Kingston v. Ameritrade, Inc.

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No. 99-673

IN THE SUPREME COURT OF THE STATE OF MONTANA

2000 MT 269

WILLIAM J. KINGSTON, III and

VIRGINIA L. KINGSTON,

Plaintiffs and Appellants,

v.

AMERITRADE, INC., a Nebraska corporation,

Defendant and Respondent.

APPEAL FROM: District Court of the Second Judicial District,

In and for the County of Silver Bow,

The Honorable James E. Purcell, Judge presiding.

COUNSEL OF RECORD:

For Appellants:

William P. Joyce, Joyce & Starin, Butte, Montana

For Respondent:

William M. O'Leary, Corette, Pohlman & Kebe, Butte, Montana

Submitted on Briefs: June 1, 2000
Decided: October 26, 2000

Filed:

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__________________________________________

Clerk

Justice Jim Regnier delivered the opinion of the Court.

¶1 William and Virginia Kingston appeal from the October 19, 1999, order of the Second
Judicial District Court, Silver Bow County, granting Ameritrade's combined motion to
dismiss and to compel arbitration. We reverse and remand for further proceedings
consistent with this opinion.

¶2 The sole issue presented on appeal is whether the District Court erred when it
concluded that the arbitration provision in the Ameritrade contract is valid and enforceable
and, therefore, the Kingstons are compelled to arbitrate their dispute with Ameritrade.

BACKGROUND

¶3 In January 1998 the Kingstons opened a cash stock brokerage account with Ameritrade,
Inc., an on-line brokerage firm. The booklet provided with the application packet
promised the ability to access one's on-line account at any time. William Kingston signed
the application form on December 30, 1997, and Virginia Kingston signed the same
application on January 4, 1998. The Kingstons began to utilize their account to trade
stocks over the Internet. Based on the allegations in Kingstons' amended complaint,
because of failures with the Ameritrade system on November 30, 1998, the Kingstons
were unable to place an order to sell certain stocks. The Kingstons contend that, as a result
of the inability to sell their stock, they lost $32,652.87 in profits, which further caused
William Kingston severe emotional distress, mental pain, and anxiety.

¶4 The Kingstons filed suit against Ameritrade, Inc., on March 24, 1999, seeking
compensation for lost investment income, and the emotional distress, mental pain, and
anxiety suffered by William Kingston. On April 28, 1999, Ameritrade filed a Combined
Motion to Compel Arbitration and Dismiss. Both parties subsequently filed briefs and
affidavits relative to the combined motions.

¶5 At issue are the terms and conditions relevant to the account application signed by the
Kingstons. The account application signed and submitted by the Kingstons includes the

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following:

I have received and read the terms and conditions that will govern my account. I
agree to be bound by these terms and conditions, as amended from time to time, and
request a cash and cash margin account to be opened in the name(s) set forth below.

This brokerage account agreement contains pre-dispute arbitration clauses in
Paragraphs 6 and 7 of the Terms and Conditions section.

¶6 The Kingstons acknowledge receiving and reading the application. They also
acknowledge receiving a handbook from Ameritrade. Language in the handbook relating
to opening an account stated that to open a new account, "Simply fill out the brief
application we have enclosed with this booklet. You also may use our interactive
application found at our website . . . . Be sure to enclose your initial equity deposit
(minimum $2,000)." There is no mention of other terms and conditions in the handbook.
The Kingstons contend that these two documents are the only documents they received
from Ameritrade. Ameritrade contends that the terms and conditions noted in the
application refer to terms and conditions found in the document titled "Terms and
Conditions" which sets forth specific arbitration requirements. These arbitration
disclosures state that arbitration is binding, the parties are waiving their right to seek
(1)
remedies in the courts, that the right to appeal is limited, and other agreements. The
Kingstons, by affidavit, deny that they ever received this document. The Kingstons also
claim that no terms and conditions were listed on the Ameritrade website.

¶7 In response to the complaint filed by the Kingstons, Ameritrade filed a motion to
dismiss pursuant to Rule 12(b)(1), M.R.Civ.P., and a motion to compel arbitration
pursuant to § 27-5-115, MCA. Rule 12(b)(1), M.R.Civ.P., provides in relevant part:

Every defense, in law or fact, to a claim for relief in any pleading, whether a claim,
counterclaim, cross-claim, or third party claim, shall be asserted in the responsive
pleading thereto if one is required, except that the following defenses may at the
option of the pleader be made by motion: (1) lack of jurisdiction over the subject
matter.

Section 27-5-115, MCA (1997), provides in relevant part:

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Proceedings to Compel or Stay Arbitration. (1) On the application of a party
showing an agreement described in 27-5-114 and the opposing party's refusal to
arbitrate, the district court shall order the parties to proceed with arbitration; but if
the opposing party denies the existence of the agreement to arbitrate, the court shall
proceed summarily to the determination of that issue raised and shall order
arbitration if it finds for the applying party or deny the application if it finds for the
opposing party.

(2) On application, the district court may stay an arbitration proceeding commenced
or threatened on a showing that there is no agreement to arbitrate. Such an issue,
when in substantial and bona fide dispute, shall be immediately and summarily tried
and the stay ordered if the court finds for the applying party. If the court finds for
the opposing party, it shall order the parties to proceed to arbitration.

(Emphasis added.)

¶8 The District Court heard oral arguments on August 25, 1999, and granted Ameritrade's
motion on October 18, 1999. The District Court concluded, as a matter of law, it did not
have subject matter jurisdiction over the Kingstons' claims, and thus dismissed the matter
and compelled arbitration. The Kingstons appeal.

STANDARD OF REVIEW

¶9 The District Court's determination that it did not have jurisdiction over this case is a
conclusion of law. Hilands Golf Club v. Ashmore (1996), 277 Mont. 324, 328, 922 P.2d
469, 472. We review a district court's conclusion of law regarding arbitrability to
determine if it is correct. Ratchye v. Lucas, 1998 MT 87, ¶ 14, 288 Mont. 345, ¶ 14, 957
P.2d 1128, ¶ 14. When reviewing a dismissal of a claim, we take all allegations of fact by
the nonmoving party as true. Hilands, 277 Mont. at 328, 922 P.2d at 472. In this case, we
conclude that the District Court erred in its legal conclusion that it lacked subject matter
jurisdiction over whether an arbitration agreement existed.

DISCUSSION

¶10 Did the District Court err when it concluded that the arbitration provision in the
Ameritrade contract is valid and enforceable and, therefore, the Kingstons are compelled
to arbitrate their dispute with Ameritrade?

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¶11 Ameritrade argues that the District Court correctly found that the Kingston's claims
were preempted by a requirement to arbitrate, and thus the District Court lacked subject
matter jurisdiction to hear the claim. The Kingstons, on the other hand, maintain that the
arbitration clause in the Ameritrade contract does not preempt their claims because there is
an ambiguity in what specific terms and conditions apply to the arbitration provision
contained in the contract.

¶12 The Kingstons contend that under § 27-5-115, MCA, there is a "substantial and bona
fide dispute" over whether there has been an agreement to arbitrate. Ameritrade responds
that the District Court's lack of jurisdiction, under Rule 12(b)(1), M.R.Civ.P., is premised
on the fact that the Kingston's dispute is subject to the arbitration provision they accepted
when signing their agreement to open a brokerage account. The District Court concluded
that it must grant Ameritrade's motion unless the Kingstons deny the existence of the
arbitration agreement. The District Court then concluded that the Kingstons denied the
existence of the contract as a whole, and their claim could not be considered to be solely a
denial of the arbitration agreement. We disagree.

¶13 The Federal Arbitration Act (FAA) and similar state law governs the present dispute.
9 U.S.C. § 1, et seq., §§ 27-5-114 and -115, MCA. The FAA provides that an agreement to
arbitrate is valid except where grounds exist at law or in equity to revoke the contract. 9 U.
S.C. § 2. Thus, the FAA reverses the longtime judicial hostility to arbitration agreements
and puts them on the same footing as other contract provisions. Vukasin v. D.A. Davidson
& Co. (1990), 241 Mont. 126, 128-29, 785 P.2d 713, 715; Cohen v. Wedbush, Noble,
Cooke, Inc., (9th Cir. 1988), 841 F.2d 282, 285; Scherk v. Alberto-Culver Co. (1974), 417
U.S. 506, 510, 94 S. Ct. 2449, 2453, 41 L. Ed. 2d 270. Montana law also requires the
enforcement of predispute arbitration clauses "except upon grounds that exist at law or in
equity for the revocation of a contract." Section 27-5-114(2), MCA. Generally, these
provisions require a court to follow a liberal policy in enforcing arbitration agreements,
including resolving any doubts concerning the scope of arbitrable issues in favor of
arbitration. See Vukasin, 241 Mont. at 133, 785 P.2d at 718. Yet, under the provisions of
§ 27-5-115, MCA, a district court may not order arbitration if there is a substantial and
bona fide dispute over whether there exists an agreement to arbitrate.

¶14 Ameritrade contends that the Kingstons must submit to arbitration, pursuant to the
agreement they signed, and are precluded from bringing suit in district court. The
Kingstons contend that they did not knowingly agree to nonbinding arbitration as the
exclusive method to resolve this dispute when they signed the agreement. Essentially they

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contend that the critical "Terms and Conditions" were never provided to them, and no part
of the contract stated that they were subjecting themselves to binding arbitration or
foregoing their right to trial in the district court. Thus, the Kingstons contend that the
District Court has authority to determine the threshold question of whether a valid
agreement to arbitrate was even entered into by Ameritrade and the Kingstons.

¶15 The federal policy under the FAA is designed to ensure the enforceability of private
agreements to arbitrate. Volt Info. Sciences, Inc. v. Board of Trustees of Leland Stanford
Univ. (1989), 489 U.S. 468, 472, 109 S. Ct. 1248, 1252, 103 L. Ed. 2d 488; Doctor's
Assoc., Inc. v. Casarotto (1996), 517 U.S. 681, 116 S. Ct. 1652, 134 L. Ed. 2d 902. Thus,
a district court may only properly adjudicate the validity of an arbitration agreement when
a party contests the validity of an arbitration clause within a contract, but does not contest
the validity of the contract as a whole. See Larsen v. Opie (1989), 237 Mont. 108, 111-12,
771 P.2d 977, 979-80; see also Prima Paint Corp. v. Flood & Conklin Mfg. Co. (1967),
388 U.S. 395, 403-04, 87 S. Ct. 1801, 1806, 18 L. Ed. 2d 1270.

¶16 Although the policy behind the FAA is to encourage and enforce arbitration
agreements, enforcement of arbitration agreements extends only to valid arbitration
agreements. See Mueske v. Piper, Jaffray & Hopwood, Inc. (1993), 260 Mont. 207, 213,
859 P.2d 444, 448. In the instant case, the District Court erred in not fully addressing
whether a valid arbitration agreement exists.

¶17 We have previously affirmed district court orders compelling arbitration under a
variety of scenarios. See Larsen, 237 Mont. at 112, 771 P.2d at 980 (affirming order
compelling arbitration notwithstanding plaintiff's claim that he did not specifically consent
to the arbitration clause although he did not dispute executing the contract containing the
clause); Passage v. Prudential-Bache Sec. (1986), 223 Mont. at 64, 727 P.2d at 1300
(affirming order compelling arbitration where the investor challenged an arbitration clause
in the brokerage contract claiming he didn't read the documents before signing). Yet, a
motion to compel arbitration is appropriately denied where the arbitration clause itself is
questioned. See Vukasin, 241 Mont. at 131, 785 P.2d at 717.

¶18 In summary, the critical question a district court must decide when confronting this
issue is whether the contesting party is disputing the validity of the arbitration clause
itself. Two previous cases guide us in determining what constitutes an appropriate denial
of a motion to compel arbitration when the existence of an arbitration clause is in question.
First, in Mueske, we upheld the district court's refusal to grant a motion to compel

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arbitration because the arbitration clause itself required the use of specific notice rules in
the formation of the arbitration agreement, and the brokerage failed to use such rules.
Mueske, 260 Mont. at 212, 859 P.2d at 447. By failing to use the specific notice rules
when forming the arbitration agreement, the broker could not invoke the arbitration clause
and compel arbitration during subsequent litigation. The failure of the broker to follow
these rules required the invalidation of the arbitration clause, but not invalidation of the
contract as a whole. Mueske, 260 Mont at 216, 859 P.2d at 450. Additionally, in Frates v.
Edward D. Jones and Co. (1988), 233 Mont. 377, 760 P.2d 748, a motion to compel
arbitration was properly denied by the district court because the arbitration clause was
ambiguous in its construction and, therefore, could not be read to apply to disputes arising
before the arbitration agreement was signed. In Mueske and Frates, there was a discreet
question as to whether a valid arbitration clause existed in an otherwise valid contract.

¶19 The issue presented by the Kingstons is substantially similar. Taking all allegations of
the Plaintiffs as true, it appears that the Kingstons never received the terms and conditions
which contained the mandatory arbitration provisions. In the instant case, the Kingstons
signed a contract with Ameritrade. They do not dispute the existence of the contract itself;
in fact they traded stocks pursuant to their contract with Ameritrade. Rather, they claim
that, though they signed a valid contract, there was no valid agreement to arbitrate in the
contract. By their allegations, they were not provided with any terms and conditions
applicable to an agreement to arbitrate, no specific terms in the contract they signed
required binding arbitration, and no terms relevant to an agreement to arbitrate were listed
on the Ameritrade website.

¶20 By alleging that they never received the specific terms and conditions, and that the
terms and conditions were not listed on Ameritrade's website, the Kingstons have
identified a substantial ambiguity in the nature of the terms and conditions of the
arbitration clause. Certainly Kingstons were on notice that there was some form of
arbitration that governed the agreement. The specific language above their signature on
the application states that "[t]his brokerage account agreement contains pre-dispute
arbitration clauses in Paragraphs 6 and 7 of the Terms and Conditions section." However,
they had no indication that they were agreeing to binding arbitration or that arbitration was
their exclusive remedy in resolving any disputes with Ameritrade. These are critical
factors which go to the heart of the arbitration provision that Ameritrade attempts to
enforce as binding and impose on the Kingstons. The provisions in the terms and
conditions are the operative clauses which deny Kingstons access to the courts. We have
previously recognized that uncertain terms in a contract are to be construed strictly against

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the party causing the uncertainty. Frates, 233 Mont. at 382, 760 P.2d at 752; Mueske, 260
Mont. at 216, 859 P.2d at 449-50. Consequently, we conclude that there is a substantial
and bona fide dispute over the arbitration agreement that cannot be overcome by the
general federal policy encouraging upholding agreements to arbitrate. Thus, the District
Court erred in granting Ameritrade's combined motion to dismiss and compel arbitration.

¶21 Ameritrade urges us to conclude that the Kingstons dispute the formation of the entire
contract because they do not mention the arbitration agreement in their original pleading.
However, this claim begs the question as to whether a valid arbitration clause exists. The
Kingstons apparently did not articulate the opposition to an arbitration clause because they
claim that they did not know that such a clause existed requiring them to submit to
"binding arbitration."

¶22 The Kingstons further argue that the contract is one of adhesion, which requires
analysis from the consumer's perspective regarding reasonable expectations for an
arbitration clause to be enforceable. Since we have concluded that the District Court erred
as a matter of law in concluding that there was a binding arbitration agreement, we need
not reach the issue relating to adhesion.

¶23 Reversed and remanded for further proceedings consistent with this opinion.

/S/ JIM REGNIER

We Concur:

/S/ JAMES C. NELSON

/S/ WILLIAM E. HUNT, SR.

/S/ W. WILLIAM LEAPHART

/S/ TERRY N. TRIEWEILER

1. The booklet entitled "Terms and Conditions," five pages of contract language, includes the following,
which is printed in bold on the first page:

6. ARBITRATION DISCLOSURES

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(i) Arbitration is final and binding on the parties.

(ii) The Parties are waiving their right to seek remedies in court, including the right to a
jury trial.

(iii) Pre-arbitration discovery is generally more limited than and different from court
proceedings.

....

I agree that all controversies which may arise between us concerning any transaction, the
construction, performance, or breach of this or any other agreement between us, whether
entered into prior, on or subsequent to the date hereof, or any other matter shall be
determined by arbitration in accordance with the rules of the National Association of
Securities Dealers, Inc.

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