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The Fiduciary Litigator

Federal Court Holds That Trust Beneficiaries’ Claims Against Brokerage Firm Should Not Be Compelled To Arbitration

By David Fowler Johnson on May 11, 2019
Posted in Items of Interest

In Freeman v. Fid. Brokerage Servs., LLC, the mother of the plaintiffs executed a living trust agreement. No 3:18-CV-0947-G, 2019 U.S. Dist. LEXIS 34694 (N.D. Tex. March 5, 2019). Upon her death, the trust agreement directed that the trust assets were to be divided and allocated into trusts for the benefit of her husband if he was still living and for the benefit of the plaintiffs. Upon the death of the husband, his trust would terminate and all remaining assets of that trust would be distributed to the plaintiffs’ trust. The mother died, and the husband proceeded to manage the assets and affairs of both trusts alone, without a co-trustee, in direct violation of the terms and requirements of the trust agreement. The husband then transferred the assets of the trusts to trust accounts managed by Fidelity. The plaintiffs assert that at all times the trust assets in Fidelity’s possession were subject to trust restrictions and fiduciary obligations under the trust agreement. Fidelity received a hard copy of the trust agreement and thus knew of the co-trustee requirement to manage the assets and accounts of the trusts.

Following the husband’s death, the plaintiffs discovered that he had “withdrawn, transferred, disbursed and depleted the assets of the trust accounts maintained at Fidelity, without the required involvement of a co-trustee, in violation of the terms and conditions of the Trust Agreement, and in breach of Crisler’s fiduciary duties” with Fidelity’s knowledge, participation, and support. Id. The plaintiffs asserted that although Fidelity knew the terms of the trust, including the co-trustee requirement, Fidelity ignored those terms and “never took any measures to see that the trust assets in Fidelity’s custody and possession were administered properly and protected from depletion by a single, self-interested trustee.” Id. The plaintiffs sued Fidelity for breach of fiduciary duty and knowing participation in breach of fiduciary duty, and Fidelity removed the case to federal court. Fidelity then filed a motion to compel the case to arbitration under an arbitration clause contained in account agreements signed by the husband when he opened the accounts.

The federal district court described the grounds for compelling a case to arbitration:

The Fifth Circuit applies six theories under which a court may compel a nonsignatory to arbitration: (1) incorporation by reference; (2) assumption; (3) agency; (4) veil-piercing/alter ego; (5) estoppel; and (6) third-party beneficiary…The Fifth Circuit has described these two types of equitable estoppel as follows.

Id. Fidelity contended that “[t]his case presents an uncommon twist on typical doctrines of equitable estoppel like ‘direct benefits’ and ‘intertwined claims’ estoppel” and thus the Customer Agreement’s arbitration clause binds the Freemans as nonsignatory plaintiffs to arbitrate their claims. The plaintiffs, on the other hand, insist their case “simply calls for application of ordinary principles of contract law” independent of the agreements between Fidelity and the trust, and equitable estoppel is thereby inapplicable. The court first rejected the first type of estoppel:

The “intertwined claims” theory governs motions to compel arbitration when a signatory-plaintiff brings an action against a nonsignatory-defendant asserting claims dependent on a contract that includes an arbitration agreement that the defendant did not sign. It does not govern the present case, where a signatory-defendant seeks to compel arbitration with a nonsignatory-plaintiff.

Id. The court then rejected the second type of estoppel:

The “direct benefits” theory of equitable estoppel “prevents a nonsignatory from knowingly exploiting an agreement containing the arbitration clause.” That is, “a nonsignatory cannot sue under an agreement while at the same time avoiding its arbitration clause.” This theory is inapplicable here because the Receiver does not seek to enforce the various contracts containing the arbitration agreements; rather, he seeks to unwind them and reclaim the benefits fraudulently distributed to the defendants under the contracts.

Id. The court concluded:

There is no evidence that the Freemans sought to derive direct benefits from or knowingly exploited the Customer Agreement, embraced the Customer Agreement as nonsignatories but now attempt to repudiate the arbitration clause, or that they brought suit against Fidelity premised on an agreement which includes or is intertwined with an arbitration clause. Here, the Freemans seek to reclaim the monies alleged to have been fraudulently disbursed to Crisler. Moreover, pursuant to the terms of the Trust Agreement, the trust assets were to be managed by co-trustees. Nowhere in the Trust Agreement does it state that the signature of co-trustee Crisler was sufficient to bind the trusts. Nevertheless, Fidelity permitted Crisler, acting alone and also in the capacity as a primary beneficiary, to sign the Fidelity Application, to open the Fidelity account, and to deplete the trust assets. Fidelity cannot now compel the Freemans, as nonsignatories to the Fidelity Application and Customer Agreement, to arbitrate. In short, there exists no valid and enforceable arbitration agreement between the parties in this case. The court therefore need not consider whether there are any external legal constraints on arbitration.

Id. The court denied the motion to compel arbitration.

Tags: account agreement, aiding and abetting breach of fiduciary duty, Breach of Fiduciary Duty, direct benefit estoppel, intertwined claims estoppel, knowing participation in breach of fiduciary duty, motion to compel arbitration, trustee breach of fiduciary duty
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Photo of David Fowler Johnson David Fowler Johnson

[email protected]
817.420.8223

David maintains an active trial and appellate practice and has consistently worked on financial institution litigation matters throughout his career. David is the primary author of the The Fiduciary Litigator blog, which reports on legal cases and issues impacting the fiduciary…

[email protected]
817.420.8223

David maintains an active trial and appellate practice and has consistently worked on financial institution litigation matters throughout his career. David is the primary author of the The Fiduciary Litigator blog, which reports on legal cases and issues impacting the fiduciary field in Texas. Read More

David’s financial institution experience includes (but is not limited to): breach of contract, foreclosure litigation, lender liability, receivership and injunction remedies upon default, non-recourse and other real estate lending, class action, RICO actions, usury, various tort causes of action, breach of fiduciary duty claims, and preference and other related claims raised by receivers.

David also has experience in estate and trust disputes including will contests, mental competency issues, undue influence, trust modification/clarification, breach of fiduciary duty and related claims, and accountings. David’s recent trial experience includes:

  • Representing a bank in federal class action suit where trust beneficiaries challenged whether the bank was the authorized trustee of over 220 trusts;
  • Representing a bank in state court regarding claims that it mismanaged oil and gas assets;
  • Representing a bank who filed suit in probate court to modify three trusts to remove a charitable beneficiary that had substantially changed operations;
  • Represented an individual executor of an estate against claims raised by a beneficiary for breach of fiduciary duty and an accounting; and
  • Represented an individual trustee against claims raised by a beneficiary for breach of fiduciary duty, mental competence of the settlor, and undue influence.

David is one of twenty attorneys in the state (of the 84,000 licensed) that has the triple Board Certification in Civil Trial Law, Civil Appellate and Personal Injury Trial Law by the Texas Board of Legal Specialization.

Additionally, David is a member of the Civil Trial Law Commission of the Texas Board of Legal Specialization. This commission writes and grades the exam for new applicants for civil trial law certification.

David maintains an active appellate practice, which includes:

  • Appeals from final judgments after pre-trial orders such as summary judgments or after jury trials;
  • Interlocutory appeals dealing with temporary injunctions, arbitration, special appearances, sealing the record, and receiverships;
  • Original proceedings such as seeking and defending against mandamus relief; and
  • Seeking emergency relief staying trial court’s orders pending appeal or mandamus.

For example, David was the lead appellate lawyer in the Texas Supreme Court in In re Weekley Homes, LP, 295 S.W.3d 309 (Tex. 2009). The Court issued a ground-breaking opinion in favor of David’s client regarding the standards that a trial court should follow in ordering the production of computers in discovery.

David previously taught Appellate Advocacy at Texas Wesleyan University School of Law located in Fort Worth. David is licensed and has practiced in the U.S. Supreme Court; the Fifth, Seventh, and Eleventh Federal Circuits; the Federal District Courts for the Northern, Eastern, and Western Districts of Texas; the Texas Supreme Court and various Texas intermediate appellate courts. David also served as an adjunct professor at Baylor University Law School, where he taught products liability and portions of health law. He has authored many legal articles and spoken at numerous legal education courses on both trial and appellate issues. His articles have been cited as authority by the Texas Supreme Court (twice) and the Texas Courts of Appeals located in Waco, Texarkana, Beaumont, Tyler and Houston (Fourteenth District), and a federal district court in Pennsylvania. David’s articles also have been cited by McDonald and Carlson in their Texas Civil Practice treatise, William v. Dorsaneo in the Texas Litigation Guide, and various authors in the Baylor Law Review, St. Mary’s Law Journal, South Texas Law Review and Tennessee Law Review.

Representative Experience

  • Civil Litigation and Appellate Law
Read more about David Fowler JohnsonDavid's Linkedin Profile
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