Lincoln Financial Advisors Corporation v. Bridgette Ards, Acting as Next Friend for Her Daughter, Gabrielle Ards

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-18-00437-CV
Lincoln Financial Advisors Corporation, Appellant
v.
Bridgette Ards, acting as next friend of her daughter, Gabrielle Ards, Appellee
FROM THE PROBATE COURT NO. 1 OF TRAVIS COUNTY
NO. C-1-PB-18-000269, HONORABLE GUY S. HERMAN, JUDGE PRESIDING
MEMORANDUM OPINION
In this interlocutory appeal, Lincoln Financial Advisors Corporation (LFA) appeals
from the probate court’s order denying LFA’s motion to compel arbitration. In the underlying
proceeding, Bridgette Ards, acting as next friend of her daughter, Gabrielle Ards, sued LFA; Brenda
Ards, who was the successor trustee of the Gabrielle Ards Trust; and Carl B. Ards, III, who was the
former trustee of the Gabrielle Ards Trust. Bridgette sought to hold Carl, Brenda, and LFA jointly
and severally liable for alleged misconduct that materially depleted the value of the trust estate.1 On
appeal, LFA contends that the probate court committed reversible error by denying its motion to
compel arbitration because Bridgette and Gabrielle, although not signatories, are bound by
1
Because many of the parties in the underlying proceeding have the same last name, we refer
to them by their first names. Although they are parties in the underlying proceeding, Brenda and
Carl are not parties to this interlocutory appeal.
arbitration clauses in LFA’s account agreements with Carl and Brenda. For the reasons that follow,
we affirm the probate court’s order denying LFA’s motion to compel arbitration.
Background
Carl B. Ards, Jr. (Decedent) died on June 27, 2008. In his will, he created a trust;
designated his granddaughter Gabrielle, who is a minor, as the beneficiary of the trust; and his son
Carl served as the original trustee. Carl opened an investment account at LFA in the name of “Carl
B. Ards III, TTEE Gabrielle Ards Trust U/W 6/27/08.” Related to this account, Carl signed a
“Brokerage Basic Account Application” that bound him to the “Brokerage Basic Account Customer
Agreement.” In the application, he listed himself in his individual name as the account holder, did
not list any beneficiaries or other account holders, and crossed out information about Gabrielle that
he had handwritten in the section of the application tilted “additional account holders.”
The agreement between Carl and LFA contains the following relevant clauses
concerning arbitration:
Resolving Disputes—Arbitration
This agreement contains a pre-dispute arbitration clause. Under this clause, which
becomes binding on all parties when you sign your account application, you, we, and
NFS[2] agree as follows:
A. All parties to this agreement are giving up the right to sue each other in court,
including the right to a trial by jury, except as provided by the rules of the
arbitration forum in which a claim is filed. . . .
2
In the “Brokerage Basic Account Agreement,” “NFS” stands for National Financial
Services LLC, a NYSE member that provides custody and clearing services for LFA and
its customers.
2
All controversies that may arise between you, us and NFS concerning any subject
matter, issue or circumstance whatsoever (including, but not limited to, controversies
concerning any account, order or transaction or the continuation, performance,
interpretation or breach of this or any other agreement between you, us and NFS,
whether entered into or arising before, on or after the date this account is opened)
shall be determined by arbitration in accordance with the rules then prevailing of the
Financial Industry Regulatory Authority (FINRA) or any securities self-regulatory
organization or securities exchange of which the person, entity or entities against
whom the claim is made is a member, as you may designate.
Brenda, the Decedent’s wife, subsequently replaced Carl as the trustee of the
Gabrielle Ards Trust, and on January 6, 2017, she signed a “Client Profile,” acknowledging the
pre-dispute arbitration clause. The Client Profile stated that it applied “to all accounts established
in conjunction with this Client Profile” at LFA and specified in relevant part:
(1) All parties to this agreement are giving up the right to sue each other in court,
including the right to a trial by jury, except as provided by the rules of the
arbitration forum in which a claim is filed.
...
It is agreed that any controversy arising out of or relating to the accounts established
herewith, shall be submitted to arbitration in accordance with the rules adopted by
the Financial Industry Regulatory Authority, Inc. Dispute Resolution Board.
In the Client Profile, Brenda listed herself in her individual name as the account holder and the name
of the account as “Gabrielle Ards Trust.”
In February 2018, Bridgette, acting as next friend of Gabrielle, sued Carl, Brenda, and
LFA, alleging in part that, “[t]hrough numerous breaches of fiduciary duty, self-dealing and
misapplication of fiduciary funds [Carl] materially depleted the value of the trust estate of the
Gabrielle Ards Trust”; LFA “had actual knowledge of Carl’s breaches of fiduciary duty, self dealing,
3
and misapplication of fiduciary funds”; and “[LFA was] therefore jointly and severally liable with
Carl.”3 Bridgette asserted that Gabrielle was the designated beneficiary of the trust and that
Bridgette was proceeding “derivatively on behalf of the trustee of the Gabrielle Ards Trust because
such trustee [Brenda] cannot sue herself.” Bridgette’s factual allegations included that: (i) “Carl
initially invested most, if not all, of the trust estate of the Gabrielle Ards Trust with [LFA] who knew
they were investing fiduciary funds because the account was titled ‘Carl B. Ards III, TTEE Gabrielle
Ards Trust U/W 6/27/08’”; (ii) “[LFA] knowingly participated in Carl’s breaches of fiduciary duty”;
and (iii) “[LFA] failed to insure that the fiduciary funds that it was administering were not being
improperly withdrawn.” Bridgette pleaded for “derivative damages” based on her “derivative
capacity on behalf of the trustee of the Gabrielle Ards Trust against defendants,” including “an
amount equal to all compensation taken by any Defendant for serving as trustee or investment
advisor of the Gabrielle Ards Trust since its inception” and “an amount equal to all profit made by
any Defendant through or arising out of the administration of the Gabrielle Ards Trust.”
LFA answered and filed a motion to compel arbitration under the Federal Arbitration
Act (FAA), contending that Bridgette was bound to arbitrate her claims based on the arbitration
clauses in LFA’s account agreements with Brenda and Carl. See 9 U.S.C. § 2 (addressing
agreements to arbitrate arising out of “transaction involving commerce”). Following a hearing, the
probate court denied the motion to compel and stayed the proceeding pending any interlocutory
appeal that LFA elected to file. This appeal followed. See Tex. Civ. Prac. & Rem. Code § 51.016
3
Bridgette, acting as next friend of Gabrielle, also sought to remove Brenda as the trustee,
to compel an accounting by Brenda, to examine the books and records of the trust, and to recover
attorney’s fees and costs.
4
(authorizing interlocutory appeal under same circumstances that appeal from federal district court’s
order would be permitted under FAA).
Analysis
In three issues on appeal, LFA contends that the probate court committed reversible
error by denying LFA’s motion to compel arbitration because Bridgette and Gabrielle, although not
signatories to the account agreements, were bound by the arbitration clauses in those agreements
under theories of third party beneficiary, estoppel, and agency. LFA also argues that Bridgette is
bound by the arbitration clauses because she seeks to proceed derivatively on behalf of the trust and
her claims against LFA arise out of or relate to the funds in the trust account at LFA.
Standard of Review and Applicable Law
We review an order denying a motion to compel arbitration for abuse of discretion.
See D.R. Horton-Emerald, Ltd. v. Mitchell, No. 01-17-00426-CV, 2018 Tex. App. LEXIS 731,
at *5–6 (Tex. App.—Houston [1st Dist.] Jan. 25, 2018, no pet.) (mem. op.); Santander Consumer
USA, Inc. v. Mata, No. 03-14-00782-CV, 2017 Tex. App. LEXIS 2631, at *3 (Tex. App.—Austin
Mar. 29, 2017, no pet.) (mem. op.). “Under this standard, we defer to a trial court’s factual
determinations if they are supported by evidence, but we review a trial court’s legal determinations
de novo.” Mitchell, 2018 Tex. App. LEXIS 731, at *6 (quoting Rocha v. Marks Transp., Inc.,
512 S.W.3d 529, 535 (Tex. App.—Houston [1st Dist.] 2016, no pet.) (citing In re Labatt Food Serv.,
L.P., 279 S.W.3d 640, 643 (Tex. 2009) (orig. proceeding))). Further, whether a non-signatory is
bound to an arbitration agreement is a gateway matter that is reviewed de novo. See Jody James
5
Farms, J.V. v. Altman Grp., 547 S.W.3d 624, 629 (Tex. 2018); Labatt Food Serv., 279 S.W.3d at
643; Cardon Healthcare Network, Inc. v. Goldberg, No. 03-17-00474-CV, 2018 Tex. App. LEXIS 1639,
at *2 (Tex. App.—Austin Mar. 2, 2018, no pet.) (mem. op.).
The parties do not dispute that the FAA governs the arbitration clauses at issue. See
9 U.S.C. §§ 1–16; Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266, 269–70 (Tex. 1992) (stating that FAA
“applies to all suits in state and federal court when the dispute concerns a ‘contract evidencing a
transaction involving commerce’”); see, e.g., In re McKinney, 167 S.W.3d 833, 835 (Tex. 2005) (orig.
proceeding) (applying FAA to account agreement between brokerage firm and its customer); In re
Raymond James & Assocs., 196 S.W.3d 311, 321 (Tex. App.—Houston [1st Dist.] 2006, orig.
proceeding) (concluding that FAA applied because parties agreed to arbitrate under FAA in account
agreements and complaints “involve the sale of securities, and therefore involve interstate commerce”).4
In general, a party seeking to compel arbitration under the FAA has the burden to show
the existence of a valid agreement to arbitrate and a dispute within the agreement’s scope. In re Kellogg
Brown & Root, Inc., 166 S.W.3d 732, 737 (Tex. 2005) (orig. proceeding). “Under the FAA, ordinary
principles of state contract law determine whether there is a valid agreement to arbitrate.” Id. at 738.
“Because arbitration is contractual in nature, the FAA generally ‘does not require parties to arbitrate when
they have not agreed to do so.’” Id. (quoting Volt Info. Scis., Inc. v. Board of Trs. of Leland Stanford
4
The Texas Supreme Court has observed “that it is important for federal and state law to be
as consistent as possible in this area, because federal and state courts have concurrent jurisdiction
to enforce the FAA.” In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 739 (Tex. 2005) (orig.
proceeding) (resting decision on state law but explaining that decision is also “informed by
persuasive and well-reasoned federal precedent”). Consistent with the Texas Supreme Court’s
directive, we rest our decision on state law but also are informed by federal precedent.
6
Junior Univ., 489 U.S. 468, 478–79 (1989)). The presumption in favor of arbitration under the FAA
“arises only after the party seeking to compel arbitration proves that a valid arbitration agreement exists,”
id. at 737–38 (quoting J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 227 (Tex. 2003)), “because ‘the
purpose of the FAA was to make arbitration agreements as enforceable as other contracts, not more so,’”
id. (quoting Bridas S.A.P.I.C. v. Government of Turkm., 345 F.3d 347, 354 n.4 (5th Cir. 2003)); see Carr
v. Main Carr Dev., LLC, 337 S.W.3d 489, 496 (Tex. App.—Dallas 2011, pet. denied) (explaining that
presumption in favor of arbitration “does not apply to the existence of such an agreement or to the identity
of the parties who may be bound to such an agreement” and that “policy favoring arbitration cannot
justify requiring litigants to forego a judicial remedy when they have not agreed to do so”).
In this case, LFA seeks to compel arbitration based on account agreements that Bridgette
and Gabrielle did not sign. “[U]nder certain circumstances, principles of contract law and agency may
bind a non-signatory to an arbitration agreement.” Kellogg Brown & Root, 166 S.W.3d at 738; see In re
Rubiola, 334 S.W.3d 220, 224 (Tex. 2011) (orig. proceeding) (“An obligation to arbitrate not only
attaches to one who has personally signed the written arbitration agreement but may also bind a
non-signatory under principles of contract law and agency.”). Relevant to this appeal, courts may require
non-signatories to arbitrate their claims under theories of agency, equitable estoppel, and third party
beneficiary, see Jody James Farms, 547 S.W.3d at 633; Kellogg Brown & Root, 166 S.W.3d at 739,5 or
“because of the derivative nature of their claims,” Labatt Food Serv., 279 S.W.3d at 644.
5
Although not relevant here, other theories that may bind non-signatories to arbitration
agreements are incorporation by reference, assumption, and alter ego. Kellogg Brown & Root,
166 S.W.3d at 739.
7
Guided by the Texas Supreme Court’s directives and the applicable standard of review,
we address the theories raised by LFA, beginning with the theory of third party beneficiary.
Third Party Beneficiary
“A third party beneficiary may enforce a contract to which it is not a party if the parties
to the contract intended to secure a benefit to that third party and entered into the contract directly for the
third party’s benefit.” In re Palm Harbor, Inc., 195 S.W.3d 672, 677 (Tex. 2006) (orig. proceeding)
(citing Stine v. Stewart, 80 S.W.3d 586, 589 (Tex. 2002)); see First Bank v. Brumitt, 519 S.W.3d 95, 102
(Tex. 2017) (explaining that “person seeking to establish third-party-beneficiary status must demonstrate
that contracting parties ‘intended to secure a benefit to that third party’ and ‘entered into the contract
directly for the third party’s benefit’” (quoting Stine, 80 S.W.3d at 589)). In this case, LFA argues the
converse scenario of a non-signatory seeking to enforce the terms of a contract against signatories—LFA
seeks to bind Bridgette and Gabrielle, who are not signatories to the account agreements, to the
agreements between Carl, Brenda, and LFA. LFA argues that the “Will and the Account Agreements,
read together, ‘clearly and fully express an intent to confer a direct benefit’ on Gabrielle” and that
Gabrielle’s status as the beneficiary of the trust binds her to the arbitration clauses in the account
agreements. As support for the latter argument, LFA cites Bridgette’s asserted basis for standing as an
“interested person” under the Texas Trust Code. See Tex. Prop. Code § 111.004(7) (defining “interested
person” to mean “trustee, beneficiary, or any other person having an interest in or a claim against the trust
or any person who is affected by the administration of the trust”).
The Texas Supreme Court, however, has made clear that the analysis of “[w]ho is bound
to an arbitration agreement is normally a function of the parties’ intent, as expressed in the agreement’s
8
terms.” Jody James Farms, 547 S.W.3d at 633; see Brumitt, 519 S.W.3d at 102, 110 (explaining that
generally “a person’s status as a third-party beneficiary depends solely on the contracting parties’ intent”
and holding that trial court erred by permitting jury to consider extrinsic evidence as basis for adding term
to parties’ contract that parties intended third party beneficiary). “Specifically, a person seeking to
establish third-party-beneficiary status must demonstrate that the contracting parties ‘intended to secure
a benefit to that third party’ and ‘entered into the contract directly for the third party’s benefit.’” Brumitt,
519 S.W.3d at 102 (quoting Stine, 80 S.W.3d at 589). “To determine whether the contracting parties
intended to directly benefit a third party and entered into the contract for that purpose, courts must look
solely to the contract’s language, construed as a whole.” Id. “The contract must include ‘a clear and
unequivocal expression of the contracting parties’ intent to directly benefit a third party,’ and any implied
intent to create a third-party beneficiary is insufficient.” Id. (quoting Tawes v. Barnes, 340 S.W.3d 419,
425 (Tex. 2011)); see Steer Wealth Mgmt., LLC v. Denson, 537 S.W.3d 558, 566 (Tex. App.—Houston
[1st Dist.] 2017, no pet.) (explaining that “intent to contract or confer a direct benefit to a third party
‘must be clearly and fully spelled out or enforcement by the third party must be denied’” (quoting MCI
Telecomms. Corp. v. Texas Utils. Elec. Co., 995 S.W.2d 647, 651 (Tex. 1999))).
We further observe that “there is a presumption against, not in favor of, third-party
beneficiary agreements.” MCI Telecomms. Corp., 995 S.W.2d at 652. It is not enough that the third
party would benefit from the parties’ performance. Brumitt, 519 S.W.3d 95 at 102. “To create a
third-party beneficiary, the contracting parties must have intended to grant the third party the right to be
a ‘claimant’ in the event of a breach.” Id. (quoting Corpus Christi Bank & Tr. v. Smith, 525 S.W.2d 501,
505 (Tex. 1975)).
9
Here there is no express reference in the respective customer account agreements between
LFA, Brenda, and Carl—the parties to the agreements—that they intended the agreements to be for the
direct benefit of Gabrielle. See id. at 103 (explaining that “‘controlling factor is the absence of any
sufficiently clear and unequivocal language demonstrating’ the necessary intent” to directly benefit third
party (quoting Tawes, 340 S.W.3d at 428)). On their face, the account agreements were for the benefit
of LFA and the account holders, Carl and Brenda. See id.; see also Fleetwood Enters., Inc. v. Gaskamp,
280 F.3d 1069, 1076 (5th Cir. 2002) (noting that “contract does not mention the Gaskamp children at all
and [that] there is no indication in the contract that it is designed to benefit anyone other than the
Gaskamp parents, who purchased the home”); Goldberg, 2018 Tex. App. LEXIS 1639, at *7–8
(concluding that there was no allegation that underlying provider agreement between hospital and insurer
that contained arbitration clause was made for plaintiff’s benefit); In re SSP Partners, 241 S.W.3d 162,
169 (Tex. App.—Corpus Christi-Edinburg 2007, orig. proceeding) (“There is no provision in the
agreement stating that Garcia, on behalf of her children, was agreeing to submit the children’s claims
to arbitration.”).
To support its position, LFA relies on the creation of the trust in the will for Gabrielle’s
benefit, Carl’s opening of the account at LFA in the name of “Carl B. Ards III, TTEE Gabrielle Ards
Trust U/W 6/27/08,” and Brenda’s naming the “Gabrielle Ards Trust” as the account’s title in the “Client
Profile” that she signed. The terms of the will, however, do not factor into whether LFA, Brenda, and
Carl intended to make Gabrielle a third party beneficiary of the account agreements. See Brumitt,
519 S.W.3d at 102–03.
10
Further, although the trustee’s use of the trust name in naming the account at LFA may
have put LFA on notice that it was holding trust assets, the account name is not “‘clear and unequivocal
language demonstrating’ the necessary intent.” See id. at 103. The fact that trust assets of the Gabrielle
Ards Trust were being held in an LFA account does not lead to the conclusion that the account
agreements between the trustees, who were the account holders, and LFA were entered into for
Gabrielle’s direct benefit. See id. (beginning analysis with presumption that parties contract solely for
themselves and that “only a clear expression of the intent to create a third-party beneficiary can overcome
that presumption”); see also Bridas, 345 F.3d at 362 (explaining that, under third-party beneficiary
doctrine, courts look to parties’ intentions when contract was executed and presume parties are
contracting for themselves only, and that “presumption may be overcome only if the intent to make
someone a third-party beneficiary is ‘clearly written or evidenced in the contract’” (quoting Gaskamp,
280 F.3d at 1075–76)). Reference to a trust’s name is not reference to its beneficiary. See Tex. Prop.
Code §§ 111.004 (defining “beneficiary,” “trustee,” and “trust property”), 112.001 (listing methods for
creating trusts), 112.008 (addressing trustee’s capacity). Moreover, the claims that Bridgette, acting as
next friend of Gabrielle, has asserted against LFA are not premised upon the account agreements and do
not otherwise seek to enforce the terms of those agreements. See Bridas, 345 F.3d at 363 (stating that
court was reluctant to bind non-signatory to terms of agreement based on theory of third party beneficiary
“because the [non-signatory] has never filed a claim against Bridas premised upon the agreement, or
otherwise sought to enforce its terms”).
As further support for its position, LFA cites Ameriprise Financial Services, Inc.
v. Farias, No. 13-13-00279-CV, 2013 Tex. App. LEXIS 14204, at *8–10 (Tex. App.—Corpus
11
Christi––Edinburg Nov. 21, 2013, pet. denied) (mem. op.), and Merrill Lynch, Pierce, Fenner & Smith
v. Eddings, 838 S.W.2d 874, 879 (Tex. App.—Waco 1992, writ denied). We find both cases
factually distinguishable.
(i) Merrill Lynch, Pierce, Fenner & Smith v. Eddings
In Eddings, a bank sued the trustee, Merrill Lynch, and others, alleging that the bank
held a security interest in certain shares previously held in a trust account at Merrill Lynch and that
Merrill Lynch converted the shares by liquidating them. 838 S.W.2d at 876. Merrill Lynch then
filed a third party action against the settlor of the trust seeking indemnity or imposition of a
constructive trust against the settlor. The settlor, joined by his daughters who were the beneficiaries
of the trust, filed claims against Merrill Lynch and a third party claim against an employee of Merrill
Lynch. Id. After Merrill Lynch filed a motion to compel arbitration that was based on an account
agreement that was signed by the trustee, the settlor abandoned his claims against Merrill Lynch and
its employee, but the daughters maintained those claims “as beneficiaries of the trust.” Id.
Based on its examination of the pleadings, the Waco Court of Appeals concluded that
“the account agreement [was] the underlying basis for all of the claims” and that the settlor and
beneficiaries “would have no claims had the account agreement never been signed by the trustee.”
Id. Our sister court then held “that the settlor and beneficiaries of a trust are bound by a clause in
an account agreement to arbitrate the claims arising out of transactions in the trust’s account.” Id.
Although the court did not elaborate on the nature of the daughter’s claims, they were made in the
context of the bank’s suit against Merrill Lynch for the liquidation of shares held in the account. Id.
at 876. In contrast, the claims of Bridgette, acting as next friend of Gabrielle, are asserted against
12
the trustees and LFA jointly and severally and exist independently of the account agreements
between the trustees and LFA.
Further, to the extent the holding in Eddings stands for the proposition that a trust
beneficiary is bound to arbitrate her claims against a financial institution on the sole basis that a
trustee agreed to an arbitration clause in an account agreement, we decline to follow its analysis in
the context of this case. See, e.g., In re Weekley Homes, L.P., 180 S.W.3d 127, 132 (Tex. 2005)
(orig. proceeding) (explaining that “[c]laims must be brought on the contract (and arbitrated) if
liability arises solely from the contract or must be determined by reference to it,” but that, “[o]n the
other hand, claims can be brought in tort (and in court) if liability arises from general obligations
imposed by law”).
(ii) Ameriprise Financial Services, Inc. v. Farias
In Farias, the Corpus Christi–Edinburg Court of Appeals concluded that
non-signatory beneficiaries of a trust were bound to arbitrate their claims against Ameriprise,
including claims asserting breach of fiduciary duty, based on account agreements that contained
arbitration clauses that had been signed by the trustee, who was the beneficiaries’ father. 2013 Tex.
App. LEXIS 14204, at *4, 8–10. Focusing on the language of the trust decrees, our sister court
concluded that the daughters were third party beneficiaries of the account agreements because the
“uncontroverted evidence” established that “the parties clearly and fully spelled out the intent to
confer a direct benefit on the [the daughters] by opening the accounts at Ameriprise.” Id. A district
court had entered the trust decrees “for the sole benefit” of the daughters and expressly directed the
trustee to place the trust funds with Ameriprise for investment purposes. See id. at *1, 8–9; see also
13
Tex. Prop. Code § 142.005 (addressing creation of trust for property recovered in suit by next
friend or guardian ad litem). The daughters also were specifically identified as the “primary
account holders” in the account agreements that contained the arbitration clauses. Farias,
2013 Tex. App. LEXIS 14204, at *11; see id. at *1–2 (reciting that trustee signed account
agreements pursuant to authority under trust decree and “in connection with the opening of accounts
for [his daughters]”). In contrast to the “uncontroverted” evidence before our sister court, here Carl
and Brenda listed themselves as the account holders in their individual names and did not list
Gabrielle as a beneficiary of the account in the documents that they signed. In particular, Carl on
his application crossed out the inclusion of Gabrielle as an “additional account holder.”
Further, to the extent that the holding in Farias is based on evidence other than the
language in the account agreements, we decline to follow that analysis in the context of this case.
See Jody James Farms, 547 S.W.3d at 633; Brumitt, 519 S.W.3d at 102–03; Stine, 80 S.W.3d at 589.
We are bound to follow the directive from the Texas Supreme Court to look “solely to the contract’s
language, construed as a whole.” See Brumitt, 519 S.W.3d at 102; see also Smith v. East, 411 S.W.3d
519, 526–27 (Tex. App.—Austin 2013, pet. denied) (“We are thus bound to follow [precedent from
Texas Supreme Court] unless and until the Texas Supreme Court instructs us otherwise.”).
Bound by the Texas Supreme Court’s directives and based on our review of the
language in the account agreements, we conclude that the probate court did not err to the extent it
14
concluded that Bridgette, acting as next friend of Gabrielle, was not bound to arbitrate her claims
against LFA on the theory of third party beneficiary.6
Equitable Estoppel
Independent of its argument under the theory of third party beneficiary, LFA argues
that Bridgette and Gabrielle are estopped from avoiding the arbitration clauses in the account
agreements because they effectively are seeking recovery under the account agreements. LFA
is relying on direct benefits estoppel, which is a type of equitable estoppel. Kellogg
Brown & Root, 166 S.W.3d at 739; see Toll Dall. TX, LLC v. Dusing, No. 03-18-00099-CV,
2019 Tex. App. LEXIS 3947, at *12–15 (Tex. App.—Austin May 16, 2019, no pet.) (mem. op.)
(discussing direct benefits estoppel). “Under ‘direct benefits estoppel,’ a non-signatory plaintiff
seeking the benefits of a contract is estopped from simultaneously attempting to avoid the contract’s
burdens, such as the obligation to arbitrate disputes.” Kellogg Brown & Root, 166 S.W.3d at 739;
see id. at 741 (concluding that “non-signatory should be compelled to arbitration a claim only if it
seeks, through the claim, to derive a direct benefit from the contract containing the arbitration
provision”); see also Rachal v. Reitz, 403 S.W.3d 840, 847 (Tex. 2013) (noting that “it would be
6
Compare Morgan Stanley DW, Inc. v. Halliday, 873 So. 2d 400, 402–05 (Fla. 4th Dist. Ct.
App. 2004) (concluding that non-signatory trust beneficiary was not bound by customer account
agreement containing arbitration clause that was entered into by trustee and Morgan Stanley), with
In re Blumenkrantz, 824 N.Y.S.2d 884, 888–89 (N.Y. Sur. Ct. 2006) (concluding that beneficiary
and trustee were bound to arbitrate claims against financial institution pursuant to account agreement
signed by trustee); In re Shahan Irrevocable & Inter Vivos Tr., 932 P.2d 1345, 1348 (Ariz. App.
1996) (“Shahan, as trust beneficiary, was the intended third-party beneficiary of the customer
agreement between the trust and Staley.”).
15
incongruent to allow a beneficiary to hold a trustee to the terms of the trust but not hold the
beneficiary to those same terms”).
“If, however, a non-signatory’s claims can stand independently of the underlying
contract, then arbitration generally should not be compelled under this theory.” Kellogg Brown &
Root, 166 S.W.3d at 739–40; see id. at 741 (concluding that, under direct benefits estoppel,
relationship between non-signatory’s claims and contract containing arbitration provision “does not,
in itself, bind the non-signatory to the arbitration provision” but that “non-signatory should be
compelled to arbitrate a claim only it is seeks, through the claim, to derive a direct benefit from the
contract containing the arbitration provision”); see also G.T. Leach Builders, LLC v. Sapphire V.P.,
L.P, 458 S.W.3d 502, 528 (Tex. 2015) (“‘[W]hen the substance of the claim arises from general
obligations imposed by state law, including statutes, torts and other common law duties, or federal
law,’ rather than from the contract, ‘direct benefits’ estoppel does not apply, even if the claim refers
to or relates to the contract.” (quoting In re Morgan Stanley & Co., 293 S.W.3d 182, 184 n.2 (Tex.
2009) (orig. proceeding))); Weekley Homes, 180 S.W.3d at 132.7
LFA argues that Bridgette and Gabrielle seek recovery under the account agreements
and that, although Bridgette asserts a tort claim, it cannot be determined without reference to the
account agreements because the agreements define the scope of LFA’s duties to the Gabrielle Ards
7
See also Smith v. Multi-Financial Secs. Corp., 171 P.3d 1267, 1273–74 (Colo. App. 2007)
(holding that trust beneficiaries were estopped from avoiding arbitration provisions in account
agreements that trust had entered into with investment company because they sought to benefit from
agreements); In re Jean F. Gardner Amended Blind Tr., 70 P.3d 168, 170 (Wash. App. 2003)
(concluding that non-signatory trust beneficiaries’ claims for breach of fiduciary duty for
imprudently investing and failing to diversify assets “directly concern or arise from the [investment
account] agreement”).
16
Trust. See Global Fin. Servs., L.L.C. v. Estate of Brittingham-McLean, Nos. 04-04-00854-CV
& 04-05-00074-CV, 2007 Tex. App. LEXIS 4748, at *17 (Tex. App.—San Antonio June 20, 2007,
no pet.) (mem. op.) (concluding that “both tort-based and contract-based” claims were subject to
arbitration because they were based on relationship created by customer agreement that contained
arbitration clause); see also VSR Fin. Servs., Inc. v. McLendon, 409 S.W.3d 817, 832 (Tex.
App.—Dallas 2013, no pet.) (“Generally, if the facts alleged ‘touch matters,’ have a ‘significant
relationship’ to, are ‘inextricably enmeshed’ with, or are ‘factually intertwined’ with the contract
containing the arbitration provision, the claim is arbitrable.” (citation omitted)).
“Under both Texas and federal law, whether a claim seeks a direct benefit from a
contract containing an arbitration clause turns on the substance of the claim, not artful pleadings.”
Weekley Homes, 180 S.W.3d at 131–32. Based on our review of the substance of Bridgette’s
pleaded claims, we conclude that her common law and statutory claims against the trustees and
LFA—alleging misconduct by Carl that materially depleted the value of the trust estate and seeking
joint and several liability—do not assert rights or rely on the terms of the account agreements but
are independent of those agreements. See Jody James Farms, 547 S.W.3d at 638 (“A fiduciary duty
generally ‘arises from the relationship of the parties and not from the contract.’” (citation omitted));
Kellogg Brown & Root, 166 S.W.3d at 740 (“[U]nder ‘direct benefits estoppel,’ a non-signatory
plaintiff cannot be compelled to arbitrate on the sole ground that, but for the contract containing the
arbitration provision, it would have no basis to sue.”); Goldberg, 2018 Tex. App. LEXIS 1639,
at *12 (concluding that non-signatory’s claims “rooted in statutory and common law” did not
arise from terms of agreement that contained arbitration clause); In re Prudential Secs., Inc.,
17
159 S.W.3d 279, 283 (Tex. App.—Houston [14th Dist.] 2005, orig. proceeding) (“Ordinarily, a
non-signatory can only be bound by the terms of an arbitration provision if the non-signatory is
asserting claims requiring reliance on the terms of the written agreement containing the arbitration
provision.”); see also InterGen N.V. v. Grina, 344 F.3d 134, 145–46 (1st Cir. 2003) (“Although
federal courts generally ‘have been willing to estop a signatory from avoiding arbitration with a
nonsignatory when the issues the nonsignatory is seeking to resolve in arbitration are intertwined
with the agreement that the estopped party has signed,’ they have been hesitant to estop a
nonsignatory seeking to avoid arbitration.” (emphasis in original, internal citation omitted)). Further,
LFA does not assert that Gabrielle has exercised other rights under the account agreements that
would bind her to the arbitration clauses. See Weekley Homes, 180 S.W.3d at 134–35 (concluding
non-signatory was compelled to arbitrate personal injury claim that was not based on contract
because of “her prior exercise of other contractual rights and her equitable entitlement to other
contractual benefits,” explaining that “nonparty cannot both have his contract and defeat it too”);
Dusing, 2019 Tex. App. LEXIS 3947, at *13–14 (holding that non-signatory homeowners were
bound to arbitrate based on arbitration provision in home builder’s warranty because homeowners
had made claims under warranty and obtained repairs to house).
For these reasons, we conclude that the probate court did not err to the extent that it
concluded that Bridgette, acting as next friend of Gabrielle, was not bound to arbitrate her claims
against LFA based on the theory of equitable estoppel.
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Agency
LFA also argues that Bridgette and Gabrielle are bound to arbitrate their claims under
the theory of agency. See Rubiola, 334 S.W.3d at 224 (explaining that obligation to arbitrate in
agreement may bind non-signatory under principles of agency); see also The Rice Co. (Suisse), S.A.
v. Precious Flowers Ltd., 523 F.3d 528, 538 (5th Cir. 2008) (“Directly put, where an agent signs a
contract requiring arbitration, the principal is bound by the arbitration requirement.”). “Agency is
‘the fiduciary relation which results from the manifestation of consent by one person to another that
the other shall act on his behalf and subject to his control, and consent by the other so to act.’”
Bridas, 345 F.3d at 356–57 (quoting Restatement (Second) of Agency § 1(1)(1958)). “An agency
relationship may be demonstrated by ‘written or spoken words or conduct, by the principal,
communicated either to the agent (actual authority) or to the third party (apparent authority).’” Id.
at 357 (quoting Hester Int’l Corp. v. Federal Republic of Nigeria, 879 F.2d 170, 181 (5th Cir.
1989)); see also Jody James Farms, 547 S.W.3d at 635 (discussing theory of agency for compelling
arbitration and concluding that arbitration could not be compelled on facts before court).
In this case, there was no evidence that Carl or Brenda had actual or apparent
authority to act on behalf of Gabrielle such that they were acting in an agency capacity for her when
they signed the account agreements. Under the trust decrees, the trustee’s actions during the life of
the trust were not subject to Gabrielle’s control or direction. For example, it was within the trustee’s
“full and complete discretion” to determine distributions, and the trustee’s powers generally included
“complete discretion” as to investment decisions of trust assets and “as wide a latitude in the
selection, retention, or making of investments as an individual would have in retaining or investing
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his own funds.” Although Carl and Brenda owed fiduciary duties as trustees, we conclude that they
were not acting as Bridgette’s or Gabrielle’s agents when they signed the account agreements. See
Bridas, 345 F.3d at 356–57; see also SSP Partners, 241 S.W.3d at 169 (concluding that there was
no provision in agreement in which mother agreed to submit her minor children’s claims to
arbitration and that mother did not “sign the agreement on behalf of the children or as representative
of the children”).8
On these bases, we conclude that the probate court did not err to the extent that it
concluded that Bridgette, acting as next friend of Gabrielle, was not bound to arbitrate her claims
against LFA on the theory of agency.
Derivative Nature of Claims
Independent of the three theories discussed above, LFA argues that the derivative
nature of Bridgette’s claims bound her and Gabrielle to the arbitration clauses in the account
agreements. LFA focuses on Bridgette’s pleadings seeking to recover “in her derivative capacity on
behalf of the trustee of Gabrielle Ards Trust.” LFA argues that “[b]y virtue of these efforts to step
into the shoes of Carl and Brenda, Bridgette and Gabrielle are bound by the arbitration provisions.”
As support for its argument, LFA cites Labatt Food Service, 279 S.W.3d at 643, and Cedillo
v. Immobiliere Jeuness Establissement, 476 S.W.3d 557 (Tex. App.—Houston [14th Dist.] 2015,
8
We also observe that Gabrielle is a minor, and a contract with a minor is voidable. See
PAK Foods Hous., LLC v. Garcia, 433 S.W.3d 171, 176–77 (Tex. App.—Houston [14th Dist.] 2014,
pet. dism’d) (stating that law in Texas is that contract executed by minor is voidable by minor). In
this context, it would be incongruent to bind Bridgette, acting as next friend of Gabrielle, to arbitrate
her claims against LFA under an agency theory when Gabrielle could have voided the account
agreements if she had actually signed them.
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pet. denied). We find the claims that were asserted derivatively by the plaintiffs in those two cases
not to be analogous to the claims asserted by Bridgette, acting as next friend of Gabrielle.
In Labatt Food Service, the Texas Supreme Court determined that the wrongful death
beneficiaries, the children and parents of the decedent, were bound by the decedent’s pre-death
agreement to arbitrate claims with his employer “because of the derivative nature of their claims.”
279 S.W.3d at 641. In reaching its conclusion, the court observed “that the right of statutory
beneficiaries to maintain a wrongful death action is entirely derivative of the decedent’s right to have
sued for his own injuries immediately prior to his death” and that “statutory wrongful death
beneficiaries’ claims place them in the exact ‘legal shoes’ of the decedent.” Id. at 644. In contrast
to claims brought by wrongful death beneficiaries that are dependent on a decedent’s claims,
Bridgette’s claims do not arise from injury to the trustees but are based on her own injury, allegedly
caused by the trustees and LFA. Unlike the plaintiffs in Labatt Food Service who were asserting
statutory claims for wrongful death derived from the decedent’s rights, Bridgette’s claims—directed
at alleged trustee misconduct with LFA’s actual knowledge and participation—do not place her in
the “exact ‘legal shoes’” of the trustees and are not derivative of the trustees’ rights under the
account agreements. See id.; see also Tex. Prop. Code §§ 114.001 (addressing liability of trustee to
beneficiary for breach of trust), .002 (addressing liability of successor trustee for breach of trust by
predecessor), .008 (addressing remedies for breach of trust); Kinzbach Tool Co. v. Corbett-Wallace
Corp., 160 S.W.2d 509, 514 (Tex. 1942) (stating that “where a third party knowingly participates
in the breach of duty of a fiduciary, such third party becomes a joint tort-feasor with the fiduciary
and is liable as such”); Southwest Tex. Pathology Assocs., L.L.P. v. Roosth, 27 S.W.3d 204, 208
21
(Tex. App.—San Antonio 2000, pet. dism’d w.o.j.) (“[A] third party who knowingly aids and assists
in the breach of a fiduciary duty may also be liable.”).
In Cedillo, the plaintiff company was a partner in partnerships and sued lawyers,
asserting claims derivatively on behalf of the partnerships for legal malpractice based on the lawyers’
representations of the partnerships. See 476 S.W.3d at 561. In this context, our sister court
concluded that the company was bound to the arbitration clause in the written representation
agreement between the lawyers and the partnerships. See id. at 567 (stating that court saw “no
reason to depart from the well-established principle that a plaintiff suing derivatively on behalf of
another party is bound to any relevant agreements to which that party agreed, including a valid
arbitration agreement”). In contrast, as observed above, Bridgette has not asserted claims on behalf
of Carl or Brenda against LFA for harm to the trustees; her claims are for harm to Gabrielle as the
beneficiary of the trust against all three jointly and severally based on common law and statutory
duties that are independent of the account agreements. See Tex. Prop. Code §§ 114.001, .002, .008;
Roosth, 27 S.W.3d at 208; see, e.g., Ali v. Smith, 554 S.W.3d 755, 762 (Tex. App.—Houston [14th
Dist.] 2018, no pet.) (explaining that fiduciary duty owed by executor or administer to estate is
derived from statutes and common law); cf. Global Fin. Servs., 2007 Tex. App. LEXIS 4748, at
*15–16 (explaining that counsel for non-signatory conceded during oral argument that claims against
licensed security broker “were derivative of the Estate’s claims” pursuant to the customer agreement
between estate and broker). She is suing on behalf of Gabrielle for damages to the trust estate as an
individual beneficiary is authorized to do. See Tex. Prop. Code § 114.001(c); see also id.
22
§§ 111.004(7) (defining “interested person” to include beneficiary), 115.011 (stating that interested
person may bring action).
Based on our review of Bridgette’s pleaded claims, we conclude that the probate court
did not err to the extent that it concluded that her claims that are asserted as “derivative” claims did
not bind her to arbitrate those claims against LFA.
Scope of Arbitration Clauses
Because we have concluded that LFA did not satisfy its burden to show that
Bridgette, acting as next friend of Gabrielle, was bound to the arbitration clauses in the account
agreements, we do not address LFA’s arguments concerning whether her claims fall within the scope
of those clauses. See Tex. R. App. P. 47.1, 47.4; Jody James Farms, 547 S.W.3d at 633 (stating that
whether non-signatory was bound to arbitration agreement is gateway matter); Kellogg Brown &
Root, 166 S.W.3d at 737 (stating that party seeking to compel arbitration under FAA has burden to
show existence of a valid agreement to arbitrate and dispute within the scope of the agreement).
Conclusion
For these reasons, we conclude that the probate court did not abuse its discretion by
denying LFA’s motion to compel arbitration and affirm the probate court’s order.
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__________________________________________
Melissa Goodwin, Justice
Before Justices Goodwin, Baker, and Smith
Affirmed
Filed: December 19, 2019
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