Court said a party who seeks arbitration under the TAA must demonstrate that a valid agreement to arbitrate exists and the dispute falls within the scope of that agreement. The Court added that it must look to the Legislature’s intent and the plain meaning of the words when construing a statute. Next, the Court stated it agreed with Rachal’s argument “that the TAA does not require a formal contract but rather only an agreement to arbitrate future disputes.”

After that, Texas’ high court looked to the settlor’s intent when he created the trust. The court said “We enforce the settlor’s intent as expressed in an unambiguous trust over the objections of beneficiaries that disagree with a trust’s terms.” According to the Court,

Here, the settlor unequivocally stated his requirement that all disputes be arbitrated. He specified that, “[d]espite anything herein to the contrary,” arbitration would be “the sole and exclusive remedy” for “any dispute of any kind involving this Trust or any of the parties or persons connected here with (e.g., beneficiaries, Trustees) . . . .” Because this language is unambiguous, we must enforce the settlor’s intent and compel arbitration if the arbitration provision is valid and the underlying dispute is within the provision’s scope. Meyer, 211 S.W.3d at 305.

Next, the Supreme Court analyzed the requirements for an agreement under the TAA and stated, “although an agreement need not meet all the formal requirements of a contract, it must be supported by mutual assent.” The Court then discussed the ways in which a party may demonstrate his or her assent to arbitrate and said the doctrine of direct benefits estoppel applies to arbitration agreements in Texas. Because “Reitz’s conduct indicated acceptance of the terms and validity of the trust,” the Court held “the doctrine of direct benefits estoppel applies to bar Reitz’s claim that the arbitration provision in the trust is invalid.” The court added,

Reitz argues, however, that direct benefits estoppel cannot apply here because there is no underlying contract. We have generally applied direct benefits estoppel when there is an underlying contract the claimant did not sign, but we have never held a formal contract is required for direct benefits estoppel to apply.

The Texas Supreme Court then dismissed Reitz’s argument that Texas should follow two other states that have held arbitration provisions in a trust are unenforceable. According to the Court, the decisions Reitz relied upon were later superseded. The Court also pointed to “a dearth of authority as to the validity of an arbitration provision in a trust,” and stated “that other courts, while not addressing the precise issue raised here, have nonetheless favorably viewed arbitration provisions in trusts.”

After determining that a valid agreement to arbitrate existed, the Supreme Court addressed whether the dispute was within the scope of the agreement. The Court stated,

Reitz asserts that his lawsuit falls outside the scope of the agreement because the trust’s terms indicate the settlor’s intent to exempt trustee misconduct claims from the scope of the arbitration provision. We disagree.

According to the Court, the factual allegations related to a dispute must be analyzed in order to determine whether the legal claims asserted fall within the scope of an arbitration agreement. The court also found that a trust clause which allowed a trustee to fund litigation costs from the trust in cases of unintentional misconduct did not defeat the arbitral provision because,

First, to the extent the two provisions conflict, the arbitration provision—by its own terms—prevails over “anything herein to the contrary.” Second, the trustee exoneration provision, when read in conjunction with the arbitration provision, still has meaning.

Because “Rachal demonstrated the existence of a valid arbitration agreement that covers the claims at issue,” the Supreme Court of Texas reversed the lower court’s decision and remanded the case with instructions to submit the dispute to arbitration.