Trusts are generally implemented by individuals with specific goals. Courts give great deference to the plain meaning and intent within a person’s trust. However, a court must balance the intent of a trustor with the constitutional rights of a beneficiary. In May 2011, the Second Appellate District Court of Appeal of the State of California squared these competing issues correctly in its published decision Diaz v. Bukey.
The Diaz Family Trust was established by the parents of two daughters in 1995. On November 1, 2004, Bukey became the Successor Trustee. Bukey and Diaz are sisters and beneficiaries of the Trust. Upon the death of the surviving settlor on November 6, 2006, the Trust became irrevocable.
On May 8, 2009, Diaz requested an accounting of the financial activities of the Trust from November 1, 2004 through current. Bukey did not adequately comply with this request. Therefore, on November 5, 2009, Diaz filed a Probate Code Section 17200 petition to remove the trustee, appoint a successor trustee, and compel the current trustee to account and reimburse the trust. The allegations included that Bukey breached her fiduciary duties by failing to provide a proper accounting, failing to distribute the assets of the Trust, and using Trust assets for her personal benefit.
Bukey responded by filing a demurrer and petitioned for an order to compel arbitration and otherwise stay the proceedings. There was an arbitration provision within the Trust which read: “Any dispute arising in connection with this Trust, including disputes between Trustee and any beneficiary or among Co-Trustees, shall be settled by the negotiation, mediation and arbitration provisions of that certain LawForms Integrity Agreement (Uniform Agreement Establishing Procedures for Settling Disputes) entered into by the parties prior to, concurrently with or subsequent to the execution of this Trust. . .”
Diaz opposed the demurrer and petition to arbitrate. The trial court overruled the demurrer and denied the petition to arbitrate. The trial court reasoned that Diaz was not contractually bound to an arbitration clause as a beneficiary of a Trust. Bukey claimed that the arbitration clause was binding because Diaz was a third party beneficiary affirmatively seeking benefits and the Trust was a contract.
The Diaz court rejected the theory that a Trust is a contract by delineating the cases cited as disputes between trust beneficiaries and trustees regarding trustee compensation, inapposite here. The thrust of Diaz’s complaint were the actions or inactions taken by the Successor Trustee while purportedly acting as Successor Trustee. The main thrust of the complaint was not that the Successor Trustee fees were excessive.
The Diaz court looked to and adopted Schoneberger v. Oelze (1004) 208 Ariz. 591, 96 P.3d 1078 which discussed an arbitration provision within a trust that had marked similarities to the Diaz provision. The Schoneberger court rejected claims that the trusts at issue were contracts. In part, the Schoneberger court cited that a fiduciary relationship exists between a trustee and a trust beneficiary, such relationship not existing between contract parties. The Diaz court did not decide whether or not arbitration could be compelled if the beneficiaries either gave their consent or consideration to attain such status.