Houston COA Holds Administrator Not Bound by Will’s Arbitration Provision

Originally published by Beth Graham.

A Houston appeals court has ruled that the administrator of an estate is not bound by an arbitration clause that was contained in a will. In Ali v. Smith, No. 14-18-00003-CV (Tex. App.—Houston [14th Dist.] July 10, 2018), a Texas man, Sultan, named another individual, Ali, as an independent executor in his written will. The will contained an arbitration clause that stated:

If a dispute arises between or among any of the beneficiaries of my estate, the beneficiaries of a trust created under my Will, the Executor of my estate, or the Trustee of a trust created hereunder, or any combination thereof, such dispute shall be resolved by submitting the dispute to binding arbitration. It is my desire that all disputes between such parties be resolved amicably and without the necessity of litigation.

Following Sultan’s death, the man’s son accused Ali of breaching his fiduciary duty and mismanaging Sultan’s estate. In addition, the son sought a temporary restraining order and injunction against Ali. As a result, Ali resigned from his position as executor and a trial court named a third party, Smith, to serve as the administrator of Sultan’s will.

Next, Smith filed a lawsuit against Ali in Harris County claiming the man “wasted, misappropriated, converted or otherwise disposed of inappropriately,” the assets of Sultan’s estate. In response, Ali filed a motion to compel the case to arbitration based on the arbitral clause that was included in Sultan’s will. The trial court denied Ali’s motion and he filed an appeal with Texas’s Fourteenth District Court of Appeals.

According to Ali, the issues presented in the case included:

1. Does the Texas General Arbitration Act or any other statute or case precedent bar arbitration clauses in a will, which governs fiduciary duties, and successor administrators or executors, and does the Successor cite any law to support her position in the Court Record of the Underlying Suit?

2. Can the successor administrator of the Estate of Amjad “A.J.” Sultan receive compensation under the Will, bring claims under the Will of Amjad “A.J.” Sultan, and enforce the provisions of the Will while simultaneously refusing to comply with its arbitration provision?

3. Are the claims raised within the arbitration provision’s scope when the Will provides that executor includes alternates and successors and the claim is “by or among” the Successor and the Former Executor?

4. Did the Court abuse its discretion in denying the Appellant’s Motion?

At the outset, the appeals court stated the second issue presented was dispositive and declined to consider Ali’s three other claims. After that, the court said both the burden of demonstrating an agreement to arbitrate exists and the case at hand fell within the scope of that agreement was on Ali because he sought to compel the dispute to arbitration. The Houston court next stated a party typically manifests its assent to an agreement by signing it. Because neither Ali nor Smith were signatories to Sultan’s will, the Court of Appeals applied the doctrine of direct benefits estoppel to the case.

Since neither party cited “any Texas case addressing arbitration in the context of administering a will,” the Houston court examined the Texas Supreme Court’s 2013 decision in Rachal v. Reitz for guidance. In that case, the doctrine of “direct-benefits estoppel applied to a beneficiary of a trust who sued the trustee.” The Rachal court ultimately “held that a nonsignatory ‘who attempts to enforce rights that would not exist without the trust manifests her assent to the trust’s arbitration clause.’”

The appellate court found:

In particular, the Rachal court considered the fact that the beneficiary did not disclaim an interest in the trust and that he claimed he was entitled to profits that would accrue to the trust estate. Id. The Rachal court looked further to the beneficiary’s allegations in the lawsuit. See id. The beneficiary claimed that the trustee had “materially violated the terms of the Trust and his fiduciary duty by failing to account to the beneficiary and . . . ha[d] materially violated th[e] terms of the Trust by his conversion of the Trust assets which has resulted in material financial loss to the Trust.” Id. (omission in original). The court held that the beneficiary accepted the benefits of the trust and sued to enforce the terms of the trust; thus, he accepted the terms and validity of the trust, including the arbitration clause. See id. The non-signatory beneficiary was compelled to arbitrate under the theory of direct-benefits estoppel. See id. at 842.

In this case, however, Smith contends that her claims against Ali derive from statutes and common law, irrespective of the will. And Smith contends that, to the extent her claims theoretically could be determined by reference to the will, Ali failed to meet his burden to prove direct-benefits estoppel. We agree with Smith.

Next, the appeals court stated, “Smith does not allege in the petition that Ali violated any terms of the will. Rather, Smith contends that her claims are based on common law and statutory provisions such as Sections 351.001 and 351.101 of the Estates Code.” The court continued:

Nothing in Smith’s petition indicates that Ali’s liability need be determined by reference to the will, even though he would not have been an executor “but for” the will. The substance of the claims arise from general duties imposed by statutes and the common law. See Jody James Farms, 2018 WL 2168306, at *7–8; see also Mohseni, 363 S.W.3d at 656–57. Smith has not alleged that Ali violated any terms of the will, so this theory of direct-benefits estoppel is inapplicable. Cf. Rachal, 403 S.W.3d at 847–48 (direct-benefits estoppel applied to fiduciary duty claim because the non-signatory alleged violations of the terms of the trust).

The court also dismissed Ali’s claim that the arbitration provision applied to Smith because she obtained a benefit from the will by collecting payment for her services as an appointed administrator. The court found:

The trial court’s order authorizing Smith to collect appointee fees does not state that Smith collected a benefit under the will. And, the authorizing statute does not make a distinction based on the existence of a will. See id.; see also id. § 22.031(a) (defining “personal representative” as including “(1) an executor and independent executor; (2) an administrator, independent administrator, and temporary administrator; and (3) a successor to an executor or administrator listed in Subdivision (1) or (2).”).

Because the trial court awarded fees and expenses to Smith without reference to the will, Ali has not shown that Smith deliberately sought or obtained substantial benefits from the will by a means other than the lawsuit. See In re Weekley Homes, 180 S.W.3d at 132.

Finally, the Fourteenth Court of Appeals in Houston affirmed the trial court’s order denying Ali’s motion to compel arbitration.

Although a dissenting opinion was filed by Justice Jamison, Ali did not file a petition for review with the Supreme Court of Texas.

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