Enforceable arbitration clauses are usually the result of a contract between parties. But does that work in probate law, where beneficiaries rarely sign contracts, and the most important party is always dead?
The Texas Supreme Court reversed two lower courts by answering "yes" to that question in a decision released May 3. The background, according to the high court’s May 3 decision in Hal Rachal Jr. v. John W. Reitz, is as follows.
Andrew Francis Reitz established the A.F. Reitz Trust in 2000. Upon his death, Hal Rachal Jr., the attorney who drafted the trust, became the successor trustee.
In 2009, Andrew Reitz’s son John Reitz, who is a beneficiary of the trust, sued Rachal, alleging Rachal had misappropriated trust assets, and sought his removal as a trustee.
Rachal denied the allegations and later moved to compel arbitration under the Texas Arbitration Act, relying on an arbitration provision in the trust. That provision stated that arbitration would be the sole remedy for "any dispute of any kind involving this Trust."
A Dallas probate court denied Rachal’s motion to compel arbitration, a decision affirmed by a divided en banc Dallas 5th Court of Appeals. The 5th Court held that a binding arbitration provision must be the product of an enforceable contract between the parties, reasoning that such a contract does not exist in the trust context and the trust beneficiaries have not consented to such a provision. Rachal appealed that decision to the high court. [See "High Court Weighs Enforceability of Trust's Arbitration Clause," Texas Lawyer, Nov. 19, 2012, page 1.]
In its opinion, the Supreme Court examined whether the direct-benefits estoppel doctrine, Texas Property Code §112.010, applies to an arbitration provision in a trust. That doctrine allows a beneficiary to disclaim an interest in a trust. It also allows a beneficiary to challenge the validity of a trust, but it makes the beneficiary assent to the trust’s terms to do so, according to the decision.
"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," wrote Justice Eva Guzman in a unanimous opinion.
"As equitable defensive theories, direct benefits estoppel and promissory estoppel promote fairness by holding a party to its position in the performance of an agreement or in bringing litigation," Guzman wrote. "A valid, underlying contract is not required under these theories, nor is it required here; thus, Reitz’s argument is without merit."
"Reitz’s assent to the trust is reflected in his acceptance of the benefits of the trust and his suit to compel the trustee to comply with the trust’s terms," Guzman concluded in the decision, which reverses the 5th Court’s decision and remands the case to the probate court.
Chad Baruch, a Rowlett solo who represents Reitz, says he’s disappointed in the decision.
"The result was not unexpected, given the Texas Supreme Court’s pretty consistent support of arbitration," Baruch says. "We knew we would have an uphill battle in direct-benefits estoppel. I was a little bit surprised in the court’s analysis of traditional contract principals. We had felt like they would apply a little more contract-focused lens" on the case, he says.
Cathy Brandt, an associate with Wills Point’s Wynne & Wynne who represents Rachal, says she was pleased to receive a "clean and well-reasoned" opinion from the high court. She believes the decision will encourage more use of arbitration clauses in trusts and wills.
"A lot of people don’t want things like this litigated. Some people say, ‘If you contest the will, you’re out of it,’ " Brandt says. "I think this will help people keep things more private.”