On December 3, 2012, the parties to the case of Diaz v. Bukey requested dismissal of the proceeding pending in the Second District California Court of Appeal. That dismissal, granted December 6, 2012, leaves us without a clear answer to this question.
The superseded opinion in Diaz v. Bukey (2011) 195 Cal.App.4th 315 held that trust beneficiaries were not bound by a trust provision requiring arbitration of disputes. The California Supreme Court granted review, but then deferred action in the matter “pending disposition of a related issue in Pinnacle Museum Tower Association v. Pinnacle Market Development.” The Supreme Court’s decision in Pinnacle – enforcing an arbitration provision against members of a condominium association – issued on August 16, 2012 (55 Cal.4th 223), and on October 19, 2012, the Supreme Court ordered the Diaz matter transferred to the Court of Appeal with directions to vacate its decision and to reconsider the cause in light of the Pinnacle decision. We will now never know what the Court of Appeal would have done, but its original decision is no longer good law.
What might the Court of Appeal have done? There are two significant reasons why the Pinnacle holding might not have been followed:
First, the contract in Pinnacle was governed by the Federal Arbitration Act. As the Supreme Court observed, under the FAA agreements to arbitrate are favored and state laws discriminating against arbitration are pre-empted. The FAA would probably not be applied to an agreement contained in a California trust instrument.
Second, the agreement in Pinnacle was a recorded declaration establishing a common interest development and governing its operation subject to an extensive statutory scheme which, among other things, establishes that the terms of the declaration are “enforceable equitable servitudes, unless unreasonable, [which] shall inure to the benefit of and bind all owners of the separate interests in the development” (Civil Code section 1354(a)) (cited in Pinnacle, supra, 55 Cal.4th at 238). That same statutory scheme provides “various protections to help ensure that condominium purchasers know what they are buying into.” Ibid. Critically, the Supreme Court stated: “In light of the foregoing, it is no surprise that courts have described recorded declarations as contracts.” Pinnacle, supra, 55 Cal.4th at 240. The court then rejected the Court of Appeal’s finding that the condominium declaration could not bind the association because the association did not exist at the time the declaration was prepared: “This reasoning is not persuasive in light of the statutory and contract principles at play.” Ibid. With respect to a trust, these statutory and contract principles are absent – the court in the original Diaz decision specifically finding that “there is no evidence that the beneficiaries gave either their consent or consideration to achieve the status of beneficiary.”
In the superseded decision, the Court of Appeal followed an Arizona appellate decision that held that “the legal distinctions between a trust and a contract are at the heart of why [the beneficiaries] cannot be required to arbitrate their claims.” Schoneberger v. Oezle (2004) 208 Ariz. 591. The Arizona legislature subsequently enacted a statute authorizing trusts to include arbitration provisions that may be enforced when reasonable. (Ariz. Rev. Stat. §14-10205). Perhaps the California legislature will provide the answer to my question.