Petition for Writ of Certiorari — Cruttenden & Co. v. Lynch
Supreme Court brief1994
Ask Donna
What actually matters in this document.
Text
In the Supreme Court
1 MAR °
OF THE
United States
bene
OCTOBER TERM, 1993
CRUTTENDEN & COMPANY, TALLEY MCNEIL & COMPANY,
INc., SUTRO & Co., INC., ROBERT C. CARTY, JR., SUN LIFE
ASSURANCE COMPANY OF CANADA, SUN FINANCIAL GROUP,
Loomis SAYLES & Co., DOES 1 THROUGH 100, INCLUSIVE,
Petitioners,
vs.
ROBERT A. LYNCH, BETTY LAVERNE LYNCH, individually and
as TRUSTEES OF THE ROBERT A. LYNCH AND BETTY
LAVERNE LYNCH FAMILY TRUST DATED May 30, 1979
Respondents.
On Petition for Writ of Certiorari to the
Supreme Court of the State of California
PETITION FOR WRIT OF CERTIORARI
Dawn M. SCHOCK GILBERT R. SEROTA
Counsel of Record HOWARD, RICE, NEMEROVSKI,
JOHN R. Lorrus CANADY, ROBERTSON, FALK &
KEESAL, YOUNG & LOGAN RABKIN
A Professional Corporation A Professional Corporation
Catalina Landing — Seventh Floor
310 Golden Shore Three Embarcadero Center
Post Office Box 1730 San Francisco, CA 94111
Long Beach, California 90801-1730 Telephone: (415) 434-1600
Telephone: (310) 436-2000 Attorneys for Petitioner
Attorneys for Petitioners SuTro & Co., INC.
CRUTTENDEN & COMPANY, TALLEY
MCNEIL & COMPANY, INC., and
RosBerT C. CARTY, JR.
=
a
of Los Angeles, Inc., Law Printers (213) 627-2200 J
QUESTION PRESENTED
Is the rule of law affirmed by the California Supreme Court —
that alleged misrepresentations that certain contracts as a whole
were formalities that did not affect respondents’ legal rights are
sufficient under the Federal Arbitration Act, 9 U.S.C. § 1, et seq.
(‘FAA”), to avoid arbitration — preempted by the rule estab-
lished by this Court in Prima Paint Corp. v. Flood & Conklin
Mfg. Co., 388 U.S. 395, 87 S. Ct. 1801, 18 L. Ed. 2d 1270
(1967), that “fraud in the inducement of the arbitration clause
itself’ must be alleged in order to avoid an order compelling
arbitration under the FAA?
il
TABLE OF CONTENTS
Page
QUESTION PRESENTED. .......-.---+ssesrerrreeee i
OPINIONS BELOW ........---eeeeereeereerereeees l
JURISDICTION ..... ccc ccccccccccccccevvsvccccces 2
STATUTE INVOLVED........--:eeeecrtee er ereeees 2
STATEMENT OF THE CASE .....------sseserreees 3
ae) lj) rrr errr rrr rer eo 3
B. PROCEDURE .........-.cceeccreecceeeereres 4
ARGUMENT .......--ccccccccccccecccccesecncecnes 5
I
REVIEW SHOULD BE GRANTED BECAUSE THE
CALIFORNIA SUPREME COURT HAS DENIED
ARBITRATION UNDER THE FAA IN DIRECT
CONFLICT WITH DECISIONS OF THIS COURT,
THE UNITED STATES COURTS OF APPEALS,
AND OTHER STATE COURTS OF LAST RESORT 5
A. THIS COURT HAS INTERPRETED THE FAA
TO LIMIT JUDICIAL FACT-FINDING TO AL-
LEGATIONS OF FRAUD DIRECTED SPECIFI-
CALLY TO AN ARBITRATION CLAUSE AND
REJECTED JUDICIAL INTERVENTION
BASED UPON ALLEGATIONS OF FRAUD IN
THE INDUCEMENT OF THE CONTRACT
GENERALLY ...ccedcccccccccuvecvcncsscers 5
3. THE UNITED STATES COURTS OF APPEALS
AND NUMEROUS STATE COURTS OF LAST
RESORT HAVE REJECTED ATTEMPTS TO
UNDERMINE THE PRIMA PAINT DOCTRINE 6
C. THE OPINION IN THE CASE BELOW IM-
PROPERLY DENIES ARBITRATION UNDER
THE FAA BASED UPON GENERALIZED AL-
LEGATIONS OF FRAUDULENT INDUCE-
MENT OF THE CONTRACTS AS A WHOLE,
NOT FRAUD CLAIMS DIRECTED SPECIFI-
CALLY TO THE ARBITRATION CLAUSES .. 9
EE
iii
TABLE OF CONTENTS
Z
1. Contrary to the Position of the California Courts, the
Circuit Courts of Appeals Reject Challenges to Ar-
bitration Based Upon the Allegations of a Failure to
Read the Contract .........:- eee ee creer eeeeees 10
2. Contrary to the Position of the California Courts, the
United States Courts of Appeals Reject Challenges
to Arbitration Based Upon the Allegation that the
Broker Advised that the Contract was a Mere For-
mality that Would Not Affect Legal Rights and Did
Not Advise of the Existence of the Arbitration
ccc artes ceensevesedeoseresers 12
3. Contrary to the Position of the California Courts, the
United States Courts of Appeals Have Rejected the
Notion that Allegations of Fraud in the Inducement
Can be Directed at Both the Arbitration Clause and
the Contract As A Whole ......-.-.+eeeeeeeees 13
D. ALLEGATIONS OF A FIDUCIARY RELA-
TIONSHIP DO NOT JUSTIFY THE COURT'S
DEPARTURE FROM PRIMA PAINT DOC-
TRINE IN THE ABSENCE OF EXTRAORDI-
NARY ABUSES OF THE RELATIONSHIP.... 14
E. THERE IS NO DISPUTE THAT FEDERAL
LAW CONTROLS THE ISSUES DECIDED IN
THE CASE BELOW AND PREEMPTS CON-
FLICTING STATE LAW .........----eeeee05> 16
Il.
REVIEW SHOULD BE GRANTED BECAUSE THE
DECISION BELOW DEPARTS FROM AND SUB-
STANTIALLY UNDERMINES THIS COURT'S
STRONG ENDORSEMENT OF SECURITIES ARBI-
|
iv
TABLE OF AUTHORITIES
Cases
Page
Arnold v. Arnold, 920 F.2d 1269 (6th Cir. 1990) ....... 7, 13
Bayma v. Smith Barney, Harris Upham & Co., 784 F.2d
oe, Oe ee | errr ry Terr rere Tee 16
Bhatia v. Johnston, 818 F.2d 418 (Sth Cir. 1987) ...... 6, 15
Capital Income Properties-LXXX v. The Honorable R.
Blackmon, 843 S.W.2d 22 (Sup. Ct. Tex. 1992) ..... 8,15
Cohen v. Wedbush, Noble, Cooke, Inc., 841 F.2d 282 (9th
Ch Sc kcoukcesenvacsceadensweeeneessdesebes 11
David v. Merrili Lynch, Pierce, Fenner & Smith, Inc., 440
N.W.2d 269 (Sup. Ct. N.D. 1989) .............000- 8
Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 105 S.
Co, GRR OG Cee Cae CONSE ccc vvesescccvceces 18
Frame v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 20
Cal.App.3d 668, Cal.Rptr. 811 (1971) .............. 11
Hamilton Life Ins. Co. of N.Y. vs. Republic Nat'l Life Ins.
Coy, GES Fae Gee Tee Ga TRUMP ec cvcccccscccessecs 7
Hercules & Co. v. Shama Restaurant Corp., 613 A.2d 916
Cie ee I EE bid ok nih vances ceancebdvecves: 8
In the Matter of the Arbitration Between Weinrott and
Comm, 32 FA. 38 GA. AO TG BP iae ccccccccceces
Jeske v. Brooks, 875 F.2d 71 (4th Cir. 1989) ..........
Jones v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 604
ee a SED 000.00 cae casecnnrcedecs 8,15
Lynch v. Cruttenden & Co., 18 Cal. App. 4th 802, 22 Cal.
& 2. ae Sore ee ey re 10
Macaulay v. Norlander, 12 Cal. App. 4th 1, Cal. Rptr. 2d
Bee Cae aeededs cavdsareentsemieteneon 10
Macchiavelli v. Shearson, Hammill & Co., 384 F.Supp. 21
Cs BE oh he nddvc cdtanneeducdbaeneee 16
Miller v. Drexel Burnham Lambert Inc., 791 F.2d 850
CR Ge PE aso biccw nedeakoscasereeciees 7
Vv
TABLE OF AUTHORITIES
CASES
Page
Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp.,
460 U.S. 1, 103 S. Ct. 927, 74 L.Ed. 2d 765 (1983) .. 17
N&D Fashions, Inc. v. DHJ Indus. Inc., 548 F.2d 722 (8th
Sc ca ceanbcGuhdhvesds0bduseeaesds tees 7
Parr v. Superior Court, 139 Cal. App. 3d 440, 188
COLI. Bee CIGGED sccvcwcccccccvcvasvencendecs 10
Perez & Assoc. v. Welch, 960 F.2d 534 (Sth Cir. 1992) .. 11, 14
Perry v. Thomas, 482 U.S. 483, 107 S.Ct. 2520, 96 L.Ed.
FE RA ECT eT Te Pre Tre Tr err erree 17
Pierson v. Dean Witter Reynolds Inc., 742 F.2d 334 (7th
Ge tee rk awash AUAeeRee se cebirecnneeeess 11
Prima Paint Corp. v. Flood & Conklin Mfg. Co., 33 U.S.
Fee es Ps OE ee AE BBP ccc ccicescnvences i, 4, 5
Republic of Nicaragua v. Standard Fruit Co., 937 F.2d 469
SE EE caah cdbs optades ss eacnadacdesers 16
Riley v. Kingsley Underwriting Agencies, Lid. 969 F.2d
Se Ce ne SE ao 6 ea vacbcdwredcbcconrerveses 7
Rodriquez de Quijas v. Shearson/American Express Inc.,
490 U.S. 477, 109 S. Ct. 1917, 104 L.Ed. 2d 526 (1989) 18
Rowland v. PaineWebber Inc., 4 Cal. App. 4th 279, 6 Cal.
PE Be BEER cn kdcnacedcausenetececsveceeers 10, 16
Schacht v. Beacon Ins. Co., 742 F.2d 386 (7th Cir. 1984) 7
Sentry Sys., Inc. v. Guy, 98 Nev. 507 (Sup. Ct. Nev. 1982) 8
Shearson/American Express, Inc. v. McMahon, 482 U.S.
220, 107 S. Ct. 2332, 96 L.Ed. 2d 185 (1987) ....... 16
South Carolina Pub. Serv. Auth. v. Great W. Coal, Inc.,
GOT Gee ae CO GA. BA. TIPE) 0 cccctcteccvces: 8
Statement Mach. Co. v. Alperin, 591 F.2d 234 (3d Cir.
IRD Uae DER Ep si grtae asaya ee ee 7
Southland Corp. v. Keating, 465 U.S. 1, 104 S.Ct. 852, 79
RA ee CN Seti vcthacdecuseeteseusnree: 16, 17
iil ae
TABLE OF AUTHORITIES
CASES
Page
Sweet Dreams Unlimited v. Dial-A-Mattress Int'l, | F.3d
639 (7th Cir. 1993)... ...cceeeeeeeeeeeeeveeverees 14
Teledyne, Inc. v. Kone Corp., 892 F.2d 1404 (9th Cir.
1990)... crescccdevssdsceeyetssveccoccsceseonenes 6, 14
Thayer v. American Fin. Adviser, Inc. 322 N.W.2d 599
(Sup. Ct. Minn. 1982) ........ cece eee cere eee eens 8
Three Valleys Mun. Water Dist. v. E.F. Hutton & Co., 925
F.2d 1136 (9th Cir. 1991) 2... .. cece cece eee ee eee 6, 14
Tonetti v. Shirley, 173 Cal.App.3d 1144, 219 Cal. Rptr.
616 (19BS) 6 cr ccccvcccvcccsserscscceseccccccess 16
Union Mut. Stock Life Ins. Co. of Am. v. Beneficial Life
Ins. Co., 774 F.2d 524 (1st Cir. 1985) ........-000- 7
Volt Info. Sys. Inc. v. Board of Trustees of the Leland
Standford Junior Univ., 489 U.S. 468, 103 L.Ed. 2d 488
(19GB) co csncvssenguseekaeaawsen tects cendeceuys 16
Vukasin v. DA. Davidson & Co., 241 Mont. 126 (Sup. Ct.
Mont. 1990) .o:caccdacwaseceevestersesccsasscces 8
Statutes
28 U.S.C. Goethe TAS? ci cwcwsecececcvececccccccces 2
9 U.S.C. Sectloms 2 & 4... ccesivccescccevscccsccess
Rules
United States Supreme Court Rule 29.1 ...........--- l
i
No.
In the Supreme Court
OF THE
United States
OCTOBER TERM, 1993
CRUTTENDEN & COMPANY, TALLEY MCNEIL & COMPANY,
INC., SUTRO & Co., INC., ROBERT C. CARTY, JR., SUN LIFE
ASSURANCE COMPANY OF CANADA, SUN FINANCIAL GROUP,
Loomis SAYLES & Co., Dogs 1 THROUGH 100, INCLUSIVE,
Petitioners,
vs.
RosBerT A. LYNCH, BETTY LAVERNE LYNCH, individually and
as TRUSTEES OF THE ROBERT A. LYNCH AND BETTY
LAVERNE LYNCH FAMILY TRUST DATED May 30, 1979
Respondents.
On Petition for Writ of Certiorari to the
Supreme Court of the State of California
a
ed
PETITION FOR WRIT OF CERTIORARI
OSS
OPINIONS BELOW
The orders of the Superior Court of the State of California for
the County of Ventura denying the petitioners’ motions to compel
‘Pursuant to United States Supreme Court rule 29.1, petitioner
CRUTTENDEN & COMPANY reports no parent or subsidiary corpo-
rations, petitioner TALLEY McNEIL & COMPANY, INC. reports
parent corporation Cruttenden & Company and no subsidiary corpora-
tions, and petitioner SUTRO & CO., INC. reports parent corporations
2
arbitration are not officially reported and are reproduced in the
appendix (“App.”) at pages la-4a.’
The order of the Second District Court of Appeal for the State
of California affirming the denial of the petitions to compel
arbitration is officially reported at 18 Cal. App. 4th 802 (1993)
and is reproduced in the appendix at page 5a.
The order of the California Supreme Court denying the petition
for writ of certiorari is not officially reported and is reproduced in
the appendix at page 14a.
JURISDICTION
The order of the California Supreme Court denying the peti-
tioners’ petition for writ of certiorari was rendered on December
16, 1993. The jurisdiction of this Court is invoked under 28
U.S.C. § 1257.
STATUTE INVOLVED
Sections 2 and 4 of the FAA, 9 U.S.C. §§ 2 & 4, are repro-
duced as follows:
A written provision in any maritime transaction or a contract
evidencing a transaction involving commerce to settle by
arbitration a controversy thereafter arising out of such con-
tract or transaction, or the refusal to perform the whole or
any part thereof, or an agreement in writing to submit to
John Hancock Freedom Securities, Inc. and John Hancock Mutual Life
Insurance Co. and no subsidiary corporations.
Originally, petitioners CRUTTENDEN & COMPANY and TAL-
LEY McNEIL & COMPANY, INC. (collectively “Cruttenden”) and
petitioner SUTRO & CO., INC. (“Sutro”) brought separate motions to
compel arbitration (Superior Court of California, County of Ventura
Case No. 119524). Petitioners then brought separate appeals which
were consolidated for argument (Court of Appeal of California, Second
Appellate Court District Case Nos. B065193 & B066610). Cruttenden
and Sutro then brought a joint petition for writ of certiorari to the
California Supreme Court (Case No. S035471).
aca
3
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 any contract.
9 U.S.C. § 2 (1982).
A party aggrieved by the alleged failure, neglect, or refusal of
another to arbitrate under a written agreement for arbitration
may petition any United Statis district court... for an order
directing that such arbitration proceed in the manner pro-
vided for in such agreement.... 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 making of the arbitration agree-
ment or the failure, neglect, or refusal to perform the same
be in issue, the court shall proceed summarily to the trial
thereof.
9 U.S.C. § 4 (1982).
STATEMENT OF THE CASE
A. FACTS.
The respondents, ROBERT A. LYNCH and BETTY LA-
VERNE LYNCH, individually and as TRUSTEES OF THE
ROBERT A. LYNCH AND BETTY LAVERNE LYNCH
FAMILY TRUST DATED MAY 30, 1979 (“respondents”),
alleged, in part, securities fraud and breaches of fiduciary duty
against the petitioners, securities brokerage firms and their em-
ployee, in the handling of their securities accounts. Throughout
the life of the respondents’ securities accounts at Sutro and then
Cruttenden, the respondents signed 12 separate documents, each
containing an agreement to arbitrate disputes concerning their
accounts. Many of the arbitration clauses signed by the respon-
dents were written in bold print and were positioned immediately
before the signature lines where the respondents signed their
names.
4
To avoid their contractual obligation to arbitrate, the respon-
dents alleged in their complaint and in declarations in opposition
to motions to compel arbitration: (1) that they were told they
were signing agreements which did not affect their legal rights,
(2) that they were not informed of the arbitration clauses, and
(3) that they did not read the agreements before they signed
them.
B. PROCEDURE.
The petitioners sought to compel arbitration based upon the
FAA. Portions of the motions to compel arbitration indicating
reliance upon the FAA are reproduced in the appendix at pages
1Sa-19a and 20a-23a. While the state courts of first instance
recognized the conflict between state appellate courts’ and federal
appellate courts’ interpretations of the FAA, they, nevertheless,
felt that the state rule mandated the denial of the motions to
compel arbitration. Portions of the transcripts of the hearings
before the trial courts, which indicate the awareness of this
conflict between the state and the federal rules are reproduced in
the appendix at pages 24a-26a and 27a-42a.
The petitioners then argued before the Second District Court of
Appeal that the interpretation of the FAA as set forth in this
Court’s decision in Prima Paint Corp. v. Flood & Conklin Mfg.
Co., 388 U.S. 395, 87 S. Ct. 1801, 18 L. Ed. 2d 1270 (1967),
controlled and preempted any contrary state rules. The portions of
the petitioners’ briefs filed with the District Court of Appeal
raising the federal question are reproduced in the appendix at
pages 44a-48a and 49a-54a. The Second District Court of Appeal,
however, distinguished the federal cases, applied California law
and affirmed the trial courts’ denial of the petitions to compel
arbitration.
The petitioners then joined in a petition for review to the
California Supreme Court, again raising the argument that the
State court cases were in conflict with federal cases interpreting
the FAA and were, thus, preempted. Review was denied. The
portions of the petition for review to the California Supreme
Court raising the preemption issue are reproduced in the appendix
at pages 55a-6la.
\ —
—
“4
5
ARGUMENT
L
REVIEW SHOULD BE GRANTED BECAUSE THE CALI-
FORNIA SUPREME COURT HAS DENIED ARBITRA-
TION UNDER THE FAA IN DIRECT CONFLICT WITH
DECISIONS OF THIS COURT, THE UNITED STATES
COURTS OF APPEALS, AND OTHER STATE COURTS
OF LAST RESORT.
A. ThIS COURT HAS INTERPRETED THE FAA TO
LIMIT JUDICIAL FACT-FINDING TO ALLEGA-
TIONS OF FRAUD DIRECTED SPECIFICALLY TO
AN ARBITRATION CLAUSE AND REJECTED JU-
DICIAL INTERVENTION BASED UPON ALLEGA-
TIONS OF FRAUD IN THE INDUCEMENT OF THE
CONTRACT GENERALLY.
This Court provided the rule which governs this petition in
Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87
S. Ct. 1801, 18 L. Ed. 2d 1270 (1967). In that case, the Court
considered whether the issue of the enforceability of a contract
alleged to have been fraudulently induced and which contained an
arbitration provision was to be considered by a court or by
arbitrators. The Court ruled that the matter was to be sent to
arbitration. In so holding, the Court recognized that the arbitra-
tion clause is severable from the rest of the contract. The Court
held:
{I]f the claim is fraud in the inducement of the arbitration
clause itself — an issue which goes to the “making” of the
agreement to arbitrate — the federal court may proceed to
adjudicate it. But the statutory language does not permit the
federal court to consider claims of fraud in the inducement of
the contract generally.
Id. at 403-04 (emphasis added).
As is demonstrated in the following sections, the Prima Paint
rule has been uniformly applied throughout the federal system.
Challenges to contracts, such as those in the present case, which
6
are not specific to the arbitration clause must be compelled to
arbitration under the FAA.
B. THE UNITED STATES COURTS OF APPEALS AND
NUMEROUS STATE COURTS OF LAST RESORT
HAVE REJECTED ATTEMPTS TO UNDERMINE
THE PRIMA PAINT DOCTRINE.
Federal Circuit Courts of Appeals have preserved the distinc-
tion between generalized allegations of fraud directed to the entire
contract and those challenges directed specifically to the arbitra-
tion clause. The Ninth Circuit repeatedly has ruled that in order
for a “fraud in the inducement” challenge to be heard in court
rather than in arbitration, the challenge must be “separate and
distinct from any challenge to the underlying contract.” Teledyne,
Inc. v. Kone Corp,. 892 F.2d 1404, 1410 (9th Cir. 1990). In Three
Valleys Mun. Water Dist. v. E.F. Hutton & Co., 925 F.2d 1136
(9th Cir. 1991), the court said of the Prima Paint doctrine:
“Under this analysis, a federal court may consider a defense of
fraud in the inducement of a contract only if the fraud relates
specifically to the arbitration clause itself and not to the contract
generally.” Id. at 1140 (emphasis added).
The other federal circuit courts of appeals are in accord with
the Ninth Circuit’s interpretation of Prima Paint and, thus, are
contrary to the resolution of the issue reached by the California
courts in the present case. In Bhatia v. Johnston, 818 F.2d 418
(Sth Cir. 1987), for instance, a securities customer alleged in his
complaint and in declarations in opposition to a motion to compel
arbitration that he signed a customer agreement containing an
arbitration clause at the instruction of his broker, that the broker
did not explain the significance of the arbitration clause, and that
the broker did not explain that the customer’s legal rights under
the agreement were different than they were under a previous
agreement. Jd. at 422 nn.4 & 5. The Fifth Circuit said of these
allegations: “We are persuaded that Bhatia did not assert that the
arbitration clause alone, as opposed to the customer agreement
generally, was induced by the misrepresentations and actions of
Johnston.” Jd. at 422.
7
The Seventh Circuit, in Schacht v. Beacon Ins. Co., 742 F.2d
386 (7th Cir. 1984), emphasized that the “fraud in the induce-
ment” challenge must refer solely to the arbitration clause in
order to bypass arbitration:
Appellant nowhere contends that the alleged fraud in the
inducement applied solely to the arbitration clause. Its claim
of fraud applies equally to all provisions of the contract.
Thus, if the clause is sufficiently broad to encompass a claim
of fraud in the inducement, the district court properly con-
cluded that Prima Paint precludes the court from addressing
that claim.
Id. at 390. See also Union Mut. Stock Life Ins. Co. of Am. v.
Beneficial Life Ins. Co. 774 F.2d 524, 528 (1st Cir. 1985)
(“[t]here must be an independent challenge to the making of an
arbitration clause”); Hamilton Life Ins. Co. of N.Y., vs. Republic
Nat'l Life Ins. Co. 408 F.2d 606, 610 (2d Cir. 1969)
(“[i]llegality, fraudulent inducement, or repudiation of the prin-
cipal contract does not operate to nullify an agreement to arbi-
trate”); Statement Mach. Co. v. Alperin, 591 F.2d 234, 238 (3d
Cir. 1979); Jeske v. Brooks, 875 F.2d 71, 75 (4th Cir. 1989)
(“‘[b]Jecause the alleged defects pertain to the entire contract,
rather than specifically to the arbitration clause, they are properly
left to the arbitrator for resolution”); Arnold v. The Arnold Corp.,
920 F.2d 1269, 1278 (6th Cir. 1990) (“‘[t]he question presented
... is ... whether the... complaint contains a... claim of fraud
in the inducement of the arbitration clause itself, standing apart
from the whole agreement...); N&D Fashions, Inc. v. DHJ
Indus, Inc., 548 F.2d 722, 728 (8th Cir. 1977) (“[a]t most, N&D
claims fraud in the inducement to enter the contract of sale,
rather than fraud in the inducement to enter the agreement to
arbitrate. Fraud of the first type does not affect the duty to
arbitrate”); Riley v. Kingsley Underwriting Agencies, Lid., 969
F.2d 953, 960 (10th Cir.), cert. denied, 121 L. Ed. 2d 584 (1992)
(“{a] plaintiff seeking to avoid a choice _ provi-
sion... must... plead fraud going to the specific provision”);
Miller v. Drexel Burnham Lambert Inc., 791 F.2d 850, 854 (11th
Cir. 1986) (‘‘[a]ppellant’s claim bars arbitration only if it goes to
the arbitration clause itself and not the whole contract”).
8
While not as uniform in following the dictates of Prima Paint
as the Circuit Courts of Appeals, many state courts of last resort
likewise have rejected attempts similar to those presented in the
present case to avoid contractual arbitration. In Jones v. Merrill
Lynch, Pierce, Fenner & Smith, Inc., 604 So.2d 332 (Sup. Ct.
Ala. 1991), the Supreme Court of Alabama noted that allowing
allegations that a brokerage firm mailed a contract to its customer
for signature without an explanation that the contract contained
an arbitration clause to defeat a motion to compel arbitration
would, in every case, allow “a skillfully crafted complaint” to
avoid arbitration, “thus effectively eviscerating the FAA and
circumventing the strong policy favoring arbitration.” Jd. at 336.
See also South Carolina Pub. Serv. Auth. v. Great W. Coal, Inc.,
437 S.E.2d 22 (Sup. Ct. S.C. 1993); Capital Income Properties-
LXXX. et al. v. The Honorable Robert M. Blackmon, 843 S.W.2d
22 (Sup. Ct. Tx. 1992); Hercules & Co. v. Shama Restaurant
Corp. 613 A.2d 916 (D.C. Ct. App. 1992); Vukasin v. DA.
Davidson & Co., 241 Mont. 126 (Sup. Ct. Mont. 1990); Sentry
Sys., Inc. v. Guy, 98 Nev. 507 (Sup. Ct. Nev. 1982); David v.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 440 N.W.2d 269
(Sup. Ct. N.D. 1989).’
All of the federal appellate courts and many state courts of last
resort, therefore, follow Prima Paint in requiring a “fraud in the
inducement” challenge to arbitration to be directed specifically
and solely to the arbitration clause in order to defeat a motion to
compel arbitration.
3 Other state courts of last resort, like the California Supreme Court,
recognize exceptions to the Prima Paint doctrine in cases under the
FAA for allegations of fraud in the inducement which refer to the
contract generally rather than to the arbitration clause specifically. See,
e.g., In the Matter of the Arbitration Between Weinrott and Carp, 32
N.Y.2d 190, 197 (Ct. App. N.Y. 1973) (“if the alleged fraud was part
of a grand scheme that permeated the entire contract, including the
arbitration provision, the arbitration provision should fall with the rest of
the contract”); Thayer v. American Fin. Adviser, Inc., 322 N.W.2d 599
(Sup. Ct. Minn. 1982) (language of the arbitration clause must indicate
a specific intent to arbitrate fraudulent inducement claim).
penne
9
C. THE OPINION IN THE CASE BELOW IMPROP-
ERLY DENIES ARBITRATION UNDER THE FAA
BASED UPON GENERALIZED ALLEGATIONS OF
FRAUDULENT INDUCEMENT OF THE CON-
TRACTS AS A WHOLE, NOT FRAUD CLAIMS DI-
RECTED SPECIFICALLY TO THE ARBITRATION
CLAUSES.
In responding to the petitioners’ motions to compel arbitration
below, the respondents made allegations concerning the circum-
stances surrounding their signing the agreements containing arbi-
tration clauses. None of these allegations satisfy Prima Paint. A
review of the respondents’ references to the signing of the docu-
ments which were presented below indicates that all but one of
the references unambiguously apply to the agreements generally,
not to the arbitration clauses specifically. The only allegation
which arguably could be interpreted to be specific to the arbitra-
tion clauses in either the complaint or the declarations is the
allegation that the broker did not reveal the arbitration provisions
to the respondents (“[t]he Lynches claimed they were not
advised of the contents of the documents . . .”). (App., 6a-7a.)
As is demonstrated below, however, the failure of the respondents
to read their documents is not grounds to void the contracts.
All remaining allegations relating to fraud in the execution of
the agreements refer to the contracts generally. £.¢.,
“MR. CARTY ... told us... that he needed some ‘form’
documents signed in order to open the account. . .. He told me
_.. that it was not necessary to read the documents since they
simply effected an opening of the account. . .”; “MR. CARTY
told me that they were simply forms . . . needed... for the
continuing management of our family funds . . .”; “MR. CARTY
repeatedly told us that any document papers were . . . SO that he
could ‘manage our money’.” (App., 6a-7a.)
These are all comments that, on their face, refer to the making
of the contract generally, not the arbitration clause specifically.
As such, they should have been compelled to arbitration under
the Prima Paint doctrine.
10
1. Contrary to the Position of the California Courts, the
Circuit Courts of Appeals Reject Challenges to Arbitra-
tion Based Upon the Allegations of a Failure to Read
the Contract.
Underlying the respondents’ claims of fraud in the inducement
of the contract is the admitted fact that they did not read the 12
contracts containing arbitration clauses before they signed them.
Of this admitted failure to read the contracts, the California
Court of Appeal, in Lynch v. Cruttenden & Co., 18 Cal. App. 4th
802, 22 Cal. Rptr 2d 636 (1993) (App., 8a-9a), wrote:
The general rule in California is that even in the absence of a
fiduciary relationship plaintiff's failure to read a contract is
excusable where reliance is placed on the misrepresentations
of the other party.
Id. at 807, 22 Cal. Rptr. 2d at 639 (App., 8a-9a). The Lynch
court relied upon prior California state court decisio'.« %« assert
that this general rule is particularly applicable in cases . “sre the
plaintiff is unfamiliar with stockbrokerage documents and “‘is
deceived as to the nature and effect of the documents.” Jd.
Many well-reasoned cases of the United States Courts of
Appeals, however, have reviewed the circumstances under which
a party may be excused from reading a contract and have reached
precisely the opposite result. The Ninth Circuit, in Cohen v.
‘Indeed, California state courts themselves seem to belie the Lynch
court’s interpretation of the general rule in California. See Rowland v.
PaineWebber Inc., 4 Cal. App. 4th 279, 286, 6 Cal. Rptr. 2d 20, 24
(1992) (“[r]easonable diligence requires the reading of a contract
before signing it. A party cannot use his own lack of diligence to avoid
an arbitration agreement”); Macaulay v. Norlander, 12 Cal. App. 4th 1,
6, 15 Cal. Rptr. 2d 204, 207 (1992) (“[rJespondents . . . were bound by
the provisions of the client agreement whether they read it or were aware
of the arbitration clause when they signed the document”); Parr v.
Superior Court, 139 Cal. App. 3d 440, 445-46, 188 Cal. Rptr. 801, 804
(1983) (“[a]t the same time, that very person, whether in fact he had
read it or not, could choose alternatively to seek arbitration, or, should
he prefer, to perform and receive the benefits of the contract...”);
Frame v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 20 Cal. App. 3d
11
Wedbush, Noble, Cooke, Inc., 841 F.2d 282 (9th Cir. 1988),
recognized that, despite allegations of misrepresentations:
We see no unfairness in expecting parties to read contracts
before they sign them..... We therefore hold that allega-
tions of misrepresentations directly contrary to the specific
and unambiguous terms of a written arbitration agreement
do not, as a matter of law, state a claim for fraud.....
Whether the Cohens read the agreement but did not notice
the arbitration clause, or chose not to read the agreement at
all, their reliance on Wedbush’s alleged misrepresentations
was unreasonable in light of the clear and explicit language
of the contract.
Id. at 287-88 (emphasis added).
In Perez & Assoc. v. Welch, 960 F.2d 534, 538 (Sth Cir. 1992),
the court noted that two customers of a securities broker signed
customer agreements containing arbitration clauses without first
reading the documents. This did not allow these customers to
bypass contractual arbitration.
Likewise, in Pierson v. Dean Witter Reynolds Inc., 742 F.2d
334, 339 (7th Cir. 1984), the court ruled that the failure to read a
brokerage contract cannot be used to avoid the consequences of
an arbitration clause contained in that contract.
Federal courts interpreting the FAA, therefore, have reached a
conclusion directly contrary to that reached by the California
courts in the present case.
668, 672, 97 Cal. Rptr. 811, 813 (1971) (court enforced arbitration
agreement despite assumption for argument’s sake that it was
“adhesory’’).
12
2. Contrary to the Position of the California Courts, the
United States Courts of Appeals Reject Challenges to
Arbitration Based Upon the Allegstion that the Broker
Advised that the Contract Was a Mere Formality that
Would Not Affect Legal Rights and Did Not Advise of
the Existence of the Arbitration Clause.
Of the respondents’ allegations that they were advised that the
account documents were a “mere formality” and that they were
not told that the documents contained arbitration clauses, the
Lynch court wrote:
[W]e fail to see why a representation that signing a
document will rot affect the Lynches [sic] rights, cannot
fairly be characterized as fraud going directly as to the
arbitration clause, a clause that clearly affects the Lynches’
rights.
The alleged representation, that the documents were a for-
mality and did not affect the rights of the Lynches, was
tantamount to a representation that the documents contained
no arbitration clause.
18 Cal. App. 4th at 809-10, 22 Cal. Rptr. at 640-41 (App.,
10a-11a).°
The Ninth Circuit in Cohen, however, squarely rejected an
assertion similar to that relied upon by the Lynch court that a
representation that the agreement does not affect legal rights is
“tantamount” to fraud aimed directly at the arbitration clause.
Cohen, 841 F.2d at 287. On the same issue, the Ninth Circuit
held in Cohen:
The Cohens’ other allegation in support of the claim of fraud
is that they were “advised, either expressly or implicitly .. .
that [the margin agreement] did not compromise any of
‘The Lynch court also attempted to distinguish the Cohen decision
upon the grounds that there was no fiduciary relationship alleged in
Cohen as there was in Lynch. The effect of the fiduciary duty allegations
upon the rule in Prima Paint is discussed in detail in Section D infra.
13
[their] rights.” ... [T]he alleged statement here cannot
fairly be characterized as fraud in the inducement as to the
arbitration clause. The statement is quite general, relating to
the contract as a whole rather than to the arbitration clause
in particular. Indeed, the Cohens complain that nothing at
all was said about the abritration clause. Because the Cohens
have not raised a challenge to the validity of the arbitration
clause itself, this issue is subject to mandatory arbitration.
Id. at 287.
The federal court interpreting the FAA, therefore, reached a
conclusion directly contrary to that reached by the California
courts in the present case.
3. Contrary to the Position of the California Courts, the
United States Courts of Appeals Have Rejected the
Notion that Allegations of Fraud in the Inducement Can
be Directed at Both the Arbitration Clause and the
Contract As A Whole.
The Lynch court characterized allegations of fraud in the
inducement of a contract generally as follows:
That the misrepresentation may go to some or even all of the
clauses of the contract as well as the arbitration clause does
not mean that fraud in the making of agreement for arbitra-
tion is not in issue. Prima Paint does not stand for the
proposition that a fraudulently induced arbitration agreement
becomes valid and enforceable if the fraud also goes to other
parts of the contract.
18 Cal. App. 4th at 810, 22 Cal. Rptr. 2d at 641.
Federal courts, however, hold that Prima Paint stands precisely
for the proposition that fraud which goes to portions of the
contract in addition to the arbitration clause must be compelled to
arbitration.
In Arnold v. Arnold, 920 F.2d 1269 (6th Cir. 1990), the court
provided the following interpretation of the Prima Paint doctrine:
The question presented by the present case is thus whether
the amended complaint contains a well-founded claim of
14
fraud in the inducement of the arbitration clause itself,
standing apart from the whole agreement, that would provide
grounds for the revocation of the agreement to arbitrate.
Id. at 1278. See also Sweet Dreams Unlimited v. Dial-A-Mattress
Int'l, 1F.3d 639, 641 n.4 (7th Cir. 1993) (“[a] court may
consider a claim that a contracting party was fraudulently induced
to include an arbitration provision in the agreement but not claims
that the entire contract was the product of fraud”).
Likewise, the Ninth Circuit has rejected reasoning similar to
that of the Lynch court that allegations of fraud in the induce-
ment may be directed both at the contract generally and at the
arbitration clause and still bypass arbitration. Kone, 892 F.2d at
1410; Three Valleys, 925 F.2d at 1140.
The California courts, therefore, refused to compel arbitration
of the present allegations in contravention of the controlling
federal precedent.
D. ALLEGATIONS OF A FIDUCIARY RELATIONSHIP
DO NOT JUSTIFY THE COURT’S DEPARTURE
FROM PRIMA PAINT DOCTRINE IN THE AB-
SENCE OF EXTRAORDINARY ABUSES OF THE
RELATIONSHIP.
The California Court of Appeal attempted to distinguish the
facts before it from those in applicable federal cases by asserting
that the respondents’ allegation of a preexisting fiduciary duty
with the broker justified their failure to read their contracts before
signing them. The only factual allegation the respondents offered,
however, to support the alleged existence of a fiduciary duty was
that the broker secured the trust and confidence of the respon-
dents before asking them to sign the customer agreements. (App..,
6a-7a.) The same type of allegation did not preclude arbitration
under the FAA in Perez & Assoc. v. Welch, 960 F.2d 534, 538
(Sth Cir. 1992). In that case, two custmers of securities broker-
dealers complained that they signed customer agreements without
reading them or understanding that they contained arbitration
clauses because they “trusted” the broker. Because that trust led
them to execute the entire contract, however, and not just the
15
arbitration clause, the issue of breach of fiduciary duty itself was
referred to arbitration.
In Bhatia v. Johnston, 818 F.2d 418 (5th Cir. 1987), the fact
that the broker and the customer had a preexisting relationship at
another brokerage firm did not excuse arbitration even though the
customer alleged that the broker misrepresented the terms of the
new customer agreement to him.
Likewise, the Supreme Court of Alabama considered whether
allegations by a brokerage customer of fraud in the inducement of
the contract containing an arbitration clause mandate a hearing
by the court when they are combined with the allegation that the
broker owed a fiduciary duty to disclose the existence of the
arbitration clause. That court refused to allow such allegations to
defeat contractual arbitration under the FAA:
The plaintiff contends that the “central issue in this case is
whether Merrill Lynch owed a duty to [her] to disclose
the... material facts regarding the arbitration agree-
ment.” ... The omission to do so, the argument goes, consti-
tuted fraud in the making of the arbitration clause itself. We
also reject that argument because Mrs. Jones’ claim of
breach of fiduciary duty to disclose material facts applies as
cogently to all of their claims as to the arbitration clause
itself.
Jones v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 604 So.2d
332, 338 (Sup. Ct. Ala. 1991). See also Capital Income Proper-
ties-LXXX v. The Honorable R. Blackmon, 843 S.W.2d 22, 23
(Sup. Ct. Tex. 1992) (“[a] claim of fraud in the inducement,
unless specifically directed to the making of the arbitration clause,
does not defeat application of that clause to the agreement as a
whole”).
The California courts, therefore, refused to compel arbitration
for reasons directly contradicted by holdings of the federal courts
and other state courts of last resort.
16
E. THERE IS NO DISPUTE THAT FEDERAL LAW
CONTROLS THE ISSUES DECIDED IN THE CASE
BELOW AND PREEMPTS CONFLICTING STATE
LAW.
There is no dispute that the present controversy is governed by
the FAA See Rowland v. PaineWebber Inc., 4 Cal. App. 4th 279,
6 Cal. Rptr. 2d 20 (1992); Shearson/American Express, Inc. v.
McMahon, 482 U.S. 220, 107 S. Ct. 2332, 96 L. Ed. 2d 185
(1987), which provides that a contract involving interstate com-
merce and containing an arbitration clause shall be enforceable
“save upon such grounds as exist at law or in equity for the
revocation of any contract.” 9 U.S.C. §§ 1 & 2 (1982); Republic
of Nicaragua v. Standard Fruit Co., 937 F.2d 469, 475 (9th Cir.),
cert. denied, 117 L. Ed. 2d 516 (1991). As the transactions in the
respondents’ accounts involved national securities exchanges, they
were performed under contracts evidencing transactions involving
commerce. Cohen, 841 F.2d at 284; Macchiavelli v. Shearson,
Hammill & Co., 384 F. Supp. 21, 30 (E.D. Cal. 1974).
Both state and federal courts recognize that on issues of
arbitration stemming from contracts governed by the FAA, fed-
eral law preempts conflicting state law. Southland Corp. v. Keat-
ing, 465 U.S. 1, 13, 104 S. Ct. 852, 79 L. Ed. 2d 1, 13 (1984);
Bayma v. Smith Barney, Harris Upham & Co., 784 F.2d 1023,
1025 (9th Cir. 1986); Tonetti v. Shirley, 173 Cal. App. 3d 1144,
1148-50, 219 Cal. Rptr. 616, 618-20 (1985). As this Court itself
has decreed, the pronouncement of a federal court on the FAA
supersedes any contrary state law Volt Info. Sys. Inc. v. Board of
Trustees of the Leland Standford Junior Univ., 489 U.S. 468, 477,
103 L. Ed. 2d 488, 499 (1989) (“state law may nonetheless be
preempted to the extent that it actually conflicts with federal
law’”’) (emphasis added).
The federal preemption doctrine has been applied to the
exclusion of contrary state interpretations of Section 2 of the
FAA, which was relied upon by the California courts below:
Section 2 [of the FAA] is a Congressional declaration of a
liberal federal policy favoring arbitration agreements, ot-
withstanding any state substantive or procedural policies to
17
the contrary. The effect of this section is to create a body of
federal substantive law of arbitrability, applicable to any
arbitration agreement within the coverage of the Act....
[T]he Courts of Appeals have . . . consistently concluded
that questions of arbitrability must be addressed with a
healthy regard for the federal policy favoring arbitration. We
agree. The Arbitration Act establishes that as a matter of
federal law, any doubts concerning the scope of arbitral
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.
Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460
US. 1, 24-25, 103 S. Ct. 927, 941, 74 L. Ed. 2d 765, 785 (1983)
(emphasis added).
Thus, it is clear that where the federal courts have spoken on
issues under the FAA, that law controls both in state and federal
courts. (See, e.g., Southland Corp. v. Keating, 465 U.S. 1, 104 S.
Ct. 852, 79 L. Ed. 2d 1 (1984) (California Supreme Court
overruled); Perry v. Thomas, 482 U.S. 483, 489, 107 S. Ct. 2520,
96 L. Ed. 2d 426 (1987) (California statute preempted). Because
the federal courts have explicitly and uniformly ruled that allega-
tions such as those raised below must be compelled to arbitration,
the California courts were bound to follow that federal precedent.
II.
REVIEW SHOULD BE GRANTED BECAUSE THE DECI-
SION BELOW DEPARTS FROM AND SUBSTAN-
TIALLY UNDERMINES THIS COURT’S STRONG
ENDORSEMENT OF SECURITIES ARBITRATION.
This petition should be granted for an additional and equally
important reason — the opimon below and the prior California
state court opinions upon which it relies create a loophole in the
alternative dispute resolution process relied upon by the brokerage
industry and strongly endorsed by this Court. Unless this Court
grants review, the California courts are likely to continue to
undermine this Court’s policy favoring arbitration and to broaden
18
California’s articulation of policies directly conflicting with fed-
eral courts’ interpretation of federal law.
Despite this Court’s clear articulation of a policy favoring
arbitration, the California courts have issued opinions interpreting
the FAA in a manner which permits individuals to defeat arbitra-
tion by generalized allegations of fiduciary nondisclosure com-
bined with admitted failures to read contracts. The decision below
goes farther than any prior California decision in undermining
federal policy. Read broadly, it suggests that a client of a
brokerage firm can fail to read a contract, can ignore bold-faced,
highlighted clauses in the contract, can ask no questions of his
broker, and can nonetheless avoid a clear contractual provision
providing for arbitration merely by claiming that he relied upon
the broker as a “fiduciary” and was told the contract was a
“formality.”
Federal policy is directly to the contrary, requiring that all
doubts be resolved in favor of ordering — not denying — arbitra-
tion. Indeed, this Court itself has strongly endorsed arbitration of
disputes between brokerage firms and its customers, sweeping
away prior decisions founded largely upon a mistrust of arbitration
as a proper forum for the enforcement of customers’ rights. See,
e.g., Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 105 S. Ct.
1238, 84 L. Ed. 2d 158 (1985); McMahon; and Rodriguez de
Quijas v. Shearson/American Express Inc., 490 U.S. 477, 109 S.
Ct. 1917, 104 L. Ed. 2d 526 (1989).
This Court’s statement of policy in favor of arbitration relies, in
part, upon the inherent fairness of arbitration and the oversight of
the industry arbitration rules and procedures by the Securities and
Exchange Commission. See, e.g., McMahon, 482 U.S. at 233-34.
The decision below is inconsistent with the federal policies
articulated in these cases. It creates a convenient road map for a
plaintiff intent on avoiding arbitration and essentially says that an
arbitrator is incapable of deciding threshold issues of fiduciary
fraud or misrepresentation. It turns the advantage of arbitration
on its head by burdening the courts with deciding threshold
factual issues concerning the ertry into agreements. A better and
more efficient policy is to let arbitrators decide whether genera-
19
lized fraud claims are sufficient to release a claimant from an
arbitration obligation or whether a claimant’s acceptance of
contractual benefits from a brokerage firm for months or years at
a time constitutes acceptance of all terms of the governing
contract.
CONCLUSION
For these reasons, petitioners request that this Court accept
this matter for review.
Dated: March 14, 1994
Respectfully submitted,
Dawn M. SCHOCK
Counsel of Record
JOHN R. LOFTUS
KEESAL, YOUNG & LOGAN
Attorneys for Petitioners
CRUTTENDEN & COMPANY, TALLEY
MCNEIL & COMPANY, INC., AND
RosBERT C. CarRTY, JR.
GILBERT R. SEROTA
HOWARD, RICE, NEMEROVSKI,
CANADY, ROBERTSON, FALK & RABKIN
Attorneys for Petitioner
Sutro & Co., Inc.
"
la
SUPERIOR COURT OF CALIFORNIA
COUNTY OF VENTURA
LAW & MOTION MINUTE ORDER
HON. EDWIN M. OSBORNE
Reporter: R. JEFFREY
Clerk: BARBARA GALLISON
Bailiff: DOUGLAS BENTLEY
For: 2/19/92 Wednesday Dept: 43
4 5. 3:30 PM Case No: 119524
RoBERT A. LYNCH
vs.
CRUTTENDEN & COMPANY
Addl Info: Filing Date: 12/27/91
Case: FRAUD At Issue: 00/00/00
Trial:
Event: [D] MOTION TO COMPEL ARBITRATION & STAY
PROCEEDINGS (CRUTTENDEN & CO., TALLEY
McNEIL & CO. INC. & ROBERT CARTY JR.)
Pintff: LYNCH, ROBERT A. ATTY: P. GOLDENRING &
TRSTEE: LYNCH FAMILY TRUST GOLDENRING
DATED 05-30-79
Pintff: LYNCH, BETTY LAVERNE ATTY: P. GOLDENRING &
TRSTEE: LYNCH FAMILY TRUST GOLDENRING
DATED 05-30-79
Defndt: CRUTTENDEN & COMPANY Atty: KEESAL YOUNG & LOGAN
— TALLEY MCNEIL & COMPANY Atty: KEESAL YOUNG & LOGAN
NC.
Defndt: SuTRO & Co. INC.
Defndt: CARTY Jr., RoBERT C. Atty: KEESAL YOUNG & LOGAN
Defndt: SUN LIFE ASSURANCE DAWN M. SCHOK
COMPANY OF CAN
Defndt: Loomis SAYLes & Co.
© Courts Motion © Moving Party Request © Stipulation
O OFF CALENDAR O No Appearance 2 No Proof of Service
O CONTINUED TO: —_/__/__ at_____ p.m. _in courtroom
Judge
LMI
MOTION(S) are submitted @ with O without argument.
@ MOTION(S): O GRANTED @ DENIED IN ITS ENTIRETY
O WITHOUT PREJUDG OC SUBMITTED
2a
© PURSUANT TO THE FORMAL ORDER NOW SIGNED BY THE
COURT
© DEMURRER: 0 OVERRULED © SUSTAINED on grounds
O prf O Deft O is granted days leave within
which to (© amend () answer.
O
© Notice waived. @& Counsel for @ Pitf O Deft O is
directed to @ give notice. © prepare and serve a formal order.
SHEILA GONZALEZ, Superior Court
Executive Officer and Clerk
By: Barbara Gallison
Deputy Clerk
3a
SUPERIOR COURT OF CALIFORNIA
COUNTY OF VENTURA
LAW & MOTION MINUTE ORDER
HON. STEVEN Z. PERREN
Reporter: Sharon Lewis
Clerk: Julie Camacho
Bailiff: M. Hanks
For: 3/12/92 Thursday Dept. 30
4. 3:30 P.M. Case No. 119524
Rospert A. LYNCH
VS.
CRUTTENDEN & COMPANY
Addl Info: Filing Date: 12/27/91
Case: FRAUD At Issue: 00/00/00
Trial:
Event: [D] MOTION TO COMPEL ARBITRATION AND MTN
TO STAY FURTHER PROCEEDINGS IN THIS
ACTION (SUTRO & CO. INC.)
Pintff: LyNCH, ROBERT A. ATTY: PETER GOLDENRING &
TRSTEE: LYNCH FAMILY TRUST GOLDENRING
DATED 05-30-79
Pintff; LyNcH, Berry LAVERNE ATTY: GOLDENRING &
TRSTEE: LYNCH FAMILY TRUST GOLDENRING
DaTED 05-30-79
Defndt: CRUTTENDEN & COMPANY Atty: KEESAL YOUNG & LOGAN
Defndt: TALLEY MCNEIL & COMPANY Atty: KEESAL YOUNG & LOGAN
INC.
Defndt: SuTRo & Co. INC. Atty: GILBERT R. SEROTA
Defndt: CarTy Jr., ROBERT C. Atty: KEESAL YOUNG & LOGAN
Defndt: SUN LIFE ASSURANCE
COMPANY OF CAN
Defendt: Loomis SayLes & Co.
© Courts Motion © Moving Party Request © Stipulation
O OFF CALENDAR © No Appearance OC No Proof of Service
O CONTINUED TO: —_/__/__ at_____ p.m. _ in courtroom
Judge
LMI
@ MOTION(S) are submitted @ with CO without argument.
@ MOTION(S): O GRANTED @ DENIED
C WITHOUT PREJUDG O SUBMITTED
4a
© PURSUANT TO THE FORMAL ORDER NOW SIGNED BY THE
COURT ’
O DEMURRER: 0 OVERRULED © SUSTAINED on grounds
O pf O Deft O is granted days leave within
which to © amend C) answer.
0
© Notice waived. & Counsel for @ Pitf O Deft O is
directed to @ give notice. © prepare and serve a formal order.
SHEILA GONZALEZ, Superior Court
Executive Officer and Clerk
BY: JULIE CAMACHO
Deputy Clerk
Le ORE RRA
Sa
COURT OF APPEAL OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SIX
2ND CASE of Level | printed in FULL format.
Ropert A. LYNCH et al.,
Plaintiffs and Respondents,
v.
CRUTTENDEN & COMPANY ¢t al.,
Defendants and Appellants.
Nos. B065198, B066610
18 Cal. App. 4th 802; 1993 Cal. App.
LEXIS 912; 22 Cal. Rptr. 2d 636; 93 Cal. Daily Op.
Service 6712; 93 Daily Journal DAR 11395
September 2, 1993, Filed
NOTICE: [*1] THE LEXIS PAGINATION OF THIS DOC-
UMENT IS SUBJECT TO CHANGE PENDING RELEASE
OF THE FINAL PUBLISHED VERSION.
SUBSEQUENT HISTORY: Review Denied December 16,
1993, Reported at: 1993 Cal. LEXIS 6481.
PRIOR HISTORY: Superior Court County of Ventura. Super.
Ct. No. 119524. Hons. Edwin M. Osborne and Steven Z. Perren,
Judges.
COUNSEL: Howard, Rice, Nemerovski, Canady, Robertson &
Falk, and Gilbert R. Serota and John M. Chaisson for Defendants
and Appellants Sutro & Co., Inc.
Keesal, Young & Logan, Dawn M. Schock and John R. Loftus
for Defendants and Appellants Cruttenden & Company and
Talley McNeil & Company, Inc. and Robert C. Carty, Jr.
Goldenring and Goldenring and Peter A. Goidenring for Plaintiffs
and Respondents.
JUDGES: GILBERT, Acting P.J.; YEGAN, J., and WIL-
LARD, J., *concurring.
* Retired judge of the superior court sitting under assignment by
the Chairperson of the Judicial Council.
6a
OPINION BY: GILBERT
OPINION:
GILBERT, Acting P.J.:
This consolidated appeal concerns the denial of two motions to
compel arbitration made in the same case. We hold that the
plaintiffs’ allegations of fraud are sufficient to support the denial
of the motions, and that the denial does not conflict with Prima
Paint Corp. v. Flood & Conklin (1967) 388 U.S. 395, 18 L. Ed. 2d
1270, 87 S. Ct. 1801.
FACTS
Robert and Betty Lynch filed an action [*2] against Crut-
tenden & Company, Talley McNeil & Company, Robert C. Carty
(hereinafter collectively “Cruttenden”) and Sutro & Co. The
complaint alleged that Carty, a licensed securities broker, acted as
the agent of and in conspiracy with Cruttenden and Sutro,
licensed brokerage houses, to defraud the Lynches by taking
excessive fees.
The complaint states that the Lynches became personal friends
of Carty in 1989. Carty encouraged them to have trust and
confidence in him and to rely on him for financial advice. The
Lynches opened accounts with Cruttenden and Sutro through
Carty and transferred money to the defendants. Carty instructed
the Lynches to sign various documents from time to time. He told
the Lynches the documents were “... necessary to effect the
continuing reliance and trust by [the Lynches in Carty and the
other defendants}, and that the documents did not affect legal
rights and it was not necessary that they be read.” The Lynches
also alleged Carty told them the documents were necessary to
open accounts and were only a formality. The Lynches claimed
they were not advised of the contents of the documents and were
not provided “. . any substantial opportunity to read” [*3] them.
Cruttenden and Sutro responded by making separate motions
to compel arbitration. Attached to the moving papers were
various documents purportedly signed by the Lynches. The docu-
ments contained arbitration clauses in bold type requiring the
Ta
parties to submit disputes to arbitration before the National
Association of Securities Dealers, Inc. or the New York Stock
Exchange.
The Lynches filed affidavits in opposition to the motions.
Robert Lynch declared that he attended school only to the ninth
grade. Prior to meeting Carty he never had a securities account
and never executed stockbroker or brokerage house agreements.
Lynch first met Carty in 1988. Carty manipulated Lynch into
believing Carty was a very close friend and confidante. At the
beginning Carty did not mention managing Lynch’s money, but
spent considerable time befriending him, visiting him at his home
or office as often as twice a week. In the course of the developing
friendship Lynch told Carty that he owned a cement business he
built from scratch. Lynch said that he was considering selling the
business and investing the proceeds for retirement and for his
children.
Eventually the Lynches sold the business for $5,000,000. [*4]
They wanted to invest what remained after taxes and Carty asked
the Lynches to allow him to manage the funds. Lynch said he had
no experience with stocks. Carty told Lynch repeatedly that he
should trust him and rely on his expertise and management skills.
Carty told Lynch that documents he was asked to sign were
“ ‘standard’ ” and a “ ‘formality.’ ” Carty specifically discouraged
Lynch from reading the documents, repeatedly referring to their
friendship and the level of trust that had developed. At no time
was Lynch told that the documents were contracts or that they
contained an arbitration clause or otherwise limited their rights.
Lynch declared that as result of churning and mismanagement
by Carty and the other defendants, the Lynches’ funds have been
reduced by well over half while defendants earned approximately
$1,000,000 in commissions. An affidavit submitted by Betty
Lynch affirmed her husband’s declarations.
The trial court separately denied each motion and the moving
parties appealed.
DISCUSSION
Our task on appeal is simply to determine whether the plaintiffs
have alleged in their complaint and affidavits sufficient facts to
warrant a trial on the validity of the arbitration [*5] agreement.
(See Strotz v. Dean Witter Reynolds, Inc. (1990) 223 Cal. App.
3d 208, 211272 Cal. Rptr. 680, fn. 2.)
The Federal Arbitration Act provides that a written arbitration
provision in a contract involving commerce is valid and enforce-
able “save upon such grounds as exist at law or in equity for the
revocation of any contract.” (9 U.S.C. § 2.) Of course, it is well
recognized that fraud may be a ground for the revocation of a
contract. (See 1 Witkin, Summary of Cal. Law (9th ed. 1987)
Contracts, § 392, p. 356; Rest.2d Contracts, § 7 com. b, at p. 22.)
Cruttenden and Sutro contend, however, that none of the
statements alleged to have been made by Carty were false. Carty
was alleged to have represented that the documents were stan-
dard, a formality and did not affect the rights of the Lynches. It
may be true that the documents were standard, but it is untrue
that the documents were a formality and that they did not affect
the Lynches’ rights.
If the agreements are enforceable, the Lynches have waived
their right to a jury trial, limited their discovery rights, and waived
their right to appeal. It is anomalous for Cruttenden and Sutro to
argue [*6] on appeal they are trying to enforce an agreement
against the Lynches, and to also argue the agreement is a
formality and does not affect the Lynches’ rights.
Cruttenden and Sutro claim the Lynches cannot rely on their
own failure to read the agreements. However, California cases
have consistently taken the position that where a plaintiff is
unfamiliar with the nature of the documents used in the stock-
brokerage business and is deceived as to the nature and effect of
the documents, failure to read the documents is excusable. (See
Main v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1977) 67
Cal. App. 3d 19, 30-33, 136 Cal. Rptr. 378; Strotz v. Dean Witter
Reynolds, Inc., supra, 223 Cal. App. 3d 208, 218-219; Rice v.
Dean Witter Reynolds, Inc. (1991) 235 Cal. App. 3d 1016, 1025-
1026.) The general rule in California is that even in the absence
7 aly Ree
+ ee
9a
of a fiduciary relationship plaintiff's failure to read a contract is
excusable where reliance is placed on the misrepresentations of
the other party. (1 Witkin, Summary of Cal. Law (9th ed. 1987)
Contracts, § 407, p. 366.) The Restatement of Contracts Second
adopts a similar position. (See {*7] Rest.2d Contracts, § 177.)
Our recent decision in Rowland v. Paine Webber Inc. ( 1992) 4
Cal App.4th 279 is not to the contrary. There Rowland was a
former securities broker and employee of Paine Webber, and
“presumably, he was familiar with all industry contract terms
necessary to open an investment account.” (Id. at p. 286.) Here
the representation that the documents did not affect the Lynches’
rights is equivalent to a representation that the documents are not
contracts, a deception as to the nature and effect of the
documents.
Cruttenden and Sutro stated at oral argument that the Lynches
never alleged they did not know they were signing contracts. But
the Lynches alleged they were ignorant of the falsity of Carty’s
representations and believed them to be true. The Lynches could
not have believed Carty’s representation that the documents
would not affect their legal rights, and also have known they were
signing contracts.
As to Carty’s status as a non-lawyer, a person may be found to
have reasonably relied on the legal opinion of a non-lawyer where
the recipient of the opinion is in a relationship of trust and
confidence, or where [*8] the recipient of the opinion reasonably
believes that, as compared with himself, the maker of the opinion
has special knowledge or skill with respect to the subject matter.
(Rest.2d, Contracts, §§ 169, 170; and com. b to § 170 [reliance
may be reasonable where, for example, a real estate broker or
insurance agent gives an opinion of law on a routine matter within
his competence to a layman]; 5 Witkin, Summary of Cal. Law
(9th ed. 1988) Torts, §§ 680, 682, 684, pp. 781-782, 784, 785.)
The Lynches’ allegations are sufficient to bring them within either
of these circumstances.
Cruttenden and Sutro’s reliance on Cohen v. Wedbush, Noble,
Cooke, Inc. (9th Cir. 1988) 841 F.2d 282 is misplaced. There the
Cohens signed a margin account agreement containing an arbitra-
10a
tion clause. In response to Wedbush’s motion to compel arbitra-
tion the Cohens alleged that Wedbush did not explain the
meaning and effect of the arbitration clause. The court held: “We
know of no case holding that parties dealing at arm’s length have
a duty to explain to each other the terms of a written contract. We
decline to impose such an obligation. . . .” (Id. at p. 287.) [*9]
In response to the Cohens’ allegation that they were advised
“* either expressly or implicitly . . .’” that the agreement did
not compromise any of their rights, the court replied, “Even
assuming the dubious proposition that an ‘implicit’ statement bya
non-lawyer regarding a question of law can constitute fraud, the
alleged statement here cannot fairly be characterized as fraud in
the inducement as to the arbitration clause.” (Cohen v. Wedbush,
Noble, Cooke, Inc., supra, 841 F.2d 282, 287.)
The court also said that even assuming the alleged statements
were specifically directed to the arbitration clause there was no
fraud because reliance on a misrepresentation is not reasonable
when plaintiff could have ascertained the truth by reading the
contract. (Cohen v. Wedbush, Noble, Cooke, Inc., supra, 841 F.2d
282, 287.)
In Cohen the court assumed the parties were dealing at arm’s
length. The case did not discuss whether Wedbush was acting in a
fiduciary capacity. Where a person reposes trust and confidence in
another and the person in whom such confidence is reposed
obtains control over the other person’s affairs, a fiduciary relation-
ship [*10] is created. (Ford v. Shearson Lehman American
Express, Inc. (1986) 180 Cal. App. 3d 1011, 1020, 225 Cal. Rptr.
895.) Here the Lynches allege that Carty obtained control over
their funds through the trust and confidence they reposed in him
as a friend and a purported expert in investments. The Lynches
also alleged that Carty was acting as the agent of Cruttenden and
Sutro. This is sufficient to allege that the defendants were acting
in a fiduciary capacity.
Second, as we will discuss below, we fail to see why a represen-
tation that signing a document will not affect the Lynches rights,
cannot fairly be characterized as fraud going directly as to the
arbitration clause, a clause that clearly affects the Lynches’ rights.
lla
Third, in stating there could be no fraud if the plaintiffs did not
read the contract, the Cohen court ignored California authority
and the Restatement, which are to the contrary.
II
Cruttenden and Sutro next contend that even if the elements of
fraud are sufficiently alleged, arbitration is required under Prima
Paint Corp. v. Flood & Conklin, supra, 388 U.S. 395.
Prima Paint contracted to buy F & C’s business. The parties
also contracted [*11] that F & C would serve as a consultant to
Prima Paint for six years. The consulting agreement contained an
arbitration clause. No reference was made in the agreements to
possible financial problems which F & C might encounter.
Shortly after the first payment was due under the consulting
agreement, Prima Paint notified F & C’s attorney that their client
had fraudulently represented it was solvent and able to perform its
contractual obligations, whereas it was insolvent and intended to
file a petition in bankruptcy. Prima Paint filed suit for recision on
the ground of fraud in the inducement. F & C sought to stay the
court proceeding pending arbitration.
In upholding the order staying proceedings pending arbitration,
the court pointed out that there was a conflict in the federal courts
of appeals over whether “. . . arbitration clauses as a matter of
federal law are ‘separable’ from the contracts in which they are
imbedded. . . .” (Prima Paint Corp. v. Flood & Conklin, supra,
388 U.S. 395, 402.) If separable, the arbitration clause is broad
enough to encompass claims of fraud “. . . where no claim is made
that fraud was directed to the arbitration clause (*12] itself... .”
(Ibid.)
The Supreme Court held the answer was to be found in section
4 of the Federal Arbitration Act. “Under § 4, . . . the federal court
is instructed to order arbitration to proceed once it is satisfied that
‘the making of the agreement for arbitration or the failure to
comply [with the arbitration agreement] is not in issue.’ Accord-
ingly, if the claim is fraud in the inducement of the arbitration
clause itself — an issue which goes to the ‘making’ of the agree-
ment to arbitrate — the federal court may proceed to adjudicate
12a
it. But the statutory language does not permit the federal court to
consider claims of fraud in the inducement of the contract
generally.” (Prima Paint Corp. v. Flood & Conklin, supra, 388
U.S. 403-404, fns. omitted.)
Cruttenden and Sutro argue that here the claim of fraud goes
to the inducement of the contract generally, and does not go to
the making of the agreement for arbitration. We disagree. The
alleged representation that the documents were a formality and
did not affect the rights of the Lynches, was tantamount to a
representation that documents contained no arbitration clause.
Because the representation is in direct [*13] conflict with the
existence of an arbitration clause, the making of the agreement
for arbitration is in issue and the court has no power to order
arbitration under section 4 of the Act.
That the misrepresentation may go to some or even all of the
clauses of the contract as well as the arbitration clause does not
mean that fraud in the making of agreement for arbitration is not
in issue. Prima Paint does not stand for the proposition that a
fraudulently induced arbitration agreement becomes valid and
enforceable if the fraud also goes to other parts of the contract.
Prima Paint simply interpreted section 4 of the Act as requiring
the arbitration provision of the contract to be treated as a separate
agreement for the purpose of determining whether it is
enforceable.
The fraud alleged in Prima Paint concerned misrepresentation
of a party’s financial condition. In contrast to the instant case
there was no allegation in Prima Paint that a party was misled as
to the existence or effect of the arbitration clause. Here, it is
alleged the parties were misled as to the very existence of the
arbitration clause. In Prima Paint the fraud went to the making of
the contract generally, not to the [*14] making of the arbitration
clause.
California cases are unanimous in holding that Prima Paint
does not require arbitration where, as alleged here, the plaintiffs
were so deceived they did not understand they were contracting.
(Ford v. Shearson Lehman American Express, Inc., supra, 180
CalApp.3d 1015, 1028-1029; Strotz v. Dean Witter Reynoids,
13a
Inc., supra, 223 CalApp.3d 208, 217; Rice v. Dean Witter
Reynolds, Inc., supra, 235 CalApp.3d 1016, 1023; compare,
Rowland v. Paine Webber Inc., supra, 4 Cal. App. 4th 279, where
plaintiff, a retired stockholder, could not have been so deceived.)
Such a fraud necessarily raises issues that go directly to the
making of the agreement to arbitrate. Thus under section 4 of the
Act the court may not order arbitration unless those issues are
resolved in court against the plaintiffs.
Cruttenden and Sutro seek to distinguish Ford, Strotz and Rice
on the ground that in those cases the defendants exerted complete
dominion and control over the plaintiff's affairs. But we know of
no requirement that plaintiffs allege complete dominion or control
in [*15] order to sustain an allegation of fraud. We agree with the
trial court judges. The allegations in the instant case are sufficient.
The orders denying the defendants’ motions for arbitration are
affirmed. Costs on appeal are awarded to the Lynches.
YEGAN, J., and WILLARD, J., concurring.
l4a
IN THE SUPREME COURT
OF THE
STATE OF CALIFORNIA
Second Appellate District
Division Six
No. B065198/B066610
S035471
IN BANK
ROBERT A. LYNCH Et Al.,
Respondents
Vv.
CRUTTENDEN & COMPANY Et ALl.,
Appellants.
Appellants’ petition for review DENIED.
LUCAS
Chief Justice
15a
a at
DAWN M. SCHOCK (121746)
JOHN R. LOFTUS (126841)
KEESAL, YOUNG & LOGAN
A Professional Corporation
Catalina Landing — 310 Golden Shore
Post Office Box 1730
Long Beach, California 90801-1730
Telephone: (310) 436-9051
Attorneys for Defendants
Cruttenden & Company, Talley McNeil &
Company, Inc., and Robert C. Carty, Jr.
SUPERIOR COURT OF CALIFORNIA
COUNTY OF VENTURA
ROBERT A. LYNCH, BETTY LAVERNE
LYNCH, individually and as
TRUSTEES OF THE ROBERT A. LYNCH
AND Betty LAVERNE LYNCH FAMILY
TRUST DATED May 30, 1979,
Plaintiffs,
VS.
CRUTTENDEN & COMPANY, TALLEY
MCNEIL & COMPANY, INC., SUTRO &
Co., INC., ROBERT C. CARTY, Jr.,
SUN LIFE ASSURANCE COMPANY OF
CANADA, SUN FINANCIAL GROUP,
Loomis SAYLES & Co., Dogs !
through 100, inclusive,
Defendants.
No. 119524
MEMORANDUM OF POINTS AND AUTHORITIES
IN SUPPORT OF MOTION TO COMPEL
ARBITRATION AND STAY PROCEEDINGS;
DECLARATIONS OF ROBERT C. CARTY, Jr.,
MARILYN FRANCE, AND JOHN R. LoFtus
Date: February 19, 1992
Time: 3:30 p.m.
Dept: 43
16a
TABLE OF AUTHORITIES
Federal Cases
Page
Bayma v. Smith Barney, Harris Upham & Co., 784 F.2d
1023 (9th Cir. 1986) ........ ce eee reece eeeee 19a, 47a, 60a
Cauble v. Mabon Nubert & Co., 594 F. Supp. 985 (1984) ..
Cohen v. Wedbush, Noble, Cooke, Inc., 841 F.2d 282 (9th Cir.
FOND ciaiecdcccvcsecesdéccesevcescsss 9a, 10a, 18a, 19a, 47a
Dean Witter Reynolds Inc. v. Byrd, 410 U.S. 213, 84 L.Ed. 2d
158, 105 S. Ct. 1238 (1985)... 2... eee eee eee eee eens 54a
Gonick v. Drexel Burnham Lambert Inc., Fed. Sec. L. Rep.
(CCH) 9 94,127 (Dec. 1988).... 6... cece cere e ee ees
Kelly v. Einbinder [1989-90 Transfer Binder], Fed. Sec. he
Rep. (CCH) 9 94,963 (1990) ......--.ee eee ee eeeees
Letizia v. Prudential-Bache Sec. Inc., 802 F.2d 1185 (9th Cir.
TOG) oc ccccccccccecesesoncsacccessaceencesovccees 18a
Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460
U.S. 1, 74 L.Ed. 2d 765, 103 S. Ct. 927 (1983)
seedecunvesesedpecevucoeeescousetasec 18a, 47a, 54a, 6la
Nesslage v. York Sec. Inc., 823 F.2d 231 (8th Cir. 1987)...
Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395,
18 L.Ed. 2d 1270, 87 S. Ct. 1801 (1967) ... 6a, lla, 12a, 62a
Rodriguez de Quijas v. Shearson/American Express Inc., 490
U.S. ___., 104 L.Ed. 2d 526, 109 S. Ct. 1917 (1989)
jdeuceéeucccdee,¥eewest dees Cases eceevess 18a, 47a, 55a
Shearson/American Express, Inc. v. McMahon, 482 U.S. 220,
96 L.Ed. 2d 185, 107 S. Ct. 2332 (1987) .. 18a, 47a, 54a, 60a
17a
TABLE OF AUTHORITIES
State Cases
Page
Berman v. Dean Witter & Co., 44 Cal. 3d 999, 119 Cal. Rptr.
i of). ewer rer TTT rer rrerretT Tries tie,
Ford v. Shearson/American Express, 180 Cal. App. 3d 1011,
225 Cal. Rptr. 895 (1986) ......cccccccccccseces 10a, 12a
Green v. Mt. Diablo Hosp. Dist., 207 Cal. App. 3d 63, 254 Cal.
Rete. GBD CIGGD) «oc cccccccvcsccceccccsvceveccesces
Rice v. Dean Witter Reynolds, Inc., 1 Cal. Rptr. 265 (1991)
Strotz v. Dean Witter Reynolds, Inc., 223 Cal. App. 3d 208,
272 Cal. Retr. GEO (1990) 0. ccccccccccccccccecvess 8a
Tonetti v. Shirley, 173 Cal. App. 3d 1144, 219 Cal. Rptr. 616
SRE seb s'esepcicncenecusacocsesuedcs 19a, 47a, 54a, 60a
Van Luven v. Rooney Pace, 195 Cal. App. 3d 1201, 241 Cal.
PN DER LISS cece Ghicentveceveveensenssescucess
DORE BE CHI, ducal sta cotiecdxeess coneeicwacess
State Statutes
oe Be fe @ 5 bof rere rTT err Tree 8a, 12a, 53a
Cal, Cate Com FUG. © EAA COD 0 cc ccc ccccccccstveces
Ce, Core Cae, PU OB Bae ccc ccesccasscvctesvvcussscs
18a
III.
LEGAL ARGUMENT
A. THE FEDERAL ARBITRATION ACT REQUIRES
THAT THE COURT ENFORCE THE PARTIES’
AGREEMENT TO ARBITRATE CONTROVERSIES.
The issue of whether an agreement to arbitrate is valid is
determined by federal law. See Shearson/American Express, Inc.
v. McMahon, 482 U.S. 220, 96 L.Ed. 2d 185, 107 S. Ct. 2332
(1987); see also Letizia v. Prudential-Bache Sec. Inc., 802 F.2d
1185, 1187 (9th Cir. 1986). Section 2 of the Federal Arbitration
Act, 9 U.S.C. § 2 (1982), provides that a contract involving
interstate commerce and containing an arbitration clause shall be
enforceable, “save upon such grounds as exist at law or in equity
for the revocation of any contract.” As the transactions for the
plaintiffs’ account involve national securities exchanges, this is a
contract evidencing a transaction involving commerce. Cohen v.
Wedbush, Noble, Cooke, Inc., 841 F.2d 282, 284 (9th Cir. 1988).
Two recent opinions of the U.S. Supreme Court have reaf-
firmed the strong federal policy in favor of arbitration. Shear-
son/American Express, Inc. v. McMahon, supra; Rodriguez de
Quijas v. Shearson/American Express Inc., 490 US. aun, 106
L.Ed. 2d 526, 109 S. Ct. 1917 (1989). The Supreme Court stated
in McMahon:
The Arbitration Act thus establishes a federal policy
favoring arbitration, Moses H. Cone Memorial Hosp. v.
Mercury Const. Corp., 460 U.S. 1, 74 L.Ed. 2d 765, 103
S. Ct. 927 (1983), requiring that we vigorously enforce
agreements to arbitrate.
470 U.S. 213, 221 (1985). In an earlier decision, the Court
stated:
Section 2 is a Congressional declaration of a liberal federal
policy favoring arbitration agreements, notwithstanding any
state substantive or procedural policies to the contrary. . . .
The Arbitration Act establishes that, as a matter of federal
law, any doubts concerning the scope of arbitratable issues
19a
should be resolved in favor of arbitration, whether the
problem at hand in the construction of the contract language
itself or an allegation of waiver, delay or like defense to
arbitrability.
Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., supra,
460 U.S. at 24-25).
The Ninth Circuit Court of Appeals has held that, on issues of
arbitration, federal law preempts state law. Bayma v. Smith
Barney, Harris Upham & Co., 784 F.2d 1023, 1025 (9th Cir.
1986). California courts have also recognized that federal law
preempts state law on issues of arbitrability. Tonetti v. Shirley,
173 Cal. App. 3d 1144, 1148-50, 219 Cal. Rptr. 616, 618-20
(1985).
20a
GILBERT R. SEROTA, STATE BAR NO. 75303
HOWARD, RICE, NEMEROVSKI, CANADY,
ROBERTSON & FALK
A Professional Corporation
Three Embarcadero Center, 7th Floor
San Francisco, California 94111
Telephone: 415/434-1600
Attorneys for Defendant
Sutro & Co., Incorporated
SUPERIOR COURT OF THE STATE OF CALIFORNIA
FOR THE COUNTY OF VENTURA
RoBERT A. LYNCH, BETTY LAVERNE LYNCH,
individually and as TRUSTEES OF THE ROBERT A. LYNCH AND
Betry LAVERNE LYNCH FAMILY TRUST
DATED May 30, 1979,
Plaintiffs,
VS.
CRUTTENDEN & COMPANY, TALLEY MCNEIL & COMPANY,
INc., Sutro & Co., INC., ROBERT C. CARTY, JR.,
SUN LIFE ASSURANCE COMPANY OF CANADA,
SUN FINANCIAL Group, Loomis SAYLES & Co., DoEs |
through 100, inclusive,
Defendants.
Case No. 119524
DEFENDANT SUTRO & CO., INCORPORATED’S
PETITION TO
COMPEL ARBITRATION AND MOTION TO STAY
FURTHER PROCEEDINGS IN THIS ACTION
Date: March 12, 1992
Time: 3:30 p.m.
Courtroom: 30
2la
Petitioner Sutro & Co., Incorporated (“Sutro”), pursuant to
Code of Civil Procedure Sections 1281.2 and 1292.4, petitions
this Court for an order pursuant to Sections 3 and 4 of the Federal
Arbitration Act (9 U.S.C. §§ 3,4), compelling Plaintiffs to arbi-
trate all claims asserted in their Complaint against Sutro, and for
an order staying further proceedings in this action until such
arbitration has been concluded. Sutro alleges as follows:
1. On or about February 27, 1989, Plaintiffs Robert A. Lynch
and Betty Laverne Lynch, signed a written Client Agreement. A
true and correct copy of that agreement is attached to the
Declaration of Gilbert R. Serota filed herewith as Exhibit A
which provides in paragraph 9 that:
“... all controversies which may arise between you and us
concerning any transaction or the construction, performance,
or breach of this or any other agreement between you and us,
whether entered into prior, on or subsequent to the date
hereof, shall be determined by arbitration. . . .”
2. On or about April 5, 1989, Plaintiffs signed a written
“Client Agreement-Fee in Lieu of Commission.” A true and
correct copy of that agreement is attached to the Declaration of
Gilbert R. Serota filed herewith as Exhibit B which provides that:
“Client agrees that any dispute arising out of the services
described in this Agreement shall be resolved by arbitration
before the National Association of Securities Dealers, Inc.
on the New York Stock Exchange.”
3. The “Client Agreement-Fee in Lieu of Commission” was
temporarily amended on December 8, 1989. A true and correct
copy of the Amendment is attached to the Declaration of Gil-
bert R. Serota filed herewith as Exhibit C.
4. On or about July 28, 1989, Plaintiffs signed a written
Option Agreement. A true and correct copy of that agreement is
attached to the Declaration of Gilbert R. Serota filed herewith as
Exhibit D which provides that:
“... all controversies which may arise between us concerning
any transaction or the construction, performance, or breach
of this or any other agreement between us, whether entered
22a
into prior, on, or subsequent to the date hereof, shall be
determined by arbitraticn.”
5. Based on Plaintiffs’ Complaint, in or after 1989, a contro-
versy arose between Sutro and Plaintiffs concerning Plaintiffs’
securities transaction and investment relationship with Sutro.
6. The controversy, as alleged by Plaintiffs, is as follows:
Defendants made certain false representations and withheld cer-
tain material facts regarding Plaintiffs’ accounts and handled
Plaintiffs’ accounts in such a manner as to effectuate a profit for
its own gain in a manner which subjected Plaintiffs to high
investment risks and resulted in breaches of contract and fiduciary
duty.
7. On January 31, 1992, Sutro requested Plaintiffs to arbitrate
in accordance with the terms of the above-mentioned Client
Agreement, Client Agreement-Fee in Lieu of Commission, and
Option Agreement, but Plaintiffs have refused to do so by failing
to respond to Sutro’s request. Subsequently, on February 7, 1992,
Sutro elected the New York Stock Exchange as the arbitral
forum, as it was entitled to do pursuant to the terms of the
agreement when Plaintiffs failed to respond.
8. The arbitration agreements herein alleged require that
Sutro and Plaintiffs arbitrate such controversy in its entirety.
WHEREFORE, Petitioner Sutro prays:
1. That the Court order Plaintiffs to arbitrate the said dispute
as alleged in the Complaint before the New York Stock
Exchange;
2. For an order staying all proceedings in this action pending
determination of this petition and, if granted, pending arbitration
of the controversy herein alleged; and
23a
3. For such other and further relief as the Court deems
appropriate.
DATED: February 20, 1992.
GILBERT R. SEROTA
HOWARD, RICE, NEMEROVSKI,
CANADY, ROBERTSON & FALK
A Professional Corporation
By
GILBERT R. SEROTA
Attorneys for Defendant
Sutro & Co., Incorporated
24a
SUPERIOR COURT OF THE STATE OF CALIFORNIA
FOR THE COUNTY OF VENTURA
Ropert A. LYNCH, BETTY LAVERNE LYNCH,
individually and as TRUSTEES OF THE ROBERT A. LYNCH AND
Betry LAVERNE LYNCH FAMILY TRUST
DaTED May 30, 1979,
Plaintiffs,
vs.
CRUTTENDEN & COMPANY, TALLEY MCNEIL & COMPANY,
INc., SuTRO & Co., INC., ROBERT C. CarRTY, JR.,
SuN LIFE ASSURANCE COMPANY OF CANADA,
SUN FINANCIAL Group, LOOMIS SAYLES & Co., Dogs |
through 100, inclusive,
Defendants.
Case No. 119524
Courtroom 43
Hon. EDWIN M. OSBORNE, Judge
REPORTER’S TRANSCRIPT OF PROCEEDINGS
Wednesday, February 19, 1992
APPEARANCES:
For Plaintiffs: _GOLDENRING & GOLDENRING
By: Peter A. GOLDENRING
6050 Seahawk Street
Ventura, California 93003
For Defendants:
KEESAL, YOUNG & LOGAN
By: DAwn M. SCHOCK
Catalina Landing
310 Golden Shore
Long Beach, California 90801-1730
RHONDA JEFFREY, CSR 5364
Official Reporter Pro Tempore
800 South Victoria Avenue
Hall Of Justice, Room 313
Ventura, California 93009
~ eter titan ieee Be
25a
Journal, Mago v. Shearson Lehman Hutton. It is a Ninth Circuit
case, but it reemphasizes again the rule in Prima Paint. If the
fraud alleged goes to the inducement of the contract as a whole as
opposed to the arbitration clause within the contract, then that is
an issue which must be referred to arbitration.
Now, the way the plaintiffs have presented their argument in
light of the Strotz case really goes against the rule in Prima Paint.
THE COURT: I hear what you are saying if the Ninth Circuit
is interpreting — is stating correctly the rule. But when I look
back at Strotz and Rice, I can’t distinguish the type of allegation
that was held sufficiently.
MS. SCHOCK: But I think that the Mago case stands for the
proposition that Strotz interpreted, as the plaintiffs in this case
interpreted, that is that they are alleging that the fraud went to
their signing the nine agreements, that that interpretation of
Strotz has been preempted by federal law and it is not valid.
Now, the only way Strotz and Rice can make sense is that if the
fraud is so severe the plaintiff is so beguiled as to not understand
the act of contracting itself. That is made most clear in Rice
where Mrs. Rice was actually told that what she was signing was
not a contract for arbitration services.
THE COURT: I am familiar with the facts. It may be that the
Ninth circuit case which I have not read is correct, but it is not
binding on this court. And Strotz and Rice I think are right or
wrong. So I don’t think it does me any good or anyone else any
good to further analyze those.
As I say, the motion to compel arbitration and stay proceedings
is denied.
MR. GOLDENRING: I will give notice, Your Honor, because
there are other people who were served, but have not appeared
yet.
MS SCHOCK: Thank you, Your Honor. At one point the
parties were discussing limited discovery as to the arbitration
question itself. Since that is the only issue that is before the court
at this time, we would propose that discovery —
26a
THE COURT: Let me address that in this way. I believe what
is before the court is whatever Strotz and Rice say the issues are
as far as fraud in the inception. But I am not prepared in advance
to start trying to give an outline as to what does and does not fit
within that. If that, as I rather suspect, becomes a matter of
contention, that will require more than my sitting here and
winging it for guidance.
MR. GOLDENRING: Just for the record, Your Honor, it’s
our view that the entire case is before the court until some
bifurcated proceeding occurs.
27a
IN THE COURT OF APPEAL OF THE STATE OF
CALIFORNIA
SECOND APPELLATE DISTRICT
ROBERT A. LYNCH, BETTY LAVERNE LYNCH,
individually and as TRUSTEES OF THE ROBERT A. LYNCH AND
Betty LAVERNE LYNCH FAMILY TRUST
DATED May 30, 1979,
Respondents,
vs.
CRUTTENDEN & COMPANY, TALLEY MCNEIL & COMPANY,
INc., SuTRO & Co., INc., RoBERT C. CarRTY, JR.,
SUN LIFE ASSURANCE COMPANY OF CANADA,
SUN FINANCIAL Group, Loomis SAYLES & Co., Dogs |
through 100, inclusive,
Appellants.
No.
Superior Court
No. 119524
APPEAL FROM THE SUPERIOR COURT
OF VENTURA COUNTY
HONORABLE STEVEN Z. PERREN
JUDGE PRESIDING
REPORTER’S TRANSCRIPT ON APPEAL
APPEARANCES:
For the Respondents: GOLDENRING & GOLDENRING
By: PETER A. GOLDENRING
Attorney at Law
6050 Seahawk Street
Ventura, California 93003
For the Appellants: HOWARD, RICE, NEMEROVSKI, CANADY,
ROBERTSON & FALK
By: GILBERT R. SEROTA
Attorney at Law
Three Embarcadero Center,
7th Floor
San Francisco, California 94111
SHARON LINDLEY Lewis, CSR 6822
as Reporter
South Victoria Avenue
Volume I of I Suite 313
Pages | through 18 = Ventura, California 93009
|
28a
SUPERIOR COURT OF THE STATE OF CALIFORNIA
FOR THE COUNTY OF VENTURA
HON. STEVEN Z. PERREN, JUDGE
ROBERT A. LYNCH, et. al.,
Plaintiffs,
vs.
Cruttenden & Company, et. al.,
Defendants.
COURTROOM 22
No. 119524
REPORTER’S TRANSCRIPT ON APPEAL
Thursday, March 12, 1992
APPEARANCES:
For the Plaintiffs: PETER GOLDENRING
Attorney at Law
For the GILBERT SEROTA
Defendants: Attorney at Law
Reported by: SHARON LINDLEY LEWIS, CSR 6822
Official Reporter
800 South Victoria Avenue
Room 313
Ventura, California 93009
29a
VENTURA, CALIFORNIA
THURSDAY, MARCH 12, 1993
AFTERNOON SESSION
THE COURT: Lynch vs. Cruttenden, et al. Tentative is to
deny the motion to compel arbitration and to do so based upon a
statement that could not have been made better than, “‘Gee, if all
it takes is an allegation of this nature, then everybody can avoid
arbitration,” and the answer is you’re absolutely right.
MR. SEROTA: May I address that, your Honor?
THE COURT: You may.
MR. SEROTA: I’m Gil Serota, representing Sutro & Com-
pany, the moving party.
Your Honor, we move to compel arbitration on the basis of
three contracts and a fourth written document which amends one
of the prior contracts, and I put those in evidence through my
declaration, my authentication of that which is consistent with
Evidence Code 400. There’s been no denial by the Lynchs that
they signed all those contracts.
THE COURT: Then you want a motion for summary judg-
ment on the issue, essentially, don’t you?
MR. SEROTA: Pardon me?
THE COURT: Isn’t this then a motion for summary
judgment?
MR. SEROTA: On arbitration?
THE COURT: Uh-huh.
MR. SEROTA: Typically, your Honor, under the Federal
Arbitration Act as well as California Code of Arbitration Proce-
dures these things are handled as law and motiun matters with a
petition to compel, which is what we filed, accompanied by a
noticed motion for hearing.
THE COURT: Okay. As I understand it, then, if I deny your
motion then the trial is had, almost a bifurcated trial issue. The
fact that I deny your motion doesn’t necessarily mean that the
entirety of the contract becomes a matter of the state court, but
30a
rather the first issue tried for whatever trial judge managing it
would be the issue of fraud in the inception or however it’s
characterized. I think that’s the most recent phrase that’s used.
You try that issue, and it seems to me that issue can be framed
on motion for summary adjudication or summary judgment, if it’s
based upon your declarations and there’s a factual issue, if there’s
fraud in the inducement, I have by declarations under penalty of
perjury an allegation by both of the plaintiffs to the effect that
were induced into this.
Hey, somebody got it right. There’s no sense in avoiding that.
And once you get to that point there has to be a factual
adjudication of the issue. They swear under penalty of perjury
they were led down the primrose path and induced to sign
something they didn’t know to be a contract.
You know, if I’m sitting here looking at this, I’m a bit cynical
that a man who runs a cement business and has a 5 million dollar
business was led down the primrose path. I think it’s a hoak. But,
you kow what, I can’t make that finding on this record and I don’t
think I’m permitted to. He makes a declaration that put it in the
declaration of the State Court. It may be true, but that’s a
decision of fact and that’s beyond the declarations that I have
before me.
MR. SEROTA: If I could, that’s exactly the point I'd like to
address for just a moment, if I could.
THE COURT: Go ahead.
MR. SEROTA: I think the Court — First of all, you correctly
identified the procedural context that we’re in and what will
happen, as I understand it, if the motion is denied and there’s no
appeal that overrules it.
The question before the Court, as I understand it, then, is are
these declarations sufficient under Federal law and under the
California State Court law, which is interpreting Federal law, to
avoid arbitration at this stage and that’s the point I want to
address, because I don’t think they are.
THE COURT: Go ahead.
3la
MR. SEROTA: We all agree the Federal law controls I think
and we certainly agree Strotz and Rice says that and we all also
agree that Federal law compels a presumption in favor of arbitra-
tion, and if there are any doubts that those are in favor of
arbitration.
The question then becomes, if you have contracts in front of
you what do they have to allege to get back into court for at least
the determination of fraud in the inception? There’s two things —
there’s two things that I think get you into court, and I don’t think
they’ve alleged either one in any reasonable or particular way.
Number one is if you read Prima Paint and read Strotz —
THE COURT: Didn’t read Prima but studied Strotz.
MR. SEROTA: Strotz says that an allegation of a fraudulent
scheme in general is not enough.
THE COURT: True.
MR. SEROTA: You have to allege fraud in the agreement to
arbitrate itself. That’s one way.
THE COURT: Not exactly.
MR. SEROTA: Well —
THE COURT: If I—
MR. SEROTA: At Strotz in the Cal.App.3d that I have,
Page 214 it says,
“The issue of fraud is to be decided by the Court only
where it is alleged the arbitration agreement itself was
obtained by fraud or is part of a fraudulent scheme. It is not
sufficient to allege simply that the arbitration agreement is
located in a contract which was otherwise procured by
fraud.”
And that’s in the middle of middle paragraph, Page 214. Here
there is —
THE COURT: I’m looking at Page 214. Are you talking about
the paragraph with the word, “thus’’?
Fi cieenineeeeieeinneenenneeemea
32a
MR. SEROTA: Yes. And if you look at the second sentence it
begins with the issue of fraud.
THE COURT: But you have to read that. You’re not reading
the whole paragraph. You're construing Prima Paint but the key
language is 218, Head Note 3, that’s the key line.
MR. SEROTA: Well, I want to address the Court’s attention
to the analysis that gets you there, because I agree the head note
says, “Allegations of fraud in the inception.”
THE COURT: I didn’t read just the head note, I read the text.
Judge is supposed to do more.
MR. SEROTA: I agree with it. What we’re talking about at
this point in time is what the allegation of fraud in the inception
that gets you this far.
THE COURT: Here the allegation made by the Lynchs under
their declaration is Mr. Carty wormed his way into their confi-
dence; having done so, put himself in a position having known
they were about to retire, when in a moment of weakness the
plaintiff said, “You know, I’ve been thinking of what to do with
my five million.”
Mr. Carty, well schooled in the oily practice of the securities
exchange says, “I have a plan for you. Here, let me have your
money and I'll take care of it. Just sign these meaningless
documents.” That’s Mr. — plaintiff's allegations.
MR. SEROTA: In fact, what they say is the documents were
standard and a formality. That’s what’s —I want the Court to
focus on that for a second.
THE COURT: Go ahead.
MR. SEROTA: The first way I see these cases saying you get
out of arbitration if you were induced to enter arbitration agree-
ment by fraud. That’s where somebody says there’s no arbitration
agreement in here. Don’t worry. Sign it. That's not this case.
THE COURT: Correct.
33a
MR. SEROTA: Okay. Question then is fraud in the inception,
and what does that mean, and therefore what do you have to
allege?
THE COURT: Uh-huh.
MR. SEROTA: In all these cases, Lynch, Strotz and Ford,
what it means is that the person did not know that he was even
entering a contract that’s —
THE COURT: That’s basically true.
MR. SEROTA: Okay.
THE COURT: Or if he knew he was entering a contract, it
wasn’t a contract for anything he knew about it.
MR. SEROTA: In Rice they describe Ford and they say the
promisore is deceived as to the nature of his act.
THE COURT: Right.
MR. SEROTA: Does not know what he was signing, did not
intend to enter into a contract.
THE COURT: Right.
MR. SEROTA: Okay. Now, I do not believe that in these
declarations of the Lynchs you will see anything that says that
when they signed the contracts with Sutro on four different dates,
on four different occasions they didn’t know that they were
entering into a contract. Because they say they were told it was a
formality, they were told it was standard, but they don’t say that
we didn’t believe that there was a contract, and even if they did it
would be rebutted by the letter that we produced as Exhibit 3 or
Exhibit C to my declaration, because in Exhibit C —
THE COURT: Just a second. Bear with me. Here we are. Yes.
MR. SEROTA: Exhibit C is a letter.
THE COURT: Uh-huh.
MR. SEROTA: Doesn't contain any hidden anything. It says
to temporarily amend our client agreement.
THE COURT: Uh-huh.
34a
MR. SEROTA: Now, how is it that someone could sign
something that amends something else whose only purpose is to
amend something else and claim that they didn’t know they were
entering into a contract or had entered into a contract.
THE COURT: And the answer is I haven’t a clue. That’s what
the contract trial is going to be about.
MR. SEROTA: But they haven’t alleged — my point is, your
Honor, that they have not alleged in their papers that they were
deceived as to the nature of this document. They don’t even
address this document in their papers. They don’t even explain it.
They don’t even make the initial showing that would get them out
of arbitration.
To get them out of arbitration they would have to say and
explain in some kind of particularized way how they could sign
four separate dates, four separate documents and not know they’re
entering into a contract. That’s not in their declaration, and that’s
why I don’t think they’ve made the showing that is required under
a fair reading of Strotz and Rice when put into context with
Federal law.
Because fraud in the inception just doesn’t mean that I say this
whole thing was part of a general fraudulent scheme. You've got
to say that I either — the specific agreement to arbitrate was
fraudulently induced, which they don’t or I didn’t know I was
signing any contract at all, which they don’t.
Now, these things may well have been formalities, they may
well have been standard, but that doesn’t mean they didn’t know
they were signing a contract.
And if a declarant doesn’t explain in his opposition to the
motion, how this letter could have come about amending a
contract, he doesn’t meet the burden to get over the presumption
of arbitration, and that’s why I think it would be wrong to read
Strotz and Rice so broadly that all they have to do is allege, as
you said, a broad scheme of trust and reliance and I was told it
was a formality because that’s not enough.
That puts you in Prima Paint. That puts you in what Strotz said
is if it’s a general fraudulent scheme it’s for the arbitrator. If it’s
aerate
35a
specific to the arbitration agreement that’s for the judge, and then
there’s this fraud in the inception which is like Mrs. Rice. Mrs.
Rice thought she was making a loan. I mean there’s no allegation
of that here. They knew they were investing their money with
Sutro. They hoped they weren’t signing their life away, but
nobody says they were signing their life away. Okay.
In Ford, the other case they rely on, the poor man had given
blank checks and credit cards and bill paying authority and all the
rest to the guy who induced him to enter into this agreement.
That’s not this case.
And so my point is that to avoid the exception undermining the
rule, you’ve got to take an approach that says do they really meet
this standard, do they really prove or allege in their declarations
fraud in the inception. And I don’t think there’s anything in their
declarations that say I didn’t know I was contracting. I didn’t
know I was entering into a formal relationship. They say standard
and formal. Again, I don’t think that’s enough.
That’s really our point on this, and I would just urge the Court,
and maybe you don’t have copies — I can hand them up. Cohen
vs. Wedbush, Noble and Cooke, Ninth Circuit case said it’s not
enough to allege, for example, that the arbitration agreement was
undisclosed or that it was adhesive or unconscionable. That
doesn’t get you a separate trial on fraud and Hurlbut case from
the District of Massachusetts is the same thing.
It's not enough to say I wasn’t allowed to read it, wasn’t given
legal advice, it wasn’t explained to me. That doesn’t get you in
fraud in the inception or to a separate trial on the issue of
arbitration, and that’s where I think the failing is in this case and
in the generalized declarations.
And I would be happy to hand those federal cases up to the
Court if you’d like to look at them.
MR. GOLDENRING: If I might respond, your Honor.
THE COURT: You may.
MR. GOLDENRING: What counsel is attempting to do is
make this the summary judgment motion or bifurcated trial.
36a
A reading of Strotz and Rice made clear that all that is at issue
now is whether there is an allegation and if there is an allegation
then the petition is denied. At that point, at the defendant's
election they can seek the bifurcated trial or not if they choose.
That's then their choice.
The argument of counsel is essentially identical to that which
was placed before Judge Osborne by Talley McNeil and Crut-
tenden. The Sutro documents were before Judge Osborne in the
petition.
If you look at the original basically Mr. Carty was Sutro,
started the relationship, moved over to Talley McNeil, which
became Cruttenden, and took the Lynchs along with him, and all
of the documents were before Judge Osborne in the Talley
McNeil, Cruttenden petition and the identical argument was
made.
What the argument really is when you cut through the niceties
of language of counsel is that if there’s an understanding that
there’s a business relationship then ipso facto arbitration follows.
Unless someone can claim that they don’t have any basis to
understand that there’s a business relationship, then they are
required to proceed to arbitration.
In Strotz the language is very clear of the Court each time.
According to plaintiff, defendants advised her that these, the
documents being presented were simply standard forms required
for her act and there was nothing to worry about. She also stated
in her declaration that she signed these — this document in
reliance on defendant's assurances that these documents were
merely standard forms.
In Rice, again, she’s presented standard forms and both con-
text. There’s no allegation by the plaintiff that they didn’t know
that there was a business relationship occurring.
To interpret Strotz and Rice in that fashion is to essentially gut
them. What both of those cases talk about is that in the context of
the fiduciary relationship is there the allegation that meets either
the inception or permeation theory, and I don’t want to lose sight
of the fact that both theories exist in California law and they have
37a
not been reconciled as specifically articulated in the Rice case
that they rule only on inception.
THE COURT: Permeation seems to be in its death row in all
candor.
MR. GOLDENRING: I’m not disagreeing, but specifically the
Rice court, the latest articulation makes clear it is not ruling on
the permeation doctrine and simply on the inception.
What is critical it seems to me, your Honor, is the language of
the Court in its holding in Strotz because there’s no ambiguity in
that holding and counsel's articulations to the contrary.
It is not Federal law by which what we measure the allegation
— by which we measure the allegation. The fact that a Federal
court back east or Ninth Circuit is talking about what they think
the Federal Arbitration Act means is irrelevant, because none of
those cases talk about California law which is the measure under
Strotz and Rice.
In Strotz the Court says, without any limitations as to the
nature of the relationship it says:
“Accordingly, we hold absolutely, we hold that allegations
of fraud in the inception or execution of a contract which
contains an agreement to arbitrate are sufficient to place the
issue of fraud before the Court and deny a petition to compel
arbitration.”
Here the plaintiff has alleged that the —
THE COURT: I've got that.
MR. GOLDENRING: That’s where we're at, and as much as
defendants want — and I mean it’s the argument that I heard in
front of Judge Osborne. As much as they want to try to narrow
those cases, the holdings of those cases are not narrow at all.
Once the allegation is made then the matter is a triable issue of
fact in the context of the fiduciary relationship that exists and
that’s a determination that occurs in the bifurcated trial if that’s
what the defendants choose to proceed with. That’s their option
once the Court denies the motion, if the Court so chooses.
38a
There is no language that narrows either Strotz or Rice in their
holdings to the blind, deaf, dumb person who doesn’t even know
that they’re signing a document. That’s not what those cases hold
and that’s not what the facts are. In both cases they were standard
documents and both cases they were told, don’t read them, don’t
worry, they’re just standard formalities for us to take care of you.
And what has occurred in this case is my clients were presented
with various documents at various points in time in the context of
this, and that’s what occurred, and our allegations, your Honor,
are sufficient indeed under Strotz.
It is probably true that the allegations in the Complaint alone
are sufficient if the Complaint had been verified, because the
Court talks in Strotz about allegations in the complaint as well as
by declaration, but I present both so that this Court has a feeling
not just from the pleading what its nature is but also as to the
nature of its relationship so the Court has some depth in terms of
it, but the measure of the depth, or the truthfulness of the
declarations or the believability of my clients or the weighing of
that evidence is not what occurs today.
Once the allegations are married that’s enough for us to go to
the next step, which is the trial on the bifurcated proceeding
where a trier of fact makes those determinations.
MR. SEROTA: Your Honor, four brief points to make in
rebuttal.
First of all, let me address Strotz. We, all three of us read the
words that have been quoted by you, by Mr. Goldenring and
myself, but that’s conclusion allegations of fraud in the inception.
The question is are there allegations of fraud in the inception that
are sufficient to get past this motion.
In Strotz at the bottom of 317 is where they define what is
fraud in the inception, which is we agree that if a party is unaware
he is signing any contract, obviously he also is unaware he is
agreeing to arbitration. I think that’s the definition of fraud in the
inception and I certainly — ’
Strotz was clarified by the Court in Rice which clearly stated
that fraud in the inception is someone who is deceived as to the
39a
nature of her act and actually did not know what she was signing.
Again, there a loan agreement masquerading as a contract. That’s
point one.
THE COURT: Other way around I think.
MR. SEROTA: They were — she thought it was a loan agree-
ment. Okay.
Point two is: The statement that you should ignore Federal
cases in making this determination. Okay. I think that’s clearly
wrong.
And in Moses Cone vs. Mercury Construction, United States
Supreme Court, addressing Section 2 of the Federal Arbitration
Act, which is what we’ve invoked here, says that Section 2 is a
congressional declaration of a liberal Federal policy favoring
arbitration agreements notwithstanding any state substantive or
procedural policies to the contrary. The effect of the section is to
create a body of Federal substantive law applicable to any
arbitration agreement within the coverage of the act. That doesn’t
allow counsel’s argument that you can ignore Federal law.
The final point is, if you follow Federal law and you look at the
Ninth Circuit case in Cohen vs. Wedbush, Noble and Cooke,
there the Cohens say they were never advised that the margin
agreement compromised any of their rights. That’s the allegation.
The Ninth Circuit says:
“Even assuming the dubious proposition that an implicit
statement regarding a question of law can be fraud, this is not
fraud in the inducement of the arbitration agreement, and
this allegation goes to arbitration.”
So where I come out again on this is in the — taking their
declarations at face value, as I think you need to, there is not an
allegation that they were fraudulently induced to enter the arbi-
tration agreement itself. No one lied about its existence or
nonexistence or anything.
THE COURT: I think that’s where we part. That’s exactly
what can be gleaned from this starting at Page 7, Line 2 and
running through Page 8, Line 12.
40a
MR. SEROTA: They said they didn’t know.
THE COURT: They start off by saying, “We were told ignore
these documents. They're mere formalities. Just give us the
signature. Don’t worry about them.” They worry on the fiduciary,
whom they place trust and hope, and unbeknownst to them
contained in the documents that they were told expressly to
ignore was language, which had they known it was there they
would have never signed and specifically intended not to waive.
I think it gets it.
MR. SEROTA: Cohen vs. Wedbush, Noble and Cooke says no
way on that, exactly on that. It says that requiring reasonable
investigation by the parties claiming fraud is appropriate in cases
where the explicit language of the contract directly contradicts
the alleged misrepresentation.
We see no unfairness in expecting parties to read contracts
before they sign them, and that this reasoning is particularly
pervasive in the context of arbitration clauses where permitting
plaintiffs to present their claims te a jury would frustrate the very
policies these clauses and the arbitration act itself are meant to
promote, the very thing we were induced not to read this. We
were told that this didn’t compromise our rights is absolutely
rejected by the Ninth Circuit and they’re sent to arbitration.
That’s Federal law.
And quite frankly I still don’t think that’s inconsistent with
Strotz and Rice, because I don’t think that that’s fraud in the
inception. I don’t think your failure to read or even being induced
not to read an entire agreement is fraud in the inception.
Fraud in the inception is don’t worry, it’s not a contract. Don’t
worry, it’s only a loan agreement or it’s a receipt, you know, this is
your receipt. They don’t say that. And I know perhaps I’m hitting
myself — my head against a brick wall at this point but I think —
THE COURT: I've been called other things in my time.
MR. SEROTA: But the ruling itself being a brick wall. But I
think that read in the context of what Strotz and Rice stand for in
4la
terms of fraud in the inceptions, these declarations don’t make it
and obviously they can’t make it or they would have made it.
In other words, if they were told, you're not signing a contract,
this doesn’t have to do with a relationship between us, it’s a
receipt or it’s something else, they would have said that in the
declarations, they don’t.
And I would just respectfully ask your Honor to take one more
look at this perhaps before making a final decision. Thank you.
THE COURT: Actually I spent about, cumulative time about
two hours on this file.
MR. SEROTA: I didn’t mean to imply that you had not.
THE COURT: I didn’t understand that to mean that. And I
did it because I as utterly ignorant of the subject area.
But the only thought that comes to my mind you have my
sympathy but not my ruling. I think that what Strotz has done is
to eviserate the rule. I think it’s a terrible case. I think it’s a bad
law and counter to public policy and I think it tries to abrogate
the Federal rule. I can give you a list of reasons.
I think it is the, for whatever reason, a means by which the
state courts have tried to usurp Federal prerogative. And there’s
some good reasons for that. I think they were principally brought
about if 1 —I think it was the paint case, because under these
agreements not only did they go this far but moved people in
different jurisdictions where they couldn't protect themselves, and
that’s probably where this thing found its genesis and at its
inception had pretty good reason. This is all by way of dicta at
best, but I read it and was surprised at the language.
It does do exactly what you said it can do, but I think you're
absolutely correct. I think that’s exactly what the plaintiffs can do.
I think they’re going to be hard pressed to prevail.
Mr. Goldenring’s protestations to the contrary notwithstanding |
think he’s got a tough road to hoe in this case. But if he wants to
lengthen it out and pick up that hoe, I guess that’s his right.
Motion is denied.
42a
MR. GOLDENRING: Your Honor, I'll give notice. There are
other parties.
THE COURT: Please. This one will go up on appeal with its
companion.
MR. SEROTA: We haven’t made that determination.
THE COURT: I thought I saw a Notice of appeal.
MR. SEROTA: Cruttenden has appealed and we have not
decided that.
MR. GOLDENRING: Also a third defendant not subject to
the arbitration clause, the insurance company who’s answered. So
it’s going to be an interesting case procedurally.
I'll give because of all the different players.
THE COURT: Thank you.
(Proceedings concluded for the day.)
43a
REPORTER’S CERTIFICATE
STATE OF CALIFORNIA eo
COUNTY OF VENTURA
I, SHARON LINDLEY LEWIS, CSR No. 6822, Certified
Shorthand Reporter of the State of California, for the County of
Ventura, do hereby certify that the foregoing, pages | through 18,
comprise a full, true and correct transcript of the proceedings had
in the above-entitled action on February 12, 1992.
Dated at Ventura, California, this 12th day of August, 1992.
SHARON LINDLEY LEWIS, CSR 6822
Official Reporter
2d Civ. No. B065198
COURT OF APPEAL, STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT, DIVISION SIX
Ropert A. LYNCH, BETTY LAVERNE LYNCH, individually and
as TRUSTEES OF THE RoBERT A. LYNCH AND BETTY
LAVERNE LYNCH FAMILY TRUST DATED MAY 30, 1979,
Plaintiffs and Respondents,
vs.
CRUTTENDEN & COMPANY, TALLEY MCNEIL & COMPANY,
Inc., SuTRO & Co., INc., RoBerT C. CarTY, JR., SUN LIFE
ASSURANCE COMPANY OF CANADA, SUN FINANCIAL GROUP,
Loomis SAYLES & Co., Dogs | through 100, inclusive,
Defendants and Appellants.
Ventura County Superior Court
Case No. 119524
(Hon. Edwin M. Osborne)
(Notice of Appeal Filed February 27, 1992)
APPELLANTS’ OPENING BRIEF
Dawn M. ScHOcK (121746)
JOHN R. Lorrus (126841)
KEESAL, YOUNG & LOGAN
A Professional Corporation
Catalina Landing —
310 Golden Shore
Post Office Box 1730
Long Beach, California 90801-1730
Telephone: (310) 436-2000
Attorneys for Appellants
CRUTTENDEN & COMPANY,
TALLEY McNEIL &
COMPANY, INC., and ROBERT
C. CARTY, JR.
4Sa
TABLE OF AUTHORITIES
Federal Cases
Page
Alascom Inc. v. ITT N. Electric Co., 727 F.2d 1419 (9th
CRE, BODO oc ccc nnceccdondeccscdcececsoscccivscs
Bayma v. Smith Barney, Harris Upham & Co., 784 F.2d
1023 (9th Cir. 1986) ........ce eee eeeeeeee 19a, 47a, 60a
Cohen v. Wedbush, Noble, Cooke, Inc., 841 F.2d 282
(Sth Cit. 19GB). cccccccsces 9a, 10a, 18a, 19a, 47a, 55a, 60a
Moseley v. Electronic Facilities, 374 U.S. 167, 10 L. Ed. 2d
SIG, 63 GS. Ce. IBIS (IDES) 2. cccccccvcccceccvcess
Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp.,
460 U.S. 1, 74 L. Ed. 2d 765, 103 S. Ct. 927 (1983)
ceuises beled bbw ds eevaeeeneeeaeeeen 18a, 47a, 54a, 61a
» SPPPPrrryrirr rier te
Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S.
395, 18 L. Ed. 2d 1270, 87 S. Ct. 1801 (1967)
pdoabésbascecerssaeseseueteseserestnds 6a, lla, 12a, 62a
Rodriguez de Quijas v. Shearson/American Express Inc.,
490 U.S. 477, 104 L. Ed. 2d 526, 109 S. Ct. 1917 (1989)
sovendovesseueeneeccesn éstadesanveveseosne 18a, 47a, 55a
Shearson/American Express, Inc. v. McMahon, 482 U.S.
220, 96 L. Ed. 2d 185, 107 S. Ct. 2332 (1987)
Seweee c¥nsedesensodusedenwesscauaens 18a, 47a, 54a, 60a
Zolezzi v. Dean Witter Reynolds Inc., 787 F.2d 1447 (9th
- e PeerrrrrrrrrrTTrerirrrrriit Tie
State Cases
Ford v. Shearson Lehman/American Exp., Inc., 180 Cal.
App. 3d 1015, 225 Cal. Rptr. 895 (1986) ........... 12a
Heily v. Superior Court, 202 Cal.App.3d 255, 248 Cal.
Rptr. 673 (1988) .........ccccreccccsccescvevenes
Main v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., Cal.
App.3d 19, 136 Cal. Rptr. 378 (1977) ..........-+-. 8a
46a
TABLE OF AUTHORITIES
State Cases
Rice v. Dean Witter Reynolds, Inc., 235 mines 1016,
1 Cal. Rptr. 2d 265 (1991) .. seweteeneaaeret Ra,
Rowland v. Paine Webber, Inc., 92 Daily ened D.A.R.
3353 (1992)
Stansfield v. Starkey, 220 er 59, 269 Cal. Rptr.
337 (1990) cat oe chk neeeave eee
Strotz v. Dean Witter Reynolds, Inc., 223 Cal. APD 3d 208,
272 Cal. Rptr. 680 (1990) | reac 8a,
Tonetti v. Shirley, 173 Cal.App.3d 1144, 219 Cal. Rptr.
616 (1985) .. eee .... 19a, 47a, 54a,
Federal Statutes
DUSBC. OU GC OOG . co cccvndsvecsncsccscscccssscuees
9 U.S.C. $2 (1982)... 0653 SPAS Try 8a, 18a, 47a,
State Statutes
Code of Civil Procedure §1294(a) 0.0.6.6 6 6c c eee eens
a ae 9a, 13a, 47a, 48a, 55a,
Page
l3a
60a
l2a
60a
60a
47a
Vil.
LEGAL ARGUMENT
A. THE FEDERAL ARBITRATION ACT REQUIRES
THAT THE COURT ENFORCE THE PARTIES’
AGREEMENTS TO ARBITRATE CONTROVERSIES
It is beyond dispute that the present controversy is governed by
the Fedevai Arbitration Act (“FAA”). 9 USC § 1 et seq See,
Rowland v. Painewebber, 92 Daily Journal D.A.R. 3353 (1992),
Shearson/American Express, Inc v. McMahon, 482 US. 220, 96
L.Ed. 2d 185, 107 S. Ct. 2332 (1987). Section 2 of the FAA
provides that a contract involving interstate commerce and con-
taining an arbitration clause shall be enforceabie, “save upon such
grounds as exist at law or in equity for the revocation of any
contract.” 9 USC § 2 (1982). As the transactions in the Lynches’
accounts involve national securities exchanges, this is a contract
evidencing a transaction involving commerce. Cohen v Wedbush,
Noble, Cooke, Inc., 41 F.2d 282, 284 (9th Cir. 19838).
The enactment of the FAA and the cases interpreting it
emphasize the strong national policy in favor of arbitration.
Shearson/American Express, Inc. v. McMahon. supra, Rodriguez
de Quijas v. Shearson/American Express, Inc, 490 U.S. 477, \04
L.Ed. 2d 526, 109 S. Ct. 1917 (1989). That policy is so strong
that:
any doubts concerning the scope of arbitrable issues should
be resolved in favor of arbitration, whether the probiem at
hand is the construction of the contract language itself or an
allegation of waiver, delay or like defense to arbitrability
Moses H. Cone Memorial Hosp. v. Mercury Constr Corp., 460
US. 1, 24-25, 74 L. Ed. 2d 765, 103 S. Ct. 927 (1983)
Both state and federal courts have recognized that on issues of
arbitration, federal law preempts state law Bayma v. Smith
Barney, Harris Upham & Co., 784 Fld 1023, 1025 (9th Cir.
1986): Tonetti v. Shirley, 173 Cal. App. 3d 1144, 1148-50, 219
Cal. Rptr. 616, 618-20 (1985)
4ka
B. THE LYNCHES' FACTUAL ALLEGATIONS ARE
INSUFFICIENT TO VITIATE THE AGREEMENTS TO
ARBITRATE
1 The Lynches Make No Allegation That Any Statement
Related to Signing the Agreements Was False
Since the trial court denied Cruttenden’s motion to compel
arbitration, this court has rendered a decision which, Cruttenden
submits, is dispositive of the primary issues in this appeal.
49a
2d Civil No. B066610
COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT (DIVISION SIX)
Ropert A. LyncH, Betry LAVERNE LYNCH,
individually and as TRUSTEES of the
Ropert A. LYNCH AND Betty LAVERNE LYNCH
FAMILY Trust Datep May 22, 1979
Plaintiffs and Respondents,
v.
Sutro & Co., INC.
Appellant and Defendant
Ventura County Superior Court
Case No. 119524
(Hon. Steven Z. Perren)
(Notice of Appeal Filed April 20, 1992)
APPELLANT'S OPENING BRIEF
GILBERT R. SEROTA
JOHN M. CHAISSON
HOwarD, RICE, NEMEROVSKI,
CANADY, ROBERTSON & FALK
A Professional Corporation
Three Embarcadero Center, 7th Floor
San Francisco, California 94111
Telephone: 415/434-1600
Attorneys for Appellant-Defendani,
Sutro & Co. Inc.
50a
TABLE OF AUTHORITIES
Cases
Alascom Inc. v. ITT N. Elec. Co.,, 727 F.2d 1419 (9th Cir
Cohen v. Wedbush, Noble, Cooke, Inc, ®41 F.2d 282
(9th Cir. 1988) ............. Ga, 10a, 1Ba, 19a, 47a, 55a, 60a
Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213 (1985) = 54a
Erickson. Arbuthnot, McCarthy, Kearney & Walsh, Inc. v
100 Oak Street, 35 Cal. 34 312 (1983)
Ford v. Shearson Lehman American Express, Inc, \80
Cal. App. 3d 1011 (1986) . 10a, |2a
Main v. Merrill Lynch. Pierce, Fenner & Smith, Inc, 67
Cal. App. 3d 19 (1977) ... Ra
Moseley v. Electronic & Missile Facilities, 474 U.S. 167
Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp.,
460 U.S. 1 (1983) ...... rari _, Ba, 47a, 54a, 6la
Perry v. Thomas, 482 U.S. 483 (1987)... 0.666 6c eee 54a, 6la
Pierson v. Dean Witter Reynolds, Inc. 742 F.2d 334 (7th
Cig, 19BED ..cccccvecdeeebebeeesbocsoncehreeeeves
Prima Paint Corp. v. Flood & Conklin Mfg. Co, 388
U.S. 395 (1967) ..ccccvcvccssccassevcess 6a, lla, 12a, 62a
Rice v. Dean Witter Reynolds, Inc., 235 Cal. App. 3d 1016
(1DD1) ..ccccccccesccccevecvcsessccsveseersoseses 8a, l3a
Rodriguez de Quijas v. Shearson/American Express Inc.,
490 U.S. 477 (1989) 2... cece reece eceeeeees 18a, 47a, 55a
Rowland v. Paine Webber, Inc, 4 Cal. App. 4th 279
(1992) ..ccicccccnnuceuewevesss« 9a, 13a, 47a, 48a, 55a, 60a
Shearson/American Express, Inc. v. McMahon, 482 U.S.
220 (1987) oc ccvcccccccccescsecceesveces 18a, 47a, 54a, 60a
Southland Corp. Keating, 465 U.S. | (1984) ..... 54a, 60a, 6la
Standfield v. Starkey, 220 Cal. App. 3d 59 (1990)......
Sla
TABLE OF AUTHORITIES
CASES
Page
Strotz v. Dean Witter Reynolds, Inc., 223 Cal. App. 3d 208
(1990), cert. denied, _. US —, 111 S. Ct. 1417 (1991)
bebeuedcéaseedcowenseseas 8a, |2a
Tonetti v. Shirley, 173 Cal. App. 3d 1144 (1985)
... 19a, 47a, 54a, 60a
Van Luven v. Rooney Pace, Inc., 195 Cal. App. 3d 1201
(1987)
Zollezzi v. Dean Witter Reynolds Inc, 789 F.2d 1447 (9th
Cir. 1986)
Statutes and Regulations
9U S.C. §2 Ra. 18a, 47a, 53a, 60a
Fed. Rule Civ. Proc. 9(b)
Code Civ. Proc
§ 1281.2
§ 1294(a)
52a
the trial court below:
“The Court: I think that what Strotz has done is to eviscerate
the rule. I think it’s a terrible case. I think it’s bad law and
counter to public policy and I think it tries to abrogate the
Federal rule. I can give you a list of reasons.
I think it is the [sic], for whatever reason, a means by which
the state courts have tried to usurp federal prerogative.” (RT
17)
ARGUMENT
lL.
FEDERAL LAW REQUIRES THAT ALL OF
PLAINTIFFS’ CLAIMS BE ARBITRATED.
A. All of Plaintiffs’ Claims Are Governed By The Federal
Arbitration Act Which Required The Court To Enforce The
Agreements.
Although both the trial court and Plaintiffs’ counsel treated
federal arbitration law as almost an afterthought for the purposes
of Sutro’s motion, it is clear that the Federal Arbitration Act
(“the Act”) governs the present controversy and agreements to
arbitrate. In enacting the Act, Congress sought to establish a
federal policy in favor of the validity and enforceability of arbitra-
tion agreements which involve some aspect of commerce — such
as Plaintiffs’ agreements regarding securities investment. This is
made clear by the language of the Act itself. Section 2 provides
that:
“A written provision in any ... contract evidencing a trans-
action involving commerce to settle by arbitration a contro-
versy thereafter arising out of such contract or transaction, or
the refusal to perform the whole or any part thereof .. . shall
be valid, irrevocable, and enforceable, save upon such
as exist at law or in equity for the revocation of any
contract.” (9 U.S.C. § 2(emphasis added) )
Thus, an agreement to arbitrate contained in a contract which
pertains to any transaction involving commerce is governed by the
53a
Act. For these purposes, the Act preempts state law on questions
of enforceability, application of the agreement, and arbitrability.
See Perry v. Thomas, 482 U.S. 483, 489 (1987) (“Section 2,
therefore, embodies a clear federal policy of requiring arbitration
unless the agreement to arbitrate is not part of a contract
evidencing interstate commerce or is revocable . . . .”); Southland
Corp. v. Keating, 465 1, 11 (1984) (“We see nothing in the Act
indicating that the broad principle of enforceability is subject to
any additional limitations under the state law.”); Van Luven v.
Rooney Pace, Inc., 195 Cal. App. 3d 1201, 1206 (1987) (“The
act... preempts California law governing the validity of an
arbitration clause.”) Tonetti v. Shirley, 173 Cal. App. 3d 1144,
1147 (1985) (“Recent United States Supreme Court cases have
made it clear this federal statute preempts state law on the issue
of arbitrability of an agreement falling under the Act.”). This
preemption, and the federal policies favoring the validity of
arbitration agreements embodied in the Act, will operate despite a
party’s attempt to invoke state policies or laws to the contrary:
“Section 2 is a congressional declaration of a liberal policy
favoring arbitration agreements, notwithstanding any state
substantive or procedural policies to the contrary. The effect
of the section is to create a body of federal substantive law of
arbitrability, applicable to any arbitration agreement within
the coverage of the Act... . The Arbitration Act establishes
that, as a matter of federal law, any doubts concerning the
scope of arbitrable issues should be resolved in favor of
arbitration... .” (Moses H. Cone Memorial Hosp. v.
Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983) (emphasis
added) ).
It is this federal policy and body of substantive law of arbi-
trability which requires that both federal and state courts vigor-
ously enforce agreements to arbitrate which fall under the Act.
Shearson/American Express, Inc. v. McMahon, 482 U.S. 220,
226 (1987) (the Act requires rigorous enforcement of agreements
to arbitrate); Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213,
221 (1985) (uncertainties must be resolved in favor of arbitra-
tion); see also Rodriguez de Ouijas v. Shearson/American
Express, Inc., 490 U.S. 477, 478-83 (1989) (describing the
54a
federal policy favoring arbitration embodied in the Act); Rowland
v. Paine Webber Inc., 4 Cal. App. 4th 279, 284 (1992) (same).
There is no dispute that the arbitration agreements between Sutro
and Plaintiffs were governed by the Act and federal law. Con-
tracts which involve the national securities exchange are consid-
ered to be contracts involving “commerce” within the meaning of
Section 2. Cohen v. Wedbush, Noble, Cooke, Inc., 841 F.2d 282,
285 (9th Cir. 1988). Moreover, arbitration agreements between
brokerage firms and customers have been consistently enforced
under of the Act. E.g., Byrd, 470 U.S. at 217.
Given this backdrop of federal policies favoring arbitration and
requiring that uncertainties regarding agreements which fall
within the scope of the Act be resolved in favor of enforcement, it
is difficult to understand the trial court’s readiness to deny Sutro’s
motion to compel arbitration based on exceptions which the court
itself admitted were attempts to usurp federal law. This decision
becomes all the more surprising once the broad scope of the
agreements are examined.
55a
Sup. Ct. No.
2d Civ. Nos. B065198, B066610
Ventura Sup. Ct. No. 119524
IN THE
SUPREME COURT OF CALIFORNIA
RoBERT A. LYNCH, BeTry LAVERNE LYNCH,
individually and as TRUSTEES OF THE
ROBERT A. LYNCH AND Betty LAVERNE LYNCH
FAMILY TRUST DATED May 30, 1979,
Plaintiffs and Respondents,
vs.
CRUTTENDEN & COMPANY, TALLEY MCNEIL &
COMPANY, INC., SuTRO & Co., INC., ROBERT C. CARTY, JR.,
SUN LIFE ASSURANCE COMPANY OF CANADA,
SUN FINANCIAL Group, Loomis SAYLES & Co.,
Does | through 100, inclusive,
Defendants and Petitioners.
After Decision by the Court of Appeal,
Second Appellate District, Division Six
PETITION FOR REVIEW
DAWN M. SCHOCK (121746) GILBERT SEROTA (75305)
JOHN R. LOFTUS (126841) HOWARD, RICE,
KEESAL, YOUNG & LOGAN NEMEROVSKI, CANADY,
A Professional Corporation ROBERTSON & FALK
Catalina Landing A Professional Organization
310 Golden Shore Seventh Floor
Post Office Box 1730 Three Embarcadero Center
Long Beach, CA 90801-1730 San Francisco, CA 94111
Telephone: (310) 436-2000 Telephone: (415) 434-1600
Attorneys for Petitioners Attorneys for Petitioners
CRUTTENDEN & SUTRO & CO., INC.
COMPANY, TALLEY
McNEIL & COMPANY, INC.,
and ROBERT C. CARTY, JR.
56a
TABLE OF AUTHORITIES
Federal Cases
Page
Arnold v. The Arnold Corp., 920 F.2d 1269 (6th Cir. 1990) 7, 13
Bayma v. Smith Barney, Harris Upham & Co., 784 F.2d
ORD CH Ga. TIGER hci vccctevesesstcnsacas 19a, 47a, 60a
Bhatia V. Johnston, 818 F.2d 418 (Sth Cir. 1987) ...... 6, 15
Cohen v. Wedbush, Noble, Cooke, Inc. 841 F.2d 282
CO Ga Ges o's caveunecas 9a, 10a, 18a, 47a, 54a, 55a, 60a
Hamilton Life Ins. Co. of N.Y. v. Republic Nat'l Life Ins.
Co., 408 F.2d 606 (2d Cir. 1969) .............0085. 7
Jeske v. Brooks, 875 F.2d 71 (4th Cir. 1989) .......... 7
Macchiavelli v. Shearson Hammill, 384 F. Supp. 21 (E.D.
eR Pe ee ere Te errr Pr ere eer ee 60a
Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp.,
460 U.S. 1, 103 S. Ct. 927, 74 L. Ed. 2d 765 (1983)
POT UTTTUTTT CT Tree ree ete eee 18a, 19a, 6la
Perry v. Thomas, 482 U.S. 483, 107 S. Ct. 2520, 96 L. Ed.
RE cg carcavend cen easterraeee ens rer 54a, 61a
Pierson v. Dean Witter Reynolds Inc., 742 F.2d 334 (7th
Py ore ror CPT eee TTT eere 11
Prima Paint Corp. v. Flood & Conklin Mfg., 388 U.S. 395,
87 S. Ct. 1801, 18 L. Ed. 2d 1270 (1967)
scab oe ene pene teehee eeaees oCehaneeent 6a, lla, 12a, 62a
Republic of Nicaragua v. Standard Fruit Co., 937 F.2d 469
(9th Cir.), cert. denied, 117 L. Ed. 2d 516 (1991).... 60a
Schacht v. Beacon Ins. Co., 742 F.2d 386 (7th Cir. 1984)
Shearson/American Express, Inc. v. McMahon, 482 U.S.
220, 107 S. Ct. 2332, 96 L. Ed. 2d 185 (1987)
ieneusuedddseewcenedesedsaesde cates 18a, 47a, 54a, 60a
Southland Corp. v. Keating, 465 U.S. 1, 104 S. Ct. 852, 79
* FS £0 rrr rer 54a, 60a, 6la
Stateside Mach. Co. v. Alperin, 591 F.2d 234 (3d Cir.
PU ccc vcusdedcecdveecdsekyy sted erenceunne
57a
TABLE OF AUTHORITIES
FEDERAL CASES
Page
Teledyne, Inc. v. Kone Corp., 892 F.2d 1404 (9th Cir.
OES Une ad F500 0 046.05 6.0 CER CEPE CRED cans 6, 14
Three Valleys Mun. Water Dist. v. E.F. Hutton & Co., 925
er i MED sco aie carsakadewnv vies 6,14
Union Mutual Stock Life Ins. Co. of Am. v. Beneficial Life
fue. GO, Tee ree See CIE CEH, IDES) oo ccc ccccccess 7
Volt Info. Sys. Inc. v. Board of Trustees of the Leland
Stanford Junior Univ., 489 U.S. 468, 103 L. Ed. 2d 488
SEE IN Pe POR a A ea ee 6la
Walker v. KFC Corp., 728 F.2d 1215 (9th Cir. 1984) ...
State Cases
Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v.
100 Oak St., 35 Cal. 3d 312, 197 Cal. Rptr. 581 (1983)
Ford v. Shearson Lehman/American Express Inc., 180
Cal. App. 3d 1011, 225 Cal. Rptr. 895 (1986)...... 10a, 12a
Frame v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 20
Cal. App. 3d 668, 97 Cal. Rptr. 81! (1971) ......... 11
Macaulay v. Norlander, \2 Cal. App. 4th 1, 15 Cal. Rptr.
is laa cae ble ba eds ode 0's 10
Parr v. Superior Court, 139 Cal. App. 3d 440, 188 Cal.
AE ER a a ae 10
Rice v. Dean Witter Reynolds Inc., 235 Cal. App. 3d 1016,
DR OUND 6 ccc ccc vevecksceweeves 8a, l3a
Rowland v. PaineWebber Inc., 4 Cal. App. 4th 279, 6 Cal.
we SF. ee 9a, 13a, 47a, 48a, 55a, 60a
Stroiz v. Dean Witter Reynolds Inc., 223 Cal. App. 3d 208,
pap oe ER 8a, l2a
Tonetti v. Shirley, 173 Cal. App. 3d 1144, 219 Cal. Rptr.
aes ccialekcesewsews 19a, 47a, 54a, 60a
58a
TABLE OF AUTHORITIES
Page
Federal Statutes
pit Fame Ff PPPrere Terr TTY TR TET eT etree 60a
it i Se) | reer ert? er rrer 8a, 18a, 47a, 53a, 60a
Docketed Cases
Lynch v. Cruttenden & Co., 93 Daily Journal D.A.R. 11395
GU, Os CPE. vee cisenscussenesrtssceacasoecess
State Statutes
Code of Civil Procedure Section 1280, et seq...........
59a
IV.
THIS COURT SHOULD GRANT REVIEW BECAUSE THE
LOWER COURT’S INTERPRETATION OF THE
“PRIMA PAINT” DOCTRINE, AS IT APPLIES TO SE-
CURITIES ARBITRATION AGREEMENTS, IS IN DI-
RECT CONFLICT WITH CONTROLLING FEDERAL
LAW
A. FEDERAL LAW PREEMPTS CONFLICTING
STATE LAW IN THE PRESENT CASE.
It is beyond dispute that the present controversy is governed by
the FAA, 9 U.S.C. § 1, et seg. See Rowland v. PaineWebber Inc.,
4 Cal. App. 4th 279, 6 Cal. Rptr. 2d 20 (1992); Shear-
son/American Express, Inc. v. McMahon, 482 U.S. 220, 107 S.
Ct. 2332, 96 L. Ed. 2d 185 (1987). Section 2 of the FAA provides
that a contract involving interstate commerce and containing an
arbitration clause shall be enforceable “save upon such grounds as
exist at law or in equity for the revocation of any contract.” 9
U.S.C. § 2 (1982); Republic of Nicaragua v. Standard Fruit Co.,
937 F.2d 469, 475 (9th Cir.), cert. denied, 117 L. Ed. 2d 516
(1991). As the transactions in the Lynches’ accounts involved
national securities exchanges, these are contracts evidencing a
transaction involving commerce. Cohen v. Wedbush, Noble,
Cooke, Inc., 841 F.2d 282, 284 (9th Cir. 1988); Macchiavelli v.
Shearson Hammill, 384 F. Supp. 21, 30 (E.D. Cal. 1974).
Both state and federal courts recognize that on issues of
arbitration, federal law preempts conflicting state law. Southland
Corp. v. Keating, 465 U.S. 1, 13, 104 S. Ct. 852, 79 L. Ed. 2d 1,
13 (1984); Bayma v. Smith Barney, Harris Upham & Co., 784
F.2d 1023, 1025 (9th Cir. 1986); Tonetti v. Shirley, 173 Cal. App.
3d 1144, 1148-50, 219 Cal. Rptr. 616, 618-20 (1985).
As the United States Supreme Court has decreed, the pro-
nouncement of a federal court supersedes any contrary state law:
But even when Congress has not completely displaced state
regulation in an area, state law may nonetheless be pre-
empted fo the extent that it actually conflicts with federal law
— that is, to the extent that it “stands as an obstacle to the
60a
accomplishments and execution of the full purposes and
objectives of Congress.”
Volt Info. Sys. Inc. v. Board of Trustees of the Leland Stanford
Junior Univ., 489 U.S. 468, 477, 103 L. Ed. 2d 488, 499 (1989)
(emphasis added).
Since the court below relied primarily upon Section 2 of the
FAA to argue that state law must be applied to the exclusion of
federal law in this case, it is important to review judicial interpre-
tations of that section:
Section 2 [of the FAA] is a Congressional declaration of a
liberal federal policy favoring arbitration agreements, not-
withstanding any state substantive or procedural policies to
the contrary. The effect of this section is to create a body of
federal substantive law of arbitrability, applicable to any
arbitration agreement within the coverage of the Act....
[T]he Courts of Appeals have ... consistently concluded
that questions of arbitrability must be addressed with a
healthy regard for the federal policy favoring arbitration. We
agree. The Arbitration Act establishes that as a matter of
federal law, any doubts concerning the scope of arbitral
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.
Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460
USS. 1, 24-25, 103 S. Ct. 927, 941, 74 L. Ed. 2d 765, 785 (1983)
(emphasis added).
Thus, while it is evident that the FAA does not completely
occupy the field as to arbitrability, it is clear that where the
federal courts have spoken, that law controls both in state and
federal courts. See, e.g, Southland Corp. v. Keating, 465 US. 1,
104 S. Ct. 852, 79 L. Ed. 2d 1 (1984) (California Supreme Court
overruled); Perry v. Thomas, 482 U.S. 483, 489, 107 S. Ct. 2520,
96 L. Ed. 2d 426 (1987) (California statute preempted).
6la
B. UNDER FEDERAL LAW, GENERALIZED CHAL-
LENGES TO CONTRACTS CONTAINING ARBI-
TRATION CLAUSES MUST BE COMPELLED TO
ARBITRATION.
The United States Supreme Court provided the rule which
governs this issue in Prima Paint Corp. v. Flood & Conklin Mfg.,
388 U.S. 395, 87 S. Ct. 1801, 18 L. Ed. 2d 1270 (1967). In that
case, the Court considered whether the issue of the enforceability
of a contract alleged to have been fraudulently induced and which
contained an arbitration provision was to be considered by a court
or by arbitrators. The Court ruled that the matter was to be sent
to arbitration. In so holding, the Court recognized that the
arbitration clause is severable from the rest of the contract. The
Court held in that regard:
[I]f the claim is fraud in the inducement of the arbitration
clause itself — an issue which goes to the “making” of the
agreement to arbitrate — the federal court may proceed to
adjudicate it. But the statutory language does not permit the
federal court to consider claims of fraud in the inducement of
the contract generally.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.