Harvey ex rel. Gladden v. Cumberland Trust & Inv. Co.

• Decision Date: 20 October 2017
• Docket Number: No. E2015-00941-SC-R11-CV,E2015-00941-SC-R11-CV
• Citation: 532 S.W.3d 243
• Parties: Wade HARVEY, EX REL. Alexis Breanna GLADDEN v. CUMBERLAND TRUST AND INVESTMENT COMPANY, et al.
• Court: Tennessee Supreme Court

532 S.W.3d 243

Wade HARVEY, EX REL. Alexis Breanna GLADDEN

v.CUMBERLAND TRUST AND INVESTMENT COMPANY, et al.

No. E2015-00941-SC-R11-CV

Supreme Court of Tennessee, AT KNOXVILLE.

January 10, 2017 Session

FILED October 20, 2017

Mark D. Griffin and Will E. Routt, Memphis, Tennessee, for the appellants, Albert Alexander, Jr., and Wunderlich Securities, Inc.

William Lewis Jenkins, Jr., Dyersburg, Tennessee, and F. Braxton Terry, Morristown, Tennessee, for the appellee, Wade Harvey, Jr., ex rel. Alexis Breanna Gladden.

Holly Kirby, J., delivered the opinion of the court, in which Jeffrey S. Bivins, C.J., and Cornelia A. Clark, Sharon G. Lee, and Roger A. Page, JJ., joined.

Holly Kirby, J.

In this interlocutory appeal, the trustee of a trust executed an investment/brokerage account agreement that included a provision requiring the arbitration of disputes. The trust beneficiary filed a lawsuit asserting claims against the investment broker, and the defendant broker sought to compel arbitration under the arbitration provision in the account agreement. The trial court granted the motion to compel arbitration and granted permission for this interlocutory appeal. The Court of Appeals reversed. On appeal, we are asked to determine whether the signature of the trustee on the account agreement binds the beneficiary of the trust to the predispute arbitration provision. We hold that the Tennessee Uniform Trust Code is intended to give trustees broad authority to fulfill their duties as trustee. We also hold that the Tennessee Uniform Trust Code gives trustees the power to enter into predispute arbitration agreements, so long as doing so is not prohibited under the operative trust instrument. We hold that the trust instrument in this case gives the named trustee broad authority and does not prohibit the trustee from entering into a predispute arbitration agreement. As a result, we interpret the trust instrument as authorizing the trustee to execute the account agreement with the defendant broker, including the predispute arbitration provision therein. Thus, under both the Tennessee Uniform Trust Code and the operative trust instrument, the trustee had authority to enter into the arbitration agreement contained within the account agreement. The question of whether the trust beneficiary in this case is bound by the arbitration provision is governed by the principle that a third party who seeks the benefit of a contract must also bear its burdens. Applying this principle, the trust beneficiary in this case may be bound to arbitrate claims against the investment broker that seek to enforce the account agreement. We reverse the decision of the Court of Appeals and vacate the trial court order compelling arbitration of all claims. We remand the case to the trial court for further proceedings, including a determination as to which if any of the claims asserted by the trust beneficiary seek to enforce the account agreement.

FACTUAL AND PROCEDURAL BACKGROUND

Trust Formation

The minor trust beneficiary in this case, Alexis Breanne Gladden, was born in 1997 to Shauna Gladden (a/k/a Shauna Lynn Harvey) ("Mother") and Billy P. Gladden ("Father"). When Alexis was eight months old, she was hospitalized with fever and possible sepsis. In the hospital, there was apparently a delay in administering antibiotics to Alexis. Complications ensued. Alexis endured a lengthy hospitalization and multiple surgeries, including several amputations, and ended up significantly disabled.¹

As a result, Mother filed a lawsuit in the Circuit Court for Hamblen County, Tennessee, against the pediatric practice, the physicians, the hospital, and the nurses. The lawsuit asserted that they were responsible for the catastrophic illness and injuries to infant Alexis. All of the defendants initially denied liability.

In May 2001, Mother settled with the physicians and the pediatric practice for a total of $1,000,000. In connection with its approval of the settlement, the circuit court required the establishment of a trust for the benefit of Alexis to receive the settlement proceeds. Pursuant to this directive, a trust instrument ("Trust Instrument") was executed and approved by the circuit court, establishing the Alexis Breanne Gladden Irrevocable Trust ("Trust"). The Trust Instrument states that the Trust was created "as a means by which trust assets may be held for the benefit" of Alexis, and recites an intent "to provide a system for fiscal management, administration and disbursement, advocacy, care and emotional guidance" for Alexis.² As outlined below, the Trust Instrument gave the Trustee broad authority to invest the trust assets and settle and arbitrate disputes.³

A.G. Edwards Trust Company, FSB ("A.G. Edwards"), was designated as the Trustee. Slightly less than half of the proceeds from the settlement with the physicians and the pediatric practice were paid to A.G. Edwards as the Trustee and ultimately became the initial Trust assets. Of the remainder, $150,000 went to Mother individually, and the balance was paid toward attorney fees and expenses.

Two months later, Mother settled with the hospital and the nurses for a total of $3,350,000. Of this total, almost $2,100,000 was paid to the Trustee to pay into the Trust, $130,000 was paid to Mother individually, and the rest went toward attorney fees and expenses. Thus, the Trust received a total of almost $2,600,000 in settlement monies for the benefit of Alexis.⁴

In October 2002, Mother successfully petitioned the circuit court to remove A.G. Edwards as Trustee and appoint the Wilmington Trust Company ("Wilmington") as the successor Trustee, with Defendant/Appellant Albert M. Alexander, Jr., to serve as financial advisor to the Trust. During Wilmington's tenure as Trustee, the Trust retained Defendant/Appellant Wunderlich Securities, Inc. ("Wunderlich"), to supervise and direct some of the Trust assets.⁵

In 2004, again at Mother's request, the circuit court removed Wilmington as Trustee and appointed Cumberland Trust and Investment Company ("Cumberland") in its stead.⁶ Pursuant to Mother's petition, the circuit court specified that Mr. Alexander would remain as the financial advisor to the Trust. After Cumberland became the Trustee, the Trust continued to invest Trust assets with Wunderlich.

Investment Account Agreement

In 2009, Cumberland entered into the agreement that contains the arbitration clause that is the subject of this appeal. In July 2009, Cumberland and Wunderlich executed a contract entitled "Pathways Client Agreement" ("Client Agreement"), under which Cumberland engaged Wunderlich's investment services for the Trust.⁷ The Client Agreement identifies the Trust as the subject of the parties' agreement and Alexis as the beneficiary of the Trust. In addition, page one of the Client Agreement contains a notice in bold letters that it includes a predispute arbitration agreement, and provides for the parties to sign an acknowledgement that they received a copy of the arbitration agreement.⁸ Following this notice are the signatures of the representatives of both Cumberland and Wunderlich, as well as the signature of Mr. Alexander as financial advisor to the Trust.

Lawsuit Underlying This Appeal

For reasons that are not stated expressly in the record, in June 2011, the circuit court appointed Alexis's maternal grandfather, Plaintiff/Appellee Wade Harvey, Sr., as the guardian of Alexis.⁹

Almost a year later, on May 10, 2012, Mr. Harvey, as next friend of Alexis ("Plaintiff"), filed the lawsuit underlying this appeal in the Circuit Court of Hamblen County, Tennessee. Among others, the amended complaint named as defendants Cumberland, Mr. Alexander, and Wunderlich.¹⁰

The complaint alleged that, after Mr. Harvey was appointed as Alexis's guardian in June 2011, he discovered that the Trust funds had been drastically depleted. The complaint noted that, until approximately 2008, the Trust had retained a corpus totaling at least $2,300,000. Soon, however, the Trust assets began to be "recklessly depleted." According to Plaintiff, during 2009, there were $578,000 in disbursements from the Trust. The rate of depletion accelerated during 2010. That year, there were $886,000 in disbursements, some of which went to build a large five-bedroom house on seven acres of land, an expenditure that the complaint characterized as being of "no use" to Alexis. The end result, the complaint alleged, was reduction of the Trust corpus to less than $200,000.

The complaint asserted that Wunderlich and Mr. Alexander (together "Defendants") had breached a number of duties to Alexis. These included their fiduciary duty in investing Trust monies; their duty to either disclose conflicts of interest or withdraw in the event of such conflicts; and their duty to act in Alexis's best interest and safeguard the Trust monies. Among other things, the complaint asserted that the Defendants failed to disclose facts material to their decision-making; failed to properly oversee the Trust assets and disbursements; negligently mismanaged Trust funds; gave negligent investment advice to the Trust; misappropriated Trust funds; engaged in deceptive and unfair trade practices under the Tennessee Consumer Protection Act; and fraudulently allowed Trust monies to be used on purchases that had no value to Alexis, resulting in the near complete depletion of the Trust monies.

As to Mr. Alexander, the complaint alleged that he entered into an inappropriate relationship with Mother, "which led to the unscrupulous spending" of Trust monies intended to benefit Alexis. In turn, the complaint asserted, the other defendants negligently failed to monitor Mr. Alexander, who held himself out as an investment advisor. The complaint alleged that Mr. Alexander advised Mother to change from trustee to trustee, which facilitated their manipulation of the Trust to accomplish their personal desires. As relief, the complaint sought a complete accounting of the Trust funds and an award of...