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Arbitration Clause in Will is Unenforceable

WEINER LAWInsightsFiduciary LitigationArbitration Clause in Will is Unenforceable

Fiduciary Litigation Trusts & Estates Tuesday, February 28, 2023

Can a will impose an agreement to arbitrate on the beneficiaries of the estate?  And if the will can make that condition, will it apply to a demand that the executor provide an accounting of what is in the estate?  That was the question presented in a dispute involving the beneficiary of a “substantial” estate left by real estate developer Samuel Hekemian, who died in 2018.Arbitration clause in will

Not infrequently, individuals will want to keep the information about their estate out of the public record.  One of the strategies that might work would be to require the private arbitration of any will disputes.  Perhaps that is why Hekemian’s will, which  established several trusts, contained an arbitration clause in the event of disputes.

Arbitration Clause Included in Will May Avoid Public Disclosures

After one of his son’s sued to compel an accounting, the co-executors, son Peter Hekemian and attorney Edward Imperatore, sought to compel arbitration under a provision in his Last Will and Testament (referred to by the court as the LWT).

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The effort failed.  The Appellate Division in an unreported decisions, Matter of Estate of Hekemian affirmed, holding that there was no binding agreement to arbitrate and that it was inconsistent with the specific and detailed authority given by statute to courts to oversee the probate process.

Will Requires Arbitration of any Disputes Concerning and Trusts

Any dispute regarding the interpretation [of] this [LWT] and the trusts created hereunder, or arising out of administration by the executors and/or others acting hereunder in a fiduciary or other capacity, shall be submitted for settlement by arbitration, in the following manner:

(A) Any interested party may initiate arbitration by giving written notice by certified mail to the executors and/or trustees of the intention to arbitrate the dispute. Such notice shall explain the nature of the dispute and any remedy or remedies sought. If the party initiating such arbitration and the executors and/or trustees shall be unable to agree upon a single arbitrator within sixty (60) days of the mailing of the notice to arbitrate, each of them may designate his or her own arbitrator (with the executors and/or trustees to designate one and only one arbitrator for the executors and/or trustees, collectively), none of whom shall be an interested party hereunder. All such designated arbitrators shall then meet and decide upon a single, mutually acceptable arbitrator to resolve the dispute serving as sole arbitrator thereof.

(B) The arbitrator shall decide the dispute by applying the substantive law of the State of New Jersey. Procedures for the arbitration shall be established by agreement of the interested parties, or in the absence of such an agreement by the arbitrator. The decision of the arbitrator shall be final and binding upon all interested parties and shall not be appealable to any court of law. Costs of the arbitration shall be paid from such trust, or assessed against the parties as may be determined by the arbitrator, as part of the decision.

(C) Arbitration shall be the exclusive remedy for resolving disputes concerning th[e] [LWT] and the trusts created hereunder, including but not limited to the administration of th[e] [LWT] and such trusts; provided, however, that an interested party may bring an action at law or equity to enforce any decision and/or award of an arbitrator hereunder.

Hekemian’s son Richard sought a distribution or loan from from one of the trusts.  When his request was denied and his attempts to convince the executors to reconsider were ignored, he filed an action under N.J.S.A. 3B:17-2 as an interested party to compel the executors to account.

The trial judge rejected the executors’ motion to compel arbitration, finding first that there was no mutual agreement to arbitrate as required by the New Jersey Arbitration Act, which requires “an agreement contained in a record” to submit a controversy to arbitration.   A will, the court reasoned, is a unilateral gift, not an agreement that requires mutual assent.

Affirming the court below, the Appellate Division agreed that a party must agree to submit to arbitration, as it requires a waiver of a right to litigate.  Here there was no such agreement.

Executors Argue an Implied Agreement to Arbitrate Under ‘Direct Benefits’ Theory

The executors argued that there was an implied agreement to submit to arbitration based on Richard’s attempt to secure a benefit from the estate.  In so doing, the executors relied on the concept of “direct benefits estoppel” which implies an agreement to arbitrate by accepting the benefits of a contract with an agreement to arbitrate.  They argued the court should follow a 2013 decision from Texas, Rachal v. Reitz, in which the Texas Supreme Court had enforced an arbitration provision in an inter vivos trust against a beneficiary who sued the trustee.

No New Jersey court as adopted the theory of direct benefits estoppel and the attempt by the executors to use equitable estoppel failed because it requires detrimental reliance by the party invoking the principle.  Here there was nothing to suggest that anyone had relied on any action taken by the plaintiff.

The Appellate Division also agreement that an application to compel an accounting was not a “dispute” within the scope of the arbitration, as it is a right that may be invoked by any interested party under New Jersey  Court Rule 4:87-1.  The mere request that a fiduciary account is not inherently a dispute.

Finally, the Appellate Division noted that private arbitration is contrary to the exclusive rights of the courts, which have authoty “to hear and determine all controversies respecting wills and trusts” under N.J.S.A. 3B-2.

While we need not decide whether a will may include a valid and enforceable arbitration provision under New Jersey law to resolve the issue presented in this case, we note that arbitration clauses that eliminate the courts’ expected role in resolving will disputes are inconsistent with the detailed statutory scheme vesting the superior courts with the authority to adjudicate such issues.

This final statement frames what may be the overriding issue the next time the issue surfaces, most likely in a case in which a party that has accepted the benefit of a gift to which is attached an agreement to arbitrate; for example after accepting a bequest or disbursements from a trust.

Jay R. McDaniel