By Cyril Tuohy
The beneficiary of a wealth management agreement isn’t bound by the agreement’s arbitration clause if the beneficiary is not a signatory to the agreement, the Mississippi Supreme Court has ruled.
The state's high court affirmed a trial court’s ruling in Pinnacle Trust Co., EFP Advisors and Douglas M. McDaniel v. Lisa Brocato McTaggart, and ordered that the case be sent back to the lower court.</p>
“The McTaggarts neither sought to enforce the terms of the WMA [wealth management agreement], as they were not parties to the WMA, nor are their claims dependent upon its existence,” Mississippi Supreme Court Judge Michael K. Randolph wrote.
The Mississippi Supreme Court found that only in “rare circumstances” should nonsignatory parties be bound by an arbitration agreement against a nonsignatory. In this case, however, “this matter does not present one of those ‘rare circumstances’ where this Court will bind nonsignatories to arbitration,” the court ruled.
“The McTaggarts are ‘strangers to the contract,’ for they never knew of its existence and are not attempting to enforce any provision of the WMA,” Randolph wrote in a 12-page decision.
In 2013, Lisa Brocato McTaggart filed suit in Madison County Chancery Court against Pinnacle Trust , EFP Advisors and EFP President Douglas M. McDaniel for breach of fiduciary duty in connection with the loss of more than $1.5 million in trust assets between 2007 and 2011.
The assets were held in the Billie B. Brocato Family Trust. McTaggart’s mother, Billie Brocato, set up the trust for her daughter and four grandchildren before she died in 2004.
The WMA contained a clause stating that any claim arising under the Investment Advisors Act of 1940 would be resolved through arbitration. The agreement also stated that no rights are conferred on anyone other than the signatories.
McTaggart argued that she never signed the document, much less knew of the document’s existence.
Pinnacle, EFP and McDaniel argued that even if McTaggart did not sign the agreement, the WMA was entered into on behalf of the trust and for the benefit of the McTaggart family. The three firms claimed that because McTaggart had signed a separate document in 2005, appointing Pinnacle as trustee of the Billie B. Brocato Family Trust, she was bound by the WMA.
On Oct. 2, 2013, the trial court held that “because the McTaggarts did not sign the WMA, the arbitration clause was not binding on them.” The arbitration clause was not at issue because neither Pinnacle nor EFP nor McDaniel alleged any wrongdoing against one another, the trial court found.
Pinnacle, EFP and McDaniel appealed the trial court’s decision to the state supreme court.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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