Opposition Brief — Cruttenden & Co. v. Lynch

No. 93-1479 | JUN 10 1994

In the Supreme Céiirt’“ ="

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.,

DOES | THROUGH 100, INCLUSIVE,

Petitioners,

VS.

ROBERT A. LYNCH, BETTY LAVERNE LYNCH, individually

and 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

BRIEF IN OPPOSITION TO WRIT OF CERTIORARI

PETER A. GOLDENRING, Esq.

GOLDENRING, DEBBAS & PROSSER

A Professional Law Corporation

6050 Seahawk Street

Ventura, California 93003

Telephone: (805) 642-6702

Attorneys for Respondents

ROBERT A. LYNCH, BETTY A. LYNCH,

individually and as

TRUSTEES OF THE ROBERT A. LYNCH

AND BETTY LAVERNE LYNCH FAMILY

TRUST DATED May 30, 1979

Bowne of Los Angeles, Inc., Law Printers (213) 627-2200

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TABLE OF CONTENTS

Page

STATEMENT OF THE CASE .........0...cccveccs. 2

OE Ue ois ok Vials) ARONA S 6 656 vivid vu 6 aed due 2

tse hoesoriseges ach PEPE Ee a | PES nt ne 10

I

THE DECISION OF THE CALIFORNIA COURTS

EE BPR AG oaks LiNerevenre sy. 10

IT.

THE DECISION OF THE CALIFORNIA COURTS

ARE NOT “FINAL” AND ANY DETERMINATION

BY THIS COURT WOULD BE PREMATURE ..... 11

ITI.

THE CASES CITED TO SUPPORT THE PETITION

ARE DISTINGUISHABLE ....................... 12

IV.

CALIFORNIA STATE LAW IS NOT TOTALLY PRE-

EMPTED BY THE FAA AND AN INDEPENDENT

STATE GROUND EXISTS FOR THE CALIFORNIA

UNITY aikdic b ASG 6 cos vic sces'dekcee.. 15

ee tee et en ee 16

A. WHETHER THE UNILATERAL IMPOSITION

OF ARBITRATION CLAUSES IN THE SECU-

- RITIES INDUSTRY HAS BECOME UNCON-

We iNav oveeocuescutbor lah és. k. 16

B. WHETHER OR NOT THE SECURITIES IN-

DUSTRY IMPOSED ARBITRATION HAS

BECOME UNCONSCIONABLE IN ITS IMPLE-

NN hob oudns cterk wae esas ok bn 18

SA 65 vo ho rink ini 6 seas te eee) 19

a

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TABLE OF AUTHORITIES

Cases |

Page

Federal Cases

Cohen v. Wedbush Noble Cooke, Inc. (9th Cir. 1988)

> & > reat rr a ere: 12, 13 H

General Talking Pictures Corp. v. Western Electric Co.

(1938) 304 U.S. 175 adhered to in 305 U.S. 124, reh den

UR TUE: SEPT Tee PLEEEY TCL Eee Teer ll

Henry v. Mississippi (1965) 379 U.S. 443 .............. 16

Herb v. Pltoairn (1945) 324 US. 117 ......0cccceccees: 16 }

NLB vy. Pittsburgh SS Co. (1951) 340 U.S. 498.......... M1

Perry v. Thomas (1987) 482 U.S. 483, 493, footnote9 ... 15

Prima Paint v. Flood and Conklin (1967) 388 U.S. 395 .. 14

Southland Corp. v. Keating (1984) 465 U.S. 1.......... 13

Volt Information Sciences, Inc. v. Board of Trustees of

Leland Stanford, Jr University (1989) 489 U.S. 468... 12

Williams v. Georgia (1955) 349 U.S. 375 .............. 16

Wolfe v. North Carolina (1960) 364 U.S. 177........... 16 .

State Cases |

Dean Witter Reynolds v. Superior Court (1989) 211

Ch deni 5 os. a ae 17

Ford v. Shearson Lehman/American Express, Inc. (1986) |

EGE GE S890 bs ova ceueseesrunsenedigesss 15

Main v. Merrill Lynch Pearce Fenner & Smith, Inc. (1977) ;

pe FS ye errr rr ens corr pe 12, 13

Merrill Lynch Pearce Fenner & Smith, Inc. (1977) 67

CI iio haha ae 6 ai 12

Neal v. State Farm Insurance Companies (1961) 188 /

Ce Remi ae Gey GG ocx ve ce vnnc ives ixediadeietens 17

O’Neil v. Spillane (1975) 45 Cal.App. 2d 147........... 13 |

Rice v. Dean Witter Reynolds, Inc. (1991) 235 Cal.App.3d

BOO 6240 nob 6090 60600560s000003 40000 Tee 15

iil

Page

Strotz v. Dean Witter Reynolds, Inc. (1990) 223 Cal.App.3d

Es CONG E D528 Woods ok sok kkocb ice 12

Twomey v. Mitchum Jones and Templeton, Inc. (1968) 262

ES 13

Other Cites

ET a 12

SC 13

Los Angeles Times Business Section

Section D, November 8, 1993......................... 18

United States General Accounting Office (GAO/GGD

92-71, May 11, 1992); GAO/HEHS-94-17, March 30,

Nea ae TTR G bdr Sek vee chess bs deedccss.. 18

No. 93-1479

In the Supreme Court

OF THE

United States

OCTOBER TERM, 1993

CRUTTENDEN & COMPANY, TALLEY MCNEIL & COMPANY, INC.

Sutro & Co., INc., Ropert C. Carty, Jr.,

SUN LIFE ASSURANCE COMPANY OF CANADA,

SUN FINANCIAL Group, Loomis & SAYLES & Co.,

Does | THROUGH 100, INCLUSIVE,

Petitioners,

vs.

Rosert A. LYNCH, BeTTY LAVERNE LYNCH, individually

and 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

———

BRIEF IN OPPOSITION TO WRIT OF CERTIORARI

BSNG6QN06e606)0)0—0—0—0—08€3(0@—@asomamaS09@TOooo EEE

The Petition for Writ of Certiorari presented by CRUT-

TENDEN & COMPANY, TALLEY McNEIL & COM-

PANY, INC., SUTRO & CO., INC. and ROBERT C.

CARTY, JR. should be denied.

2

STATEMENT OF THE CASE

I.

FACTS

The Petition for Writ of Certiorari correctly presents to

this Court the Orders of the Superior Court of the State of

California for the County of Ventura (Petition Appen-

dix 1A-4A), the Decision of the Second District Court of

Appeal for the State of California officially reported at

18 Cal.App.4th 804 (1993) (Petition Appendix 5A) and the

Order of the California Supreme Court unanimously deny-

ing the Petition for Hearing, the Honorable Malcom Lucas,

Chief Justice speaking for the Court (Petition

Appendix 14A).

The Facts as presented by Petitioners herein are inaccu-

rate. The accurate evidentiary facts are as follows:

Respondent ROBERT A. LYNCH (hereinafter referred

to as ROBERT), born November 26, 1929 (Appendix 1A)!

attended school only to the ninth grade, never graduating

high school, never attending college, and never obtaining

any degrees or special training from any institutions of |

higher learning (Appendix 1A). His wife, Respondent

BETTY LAVERNE LYNCH (hereinafter referred to as

BETTY), born May 9, 1930 (132), graduated high school

in 1948 and never attended any college. After high school

she briefly attended a trade school to learn shorthand and

typing (Appendix 8A).

Neither ROBERT nor BETTY, prior to the events which

give rise to the instant litigation had ever had a securities

account at any brokerage house or any other institution.

(Appendix 1A). Indeed, neither ROBERT or BETTY,

prior to meeting MR. CARTY, ever had executed any stock

'In the Appendix attached hereto, Respondents present to this Court

the evidentiary record supporting the factual statement herein.

a

3

broker agreements, brokerage house agreements, or any

other agreements of the type alleged to exist by the Appel-

lants in the instant matter. (Appendix 1A).

ROBERT first met Defendant/Appellant MR. CARTY

in 1988 while purchasing a used car from MR. CARTY’S

brother in Santa Barbara. (Appendix 1A) MR. CARTY

struck up ROBERT’S friendship. MR. CARTY told

ROBERT he was related to many well-established multi-

generational Ventura County families with whose names

ROBERT was familiar. MR. CARTY explained that his

grandfather was a close associate and personal friend of

Martin Smith, the well-known Oxnard developer.

MR. CARTY also told ROBERT that he was married to

the daughter of Mr. Ted Engs of Engs-Peterbilt — another

well-established Ventura and Los Angeles County family.’

[Appendix 2A]. As the close and personal relationship

between ROBERT and Mr. CARTY developed and grew,

MR. CARTY did not initially discuss anything having to

do with managing or investing the funds or properties of

ROBERT and BETTY. Instead, he concentrated on be

coming a close personal friend of ROBERT. (126)

MR. CARTY would come by ROBERT’S office or house

as often as two (2) times per week, take ROBERT to

lunch regularly at the Tower Club at the top of the Union

Bank Building in Oxnard, where they would sit at what

MR. CARTY described as “Mr. Smith’s private table”.

(Appendix 2A).

’The nature of the development of the relationship between ROBERT

and MR. CARTY is significant because unlike any of the cases

presented by Petitioners, the instant matter is not a circumstance where

Respondents went to a securities brokerage house to seek their

assistance, advisement or services. In the instant matter, as set forth in

the Declaration of Robert A. Lynch (commencing Appendix: 2A),

ROBERT and BETTY were approached by MR. CARTY after first

establishing a close and intimate personal relationship.

a

4

In the course of the many personal and intimate

conversations between MR. CARTY and ROBERT,

ROBERT told MR. CARTY that he had no experience in

stocks, bonds, mutual funds, or any other kind of activity

that MR. CARTY would from time to time describe.

(Appendix 3A) ROBERT told MR. CARTY during these

conversations that he did not understand most, if not all, of

what MR. CARTY would describe as his business.

MR. CARTY often stated to ROBERT that managing

money safely was “his business” and that’s what he was an

“expert in”. (Appendix 3A).

In the context of the close friendship that MR. CARTY

nurtured and developed with ROBERT over several years,

ROBERT started confiding with MR. CARTY that he

was thinking of selling the cement business he had built

from scratch (Appendix 3A), paying the taxes on the sale

and retiring with the money that was left in safe investments

for he and his wife and ultimately their children. (Appen-

dix 3A) MR. CARTY, in the context of their close friend-

ship, became very solicitous of ROBERT, increasing the

friendship and trust that had already been established be-

tween them. * (Appendix 3A).

Finally, the business was sold, and the taxes paid.

ROBERT told his friend, MR. CARTY, about the sale and

at that ttme MR. CARTY asked ROBERT, as a friend, to

become the personal manager of the funds for ROBERT

and BETTY, and their family. (Appendix 3A) When

MR. CARTY first broached the subject with his friend,

ROBERT, about becoming the family’s manager of the

*During the several years where MR. CARTY nurtured the friendship

and trust between he and ROBERT, at no time were there any business

relationships between the two. At no time were there any securities |

accounts opened or investments made. In other words, the relationship |

was created and nurtured by MR. CARTY, on its face, to be that of true

close friends with great trust in each other.

er Re a NR i Sn Bane le et

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5

funds, MR. CARTY repeated and affirmed his friendship

and trust with and from ROBERT and BETTY, and that

ROBERT and BETTY should rely upon that trust and

friendship, as well as MR. CARTY’S expertise and man-

agement skills. (Appendix 4A). ‘

In the context of the close and trusting friendship

nurtured and developed by MR. CARTY over several years

with ROBERT, and MR. CARTY’S suggestion to

ROBERT that he (MR. CARTY) could and should take

care of the family retirement, MR. CARTY came to

ROBERT and BETTY and told them that he needed some

“form” documents signed in order to open the accounts so

he could handle the safe management of the funds.

(Appendix 4A). At this time, MR. CARTY told ROBERT

and BETTY, who he knew had never seen documents like

this before and had never had any kind of securities account,

that the documents were “standard” and “simply a

formality”; and, that they were not necessary to read

because they “simply effected an opening of the account and

the transference of the funds to him”. (Appendix 4A). At

the time of the presentation of the documents, and in

accordance with the long, continuing, trusting relationship

‘The Court's attention is respectfully directed to the Declaration of

Robert A. Lynch (Appendix: 1A) and the Declaration of Betty Laverne

Lynch (Appendix: 8A). This Statement of Facts while highlighting

certain key issues cannot give the feeling for the declaration itself which

makes clear that over the course of several years, and before

MR. CARTY ever broached the subject of becoming the family

investment counselor for ROBERT and BETTY, MR. CARTY nur-

tured a very close friendship and trusting relationship between he and

ROBERT. It is this trusting friendship, nurtured by MR. CARTY, that

formed the basis of ROBERT and BETTY’S willingness to accept

MR. CARTY ’S suggestion, as their close friend, to manage their moncy

for retirement and for the children. It is also in this context, this close

and trusting pre-existing friendship, that the comments of MR. CARTY

and his instructions in regard to signing documents, must be measured.

6

that had been developed, MR. CARTY repeatedly stressed

that he could be trusted and that his friends, ROBERT and

BETTY, did not need to read the documents because they

were “simply a formality”. (Appendix 5A).°

When MR. CARTY told ROBERT and BETTY to sign

the documents, MR. CARTY never advised ROBERT and

BETTY that the documents constituted a “contract”

addressing the rights and responsibilities of the parties

(Appendix 5A). Indeed, there was a very specific

conversation that ROBERT remembers with absolute

clarity concerning certain of the documents at issue:

“CARTY: These are documents I need for you to sign

so I can manage your money for you. Don’t worry about

the documents, they’re formalities, just go ahead and

sign them.

(ROBERT/BETTY): Okay — We trust you.

ROBERT (jokingly): I hope I’m not signing my life

away.

CARTY (laughing): No — They’re just a formality,

they’re not important.” (Appendix 6A).

*While previously stated, it is important to emphasize that

MR. CARTY knew and had been told in the context of the close.

personal relationship he had developed and nurtured with ROBERT,

that ROBERT had never had any experience with any securities brokers

or any securities transactions whatsoever and that he had never seen any

documents such as these before. (Appendix: 4A). Each time

MR. CARTY needed some documentation signed he would personally

bring it to ROBERT and BETTY, reiterate the closeness of the pre-

existing friendship and advise he simply needed a “signature” on a

“standard” document as a “formality”. (Appendix: 5A).

7

There was no evidence presented by Petitioners contra-

dicting the facts as presented by ROBERT and BETTY in

their respective declarations. Thus, it is undisputed that:

(1) MR. CARTY solicited, nurtured and developed a

close, personal, intimate, and trusting relationship with

ROBERT for several years before there was ever any execu-

tion of brokerage account documents;

(2) MR. CARTY was, in fact, a close and intimate

confidante and personal friend who solicited and received

ROBERT and BETTY’S trust and confidence long before

he presented any documents for them to sign;

(3) MR. CARTY advised ROBERT and BETTY that

the brokerage account documents that he asked them to

sign were “not important” and were “not a contract”; and,

(4) As a result of the malfeasance of MR. CARTY and

the various brokerage houses with whom he worked, the

losses of ROBERT and BETTY have exceeded One and

One Half Million Dollars ($1,500,000.00) (Appendix 6A),

while at the same time MR. CARTY and the brokerage

houses for whom he worked have earned commissions on

Respondents’ accounts in excess of One Million Dollars

($1,000,000.00) (Appendix 6A).

From the mid-1980’s, the securities industry (brokerage

houses) has, as an industry, effectively sought to foreclose

access to courts and juries by no matter how egregious the

conduct or great the harm. There has been a clear and

unequivocal industry-wide attempt to simply preclude ac-

cess to the courts by anyone with respect to any claim

involving a brokerage house. These efforts have now reached

the point where it is virtually impossible to have any kind of

brokerage account without the documentation having buried

within it, somewhere, an arbitration clause requiring all

disputes, of any nature or type, to go before a securities

industry panel in a binding fashion.

8

The most recent data that could be obtained in the

context of the brokerage industry was as of January 1, 1989

which indicated that there were 3551 retail offices for

brokerage firms in the United States. (Appendix 10A). Of

those retail outlets, 2933 were of the top six brokerage

houses: Dean Witter, Shearson-Lehman, Merrill-Lynch,

A.G. Edwards, Prudential-Bache, Paine Webber, and

Oppenheimer. Thus, eighty-seven and one-half percent

(872%) of the total retail brokerage houses as of January 1,

1989, were owned and operated by the largest six brokerage

houses. (Appendix 11A). In regard to the number of

registered representatives (stock brokers), as a statistic

distinct from the number of stock brokerage offices, the

statistics indicated that as of January 1, 1989 the total

number of brokers in the United States was 58,383 with

46,170, or 79.08%, being in those same six brokerage houses

above-referenced. (Appendix 11A). Each one of those

brokerage houses, which control almost 90% of the

brokerage house business in the United States inserts a

mandatory binding arbitration clause almost identical to that

in the instant matter. (Appendix 14A). Thus, an entire

industry has joined together to attempt to preclude access to

the courts for any of its customers.

After learning of the malfeasance of the Defendants,

ROBERT and BETTY filed their Complaint alleging nine

causes of action. In that Complaint ROBERT and BETTY

allege, inter alia, that MR. CARTY was their intimate

friend and through that friendship they developed and re-

posed substantial trust and confidence in him; that

MR. CARTY encouraged and solicited the trust and confi--

dence of them and in that context, and after he had

established the friendship and the close personal relation-

ship, engaged in the activities that are the subject of the

Neither the Trial Court nor the Court of Appeal relied upon this

ground to deny the Petition to Compel Arbitration.

9

Complaint that from time to time, and in the context of

this close personal friendship and trust that pre-existed

the activities which form the basis of the Complaint,

MR. CARTY instructed them to sign various documenta-

tion which was “simply necessary to effect the continuing

reliance and trust by Plaintiffs and Defendant CARTY”;

that MR. CARTY specifically advised them in the context

of having them sign certain documents and in the context of

the continuing relationship of trust and confidence, that the

documents did “not affect legal rights”, that it was “not

necessary that they be read”, and, that they were “not

provided any substantial opportunity to read any such docu-

ments”, nor were they “advised of any contents thereof”;

that at the time of the various meetings between they and

MR. CARTY where documents were requested to be

signed, MR. CARTY specifically represented in the context

of their pre-existing relationship of trust and confidence that

the documents “did not affect legal rights and it was not

necessary to read them”, that the documents were “only a

formality” and that ROBERT and BETTY relied upon

these representations by MR. CARTY and reposed their

trust and confidence in him because of their pre-existing

relationship; that these representations by MR. CARTY

were false; that MR. CARTY knew them to be false and

that they were made with the intent to deceive and defraud

ROBERT and BETTY and to induce them to act in the

manner alleged; and, that they were ignorant of the falsity of

MR. CARTY’S representations and believed them to be

true and in reliance upon his representations, did act in

accord with his requests including the signing of the docu-

mentation and the transference of their retirement money to

him.

The facts are as delineated above. At no time have

Petitioners ever disputed, under oath, any of the facts set

forth. They present no contrary evidence to this Court, nor

have they to any other Court.

10

ARGUMENT

I.

THE DECISION OF THE CALIFORNIA COURTS

ARE CORRECT

The decision of all three levels of California Courts

(Superior, Court of Appeal and Supreme) are predicated on

the undisputed facts set forth above. Unlike any case cited

by Petitioners, the instant matter involves a circumstance of

a pre-existing fiduciary relationship where Respondents

were solicited by Petitioners. The record contains ample

factual support for the unanimous California Court findings

of fraud in the inducement of the arbitration agreement; a

fraud that also exists with the balance of the relationship. As

enunciated by the Second District Court of Appeal:

“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 inter-

preted 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 mis-

representation of a party’s financial condition. In con-

trast 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 that the parties were misled as to the very

existence of the arbitration clause.” (18 Cal.App.4th

802, 810).

ee

1]

The California Courts have thus unanimously held that

Respondents herein have presented uncontroverted evidence

of fraud in the inducement in the arbitration agreement.

Petitioners have not once presented any evidence to the

contrary. Ample evidence exists in the record to support the

determination of the California Courts.

Since the determination of all three levels of California

Courts were based on uncontroverted evidence, the true

thrust of the Petition is simply a request to have this Court

review evidence or review inferences drawn from that evi-

dence. This Court properly denies certiorari in such a

circumstance (General Talking Pictures Corp. v. Western

Electric Co. (1938) 304 U.S. 175, adhered to in 305 US.

124, reh den 305 U.S. 675; NLB v. Pittsburgh SS Co. (1951)

340 U.S. 498).

II.

THE DECISION OF THE CALIFORNIA COURTS ARE

NOT “FINAL” AND ANY DETERMINATION BY

THIS COURT WOULD BE PREMATURE

Petitioners contend that the issue of arbitration has been

conclusively determined against them by the California

Courts. That conclusion is simply in error. The first sentence

of the Discussion portion of the Opinion of the California

Court of Appeal is as follows:

“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 agreement. (Citations omitted)” (18

Cal.App.4th 802, 805).

The Petition to this Court does not follow a final determi-

nation either in favor of or denying arbitration; nor is it a

Petition following an evidentiary hearing.

i

Unless Petitioners are prepared to accept the state of the

evidence as uncontroverted, then Petitioners must acknowl-

edge that procedurally they have been granted the right by

all three levels of the California Courts to an evidentiary

hearing on the issue of fraud in the inducement (9 U.S.C.

Section 4). That Petitioners have this right is supported by

the California authorities (Strotz v. Dean Witter Reynolds,

Inc. (1990) 223 Cal.App.3d 208, ftnt 2 cited with approval

by the Court of Appeal in the instant matter.

This Court has previously determined that California law

in regard to addressing procedures of implementation of

arbitration, even under the Federal Arbitration Act is

proper; and that this Court will defer to the implementation

of the arbitration procedures under California law in such a

circumstance (Voit Information Sciences, Inc. v. Board of

Trustees of Leland Stanford, Jr. University (1989: «© U.S.

468). Unless Petitioners are prepared to concede t= « uncon-

troverted evidence, a concession they do not make in their

Petition, then Petitioners must concede that their Petition is

premature since the evidentiary hearing contemplated under

9 U.S.C. Section 4 and its implementation in California

pursuant to Strotz, supra, and Main v. Merrill Lynch Pearce

Fenner & Smith, Inc. (1977) 67 Cal.Ap.3d 19, 24 has not

yet occurred nor has it yet been requested by Petitioners.

Il.

THE CASES CITED TO SUPPORT THE PETITION

ARE DISTINGUISHABLE

Each and every case cited by Petitioners to support their

Petition have at their core an arms length, non fiduciary,

business relationship. As enunciated by the Court in Cohen

a ee ) ,

13

v. Wedbush Noble Cooke, Inc. (9th Cir. 1988) 841 F.2d

282:

“We know of no case holding that parties dealing at

arms length have a duty to explain to each other the

terms of a written contract. We have declined to

impose such an obligation . . .” (Id at page 287) (Cited

by the Court of Appeal in the instant matter at 808.

(Emphasis Added).

The Federal Arbitration Act does not pre-empt the total-

ity of state law. (Volt, supra). While this Court has recog-

nized a national policy favoring arbitration (Southland

Corp. v. Keating (1984) 465 U.S. 1), this Court likewise has

determined that enforceability of arbitration provisions gov-

erned by the Federal Arbitration Act does not exist if

grounds for revocation ‘exist at law or in equity for the

revocation of any contract’. (Southland Corp. v. Keating,

supra). The California Courts have held that the relation-

ship of the parties such as in the instant matter are not

“arms length” but instead are in the nature of fiduciary

relations and governed by those substantive rules (Strotz,

supra; Main v. Merrill Lynch Pearce Fenner & Smith, Inc.

(1977) 67 Cal.App.3d 19; Twomey v. Mitchum Jones and

Templeton, Inc. (1968) 262 Cal.App.2d 690; O'Neil v.

Spillane (1975) 45 Cal.App. 2d 147).

As stated in Main, supra:

“When a fiduciary enters into a transaction with a

beneficiary whereby the fiduciary’s position is im-

proved, or he obtains a favorable opportunity, or

whether he otherwise gains, benefits, or profits, it may

fairly be said that an advantage has been obtained

(Citations omitted)... It is the settled law of this

state, and elsewhere, that where there exists a relation-

ship of trust and confidence, it is the duty of one in

whom the confidence is reposed to make full disclosure

—

ot

of all material facts within his knowledge relating to the

transaction in question and any concealment of mate-

rial fact is fraud. (Citations omitted) Where there is

[such] a duty to disclose, the disclosure must be full

and complete, and any material concealment or misrep-

resentation will amount to fraud sufficient to entitle the

party injured thereby to an action.” (Citations omitted)

(Id, 67 Cal.App.3d at 31-32)

While acknowledging Prima Paint v. Flood and Conklin

(1967) 388 U.S. 395 (not a stockbroker/ fiduciary relation-

ship case but rather an arms length business transaction),

the Court in Main, supra, made clear that where there is a

confidential/fiduciary relationship, then those rules will gov-

ern the transaction. In the instant matter, the undisputed

facts are that such a confidential/fiduciary relationship ex-

isted, not just as a matter of California law but as a factual

matter as between the parties. The Court of Appeal in the

instant matter makes clear that the nature of that relation-

ship, and indeed its existence, is what Petitioners are enti-

tled to have presented to a jury, should they choose, in

determining whether or not the arbitration clause is to be

enforced. As stated by the Court of Appeal in the instant

matter:

“In Cohen the court assumed the parties were dealing

at arms 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 confidence is reposed obtains control

over the other persons’ affairs, a fiduciary relationship is |

created (citations omitted). 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 Crut-

tenden and Sutro. This is sufficient to allege that the

15

Defendants were acting in a fiduciary capacity.” (Id at

808-809).

Thus, the uncontroverted evidence supports the finding

and inferences of the confidential and fiduciary relationship.

Not one single case cited by Petitioners herein arises out of,

addresses, or concerns such a relationship.

IV.

CALIFORNIA STATE LAW IS NOT TOTALLY PRE-

EMPTED BY THE FAA AND AN INDEPENDENT

STATE GROUND EXISTS FOR THE CALIFORNIA

DETERMINATION

This Court has previously held that the Federal Arbitra-

tion Act is not all inclusive and all pre-emptive. (Volt

Information Services, Inc., supra) In accord are the Califor-

nia cases (Ford v. Shearson Lehman/American Express,

Inc. (1986) 180 Cal.App.3d 1011; Rice v. Dean Witter

Reynolds, Inc. (1991) 235 Cal.App.3d 1016; Main v. Merrill

Lynch Pearce Fenner & Smith, Inc., supra), all citing with

approval Southland v. Keating, supra, where this Court

stated:

“Such clauses may be revoked upon grounds as exist at

law or in equity for the revocation of any contracts.”

The three levels of California Courts in the instant matter

unanimously have determined that under California law

sufficient uncontroverted factual allegations have been

presented so as to require an evidentiary proceeding to

determine the existence and nature of the fiduciary and

confidential relationship and fraud therein as to the arbitra-

tion agreement. (Petition Appendix 10A-11A) This finding

is in accord with the Federal Arbitration Act and this

Court’s determinations in Southland, supra, and Perry v.

Thomas (1987) 482 U.S. 483, 493, ftnt 9. No federal cases

have been presented by Petitioners to the contrary, and the

16

area of law not being universally and completely pre-empted

by the Federal Arbitration Act, the California Courts have

properly applied state substantive law concerning fiduciary

and confidential relationships. These findings are properly

left intact. This Court from the time of its foundation has

adhered to the principle that it will not review judgments of

state Courts that rest on adequate and independent state

grounds. (Herb v. Pitcairn (1945) 324 U.S. 117; Williams v.

Georgia (1955) 349 U.S. 375; Wolfe v. North Carolina

(1960) 364 U.S. 177; Henry v. Mississippi (1965) 379

U.S. 443).

V.

ADDITIONAL ISSUES

If this Court grants the Petition, it is respectfully re-

quested that this Court consider the following additional

issues:

A. WHETHER THE UNILATERAL IMPOSITION OF

ARBITRATION CLAUSES IN THE SECURITIES

INDUSTRY HAS BECOME UNCONSCIONABLE.

When this Court originally considered arbitration clauses

in the securities industry, the provisions for arbitration and

their implementation were in an embryonic stage. Now, the

requirements of arbitration are near universally contained in

Securities Industry standard preprinted forms. In its head-

long rush to eliminate the ability of the American public to

have access to Court’s of law, the securities industry, which

controls the financial heart of this country has unilaterally

mandated securities industry controlled and implemented

arbitration.’

” See 27 Willamette Law Review (Summer 1991) 69 ftnt 50 stating

that the results of their informal survey revealed one hundred percent

(100%) of the leading brokerage houses polled require pre-dispute

a eae erate

17

California Courts have held that such standardized con-

tracts, imposed and drafted by a party of superior bargaining

strength (clearly existing in the instant matter and now

existing on an industry wide basis to the entirety of the

population of this country) constitute adhesion contracts

(Neal v. State Farm Insurance Companies (1961) 188

Cal.App.2d 690, 694) and have further held that if uncon-

scionable then they are unenforceable unless there is a

meaningful choice of reasonably available alternative

sources of supply (Dean Witter Reynolds v. Superior Court

(1989) 211 Cal.App.3d 758). This issue was presented by

Respondents at the trial Court, Court of Appeal and Su-

preme Court. None of the California Courts have reached

the issue because they determined the Petitions to Compel

Arbitration were properly denied factually, there being no

substantive evidence in opposition thereto, pending a full

evidentiary hearing. If this Court accepts the Petition, it is

requested tat this Court visit the issue of whether or not the

pervasiveness of the unilaterally imposed and drafted arbi-

tration clauses by the entirety of the securities industry

constitute adhesion contracts that now are properly required

to be conscionable both in their imposition and terms.

Securities Industry arbitration agreements in order to open new margin

accounts. The endisputed record before the trial court in the instant

matter is that in excess of ninety percent (90%) of all brokerage houses

actually surveyed in 1989 have the standard industry arbitration provi-

sions within their account documeutation. This fact is further borne out

by the failure of Petitioners, at the trial Court level, the Court of Appeal

level, the California Supreme Court level, or indeed, in their Petition, to

even suggest that there are meaningful alternatives available to the

public. A member of the public cannot buy stocks or bonds without

signing provisions eliminating rights to trial in a ‘our of law.

aa re

18

B. WHETHER OR NOT THE SECURITIES INDUS-

TRY IMPOSED ARBITRATION HAS BECOME

UNCONSCIONABLE IN ITS IMPLEMENTATION.

When this Court visited the issue of securities arbitration

and embraced it generally, the evidence did not exist, nor

had there been any studies as to what was actually occurring

in the securities arbitration proceedings. There have since

been studies, both formal and informal, concerning the

fairness, legitimacy and efficacy of the industry sponsored

and controlled customer arbitration process. In the instant

matter, since the Petition to this Court is premature, no

evidentiary record has yet been made though the issue has

been presented by Respondents from inception of the

proceedings."

"In this regard, a recent article in the Los Angeles Times Business

Section, Section D, on November 8, 1993 discussed the securities

arbitrations and noted that the particular brokerage firm (Prudential

Secunties) was “making false statements to arbitrators, refusing to

produce documents and postponing or drawing out hearings to increase

the legal expenses of customers” and importantly:

“The incidence show the flaws inherent in any customer arbitration

case involving a brokerage firm. Debra Masucci, the head of the

National Association of Securities Dealers confirmed that THERE

IS NO NASD RULE THAT PROHIBITS FIRMS FROM MAK-

ING FALSE STATEMENTS IN ARBITRATION CASES. She

said that although such conduct could be considered a violation of

the NASD’s general ban on unfair conduct, she said she believes no

such case has ever been brought.” (Emphasis added).

As referenced in the article, one of the firms involved in representing

Prudential Securities, the brokerage firm which may have made false or

imcorrect statements to the Arbitration Panel is the firm of Keesal.,

Young & Logan, counsel for Petitioners herein. Additionally, there have

been federal studies concerning arbitration by the United States General

Accounting Office including the May 19, 1992 concerning Sccurities

Arbitration and Investors (GAO/GGD 92-71, May 11, 1992) and the

study of employment discrimination and how registered representatives

fare in industry controlled arbitration (GAO/HEHS-94-17 Employ-

ment Discrimination, March 30, 1994). Both studies delineate signifi-

19

VI.

CONCLUSION

For the above stated reasons it is respectfully submitted

that the petition be denied.

DATED: June 8, 1994

Respectfully submitted,

Peter A. GOLDENRING, Esa.

GOLDENRING, DesBas & PROSSER

A Professional Law Corporation

Attorneys for Respondents

Robert A. Lynch, Betty A. Lynch

individually and as Trustees of

the Robert A. Lynch and Betty

Laverne Lynch Family Trust

Dated May 30, 1979

cant flaws in the arbitration process, flaws inuring to the benefit of the

securities industry and the brokerage firms.