November 8, 2011 NOTE: The California Supreme Court has granted review of this decision.
With increasing frequency, trust instruments are prepared that require binding arbitration of all disputes relating to the trust. Now, addressing the issue for the first time in California, an appellate court has held that such a provision is unenforceable against a beneficiary who brings an action against the trustee. Diaz v. Bukey (May 10, 2011) 2011 DJDAR 6650.
The premise of the decision is the well-established rule that only parties to an arbitration contract may enforce it or be required to arbitrate. The trust instrument at issue, the court found, did not constitute a contract binding on the beneficiaries because (as in most instances) “there is no evidence that the beneficiaries gave either their consent or consideration to achieve the status of beneficiary.” Citing earlier California precedent and a 2004 Arizona case, the court rejected appellant’s argument that the trust instrument was a third-party beneficiary contract, and that the beneficiary was equitably estopped from denying her obligation to arbitrate by accepting the benefits of the trust. The trustee could not show that the beneficiary had agreed to arbitrate the claims asserted and therefore could not compel arbitration on the basis of the provision in the trust instrument requiring arbitration.