In a Hamblen County case involving a trust for a severely disabled child, the Tennessee Supreme Court held that Tennessee law authorized the trustee to sign an agreement requiring the trust to “arbitrate” claims against the broker who managed the trust funds. Arbitration is a process where parties agree to have their disputes decided by an independent third party instead of by a judge or jury. The Supreme Court sent the case back to the trial court to determine which claims in the lawsuit need to be arbitrated.
The beneficiary of the trust, Alexis Breanne Gladden, was hospitalized with a fever as an infant, and a delay in administering antibiotics caused complications. After a long hospitalization and multiple surgeries, including several amputations, Alexis ended up significantly disabled.
Alexis’s mother, Shauna Gladden, filed a lawsuit on Alexis’s behalf against the hospital and doctors, and ultimately received several million dollars in settlement money. The court required Ms. Gladden to set up a trust for the settlement money to pay for Alexis’s care over her lifetime. Over $2.5 million in settlement funds were placed in the trust for Alexis.
Several years later, investment broker Wunderlich Securities, Inc. was hired to manage some of the trust funds, and Wunderlich employee Albert Alexander, Jr., was hired to serve as the trust’s financial advisor. Cumberland Trust and Investment Company was named as the trustee. Cumberland signed an account agreement with Wunderlich for Wunderlich to invest funds for the trust. The agreement required the trust to arbitrate any disputes with Wunderlich.
In 2011, the circuit court appointed Alexis’s maternal grandfather, Wade Harvey, Sr., as Alexis’s guardian. Almost a year later, Mr. Harvey filed this lawsuit on behalf of Alexis, against Cumberland, Mr. Alexander, and Wunderlich. After Mr. Harvey was appointed as Alexis’s guardian, he discovered the trust funds had been drastically depleted. Before 2008, the trust had well over $2 million. After that time, Mr. Harvey’s lawsuit alleged, the defendants depleted the trust funds by spending the money on many things unrelated to Alexis’s care, including a large five-bedroom house and seven acres of land. By the time the lawsuit was filed, Mr. Harvey said, the trust had less than $200,000, and he did not have enough money to take care of Alexis’s needs.
The lawsuit accused Mr. Alexander of breaching his fiduciary duty to Alexis by having an inappropriate relationship with Alexis’s mother, Ms. Gladden, which led to the “unscrupulous spending” of trust funds that were supposed to be for Alexis’s care. In turn, Mr. Harvey’s lawsuit claimed, Wunderlich and Cumberland breached their fiduciary duties to Alexis by failing to monitor Mr. Alexander’s behavior, failing to safeguard the trust funds, and failing to act in the best interest of the beneficiary, Alexis. The lawsuit sought over $3 million in damages.
Citing the arbitration clause in the contract between the trust and Wunderlich, the defendants filed a motion to require Mr. Harvey to arbitrate the claims in the lawsuit, rather than have them decided by a judge or a jury. The trial court granted the motion.
In the meantime, Alexis died, and Mr. Harvey was substituted as the plaintiff. Mr. Harvey was given permission to appeal the trial court’s ruling. The court of appeals reversed. It held that the trustee Cumberland did not have the authority to bind the trust beneficiary to arbitrate the claims in the lawsuit.
On appeal, the Tennessee Supreme Court reviewed the history of trusts and Tennessee trust law. For many years, the Court explained, states have given trustees greater authority to perform their duties in managing trust funds and assets. Tennessee’s legislature, the Court said, enacted laws that give trustees broad authority to fulfill their duties.
The Court held that Tennessee trust laws give trustees the power to enter into arbitration agreements, so long as doing so is not prohibited under the document that set up the trust. It found that the trust document in this case did not prohibit the trustee, Cumberland, from entering into the arbitration agreement with Wunderlich.
In this case, the Court explained, the lawsuit was brought by the trust beneficiary, not the trust. The arbitration requirement was contained in the contract between the trust and Wunderlich, so the question was whether the trust beneficiary was bound by the arbitration requirement in the agreement between the trust and Wunderlich. One of the cornerstones of arbitration is that the parties must agree to arbitration and cannot be forced to arbitrate.
However, the Court said that a third-party beneficiary who did not sign a contract with an arbitration provision may nevertheless be required to arbitrate claims, under the legal principle that a party who seeks the benefit of a contract must also bear its burdens. The Court held that, in this case, the trust beneficiary would be required to arbitrate any claims against Wunderlich in which the beneficiary sought to enforce the account agreement between Cumberland and Wunderlich. Any claims that did not seek to enforce the account agreement, however, would be decided by a judge or a jury, not by an arbitrator.
Under these principles, the Supreme Court reversed the court of appeals denying arbitration, and vacated the trial court’s order requiring arbitration of all of the trust beneficiary’s claims. The case was sent back to the trial court to determine which of the beneficiary’s claims had to be decided by an arbitrator.
To read the unanimous opinion in Wade Harvey ex rel. Alexis Breanna Gladden v. Cumberland Trust and Investment Company, et al., authored by Justice Holly Kirby, go to the opinions section of TNCourts.gov.