Freeman et al v. Fidelity Brokerage Services LLC

Filing 17

MEMORANDUM OPINION AND ORDER: Fidelity's 5 motion to compel arbitration and stay all proceedings is denied. (Ordered by Senior Judge A. Joe Fish on 3/5/2019) (mla)

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION

PRESTON DIAL FREEMAN, AND
TROY CHANCELLOR FREEMAN,
Plaintiffs,
VS.
FIDELITY BROKERAGE SERVICES,
LLC,
Defendant.

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CIVIL ACTION NO.
3:18-CV-0947-G

MEMORANDUM OPINION AND ORDER

Before the court is the motion of the defendant Fidelity Brokerage Services,
LLC (“Fidelity”) to compel arbitration and stay all proceedings (docket entry 5). For
the reasons set forth below, the motion is denied.
I. BACKGROUND
On April 8, 1993, Nancy Ann Crisler (“Nancy Crisler”), mother of the
plaintiffs Preston Dial Freeman and Troy Chancellor Freeman (collectively, the
“Freemans”), executed a living trust agreement (“Trust Agreement”). Plaintiffs’
Original Petition (“Petition”) ¶¶ 8, 9, attached to Notice of Removal of Civil Action
(“Notice of Removal”) (docket entry 1) as Exhibit A; see also Appendix in Support of
Plaintiffs’ Response to Defendant’s Motion to Compel Arbitration and Stay All

Proceedings (“Plaintiffs’ Appendix”) (docket entry 11) at 9-51. Upon Nancy Crisler’s
death, the Trust Agreement directed that the trust assets were to be divided and
allocated into trusts for the benefit of her husband William P. Crisler (“Crisler”) if he
was still living (“the Marital Trust”) and for the benefit of the Freemans (“the Family
Trust”). Petition ¶ 10. Crisler was the Freemans’ stepfather. Plaintiffs’ Appendix at
5, 54. The Trust Agreement further provided that upon the death of Crisler, the
Marital Trust would terminate and all remaining assets of the Marital Trust would be
distributed to the Family Trust for the benefit of and for distribution to the
Freemans. Petition ¶¶ 11, 12.
The Trust Agreement expressly called for co-trustees, naming Crisler and
Joseph Dial (“Dial”), Nancy Crisler’s brother, in those capacities. Id. ¶¶ 9, 13. The
Trust Agreement instructed co-trustees to “. . . act with respect to the management
and affairs of both the Marital Trust and the Family Trust, including withdrawal,
transfer and distribution of each trust’s assets.” Id. ¶ 13. Dial was not a beneficiary
under the Trust Agreement. Plaintiffs’ Appendix at 5, 54. The Freemans aver that
“[t]he appointment of co-trustees was particularly critical to provide oversight of and
constraints on Crisler, who was a trustee and also a primary beneficiary of both trusts
. . . [, and] to make sure that Crisler, while acting as a trustee, (a) adhered to the
standards and requirements of the Trust Agreement and (b) did not commit wrongful
self-dealing, allow himself to become unduly influenced by another person, dissipate

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the assets of the trusts, disregard the interests of Plaintiffs, and otherwise fail to
discharge his fiduciary duties, including to act for the benefit of Nancy’s children. . .
.” Petition ¶ 14. The Trust Agreement further called for the appointment of a
successor co-trustee in the event either Crisler or Dial relinquished their co-trustee
duties and designated specific persons to serve as successor co-trustees. Id. ¶ 16; see
also Plaintiffs’ Appendix at 29-31.
In February 2003, Nancy Crisler died. Petition ¶ 15. In accordance with the
Trust Agreement, her living trust assets then were reallocated to the Marital Trust
and the Family Trust. Id.
On May 19, 2003, Dial resigned as a trustee. Id. ¶ 16. In violation of the
terms of the Trust Agreement, Crisler did not notify any successor co-trustee that
Nancy Crisler had designated them to serve as a successor co-trustee of the Marital
Trust or the Family Trust following Dial’s resignation. Id.; see also Plaintiffs’
Appendix at 29-31. “Instead, despite also being a beneficiary, Crisler proceeded to
manage the assets and affairs of both the Marital Trust and the Family Trust alone,
without a co-trustee, in direct violation of the terms and requirements of the Trust
Agreement.” Petition ¶ 16.
Beginning in August 2004, acting as sole trustee, Crisler transferred the assets
of the Marital Trust and the Family Trust to trust accounts managed by Fidelity. Id.
¶¶ 17, 18.

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The Freemans assert that at all times the trust assets in Fidelity’s possession
were subject to trust restrictions and fiduciary obligations under the Trust
Agreement. Id. ¶ 17. Fidelity received a hard copy of the Trust Agreement and thus
knew of the co-trustee requirement to manage the assets and accounts of the trusts.
Id. ¶¶ 18, 19; Plaintiffs’ Appendix at 5, 54 (“According to Fidelity’s records, which
Fidelity provided after . . . Crisler passed away, Fidelity was provided with a copy of
the Trust Agreement and had a copy of the Trust Agreement in Fidelity’s file.”).
Transfer of the Marital Trust and the Family Trust assets to Fidelity required
Crisler to sign a Trust Account Application (“Fidelity Application”) which
incorporated a Fidelity Account Customer Agreement (“Customer Agreement”).
Defendant’s Opposed Motion to Compel Arbitration and Stay All Proceedings
(“Motion”) (docket entry 5) at 1, 3. The Freemans neither had knowledge of nor
were involved with Crisler’s decision to open or maintain the trust account at Fidelity
and were not signatories to the documents executed by Crisler and Fidelity.
Plaintiffs’ Appendix at 5-6, 54-55. Fidelity contends that the Fidelity Application
and Customer Agreement gave Fidelity the authority to execute transactions on
behalf of the trusts and the Freemans. Motion at 3. The Fidelity Application,
provided, in part, as follows:
I acknowledge that I have been furnished with a copy of
the Fidelity Account Customer Agreement and that I have
read, understood, and agree to be bound by its terms and

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conditions as they are currently in effect and as they may
be amended in the future.
***
This account is governed by a predispute arbitration
clause, which is found in Section 18 of the Customer
Agreement. I acknowledge receipt of the predispute
arbitration clause.
Defendant’s Appendix in Support of Opposed Motion to Compel Arbitration and
Stay All Proceedings (“Defendant’s Appendix”) (docket entry 6) at 13 (emphasis in
the original).
The Customer Agreement contained the following clause.
18. Pre-Dispute Arbitration Clause I agree that all
controversies that may arise between us (including but not
limited to controversies concerning this or any other
account maintained with you), whether arising before, on
or after the date this account is opened, shall be
determined by arbitration in accordance with the rules
then prevailing of either the New York Stock Exchange,
Inc., or National Association of Securities Dealers, Inc. as I
may designate.
***
I am aware of the following:
a. Arbitration is final and binding on the parties.
b. The parties are waiving their right to seek remedies in
court, including the right to jury trial.
c. Pre-arbitration discovery is generally more limited than
and different from court proceedings.
d. The arbitrators’ award is not required to include factual
findings or legal reasoning, and any party’s right to appeal
or to seek modification of rulings by the arbitrators is
strictly limited.
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e. The panel of arbitrators will typically include a minority
of arbitrators who were or are affiliated with the securities
industry.
Id. at 21-22.
Though the Fidelity Application asked for background information and
signatures of more than one trustee if applicable, only Crisler signed the application,
and Fidelity opened the accounts with Crisler styled as the sole trustee despite the
Trust Agreement’s co-trustee requirement. Petition ¶ 18; see also Defendant’s
Appendix at 9, 13. Thereafter, the Freemans assert that Crisler “operated without
the checks and balances of a co-trustee.” Plaintiffs’ Response to Defendant’s Motion
to Compel Arbitration and Stay All Proceedings (“Response”) (docket entry 10) at 5.
Following Crisler’s death on June 15, 2016,* the Freemans discovered that
Crisler had “withdrawn, transferred, disbursed and depleted the assets of the trust
accounts maintained at Fidelity, without the required involvement of a co-trustee, in
violation of the terms and conditions of the Trust Agreement, and in breach of
Crisler’s fiduciary duties” with Fidelity’s knowledge, participation, and support.

*

After Crisler died, Roger Blackmar (“Blackmar”), listed as a successor
co-trustee in the Trust Agreement in sequence after Dial, assumed management of
the trusts and also executed a Fidelity account application and customer agreement.
Motion at 4; see also Defendant’s Appendix at 34-47; Plaintiffs’ Appendix at 29.
Thus, Fidelity contends that “the trust has now agreed to arbitration twice – once
when the account was originally opened, and once shortly before bringing these
claims.” Motion at 4. The Freemans insist that they are not parties to an account
application and customer agreement entered into by Fidelity and Blackmar.
Plaintiffs’ Appendix at 6, 55.
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Petition ¶¶ 23, 24; see also Response at 5. Specifically, the Freemans allege that
“Crisler withdrew, transferred or disbursed in excess of $1,000,000 of trust assets to
himself, or to or for the benefit of persons other than [the Freemans]” over a period
of years. Petition ¶ 21. The Freemans maintain that “[e]very such withdrawal,
transfer of disbursement of trust assets out of the Marital Trust and the Family
Trust, that was done by Crisler and permitted by Fidelity without the involvement
and approval of a co-trustee, constituted a clear breach of fiduciary duty.” Id. ¶ 22.
They assert that although Fidelity knew the terms of the Trust Agreement, including
the co-trustee requirement, Fidelity ignored those terms and “never took any
measures to see that the trust assets in Fidelity’s custody and possession were
administered properly and protected from depletion by a single, self-interested
trustee.” Response at 5; see also Petition ¶¶ 19, 20. Prior to Crisler’s death, the
Freemans had not seen a copy of the Trust Agreement. Plaintiffs’ Appendix at 5, 54.
On February 23, 2018, the Freemans filed this suit in the 68th Judicial District
Court of Dallas County, Texas. See generally Petition. The Freemans sued Fidelity for
breach of fiduciary duty and knowing participation in breach of fiduciary duty. Id. at
7-8. Specifically, the Freemans assert that Fidelity assumed a fiduciary duty of its
own with respect to the Marital Trust and the Family Trust assets in its custody and
possession, including the obligation to ensure that those assets were managed and
disbursed in accordance with the Trust Agreement, and Fidelity breached that duty.

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Id. ¶¶ 26-27. Additionally, the Freemans contend that Fidelity knowingly
participated in Crisler’s breach of fiduciary duty and actions in violation of the terms
of the Trust Agreement. Id. ¶ 28.
On April 16, 2018, Fidelity removed the case to this court based on diversity
of citizenship. Notice of Removal at 2. Fidelity asserts that the Freemans’ claims for
breach of fiduciary duty and knowing participation in breach of fiduciary duty fall
within the scope of the arbitration clause of the Customer Agreement, and that the
Freemans “ignored their obligation to arbitrate by bringing their claims in state court.
. . .” Motion at 2. Accordingly, Fidelity moves to compel arbitration and stay all
proceedings. See generally id. Conversely, the Freemans assert that they did not
agree to arbitrate their claims, and that their claims are not within the scope of the
arbitration provision that Fidelity seeks to enforce. Response at 1-2; see also
Plaintiffs’ Appendix at 6, 55 (“I did not consent to any arbitration provision with
respect to the trust assets that were maintained under the Trust Agreement.”).
II. ANALYSIS
A. Legal Standard
Federal law strongly favors arbitration. Buckeye Check Cashing, Inc. v. Cardegna,
546 U.S. 440, 443 (2006); see also Moses H. Cone Memorial Hospital v. Mercury
Construction Corporation, 460 U.S. 1, 24-25 (1983) (“The [Federal] Arbitration Act
establishes that, as a matter of federal law, any doubts concerning the scope of

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arbitrable issues should be resolved in favor of arbitration, whether the problem at
hand is the construction of the contract language itself or an allegation of waiver,
delay, or a like defense to arbitrability.”). Much like the federal policy, there is “a
strong presumption in Texas public policy favoring arbitration and upholding the
parties’ intentions.” ASW Allstate Painting & Construction Company, Inc. v. Lexington
Insurance Company, 188 F.3d 307, 310 (5th Cir. 1999).
While there are strong federal and state policies favoring arbitration, the court
does not yield to these policies when making the initial threshold determination
about the existence of an agreement to arbitrate, Sherer v. Green Tree Servicing LLC,
548 F.3d 379, 381 (5th Cir. 2008); Will-Drill Resources, Inc. v. Samson Resources
Company, 352 F.3d 211, 214 (5th Cir. 2003), and the controversy must come within
the contract’s arbitration provision before the court can order arbitration. See J.M.
Davidson, Inc. v. Webster, 128 S.W.3d 223, 227 (Tex. 2003) (“Although we have
repeatedly expressed a strong presumption favoring arbitration, the presumption
arises only after the party seeking to compel arbitration proves that a valid arbitration
agreement exists.”); Certain Underwriters at Lloyd’s of London v. Celebrity, Inc., 950
S.W.2d 375, 377 (Tex. App. – Tyler 1996, writ dism’d w.o.j.).
To decide whether parties should be compelled to arbitrate their dispute, the
Fifth Circuit has developed a two-step inquiry. OPE International LP v. Chet Morrison
Contractors, Inc., 258 F.3d 443, 445 (5th Cir. 2001) (per curiam). First, the court

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must determine “whether the parties agreed to arbitrate their dispute.” Id. Two
considerations guide the court in making this determination: (1) whether a valid
agreement to arbitrate exists between the parties; and (2) if the court finds that the
parties agreed to arbitrate, whether the dispute in question is within the scope of the
arbitration agreement. Id.; ASW Allstate Painting, 188 F.3d at 311 (citing Celebrity,
950 S.W.2d at 377); Henry v. Gonzalez, 18 S.W.3d 684, 688-89 (Tex. App. – San
Antonio 2000, pet. dism’d) (citation omitted). “The party seeking to compel
arbitration need only prove the existence of an agreement to arbitrate by a
preponderance of the evidence.” Grant v. Houser, 469 Fed. Appx. 310, 315 (5th Cir.
2012) (per curiam).
Second, the court must ensure that no legal constraints external to the
agreement have foreclosed arbitration of the disputed claims. OPE International, 258
F.3d at 446. If the court finds that this two-step inquiry is satisfied, arbitration must
be ordered. Mitsubishi Motors Corporation v. Soler Chrysler-Plymouth, Inc., 473 U.S.
614, 628 (1985). Here, the court’s analysis need only reach the first prong.
B. Application
Fidelity seeks to compel arbitration according to the terms of the Customer
Agreement. Motion at 1. Here, the Freemans do not contest that the arbitration
clause would govern some disputes between Crisler and Fidelity. See Response at 6.
Rather, the Freemans oppose Fidelity’s motion to compel arbitration on two grounds.

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First, the Freemans maintain that the court cannot enforce the arbitration clause
against them because they are nonsignatories to the Customer Agreement. Id. at 1, 6.
Second, the Freemans aver that should the court find the arbitration clause
enforceable, their claims do not fall within the scope of the clause but instead arise
entirely out of the Trust Agreement. Id. Specifically, the Freemans contend that
they “assert breaches of fiduciary duties that arise under the Trust Agreement by
trustee Crisler and . . . allege that Fidelity is jointly liable for those breaches of
fiduciary duties arising under the Trust Agreement . . . claims based on the trustee’s
duties and liability under the Trust Agreement.” Id. at 3 (emphasis in the original).
On the other hand, Fidelity asserts that the “the only challenged conduct is Fidelity’s
execution of transactions pursuant to [the Customer] Agreement” which Fidelity
classifies as the “sole connection” between the Freemans and Fidelity. Defendant’s
Reply in Support of its Opposed Motion to Compel Arbitration and Stay All
Proceedings (docket entry 14) at 4.
The Fifth Circuit applies six theories under which a court may compel a
nonsignatory to arbitration: (1) incorporation by reference; (2) assumption; (3)
agency; (4) veil-piercing/alter ego; (5) estoppel; and (6) third-party beneficiary.
Bridas S.A.P.I.C. v. Government of Turkmenistan, 345 F.3d 347, 356 (5th Cir. 2003)
(citations omitted), cert. denied, 541 U.S. 937 (2004); see also Al Rushaid v. National
Oilwell Varco, Inc., 814 F.3d 300, 305 (5th Cir. 2016); G.T. Leach Builders, LLC v.

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Sapphire V.P., LP, 458 S.W.3d 502, 524 (Tex. 2015). Fidelity contends that “[t]his
case presents an uncommon twist on typical doctrines of equitable estoppel like
‘direct benefits’ and ‘intertwined claims’ estoppel” and thus the Customer
Agreement’s arbitration clause binds the Freemans as nonsignatory plaintiffs to
arbitrate their claims. Motion at 8. The Freemans, on the other hand, insist their
case “simply calls for application of ordinary principles of contract law” independent
of the agreements between Fidelity and the trust, and equitable estoppel is thereby
inapplicable. Response at 9; see also id. at 7-8.
The Fifth Circuit has described these two types of equitable estoppel as
follows.
The “intertwined claims” theory governs motions to
compel arbitration when a signatory-plaintiff brings an
action against a nonsignatory-defendant asserting claims
dependent on a contract that includes an arbitration
agreement that the defendant did not sign. Grigson v.
Creative Artists Agency, L.L.C., 210 F.3d 524, 527-28 (5th
Cir. 2000). It does not govern the present case, where a
signatory-defendant seeks to compel arbitration with a
nonsignatory-plaintiff. Bridas, 345 F.3d at 361. The
“direct benefits” theory of equitable estoppel “prevents a
nonsignatory from knowingly exploiting an agreement
containing the arbitration clause.” Graves v. BP Am., Inc.,
568 F.3d 221, 223 (5th Cir. 2009). That is, “a
nonsignatory cannot sue under an agreement while at the
same time avoiding its arbitration clause.” Id. This theory
is inapplicable here because the Receiver does not seek to
enforce the various contracts containing the arbitration
agreements; rather, he seeks to unwind them and reclaim
the benefits fraudulently distributed to the defendants
under the contracts.
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Janvey v. Alguire, 847 F.3d 231, 242-43 (5th Cir.) (per curiam), cert. denied, __. U.S.
__, 138 S. Ct. 329 (2017) (emphasis added); Academy of Allergy & Asthma in Primary
Care v. Superior HealthPlan, Inc., No. SA-17-CV-1122-FB(HJB), 2018 WL 3338421,
at *4 (W.D. Tex. May 1, 2018) (“[T]he “intertwined claims” theory is one used
against non-signatory defendants, not non-signatory plaintiffs.”), report and
recommendation adopted, No. SA-17-CA-1122-FB, 2018 WL 4343441 (W.D. Tex. July
23, 2018); see also Jones v. Singing River Health Services Foundation, 674 Fed. Appx.
382, 385-86 (5th Cir. 2017); In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 741
(Tex. 2005) (“We conclude that, under ‘direct benefits estoppel,’ although a
non-signatory’s claim may relate to a contract containing an arbitration provision,
that relationship does not, in itself, bind the non-signatory to the arbitration
provision. Instead, a non-signatory should be compelled to arbitrate a claim only if it
seeks, through the claim, to derive a direct benefit from the contract containing the
arbitration provision.”).
“A non-signatory can ‘embrace’ a contract containing an arbitration clause in
two ways: (1) by knowingly seeking and obtaining ‘direct benefits’ from that
contract; or (2) by seeking to enforce the terms of that contract or asserting claims
that must be determined by reference to that contract.” Noble Drilling Services, Inc. v.
Certex USA, Inc., 620 F.3d 469, 473 (5th Cir. 2010); see also In re Weekley Homes,
L.P., 180 S.W.3d 127, 131 (Tex. 2005) (“[A] litigant who sues based on a contract

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subjects him or herself to the contract’s terms.”). “Although state law determines the
validity of an arbitration agreement, courts have applied both federal and state law to
determine the related, but distinct, issue of whether non-signatory plaintiffs should
be compelled to arbitrate their claims.” In re Kellogg Brown & Root, Inc., 166 S.W.3d
at 738.
There is no evidence that the Freemans sought to derive direct benefits from or
knowingly exploited the Customer Agreement, embraced the Customer Agreement as
nonsignatories but now attempt to repudiate the arbitration clause, or that they
brought suit against Fidelity premised on an agreement which includes or is
intertwined with an arbitration clause. See Bridas, 345 F.3d at 361-62; see also
Gupta v. Lynch, No. 12-1787, 2014 WL 4063831, at *4-*5 (E.D. La. Aug. 15, 2014);
Academy of Allergy & Asthma, 2018 WL 3338421, at *4. Here, the Freemans seek to
reclaim the monies alleged to have been fraudulently disbursed to Crisler.
Moreover, pursuant to the terms of the Trust Agreement, the trust assets were
to be managed by co-trustees. Nowhere in the Trust Agreement does it state that the
signature of co-trustee Crisler was sufficient to bind the trusts. Nevertheless, Fidelity
permitted Crisler, acting alone and also in the capacity as a primary beneficiary, to
sign the Fidelity Application, to open the Fidelity account, and to deplete the trust
assets. Fidelity cannot now compel the Freemans, as nonsignatories to the Fidelity
Application and Customer Agreement, to arbitrate. In short, there exists no valid and

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enforceable arbitration agreement between the parties in this case. The court
therefore need not consider whether there are any external legal constraints on
arbitration.
III. CONCLUSION
For the reasons stated above, Fidelity’s motion to compel arbitration and stay
all proceedings is denied.
SO ORDERED.
March 5, 2019.
___________________________________
A. JOE FISH
Senior United States District Judge

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