Freeman v. Fidelity Brokerage Services, LLC
Posted on Categories Court Decisions, Securities Arbitration

By Jack D. Ballard

Trust beneficiaries were not required to arbitrate claims against brokerage firm which they alleged knowingly participated in breaches of fiduciary duty by step-father trustee, where they did not sign the account document containing the arbitration agreement and sought no benefits therefrom.

Freeman vs. Fidelity Brokerage Services, LLC, No. 3:18-CV-0947-G (N.D. Tex., 3/5/19).

Plaintiffs were the children of Nancy Crisler, who executed a Living Trust Agreement that provided for the creation of two trusts. One trust was for the benefit of the children (“Family Trust”) and one for the benefit of their stepfather, Crisler (“Marital Trust”). Upon Nancy Crisler’s death, the Marital Trust would terminate and the assets be distributed to the Family Trust. The Trust Agreement expressly called for two co-trustees to manage the affairs of the two trusts and the appointment of named successor co-trustees in the event either relinquished their duties.

Crisler and Dial, Nancy Crisler’s brother, were named as the initial trustees. Shortly after Nancy’s death, her brother Dial resigned as co-trustee. Contrary to the terms of the Trust Agreement, Crisler failed to notify any successor co-trustee that Nancy had designated them to serve. Instead, he proceeded to manage both Trusts alone, without a co-trustee, in violation of the terms of the Trust Agreement. The children were not aware of the terms of the Trust Agreement. Crisler transferred assets of the Trusts to trust accounts managed by Fidelity, signing an account agreement that contained an arbitration clause. Although Fidelity received a copy of the Trust Agreement with the co-trustee requirement and maintained it in their files, Fidelity allowed Crisler to make investment decisions, withdrawals, and otherwise manage the accounts as a sole trustee and beneficiary, and at the time of his death he had withdrawn over $1,000,000.00 of trust assets for the benefit of himself or persons other than his step children.

The step children sued Fidelity for breach of fiduciary duty and knowing participation in Crisler’s breach of fiduciary duty. Fidelity moved to compel arbitration, relying on the agreement signed by Crisler. The Court notes that, although arbitration is strongly favored, the presumption arises only after the party seeking to compel arbitration has proven that a valid arbitration agreement exists. In this case, in was undisputed that the plaintiffs did not sign an arbitration agreement. Fidelity claimed that the children were compelled to arbitrate by direct benefits estoppel, and intertwined claims estoppel, relying on the account agreement signed by Crisler. However, intertwined claims estoppel only applies where a signatory plaintiff brings a claim against a non-signatory defendant; the doctrine does not apply to these facts.

Direct benefits estoppel applies where a non-signatory embraces a contract containing an arbitration clause by knowingly seeking and obtaining benefits from that contract, or by seeking to enforce the terms of that contract, or asserting claims that must be determined by reference to that contract. In this case, the claims were based on the terms of the Trust Agreement, not the account agreement. There was no evidence that the plaintiffs sought to derive benefits from or embraced the account agreement. Because there was no valid and enforceable agreement to arbitrate between the parties, the motion to compel arbitration was denied.

(J. Ballard)

(SOLA Ref. No. 2019-14-02)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis. 

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