Austin v. Austin (CA2 4/30/15)

This is a divorce but the issue raised in this appeal concerns the validity of an arbitration clause, here one in an agreement between the spouses creating a company to hold their assets.

Josiah Austin married wealthy Valer Austin and took over her financial affairs. He formed a holding company that assumed control of her assets, gave him community property rights to some of them, gave him control over all of them, and undid the effect of irrevocable trusts she had set up for her children. The agreements creating the company contained clauses requiring arbitration of disputes. Valer signed them without paying attention, trusting her husband. When she filed for divorce disputes concerning the company came up; he moved to compel arbitration of them; the trial court denied it.. He appealed; the Court of Appeals affirms.

Harber’s Estate (1969) held that postnuptial agreements are valid but that if one spouse challenges an agreement then the burden is on the other to prove, by clear and convincing evidence, that it was not fraudulent, coerced, unfair, or inequitable. The trial court used this standard to deny Josiah’s motion, although the opinion does not give the details of the ruling. Josiah’s position was that standard contract law should apply, under which Valer is presumed to know what she signed. The rule of Harber’s Estate had only been applied to postnuptial property settlements; Josiah argued that it should be limited to them.

The court points out (based on the trial court’s findings of fact) that the holding company’s effects “were no less severe than a traditional postnuptial property division agreement.” Because the agreements were made during the marriage “and altered each spouse’s property rights in the event of death” they were postnuptial agreements subject to Harber’s Estate.

Josiah argued that this would require separate counsel for spouses that create trusts “or other complex estate documents.” (We wouldn’t have called these arrangements terribly complicated, nor even unusual, at least for such people – the GRIT and GRUT and GRAT crowd – but the court seems to think them so.) The court’s response is, basically: “Well, yeah, what’s your point?

Valens’ children were parties because of their rights in those trusts. The trial court ruled that they weren’t bound by the arbitration agreement because they hadn’t signed it. Josiah argued they were bound, under Schoneberger (2004), because they were third-party beneficiaries who received a direct benefit. But the holding company did not benefit them, directly or otherwise; instead it reduced their rights. Josiah also argued that that they were estopped to dispute the arbitration clause because their claims in part depended on the holding company agreements. But the thrust of their position was that the agreements were improper; claims under the agreements were alternative claims made in case the children were held to be bound by them. “Such a contingency, to which they object, is not sufficient to create estoppel.”

(As a mildly interesting though unrelated note, the backstory here – which the opinion has no occasion to mention – is a classic Arizona tale: the rich easterners who buy a cattle ranch (in this case the El Dorado ranch in the Chiricahuas) so that they can spend some time in quaint surroundings and also tell their friends back home, and themselves, that they are “ranchers.” In the old days the formula was to buy some Mexican cattle, hire a few cowboys to fatten them up a bit on the ranch, then ship them to a feed lot. On occasion that actually made some profit but profit wasn’t the point. Nowadays things are simpler since you can keep just a few cows and push the conservation angle instead.) 

(link to opinion)