Lincoln Fin. Advisors Corp. v. Ards

• Decision Date: 19 December 2019
• Docket Number: NO. 03-18-00437-CV,03-18-00437-CV
• Parties: Lincoln Financial Advisors Corporation, Appellant v. Bridgette Ards, acting as next friend of her daughter, Gabrielle Ards, Appellee
• Court: Texas Court of Appeals

Lincoln Financial Advisors Corporation, Appellant v. Bridgette Ards, acting as next friend of her daughter, Gabrielle Ards, Appellee

NO. 03-18-00437-CV

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

December 19, 2019

FROM THE PROBATE COURT NO. 1 OF TRAVIS COUNTY

NO. C-1-PB-18-000269, HONORABLE GUY S. HERMAN, JUDGE PRESIDING

MEMORANDUM OPINION

In this interlocutory appeal, Lincoln Financial Advisors Corporation (LFA) appeals from the probate court's order denying LFA's motion to compel arbitration. In the underlying proceeding, Bridgette Ards, acting as next friend of her daughter, Gabrielle Ards, sued LFA; Brenda Ards, who was the successor trustee of the Gabrielle Ards Trust; and Carl B. Ards, III, who was the former trustee of the Gabrielle Ards Trust. Bridgette sought to hold Carl, Brenda, and LFA jointly and severally liable for alleged misconduct that materially depleted the value of the trust estate.¹ On appeal, LFA contends that the probate court committed reversible error by denying its motion to compel arbitration because Bridgette and Gabrielle, although not signatories, are bound byarbitration clauses in LFA's account agreements with Carl and Brenda. For the reasons that follow, we affirm the probate court's order denying LFA's motion to compel arbitration.

Background

Carl B. Ards, Jr. (Decedent) died on June 27, 2008. In his will, he created a trust; designated his granddaughter Gabrielle, who is a minor, as the beneficiary of the trust; and his son Carl served as the original trustee. Carl opened an investment account at LFA in the name of "Carl B. Ards III, TTEE Gabrielle Ards Trust U/W 6/27/08." Related to this account, Carl signed a "Brokerage Basic Account Application" that bound him to the "Brokerage Basic Account Customer Agreement." In the application, he listed himself in his individual name as the account holder, did not list any beneficiaries or other account holders, and crossed out information about Gabrielle that he had handwritten in the section of the application tilted "additional account holders."

The agreement between Carl and LFA contains the following relevant clauses concerning arbitration:

Resolving Disputes—Arbitration

This agreement contains a pre-dispute arbitration clause. Under this clause, which becomes binding on all parties when you sign your account application, you, we, and NFS[²] agree as follows:

A. All parties to this agreement are giving up the right to sue each other in court, including the right to a trial by jury, except as provided by the rules of the arbitration forum in which a claim is filed. . . .

All controversies that may arise between you, us and NFS concerning any subject matter, issue or circumstance whatsoever (including, but not limited to, controversies concerning any account, order or transaction or the continuation, performance, interpretation or breach of this or any other agreement between you, us and NFS, whether entered into or arising before, on or after the date this account is opened) shall be determined by arbitration in accordance with the rules then prevailing of the Financial Industry Regulatory Authority (FINRA) or any securities self-regulatory organization or securities exchange of which the person, entity or entities against whom the claim is made is a member, as you may designate.

Brenda, the Decedent's wife, subsequently replaced Carl as the trustee of the Gabrielle Ards Trust, and on January 6, 2017, she signed a "Client Profile," acknowledging the pre-dispute arbitration clause. The Client Profile stated that it applied "to all accounts established in conjunction with this Client Profile" at LFA and specified in relevant part:

(1) All parties to this agreement are giving up the right to sue each other in court, including the right to a trial by jury, except as provided by the rules of the arbitration forum in which a claim is filed.

. . .

It is agreed that any controversy arising out of or relating to the accounts established herewith, shall be submitted to arbitration in accordance with the rules adopted by the Financial Industry Regulatory Authority, Inc. Dispute Resolution Board.

In the Client Profile, Brenda listed herself in her individual name as the account holder and the name of the account as "Gabrielle Ards Trust."

In February 2018, Bridgette, acting as next friend of Gabrielle, sued Carl, Brenda, and LFA, alleging in part that, "[t]hrough numerous breaches of fiduciary duty, self-dealing and misapplication of fiduciary funds [Carl] materially depleted the value of the trust estate of the Gabrielle Ards Trust"; LFA "had actual knowledge of Carl's breaches of fiduciary duty, self dealing,and misapplication of fiduciary funds"; and "[LFA was] therefore jointly and severally liable with Carl."³ Bridgette asserted that Gabrielle was the designated beneficiary of the trust and that Bridgette was proceeding "derivatively on behalf of the trustee of the Gabrielle Ards Trust because such trustee [Brenda] cannot sue herself." Bridgette's factual allegations included that: (i) "Carl initially invested most, if not all, of the trust estate of the Gabrielle Ards Trust with [LFA] who knew they were investing fiduciary funds because the account was titled 'Carl B. Ards III, TTEE Gabrielle Ards Trust U/W 6/27/08'"; (ii) "[LFA] knowingly participated in Carl's breaches of fiduciary duty"; and (iii) "[LFA] failed to insure that the fiduciary funds that it was administering were not being improperly withdrawn." Bridgette pleaded for "derivative damages" based on her "derivative capacity on behalf of the trustee of the Gabrielle Ards Trust against defendants," including "an amount equal to all compensation taken by any Defendant for serving as trustee or investment advisor of the Gabrielle Ards Trust since its inception" and "an amount equal to all profit made by any Defendant through or arising out of the administration of the Gabrielle Ards Trust."

LFA answered and filed a motion to compel arbitration under the Federal Arbitration Act (FAA), contending that Bridgette was bound to arbitrate her claims based on the arbitration clauses in LFA's account agreements with Brenda and Carl. See 9 U.S.C. § 2 (addressing agreements to arbitrate arising out of "transaction involving commerce"). Following a hearing, the probate court denied the motion to compel and stayed the proceeding pending any interlocutory appeal that LFA elected to file. This appeal followed. See Tex. Civ. Prac. & Rem. Code § 51.016(authorizing interlocutory appeal under same circumstances that appeal from federal district court's order would be permitted under FAA).

Analysis

In three issues on appeal, LFA contends that the probate court committed reversible error by denying LFA's motion to compel arbitration because Bridgette and Gabrielle, although not signatories to the account agreements, were bound by the arbitration clauses in those agreements under theories of third party beneficiary, estoppel, and agency. LFA also argues that Bridgette is bound by the arbitration clauses because she seeks to proceed derivatively on behalf of the trust and her claims against LFA arise out of or relate to the funds in the trust account at LFA.

Standard of Review and Applicable Law

We review an order denying a motion to compel arbitration for abuse of discretion. See D.R. Horton-Emerald, Ltd. v. Mitchell, No. 01-17-00426-CV, 2018 Tex. App. LEXIS 731, at *5-6 (Tex. App.—Houston [1st Dist.] Jan. 25, 2018, no pet.) (mem. op.); Santander Consumer USA, Inc. v. Mata, No. 03-14-00782-CV, 2017 Tex. App. LEXIS 2631, at *3 (Tex. App.—Austin Mar. 29, 2017, no pet.) (mem. op.). "Under this standard, we defer to a trial court's factual determinations if they are supported by evidence, but we review a trial court's legal determinations de novo." Mitchell, 2018 Tex. App. LEXIS 731, at *6 (quoting Rocha v. Marks Transp., Inc., 512 S.W.3d 529, 535 (Tex. App.—Houston [1st Dist.] 2016, no pet.) (citing In re Labatt Food Serv., L.P., 279 S.W.3d 640, 643 (Tex. 2009) (orig. proceeding))). Further, whether a non-signatory is bound to an arbitration agreement is a gateway matter that is reviewed de novo. See Jody JamesFarms, J.V. v. Altman Grp., 547 S.W.3d 624, 629 (Tex. 2018); Labatt Food Serv., 279 S.W.3d at 643; Cardon Healthcare Network, Inc. v. Goldberg, No. 03-17-00474-CV, 2018 Tex. App. LEXIS 1639, at *2 (Tex. App.—Austin Mar. 2, 2018, no pet.) (mem. op.).

The parties do not dispute that the FAA governs the arbitration clauses at issue. See 9 U.S.C. §§ 1-16; Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266, 269-70 (Tex. 1992) (stating that FAA "applies to all suits in state and federal court when the dispute concerns a 'contract evidencing a transaction involving commerce'"); see, e.g., In re McKinney, 167 S.W.3d 833, 835 (Tex. 2005) (orig. proceeding) (applying FAA to account agreement between brokerage firm and its customer); In re Raymond James & Assocs., 196 S.W.3d 311, 321 (Tex. App.—Houston [1st Dist.] 2006, orig. proceeding) (concluding that FAA applied because parties agreed to arbitrate under FAA in account agreements and complaints "involve the sale of securities, and therefore involve interstate commerce").⁴

In general, a party seeking to compel arbitration under the FAA has the burden to show the existence of a valid agreement to arbitrate and a dispute within the agreement's scope. In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 737 (Tex. 2005) (orig. proceeding). "Under the FAA, ordinary principles of state contract law determine whether there is a valid agreement to arbitrate." Id. at 738. "Because arbitration is contractual in nature, the FAA generally 'does not require parties to arbitrate when they have not agreed to do so.'" Id. (quoting Volt Info. Scis., Inc. v. Board of Trs. of Leland StanfordJunior Univ., 489 U.S. 468, 478-79 (1989)). The presumption in favor of arbitration under the FAA "arises only after the party seeking to compel arbitration proves that a valid arbitration agreement...