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Trust not subject to mandatory arbitration

Nick Hurston//May 27, 2022

Trust not subject to mandatory arbitration

Nick Hurston//May 27, 2022

Dispute resolution concept

The denial of a trustee’s motion to compel arbitration pursuant to a clause in the trust has been affirmed by the Virginia Supreme Court.

The court concluded that a trust is not a contract subject to mandatory arbitration under the Virginia Uniform Arbitration Act, or VUAA, and the Federal Arbitration Act, or FAA.

Furthermore, a trust beneficiary is not a party to an agreement to arbitrate and cannot be compelled under the VUAA.

Justice Stephen R. McCullough authored the April 14 unanimous en banc opinion in Boyle v. Anderson (VLW 022-6-022).

The trust

Strother R. Anderson created an inter vivos trust that divided his property into three shares and contained an unambiguous arbitration clause.

After Anderson died, Sarah Boyle became the trustee and beneficiary. Boyle was sued by the widow of one of the other beneficiaries. The widow claimed Boyle breached her duties as trustee and sought her removal or, alternatively, an order for her to comply with the trust.

Boyle moved to compel arbitration and the widow objected, arguing that the trust was not a contract and she had not agreed to mandatory arbitration.

The trial court denied the motion and Boyle appealed.

Not a contract

“This appeal calls on us to decide the narrow question of whether the [VUAA] or the [FAA] compels enforcement of an arbitration clause in a trust,” McCullough wrote.

According to its text, the VUAA applies to either a written agreement or contract provision that provides for the submission of a controversy to arbitration.

“We conclude that a trust does not qualify as a contract or an agreement [and trusts] are generally conceived as donative instruments [for] a conveyance of the beneficial interest in the trust property,” the judge wrote.

The formation of a contract depends on actual acceptance of an offer founded on mutual assent, whereas trust formation “is not dependent on the beneficiary’s knowledge or acquiescence,” McCullough said.

The court also noted that contracting parties do not owe each other fiduciary duties like a trustee does and that ownership of trust property is divided into legal and equitable titles.

VUAA

The court noted that the “VUAA does not apply to all arbitration clauses,” and because a trust is not a contract subject to the VUAA, the trust provision is not enforceable to compel arbitration.

“Assuming without deciding that a trustee’s obligations might constitute an ‘agreement’ under the VUAA, the beneficiary of a trust is not a party to a written arbitration agreement [and] the VUAA does not compel arbitration for a suit brought by the beneficiary of the trust,” McCullough concluded.

FAA

Under the FAA, arbitration clauses are enforceable if part of a contract involving a commercial transaction.

The court noted that the U.S. Supreme Court has not addressed this question, but concluded that there was “nothing in that Court’s precedent … that compels us to depart from the statute’s plain language.”

Because the “FAA by its plain terms applies to contracts [and] a trust is not a contract,” the court concluded “that the FAA does not apply to the arbitration clause at issue here.”

The court declined to express sua sponte their opinion on “whether an arbitration clause in a trust can be enforced on some basis other than the VUAA or the FAA.”

Six-year delay

Cloyd Allen Smith represented Linda Anderson, the widow of one of the beneficiaries. He said that he was “elated that the court affirmed the ruling that the VUAA and FAA do not apply to donative trust instruments.”

Smith, an attorney of the Law Office of George O. Peterson in Fairfax, said his client has been trying to get her day in court for nearly six years “while her sister-in-law continues to ignore the very basic terms of her father’s trust.”

According to Smith, despite the mandate that Boyle divide and distribute one-third shares of the trust after her father died in January 2011, “she continues to hold almost all of the funds and refused to distribute to her brother, who passed away more than five years after she became trustee, and to her niece and nephew who have not seen a cent of the money their grandfather left them.”

Smith’s colleague George O. Peterson added that, based on very limited discovery, it appears that the trust was valued at $1.5 million when Boyle took over as trustee in 2011 but the assets are now below $1 million.

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