Trust Clause Cannot Bind a Non-Beneficiary

After the death of the settlor of a lifetime trust, two beneficiaries sued the trustee alleging self-dealing arising from the trustee’s sale at below market value of real estate held in the trust to himself and his wife as tenants by the entirety.  The trustee moved to compel arbitration based on a trust term requiring controversies between parties to the trust agreement, including beneficiaries, be submitted to arbitration.  The motion was denied and the trustee appealed.

In Diggs v. Lingo,the Tennessee intermediate appellate court affirmed.  Because the trustee’s spouse is a necessary party but was not a party to the trust agreement, she cannot be bound by the arbitration clause and the beneficiaries cannot be forced to arbitrate disputes with her. While the beneficiaries could be compelled to arbitrate their claims against the trustee and try their claims against his spouse, such a result would defeat the purpose of arbitration.

Special thanks to William LaPiana (Professor of Law, New York Law School) for bringing this case to my attention.