Settlors' Advisory

The rise of fiduciary litigation in recent years (combined with ever-increasing attorneys' fees) has prompted some to search for an alternative to a traditional judicial dispute. Arbitration may provide an effective, less costly mechanism for resolving disputes but, as indicated by a recent decision from a DC appellate court, certain steps must be taken to ensure its availability to litigants.

The rise of fiduciary litigation in recent years (combined with ever-increasing attorneys' fees) has prompted some to search for an alternative to a traditional judicial dispute. Arbitration may provide an effective, less costly mechanism for resolving disputes but, as indicated by a recent decision from a DC appellate court, certain steps must be taken to ensure its availability to litigants.

In re Calomiris involved a dispute between four co-trustees (all siblings). George Calomiris wanted to remove his three co-trustees, and they wanted to remove him, hence cross-claims for removal were filed in a lower court. George then filed a motion for summary judgment arguing that the claims should be dismissed because a provision in the governing will directed that any material difference of opinion among the trustees must be resolved by arbitration. The lower court denied this motion, concluding that the trust at issue did not vest an arbitrator with the power to remove trustees. George appealed, and his siblings filed a motion to dismiss the appeal for jurisdictional defects.

The appellate court noted that the denial of a motion for summary judgment is not ordinarily an appealable order, but courts treat a motion to dismiss on the grounds that the underlying document required arbitration as a motion to compel arbitration. Ironically, therefore, the court had to touch upon the underlying merits of the dispute to decide whether it had jurisdiction to hear the appeal. The court ultimately held that the case should be dismissed for lack of jurisdiction, as the underlying document was not a contract binding the parties to arbitration.

The court stated that arbitration rests on a voluntary, contractual exchange of promises and relied heavily on a 2004 Arizona state court ruling in Schoneberger v. Oelze, 96 P.3d 1078. Schoneberger held that a trust provision mandating arbitration does not rise to the level of a contract because an "undertaking" between a settlor and trustee "does not stem from the premise of mutual assent to an exchange of promises." Ibid. at 1083.

The Calomiris court noted that the case at bar differed from Schoneberger in that the arbitration provision was contained in a will rather than a trust, but found this difference was immaterial because a will is not a contract either.

The net result of Calomiris and Schoneberger is that settlors seeking to mandate arbitration to settle disputes among trustees or beneficiaries must take additional steps to bring the potential litigants under the umbrella of contract law. The most obvious mechanism would be an arbitration clause.

Clients may find it appealing to add an arbitration agreement to their estate plans and require legatees to enter into it as a condition of receiving their bequests. However, counsel should make clear that this approach is largely untested and that a court might find a "forced to arbitrate" clause void as against public policy for its chilling effect on a beneficiary's right to access the courts. On the other hand, judges might find arbitration clauses a terrific way to keep feuding family members from wasting the court's time.

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