NO. 88-120
IN THE SUPREME COURT OF THE STATE OF MONTANA
1988
ONATA FRATES,
Plaintiff and Respondent,
-VS-
EDWARD D. JONES & CO., a limited
partnership, LAWRENCE SOBOL its
general partner and LARRY RICHARDSON,
Defendants and Appellants.
APPEAL FROM: District Court of the Thirteenth Judicial District,
In and for the County of Yellowstone,
The Honorable G. Todd Baugh, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Moulton, Bellingham, Longo & Mather; Doug James,
Billings, Montana
For Respondent :
Howard Strause and Lawrence Anderson, Great Falls,
Montana
-
Submitted on Briefs: July 14, 1988
Clerk
Mr. Justice L. C. Gulbrandson delivered the Opinion of the
Court.
This is an appeal and alternative application for Writ
of Supervisory Control by appellant/relators Edward Jones and
Co., et al. (Jones) from a January 7, 1988, order of the
Thirteenth Judicial District Court, Yellowstone County,
denying Jones' motion to compel arbitration of a claim filed
by plaintiff/respond.ent Onata Frates (Frates). Individuals
named in the suit are Lawrence Sobol, a general partner of
Jones, and Larry Richardson (Richardson), a registered
representative of Jones. We affirm.
Frates filed a complaint on April 21, 1987 against
Jones. In the claim, Frates presented eight counts of
liability against Jones alleging breach of fiduciary duty;
enforcement of an oral promise; fraud; constructive fraud;
bad faith; negligent misrepresentation; negligence; and
violations of the Montana Securities Act. These claims are
all based on the purchase of limited partnership interests by
Frates and her deceased husband through their accounts with
Jones in 1982, 1983, and 1984.
Jones presents the following issues for our
consideration:
1. Whether the District Court's order denying Jones'
motion to compel arbitration is an appealable order?
2. Whether the District Court erred by following
Montana law rather than Missouri law when it construed the
arbitration agreement?
3. Did the District Court exceed its jurisdiction when
it considered the issues of fiduciary relationship and fraud
in the procurement of the agreement signed by Frates?
4. Did the District Court err as a matter of law in
failing to compel arbitration?
Frates began purchasing securities with her husband,
who died in 1985, from Jones in May of 1981. The Frates
opened a joint cash account and began dealing with
Richardson, an individual broker-dealer of Jones. After a
number of successful investments, Mr. Frates complained that
the couples' income taxes were too high and therefore they
began delving into certain tax-advantage investments. In
addition to securities not at issue in this case, Mr. and
Mrs. Frates invested $58,000 between October 12, 1982 and
July 23, 1984 through their Jones' account in Petro-Lewis and
NRM securities. The securities that are the subject of the
complaint were limited partnership interests known as
Petro-Lewis (purchased December, 1982) , WRM 82-B (purchased
December, 1982), NRM 83-B (purchased June, 1983), and NRM
84-C (purchased July, 1984).
Prior to making each of the investments, the Frates
received prospectus statements on the securities they
purchased. Further, according to an affidavit filed by
Richardson, they were also advised of the risk associated
with the investments. The Frates signed a Petro-Lewis and
NRM application form acknowledging receipt of the prospectus
and representing that they understood the risks associated
with the investments.
After Eugene Frates' death in 1985, Mrs. Frates
continued to invest through her account at Jones. In March
of 1986, she contacted Richardson because she wanted to
borrow money against the investments for the purpose of
making loans to her son. Mrs. Frates, then age 78, was
advised by Richardson to open a "margin account." Mrs.
Frates opened the margin account by executing a document
entitled "Edward D. Jones & Co. 'Full Service Account'
Customer Loan Agreement and Loan Consent." Richardson
presented the agreement to her but she stated in her
affidavit that she did not read the agreement.
[Nlo one asked me to read the agreement,
no one encouraged me to read the
agreement, no one read the agreement to
me, no one told me the importance of the
agreement, nor did anyone explain what
was in the agreement.
Richardson claims that he "reviewed" the agreement with
Frates but he does not claim that he discussed any of the 19
paragraphs. No further investments were made by Mrs. Frates
after the margin account was opened.
Paragraphs 16 and 17 are important to this case. Those
clauses read:
16. In the event at [sic] any claim or
controversy between you and the
undersigned arising under the federal
securities laws, you have the right to
submit such matter before a judicial
forum. Any other controversy arising out
- - relating to
of or accounts s h a l l b e
-
settled by arbitrytion in accordance with
the rules, then in effect, of the
National Association of Securities
Dealers, Inc. or the Boards of Directors
of the New York Stock Exchange, Inc.
and/or the American Stock Exchange, Inc.
as I may elect. If I do not make such an
election by registered mail addressed to
you at your main office within 5 days
after demand by you that I make such
election, then you may make such
election. Judgment upon any award
rendered by the arbitrators may be
entered in any court having jurisdiction
thereof.
17. This agreement and its enforcement
shall be governed by the laws of the
State of Missouri and its provisions
shall be continuous; shall cover
.. and collectivelv -
individuallv all
accounts which the undersigned may open
- reopen with you and shall insure [sic]
or
to the benefit of your present
organization, and any successor
organization, ... and shall be binding
upon the undersigned and/or estate,
executors, administrators and assigns of
the undersigned. (Emphasis added.)
Subsequent to the signing of the agreement, the limited
partnership interests, which were based on oil and gas
development, declined in value. Richardson never informed
Frates of the decrease in value of the investments until
after her husband had died. Presently, the investments have
no value.
The arbitration clause was discovered by Jones when
responding to Frates' initial discovery requests. Jones
served Frates with a demand for arbitration but she refused
to consent. On September 28, 1987, Jones filed a motion in
the District Court requesting dismissal of the claim or, in
the alternative, to stay all litigation pending outcome of
compelled arbitration. In its memorandum and order dated
January 7, 1988, the District Court stated that the motion
was denied because of the possibility of fraud or
constructive fraud and because of the express language of the
contract. The court stated:
The language of the agreement itself
refers to present and future transactions
. .
. Paragraph (17) states: " It]his
agreement .. . shall cover ... all
accounts which the undersigned may open
or reopen with you ... " which clearly
refers to future transactions and not
those occurring prior to the date of the
agreement. Reading the document as a
whole, the provisions apply to the margin
account and future transactions only.
From this order, defendants appealed. In addition,
they have requested a writ of supervisory control in the
alternative if it is determined that the court's order is
nonappealable.
Frates initially argues that the order is nonappealable
because it is "unauthorized under the list of appealable
orders set out in Rule l(b), M.R.App.P." Frates argues that
the order denying the motion to compel arbitration is a
motion to dismiss "which is in reality [because of reliance
on matters outside the pleadings] a motion for summary
judgment." Therefore, Frates relies on the rule that orders
denying summary judgment are not appealable. Nutter v.
Permian Corp. (Mont. 1986), 727 P.2d 1338, 1340, 43 St.Rep.
2027, 2028.
Section 27-5-324(1) (a), MCA, permits appeal from "an
order denying an application to compel arbitration." We read
this statute to allow appeal when a district court denies a
motion to compel arbitration. Further, under federal law, 28
U.S.C. S 1292(a)(l) permits appeal of an order denying
arbitration as an interlocutory appeal. See Pierson v. Dean,
Witter, Reynolds, Inc. (7th Cir. 1984), 742 F.2d 334,
(holding issue of arbitration was appealable as an
interlocutory matter, 28 U.S.C. S 1292(a)(l)); Ford v.
Shearson Lehman/American Express, Inc. (Cal. 1986), 180
Cal.App.3d 1011, 225 Cal.Rptr. 895.
In Passage v. Prudential-Bache Securities, Inc. (Mont.
1986), 727 P.2d 1298, 43 St.Rep. 1532, this Court held that a
state court "clearly has jurisdiction to order arbitration
under the Federal Arbitration Act" relying on the United
States Supreme Court decision of Southland Corp. v. Keating
(1984), 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1. Therefore,
we will review the trial court's decision in this case
denying arbitration even though the District Court did not
specifically rely on the Federal Arbitration Act but more so
on the State Uniform Arbitration Act.
Frates' next claim is that the District Court properly
had jurisdiction to decide the issue of fraud in the
inducement. We note that the District Court's order does
address the possibility that fraud, constructive fraud and a
fiduciary relationship between Frates and her broker may be
present in this case, but the court properly did not make a
determination in regard to the issues. The court stated only
that it would analyze the "broker's control, the investment
sophistication of the customer, the trust and confidence the
customer places with the broker, and whether the customer
invariably followed the broker's advice." The District Court
left the claims for future determination: " [i]f this was a
fiduciary relationship and there was constructive fraud, the
agreement and the arbitration clause would be void."
The gravamen of the District Court's opinion was the
fact that the arbitration clause's specific language, when
read in light of the whole contract, did not apply to past
transactions, but was prospective only. We hold this was a
proper finding. We note that the existence of the
arbitration clause was not known by Jones until after
discovery commenced in this case. The District Court
nonetheless stated that it did not believe that Jones had
"substantially utilized the litigation machinery'' thereby
constituting a waiver of its right to assert the arbitration
clause. Citing, Maxum Foundations, Inc. v. Salus Corp. (4th
Cir. 1985), 779 F.2d 974.
The federal policy is that arbitration is favored when
a question of arbitration is raised and a contractual clause
is present. Shearson/American Express, Inc. v. McMahon
(1987), U.S. , 107 S.Ct. 2332, 96 L.Ed.2d 185. The
United States Supreme Court stated in McMahon that this
policy is based on 9 U.S.C. 5 2 that mandates that
arbitration agreements "shall be valid, irrevocable, and
enforceable, save upon such grounds - exist - law or -
as at in
equity for the revocation - any contract."
of (Emphasis
added. ) A similar policy is expressed in the Montana
Arbitration Act in § 27-5-114(1), MCA. The District Court in
this case appropriately looked at both federal and state law
and stated that an arbitration agreement may be unenforceable
where grounds existed either in law or equity to revoke the
entire contract.
Here, the issue of revocation of the entire contract
need not be decided. A plain reading of the agreement is
sufficient to dispose of this case. We begin with the
determination that arbitration clauses are creatures of
contract and therefore principles of contract interpretation
are applicable.
Frates contends, and we agree, that the contract is not
clearly drafted with numerous typographical errors, confusing
and complex language, and unclear construction. Any
ambiguity in the arbitration clause or other aspects of the
agreement are to be construed strictly against Jones because
it, in essence, drafted the contract. St. Paul ire and
Marine Ins. Co. v. Cumiskey (1983), 204 Mont. 350, 665 P.2d
223; Shanahan v. Universal Tavern Corp. (1978), 179 Mont. 36,
585 P.2d 1314, see § 28-3-206, MCA. The District Court also
followed this line of reasoning and stated "[tl his rule of
construction must be balanced against the federal policy
favoring arbitration ... "
The District Court held that the language of the
agreement was not applicable to the transactions at issue in
this case. We agree. The above underlined language of
paragraph (17) is probably the most compelling language used
to support the inference of a present or future transaction.
That language states " [tlhis agreement . .
. shall cover
. . . all accounts which the undersigned may open or reopen
with you ... ' The contract, as the District Court pointed
out, also refers to a future debtor/creditor relationship
between Frates and Jones in paragraphs (41, (51, (71, (81,
(91, (111, and (121.
We are aware of the federal policy favoring
arbitration, but our review in this case has been limited to
the application of the arbitration clause to this case and
because this is an interlocutory matter only, Jones' rights
have not been extinguished. Frates and her husband purchased
the interests at issue here prior to the time Mrs. Frates
signed the agreement to open the margin account.
Jones argues that even though the purchases by Frates
occurred in 1982, 1983, and 1984, prior to the execution of
the arbitration agreement, the District Court erred as a
matter of law. Jones cites Gilmore v. Shearson/American
Express, Inc. (S.D.N.Y. 19871, 668 F.Supp. 314, for the
proposition that an arbitration agreement signed after
specific transactions occurred can be retroactively applied
to those transactions. However, we note that the clause
involved in Gilmore stated all "transactions" rather than
"accounts" as in this instance. Therefore, the District
Court appropriately determined that the Gilmore clause was
broader than the clause involved in this case.
Due to the prospective nature of paragraph (17) and the
contract in its entirety, the District Court properly denied
Jones' motion to compel arbitration.
Affirmed.
2
'
Justic
We concur:
C / /
ief Justice
Mr. Justice John C. Sheehy did not participate in this
decision.