Rachal v. Reitz
Texas Supreme Court, No. 11-0708 (May 3, 2013)
Guzman (unanimous opinion)
The Supreme Court held that a mandatory arbitration provision in atrust instrument requires arbitration of claims brought by a trust beneficiary against the trustee. The Court emphasized the importance of the settlor’s intent and applied the doctrine of direct benefits estoppel to conclude that the trust instrument constituted an “agreement” to arbitrate under the Texas Arbitration Act. The Court therefore reversed the court of appeals’ affirmance of an order denying the defendant’s motion to compel arbitration.
Reitz, a beneficiary of a trust established by his father, sued the trustee, Rachal, for misappropriating trust assets and failing to provide an accounting. Rachal moved to compel arbitration based on a provision in the trust instrument that requires arbitration of “any dispute of any kind involving this Trust.” The trial court denied the motion, Rachal filed an interlocutory appeal, and the court of appeals, sitting en banc, affirmed. The court of appeals held that a binding arbitration provision must be the product of an enforceable contract between the parties, which does not exist in the trust context, in part because there is no consideration and in part because the beneficiaries do not consent to such a provision.
The Supreme Court disagreed. The Court first emphasized that Texas courts must enforce trusts according to the settlor’s intent, as divined from the four corners of unambiguous trusts. In this case, there was no question that the settlor’s intent was for disputes such as this to be resolved by arbitration. The Court went on to determine that, although not an enforceable contract, the trust instrument in this case constituted an “agreement” to arbitrate within the meaning of the TAA. The Court noted that the term “agreement” in the TAA is broader than the word “contract”—an “agreement” requires mutual assent, but not necessarily the other requisites of an enforceable “contract.” The Court concluded that, under the doctrine of direct benefits estoppel, Reitz assented to the trust instrument by suing to enforce the provisions of the trust. The Court explained: “[A] beneficiary who attempts to enforce rights that would not exist without the trust manifests her assent to the trust’s arbitration clause. For example, a beneficiary who brings a claim for breach of fiduciary duty seeks to hold the trustee to her obligations under the instrument and thus has acquiesced to its other provisions, including its arbitration clause. In such circumstances, it would be incongruent to allow a beneficiary to hold a trustee to the terms of the trust but not hold the beneficiary to those same terms.” Because Reitz assented to the terms of the trust instrument by suing to enforce the trust, the arbitration clause was enforceable against him, and the case was remanded to the trial court for entry of an order compelling arbitration.
