Can you compel a trust beneficiary to arbitrate a claim based on an arbitration agreement he never signed, but his trustee did?

Eichler v. Leshner, Slip Copy, 2008 WL 4459029 (M.D.Fla. Sep 29, 2008)

In the linked-to case the beneficiary of a trust tried to sue the trust’s investment manager for having “failed to properly invest trust assets.”  The defendant’s filed a motion to compel arbitration based on an arbitration clause contained in the account agreement signed by the trustee. The trust beneficiary/plaintiff in the current litigation was not a signatory to this agreement.

Compelling arbitration by non-signing trust beneficiaries:

I’ve written before about the “virtual representation” doctrine and how it can serve to bind beneficiaries to a court-approved settlement agreement [click here].  The virtual-representation doctrine has been codified – and expanded – under Florida’s new Trust Code.  Which is why I would have assumed that the binding effect of the arbitration agreement at issue in this case would have been upheld by reference to section 736.303(3) of Florida’s Trust Code, which provides as follows:

To the extent there is no conflict of interest between the representative and the person represented or among those being represented with respect to a particular question or dispute .  .  . (3) A trustee may represent and bind the beneficiaries of the trust.

But that’s no what happened, instead the court relied on an equitable estoppel argument to bind the trust beneficiary/plaintiff to the arbitration agreement signed by his trustee and the defendant. Here’s how the court summarized the general rules for deciding when parties who didn’t sign an arbitration agreement can nevertheless be bound by its terms:

Although arbitration is a contractual right that is generally predicated on an express decision to waive the right to trial in a judicial forum, the lack of a written arbitration agreement is not necessarily an impediment to arbitration. Sunkist Soft Drinks, Inc. v. Sunkist Growers, Inc., 10 F.3d 753 756-57 (11th Cir.1993). Certain limited exceptions, such as equitable estoppel, allow nonsignatories to a contract to compel arbitration. MS Dealer Service Corp. v. Franklin, 177 F.3d 942, 947 (11th Cir.1999). A second exception exists when, under agency or related principles, the relationship between the signatory and nonsignatory defendants is sufficiently close that only by permitting the nonsignatory to invoke arbitration may evisceration of the underlying arbitration agreement between the signatories be avoided. Id. (citing Boyd v. Homes of Legend, Inc., 981 F.Supp. 1423, 1432 (M.D.Ala.1997). A third exception applies when the parties to a contract together agree, upon formation of their agreement, to confer certain benefits thereunder upon a third party, affording that third party certain rights of action under the contract. Id.

Why didn’t the litigants and/or the court even mention section 736.303(3) of Florida’s Trust Code? Perhaps the defendants were not confident the court would agree to extend the virtual-representation doctrine to the transactional context. The virtual-representation doctrine is a solution developed by courts for application specifically within the litigation context. Extending this doctrine to arbitration agreements (or any other contractual transaction) is a significant step. In his recently published article entitled, SERVE THE CHEERLEADER – SERVE THE WORLD: REPRESENTATION IN ESTATE AND TRUST PROCEEDINGS AND UNDER THE UNIFORM TRUST CODE AND OTHER MODERN TRUST CODES, Professor Martin D. Begleiter specifically addressed this point as follows:

We have noted that the purposes of the representation doctrines are necessity that cases proceed where unborns are necessary parties and convenience in avoiding the expense of a guardian ad litem. The concerns are to obtain jurisdiction over unborns and persons under disability or dispense with such persons as parties and bind such persons to the result of the judicial proceeding. To go beyond this to bind such persons in a transactional context is a large and significant step. It is one thing to bind someone to a court decision on an issue of law or fact. It is quite another to say that, where voluntary action of a person is required to effectuate an outcome, that such action of another person shall be treated as consent by the person under a disability or the unborn. While the importance to the living parties and the resolution of disputes may justify the representation doctrine in court cases, it is difficult if not impossible to apply such a rationale where affirmative action by a person, such as consent or execution of a release, is required for the desired result. Nevertheless, in a scattering of cases, courts have used virtual representation to attribute such consent to parties who never consented.

Lesson learned?

Until we have a body of common law interpreting and applying the Florida Trust Code, a belts-and-suspenders approach is probably a good idea when litigating any of the Trust Code’s more controversial provisions. I think the arbitration issue in this case could have been decided by simply citing to section 736.303(3) of Florida’s Trust Code. But then again, maybe this particular judge wouldn’t want to be the first to rely on this particular new statute to extend the virtual-representation doctrine beyond anything otherwise permitted under pre-code common law. Since no one can predict with 100% certainty how any judge will rule, citing to well-settled, general principals of law for binding non-signatories to arbitration agreements was probably a good idea. In other words, if there’s more than one winning argument, it usually doesn’t hurt to include all of them in your brief and let your judge pick the one he or she likes best.