– Est. –

Arbitration Clauses Binding Upon Account Beneficiaries

From time to time we publish interesting trust and estate cases: 

Citigroup Smith Barney v. Henderson, Oregon Court of Appeals

Decedent opened up an IRA with Citigroup Smith Barney, and under the terms of the IRA agreement, the decedent agreed that all claims “arising from the business of [Citigroup] or otherwise” would be subject to arbitration and that New York law would govern and construe the IRA agreement.


The decedent then completed two forms to designate the beneficiaries of the IRA: the first form designated his personal trust – of which his second wife was the successor trustee – as the beneficiary, and the second form designated the children of the decedent’s first marriage as the beneficiaries. The second form, however, was not dated.


Upon the decedent’s death, Citigroup discovered the conflicting forms and recommended that the beneficiaries resolve the matter among themselves. When the beneficiaries were unable to resolve their competing claims to the IRA, Citigroup moved to deposit the proceeds of the IRA with the court, and moved to obtain an order relieving it of any further liability for the IRA. The trial court granted Citigroup’s motion to interplead the IRA funds, denied its motion to be dismissed, and ordered that the conflicting beneficiaries interplead and litigate any claims in the action.


The decedent’s wife filed an answer and counterclaim, alleging that Citigroup had breached its fiduciary duties to her when it accepted contradictory beneficiary designation. Likewise, the decedent’s children filed an answer and counterclaim alleging that Citigroup had breached its contract to the decedent by failing to properly manage his file and that the children were the intended beneficiaries.


In response, Citigroup filed a motion to compel arbitration of the counterclaims brought by the conflicting beneficiaries, contending that the counterclaims were subject to the arbitration clause in the IRA agreement. The decedent’s wife, in turn, argued that the arbitration clause required arbitration of all claims, including Citigroup’s interpleader action, and thus Citigroup had waived its right to arbitrate when it filed the interpleader action.  The children agreed with the wife’s argument, and in addition claimed that they could not be compelled to arbitrate because they had never agreed to do so. The trial court denied Citigroup’s motion to compel arbitration.


On appeal, Citigroup assigned error to the trial court’s denial of its motion to compel arbitration, arguing that all of the beneficiaries were subject to the arbitration clause and that it did not waive its right to arbitrate upon filing the interpleader action.


Upon recognizing that New York law applied to the IRA agreement pursuant to the Federal Arbitration Act ("FAA"), the court next addressed the issue of whether the children, as third-party beneficiaries, were bound by the arbitration clause in the IRA agreement. Under New York law, a party who has not signed an agreement containing an arbitration clause can be compelled to arbitrate if such party has derived a benefit from the contract or relied upon the contract in asserting a claim. As a result, the children’s claims were subject to the arbitration clause.


Next, the court considered whether the trial court had correctly determined that Citigroup had waived its right to arbitrate. The issue in this case, the court stated, was not how the issue should be resolved, but instead who should decide whether Citigroup had waived its right to arbitrate: an arbitrator or a court. Under the FAA, the issue of which forum should decide a question is a matter of contract interpretation under state law. Where the arbitration agreement is silent as to who should decide issues of waiver, and where the parties’ intent cannot be discerned, the default rule under the FAA is to presume that waiver issues are to be decided by the arbitrator. Moreover, the Supreme Court has recognized that it is presumed that an arbitrator will decide “procedural questions which grow out of the dispute and bear on its final disposition.” 


Here, the IRA agreement provided that it “shall be governed and construed in accordance with the laws of the State of New York.” Under New York law, choice of law provisions that select New York law to govern the enforcement of a contract are distinguished from those that select New York law to govern the contract. That is, a contract that is to be governed by New York law does not express an agreement to have New York law govern the enforcement of the agreement. Here, the IRA agreement did not include the language “shall be enforced,” and thus the parties had not intended that a court decide the issue of waiver. Likewise, because the IRA agreement was silent as to which forum should decide issues of waiver of the arbitration agreement, the court applied the presumption that waiver is an issue of procedural arbitrability that is for the arbitrator, and not the court, to decide. 


In conclusion, the court held that the children’s rights under the agreement were subject to the same limitations as were included in the wife’s IRA agreement, and thus the children were bound by the arbitration clause. Additionally, because waiver is an issue of procedural arbitrability, the issue of whether Citigroup had waived its right to arbitrate was to be left to an arbitrator.