Opposition Brief — Glazer v. Lehman Bros.

No. 04-1375

In the

Supreme Court of the United States

SAMUEL GLAZER,

Petitioner,

V.

LEHMAN BROTHERS, INC., ET AL.,

Respondents.

On Petition for a Writ of Certiorari to the United

States Court of Appeals for the Sixth Circuit

RESPONDENT LEHMAN BROTHERS, INC.'S

BRIEF IN OPPOSITION

Put C. NEAL

(Counsel of Record)

H. NicHOLAS BERBERIAN

PATRICK G. KING

NEAL GERBER & EISENBERG LLP

Two NortH LA SALLE STREET

Cuicaco, IL 60602

(312) 269-8000

(312) 269-1747 Fax

Counsel for Respondent

Lehman Brothers, Inc.

Becker Gallagher Legal Publishing, Inc. 800.890.5001

RULE 29.6 CORPORATE

DISCLOSURE STATEMENT

Pursuant to Supreme Court Rule 29.6, Respondent

Lehman Brothers Inc. states that it is a wholly-owned

subsidiary of Lehman Brothers Holdings Inc., a publicly-

owned corporation.

ii

TABLE OF CONTENTS

QUESTIONS PRESENTED. ....255.5.52153005 l

STATEMENT OF THE CASE ................ l

REASONS FOR DENYING THE PETITION ....... 4

I. This Case Does Not Present A Conflict Among

ee CRO oi ee 4

II. Applying The Parol Evidence Rule Does Not

“Render Prima Paint A Nullity.” .......... 6

Ill. The Court Of Appeals Correctly Ruled That An

Arbitration Clause Is Not A “Separate Contract.”

ili

TABLE OF AUTHORITIES

CASES

Burden v. Check Into Cash of Kentucky,

267 F.3d 483 (6th Cir. 2001), cert. denied,

rr 5-6

Galmish v. Cicchini, 90 Ohio St. 3d 22,

PPE PU CE go cc ca ccwicbowvcea 4

Mid-America Acceptance Co. v. Lightle,

63 Ohio App. 3d 590, 579 N.E.2d 721

errr Teer rere rere rT 4-5

Nilavar v. Osborn, 127 Ohio App. 3d 1,

711 N.E.2d 726 (2d Dist. 1998) ............. 5

Perry v. Thomas, 482 U.S. 483 (1987) ........... 7

Prima Paint Corp. v. Flood & Conklin Manufacturing.

Oe eT re 3, 5-9

Sphere Drake Insurance Ltd. v. All American Insurance

Cm, aoe oe oes Cre Cie. FOE) nn ccna 6

Wilson Electrical Contractors, Inc. v. Minnotte

Contracting Corp., 878 F.2d 167 (6th Cir. 1989) .. 9

]

RESPONDENT LEHMAN BROTHERS INC.’S

BRIEF IN OPPOSITION

QUESTIONS PRESENTED

1. Was the court of appeals correct in holding that the

question of whether certain account agreements were invalid

because of a broker’s fraudulent intent was an issue for the

arbitrator, not the court, under the Prima Paint doctrine?

2. Was the court of appeals correct in holding that an

arbitration clause that is part of an integrated written account

agreement is not a “separate and distinct contract” and

therefore Ohio’s parol evidence rule precludes reliance on an

alleged oral promise that the arbitration clause would not be

enforced?

STATEMENT OF THE CASE

Petitioner Glazer opened several brokerage accounts with

Respondent SG Cowen Securities Corp. (“SG Cowen”)

through an SG Cowen broker, Frank Gruttadauria, who was

manager of SG Cowen’s Cleveland office. When opening

these accounts, Petitioner’s attorney and financial advisor,

Terrance McHugh, returned each of the account agreements

at issue signed by Petitioner with no proposed modifications

of any kind. Respondent Lehman later acquired SG Cowen’s

Cleveland business, including Mr. Glazer’s accounts and

account agreements, and Mr. Gruttadauria continued as

manager of the Cleveland office. Both while at SG Cowen

and later with Lehman, Mr. Gruttadauria pursued a fraudulent

scheme involving the generation of falsely inflated account

statements and misappropriation of funds from customers’

accounts to keep the scheme going. Petitioner sued SG

2

Cowen and Lehman, asserting claims for the inflated amounts

reflected on the false account statements. Respondents moved

to compel arbitration under the broad arbitration clauses

contained in each of the account agreements. Pet. App. 4-5.

In a ruling applicable to a number of similar claims,

including Mr. Glazer’s, the district court held that the

arbitration clauses were unenforceable because Mr.

Gruttadauria’s fraudulent intent at the time the account

agreements were executed prevented a meeting of the minds

and hence there were no account agreements. Fazio vy.

Lehman Bros. Inc., 268 F. Supp. 2d 865, 869 (N.D. Ohio

2002), Pet. App. 78. As an alternative ground for refusing

arbitration, the district court held that the arbitration clauses

could not have been intended to apply to disputes arising out

of conduct that amounted to theft. Pet. App. 85.

The court of appeals rejected both grounds. Fazio v.

Lehman Bros. Inc., 340 F.3d 386 (6" Cir. 2003), Pet. App.

32. It held that only claims of fraudulent inducement of the

arbitration clause itself could be decided by the court, and that

claims involving the validity of the contract as a whole must

be left to the arbitrators. Pet. App. 39, 42. It also held that

the claims were within the scope of the arbitration clauses

because they arose out of activities contemplated by the

account agreements. Pet. App. 43. The court of appeals

remanded all the cases, including Mr. Glazer’s, for

consideration of any individual issues bearing on the validity

of the arbitration clauses, “analyzed independently from the

account agreements.” Pet. App. 48.

On the remand of Mr. Glazer’s case, the district court

again refused to order arbitration. Glazer v. Lehman Bros.

Inc., No. 1:02 CV 370 (N.D. Ohio Oct. 3, 2003), Pet. App.

ee ee es ~

3

49. With respect to the arbitration clauses in four of the five

account agreements, the court found that Mr. Gruttadauria

had made contemporaneous oral promises to Mr. Glazer that

the arbitration clauses would not be enforced. Pet. App. 67.

Although the Ohio parol evidence rule precludes varying

specific terms of a written agreement by resort to such an oral

promise, the court concluded that under Prima Paint Corp. v.

Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), the

arbitration clauses in the account agreements should be

interpreted as “separate and distinct” contracts. Pet. App.

61-62. The court’s “separate and distinct” theory was

essential to its application of the “sham agreement” exception

to the parol evidence rule, which has never been held to apply

to only one clause of an integrated agreement.

The court of appeals rejected that reasoning. Glazer v.

Lehman Bros. Inc., 394 F.3d 444 (6" Cir. 2005), Pet. App. 1.

It held that arbitration clauses are not separate and distinct

contracts, but rather that such clauses must be separately

considered to determine whether they have been fraudulently

induced apart from the contract. Pet. App. 13-14.

Consequently, the “sham agreement” exception to the parol

evidence rule did not apply, and the parol evidence rule

barred proof of contemporaneous oral agreements

contradicting a single provision of the executed written

agreements. The court also stressed that the strong federal

policy favoring arbitration reinforced the conclusions it

reached. Pet. App. 15.

Since the parol evidence rule required rejection of the

only evidence supporting the district court’s finding of

fraudulent inducement of the arbitration clauses, the court of

appeals held that the district court should have stayed the case

until the arbitration process was completed. Pet. App. 28.

REASONS FOR DENYING THE PETITION

I. This Case Does Not Present A Conflict Among The

Circuits.

In his attempt to pose a conflict among the circuits,

Petitioner relies on an inaccurate characterization of the issue

decided by the court of appeals in its initial Fazio opinion.

Petitioner characterizes the opinion as requiring that an

arbitrator decide his challenge to the validity of the contracts

at issue, notwithstanding his contention that these contracts

were “void,” and not merely “voidable.”

The argument, however, is based entirely on the label

Petitioner attaches to his claim of invalidity. It does not

reflect the substance of the claim, which is that the account

agreements are invalid in their entirety because of Mr.

Gruttadauria’s alleged undisclosed intention to defraud Mr.

Glazer. No matter how Mr. Glazer characterizes it, the claim

is quintessentially one of fraudulent inducement regarding

each of the contracts as a whole - that Mr. Gruttadauria

entered each agreement with no intention of performing under

it. See Galmish v. Cicchini, 90 Ohio St. 3d 22, 30, 734

N.E.2d 782, 791 (2000) (“The essence of Galmish’s

fraudulent inducement claim is that Cicchini harbored this

[fraudulent] intent at the time he executed the written

agreement and, therefore, made a promise with intent not to

perform.”). Even assuming plaintiff's factual allegations are

true, therefore, the agreements were not “void” but only

“voidable” because they were allegedly fraudulently induced.

See, e.g., Mid-America Acceptance Co. v. Lightle, 63 Ohio

App. 3d 590, 599, 579 N.E.2d 721, 727 (10th Dist. 1989) (“a

party who has been fraudulently induced to enter into a

5

contract has the option of rescinding the contract or retaining

the contract . . . In other words, the contract is voidable at the

option of the defrauded party.”); see also Nilavar v. Osborn,

127 Ohio App. 3d 1, 12-13, 711 N.E.2d 726, 733 (2d Dist.

1998) (“Secretly held, unexpressed intent is not relevant to

whether a contract is formed.”).

Because Mr. Glazer’s claim is one of fraudulent

inducement, it is exactly the kind of claim of invalidity that

this Court held in Prima Paint must be left to the arbitrator to

decide. 388 U.S. at 402-04. It was undisputed that Mr.

Glazer executed the agreements and that Mr. Gruttadauria

was authorized to execute them on behalf of SG Cowen. The

only alleged basis for invalidating them was Mr.

Gruttadauria’s fraudulent intent. The court of appeals

properly applied Prima Paint by holding that such claims

must be left to arbitration unless the claimed fraud was

directed to the arbitration clause itself. Pet. App. 38. A

plaintiff may not avoid Prima Paint merely by calling the

contract “void, not merely voidable.”

Petitioner cites no case from another circuit that he

contends is in conflict with the decision in this case. Rather,

he attempts to find a conflict between decisions in other

circuits and the Sixth Circuit’s decision in a different case”

(Burden v. Check Into Cash of Kentucky, 267 F.3d 483 (6th

Cir. 2001), cert. denied, 535 U.S. 970 (2002)), on which the

court relied in deciding the present case. See Pet. 14-19. In

the Burden case, the court rejected a claim that the contract

containing an arbitration clause was “void” where that claim

was based on the fact that the other party lacked a required

license. However, the court recognized that a different

question would be presented in cases where there is “no

contract” because of a forged signature or a lack of signatory

6

power. See 267 F.3d at 489 (referring approvingly to Sphere

Drake Ins. Ltd. v. All Am. Ins. Co., 256 F.3d 587, 591 (7th

Cir. 2001)). Some, perhaps most, of the federal cases cited

by Petitioner as recognizing claims of “voidness ab initio”

involved lack of signatory power, as in Sphere Drake. See

Pet. 19-23. Thus, it is not apparent in what respect the Sixth

Circuit’s understanding of the Prima Paint doctrine as

expressed in Burden differs from that of other circuits.

Indeed, this Court has already denied certiorari in the Burden

case itself and there is no reason why the Burden decision

Should be the basis for granting certiorari in this case.

Whatever the merits of the Burden decision, the initial Fazio

decision was plainly required by this Court’s decision in

Prima Paint.

II. Applying The Parol Evidence Rule Does Not “Render

Prima Paint A Nullity.”

Petitioner contends that the effect of the second decision

of the court of appeals, applying the parol evidence rule, is to

nullify the Prima Paint decision by making it impossible ever

to prove fraudulent inducement of an arbitration clause. The

contention is plainly incorrect. The Ohio parol evidence rule

does not preclude proof of fraudulent inducement consisting

of misrepresentations that do not contradict very the terms of

the written agreement itself. The court of appeals’ opinion

was explicit on this point: “[U]nder Ohio law ‘the parol

evidence rule does not prohibit a party from introducing parol

or extrinsic evidence for the purpose of proving fraudulent

inducement.’” Pet. App. 20. But the parol evidence rule

“may not be side-stepped by ‘a fraudulent inducement claim

which alleges that the inducement to sign the writing was a

promise, the terms of which are directly contradicted by the

signed writing.’” Pet. App. 21-22.

7

Thus, if assent to an arbitration clause was induced by, for

instance, misrepresentations as to how the arbitration process

works, or as to the frequency with which arbitrators decide in

favor of investors, the parol evidence rule would not exclude

such grounds for invalidating the arbitration clause.

Petitioner’s point seems to be that the apparent dearth of

Cases permitting evidence of such extrinsic fraud shows that

the parol evidence rule “realistically” bars proof of fraudulent

inducement in all but a few cases. Pet. 24. Petitioner

therefore asks this Court to “breathe life” into the “defense”

allegedly created by Prima Paint, by holding that the state-

law rule is overridden. Pet. 25-26.

The argument misconstrues the meaning of the Prima

Paint decision. The decision did not “create a defense” but

simply recognized that arbitration cannot properly be ordered

if there is no binding arbitration clause. In the language of

the Federal Arbitration Act, “[i]f the making of the arbitration

agreement . . . be in issue, the court shall proceed summarily

to the trial thereof.” See Prima Paint, 388 U.S. at 404 n. 11.

Although the Court had no occasion in Prima Paint to discuss

the substantive law applicable in determining whether an

arbitration clause is invalid because of fraud in_ its

inducement, its subsequent decision in Perry v. Thomas, 482

U.S. 483 (1987), made clear that state law “concerning the

validity, revocability, and enforceability of contracts

generally” is applicable in the enforcement of the Federal

Arbitration Act. See id. at 492 n. 9. Petitioner presents no

substantial reason for departing from that principle in this

case. The Sixth Circuit thus did not err in following the Ohio

parol evidence rule.

8

’ Petitioner’s argument that the Court should “breathe life

into” claims of fraudulent inducement of arbitration

agreements runs directly counter to the objective of the Prima

Paint decision, which was not to create new ways of avoiding

or delaying arbitration but to implement the “unmistakably

clear congressional purpose that the arbitration procedure . . .

be speedy and not subject to delay and obstruction in the

courts.” Prima Paint, 388 U.S. at 404.

It was undisputed that Mr. Glazer signed account

agreements containing arbitration provisions and forwarded

these agreements through his lawyer with no modifications to

the arbitration clause. To now allow him to escape arbitration

by claiming that he was told that the written arbitration

clauses would not be enforced contravenes the parol evidence

rule as applied in Ohio and elsewhere, and thereby undercuts

the enforceability of contracts. Nothing in Prima Paint

mandates such a result.

lil. The Court Of Appeals Correctly Ruled That An

Arbitration Clause Is Not A “Separate Contract.”

Petitioner argues that the court of appeals “inconsistently”

applied the “separability” principle of Prima Paint in its first

and second opinions in this case. Pet. 27-28. There was no

inconsistency, however. In its first opinion, the court adhered

to the requirement of Prima Paint that a court cannot consider

the defense of fraudulent inducement unless the alleged fraud

was directed to the arbitration clause, separately considered.

Pet. App. 40-41. In its second opinion, the court correctly

concluded that this requirement did not mean that the

arbitration clause is a “separate contract” for all purposes.

Pet. App. 14-17. If that were the case, as the court noted, it

would mean that there must be separate “consideration” for

9

the arbitration clause and separate satisfaction of all the other

elements of a binding contract - a conclusion that had been

rejected by the Sixth Circuit’s own prior decision in Wilson

Electric Contractors, Inc. v. Minnotte Contracting Corp., 878

F.2d 167 (1989), and similar decisions in other circuits. Pet.

App. 16. The court’s conclusion was correct. To read such

a “separate contract” requirement into the Prima Paint

decision would only undermine the effect of that decision by

creating novel grounds for avoiding arbitration. No such

purpose can be found in the language or rationale of this

Court’s decision in that case.

The entire purpose of Petitioner’s effort to treat the

arbitration clause as a separate contract is to apply the “sham

agreement” exception to the parol evidence rule. That

exception allows the introduction of parol evidence to show

that neither of the parties had any intention of entering into an

actual contract. The exception, however, has never been

applied to one clause of an integrated contract and to do so

here would substantially undercut the enforceability of

arbitration clauses by eliminating application of the parol

evidence rule to claims that such clauses were fraudulently

induced. In effect, arbitration clauses would not be on an

equal footing with other contracts because, if Petitioner’s

position were accepted, written arbitration provisions would

not be enforceable whenever one party claimed to have been

told that it would not be enforced. Nothing in Prima Paint

warrants holding that arbitration provisions can be so readily

side-stepped.

10

CONCLUSION

For all of the foregoing reasons, the petition for a writ of

certiorari should be denied.

Respectfully submitted,

Phil C. Neal

H. Nicholas Berberian

Patrick G. King

Neal Gerber & Eisenberg LLP

Two North La Salle Street

Chicago, IL 60602

(312) 269-8000

Fax: (312) 269-1747

June 15, 2005