Chris Lazarini Provides Insight on Trustee’s Power to Agree to Arbitrate Future Claims

May 2, 2016
Securities Litigation Commentator

Bass, Berry & Sims attorney Chris Lazarini provided insight on a case challenging the power of a trustee to agree to arbitrate unknown or future claims of the trust. After a de novo review, the court holds the trustee is without such power because the word “claim” does not include disputes that have not yet arisen and an agreement to arbitrate unknown or future disputes may not be in the best interests of the trust. Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SLC, please visit the SLC website to sign up for the newsletter.

Gladden vs. Cumberland Trust and Investment Co., No. E2015-00941-COA-R9 (Tenn. App., 3/24/16) 

A trustee’s signature on an account agreement containing an arbitration clause is not binding on the beneficiary of the trust as to future disputes where the Trust Agreement does not confer on the Trustee the power to so bind the beneficiary. 

This matter concerns the interpretation of a Trustee’s powers in a Trust created for the benefit of a disabled minor. The Trust Agreement (“Agreement”) gave the Trustee “all powers” conferred by the Agreement, common law, “any fiduciary powers act” or other Tennessee law. The Agreement specifically authorized the Trustee to “settle, by compromise, arbitration, or otherwise any and all claims and demands” relating to the Trust.

The court-appointed corporate trustee opened an advisory account on behalf of the Trust, and signed a brokerage account agreement, which included an agreement to arbitrate “any and all disputes” with the advisor. Plaintiff, the child’s grandfather and court-appointed guardian, later filed a state court action against the corporate trustee and the advisor, alleging mismanagement and misappropriation of Trust funds. The trial court granted the advisor’s motion to compel arbitration. The trial court and the Court of Appeals then granted Plaintiff’s motion for interlocutory appeal on the issue of whether the Trustee’s signature on the advisor’s agreement binds the minor beneficiary to arbitrate unknown future disputes or claims.

Conducting a de novo review, the Court rejects the advisor’s argument that the “any and all claims” language in the Agreement covers both existing claims, and disputes that have not yet arisen. Instead, the Court, relying on Black’s Law Dictionary, finds the word “claim” does not include disputes that have not yet arisen. The unambiguous language of the Agreement, the Court concludes, only gives the Trustee power to agree to arbitrate claims after they arise. The Trustee does not have the power to agree to arbitration prior to a claim or demand arising, an action which, the Court notes, might not be in the best interest of the minor beneficiary and might violate the Trustee’s duties. 

This result may be surprising to broker/dealers and investment advisors who rely on a trustee’s power to execute binding contracts when opening trust accounts. A review of the appellate briefs reveals that the Trustee was empowered to execute and deliver contracts necessary to carry out any of the powers granted in the Agreement, which powers included engaging registered investment advisors to manage trust investments. The Court does not address this power in what appears to be a results-driven decision.