California Appellate Court Refuses to Enforce Arbitration Clause in a Trust Document

Courts have reached conflicting results regarding the enforceability of an arbitration clause in a trust document.  For example, last year, the Texas Supreme Court held that a beneficiary was bound to an arbitration clause in a trust document (click here to see an earlier blog post about the Texas case).  The Texas Supreme Court reasoned that because a beneficiary accepts the benefits of a trust, the beneficiary is bound by the terms of the trust, including the arbitration clause.  However, an Arizona appellate court reached the opposite result, finding that the trust document was not a “contract” within the meaning of the state’s arbitration statute.

Earlier this week, a California appellate court refused to enforce an arbitration agreement in a trust.   McArthur v. McArthur, No. A137133 (Cal.App. 1 Dist. Mar. 11, 2014) (click here for a copy of the decision).  In this case, a mother created a trust, naming her three daughters as coequal beneficiaries.  After ten years, the trust document was amended to name one daughter, Kristi, as a co-trustee and to give that daughter a greater allocation, and the trust document was also amended to include an arbitration clause.  After the mother died, another daughter filed a petition contesting the trust.  The petition sought to remove Kristi as a trustee, alleging that the amended trust was void because Kristi had used undue influence over the mother who lacked capacity when executing the amendment.  Kristi then moved to compel arbitration of her sister’s claims pursuant to an arbitration provision in the amended trust document.  The trial court refused to enforce the arbitration provision.

The California appellate court also refused to enforce the arbitration provision and affirmed the denial of the motion to compel.  The appellate court acknowledged the Texas and Arizona decisions involving arbitration clauses in trust agreements, as well as a few other decisions involving the trust fact pattern, and the appellate court reasoned that the plaintiff sister in this case was not attempting to accept benefits under the amended trust or enforce rights under the amended trust.  Instead, the plaintiff sister argued the amended trust is invalid and should be set aside.  As a result, the appellate court reasoned the plaintiff sister had not consented to the terms of the amended trust, and hence the plaintiff sister was not bound to arbitrate.

1 Comment

  1. I’m a trusts-and-estates litigator practicing in Florida, which was the first state to pass legislation expressly authorizing and enforcing arbitration clauses in wills and trusts (F.S. 731.401). From my perspective there are two chief selling points for mandatory arbitration clauses in trusts and wills. First, if your arbitration clause is properly drafted, your case gets decided by a specialized trusts and estates lawyer (or lawyers) with real-life experience handling complex estate matters (usually 10+ years) vs. a randomly assigned state-court judge, who almost never has any private-practice experience dealing with complex estate matters (most judges are former prosecutors). Second, by privatizing the dispute-resolution process the parties can, to the extent permitted by F.S. 731.401 (and there are limitations), opt out of the dysfunctions inherent to an overworked and underfunded state court system. This second point is what tips the scales for me. For more on a Florida lawyer’s perspective of this issue, see my blog:

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