Parties to probate court proceedings involving family-owned business interests held in trusts or estates can agree to arbitrate their disputes instead of proceeding through the court system. Such agreements could be broadly drafted to include “all disputes” arising from or relating to a decedent’s trusts or estate. Or they could be narrowly focused to address only limited issues that may arise in the course of trust or estate administration, for example, disputes over the valuation of business interests. In all events, parties should carefully identify and agree upon the scope of the disputes they are agreeing to arbitrate before beginning the arbitration process. In In re Estate of Richard T. Gordon (Case No. 339296, November 8, 2018), the Court of Appeals of Michigan recently reviewed an award in which the arbitrator divided certain family-owned business interests that previously were held by trusts or estates. One family member challenged the award on the grounds that it exceeded the scope of the parties’ arbitration agreement.
Richard Gordon died in 2008, survived by his wife Laureen and four children, including his sons Michael and Mark. Mark died in 2009, survived by his children Justin and Kelsey. According to the Court, “a family dispute arose over the terms of Richard’s trust, principally related to the operation of a family business – Fairlane Tool Company.” The parties then entered into a “facilitation agreement,” which was incorporated into an order of the probate court in 2012. The agreement provided, generally, that the “asset baskets” for Michael and Justin/Kelsey “shall be allocated and equalized to maximize tax savings.” The agreement further provided “that the Products/Fixtureworks Division of Fairlane Tool would be spun off from Fairlane Tool” and would then exist as a standalone company known as Fairlane Products. Justin and Kelsey would manage Fairlane Products, while Michael would manage Fairlane Tool. Thereafter, most of the ownership interests in both companies would remain as assets of Laureen until her death. However, the parties agreed that certain of Laureen’s stock of Fairlane Products (up to a stated formula amount) would be gifted to Justin and Kelsey and certain of Laureen’s stock of Fairlane Tool (again, up to a stated formula amount) would be gifted to Michael.
Michael first appealed the 2012 probate court order, arguing that the parties did not actually reach any settlement of their disputed issues. The Court of Appeals rejected that argument through an order issued in March, 2014. Laureen died in October, 2014. The parties thereafter appeared at a probate court hearing to address their unresolved disputes. At that time, they “agreed to submit ‘all issues’ related to the estates of both Richard and Laureen to arbitration.” The probate court issued an order incorporating the parties’ further agreement. The parties then presented their disputes over the assets in Richard and Laureen’s estates or trusts to an arbitrator.
After conducting the arbitration hearings, the arbitrator issued an award splitting Fairlane Products into a separate entity from Fairlane Tool, as required by the 2012 agreement. The arbitrator further decided that ownership of Fairlane Products was to be distributed exclusively to Justin and Kelsey. After the arbitration, Michael moved to vacate the arbitrator’s award, arguing that the arbitrator exceeded his authority in awarding Fairlane Products to Justin and Kelsey. The probate court denied Michael’s motion and confirmed the arbitrator’s award.
Michael appealed the probate court’s order denying his motion to vacate the award. On appeal, the Court of Appeals, applying Michigan law, noted that “[j]udicial review of an arbitrator’s award is very limited. A court may not review an arbitrator’s factual findings or decision on the merits.” However, one of the limited grounds for vacating an award exists when the arbitrator exceeds his authority. As the Court noted, “[a]rbitrators exceed their powers whenever they act beyond the material terms of the contract from which they draw their authority . . . .” But, since arbitration agreements are to be interpreted in the same manner as other contracts, “an arbitration agreement must be enforced according to its terms to effectuate the parties’ intentions.”
Michael argued that the arbitrator’s authority derived exclusively from the parties’ 2012 agreement, which related to the disposition of Richard’s assets only. The Appeals Court rejected this argument since the parties had agreed, after Laureen died in 2014, to arbitrate “all issues” involving “all trusts and estates.” Thus, the Court ruled that the parties’ later agreement required that issues relating to the distribution of both Richard and Laureen’s estates and trusts be submitted to arbitration.
Michael further argued that the arbitrator exceeded his authority by awarding Justin and Kelsey full ownership of Fairlane Products. He claimed that, through the 2012 agreement, Laureen only provided for the transfer of a small share of her interest in that company to Justin and Kelsey while retaining the remainder of the stock for her support during her life. Upon Laureen’s death, Michael claimed, her remaining assets were to be shared “equally” between Michael and Justin/Kelsey. The Court rejected this argument, ruling that the limits on Laureen’s transfer of her interest in Fairlane Products were no longer operative after she died. Instead, the assets still controlled by Laureen as of her death were subject to distribution through arbitration per the parties’ later 2014 agreement.
Based on its review of the parties’ agreements, the Court ruled that the arbitrator “acted within his authority by following the intent of the parties’ 2012 settlement agreement in dividing the companies between Michael and Justin/Kelsey, including any interests previously retained by Laureen, but now subject to distribution as part of her estate or trust.” Specifically, the Court concluded that the arbitrator did not exceed his authority by awarding a 100% interest in Fairlane Products to Justin and Kelsey. The Court noted, finally, that “the arbitrator made a similar award of Fairlane Tool to Michael without challenge.” The Court thus affirmed the probate court’s denial of Michael’s motion to vacate the arbitrator’s award and its confirmation of the award.
The Estate of Gordon decision serves as a reminder that parties generally are free to agree to arbitrate any dispute between them, including disputes over the disposition of interests in family-owned businesses that otherwise may proceed in a state probate court.
However, parties should be clear as to the scope of the issues or disputes they are authorizing an arbitrator to decide. Courts generally will read provisions to submit “all disputes” or “all issues” relating to a trust or estate broadly in order to carry out the parties’ stated intent. Further, the scope of review of an arbitrator’s decision is typically quite limited. In the face of an “all disputes” arbitration clause, a party who loses at arbitration usually will have a difficult time convincing a reviewing court that the arbitrator exceeded his or her authority. Owners and potential transferees of family business interests therefore should carefully consider whether to submit any disputes concerning those interests to arbitration, and, if so, they should document as clearly as possible the scope of the claims to be arbitrated. Doing so may reduce the need to engage in lengthy and costly litigation, or arbitration, over the future ownership and management of the family-owned business.