Josiah and Valer Austin were married in 1982. Valer had two children (the “Children”) by a previous marriage and had inherited substantial property before her marriage to Josiah. Valer created two Grantor Retained Income Trusts (GRITs) for the benefit of the Children and funded the GRITs with her separate property. In 1997, Josiah and Valer formed El Coronado Holdings, LLC (“ECH”), the members of which were Josiah, Valer, and the GRITs. ECH’s operating agreement was signed by Josiah and Valer, but not the Children. It included an arbitration clause.
In 2000, Valer signed a document creating the Austin Family Revocable Trust, which may have transmuted some of Valer’s separate property into community property. In 2005, ECH’s operating agreement was amended to list as members the Austin Family Revocable Trust and the two GRITs. In 2013, Valer filed a petition for dissolution of marriage and joined the Children as additional parties necessary to resolve disputes concerning the management of ECH. Josiah then filed a civil complaint against Valer and the Children seeking to compel arbitration of the ECH dispute, and the Children subsequently filed cross-claims against Josiah. Josiah then moved to compel the Children to arbitrate their cross-claims. After consolidating the actions and holding a two-day evidentiary hearing, the superior court denied Josiah’s requests to compel arbitration. Josiah timely appealed.
The Arizona Appeals Court affirmed. It held that the Children were not required to arbitrate their dispute with Josiah. Although the general rule is that an arbitration agreement is binding only on the parties to the agreement, Dueñas v. Life Care Ctrs. of Am., Inc., 236 Ariz. 130, ¶ 26 (App. 2014), “a nonsignatory party may be bound to an arbitration agreement if so dictated by the ordinary principles of contract and agency,” Thomson-CSF, S.A. v. Amer. Arbitration Ass’n, 64 F.3d 773 (2d Cir. 1995) (internal quotation marks and citation omitted). The third-party beneficiary exception to the general rule provides that a nonsignatory may be barred from avoiding arbitration if he has received a direct benefit from the arbitration agreement. See Schoneberger v. Oelze, 208 Ariz. 591, 594 ¶ 14 (App. 2004). Similarly, under the direct benefits estoppel theory, a nonsignatory may be compelled to arbitrate if the nonsignatory (1) knowingly exploits the benefits of an agreement containing an arbitration clause, or (2) seeks to enforce terms of that agreement or asserts claims that must be determined by reference to the agreement. See Reid v. Doe Run Res. Corp., 701 F.3d 840, 846 (8th Cir. 2012).
In this case, the Court held that neither the third-party beneficiary doctrine nor the direct benefits estoppel theory applied. The record established that the Children did not receive benefits directly from the ECH operating agreement, and in fact were detrimentally impacted by the placement of the GRITs’ assets into ECH. Likewise, the Children did not seek to enforce the ECH operating agreement in their cross-claims.
In addition to holding that the Children were not subject to the arbitration clause, the Court held that Valer was not subject to it either because it was unenforceable under the heightened standards set forth in In re Harber’s Estate, 104 Ariz. 79 (1969), which apply to a postnuptial agreement dividing property between a husband and wife.
The Court denied both parties attorneys’ fees because the case had not been resolved on the merits.
Judge Miller authored the opinion. Chief Judge Eckerstrom and Judge Espinosa concurred.
Posted by Sharad H. Desai