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Trust not a contract, can’t be forced to arbitration

A Fairfax County circuit judge has declined to uphold an arbitration clause in a trust agreement, and refused to send a dispute over the actions of a trustee to arbitration.

Finding the controversy over the trustee’s actions had not arisen at the time the trust was created and concluding the trust is not a contract, Chief Judge Bruce D. White denied the defendants’ plea in bar seeking to require the plaintiff to submit to arbitration.

White also said the nature of the dispute – an alleged breach of a trustee’s duty – does not implicate interpretation or enforcement of the trust agreement.

White’s Sept. 21 opinion is Kelly v. Giuliano (VLW 020-8-104).

Family conflict

The plaintiff – Richard Kelly – is a nephew of the settlor of the trust, Maura “Pat” Kelly, according to the opinion.

Richard may have fallen from favor. He had been given a power of attorney and named as co-trustee when Pat executed the revocable trust in 2014. He allegedly consented to the trust’s arbitration agreement as one of the original co-trustees. In 2018, however, Pat revoked Richard’s power of attorney and named niece Elaine Giuliano and a friend as attorneys-in-fact and trustees.

Richard sued in 2020 alleging a breach of fiduciary duty by Elaine and other claims against Elaine and her husband. He claimed the Giulianos wrongfully took assets from the trust after Pat Kelly executed the agreement.

The court dismissed three counts, but the breach of duty claim and others survived. The Giulianos’ plea in bar asserted that Richard must submit his remaining claims to arbitration. The Giulianos contended the trust contained a valid arbitration clause and that Richard had agreed to it, as White summarized the parties’ positions.

Richard replied that the Virginia Arbitration Act did not apply because the agreement is not a written contract in which Richard agreed to arbitrate his future claims. He asserted the agreement is a not a contract at all, but rather a donative instrument similar to a will.

Trust is not a contract

White agreed with Richard’s position.

“First, a trust agreement is not a contract that would subject the present controversy to arbitration under Virginia law,” White wrote. “Second, even if the Agreement was a contract, the language of the Agreement narrows the scope of arbitrable claims to those requiring interpretation or enforcement of the Agreement,” the judge concluded.

Interpreting the Virginia Uniform Arbitration Act, White said the legislature meant to make arbitration agreements enforceable in two circumstances – a written “agreement” regarding an existing controversy or a written “contract” regarding a controversy arising later.

“Because the present controversy was not in existence at the time Ms. Kelly executed the Agreement, it cannot be construed as an agreement to arbitrate the current controversy,” White wrote.

“The Trust Agreement is also not subject to the VUAA because it is not a contract,” the judge continued. “Because a trust agreement, like a will, is the independent act of the settlor, it cannot be considered a contract, and thus, the Agreement is also not subject to the VUAA.”

Trust language not at issue

While the Virginia Uniform Trust Code allows for the use of arbitration to resolve disputes over interpretation of trusts and their administration, the grantor’s intent controls, White said. Courts have construed the language of arbitration clauses to sweep broadly or narrowly, he said, summarizing Virginia cases.

The Kelly trust’s arbitration agreement warrants a narrow interpretation with its use of the phrase “dispute arising hereunder,” White concluded.

While the allegation of a breach of fiduciary duty “requires an analysis of whether Ms. Giuliano breached her duty as a trustee, Plaintiff does not seek an interpretation of the Agreement, nor to enforce the Agreement,” White said. Other counts also failed to allege any ambiguity in the Agreement or demand interpretation, the judge said.

The parties are represented by Thomas W. Mitchell of Bethesda, Maryland; Craig S. Brodsky of Baltimore; Patrick J. Kearney of Bethesda; and Richard Dezio of Alexandria, according to the opinion letter. None was available for comment as of press time and it was not clear which parties are represented by which counsel.