Arbitration/Nonsignatories: In Case Of First Impression, First District, Div. 5 Holds That An Arbitration Clause In Trust Document Does Not Bind Trust Beneficiary

Court Would Not Compel Arbitration Here Where The Beneficiary Had Not Sought The Benefits Of The Trust Instrument, But Rather Challenged Its Validity

      Pamela McArthur v. Kristi McArthur, A137133 (1st Dist. Div. 5 March 11, 2014) (Bruiniers, Jones, Needham) is a case arising out of an inharmonious “sister act.”

     The scenario is not uncommon.  In 2001, mom McArthur creates trust for her three daughters, making them equal beneficiaries.  In 2011, mom amends trust in a way that favors daughter Kristi over daughter Pamela.  In 2012, mom dies.The trust, as amended in 2011, contains a “Christian Dispute Resolution” provision that did not exist in the 2001 trust.  The provision, which requires mediation and if necessary arbitration, states in part:

“The Trustor and Co-Trustees [(Frances and Kristi)] are Christians and believe that the Bible commands them to make every effort to live at peace and to resolve disputes with each other in private or within the Christian church (see Matthew 18:15-20; 1 Corinthians 6:1-8). Therefore, the Trustor and Co-Trustees agree that any claim or dispute arising from or related to the Trust as amended shall be settled by biblically based mediation and, if necessary, legally binding arbitration before the Institute for Christian Conciliation^TM, a division of Peacemaker® Ministries, in accordance with its Rules of Procedure for Christian Conciliation (the ‘Rules’ found at www.peacemaker.net).”

     Alas, a more apt biblical citation for the case could be Gospel of John, chapter 11, verse 35, the shortest verse in the King James Version:  Jesus wept.  For after mom died, sister Pamela sued Kristi, alleging financial elder abuse and undue influence on mom, and challenging the validity of the 2011 trust amendment.  Sister Kristi moved to compel arbitration of Pamela’s claims.  After the trial court denied sister Kristi’s motion, because Pamela was not a signatory, Kristi appealed.

      The Court of Appeal affirmed the order denying Kristi’s motion to compel arbitration, because Pamela was neither a signatory to the arbitration clause, nor did she seek benefits under the 2011 trust instrument.  Instead, Pamela sought benefits of the 2001 trust, which trust did not contain an arbitration clause.  If Pamela had sought benefits under the 2011 trust, this would be a different case.

      The Court of Appeal recognized that in some situations, there will be a “statutory scheme that justified flexibility in binding nonsignatories to arbitration clauses”, leaving it up to the Legislature to devise such rules if it wants to.