Arbitration Clause in a Trust - McArthur v. McArthur

Arbitration is a common non-judicial method of resolving legal disputes. An arbitrator, who is typically a retired judge, will weigh the evidence from both sides and issue a ruling. Arbitration clauses are typically inserted in employments contracts and consumer contracts. 

Recently settlors, the people who author trusts, have begun to insert arbitration clauses in their trust agreements. The intent behind this, presumably, is to reduce the cost of litigation and to keep the matter private. As for the cost, arbitration is typically cheaper than judicial action for a number of factors, notably lower discovery thresholds, e.g. interrogatories, depositions, etc. Thus in arbitration, litigants cannot poke and prod for the same volume of information as in a judicial matter. As for the privacy aspect, arbitration is not done in a public venue such as a superior court courtroom. Rather arbitration is done behind close-doors so to speak. Still, an arbitrator's ruling is, generally speaking, subject to judicial review. 

One such person who pursued the arbitration route was Frances McArthur. In her original 2001 trust, Ms. McArthur named her three daughters as co-equal beneficiaries, Pamela, Kristi and Deborah. Then in 2011, she amended her trust and allocated a larger share of the trust to one daughter, Kristi, and included a "Christian Dispute Resolution" clause to resolve disputes:

"The Trustor and Co-Trustees [(Frances and Kristi)] are Christians and believe that the Bible commands them to make every effort to live at peace and to resolve disputes with each other in private or within the Christian church (see Matthew 18:15-20; 1 Corinthians 6:1-8). Therefore, the Trustor and Co-Trustees agree that any claim or dispute arising from or related to the Trust as amended shall be settled by biblically based mediation and, if necessary, legally binding arbitration before the Institute for Christian Conciliation™, a division of Peacemaker® Ministries, in accordance with its Rules of Procedure for Christian Conciliation (the `Rules' found at www.peacemaker.net). To the extent authorized by the Rules, the provisions of California Code of Civil Procedure section 1283.05 (right to discovery in arbitration) are incorporated herein and made a part hereof. Judgment upon an arbitration decision may be entered in any court otherwise having jurisdiction. The Trustor and Co-Trustees understand that these methods shall be the sole remedy for any controversy or claim arising out of the Trust Agreement and expressly waive their right to file a lawsuit in any civil court against one another for such disputes except to enforce an arbitration decision. This Section shall also be binding on all successor trustees and benefices for the Trust as amended."

Following Ms. McArthur's death in 2011, Pamela sued Kristi for financial elder abuse and sought, inter alia, to have the 2011 trust invalidated. Kristi moved to compel arbitration, citing the clause in the 2011 trust. Pamela objected to this and the trial court agreed, finding that because Pamela was not a signatory to the agreement, she could not be compelled to arbitrate her claims against her sister. Kristi then appealed her decision to the 1st District Court of Appeal.

The appellate court agreed with the trial court's decision, finding that because Pamela had neither expressly or implicitly sought the benefits of the 2011 trust, she was not compelled to arbitrate.

Trust Arbitration

Arbitration is a non-judicial process for resolving disputes. Instead of litigating a contentious matter in state and federal court, litigants go to an arbitrator to resolve the matter. It is common to see mandatory arbitration clauses in employment and consumer cases. For example, a very recent United States Supreme Court Case dealt with the enforceability of an arbitration clause in a cellphone contract that disallowed class-action suits, AT&T Mobility v. Concepcion, 563 U.S. _____ (2011).  

In regards to trusts, arbitration clauses have been included in these documents as well. A recent court decision touched upon the enforceability of arbitration clauses. In, Diaz v. Bukey (2011) 195 CA4th 315, two beneficiaries, Marie and Paulette, became entangled in a legal squabble over the handling of their late parents’ trust. Marie was the successor trustee as well as a beneficiary and Paulette was the other beneficiary. In May 2009 Paulette requested that Marie provide her an accounting of the trust. When Marie provided an unsatisfactory accounting to Paulette, she filed a petition in November 2009 to have her removed as trustee for breach of fiduciary duty. Marie tried to have the case dismissed because the trust contained a mandatory arbitration clause. The trial court overruled the dismissal and Marie appealed this decision to the Court of Appeal. On appeal, the Court of Appeal held that the arbitration clause was unenforceable because Paulette was not a party to the arbitration agreement when her parents created the trust, which is generally required to enforce an arbitration clause.

However, Marie appealed this decision to the California Supreme Court and the Court agreed to review the appeal on August 10, 2011. Thus, the enforceability of an arbitration clause in a California trust hinges upon the decision of the California Supreme Court. So we shall see................