I asked this question in an Alert dated December 13, 2012, and reported that the dismissal of Diaz v. Bukey left us without a clear answer. The appellate court in Diaz had held that an arbitration provision in a trust instrument could not be enforced against the trust’s beneficiaries. The California Supreme Court granted review, then remanded the case to the Court of Appeal for reconsideration in light of Pinnacle Museum Tower Association v. Pinnacle Market Development (2012) 55 Cal.4th 223, a decision enforcing an arbitration provision against members of a condominium association. In that Alert I also suggested that the Court’s reasons for enforcing arbitration in Pinnacle should not apply to an inter vivos trust.
A recent decision comes to the same conclusion. In McArthur v. McArthur (2014) 2014 DJDAR 2955, the decedent had originally created a trust that made her three daughters coequal beneficiaries. She subsequently amended the trust, allocating a greater portion of the trust to one daughter. This amendment also added a provision requiring arbitration of disputes. After the mother’s death, one daughter sued the favored sister contesting the later instrument on undue influence grounds, and seeking damages for elder abuse. The defendant moved to compel arbitration. The trial court denied the motion because the plaintiff was not a signatory to the arbitration agreement.
The appellate court affirmed, but limited its holding to those situations (as in this case) “where the beneficiary has not either expressly or implicitly sought the benefits of a trust instrument containing the disputed arbitration provision.” (Id. at 2958, emphasis in original.)
The court first sought guidance from out of state decisions, there being no published California decision addressing the issue before it. It noted that the Texas Supreme Court had found an arbitration provision in a trust enforceable, in part under the doctrine of “direct benefits estoppel,” in an action where the beneficiary sued the trustee for misappropriation of benefits, and cited cases from other jurisdictions to the same effect. (Id. at 2956.) Here, however, the Court emphasized, challenging the validity of a trust is incompatible with consent to the trust: “Pamela has not accepted benefits under the 2011 Trust nor has she attempted to enforce rights under the amended trust instrument.” (Id. at 2957.)
The court then turned to applying the Pinnacle decision to the facts before it. It concluded that the principal basis for enforcing the arbitration provision in Pinnacle was the detailed statutory scheme applicable to homeowners’ associations and the doctrine derived therefrom of delegated authority to consent. The court found “no similar statutory scheme that would require that a trust beneficiary be bound by an arbitration clause in a trust instrument.” (Id. at 2958.) Finally the court also rejected a third party beneficiary contract argument because the party against whom the agreement was to be enforced had not accepted benefits under the trust.
So, while the court in McArthur refused to enforce an arbitration provision against a beneficiary of a trust, it laid the groundwork for another court to enforce such an agreement against a beneficiary who has accepted benefits under the trust. The answer to my question thus appears to be: “It depends.”