NO. 88-404
IN THE STJPREME COURT OF THE STATE OF MONTANA
1989
RICHARD LARSEN ,
Plaintiff and Appellant,
ROBERT OPIE and PIPER, JAFFRAY & FOPWOOD,
a Delaware Corporation,
Defendants and Respondents.
APPEAL FROM: District Court of the Thirteenth Judicial District,
In and for the County of Yellowstone,
The Honorable Russell K. Fillner, Judge presiding.
COIJNSET, OF RECORD :
For Appellant:
J. Daniel Hoven & Oliver Goe, Browning, Kaleczyc,
Berry & Hoven; Helena, Montana
For Respondent:
John G. Crist, Dorsey & Whitney; Billings, Montana
Submitted on Briefs: March 9, 1989
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Mr. Chief Justice J. A. Turnage delivered the Opinion of the Court.
Appellant Larsen sued Piper, Jaffray & Hopwood and their
seller Robert Opie in the District Court of the Thirteenth Judicial
District for misrepresentation and fraud in the inducement of
signing option agreements and margin contracts. This suit was
filed in response to respondents1 motion to compel arbitration for
a dispute arising between the parties. On June 30, 1988, Judge
Russell K. Fillner granted respondents1 motions and ordered
appellant to submit to arbitration. We affirm.
The issues on appeal are:
1. Whether the District Court's order compelling appellant
to arbitrate is an appealable order?
2. Whether the issue of fraud in the inducement regarding the
margin agreement and customer option agreement is to be determined
by the court or by arbitration?
Robert Opie, an investment executive with Piper, Jaffray &
Hopwood, negotiated with appellant Larsen to sell Larsen "Margin
and Customer Option Agreements.I1 Larsen alleges that he was a
l1neophytel1investor and had informed Piper, Jaffray & Hopwood that
he would refuse to enter any agreement which would subject him to
possible unlimited loss. Appellant also alleges that Opie was
aware of this but nonetheless coerced appellant to enter the highly
volatile area of margin agreements and option agreements.
Larsen contends that, when signing the option agreement and
margin agreement, he did not read either contract but instead
relied on the oral assertions of respondent. Appellant refers to
two specific clauses of which he was unaware: first, with each
agreement was supplied "level four and level five agreementsf1which
stated that the investor understood the high risks involved in
selling uncovered put options and that he could be exposed to
unlimited loss; second, the agreements contained an arbitration
clause which stated:
We [Larsen] specifically agree and recognize
that all controversies which may arise between
Piper, Jaffray & Hopwood Incorporated, its
agents, representatives or employees and me,
concerning any transaction, account, or the
construction, performance or breach of this or
any other agreement between us, whether en-
tered into prior, on, or subsequent to the
date hereof, shall be determined by arbitra-
tion to the fullest extent provided by law.
Because of appellant's contention that he never read the
agreements, he claims he was unaware of either of these clauses at
the time of signing. Appellant subsequently lost money on the
margin and option agreements when the stock market crashed drama-
tically on October 19, 1987. His stock was sold to cover losses
and respondents claim that he still owes $15,000, debited to his
account.
Piper, Jaffray & Hopwood sought to arbitrate the matter, but
Larsen filed a suit in District Court alleging breach of duty of
good faith and fair dealing, fraud, constructive fraud, and that
the contracts were void. Appellant argues that if a contract is
void from its inception, the arbitration clause contained therein
cannot compel arbitration to decide the validity of the contract
itself. Respondents claim that the issue of fraud is for the
arbitrator's review, compelled by the Uniform Arbitration Act, 9
U.S.C. sections 1-14 (1947).
The first issue is whether the decision of the District Court
is an appealable order.
The Montana Rules of Appellate Procedure, Title 25, Chapter
21, provide that:
(a) Upon appeal from a judgment in a civil
case, the court may review the verdict or
decision, and any intermediate order or deci-
sion excepted or objected to within the mean-
ing of Rule 46 of the Montana Rules of Civil
Procedure, which involved the merits, or
necessarily affects the judgment, except a
decision or order from which an appeal might
have been taken.
Rule 2 (a), M.R.App.P.
Respondent argues that the appeal by Larsen is an inter-
locutory appeal and is .subject to the Judicial Improvements and
Access to Justice Act, P.L. 100-702, Section 1019, which states
that an appeal may not be taken from an interlocutory order
compelling arbitration. However, the appeal to this Court is from
a final determination of the District Court. In finding that
Larsenls claims were subject to arbitration, the District Court
made a final determination regarding the claims by plaintiff at the
state court level. Any arguments by either party were thereafter
subject to arbitration as prescribed by the Arbitration Committee
of the New York Stock Exchange or the National Association of
Securities Dealers, Inc. The order was final and is appealable.
The second issue is whether the issue of fraud in the induce-
ment regarding the margin agreements and customer option agreement
is to be decided by the District Court or by arbitration.
The Uniform Arbitration Act, 9 U.S.C., applies to any contract
involving commerce. section 2 of the Act states:
. . . a contract evidencing a transaction
involving commerce to settle by arbitration a
controversy thereafter arising out of such
contract or transaction, or the refusal to
perform the whole or any part thereof, or an
agreement in writing to submit to arbitration
an existing controversy arising out of such a
contract, transaction, or refusal, shall be
valid, irrevocable, and enforceable, save upon
such grounds as exist at law or in equity for
the revocation of any contract.
In Southland Corp. v. Keating (1984), 465 U.S. 1, 10, 104
S.Ct. 852, 858, 79 L.Ed.2d 1, 12, the Court stated:
In enacting [section] 2 of the federal Act,
Congress declared a national policy favoring
arbitration and withdrew the power of the
states to require a judicial forum for the
resolution of claims which the contracting
parties agreed to resolve by arbitration.
Appellant alleges that the arbitration clauses here are
invalid. He claims that because respondents did not specifically
discuss the arbitration clauses with appellant, these clauses were
not bargained for and were misrepresentations. Appellant also
alleges that the contract as a whole is rendered void because he
was fraudulently induced into entering into the margin agreement
and customer option agreement. He contends that he told Piper,
Jaffray & Hopwood that he did not want to invest in any agreements
which could subject him to unlimited liability and he was reassured
that these agreements would not result in unlimited liability.
Because appellant claims he was induced fraudulently into
signing the agreements through Piper, Jaffray & Hopwood's mis-
representations, he contends the contracts are void from their
inception and consequently the arbitration clauses are also void.
Therefore, when the question of contract validity arises, it should
be the task of the courts and not arbitration, to decide the issue.
Section 4 of the Act provides one of the few times when a
contract containing an arbitration clause can be addressed by a
court:
A party aggrieved by the alleged failure,
neglect, or refusal of another to arbitrate
under a written agreement for arbitration may
petition any United States district court.
. .
. The court shall hear the parties, and
upon being satisfied that the making of the
agreement for arbitration or the failure to
comply therewith is not in issue, the court
shall make an order directing the parties to
proceed to arbitration in accordance with the
terms of the agreement . .
. If the makins of
the arbitration asreement or the failure,
neslect, or refusal to perform the same be in
issue, the court shall proceed summarily to
the trial thereof. [Emphasis added.]
The United States Supreme Court has discussed the issue of
who is to determine issues involving arbitration and the uniform
Arbitration Act in Prima Paint Corp. v. Flood & Conklin Mfg. Co.
(1967), 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270. The Supreme
Court looked tothe Uniform Arbitration Act for guidance, recalling
that section 4 allows for judicial intervention in cases where the
validity of the arbitration clause is at issue.
Under section 4, . . . the federal court is
instructed to order arbitration to proceed
once it is satisfied that Itthe making of the
agreement for arbitration or the failure to
comply [with the arbitration agreement] is not
in issue. Accordingly, if the claim is fraud
in the inducement of the arbitration clause
itself--an issue which goes to the tfmakingnof
the agreement to arbitrate--the federal court
may proceed to adjudicate it. But the statu-
tory language does not permit the federal
court to consider claims of fraud in the
inducement of the contract generally.
Prima Paint, 388 U.S. at 403-404, 87 S.Ct. at 1806, 18 L.Ed.2d at
1277.
The issue is the same here. There is a question of whether
the agreements between Larsen and Piper, Jaffray & Hopwood are void
for fraud in the inducement. Prima Paint has specifically held
that issues which address fraud in the inducement are issues to be
decided in arbitration. Appellant here does dispute the validity
of the arbitration clause, but only in connection with the contract
as a whole.
We have addressed the application of the Uniform Arbitration
Act in state courts in Passage v. Prudential-Bache Securities, Inc.
(Mont. 1986), 727 P.2d 1298, 43 St.Rep. 1532, cert. denied, 480
U.S. 905 (1987). We were faced with the same issue in Passaqe of
whether the clause requiring arbitration where a dispute of the
contract arises is valid if the investor did not specifically
consent to arbitration. We held that the arbitration clause was
valid and the investors were subject to its contents. The same is
true in the instant case.
Larsen cannot claim that he was unaware of the financial risks
involved in investing in uncovered put agreements. The I1level four
and level five agreements" which explain the risks involved were
set out separately fromthe margin and option agreements themselves
and required a separate signing by the investor.
We hold that the District Court properly determined that the
issue of fraud in the inducement to the execution of the contract
generally is to be decided by arbitration. Appellant cannot look
for the court to determine the validity of the contract generally
for the issue of fraud in the inducement, but only if the validity
of the arbitration clause is at issue.
Affirmed.
f/c7&L Chief Justice
We concur: