Petition for Writ of Certiorari — Piper Jaffray & Co. v. Shea
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PETITION FOR WRIT OF CERTIORARI
Petitioners respectfully petition for a Writ of Certio-
rari to review the judgments of the Supreme Court of
Montana in these cases.
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CITATIONS TO OFFICIAL AND
UNOFFICIAL REPORTS
John P. Daly and Audrey M. Daly v. U.S. Bancorp Piper
Jaffray Inc., et al., 2005 MT 62N, 110 P.3d 1057.
John D. Shea and Brenda Shea v. U.S. Bancorp Piper
Jaffray Inc., et al., 2005 MT 63N, 110 P.3d 1057.
Estate of Alice Franey v. U.S. Bancorp Piper Jaffray Inc.,
et al., 2005 MT 73N, 110 P.3d 1057.
Roberta J. Emett and Kathleen E. Merrett v. U.S. Bancorp
Piper Jaffray Inc., et al., 2005 MT 94N,___ P.3d__.
Vickie Berryman v. U.S. Bancorp Piper Jaffray Inc., et al.,
2005 MT 116N,___ P3d__.
James Leary v. U.S. Bancorp Piper Jaffray Inc., et al.,
2005 MT 161N,___ P3d__.
Each of these cases relies upon and expressly adopts
the holdings and analysis set forth in Willems v. U.S.
Bancorp Piper Jaffray Inc., et al., 2005 MT 37, 107 P.3d
465,° which is one of twenty-three civil cases arising out of
allegations of misconduct by Mr. O’Neill with respect to
the accounts of the respective plaintiffs.
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* The Willems case has been settled and therefore no Petition is
being filed with respect to that case.
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JURISDICTION
Judgment was entered in Daly and Shea on March 15,
2005; in Franey on March 22, 2005; in Emett on April 19,
~ 2005; in Berryman on May 5, 2005; and in Leary on June
28, 2005.
Justice O’Connor granted an extension of time up to
and including July 13, 2005 to file the Petition for Writ of
Certiorari in Daly and Shea on May 18, 2005.
This Court has jurisdiction pursuant to 28 U.S.C.
§ 1257.
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CONSTITUTIONAL AND STATUTORY PROVISIONS
Commerce Clause, U.S. Const., art. 1, § 8, cl. 3:
The Congress shall have the Power...
To regulate Commerce with foreign Nations, and
among the several States, and with Indian Tribes.
Federal Arbitration Act, 9 U.S.C. § 2:
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 contract or transaction, or the refusal to perform the
whole or any part thereof, or an agreement in writing to
submit to arbitration an existing controversy arising out of
such a contract, transaction, or refusal, shall be valid,
irrevocable, and enforceable, save upon such grounds as
exist at law or in equity for the revocation of any contract.
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STATEMENT OF THE CASE
This consolidated Petition requests this Court’s review
of decisions of the Montana Supreme Court in six of
twenty-three actions’ against Piper Jaffray which allege
generally that Mr. O’Neill, a former Account Executive in
the Butte, Montana Branch Office of Piper Jaffray, had
engaged in improper conduct with respect to the accounts
of the plaintiffs in each of the twenty-three lawsuits.’
Each of the Respondents here had executed one or
more account agreements containing a pre-dispute arbi-
tration provision. The provision conforms to the language
required by the securities industry self-regulatory organi-
zations such as the New York Stock Exchange, Inc.
(“NYSE”) and the National Association of Securities
Dealers, Inc. (“NASD”) and is typical of arbitration provi-
sions found in virtually every customer account agreement
used in the securities industry throughout the United
States. For example, the Sheas executed agreements when
they opened an IRA account and their joint account. (The
various agreements signed by the Respondents are collec-
tively referred to as the “Account Agreements.”) In perti-
nent part, the IRA Agreement provides:
* The twenty-three lawsuits, and the status of each, may be found
in the Appendix at 65.
* On January 12, 2005, Mr. O’Neill pled guilty to two counts of
unauthorized trading in the accounts of two (2) clients with whom Piper
Jaffray has reached settlements. Mr. O’Neill was sentenced on April 29,
2005. He is required to make restitution to Piper Jaffray in the amount
of $308,000, representing amounts which Piper Jaffray paid into a
restitution fund as part of the settlement with the Montana Securities
Department arising out of O’Neill’s alleged misconduct.
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.-+. I agree to arbitrate any disputes be-
tween Piper Jaffray and me. I specifically
agree and recognize that all controversies
which may arise between Piper Jaffray, its
agents, representatives or employees and
me, concerning any transaction, account or
the construction, performance or breach of
this or any other agreement between Piper
Jaffray and me, whether entered into prior,
on, or subsequent to the date hereof, shall
be determined by arbitration to the full ex-
tent provided by law....
(Bold in original).° The IRA Agreement also confirms Mr.
Shea’s receipt of this IRA Agreement and acknowledge-
ment of the arbitration clause in words which appear
immediately above Mr. Shea’s signature: “I UNDER-
STAND THIS AGREEMENT CONTAINS A PRE-
DISPUTE ARBITRATION CLAUSE AT PARAGRAPH
4 ABOVE, AND I ACKNOWLEDGE RECEIPT OF A
COPY OF THIS AGREEMENT.” (Bold, all capital
lettering in original document).
In their joint account agreement, Mr. and Mrs. Shea
both entered into a contract with Piper in which they
agreed that any disputes would be resolved through
arbitration. The arbitration clause employed in the joint
agreement is almost identical to that used in the IRA
Agreement, and in pertinent part provides:
.-- You agree to arbitrate any disputes
between Piper Jaffray and you. You spe-
cifically agree and recognize that all
* The complete arbitration provision contained in the [RA account
agreement may be found at App. 63-64.
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controversies which may arise between
Piper Jaffray, its agents, representatives or
employees and you concerning any transac-
tion, account or the construction, perform-
ance or breach of this or any other agree-
ment between us, whether entered into
prior, on, or subsequent to the date hereof,
shall be determined by arbitration to the
full extent provided by law....
(Bold in original).’
As with the IRA Agreement, the joint agreement also
contains the Sheas’ written confirmation of receipt of a
copy of the agreement and acknowledgement of the arbi-
tration provision immediately above the signature line:
BY SIGNING THIS AGREEMENT YOU:
2. UNDERSTAND THIS AGREEMENT CON-
TAINS A PRE-DISPUTE ARBITRATION
CLAUSE AS SHOWN ON PAGE 7, PARA-
GRAPH 12.
3. ACKNOWLEDGE RECEIPT OF A COPY
OF THIS AGREEMENT.
(Bold and all capital lettering in original document).
When each plaintiff initiated litigation, Piper Jaffray
invoked the arbitration provision by demanding arbitra-
tion of the plaintiff. When each plaintiff refused to arbi-
trate, Piper Jaffray then moved the state district court to
compel arbitration. After conducting evidentiary hearings
” The complete arbitration provision contained in the joint account
agreement may be found at App. 61-62.
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in each case, and conducting a joint hearing in which
expert testimony was taken and made applicable to all
twenty-three cases, the three district court judges who had
various of these cases uniformly held in separate opinions
for each case that the arbitration provisions were unen-
forceable.
A Notice of Appeal was filed in each case, except
where the matter was settled before the appeal time had
run. Of the twenty-three cases, these six cases have been
decided but not settled; the appeal is still pending in four
cases; and thirteen cases have been settled. The first
decision of the Montana Supreme Court was in Willems v.
U.S. Bancorp Piper Jaffray Inc., et al., 2005 MT 37, 107
P.3d 465 (decided February 22, 2005). (App. 23-25).°
In Willems, the Court held that Piper Jaffray owed its
customers a fiduciary duty which_arose out of certain
substantive provisions contained in the various Account
Agreements which are consistent with federal statute and
regulations. According to the Montana Supreme Court,
this fiduciary duty arose even before the customers signed
the agreement and that duty required Piper Jaffray to
explain the arbitration provision, but only the arbitration
provision, before the Agreement was executed. Id. at { 24
(App. 33). The Court rejected Piper Jaffray’ argument
that this requirement creates a special legal standard in
violation of the Federal Arbitration Act. Id. at |] 26-27.
(App. 33-34). Although raised in Petitioners’ brief below,
the Montana Supreme Court never addressed the impact
* Willems had been settled in principle by Piper Jaffray shortly
before the opinion was issued but before the parties had moved to
dismiss the appeal as moot. As a result, Willems is not one of the cases
for which review by this Court may be sought.
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the invalidation of the arbitration provision has upon
broker-dealers and their customers conducting business in
interstate commerce.
Subsequently, the Montana Supreme Court issued
opinions in the six cases which are the subject of this
Petition. In each decision, the Court has affirmed the
lower court by incorporating its opinion and analysis in
Willems, and has rejected Piper Jaffray’s arguments that
the Federal Arbitration Act controls and the invalidation
of the arbitration provisions at issue violates the Com-
merce Clause. Daly, supra at {J 3-4 (App. 2-3); Shea,
supra at J] 4-5 (App. 6); Franey, supra at 7 3 (App. 10);
Emett, supra at {J 3,5 (App. 12-13); Berryman, supra at
1 4-5 (App. 17); Leary, supra at [J 4,6 (App. 21-22).
Because of the hostility of the Montana judicial
system to pre-dispute arbitration provisions generally and
the import of these decisions to the viability and validity
in Montana of arbitration provisions utilized by Piper
Jaffray and the entire securities industry in the United
States, Piper Jaffray is seeking this Court’s review.
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REASONS FOR GRANTING THE WRIT
Introduction
Since 1994, when the Montana Supreme Court ren-
dered its first opinion in Casarotto v. Lombardi, 886 P.2d
931 (Mont. 1994) (Casarotto ID, the Montana judiciary has
evidenced a hostility toward arbitration and has rejected
arguments that the Federal Arbitration Act pre-empts the
. attempts of both the Montana legislature and judiciary to
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void pre-dispute arbitration agreements in matters clearly
involving interstate commerce. In Casarotto I, a Montana
statute required notice of the existence of an arbitration
provision be placed on the first page of any contract
containing such a provision; otherwise, the arbitration
provision was invalid and unenforceable. The Montana
Supreme Court held this requirement did not violate the
Federal Arbitration Act. Casarotto I, 886 P.2d at 939. This
Court granted certiorari, decided sub nom Doctor’s Associ-
ates v. Casarotto, 515 U.S. 1129 (1995), and ordered that
the judgment of the Montana Supreme Court be vacated
and remanded for further consideration in light of this
Court’s then-recent decision, Allied-Bruce Terminix Cos. v.
Dobson, 513 U.S. 265 (1995). Upon remand, the Montana
Supreme Court affirmed its prior decision. Casarotto v.
Lombardi, 901 P.2d 596 (Mont. 1995) (Casarotto II). This
Court again granted certiorari and reversed the decision of
the Montana Supreme Court, decided sub nom Doctor’s
Associates, Inc. v. Casarotto, 517 U.S. 681 (1996), holding
that the special statutory provision applicable to arbitra-
tion clauses violated the Federal Arbitration Act.
Justice Trieweiler’s specially concurring opinion in
Casarotto I provides compelling insight into the Montana
Supreme Court’s hostility toward the Federal Arbitration
Act and well-settled law favoring arbitration as a means of
dispute resolution: “I am particularly offended by the
attitude of federal judges {who favor arbitration as an
alternative dispute resolution mechanism which relieves
crowded court dockets]... . [I]f the Federal Arbitration Act
is to be interpreted as broadly as some of the decisions of
our federal courts would suggest, then it presents a
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serious issue regarding separation of powers.” Casarotto I,
886 P.2d at 939-941.
The Montana Supreme Court’s hostility toward the
Federal Arbitration Act and arbitration has not abated
since Casarotto was decided. See, e.g., Keystone, Inc. v.
Triad Systems Corp., 1998 MT 326, 971 P.2d 1240 (invali-
dating portion of arbitration clause that required parties
to arbitrate disputes outside of Montana); Iwen v. U.S.
West Direct, 1999 MT 63, 977 P.2d 989 (striking arbitration
provision in advertising contract as “unconscionable”);
Kingston v. Ameritrade, Inc., 2000 MT 269, 12 P.3d 929
(validity of arbitration provision in an agreement to be
decided by court where validity of underlying agreement
not at issue); Kloss v. Edward D. Jones, 2002 MT 129, 54
P3d 1, cert. denied, 538 U.S. 956 (2003) (arbitration
provision not within the client’s reasonable expectation
and existence of an on-going fiduciary relationship re-
quired explanation of arbitration provision).
The Montana Supreme Court’s decisions in the mat-
ters that are the subject of this Petition continue this
tradition by refusing to enforce the arbitration provisions
contained in the Piper Jaffray Account Agreements.
Indeed, the irony of the Montana Supreme Court’s opin-
ions is not lost on Piper Jaffray: in the decisions at issue
here the Montana Supreme Court has found a new ration-
ale to invalidate arbitration provisions which are in the
form and format previously required by that court. In
Mueske v. Piper, Jaffray & Hopwood, Inc., 859 P.2d 444
(Mont. 1993), the Montana Supreme Court invalidated an
arbitration clause because the account agreement failed to
provide an acknowledgement of the existence of the
arbitration provision in the agreement and receipt of a
copy of the agreement. Those requirements are mét in the
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Account Agreements at issue here. Faced with agreements
and pre-dispute arbitration provisions which comply with
Mueske, the Montana Supreme Court has created new
requirements purposefully designed to invalidate the
arbitration provisions.
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I. The Montana Supreme Court’s unique judi-
cially imposed requirement that pre-dispute
arbitration clauses commonly contained in se-
curities industry customer agreements must be
explained to the customer before the agree-
ment is even executed, which requirement is
not applied to any other contract provisions in
Montana, violates the Federal Arbitration Act
and frustrates the national policy of favoring
arbitration as a means of dispute resolution.
It is well established that a national policy favoring
arbitration is at the heart of the Federal Arbitration Act.
Southland Corp. v. Keating, 465 U.S. 1, 10 (1984); see also
First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 945
- (1995); Mitsubishi Motors Corp. v. Soler Chrysler-
Plymouth, Inc., 473 U.S. 614, 631 (1985). The Southland
Court, in reversing the California Supreme Court, deter-
mined that section 2 of the Federal Arbitration Act applies
to state court decisions and preempts conflicting state
laws. Southland, supra, at 16. And, in Shearson/ American
Express, Inc. v. McMahon, 482 U.S. 220 (1987), this Court
held that national policy applicable to securities industry
claims, stating:
[Wle are well past the time when judicial suspi-
cion of the desirability of arbitration and of the
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competence of arbitral tribunals should inhibit
enforcement of the Act in controversies based on
statutes.
Id. at 226 (citations omitted).”
The national policy in favor of arbitration preempts
state laws that infringe upon the domain Congress encom-
passed within the Federal Arbitration Act. For example, in
Perry v. Thomas, 482 U.S. 483 (1987), this Court held that
section 2 of the Federal Arbitration Act preempted a
provision of the California Labor Code that permitted
- court actions to collect wages, notwithstanding any private
agreement to arbitrate such a dispute. In dicta, the Perry
Court stated that a court may not “rely on the uniqueness
of an agreement to arbitrate as a basis for a state-law
holding that enforcement would be unconscionable, for
this would enable the court to effect what we hold today
the state legislature cannot.” Perry, supra, at 492n.9. _
In the instant cases, the Montana Supreme Court has
done precisely what this Court counseled against in Perry
by holding pre-dispute arbitration provisions to higher or
different standards than other provisions in the contracts.
It has taken a substantive provision of the Account
Agreement, which only is effective after the contract has
been formed, and has held that this post-formation provi-
sion creates a fiduciary duty which, in turn, requires Piper
Jaffray to explain only the arbitration provision to its
* Correspondingly, prior Montana law also provides a state policy
favoring arbitration. Chor v. Piper, Jaffray & Hopwood, Inc., 862 P.2d
26, 29 (Mont. 1993); Vukasin v. D.A. Davidson & Co., 785 P.2d 713, 718
(Mont. 1990).
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clients prior to execution of the agreement.” In so holding,
the Montana Supreme Court ignores the clear holding of
Doctor’s Associates, Inc. v. Casarotto, supra, and the dicta
in Perry, supra, by subjecting an arbitration clause to a
fundamentally different legal standard than applied to
any other contract provision. This violates the Federal
Arbitration Act.
Section 2 of the Federal Arbitration Act “makes
enforceable a written arbitration provision in ‘a contract
evidencing a transaction involving commerce.’ 9 U.S.C.
§ 2.” Allied-Bruce, supra, at 268 (emphasis in original). As
this Court further explained, section 2 also allows states to
“regulate contracts, including arbitration clauses, under
general contract law principles and they may invalidate an
arbitration clause ‘upon such grounds as exist at law or in
equity for the revocation of any contract. 9 U.S.C. §2
(emphasis added). What States may not do is decide that a
contract is fair enough to enforce its basic terms (price,
service, credit), but not fair enough to enforce its arbitra-
tion clause.” Jd. at 281 (citation omitted).
In the cases at bar, the Montana Supreme Court has
created a heightened burden for the arbitration provisions
than for the rest of the contract provisions. To do so, it
interpreted the following language contained in the Ac-
count Agreements to find that this provision created a
fiduciary duty even before the agreement is signed by the
customers:
* None of the decisions provides any clue as to how this explana-
tion is to be provided or memorialized. Are Miranda-type warnings
required? Must the explanation be in writing? Must it be recorded?
Does it require the client to sign a separate document acknowledging
that the explanation had been provided?
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Customer’s Orders Binding Until Notice of
Death
Upon your death or failure to comply with any
part of this Agreement or whenever Piper Jaffray
deems it necessary for its protection, Piper Jaf-
fray is authorized (but is not required) to:
-Cancel outstanding orders;
-Purchase, sell, assign, receive and deliver
all or any part of the securities held or car-
ried for you; and
-Close out short sales by purchase upon any
exchanged board or market any public or
private sale at Piper Jaffray’s option.
Willems, supra { 17 (App. 29-30).
This position completely ignores the fact that the
contracts at issue clearly and specifically advise the client
of the existence of the arbitration provision. The arbitra-
tion notice is found above the signature block and provides
that, by signing the Account Agreement, the customer
acknowledges the existence of the arbitration clause. The
language on the signature page of each Account Agree-
ment clearly and unambiguously informs the customer
that the Account Agreements contain arbitration clauses
and acknowledges receipt of the agreement. The notice
provision is generally in all capital and bold lettering, and
directs the signer to the location of the arbitration provi-
sion in the Account Agreement. Therefore, any customers
who sign the signature page of any Account Agreement
can not do so without first seeing the arbitration notice
provision which clearly refers to the arbitration clause.
Finally, and importantly, the language used in both the
arbitration clause and the notice provision has been
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approved by the Securities Exchange Commission (“SEC”)
and is consistent with the requirements imposed by both
the NYSE and NASD.
Notwithstanding these undisputed facts, the Montana
Supreme Court, as its only basis for voiding the arbitra-
tion provision, held that Piper had a fiduciary obligation to
_ explain the arbitration provision to each customer before
the Account Agreement was executed. This stands contract
law on its head and creates a special requirement applica-
ble only to arbitration provisions.
Montana contract law acknowledges that a written
contract is only effective at delivery — not prior to delivery
and certainly not prior to execution. See, generally, Mont.
Code Ann. § 28-2-906. It also recognizes that a party to a
contract is generally bound by all terms of the contract,
regardless of which terms were read. See, generally, Wiley
v. Iverson, 1999 MT 214, 985 P.2d 1176, 1181; see also,
Schlemmer v. North Central Life Co., 2001 MT 256, 37
P.3d 63, 65 (where language in an insurance application is
clear and unambiguous, plaintiff did not deny signing it,
and contract has notation directly above signature block
attesting to signatory’s understanding of the document,
plaintiff’s professed claim of ignorance as to the applica-
tion’s contents “cannot prevail.”) Furthermore, Montana
“law provides there is no fiduciary duty between an in-
vestment advisor and his or her client absent a grant of
discretionary authority. See Chor, supra, 862 P.2d at 32.
The decisions below do not require Piper to explain
any other term or condition in the Account Agreement
before execution, including the terms which the Court
below found created the fiduciary duty. The arbitration
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provision is-thus impermissibly singled out and treated
like no other provision. This requirement is as offensive
and impermissible as the statutory requirement stricken
in Doctor’s Associates, supra, 517 U.S. 681, that notice of
the existence of the arbitration provision be provided on
the first page of the agreement.
In addition, the substantive provision which the
Montana Supreme Court found created this fiduciary duty
has its roots in federal statutes and regulations and is
found in virtually every securities industry customer
agreement. The Montana Supreme Court found that this
provision gives Piper Jaffray discretion to buy and sell in
the plaintiffs’ accounts, thereby creating a fiduciary duty
on the part of Piper Jaffray to explain the arbitration
clause to the plaintiffs. Willems, supra { 22 (App. 32).
Piper Jaffray, however, did not have discretion to buy
- and sell securities in plaintiffs’ accounts." Piper Jaffray’s
“discretion” was constrained in two ways: (1) Piper
Jaffray could only act in three discrete situations; and,
(2) when it did act, Piper Jaffray was constrained by an
implicit requirement that it do so in good faith and in a
commercially reasonable manner. Accordingly, the Mon-
tana Supreme Court’s finding that “Piper’s brokers [had]
discretion to buy and sell securities,” Willems, supra | 22
(App. 32), is erroneous.
" It is important to note that the plaintiffs’ non-IRA accounts were
margin accounts in which the Plaintiffs were able to use the securities
in the accounts as collateral to obtain loans to purchase stock. The
language permitting Piper to act without customer approval was in the
context of protecting Piper when the risk from the customers’ accounts
became excessive.
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In the context of a margin account, like those at issue
in this case,” the language the Montana Supreme Court
relied upon to find a fiduciary duty merely provides
protection to Piper Jaffray in specific situations.” Piper
Jaffray is allowed to act in only three very specific situa-
tions: (1) when the customer dies; (2) when the customer
breaches the contract; or, (3) when Piper Jaffray deems it
necessary to liquidate the account for its protection. See
Willems, supra 4 17 (App. 29). It is the third situation that
the Court below relied upon to determine that Piper
Jaffray’s limited contractual right to take appropriate
action under narrowly defined circumstances somehow
makes it a fiduciary. This finding is erroneous.
The purpose of such language “is to protect brokers
from the risks associated with insufficiently secured
accounts, and to prevent customers from carrying vast
exposure in their accounts without adequate capital to
cover their positions.” Pomano-Windy City Partners, Lid.
v. Bear Stearns & Co., Inc., 794 F. Supp. 1265, 1275
(S.D.N.Y. 1992) (citations omitted). As Justice Powell
* Interestingly, Mr. Leary, one of the plaintiffs below, testified
that he did not have a margin account, but only had an IRA account
and was only suing with regard to that IRA account. See Hearing
Transcript dated February 26, 2003, pp. 11-12 (App. 58-60). The
contracts governing the IRA accounts offered by Piper Jaffray did not
contain the language the Montana Supreme Court found to be discre-
tionary, as IRA accounts are not permitted to be ou margin.
* If a customer’s margin gets out of balance (i.e. if the value of the
loan departs from certain constraints compared to the value of the
securities in the account), Piper’s exposure in the event of a default by
the customier gets too excessive and threatens to harm Piper. Piper is
carrying too much risk. Therefore, Piper is entitled to either require
additional money be added to the account (through a margin call) or to
buy or sell in the account to eliminate the risk (i.e. to liquidate the
account).
17
stated, sitting by designation in the Fourth Circuit and
interpreting similar language, “A brokerage house should
not have to risk a nearly unlimited amount of its own
funds while waiting [for a client to] to meet a margin call.”
Prudential-Bache Securities, Inc. v. Stricklin, 890 F.2d
704, 707 (4th Cir. 1989).”*
The brokerage firm’s discretion to increase the margin
or to initiate a margin call “must be exercised in good
faith.” Modern Settings, Inc. v. Prudential-Bache Securi-
ties, Inc., 936 F.2d 640, 644 (2nd Cir. 1991). “A margin call
is made in bad faith when it is ‘contrived . .. in bad faith
to penalize [the customer] for some reason unrelated to
[the broker’s] business.’” Capital Options Investments, Inc.
v. Goldberg Brothers Commodities, Inc., No. 88 C 2073,
1990 WL 180583, *5-(N.D. Ill. Nov. 5, 1990) (citations
omitted) (alterations in original). Accordingly, and in
contradiction to the Montana Supreme Court, Piper
Jaffray did not have absolute discretion to initiate a
“ The language in that contract was very similar to the language
in the Piper contracts at issue in this matter and read:
Whenever in your [appellee’s] discretion you deem it desir-
able for your protection (and without the necessity of a mar-
gin call) ... you may, without prior demand, tender, and
without any notice of the time or place of sale, all of which
are expressly waived, ... buy any securities, or commodities
or contracts relating thereto of which my account or ac-
counts may be short, in order to close out in whole or in part
any commitment in my behalf... and neither any demands,
calls, tenders or notices which you may make or give in any
one or more instances nor any prior course of conduct or
dealings between us shall invalidate the aforesaid waivers
on my part.
Prudential-Bache, 890 F.2d at 706.
18
margin call or to liquidate the account upon a determina-
tion that it was in its best interests to do so. See Modern
Settings, supra, 936 F.2d at 644 (holding that a brokerage
did not have “absolute discretion” to liquidate because it
must make this decision in good faith).
Similarly, Piper Jaffray, after determining that liqui-
dation of the account was necessary, would also be con-
strained to do so “in good faith and in a commercially
reasonable manner.” In re Kaplan, 143 F.3d 807, 818
(8rd Cir. 1998). Liquidating in a commercially reasonable
manner means to mitigate the damages of the client. See
Agra, Gill & Duffus, Inc. v. Benson, 920 F.2d 1173, 1177
(4th Cir. 1990) (“overriding the broker’s discretion to select
the manner of liquidation was its duty to mitigate [the
client’s] damages, which in this context meant to liquidate
in a commercially reasonable manner.”). See also Cauble v.
Mabon Nugent & Co., 594 F. Supp. 985, 992 (S.D.N_LY.
1984) (in commodities case, holding that “broker does not
have unbridled discretion to liquidate an account; its
power to liquidate must be exercised in good faith under
the existing facts and circumstances”).
Because Piper Jaffray’s actions were constrained by
the duty to act (1) in good faith, and, (2) in a commercially
reasonable manner in deciding when and how to liquidate
the accounts, Piper Jaffray did not have discretion over
the plaintiffs’ accounts as the Montana Supreme Court
found. Therefore, its holding and analysis that Piper
’ Jaffray somehow owed the plaintiffs a fiduciary duty are
without legal or factual support because Piper Jaffray did
not have unfettered discretion to buy and sell securities in
their accounts.
19
The inescapable conclusion is that the Montana
Supreme Court, in its hostility to arbitration, has seized
upon a unique interpretation of principles of contract law
to void the arbitration clauses, and only the arbitration
clauses, in the plaintiffs’ contracts. This Court has un-
equivocally held that the Federal Arbitration Act “makes
any such state policy unlawful, for that kind of policy
would place arbitration clauses in an ‘unequal footing’
directly contrary to the Act’s language and Congress’
intent.” Allied-Bruce, supra at 281. In this case, arbitra-
tion is not only disfavored, but effectively barred from any
use by the securities industry based upon a unique and
result-oriented judicial interpretation of principles of
contract law to find the arbitration clause unenforceable. A
Writ of Certiorari should be issued here expressly because
these decisions are directly contrary to this Court’s prece-
dent.
Il. The Montana Supreme Court’s wholesale
invalidation of pre-dispute arbitration clauses
common in the securities industry is out of.
step with the majority of state courts which
routinely enforce arbitration clauses contained
within customer agreements in the securities
industry.
It is beyond dispute that the securities industry
generally, and the relationship between broker-dealers and
their customers in particular, are matters in interstate
commerce, 15 U.S.C. § 78(b)(1), and thus come within the
Federal Arbitration Act. In this instance, the decisions of
the Montana Supreme Court at issue here interfere with
the arrangement between broker-dealers located in other
20
states and their Montana customers who are investors in
national securities markets. Firms like Piper Jaffray,
operating as broker-dealers in the heavily regulated
securities industry, routinely rely upon unilaterally
drafted customer contracts. In fact, the SEC requires firms
to use certain language in its arbitration provisions, which
language is set forth in Rule 3110 of the NASD Manual.
These contracts are executed by broker-dealers and their
customers throughout the country.
There is a reasonable expectation that arbitration
clauses are found in agreements between broker-dealers
and their clients. Indeed, prior to these Montana decisions,
this expectation has been part of Montana contract law
and has been discussed in connection with arbitration
clauses in brokerage agreements. See, Passage v. Pruden-
tial-Bache Securities Inc., 727 P.2d 1298, 1302 (Mont.
1986) (“Such predispute arbitration agreements are not
outside the reasonable expectations of the investor.” (citing
Finkle and Ross v. A.G. Becker Paribas, Inc., 622 F. Supp.
1505, 1511-12 (S.D.N.Y. 1985)).
The prevalence and the use of arbitration in the
securities industry is evidenced by recent statistics pub-
lished by the NASD, one of the self-regulatory organiza-
tions to which Piper Jaffray belongs, and one whose
arbitration rules are specifically referenced in the arbitra-
tion provision at issue here. In the last five years alone the
NASD has administered over 33,000 arbitrations. During
that time, of those claims decided by NASD arbitration
panels, approximately 55% resulted in awards in favor of
the investor. In 2004 alone, the NASD administered over
9,000 arbitrations.
21
Not only are pre-dispute arbitration provisions usu-
ally and customarily employed in the securities industry,
but their use has been acknowledged and accepted by this
Court as a legitimate and fundamentally fair means of
resolving disputes between broker-dealers and their
customers. Shearson/American Express, Inc., 482 U.S. at
237. In fact, Montana law prior to the Casarotto decisions,
held that “agreement(s] to arbitrate disputes in accordance
with SEC-approved procedures are not unconscionable as
a matter of law.” Chor, 862 P.2d at 30 (citing Cohen v.
Wedbush, Noble, Cooke, Inc., 841 F.2d 282, 286 (9th Cir.
1988) (overruled on other grounds)).
Indeed, virtually all other states recognize the en-
forceability of pre-dispute arbitration provisions in con-
tracts between broker-dealers and their clients. See, e.g.,
American Ins. Co. v. Cazort, 871 S.W.2d 575 (Ark. 1994)
(Holding that the issuer could compel the investor into
arbitration even though the issuer was not a signatory to
the arbitration agreement between the investor and the
broker); Macaulay v. Norlander, 15 Cal.Rptr.2d 204, 207
(Cal. Ct. App. 1992) (“Respondents, like other Sutro
clients, were bound by the provisions of the client agree-
ment regardless of whether they read it or were aware of |
the arbitration clause when they signed the document.”);
Eychner v. Van Vleet, 870 P.2d 486 (Colo. Ct. App. 1993)
(Holding that if initial transactions involved investment
firm accounts, all transactions would be subject to arbitra-
tion.); Fairview Cemetery Assoc. v. Eckberg, 385 N.W.2d
812, 821 (Minn. 1986) (Held that the investor’s “Minnesota
Blue Sky Law and related common law claims are there-
fore subject to arbitration.”); Smith Barney, Inc. v. Henry,
775 So. 2d 722, 727 (Miss. 2001) (“Further, the arbitration
22
provisions survive the death of Hilliard and the termina-
tion of the agreements and bind Henry as a successor of
Hilliard.”); State ex rel. PaineWebber, Inc. v. Voorhees, 891
S.W.2d 126, 130 (Mo. 1995) (“Arbitration Act requires a
court to stay a lawsuit pending arbitration where as here
the parties agree in writing to arbitrate a dispute from a
contract that involves commerce.”); Blount v. Smith
Barney Shearson, Inc., 695 So. 2d 1001 (La. Ct. App. 1997)
(Court required arbitration pursuant to arbitration clause
despite claims by investors that they had not read the
terms of the account agreements and the broker did not
explain their terms.).”
* See, also, Investment Management & Research, Inc. v. Hamilton,
727 So. 2d 71, 78 (Ala. 1999) (“Because Hamilton claimed fraud in the
inducement of the customer-agreement contract generally, as opposed to
the arbitration clause specifically, Hamilton’s claims against IMR are
subject to arbitration according to the terms of the customer agreement
he signed.”); Rocz v. Drexel Burnham Lambert, Inc., 743 P.2d 971, 976
(Ariz. Ct. App. 1987) (“Absent an ambiguity in the arbitration provision,
and absent oppressive or unconscionable terms, we presume that Rocz
assented to the arbitration terms that she should have reasonably -
expected to be included in this securities contract. We therefore reject
Rocz’s argument that the arbitration provision is unenforceable on legal
or equitable grounds.”); Salomon Smith Barney, Inc. v. Cotrone, 841
A.2d 1199 (Conn. App. Ct. 2004) (Compelling the investor into arbitra-
tion even though he did not sign the entire arbitration agreement);
Oppenheimer & Co., Inc. v. Young, 475 So. 2d 221 (Fla. 1985) (Approv-
ing broker’s right to arbitration of dispute pursuant to arbitration
clause even though broker did not pointlessly invoke the arbitration
agreement in a prior federal court action); Comvest, L.L.C. v. Corporate
Securities Group, Inc., 507 S.E.2d 21, 24 (Ga. Ct. App. 1998) (Holding
that the securities purchaser was bound by arbitration agreement even
though it did not sign the agreement.); Nelson for Soller v. Roger J.
Lange & Co., Inc., 594 N.E.2d 391, 393 (Ill. App. Ct. 1992) (“We find this
arbitration clause to be broad enough to require that the claim of fraud
in the inducement be submitted to arbitration.”); Commonwealth
Equity Services, Inc. v. Messick, 831 A.2d 1144, 1152 (Md. Ct. Spec. App.
2003) (Holding that Maryland law favors compelling arbitration as long
(Continued on following page)
23
as there is a valid arbitration agreement and the parties have not
waived the right to arbitrate.); Loche v. Dean Witter Reynolds, Inc., 526
N.E.2d 1296, 1300 (Mass. App. Ct. 1988) (Holding that investor’s claims
against firm, based on allegations of fraud, conversion and misrepre-
sentation, were subject to arbitration under Federal Arbitration Act.);
Bennett v. Shearson Lehman-American Exp., Inc., 423 N.W.2d 911
(Mich. App. Ct. 1987) (Holding that brokerage firm’s delay in seeking
arbitration while attempting to resolve dispute with customers over
firm’s handling of customers’ brokerage account did not preclude firm
from seeking to arbitrate dispute under arbitration provision in
customers’ contract after customers filed complaint.); Young v. Pruden-
tial Securities, Inc., 891 S.W.2d 842, 845 (Mo. App. Ct. 1995) (“Plaintiffs
admitted they executed the arbitration agreements, they have alleged
nothing which casts doubt on the validity of those agreements, they
have refused to arbitrate and the defendants have applied for an order
_ to compel arbitration. The court was required to grant that applica-
tion.”); Jansen v. Salomon Smith Barney, Inc., 776 A.2d 816, 821 (NJ.
Super. Ct. App. Div. 2001) (“Although plaintiffs did not sign the
arbitration provision, they were the intefided successors to Jansen’s
interest in the accounts. They are thus bound by the arbitration
clause.”); Alexander v. Calton & Associates, Inc., 110 P.3d 509, 510
(N.M. Ct. App. 2005) (“[T]he district court is compelled to order the
parties to arbitrate unless it finds that there is no enforceable agree-
ment to arbitrate.”); Park v. Merrill Lynch, 582 S.E.2d 375, 378 (N.C.
Ct. App. 2003) (“Securities brokerage agreements are contracts
‘involving’ interstate commerce and, therefore, the FAA applies to
them”); Dowd v. First Omaha Securities Corp., 495 N.W.2d 36 (Neb.
1993) (Requiring arbitration of dispute, despite plaintiff’s challenge of
the impartiality of the arbitration panel); Financial Network Invest-
ment Corp. v. Becker, 741 N.Y.S.2d 837, 838 (N.Y. Sup. Ct. 2002) (“When
valid arbitration agreement covering the dispute is shown, arbitration
is required”); David v. Merrill Lynch, Pierce, Fenner and Smith, Inc.,
440 N.W.2d 269, 275 (N.D. 1989) (“We conclude that the arbitration
agreement is applicable to David's claims against Williams and Merrill
Lynch Commodities, Inc.”); Featherstone v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., 822 N.E.2d 841 (Ohio Ct. App.-2004) (“ ‘Unless it
may be said with positive assurance that the subject arbitration clause
is not susceptible to an interpretation that covers the asserted dispute,’
a court should require arbitration according to the contract”); Dean
Witter Reynolds, Inc. v. Shear, 796 P.2d 296, 302 (Okla. 1990) (concur-
ring opinion) (“{Plarties to a commodities contract [should] be allowed
to knowingly and intentionally waive the right to trial by jury by
(Continued on following page)
24
In summary, granting the Writ of Certiorari is appro-
priate here because the decisions below are out of step
with virtually every other state which enforces pre-dispute
arbitration provisions in the securities industry; and,
because they are an anomaly, the Montana decisions
threaten to disrupt the operations of the industry as a
whole since Montana-only account agreements and proce-
dures would be required to be implemented by broker-
dealers operating in a national securities market.
agreeing to submit contractual controversies to arbitration.”) (emphasis
in original); Dickler v. Shearson Lehman Hutton, Inc., 596 A.2d 860, 867
(Pa. Super. Ct. 1991) (“Given the three paths down which this litigation
can be directed ~ compelled individual arbitration, class action in a
court of law, or compelled classwide arbitration - the last choice best
serves the dual interest of respecting and advancing contractually
agreed upon arbitration agreements while allowing individuals who
believe they have been wronged to have an economically feasible route
to get injunctive relief from large institutions employing adhesion
contracts.”); Carlsten v. Oscar Gruss & Son, Inc., 853 A.2d 1191, 1194
(R.1. 2004) (“[P]arties who voluntarily contract to use arbitration as an
expeditious and informal means of private dispute resolution ‘are bound
by the\terms of their agreement.”); Cantella & Co., Inc. v. Goodwin, 924
S.W.2d 943, 944 (Tex. 1996) (“Once a party seeking to compel arbitra-
tion establishes that an agreement exists under the FAA, and that the
claims raised are within the agreement's scope, the trial court ‘has no
discretion but to compel arbitration and stay its proceedings pending
arbitration.’”); Garmo v. Dean, Witter, Reynolds, Inc., 681 P.2d 253, 255
(Wash. 1984) (“We hold that the supremacy clause of the federal
constitution prevails and, thus, the federal arbitration law requires
enforcement of arbitration clauses in brokerage agreements.”).
25
Ill. The Montana Supreme Court’s wholesale invali-
dation of pre-dispute arbitration provisions com-
mon in the securities industry impermissibly
interferes with the relationship between broker-
dealers and their customers in interstate com-
merce and thus violates the Commerce Clause.
The United States Constitution gives Congress alone
the power “[t]o regulate Commerce with foreign Nations,
and among the several States ... .” U.S. Const. art. I, § 8,
cl. 3. Under this clause, Congress “is empowered to regu-
late and protect the instrumentalities of interstate com-
merce, or persons or things in interstate commerce, even
though the threat may come only from intrastate activi-
ties.” Pierce County, Wash. v. Guillen, 537 U.S. 129, 147
(2003), citing United States v. Lopez, 514 U.S. 549, 558
(1995) (citations omitted).
Even in areas where Congress has not exercised this
authority, state regulations may violate the Commerce
Clause either because the regulations discriminate against
interstate or foreign commerce, or because they inciden-
tally affect such commerce. Camps Newfound/ Owatonna,
Inc. v. Town of Harrison, Maine, et al., 520 U.S. 564
‘ (1997). Discrimination against interstate commerce can be
evident either on a statute’s face, or in its practical effect.
See, e.g., Wyoming v. Oklahoma, 502 U.S. 437, 456 (1992).
As explained by this Court over fifty years ago:
Our system, fostered by the Commerce Clause, is
that every farmer and every craftsman shall be
encouraged to produce by the certainty that he
will have free access to every market in the Na-
tion, that no home embargoes will withhold his
export, and no foreign state will by customs du-
ties or regulations exclude them. Likewise, every
consumer may look to the free competition from
26
every producing area in the Nation to protect
him from exploitation by any. Such was the in-
tent of the Founders; such has been the doctrine
of this Court which has given it reality.
H.P. Hood & Sons, Inc. v. Du Mond, 336 U.S. 525, 539
(1949).
Here, the practical effect of the Montana Supreme
Court’s decisions is to create a situation whereby firms,
such as Piper Jaffray, which conduct business in interstate
commerce and routinely utilize unilaterally drafted
contracts whose terms are influenced and governed by
federal statutes and regulations and whose arbitration
provisions are approved by the SEC and the self-
regulatory organizations, such as the NYSE and the
NASD, will not be able to rely upon such contracts if
executed in Montana by Montana clients. However, such
contracts are valid everywhere else in the United States.
The decision also calls into doubt the enforceability of such
provisions if a customer with an existing arbitration
agreement moves to Montana, or moves from Montana to
another state. This impairs free access to the state of
Montana by Piper Jaffray as only customer contracts
without arbitration clauses are seemingly permissible.
This undue restriction on choice of dispute resolution and,
indeed, the freedom to contract is in violation of the
Federal Arbitration Act, and only serves to impair the
contract rights of firms such as Piper Jaffray seeking to
bring access to the various national securities markets and
exchanges to Montana. The decisions below thus operate >
an undue and substantial burden on interstate commerce
and, in practical effect, violate the Commerce Clause.
The result of this unique propensity of the Montana
judiciary to void arbitration agreements in Montana is a
27
disruption of the course of business in the national securi-
ties markets. This result offends the Commerce Clause by
impeding interstate commerce and, as noted above, is out
of step with virtually every other jurisdiction which
recognizes the enforceability of arbitration clauses in the
securities industry.
,
vy
CONCLUSION
For the foregoing reasons, Petitioners respectfully
request that a Writ of Certiorari to the Montana Supreme
Court be issued.
Respectfully submitted this 13th day of July 2005.
STANLEY T. KALECZYC
BROWNING, KALECZYC, BERRY &
HOVEN, P.C.
139 N. Last Chance Gulch
P.O. Box 1697
Helena, Montana 59624
(406) 443-6820
Counsel of Record
JOHN S. LUTZ
FAIRFIELD AND Woops, PC.
1700 Lincoln, Suite 2400
Denver, Colorado 80203
(303) 830-2400
,
v
Su The
Supreme Court of the Gnited States
4
v
PIPER JAFFRAY & CO. and
ROBERT ENGLISH et al.,
Petitioners,
Vv.
JOHN P. DALY, AUDREY M. DALY, JOHN D. SHEA,
BRENDA SHEA, THE ESTATE OF ALICE A. FRANEY,
ROBERTA J. EMETT, KATHLEEN E. MERRETT, °
VICKI BERRYMAN, and JAMES LEARY,
Respondents.
App. 1
No. 04-490
IN THE SUPREME COURT OF THE STATE OF MONTANA
2005 MT 62N
JOHN P. DALY and AUDREY M.
DALY,
Plaintiffs and Respondents,
i" (Filed Mar. 15, 2005)
U.S. BANCORP PIPER JAFFRAY,
INC., and THOMAS J. O’NEILL,
and JOHN DOES I through X,
Defendants and Appellants. |
APPEAL FROM:
The District Court of the Second Judicial District,
In and For the County of Silver Bow, Cause No. DV 2002-14
Honorable Thomas M. McKittrick, Presiding Judge.
COUNSEL OF RECORD:
For Appellants:
Stanley T. Kaleczyc and Brand Boyar, Browning,
Kaleczyc, Berry & Hoven, Helena, Montana
John S. Lutz, Fairfield & Woods, Denver, Colorado
(U.S. Bancorp)
For Respondent:
William P. Joyce, Joyce & Johnston, Butte, Montana
Robert J. Phillips, Phillips & Bohyer, Missoula, Montana
\
App. 2
Submitted on Briefs: January 4, 2005
Decided: March 15, 2005
Filed:
Ed Smith -
Clerk
Justice W. William Leaphart delivered the Opinion of the
Court.
{i Pursuant to Section I, Paragraph 3(c), Montana
Supreme Court 1996 Internal Operating Rules, the follow-
ing decision shall not be cited as precedent. It shall be filed
as a public document with the Clerk of the Supreme Court
and shall be reported by case title, Supreme Court cause
number, and result to the State Reporter Publishing
Company and to West Group in the quarterly table of
noncitable cases issued by this Court.
{2 This case is one of 23 different actions against U.S.
Bancorp Piper Jaffray, Inc. (Piper), involving the alleged
mismanagement of accounts in the corporation’s Butte
office. This particular action involves a form Ms. Duly
signed in 1993. The form was mailed to her with instruc-
tions that she sign the form in two places and then mail it
back to Piper. She spoke to defendant O’Neill over the
phone about these forms, and O’Neill, who was then a
Piper employee, advised her to sign it and did not explain
to her that by signing the form she was agreeing to an
arbitration clause. Ms. Daly signed the form, but only in
one of the two signature blocks. She and Mr. Daly signed
in the final signature block, but not in the block next to
the arbitration clause.
"3 These facts and the issues arising from them are
substantially identical to those in Willems v. U.S. Bancorp
App. 3
Piper Jaffray, Inc., 2005 MT 37, { 22, 326 Mont. 103, 7 22,
___ P3d__, | 22. That case held that a clause granting
Piper broad discretion over an investor's holdings created
a fiduciary duty. That clause, in addition to the arbitration
clause,-was also part of the Dalys’ 1993 form. Willems
further held that because of the fiduciary duty, Piper was
obligated to advise the investor of the arbitration clause,
and that because Piper did not, the arbitration clause was
unenforceable. Willems, J 25.
¥4 The Dalys argue that because they did not sign the
signature box next to the arbitration clause they are not
bound by its terms. We need not address that contention.
Even if they had signed that clause they would have
entered into a fiduciary relationship with Piper, and Piper
still would have had the duty of explaining the impact of
the arbitration clause to them. Therefore, in light of
Willems, we affirm the District Court’s conclusion that
Piper owed a fiduciary duty to explain the arbitration
provision to the Dalys, that it breached that duty, and
therefore that the pre-dispute arbitration provisions are
unenforceable.
/s/ W. William Leaphart
Justice
We Concur:
/s/ Patricia Cotter
/s/ Jim Rice
/s/ James C. Nelson
/s/ John Warner
Justices
App. 4
No. 04-451
IN THE SUPREME COURT OF THE STATE OF MONTANA
2005 MT 63N
JOHN D. SHEA and BRENDA
SHEA,
Plaintiffs and Respondents,
v.
THOMAS J. O’NEILL,
ROBERT ENGLISH,
U.S. BANCORP PIPER
JAFFRAY and JOHN DOES, I-X,
Defendants and Appellants.
(Filed Mar. 15, 2005)
APPEAL FROM:
District Court of the Second Judicial District,
In and for the County of Silver Bow, Cause No. DV 2002-207
The Honorable Kurt D. Krueger, Judge presiding.
COUNSEL OF RECORD:
For Appellants:
Stanley Kaleczyc and Brand Boyer, Browning
Kaleczyc Berry & Hoven, Helena, Montana, John
S. Lutz, Fairfield & Woods, Denver, Colorado
(Counsel for U.S. Bancorp and Robert English);
Robert J. Phillips, Phillips & Bohyer, Missoula,
Montana (counsel for Thomas O’Neill)
For Respondents:
Gregory Skakles, Skakles & Gallagher, Anaconda,
Montana
App. 5 Z
Submitted on Briefs: January 19, 2005
: Decided: March 15, 2005
Filed:
Ed Smith
Clerk
_ Justice James C. Nelson delivered the Opinion of the
Court. .
G1 Pursuant to Section I, Paragraph 3(c), Montana
Supreme Court 1996 Internal Operating Rules, the follow-
ing decision shall not be cited as precedent but shall be
filed as a public document with the Clerk of the Supreme
Court and shall be reported by case title, Supreme Court
cause number and result to the State Reporter Publishing
Company and to West Group in the quarterly table of
noncitable cases issued by this Court.
{2 This case is one of 23 different lawsuits filed by
individual investors against Thomas J. O’Neill (O’Neill),
Robert English (English), and U.S. Bancorp Piper Jaffray,
Inc. (Piper), involving the alleged mismanagement of
accounts in Piper’s branch office in Butte. This particular
action involves two agreements John and Brenda Shea
(the Sheas) entered into with Piper. In October 1994, the
Sheas met with O’Neill, who at the time was a Piper
employee, to open a Self-Directed IRA with Piper. The
Sheas’ meeting with O’Neill lasted 20 or 30 minutes, but
during that time, O’Neill never explained to the Sheas any
of the terms of the agreement that John Shea signed, nor
did O’Neill inform the Sheas that the agreement contained
an arbitration clause. In addition, the Sheas weré never
given a copy of the agreement.
_ App. 6
{3 In March 1998, the Sheas opened another account
with Piper through O’Neill. However, neither of the Sheas
met with O’Neill when they signed the agreement for this
account. Instead, a receptionist provided the document to
them for their signatures, but again they were not given
any explanation concerning the terms of the agreement,
nor were they given a copy of the agreement. The agree-
ment for this account also contained an arbitration clause.
94 These facts and the issues arising from them are
substantially identical to those in Willems v. U.S. Bancorp
Piper Jaffray, Inc., 2005 MT 37, 326 Mont. 103, ___s- P.3d
__.. In that case, we held that a clause granting Piper
broad discretion over an investor’s holdings created a
fiduciary duty. Willems, { 22. That clause, in addition to
the arbitration clause, was included in the Sheas’ March
1998 agreement with Piper. Willems further held that
because of the fiduciary duty, Piper was obligated to advise
the investor of the arbitration clause, and that because
Piper did not, the arbitration clause was unenforceable.
Willems, ¥ 25.
45 Accordingly, in light of Willems, we affirm the District
Court’s conclusion that Piper owed a fiduciary duty to
explain the arbitration provision to the Sheas, that it
breached that duty and, therefore, that the pre-dispute
arbitration provisions are unenforceable.
46 Affirmed.
/s/ James C. Nelson
Justice
We Concur:
/s/ Jim Rice
/s/ W. William Leaphart
/s/ Patricia Cotter
/s/ Brian Morris
Justices
App. 7
App. 8
No. 04-493
IN THE SUPREME COURT OF THE STATE OF MONTANA
2005 MT 73N
THE ESTATE OF ALICE E.
FRANEY,
Plaintiff and Respondent,
v.
U.S. BANCORP PIPER JAFFRAY, ‘Filed Mar. 22, 2005)
INC., and THOMAS J. O'NEILL,
ROBERT ENGLISH, and JOHN
DOES, I through X,
Defendants and Appellants.
APPEAL FROM:
The District Court of the Second Judicial District,
In and For the County of Silver Bow, Cause No. DV 2002-36
The Honorable Thomas M. McKittrick, Presiding Judge
COUNSEL OF RECORD:
For Appellants:
Stanley Kaleczyc and Brand G. Boyar, Browning,
Kaleczyc, Berry & Hoven, Helena, Montana
John S. Lutz, Fairfield & Woods, Denver, Colorado
For Respondent:
William P. Joyce, Joyce & Johnson, Butte, Montana
Robert J. Phillips, Phillips & Bohyer, Missoula,
Montana
App. 9
Submitted on Briefs: January 4, 2005
Decided: March 22, 2005
Filed:
Ed Smith
Clerk
Justice W. William Leaphart delivered the Opinion of the
Court.
{1 Pursuant to Section I, Paragraph 3(c), Montana
Supreme Court 1996 Internal Operating Rules, the follow-
ing decision shall not be cited as precedent. It shall be filed
as a public document with the Clerk of the Supreme Court
and shall be reported by case title, Supreme Court cause
number, and result to the State Reporter Publishing
Company and to West Group in the quarterly table of
noncitable cases issued by this Court.
"2 This case is one of 23 different actions against U.S.
Bancorp Piper Jaffray, Inc. (Piper), involving the alleged
mismanagement of accounts in the corporation’s Butte
office. This particular action involves a form that Piper
alleges Alice Franey signed in 1994. If the form was
signed, it converted her Piper Automatic Transfer (PAT)
Account (opened in 1991) into a PAT Plus Account. The
type of form alleged is the same as that at issue in Willems
v. US. Bancorp Piper Jaffray, Inc., 2005 MT 37, 7 17, 326
Mont. 103, 4 17, __. P3d ___, 4 17. The PAT Plus Account
form included a clause granting Piper broad discretion
over an investor’s holdings, as well as an arbitration
clause. In Willems we held that the former clause created
a fiduciary duty to inform the investor of the arbitration
clause.
App. 10
G3 Franey died before this trial commenced. However, at
trial Piper presented no evidence that it informed Franey
of the arbitration clause. Therefore, in light of Willems, we
affirm the District Court’s conclusion that even if Franey
signed a PAT Plus Account form, Piper owed her a fiduci-
ary duty to explain the impact of the arbitration provision,
that Piper breached that duty, and therefore the pre-
dispute arbitration provisions are unenforceable.
G4 We affirm the judgment of the District Court.
/s/ W. William Leaphart
Justice
We Concur:
/s/ John Warner
/s/ Patricia Cotter
/s/ James C. Nelson
/s/ Jim Rice
Justices
App. 11
No. 04-517
IN THE SUPREME COURT OF THE STATE OF MONTANA
2005 MT 94N
ROBERTA J. EMETT and
KATHLEEN E. MERRETT,
Plaintiff and Respondent,
v.
U.S. BANCORP PIPER JAFFRAY,
INC., PIPER JAFFRAY, INC.,
THOMAS J. O'NEILL, and
ROBERT ENGLISH,
(Filed April 19, 2005)
Defendants and Appellants.
APPEAL FROM:
The District Court of the Second Judicial District,
In and For the County of Silver Bow, Cause No. DV 2002-29
The Honorable Thomas M. McKittrick, Presiding Judge
COUNSEL OF RECORD:
For Appellants:
Stanley Kaleczyc and Brand G. Boyar, Browning,
Kaleczyc, Berry & Hoven, Helena, Montana
John S. Lutz, Fairfield & Woods, Denver, Colorado
For Respondent:
Donald Robinson and Lisa Levert, Poore, Roth &
Robinson, Butte, Montana
Robert J. Phillips and John F. Haffey, Phillips &
Bohyer, Missoula, Montana
App. 12
Submitted on Briefs: March 23, 2005
Decided: April 19, 2005
Filed:
Clerk
Justice Jim Rice delivered the Opinion of the Court.
qi Pursuant to Section I, Paragraph 3(c), Montana
Supreme Court 1996 Internal Operating Rules, the follow-
ing decision shall not be cited as precedent. It shall be filed
as a public document with the Clerk of the Supreme Court
and shall be reported by case title, Supreme Court cause
number and result to the State Reporter Publishing
Company and to West Group in the quarterly table of
noncitable cases issued by this Court.
G2 U.S. Bancorp Piper Jaffray Inc., Piper Jaffray, Inc.,
and Robert English (Piper) appeal from the District
Court’s denial of their motion to compel arbitration of the
claims filed by Plaintiffs Roberta J. Emett and Kathleen
E. Merrett, who are the Respondents herein. We affirm.
G3 This case is one of 23 actions filed by customers of
Piper which allege mismanagement of their accounts in
the corporation’s Butte office. This action involves a Co-
Owner Account Agreement signed in 1992 by Mrs. Merrett
and Mrs. Emett, Mrs. Merrett’s daughter, and a PAT Plus
Account agreement later signed by Mrs, Merrett, which
contained an arbitration provision identical to the provi-
sion which was the subject of this Court’s holding in
Willems v. U.S. Bancorp Piper Jaffray, Inc., 2005 MT 37,
326 Mont. 103, 107 P3d 465. That case held that the
arbitration clause granted Piper broad discretion over an
investor’s holdings and created a fiduciary duty thereby,
App. 13
obligating Piper to advise the investor of the provision.
Because Piper did not do so, the arbitration clause was
unenforceable. Willems, { 28.
{4 The District Court denied Piper’s motion to compel
arbitration on several grounds, the first being Piper’s
failure to produce properly authenticated evidence of the
pre-dispute arbitration agreement executed by the Plain-
tiffs. Piper objected to this exclusion of the agreement, but
the District Court also entered conclusions of law and an
order premised on admission of the asserted arbitration
agreement. On appeal, Piper challenges the District
Court’s order on all grounds, including its denial of the
agreement’s admission into evidence. Respondents do not
contest Piper’s evidentiary argument on appeal, instead
answering its arguments on the substantive issues. We
conclude it is appropriate to resolve this matter on the
same grounds we did in Willems.
"5 The same holding as in Willems is required by the
factual record here. The uncontroverted evidence is that
the Plaintiffs were not advised of the arbitration agree-
ment cr its meaning. Indeed, the District Court found that
the broker engaged in a pattern of conduct, including
“flattery” and “professed romantic interest,” which consti-
tuted “attempts to distract [the Plaintiffs’] attention away
from the details of the accounts.” Therefore, in light of
Willems, we affirm the District Court’s conclusion that
Piper owed a fiduciary duty to explain the arbitration
provision to Plaintiffs, that it breached that duty, and that,
consequently, the pre-dispute arbitration provisions
offered by Piper are unenforceable.
App. 14
q6 Affirmed. ;
/s/ Jim Rice
Justice
We Concur:
/s/ Brian Morris
/s/ John Warner
/s/ W. William Leaphart
fai James C. Nelson
Justices
App. 15
No. 04-585
IN THE SUPREME COURT OF THE STATE OF MONTANA
2005 MT 1i6N
VICKIE BERRYMAN,
Plaintiff and Respondent,
Vv.
U.S. BANCORP PIPER JAFFRAY,
INC., PIPER JAFFRAY, INC.,
ROBERT ENGLISH, THOMAS J.
O’NEILL, and JOHN DOES,
I through X,
Defendants and Appellants.
(Filed May 05, 2005)
APPEAL FROM:
District Court of the Second Judicial District,
In and for the County of Silver Bow, Cause No. DV 02-78
The Honorable John W. Whelan, Judge presiding.
COUNSEL OF RECORD:
For Appellants:
Stanley T. Kaleczyc, Esq., Brand G. Boyer, Esq.,
Browning Kaleczyc Berry & Hoven, P.C., Helena,
Montana; John S. Lutz, Esq., Fairfield and
Woods, P.C., Denver, Colorado
For Respondent:
Tina L. Morin, Esq., Poore Roth & Robinson, P.C.,
Butte, Montana
App. 16
Submitted on Briefs: April 20, 2005
Decided: May 5, 2005
Filed:
Ed Smith
Clerk
Justice James C. Nelson delivered the Opinion of the
Court.
{@i Pursuant to Section I, Paragraph 3(c), Montana
Supreme Court 1996 Internal Operating Rules, the follow-
ing decision shall not be cited as precedent but shall be
filed as a public document with the Cler}: of the Supreme
Court and shall be reported by case title, Supreme Court
cause number and result to the State Reporter Publishing
Company and to West Group in the quarterly table of
- noncitable cases issued by this Court.
{2 U.S. Bancorp Piper Jaffray, Inc., Piper Jaffray, Inc.,
and Robert English (collectively, Piper) appeal an order of
the District Court for the Second Judicial District, Silver
Bow County, denying their motion to compel arbitration of
the claims filed by Plaintiff and Respondent herein Vickie
Berryman (Berryman). We affirm.
{3 This case is one of 23 different lawsuits filed by
individual investors of Piper involving the alleged mis-
management of the investors’ accounts in Piper’s branch
office in Butte. This particular action involves two agree-
ments Berryman entered into with Piper. On July 13,
1999, Berryman met with Thomas J. O’Neill (O’Neill), who
at the time was a securities broker in Piper’s Butte office,
to open a Self-Directed IRA with Piper. O’Neill never
explained to Berryman any of the terms of the agreement
she signed, nor did O’Neill inform Berryman that the
App. 17
agreement contained an arbitration clause. On September
30, 1999, Berryman opened a second account with Piper by
executing a Piper Automatic Transfer (PAT) Plus Account
Agreement. Once again, O’Neill did not explain the arbi-
tration clause in the agreement-to Berryman.
"¥4 These facts and the issues arising from them are
substantially identical to those in Willems v. U.S. Bancorp
Piper Jaffray, Inc., 2005 MT 37, 326 Mont. 103, 107 P.3d 465.
In that case, we held that a clause in a PAT Plus Account
Agreement granting Piper broad discretion over an investor's
holdings created a fiduciary duty. Willems, J 22. That clause,
in addition to an arbitration clause, was included in
Berryman’s September 30, 1999 PAT Plus Account Agree-
ment with Piper. Willems further held that because of the
fiduciary duty, Piper was obligated to advise the investor of
the consequences of the arbitration clause prior to the
formation of the contract, and that because Piper did not, the
arbitration clause was unenforceable. Willems,{ 25,4 28.
q5 Accordingly, in light of Willems, we affirm the District
Court’s conclusion that Piper owed a fiduciary duty to
explain the arbitration provision to Berryman, that it
breached that duty and, therefore, that the pre-dispute
arbitration provisions are unenforceable. :
G6 Affirmed.
/s/ James C. Nelson
Justice
App. 18
We Concur:
/s/ Patricia Cotter
/s/ John Warner
/s/ W. William Leaphart
/s/ Jim Rice
Justices
App. 19
No. 04-448
IN THE SUPREME COURT OF THE STATE OF MONTANA
2005 MT 161N
JAMES LEARY,
Plaintiff and Respondent,
v.
las prcereae’ ; gion sc (Filed Jun. 28, 2005)
ROBERT ENGLISH, and JOHN
DOES,
I through X,
Defendants and Appellants.
APPEAL FROM: A
District Court of the Second Judicial District,
In and for the County of Silver Bow, Cause No. DV 2002-91
The Honorable Kurt D. Krueger, Judge presiding.
COUNSEL OF RECORD:
For Appellants:
Stanley T. Kaleczyc, Brand G. Boyar, Browning,
Kaleczyc, Berry, & Hoven, P.C., Helena, Montana;
John S. Lutz, Fairfield and Woods, P.C., Denver,
Colorado
For Respondent:
Tina L. Morin, Esq., Poore, Roth & Robinson, P.C.,
Butte, Mentana
App. 20
Submitted on Briefs: April 26, 2005
Decided: dune 28, 2005
Filed:
Ed Smith
Clerk
Justice Patricia O. Cotter delivered the Opinion of the
Court.
G1 Pursuant to Section I, Paragraph 3(c), Montana
Supreme Court 1996 Internal Operating Rules, the follow-
ing decision shall not be cited as precedent. It shall be filed
as a public document with the Clerk of the Supreme Court
and shall be reported by case title, Supreme Court cause
number and result to the State Reporter Publishing
Company and to West Group in the quarterly table of
noneitable cases issued by this Court.
q2 U.S. Bancorp Piper Jaffray, Inc., and Robert English
(collectively, “Piper”); appeal an Order of the District Court
for the Second Judicial District, Silver Bow County.
Defendant Thomas J. O’Neill (“O’Neill”) is a former Piper
employee and is not a party to this appeal. The District
Court denied Piper’s motion to compel arbitration of
claims filed against Piper by James Leary (“Leary”). We
affirm.
{3 This case is one of twenty-three different lawsuits
filed by individual investors of Piper involving the alleged
mismanagement of the investors’ accounts in Piper’s
branch office in Butte. The facts behind this particular
action are that Leary was an unsophisticated investor who
relied on O'Neill, his investment advisor, to explain the
significant features of his investment accounts. When
Leary opened an investment account with his wife in 1998,
App. 21
O’Neill presented Leary with a PAT Plus Account Agree-
ment containing, among other provisions, a clause compel-
ling arbitration and a clause granting Piper broad
discretion to purchase and sell account assets without
Leary’ authorization. Leary signed the agreement as
directed by O’Neill. Leary later opened a second IRA
account which also contained an arbitration provision
similar to the PAT Plus Account Agreement’s provision.
O’Neill did not explain any of the features of the account
agreements to Leary, not did anyone at Piper explain to
Leary that the agreements contained an arbitration
provision. Leary was not informed that by signing the
account forms, he was waiving his right to access the
state’s courts to settle any disputes with Piper.
"4 These facts and the issues arising from them are
substantially identical to those presented in Willems uv.
U.S. Bancorp Piper Jaffray, Inc., 2005 MT 37. { 22, 326
Mont. 103, { 22, 107 P.3d 465, ¥ 22, in which we held that
a clause in a PAT Plus Account Agreement granting Piper
broad discretion over an investor’: holdings creates a
fiduciary duty. Willems further hela that because of the
fiduciary duty, Piper was obligated to advise the investor
of the consequences of the arbitration clause prior to the
formation of the contract, and that because Piper did not,
the arbitration clause was unenforceable. Willems, {{ 25,
28.
{5 We have determined to decide this case pursuant to
our Order dated February 11, 2003, amending Section 1.3
of our 1996 Internal Operating Rules and providing for
memorandum opinions. —
G6 We conclude that, in light of Willems, this case is
clearly controlled by settled Montana law. Therefore, we
App. 22
affirm the District Court’s conclusion that Piper owed a
fiduciary duty to explain the arbitration provision to
Leary, that it breached that duty, and therefore the pre-
dispute arbitration provisions are unenforceable.
/s/ Patricia Cotter
Justice
We Concur:
/s/ W. William Leaphart
/s/ Brian Morris
/s/ James C. Nelson
/s/ Jim Rice
Justices
App. 23
No. 04-454
IN THE SUPREME COURT OF THE STATE OF MONTANA
2005 MT 37
HARRY WILLEMS,
Piaintiff and Respondent,
Vv.
U.S. BANCORP PIPER JAFFRAY, (Filed Feb. 22, 2005)
INC., THOMAS J. O'NEILL,
ROBERT ENGLISH, and
JOHN DOES I through X
Defendants and Appellants.
APPEAL FROM:
District Court of the Second Judicial District,
In and For the County of Cause No. DV 2003-25
Honorable Kurt Krueger, Presiding Judge.
COUNSEL OF RECORD:
For Appellants:
Stanley T. Kaleczyc and Brand G. Boyar, Browning,
Kaleczyc, Berry & Hoven, P.C., Helena, Montana
John S. Lutz, Fairfield and Woods, P-C., Denver, Colorado
Robert J. Phillips, Phillips & Bohyer, P.C., Missoula,
Montana (O’Neill)
For Respondent:
William P. Joyce, Joyce & Johnston, PLLP, Butte,
Montana
App. 24
Submitted on Briefs: November 30, 2004
Decided: February 22, 2005
Filed:
Ed Smith
Clerk
Justice Jim Rice delivered the Opinion of the Court. .
G1 This case is one of 23 lawsuits filed by individual
investors against U.S. Bancorp Piper Jaffray, Inc. (Piper),
Robert English (English), and Tom O’Neill (O’Neill). The
plaintiff investors made various common law tort claims
arising from the alleged mismanagement of their accounts
created and maintained by Piper’s branch office in Butte,
Montana. O’Neill, who was a securities broker in Piper's
Butte office,’ allegedly took the actions that gave rise to
the lawsuits, and English was O’Neill’s direct supervisor
throughout this time. In response to the lawsuits, Piper
filed motions to compel arbitration in each case, seeking to
enforce “pre-dispute” arbitration clauses — that is, clauses
in the account agreements which required any dispute be
resolved by arbitration. Piper’s motions to compel arbitra-
tion led to a series of hearings by a panel of three district
court judges, who were sitting individually on the cases,
but who sat en banc to hear evidence common to all 23
cases. In addition, individual hearings were held with
respect to several of the individual plaintiffs. While Piper
called common witnesses to testify, O’Neill, in a prior
discovery deposition, invoked his Fifth Amendment right
against self-incrimination and did not offer testimony
regarding the accounts at issue.
* At the time the lawsuits were filed, O’Neill was no longer
employed at Piper.
App. 25
{2 Harry Willems (Willems) is the plaintiff in this
matter. On April 7, 2004, the Second Judicial District
Court, Silver Bow County, denied Piper’s motion to compel
arbitration of Willems’s claims, and Piper appeals there-
from. We affirm.
G3 The following issues are raised on appeal in regard to
the District Court’s denial of Piper’s motion to compel:
{4 Did the District Court err in holding that the PAT
Plus Agreements created a fiduciary duty between Piper
and Willems that was breached by Piper?
95 Did the District Court violate the Federal Arbitration
Act and Montana law by holding the arbitration agree-
ment to a different contractual standard when it concluded
the PAT Plus Agreements were contracts of adhesion?
G6 Did the District Court err in applying the Kloss
factors?
{7 Did the District Court err in holding that Willems
failed to effectively waive his constitutional rights?
"8 Is the securities arbitration process, held before a
self-regulatory organization overseen by the United States
Securities and Exchange Commission, fair and reasonable
as a matter of law?
{92 The District Court’s order offered an extensive analy-
sis of all issues raised by the parties. The District Court
determined that the PAT Plus Agreements were contracts
of adhesion; that Piper’s pre-arbitration dispute provisions
were unconscionable and not within plaintiffs’ reasonable
expectations; that Piper failed to demonstrate that plain-
tiffs voluntarily, knowingly, and intelligently waived their
constitutional rights to a jury trial and access to the court;
App. 26
Piper failed to demonstrate that plaintiffs received or
reviewed the arbitration provision; and that a fiduciary
duty was created by Piper's PAT Plus Agreements and
breached by the defendants. We conclude that the issue
pertaining to the fiduciary duty is determinative on appeal
and therefore will not address the other issues, except as
necessary to resolve the dispositive issue.
FACTUAL AND PROCEDURAL BACKGROUND
710 In 1986. Willems retained O’Neill as his broker and
financial advisor to help him open a Self-Directed Individ-
ual Retirement Account (1986 IRA). Later that year,
Willems opened a joint Piper Automatic Transfer Account
with his wife Marie Willems, which he later upgraded to a
Co-Owner Piper Automatic Transfer Plus Account in 1995.
On November 9, 1993, Willems opened a Co-Owner Piper
Automatic Transfer Plus Account with his mother Bernice
Willems. The 1993 and 1995 Piper Automatic Transfer
Plus Account agreements hereinafter shall be collectively
referred to as the “PAT Plus Agreements.”
{11 Willems claims that O’Neill, supervised by English,
engaged in unlawful, unreasonable, and unethical conduct
relating to the 1986 IRA, which did not contain a pre-
dispute arbitration clause. Willems contests Piper’s invo-
cation of the PAT Plus Agreements’ arbitration clauses
because: (1) his claims are not based upon transactions in
these accounts; and (2) Willems was informed that the
PAT Plus Agreements were entirely separate and distinct
from his 1986 IRA, and therefore had no affect on his 1986
IRA. Conversely, Piper explains that by signing the PAT
Plus Agreements, Willems agreed to arbitrate disputes
App. 27
relating to any account he held with Piper, and notes the
following language found in both PAT Plus Agreements:
You agree to arbitrate any disputes between
Piper Jaffray and you. You specifically agree and
recognize that all controversies which may
arise between Piper Jaffray, its agents, represen-
tatives or employees and you concerning any
transaction, account of the construction, per-
formance or breach of this or any other agree-
ment between us, whether entered into
prior, on, or subsequent to the date hereof
shall be determined by arbitration to the full ex-
tent provided by law. [Emphasis added.]
Thus, it is the arbitration provisions, set forth in the PAT
Plus Agreements and incorporating Willems’s 1986 IRA,
which are at issue herein.
912 On January 24, 2003, Willems filed a complaint in
the Second Judicial District Court against Piper, English,
and O’Neill alleging mismanagement of his 1986 IRA. On
March 24, 2003, Piper filed a motion to compel arbitration
based upon the provisions of the PAT Plus Agreements
requiring arbitration of disputes in any of Willems’s
accounts. On July 9, August 12, and September 3, 2003, a
panel of three district court judges sat en banc to hear
evidence common to all 23 cases arising from the alleged
misconduct of Piper’s broker, O’Neill. On April 7, 2004, the
District Court denied Piper’s motion to compel arbitration
and stay proceedings. Piper appeals therefrom.
- STANDARD OF REVIEW
G13 We review whether a district court’s conclusions of
law are correct in determining whether or not an issue is
App. 28
subject to arbitration under an existing agreement. Jwen v.
U.S. West Direct, 1999 MT 63, J 17, 293 Mont. 512, { 17,
977 P.2d 989, 9 17. When a district court is asked to
compel arbitration of a dispute, the-threshold inquiry is
whether the parties agreed to arbitrate. Solle v. Western
States Ins. Agency, 2000 MT 96, { 22, 299 Mont. 237, { 22,
999 P.2d 328, J 22. Because arbitration is a matter of
contract, the rules of contract apply, and a party cannot be
required to submit to arbitration any dispute that the
party has not agreed to submit. Solle, [J 22-23.
q14 A fiduciary relationship is created whenever a
broker has discretion to buy, sell, or otherwise control a
client’s account. Chor v. Piper, Jaffray & Hopwood, Inc.
(1993), 261 Mont. 143, 153, 862 P.2d 26, 32. In determin-
ing the scope or extent of the fiduciary obligation, our
review becomes highly fact intensive. Kloss v. Edward D.
Jones & Co., 2002 MT 129, J 35, 310 Mont. 123, 4 35, 54
P.3d 1, { 35.
DISCUSSION
{15 Did the District Court err in holding that the
PAT Plus Agreements created a fiduciary duty
between Piper and Willems that was breached by
Piper?
916 In Chor, we held that § 30-10-301(1), MCA, creates
an implied code of conduct for brokers, violations of which
may constitute a breach of the duty that a broker owes to
his customer. Chor, 261 Mont. at 152, 862 P.2d at 31-32.
We further held that in the absence of discretionary
authority by a broker to buy and sell in a customer's
account, no fiduciary relationship is created between the
broker and the customer. Chor, 261 Mont. at 153, 862 P.2d
App. 29
at 32. In Kloss, we inversely restated that principle,
holding that “a fiduciary relationship is created whenever
a broker has discretion to buy and sell in the client’s
account.” Kloss, {35. Thus, we begin our analysis by first
determining whether the PAT Plus Agreements granted
such discretion to Piper’s brokers.
{17 Piper argues that the PAT Plus Agreements did not
grant it discretion to make trades on behalf of its clients
and therefore did not create a fiduciary duty. Piper con-
tends the District Court improperly interpreted the
following underlined contract provisions:
Customer’s Orders Binding Until Notice of
Death
Upon your death or failure to comply with any
part of this Agreement or whenever Piper Jaffray
deems it necessary for its protection, Piper Jaffray
ts authorized (but is not required) to:
— Cancel outstanding orders;
- Purchase, sell, assign, receive and deliver all or
any part of the securities held or carried for
you; and
— Close out short sales by purchase upon any ex-
change board or market or any public or pri-
vate sale at Piper Jaffray’s option.
(Underlining added.) In particular, Piper claims that the
phrase, “whenever Piper Jaffray deems it necessary for its
protection,” concerns Piper’s rights upon a client’s death or
when a client is otherwise incapacitated. Piper makes note
‘aiat upon the death or incapacity of a client, it must have
a limited discretion over the client’s accounts in case the
securities decline in value so that it may ensure it is in
App. 30
compliance with certain federal requirements, but that
this limited discretion is not sufficient to trigger discretion
for purposes of creating a fiduciary duty. Thus, Piper urges
this Court to not derive a “broad” or “unfettered” grant of
discretion from the middle of a provision that merely
concerns Piper’s rights upon the death or incapacitation of
a client.
q18 Additionally, Piper notes that its Supervisory Proce-
dures Manual provides that a client must execute addi-
tional documents if the client wishes to grant discretion to
Piper. Piper claims that Willems did not execute the
required documentation according to the procedures in the
supervisory manual. Piper argues that the fact that
Willems’s claims include allegations that Piper made
“unauthorized transactions” in his 1986 IRA, a nondiscre-
tionary account, is additional evidence that Willems
understood that Piper lacked discretion to independently
authorize transactions.
G19 Finally, Piper argues that Kloss does not control the
outcome here for two reasons. First, Piper asserts that the
brokerage account agreement in Kloss is distinguishable
from the PAT Plus Agreements. Second, it argues that the
Kloss holding that a broker has a fiduciary duty to disclose
and explain the arbitration clause within the account
agreement is “in contrast to most statements of law.” Piper
contends that if a broker had discretion in handling an
account, the broker’s duties would not extend beyond
financial management. Furthermore, Piper claims that
brokers should not have the duty to read and explain
arbitration clauses to clients since clients come to brokers
for financial advice, not legal advice, and the broker may
be engaging in the unauthorized practice of law.
App. 31
q20 Piper’s second Kloss argument is essentially an
invitation to revisit and reverse our holding in Kloss.
However, we see no error in the Kloss Court’s analysis as
to the fiduciary duty in this context, and therefore, we
decline Piper’s invitation to revisit that decision. We reject
Piper's argument that such discretion does not create a
fiduciary obligation to explain the arbitration provisions,
or that such an obligation requires the broker to engage in
the unauthorized practice of law. The obligation is one
which accompanies the fiduciary relationship created
when a broker accepts a customer's authorization to make
transactions within the customer's account in the broker's
own discretion. yaar aE EE
{21 Willems responds to Piper's first Kloss argument by
arguing that the language highlighted in the PAT Plus
Agreements is similar to the language in the Kloss agree-
ment, which provided:
You may sell any or all property held in any of
my accounts and cancel any open orders for the
purchase or sale of any property without notice, |
in the event of my death or whenever in your dis-
cretion you consider it necessary for your protec-
tion.
Kloss, 4 36. We determined that this language granted
discretion to the broker to buy and sell securities on behalf
of the broker's client. Kloss, {¥ 36-37. Thus, Willems
asserts the District Court properly concluded that the
similar language in the PAT Plus Agreements likewise
granted such discretion, thereby creating a fiduciary duty
on behalf of the broker to explain the consequences of
arbitration to clients.
App. 32
(22 In spite of Piper's contention that it is required
under federal law to have “limited discretion” to make
transactions on behalf of its clients to ensure compliance
with certain federal requirements, the PAT Plus Agree-
ments contain no provisions or explanations as to this
“limitation” or that the discretion granted in the agree-
ment is effective only when securities decline in value.
Moreover, the plain meaning of the following language —
“upon your death or failure to comply with any part of this
Agreement or whenever Piper Jaffray deems it necessary
for its protection” — demonstrates that Piper retained
broad authority to purchase, sell, assign, receive and
deliver all or any part of the securities held by its clients.
(Emphasis added.) Indeed, transactions could be made
whenever Piper “deem[ed] it necessary” for its own best
interest. Thus, the District Court did not err in concluding
that the PAT Plus Agreements granted Piper’s brokers
discretion to buy and sell securities thereby creating a
fiduciary duty.
{23 Piper contends that the District Court erroneously
concluded that a fiduciary duty existed before Willems
signed the PAT Plus Agreements. Piper explains that
written contracts are only effective at delivery, and there-
fore a fiduciary duty, triggering an obligation to explain
the arbitration provision, could not exist before the PAT
Plus Agreements were signed. Willems responds that
Piper’s argument is misplaced in view of our holding in
Kloss. Willems argues that when a fiduciary duty is
created, even if it is created the very moment after the
agreement is signed, a broker has a duty to advise its
customers — pursuant to its duty of the finest loyalty — as
to the nature of arbitration, or if the client may “opt out” of
arbitration by crossing out the provision.
App. 33
q¥24 In Kloss, an investor opened an account which
contained a pre-dispute arbitration clause. We concluded
that, because the brokerage firm had discretion to buy and
sell securities in the investor’s account, a fiduciary rela-
tionship was created and the broker had an obligation to
explain the effect of an arbitration clause. Kloss, { 37.
Although we did not state that the obligation arose prior
to the actual signing of the agreement, that was, by
necessity, the effect of our holding. Entering an agreement
which bestows discretion upon the broker requires that
the customer be advised of the agreement’s arbitration
provision so that an informed decision to sign the agree-
ment can be made.
G25 It is undisputed that Piper did not advise Willems as
to the nature of the arbitration clause or that he had the
option of crossing out certain provisions. Further, the
District Court found, and Piper does not challenge on
appeal, that Willems did not understand that by signing
the PAT Plus Agreements he was in any way affecting his
1986 IRA. Therefore, in accordance with our holding in
Kloss, we conclude the District Court did not errin holding -
that the PAT Plus Agreements created a fiduciary duty
between Piper and Willems and that Piper breached its
fiduciary duty when it failed to explain the consequences
of the arbitration provision prior to the formation of the
contract.
{26 Finally, Piper contends that, pursuant to the Kloss
Court’s determination that the analysis as to whether a
fiduciary duty exists is “highly fact intensive,” the facts
here are distinguishable from those in Kloss. It notes that,
in Kloss, the broker had a regular practice of explaining
key contract terms to the customer, and that this led the
Court to conclude that the broker had a fiduciary duty to
App. 34
explain the arbitration provision to the customer. Piper
thus reasons that the District Court improperly relied on
Kloss to create a “special legal standard” regarding fiduci-
ary duties applicable only to arbitration provisions and not
to other contract provisions, in violation of the Federal
Arbitration Act (FAA) and United States Supreme Court
precedent.
¥27 We conclude that the District Court created no new
special legal standards but instead properly applied
Montana case law by relying on Kloss. “The FAA provides
that an agreement to arbitrate is valid except where
grounds e.ist at law or in equity to revoke the con-
tract.... Montana law also requires the enforcement of
predispute arbitration clauses ‘except upon grounds that
exist at law or in equity for the revocation of a contract.’
Kingston v. Ameritrade, Inc., 2000 MT 269, J 13, 302
Mont. 90, { 13, 12 P.3d 929, J 13 (citing § 27-5-114(2),
MCA). Though the brokerage firm in Kloss had a “regular
practice of explaining key contract terms,” the enforceabil-
ity of an arbitration provision is not dependent upon such
an office custom or practice. The determination of the
existence of a duty here is dependent upon all of the facts,
and particularly, the extent of authority or discretion
granted by the customer within the agreement.
{28 We affirm the District Court’s conclusion that Piper
owed a fiduciary duty to explain the arbitration provision
to Willems which was breached, and further, that the pre-
dispute arbitration provisions in the PAT Plus Agreements
are unenforceable.
/s/ Jim Rice
Justice
We Concur:
/s/ James C. Nelson
/s/ Patricia Cotter
/s/ John Warner
/s/ W. William Leaphart
Justices
App. 36
KURT KRUEGER
DISTRICT COURT JUDGE, DEPT. I
SILVER BOW COUNTY COURTHOUSE
155 W. GRANITE ST.
BUTTE, MT 59701
406/497-6410
MONTANA SECOND JUDICIAL DISTRICT COURT,
SILVER BOW COUNTY
HARRY WILLEMS,
Plaintiff,
~. CAUSE NO. DV-03-25
U.S. BANCORP PIPER
JAFFRAY, INC., THOMAS
J. O"NEILL, ROBERT
ENGLISH & JOHN DOES
I through X,
Defendants.
FINDINGS OF FACT,
CONCLUSIONS OF
LAW & ORDER
(Filed Apr. 7, 2004)
*?#t2se2e#?#?#2st& &
INTRODUCTION
Almost two dozen individuals who were investors with
Piper Jaffray (Piper) at its Branch Office in Butte, Mon-
tana, have filed suits in the above-referenced cases against
Piper as a result of its business practices and those of its
account executive, Tom O’Neill. The lawsuits involve the
investors’ individual investment accounts which were
created and maintained at the Butte office. While, of
course, the circumstances surrounding the opening and
maintenance of these accounts vary somewhat among
those Plaintiffs, there is a similar, if not identical, fact
pattern with respect to the essential facts surrounding the
actual creation and maintenance of those accounts. Plain-
tiffs allege a number of common law tort claims which
App. 37
arise from a variety of illegal business practices, such as
“churning,” unauthorized trading, and inappropriate
trading. Plaintiffs allege that Piper failed to properly
supervise O’Neill, who was at the time of his misconduct
was subject to a Consent Decree with the Montana State
Auditor. The decree arose out of prior misconduct of
O’Neill which had been uncovered following an adminis-
trative investigation in the early 1990s. Piper had a duty
to supervise O'Neill to insure that his misconduct and
unethical practices as a broker would not be repeated.
Plaintiffs allege that Piper not only allowed, but encour-
aged, O’Neill to repeat the proscribed business practices
which had given rise to the Consent Decree.
Defendants have filed Motions to Compel Arbitration
in all of the above-referenced cases. The motions gave rise
to a series of hearings by the three Montana District Court
Judges to whom these Piper cases have been assigned,
Hon. Kurt Krueger, Hon. John W. Whelan, and Hon.
Thomas M. McKittrick. Individual hearings took place
with respect to many of the Plaintiffs who have a pending
claim against Piper. Additionally, the three judges, sitting
in an en banc configuration, heard the testimony, and
received evidence, from “common expert witnesses” and
“common fact witnesses.” Those “common witness” hear-
ings took place on August 12, 2003, and September 3,
2003, at which Plaintiffs called Professor William Corbett
as a common expert witness. Plaintiffs called Jerry Camp-
bell, a former Piper account executive, as a common fact
witness. Defendants called Michael Perino, of New York,
and Wendy Harmsen, of Minneapolis, as common expert
and fact witnesses, respectively.
In a prior discovery deposition, Defendant Tom O’Neill
refused to respond to questioning regarding the opening
App. 38
and formation -of Plaintiffs’ accounts, citing his Fifth
Amendment right against self-incrimination. Thus, there
was no testimony presented by Defendants to refute the
testimony of any Plaintiff with regard to the opening and
maintenance of the account documents which they had
signed which contained the pre-dispute arbitration clauses
which are the basis of Defendants’ motion to compel
arbitration.
Following the conclusion of these common hearings,
the parties submitted their post-hearing briefs on October
10, 2003.
FINDINGS OF FACT
Findings of Fact Specific for this Plaintiff
1. The Plaintiff Harry Willems is an unsophisticated
retired Anaconda Company employee with less than
an eighth grade education. (TR, Willems, 7/9/03, pg.
21).
2. Because of his lack of sophistication and education,
Mr. Willems was not capable of understanding the
language used in Piper’s account agreements includ-
ing the language in the arbitration provision. Id.
3. Mr. Willems’ dealings with O’Neill date back to the
1980’s when O’Neill was with DA Davidson. O’Neill
took the account from DA Davidson to Piper when he
moved to Piper. Jd. at 23.
4. Based upon Mr. Willems’ testimony and demeanor in
court it is apparent that Mr. Willems is a person of
limited intelligence. This fact would have been appar-
ent to O’Neill after his first meeting with Mr. Willems.
O’Neill was aware that Mr. Willems was unsophisti-
cated and had only an 8th grade education. Jd. at 24.
App. 39
Because of his lack of intelligence and extreme lack of
sophistication, Mr. Willems relied on O’Neill to ex-
plain beforehand the purpose of the documents he
asked Mr. Willems to sign and O’Neill did speak with
Mr. Willems about the purpose of the documents he
needed Mr. Willems to sign before Mr. Willems was
asked to sign the documents. Jd. at 32.
The current litigation involves mismanagement of Mr.
Willems’ IRA account. Jd. at 27. Mr. Willems opened
the IRA account in March of 1986. The account agree-
ment concerning the IRA does not require that Mr.
Willems submit to binding arbitration concerning his
IRA. See Plaintiff’s Exhibit 1.
Mr. Willems had two other accounts with Piper
Jaffray. One, a joint PAT Plus account agreement with
his mother Bernice Willems (Exhibit A) and another a
joint PAT Plus account agreement with his wife Marie
(Exhibit B).
Both of the PAT Plus account agreements begin with
the following language:
This agreement (“Agreement”) sets forth the
terms and conditions governing the Piper
Jaffray PAT Plus Account (“PAT Plus Ac-
count”) offered by Piper Jaffray Inc. (“Piper
Jaffray”), for which you (all such signatories
hereto, whether acting in their individual or
representative capacities, are sometimes re-
ferred to as “you”) are making application
with Piper Jaffray.
This language is inconsistent with the following language
in the Pre-dispute Arbitration provision which suggests
that the account agreement applies to other accounts:
You agree to arbitrate any disputes between
Piper Jaffray and you. You specifically agree
App. 40
and recognize that all controversies which
may arise between Piper Jaffray, its agents,
representatives, or employees and you con-
cerning any transaction, account or the con-
struction, performance or breach of this or
any other agreement between us, whether
entered into prior, on, or subsequent to the
date hereof, shall be determined by arbitra-
tion to the full extent provided by law.
9. The PAT Plus account agreements also contain the
following language which confers discretion on Piper:
b. “Upon your death or failure to comply
with any part of this Agreement or whenever
Piper Jaffray deems it necessary for its pro-
tection, Piper Jaffray is authorized (but is
not required) to:
e Cancel outstanding orders;
e Purchase, sell, assign, receive and
deliver all or any part of the securi-
ties held or carried for you; and
e Close out short sales by purchase
upon any exchange board or market
or any public or private sale at Piper
Jaffray’ option. (Emphasis added)
(See Exhibit A)
10. Neither O’Neill nor anyone else at Piper ever advised
Mr. Willems about the consequences of the pre-dispute
arbitration provisions. Mr. Willems did not under-
stand that the arbitration provisions existed until he
spoke with his lawyer during this litigatisn. Id. at 32.
11. When Mr. Willems signed the two PAT Plus agree-
ments he did not know that these accounts contained
arbitration. Further, Mr. Willems understood that the
joint account with his mother and the joint account
12.
13.
14.
15.
App. 41
with his wife were separate and distinct accounts and
he did not believe that by signing documents relating
to these two accounts that he was in any way affecting
his IRA account. Jd. at 28.
Mr. Willems signed the joint PAT Plus account with
his mother Bernice (Exhibit A) at the urging of O’Neill
who told Mr. Willems that this was necessary to look
after Mr. Willems’ mother. Jd at 29. This was done be-
cause Mr. Willems’ mother had become very sick and
could not take care of her business anymore and
O’Neill told Mr. Willems that he should put his name
on the account to make sure that his mother’s money
could be looked after. Jd. at 11. Mr. Willems was con-
cerned that if his name was not put on the account
that his mother would be conned out of her money. Jd.
at 28.
When Mr. Willems had his name placed on his
mother’s account he did not expect that this was in
any way affecting his rights vis-a-vis his IRA in that
he understood that those accounts were separate and
distinct accounts. Jd. at 29.
When counsel for Piper read portions of the arbitra-
tion provisions contained in the PAT Plus account
agreements, it was apparent to the Court that Mr.
Willems did not understand the language used and
Mr. Willems clearly indicated that he did not under-
stand the arbitration provision. In his words, it was
all “Greek to me”. Id. at 15.
O'Neill took steps to gain Mr. Willems’ trust. He
repeatedly advised Mr. Willems that he was looking
after his accounts just like he looked after his dad’s
accounts. O’Neill even made reference to a small note-
book on his desk which supposedly contained the
names of O’Neill’s dad and Mr. and Mrs. Willems.
O’Neill would make reference to this notebook and
16.
App. 42
advised Mr. Willems that he checked the stocks of the
peoples whose name were in the notebook everyday
and that Mr. Willems did not need to worry. Id. at 23.
O’Neill further told Mr. Willems that he would check
his stock every day just like he checked the stocks of
his dad. Based upon these representations Mr. Wil-
lems came to trust O’Neill. Jd. at 24.
Mr. Willems and his wife Marie made it clear to
O’Neill that they wanted the joint account invested
conservatively in a money market account and not in
the stock market. O’Neill assured Mr. Willems that
the joint account with his wife would be kept entirely
separate from his IRA. O’Neill never told Mr. Willems
~ or his wife when they opened up the joint money mar-
17.
18.
ket account that it would in any way effect his IRA.
Mr. Willems understood that the money market ac-
count was completely separate from the IRA and this
was the only reason Mr. Willems and his wife opened
the joint PAT Plus account. Jd. at 30.
Mr. Willems understood that the IRA account had
specific rules that did not allow him to make with-
drawals whenever he wanted. The joint account, in
contrast, could be accessed by he and his wife at any
time. These differences in rules regarding access to
the accounts provide further support for Mr. Willems’
reasonable belief that in signing the PAT Plus account
agreement he was not affecting his rights vis-a-vis his
TRA.
O’Neill did not testify at the hearing although he had
the ability and opportunity to do so.
Findings Concerning Contract of Adhesion
19.
The contracts at issue in the instant case are stan-
dardized form contracts, prepared by Piper Jaffray.
App. 43
20.-Piper Jaffray, because they .ontrolled the Plaintiffs
21.
22.
23.
access to the securities market, had superior bargain-
ing power in the transactions at issue herein relative
to the Plaintiff who was an unsophisticated investor.
The provisions of these form contracts, and in particu-
lar the arbitration provisions, are drafted in accor-
dance with industry practice and standards to
conform to rules promulgated by the self-regulating
organizations (SROs) that govern the entire securities
industry. See Tr. Perino, 9/3/03, at pg. 44.
These contracts and the arbitration provisions they
contain are, on their face, contracts of adhesion, in
that the form language provides no “opt-out” provision
with regard to the arbitration clause, or any other
contract provisions. Tr. Corbett, 8/12/03, at pgs. 60-61.
The customer is provided no opportunity on the face of
the document to select or consent to certain provi-
sions, and not to others. A signature on the document
purports to bind the consumer investors to all of the
contract terms.
Piper did not call any employee from the Butte office
to testify that they implemented or were even aware
of the alleged “opt out” policy. O’Neill did not testify in
this regard. English did not testify in this regard. The
only witness who testified about the procedures in the
Butte office was Jerry Campbeli who was called by the
Plaintiffs. Campbell testified that he was unaware of
the alleged policy and that based upon his training
and experience with Piper, the account documents
were to be presented to investors on a take-it-or-leave-
it basis. Given that Piper, O’Neill and English all had
the ability to testify and establish that the “opt out”
policy was a part of the Butte operation and failed to
do so and given the testimony of Jerry Campbell the
court finds that there was no “opt out” policy in effect
in the Butte office and that the account documents
24.
25.
26.
27.
28.
29.
App. 44
were presented to Butte investors (like the Plaintiff)
on a take-it-or-leave-it basis.
These account forms, prepared by Piper Jaffray, were
presented to the Plaintiffs on a “take it or leave it” ba-
sis, in accordance with the manner in which brokers
are trained by Piper Jaffray to present these forms to
their clients and prospective clients. See Tr. Campbell,
9/3/03, pg. 11.
Moreover, the new PAT Plus forms presented to many
of the plaintiffs for their signatures in 1993 were en-
closed with a cover letter, advising that if the custom-
ers did not accept the terms of the new account forms,
they would be transferred to a fee-paying account. Tr.
Harmsen, 9/3/03, at pgs. 213-215. Thus, not only were
the contracts presented on a “take it or leave it” basis,
but additionally, on a “take it or pay a fee” basis.
The letter, while purporting to advise customers of the
essential new account terms, failed to inform the
- Butte branch customers that the new PAT Plus forms
contained a pre-dispute arbitration clause, which for
many customers, would be included within their ac-
count agreements for the first time. Id.
Plaintiffs herein had no bargaining power or meaning-
ful opportunity to negotiate the terms of their con-
tracts, including the arbitration provision.
Piper Jaffray’s alleged “opt out” policy relating to the
arbitration clause alone, but no other provisions in the
form contracts, does not provide investors with a
meaninzful choice in opting out of the arbitration pro-
vision.
According to this alleged policy, branch managers are
given discretion to permit a customer, at the cus-
tomer’s request, to cross out the arbitration clause in
30.
31.
32.
33.
App. 45
the account agreement forms. TR. Harmsen, 172,
Hearing Exhibit 4.
Piper does not apprise potential investors of the
existence of the alleged “opt out” policy. Piper’s in-
vestment executives who open new accounts in accor-
dance with Piper Jaffrays policies, procedures and
training do not inform or apprise their customers ei-
ther of the existence of the arbitration clause, or of the
alleged “opt out” policy. Tr. Harmsen, 9/3/03, pg. 216.
See also Tr. Campbell, 9/3/03, pgs. 11 and 12.
To be able to take advantage of this alleged “opt out”
option, the Plaintiffs in this litigation would have had
to have initiated the discussion with O’Neill, and
questioned whether it would be possible to cross out
the arbitration provision. Even then, the determina-
tion of whether this would be permissible would be
made by the Branch Manager.
The alleged “opt out” policy was not known to the
Butte branch office, from which the Plaintiffs’ account
originated. The Branch Manager (Bob English) and
Mr. Campbell both had never heard of such a policy,
and the so-called “policy” itself is centrally maintained
in Minneapolis, and not distributed to the branches.
Tr. Harmsen, pgs. 175-77. Tr. Campbell at pgs. 8-12
and pg. 20. Tr. English, (in Emett/Merrett hearing),
8/8/2003 pgs. 91-98.
It would have been impossible for the Butte office to
have implemented the supposed opt-out policy with
regard to the Plaintiffs. in this litigation without hav-
ing any knowledge of its existence, particularly in
light of the fact that the option lies completely within
the discretion of the Butte branch managers, but the
Butte branch manager had no knowledge whatsoever
that he had such discretion.
34.
35.
36.
App. 46
Plaintiffs did not have reasonable notice of their
supposed opportunity to negotiate or reject the arbi-
tration clause. The contracts, on their face, provide no
indication that the arbitration provision is optional,
and can be crossed out. Piper Jaffray did not inform
Plaintiffs that the arbitration provision was negotia-
ble.
The Plaintiff in the instant litigation had no actual,
meaningful or reasonable choice to negotiate or exer-
cise any discretion with regard to the arbitration pro-
vision contained in the standardized Piper Jaffray
form contracts.
Investors such as Plaintiffs face the possibility of
being excluded from the securities market unless they
accept Piper Jaffray’s contract with such an agree-
ment to arbitrate.
Findings Concerning Unconscionability
37.
38.
It is undisputed that under NASD and NYSE rules
one of the three arbitrators must be affiliated with the
securities industry. There is no requirement that an
arbitrator must be affiliated with the industry in
which the small investor, or “one time player,” is em-
ployed. The securities industry will always have one
third of the panel represented by it. There is clearly a
disparity of representation which is inherently sus-
pect. The securities industry itself has recognized that
this disproportionate representation creates an ap-
pearance of pro-industry bias.
Repeat players are favored in securities arbitrations
as opposed to workers or consumers who are unlikely
to be involved in arbitration more than one time. Accord-
ing to Professor William Corbett of the University of
Montana Law School, who is a very experienced labor
arbitrator in the Pacific Northwest, whose testimony
39.
41.
42.
App. 47
the Court finds credible, empirical studies conducted
by legal commen‘# “ors have concluded that arbitra-
tors tend to favor repeat players.
Filing fees for securities arbitration under NASD
rules are substantial and far greater than the filing
fees imposed in the Montana district courts. It is un-
disputed that the filing fees for such claims are in the
range of $1,400 2nd $1,500, for a filing fee and a hear-
ing deposit. This conclusion was not disputed by
Piper’s retained expert, Michael Perino. Fees at the
rate of $450 per day for each additional day of a hear-
ing would be charged.
Securities arbitration under the required NASD or
NYSE rules impose significant arbitrator fees which
make small claims prohibitive and discriminate
against investors of modest means. In addition to the
formal filing fees, an investor located in Montana
would be required to either seek a waiver of the re-
quirement that the arbitration be held in a state
which has a NASD District Offices, and then pay the
lodging and travel expenses of the arbitrators who are
required to travel from their states of residence to
Montana, or pay the expenses of Montana witnesses
who would be required to travel outside of Montana to
testify.
Additionally, arbitrator fees are $400 per session day,
plus $75 additional for the chair person of the three-
member panel, or $1,275 per day. Thus, if a case were
to last five days, arbitrator fees alone would amount
to $6,375, not to mention travel and related lodging
expenses. In contrast, in the Montana district courts,
no litigant is required to pay for the daily fees or ex-
penses of either judges or juries.
The NASD and NYSE rules require private arbitra-
tion proceedings, which result in summary decisions
43.
App. 48
which provide no basis or opportunity for an explana-
tion of the findings of the arbitrators, or the applicable
law upon which the decision is based. These rules spe-
cifically preclude written decisions explaining their
findings of fact and conclusions of law. Professor Cor-
bett concluded that the failure to provide a written.
explanatory decision is not only intentional, but
touted as an “advantage” of arbitration because the
decision makers are not “burdened” with the obliga-
tion to explain their decisionst.There are no recog-
nized public law reporting publications of securities
decisions. This “penchant for secrecy” is an accepted
feature of securities arbitration, and therefore frus-
trates a litigant’s effort to seek a vacatur of the award
in the courts, and may conceal an intentional disre-
gard of the law. Additionally, as Professor Corbett
points out, the failure to explain decision making may
obscure biased or erroneous decision making. Securi-
ties arbitration proceedings thus become shrouded in
secrecy because they are conducted in private forums
which excludes public decision making. As a result,
wrongdoing or other oppressive conduct by the securi-
ties industry or its members precludes any meaning-
ful expose of such conduct and activities.
Securities arbitration is expressly designed to excuse
arbitrators from being bound by the facts or law. It is
expressly designed to preclude arbitrators from dis-
closing to the parties written reasons which would ex-
plain the basis of their decision. The pre-dispute
arbitration provision at issue in this case recites that:
The arbitrators’ award is not required to include
factual findings or legal reasoning and any
party’s right of appeal to seek modification of rul-
ings is strictly limited.
44.
45.
46.
App. 49
Many legal commentators have rightfully criticized
the securities industry for insisting that its arbitra-
tion processes be expressly designed to preclude ex-
planatory decisions which can serve as the basis of
judicial review.
The pre-dispute arbitration provision, which is the
subject of the motion to compel, severely limits the
opportunity of claimants to discover facts necessary to
prove a claim such as a company’s business practices.
This fact is stated clearly in Piper’s own arbitration
provision, to wit:
Pre-arbitration discovery is generally more lim-
ited than and different from court proceedings.
Additionally, securities industry arbitration rules dis-
courage discovery except to a very limited extent.
Depositions are “strongly discouraged”, and limited to
“exceptional circumstances”. There has also been
criticism of the limited role of discovery in arbitration
cases, because securities firms can effectively “stone-
wall” discovery requests and delay production of in-
formation until the time of the hearing.
Because of the limited role of discovery in securities
arbitration, the ability of a litigant to discovery mat-
ters not specifically related to the investor’s account is
severely compromised, making it difficult, if not im-
possible, to establish a company’s business practice. In
the instant case, allegations of improper business
practices are central to Plaintiffs’ tort claims and
other claims surrounding the manner in which the
Defendant Piper Jaffray and O’Neill conducted their
business and the manner in which Piper supervised
and encouraged O’Neill to maintain business practices
previously determined to be improper. See Plaintiff’s
Complaint.
App. 50
CONCLUSIONS OF LAW
Piper’s Burden of Proof
1. The procedure for analyzing a Motion to Compel
Arbitration is set forth in §27-5-115 MCA which pro-
vides in relevant part:
Proceedings to compel or stay arbitration. (1) On
the application of a party showing an agreement
described in 27-5-114 and the opposing party’s
refusal to arbitrate, the district court shall order
the parties to proceed with arbitration; but if the
opposing party denies the existence of the
agreement to arbitrate, the court shall proceed
summarily to the determination of that issue
raised and shall order arbitration if it finds for
the applying party or deny the application if it
finds for the opposing party; (2) On application,
the district court may stay an arbitration pro-
ceeding commenced or threatened on a showing
that there is no agreement to arbitrate. Such an
issue, when in substantial and bona fide dispute,
shall be immediately and summarily tried and
the stay ordered if the court finds for the apply-
ing party. If the court finds for the opposing
party, it shall order the parties to proceed to ar-
bitration.
In this case, there exists a substantial and bona fide
dispute concerning the enforceability of the alleged
arbitration provisions. Pursuant to Kingston v. Amert-
trade, Inc., 2000 MT 269, 302 Mont. 90, 12 P.3d 929
this Court must therefore, conduct a hearing to obtain
evidence to resolve the dispute. Such hearings have
been held. Piper has the initial burden of establishing
a valid agreement to arbitrate.
App. 51
Fiduciary Duty Created by Piper’s PAT Plus Agree-
ment and O’Neill’s Representations
2. In Kloss v. Edward D. Jones the Montana Supreme
Court held that a fiduciary relationship is created
whenever a broker has discretion to buy and sell secu-
rities in a client’s account. The discretion to buy and
sell can arise from the language in the account
agreement. In Kloss the court found that the following
language created a fiduciary duty on behalf of the
broker and brokerage house: |
You may sell any and all property held in any of
my accounts and cancel any open orders for the
purchase or sale of any property without notice,
in the event of my death or whenever in your dis-
cretion you consider it necessary for your protec-
tion. Jd. at paragraph 36.
3. The Kloss court also held that if a pre-dispute arbitra-
tion provision is contained in an agreement that cre-
ates a fiduciary relationship then the broker and
brokerage house has a duty to explain the conse-
quences of the pre-dispute arbitration provision they
seek to enforce. Jd. at paragraph 38.
4. The language contained in Piper’s PAT Plus Agree-
ments set forth in Finding of Fact number 9 creates a
fiduciary duty on behalf of Piper and O’Neill to ex-
plain the consequences of the arbitration provisions
Piper seeks to enforce.
5. The scope of or extent of a fiduciary obligation de-
pends on the facts of the case. Kloss, supra at { 31, In
Deist v. Wacholz, 208 Mont. 207, 678 P.2d 188 (1984)
the Montana Supreme Court found that a fiduciary
duty arose when a bank officer undertook to provide
financial advise [sic] to an elderly customer concern-
ing the sale of her ranch. Because of Mr. Willems ex-
treme unsophistication and lack of education which
App. 52
O’Neill was aware of and because of the representa-
tion that O’Neill made about looking after his ac-
counts like he did his father’s account, O’Neill
established a fiduciary relationship with Mr. Willems
which also gives rise to the duty to explain arbitra-
tion.
Because neither Piper_nor O’Neill explained the
consequences of the arbitration provision in the PAT
Plus Agreements and because of the existence of the
fiduciary duty, Piper cannot now enforce those arbi-
tration provisions are unenforceable.
Piper’s Account Agreements are Contracts of Adhesion
7.
A contract of adhesion is a contract whose terms are
dictated by one contracting party to another who has
no voice in its formation. Kloss at paragraph 24, citing
Corbin on Contracts, section 1.4 at 13 (1993).
“Contracts of adhesion arise when a standardized
form of agreement, usually drafted by the party hav-
ing superior bargaining power, is presented to a party,
whose choice is either to accept or reject the contract
without the opportunity to negotiate its terms.” Kloss,
2002 MT 129 {24 (quoting Passage v. Prudential
Bache Securities, Inc. (1986), 223 Mont. 60, 66, 727
P.2d 1298, 1301-02 (citations omitted)).
In Passage v. Prudential-Bache Securities, Inc. (1986),
223 Mont. 60, 727 P.2d 1298, the Montana Supreme
Court described contracts of adhesion in the Securities
context and the circumstances under which they are
unenforceable as follows:
... [The investor is faced with an industry
wide practice of including Arbitration
Clauses in standardized brokerage contracts.
As the investor faces the possibility of being
App. 53
excluded from the securities market unless
he accepts a contract with such an agree-
ment to arbitrate, such clauses come within
the adhesion doctrine. However, mere ine-
quality in bargaining power does not render
a contract unenforceable, nor are all stan-
dardized contracts unenforceable. As a con-
sequence of current commercial realities,
form forum clauses will control, absent a
strong showing it should be set aside. For
such a contract or clause to be void, it must
fall within judicially imposed limits of en-
forcement. It will not be enforced against
the weaker party when it is: (1) not within
the reasonable expectations of said party or
(2) within the reasonable expectations of the
party, but, when considered in its context, is
unduly oppressive, unconscionable, or against
public policy. [Citations omitted.]
10. In contracts of adhesion, the contract terms are
11.
“dictated by one party to another who has no bargain-
ing power and no realistic options.” Kloss, 2002 MT
129 924. If the party in the lesser bargaining position
has no meaningful opportunity to negotiate or reject
the terms of a contract, the contract is one of adhe-
sion. See Circuit City v. Mantor, 335 F.3d 1101 (9th
Cir. 2003) (applying California law).
“A meaningful opportunity to negotiate or reject the
terms of a contract must mean something more than
an empty choice. At a minimum, a party must have
reasonable notice of his opportunity to negotiate or re-
ject the terms of a contract, and he must have an ac-
tual, meaningful, and reasonable choice to exercise
that discretion.” Circuit City v. Mantor, 335 F.3d 1101,
1106 (9th Cir. 2003) (applying California law). (em-
phasis added).
App. 54
12. Based upon the above Findings of Fact, Piper’s ac-
count agreements are determined to be contracts of
adhesion.
Piper’s Pre-Dispute Arbitration Provision is Uncon-
scionable
13. In Kloss the Court set forth the following eight factors
which this Court must examine in determining the is-
sue of the conscionability of Piper’s pre-dispute arbi-
tration provision:
1. Are potential arbitrators disproportionately
employed in one or the other party's field of
business?
2. Do arbitrators tend to favor “repeat players”
as opposed to workers or are unlikely to be
involved in arbitration again? In other words,
is there a tendency by arbitrators to avoid de-
cisions which will result in the loss of future
contracts for their services?
3. What are the filing fees for arbitration com-
pared to the filing fees in Montana’s district
courts?
4. What are arbitrators’ fees? Do they make
small claims prohibitive? Do they discrimi-
nate against consumers or workers of modest
means?
5. Are arbitration proceedings shrouded in se-
crecy so as to conceal illegal, oppressive or
wrongful business practices?
6. To what extent are arbitrators bound by the
law?
14.
App. 55
7. To what extent are arbitrators bound by the
facts?
8. What opportunity do claimants have to dis-
cover the facts necessary to prove a claim
such as a company’s business practices?
Based upon the above Findings of Fact, the Court
finds that Piper’s pre-dispute arbitration provision is
unconscionable and therefore unenforceable.
——- Ere-Dispute Arbitration Provision. Was Not
15.
16.
Based upon the above «Seiten of Fact the Court
concludes that Mr. Willems’ reasonable expectation
when signing Exhibit A was to protect his mother by
placing his name on her account. Mr. Willems’ reason-
able expectations did not include agreeing to binding
arbitration of disputes concerning his IRA account
which is the subject of this litigation.
Based upon the above Findings of Fact, the Court
concludes that Mr. Willems’ reasonable expectation in
signing Exhibit B was to establish a conservative
money market account with his wife. These expecta-
tions had nothing to do with his IRA. Therefore, Mr.
Willems did not reasonably expect that by signing Ex-
hibit B he was agreeing to binding arbitration of dis-
putes concerning his IRA which is the subject of this
litigation.
Vol Kn and Intelligently Waived His
nstitutional Trial and the
Courts 5
17. The right of trial by jury is secured to all and shall
remain inviolate. Article II, Section 26, Montana Con-
stitution. This constitutionally guaranteed right is
fundamental and deserving of the highest level of
court scrutiny and protection. State v. LaMere, 2000
MT 45, 298 Mont. 358, 2 P.3d 204.
18. Courts of justice shall be open to every person and
speedy remedy afforded for every injury to person,
property, or character. Article II, Section 16 Montana
Constitution. This right is as fundamental as any
other Article II right because the right of access to the
courts is included within the Constitution’s Declara-
tion of Right and without the right to access the courts
other Article II rights would have little protection
from infringement, and, thus, little meaning. Kloss,
supra (Nelson, J. concurring) at J 57.
19. Constitutional rights that cannot be enforced are
illusory. Jd. at { 58.
20. A waiver of a fundamental right must be proven to
have been made voluntarily, knowingly and intelli-
gently — typically by the party seeking the waiver. Id.
at J 64.
ORDER
Based upon the Findings of Fact herein, the Court
finds that Piper has failed to demonstrate a voluntary,
knowing, and intelligent waive by the Plaintiff of his
constitutional rights.
Accordingly, it is hereby
App. 57
ORDERED that the Defendant’s Motion to Compel
Arbitration and Stay Proceedings is DENIED.
DATED this 7th day of April, 2004.
/s/ Kurt Krueger
KURT KRUEGER
_ District Court Judge
App. 58
‘MONTANA SECOND JUDICIAL DISTRICT COURT
SILVER BOW COUNTY
ES EEE EEE EE HO EEESEEEEEEESESESEEEE BREESE SESE B ETH OBE EER He
JAMES LEARY,
Plaintiff,
vs.
U.S. BANCORP PIPER
JAFFRAY, INC., PIPER
JAFFRAY, INC., ROBERT
ENGLISH, THOMAS J.
O’NEILL AND JOHN
DOES I AND X,
Defendants.
EEE EE OER HOSE EEE EEE RESET HEHE SETH OEE BE TEESE HO
TRANSCRIPT OF PROCEEDINGS
Taken at:
COURTROOM
BUTTE-SILVER BOW COUNTY
COURTHOUSE
155 WEST GRANITE STREET
BUTTE, MONTANA 59701
FEBRUARY 26, 2003
HONORABLE KURT KRUEGER, PRESIDING
OK * *
CAUSE NO. DV-02-91
Nee ee ee ee ee ee ee ee ee” ee”
[11] A. No.
Q. Had you had an account somewhere else?
A. No.
Q. And did there come a time when you decided to
open an account with Mr. O’Neill?
A. Myself?
Q. Yes.
A. Yes, in —I believe it was in June the 30th of 2000,
I was going to move my 401(k) from Montana Resources
and put it into an IRA. And since we were already in-
volved with Piper Jaffray, with Tom O’Neill, we went with
Mr. O'Neill. ee
Q. And when did you first get involved with Piper
Jaffray? ‘
A. I believe it was in October of 1998 when my wife
opened her account.
Q. She had a separate account?
A. Yes, she did.
THE COURT: That wasn’t a joint account.
THE WITNESS: Well, my name was on it.
THE COURT: As a beneficiary?
THE WITNESS: Yeah, I believe I was.
THE COURT: As a beneficiary but not as an
account holder?
THE WITNESS: No. It was her account.
[12} Q. (By Mr. Lutz) So you had no prior account
relationship with Mr. O’Neill other than being a benefici-
ary on your wife’s account; is that right?
A. Yeah, as far as I understand. ~
Q. So then you opened the 401(k) in 2000?
App. 60
A. Yes, I did.
Q. And was that your retirement monies from — that
you kept elsewhere?
A. Yes.
Q. Was that with your prior employer?
A. Yes.
Q. And when you opened the account, did you meet
with Mr. O’Neill at the time?
A. Yes.
Q. The 401(k) account?
A. Yeah.
Q. And you never had your own brokerage account
before that time?
A. No.
Q. Did Mr. O’Neill review the account document
with you when you opened the account?
A. No, he didn’t.
Q. Did you take an opportunity to review the docu-
ment yourself?
A. No.
Pipi
App. 61
PAT Plus Account
Co-Owner AGREEMENT
ER JAE RAY
Customer Copy
* * *
12. Customer Agrees to Arbitrate.
Arbitration is final and binding on the parties.
The parties are waiving their right to seek
remedies in court including the right to jury
trial.
Pre-arbitration discovery is generally more
limited than and different from court proceed-
ings.
The arbitrators’ award is not required to in-
clude factual findings or legal reasoning and
any party’s right to appeal or seek modification
of rulings by the arbitrators is strictly limited.
The panel of arbitrators will typically include a
minority of arbitrators who were or are affili-
ated with the securities industry.
You agree to arbitrate any disputes between Piper
Jaffray and you. You specifically agree and recog-
nize that all controversies which may arise between
Piper Jaffray, its agents, representatives or employ-
ees and you concerning any transaction, account or
the construction, performance or breach of this or
any other agreement between us, whether entered
into prior, on, or subsequent to the date hereof,
shall be determined by arbitration to the full extent
App. 62
provided by law. Such arbitration shall be in accor-
dance with the rules then in effect of the Arbitra-
tion Committee of the New York Stock Exchange,
Inc. or the National Association of Securities Deal-
ers, Inc. as you may elect. You authorize Piper
Jaffray, if you do not make such election by regis-
tered mail addressed to Piper Jaffray at its main
office within 15 days after receipt of notification
from Piper Jaffray requesting such election, to
make such election on your behalf.
However, it is understood, no person shall bring a
putative or certified class action to arbitration, nor
seek to enforce any pre-dispute arbitration agree-
ment against any person who has initiated in court
a putative class action; who is a member of a puta-
tive class who has not opted out of the class with
respect to any claims encompassed by the putative
class action until:
(i) the class certification is denied;
(ii) the class is decertified; or
(iii) the customer is excluded from the class by
the court.
Such forbearance to enforce an agreement to arbi-
trate shall not constitute a waiver of any rights
under this agreement except to the extent stated
herein.
App. 63
Piper Jaffray Self-directed IRA
APPLICATION
PIPER JAFFRAY|
Me “ ee
C. ACCEPTANCE, ARBITRATION AGREEMENT
AND SIGNATURE ...
(4) The Customer Agrees to Arbitrate:
e Arbitration is final and binding on the par-
ties.
e The parties are waiving their right to seek
remedies in court, including the right to
jury trial.
e Pre-arbitration discovery is generally more
limited than and different from court pro-
ceedings.
e The arbitrators’ award is not required to in-
clude factual findings or legal reasoning and
any party’s right to appeal or to seek modi-
fication of rulings by the arbitrators is
strictly limited.
e The panel of arbitrators will typically in-
clude a minority of arbitrators who were or
are affiliated with the securities industry.
I agree to arbitrate any disputes between Piper
Jaffray and me. I specifically agree and recognize
that all controversies which may arise between
Piper Jaffray, its agents, representatives or employ-
ees and me, concerning any transaction, account or
the construction, performance or breach of this or
App. 64
any other agreement between Piper Jaffray and me,
whether entered into prior, on, or subsequent to the
date hereof, shall be determined by arbitration to
the full extent provided by law. Such arbitration
shall be in accordance with the rules then in effect,
of the Arbitration Committee of the New York Stock
Exchange, Inc. or the National Association of Secu-
rities Dealers, Inc. as I may elect. I authorize Piper
Jaffray, if I do not make such election by registered
mail addressed tc Piper Jaffray at its main office
within 15 days after receipt of notification from
Piper Jaffray requesting such election, to make
such election on my behalf. However, it is under-
stood, no person shall bring a putative or certified
class action to arbitration, nor seek to enforce any
pre-dispute arbitration agreement against any
person who has initiated in court a putative class
action; who is a member of a putative tlass who has
not opted out of the class with respect to any claims
encompassed by the putative class action until: (i)
the class certification is denied; (ii) the class is
decertified; or (iii) the customer is excluded from
the class by the court.
Such forbearance to enforce an agreement to arbi-
trate shall not constitute a waiver of any rights
under this agreemeut except to the extent stated
herein.
App. 65
CASE STATUS AS OF 07/08/05
Disposition
"| Plaintiff MT Supreme Court
Docket No.
Tern A. Bagley v. U.S. Bancorp Piper Jaffray Inc., et al. Case No. 04-446 Appeal dismissed after mediation
Vicki Berryman v. U.S. Bancorp Piper Jaffray Inc., et al. Case No. 04-585 Affirmed
Sandra Brown v. U.S. Bancorp Piper Jaffray Inc., et al. Case No. 04-447 Appeal dismissed after mediation
John P. and Audrey Daly v. U.S. Bancorp Piper Jaffray Inc., et al. Case No. 04-490 Affirmed
Roberta J.Emett/Kathleen E. Merrett v. U.S. Bancorp Piper Jaffray Inc., et. al. | Case No. 04-517 Affirmed
Estate of Alice A. Franey U.S. Bancorp Piper Jaffray Inc., et. al. Case No. 04-493 Affirmed
Joseph Froehlich, et al. v. U.S. Bancorp Piper Jaffray Inc., et. al. Case No. 04-495 Settled at mediation/to be dismissed
Raymond Kaufman, et al. v. U.S. Bancorp Piper Jaffray Inc., et. al. Case No. 04-491 Pending in MT. Sup. Court
James Leary v. U.S. Bancorp Piper Jaffray Inc., et al. Case No. 04-448 Affirmed
Suzanne McGee v. U.S. Bancorp Piper Jaffray Inc., et. al. Case No. 04-494 Appeal dismissed after mediation
Margaret McGrath v. U.S. Bancorp Piper Jaffray Inc., et. al. Dismissed after mediation but before appeal filed
Debbie Mueller v. U.S. Bancorp Piper Jaffray Inc., et. al. Case No. 04-530 Appeal-dismissed after mediation
Mike Paffhausen v. U.S. Bancorp Piper Jaffray Inc., et. al. Case No. 04-449 Pending in MT Sup. Court
Juanita Periman v. U.S. Bancorp Piper Jaffray Inc., et al. Case No. 04-450 Settled at mediation/to be dismissed
Evelyn Pickett v. U.S. Bancorp Piper Jaffray Inc., et. al. Case No. 04-533 Settled at mediation/to be dismissed
John D. Shea and Brenda Shea v. U.S. Bancorp Piper Jaffray Inc., et. al. Case No. 04-451 Affirmed
James and Brenda Shea v. U.S. Bancorp Piper Jaffray Inc., et. al. Case No. 04-532 Appeal dismissed after mediation
James Staedt v. U.S. Bancorp Piper Jaffray Inc., et. al. Case No. 04-492 Appeal dismissed after mediation
Stephen C. Tomazich v. U.S. Bancorp Piper Jaffray Inc., et. al. Case No. 04-452 Pending in MT. Sup. Court
Robert and Sheryl Tremis v. U.S. Bancorp Piper Jaffray Inc., et. al. Case No. 04-453 Appeal dismissed after mediation
Shirley A. Turley v. U.S. Bancorp Piper Jaffray Inc., et. al. Case No. 04-431 Settled at mediation/to be dismissed
Harry Willems v. U.S. Bancorp Piper Jaffray Inc., et. al. Case No. 04-454 Affirmed, then dismissed as a result of mediation
Nancy Zigrang v. U.S. Bancorp Piper Jaffray Inc., et. al. Case No. 04-455 Pending in MT Sup. Court
OFFICE OF THE CLERIC
SUPREME COURT, U.S
PIPER JAFFRAY & CO., and ROBERT ENGLISH, et al.,
Petitioners,
v.
JOHN P. DALY and AUDREY M. DALY, JOHN D. SHEA
and BRENDA SHEA, THE ESTATE OF ALICE A. FRANEY,
' ROBERTA J. EMETT and KATHLEEN E. MERRETT,
VICKI BERRYMAN and JAMES LEARY,
Respondents.
&
vr
On Petition For Writ Of Certiorari
To The Montana Supreme Court
a
v
BRIEF IN OPPOSITION
*DONALD C. ROBINSON WILLIAM P. JOYCE
Lisa A. LEVERT JOYCE & JOHNSTON, PLLP
PoorE, Roto & RosINson, PC. 321 W. Galena, Suite B
1341 Harrison Avenue Butte, Montana 59701
P.O. Box 2000 (406) 723-8700
Butte, Montana 59702
5 Attorneys for John P. Daly ee
(406) 497-1200 and Audis 0 Daly onal
Attorneys for Roberta J. the Estate of Alice A. Franey
> rrenegeg Kathleen E. GREG J. SKAKLES
SKAKLES & GALLAGHER
TINA L. MORIN 117 Main Street
PoorE, Roto & RosINSON, PC. Anaconda, Montana 59711
1341 Harrison Avenue (406) 563-8409
P.O. Box 2000
Butte, Montana 59702 ee for John D. Shea
(406) 497-1200 and Brenda Shea
Attorneys for
Vicki Berryman and
James Leary
*Counsel of Record for —
Respondents
COCKLE LAW BRIEF PRINTING CO (800) 225-6964
OR CALL COLLECT (402) 342-2831
QUESTION PRESENTED
Should this Court review the unpublished decisions of
the Montana Supreme Court in which the Montana court
simply followed the dictates of the Federal Arbitration Act
according to its express terms by applying state laws
governing fiduciary duties?
TABLE OF CONTENTS
Page
QUESTION PRESENTED..................ccccsscssssssssrsesesesees i
TABLE OF AUTHORITIES .............c..scccsssssssssssesssseoesees iii
STATEMENT OF THE CASE. .............cccscscsssssseeseseeeeeee 1
SUMMARY OF ARGUMENT. .............cccsscccssssseeseeeeenes 4
REASONS FOR DENYING PETITION FOR
ae IRIE sacstticivnsasccvoinnssnsqccbnstnessbitabvubstinioemisbigsabhs 5
CO I ni carats aicesiaceisancesnistdsscinepnntastbiniinioniccaiins 14
ill
TABLE OF AUTHORITIES
Page
CASES:
Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265
CN sascisaninstadsescencnsiusbshiccseteansncntesiibis sap ibtishecdinlsp cilpstashadlvadawipbuiiteas 6
Amoco Prod. Co. v. Charles B. Wilson, Jr. Inc., 266
Kan. 1084, 976 P.2d 941 (Kan. 1999)... ees 11
Appeal of Concerned Corporators of Portsmouth
Sav. Bank, 129 N.H. 183, 525 A.2d 671 (N.H. -
RI EB aie ciatagdakaincts scldnacaadseiiunsllciacadiiank villa sinhadiccsusaceisaivbesas 11
Aronson v. Quick Point Pencil Co., 440 U.S. 257
EI iste <iidich oases ce aicntlieg da cctahcaascnicasitciecuschdnaoonannsentaanaceiees 5,7
Brown v. Halbert, Division Three, 271 Cal. App. 2d
252, 76 Cal.Rptr. 781 (Cal.App. 1969)................cseeeees 11
Chor v. Piper, Jaffray & Hopwood, Inc., 261 Mont.
RE ee ae ee iar en pininintdishsccdeasslntiniccescinatas 9
Deist v. Wacholz, 208 Mont. 207, 678 P2d 188
5 RATE OIG A Coo EAE SEDER Nee EN SERIE SA OR RO 9,12
Ditis v. Ahlvin Const. Co., 408 Ill. 416, 97 N.E.2d
SN es iiaeeiiea dtechiahictinialeuchiedecouaaicchenaccahe Vasinaieliblaam tains 11
Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681
I pos kck etic ciestaucds Sa Na stet siedecs:trentecmndn atosiadeoieseceidicantineiabaanais 6
Ellezy v. Fyr-Pruf, Inc., 376 So. 2d 1328 (Miss.
OTE Kes aiciscisanssildlen Nar ssbsiewernstasastas isa apni abebphaclcoieciuccaisaies 11
Erie R. Co. v. Tompkins, 304 U.S. 64 (1938)............:-eee 6
In re Evans, 113 Ariz. 458, 556 P.2d 792 (Ariz. 1976)....... 11
Kingston v. Ameritrade, Inc., 2000 MT 269, 302
ee Ti Fae UE MI sich sic ind dnsadecnccdncbidnsennckabavacdactans 8
iv
TABLE OF AUTHORITIES — Continued
Page
Kitchen Krafters Inc. v. Eastside Bank of Montana,
et al., 242 Mont. 155, 789 P.2d 567 (1990) .............ceceeee 9
Kloss v. Edward D. Jones & Co., 2002 MT 129, 310
MN Em A BOM Ee iciscicddtinvavasdsdnsscdduscunssacicesessauuasewaed 8,11
Lindsay v. Marcus, 137 Colo. 336, 325 P.2d 267
NE NN oh bids ciscink cas bide phcbnianhascdcsssandisnesancacanescouonianh ll
Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545
RN ilies oi ah Gain iiledabincdteceubaiastns cucadekhacdestsbnbuanssshoed 10, 11
Murphy v. Redland, 178 Mont. 296, 583 P.2d 1049
aad ae AU Sas phecds dink sxaecbidea cd hdhaidsc pared pan aeidabadbcckaeee 9
Perry v. Thomas, 482 U.S. 483 (1987).................cesseseseeseeees 5
Ruhlin v. New York Life Ins. Co., 304 U.S. 202
I chee spit stale ahi icaphcaaasonnenaihaxienndassiesnscaiieaecleih 12
Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974) .....s0...00 6
Silverman v. Bresnahan, 35 N.J. Super. 390, 114
BU UE Ss, OD adic cniccisninicetcucniccadecisinsonsubnsunsobundates 11
Van Stee v. Ransford, 346 Mich. 116, 77 N.W.2d 346
I kl ars casivamrincincaceamancashineabenianen 11
Volt Information Sciences, Inc. v. Board of Trustees
of Leland Stanford Junior University, 489 U.S.
I its Lind cendabdacecsscuubonsndckuids Mdsacseddsiecliainonibaleas 6
Watson v. Fultz, 239 Mont. 364, 782 P.2d 361 (1989)......... 9
Willems v. USBancorp Piper Jaffray, Inc., et al.,
2005 MT 37, 326 Mont. 103, 107 P.3d 465.... 4, 7, 8, 9, 10
Young v. Field, 548 So. 2d 784 (Fla. 1989)..............:scs000 11
Vv
TABLE OF AUTHORITIES - Continued
OTHER AUTHORITIES:
Mont. Code Ann. § 27-5-114(2) (2003)...............ceccssessereees 12
9 U.S.C. § 2, Federal Arbitration Act (FAA) ......... 5, 6, 7, 12
1
STATEMENT OF THE CASE _
Respondents John P. Daly, Audrey M. Daly, John D.
Shea, Brenda Shea, the Estate of Alice A. Franey, Roberta
J. Emett, Kathleen E. Merrett, Vicki Berryman and James
Leary, are among 23 victims of USBancorp Piper Jaffray
Inc., Piper Jaffray, Inc.," Robert English (“Piper”), and
Thomas J. O’Neill’s unethical and deceitful securities
practices which were initially discovered and litigated by
the Securities Department of the Office of the State
Auditor of Montana. Respondents filed Complaints against
Piper alleging that, inter alia, Piper embarked upon a
fraudulent scheme with regard to Respondents’ retirement
or life savings accounts. That fraudulent scheme was
orchestrated by a long-time Piper securities broker who is
now in a federal penitentiary for his admitted violations of
federal securities laws committed in some transactions
which gave rise to this civil action. His fraudulent conduct
consisted of unauthorized and excessive trading activity
(“churning”), inappropriate and speculative trading
activity, unauthorized borrowing on margin, and inten-
tional non-disclosure of central agreement terms and
activities, as well as intentional and deceitful representa-
tions, inducements, and concealment. The broker, Tom
O'Neill, was a former Piper Jaffray branch manager who
had been previously stripped of that position, and placed
‘ Piper’s Rule 29.1 corporate disclosure makes representations as
to a corporate restructuring during the pendency of these actions
pursuant to which Piper Jaffray & Co. is now the appropriate party to
this litigation. Respondents do not concede Piper Jaffray & Co. is the
proper party, or that it has been properly substituted, and reserve their
objections pending discovery into the restructuring, including a
determination of whether the restructuring was undertaken to thwart
Respondents herein and limit liability exposure in these and other
pending legal actions.
2
on state ordered probation for prior violations of Montana
securities laws. In addition to O’Neill’s felonious conduct
which gave rise to-these cases, Respondents alleged that
Piper Jaffray had failed to properly supervise O’Neill, as
required of it by his probation, and had ceremoniously
lauded the huge commissions his illegal activity had
generated. Since the filing of these cases, O’Neill pled
guilty to two counts of unauthorized trading in the ac-
counts of two clients and was sentenced in April 2005 to
two years in a federal prison. He and Piper Jaffray were
also ordered to make partial restitution and pay fines to
the State of Montana based upon the Montana State
Auditor’s action. After Respondents filed their individual
Complaints in state district court, which were variously
assigned to three trial judges, Piper moved to compel
arbitration. Piper’s motions were denied by the respective
trial judges, in separate written decisions,’ after eviden-
tiary hearings conducted by them sitting en banc.
Subsequently, Piper filed a Notice of Appeal in each
case, except where the case had been settled before the
appeal time had run. Of the 23 cases, appeals are still
pending in four cases and 13 cases have been settled. Five
of the six cases captioned above have been decided by the
Montana Supreme Court and have not settled. The case of
Daly settled after Petitioner filed its petition with this
Court. All of the cases for which review is sought before
this Court are unpublished opinions by the Montana
* Roberta J. Emett and Kathleen E. Merrett, 4/22/04, Cause No.
: DV-02-29; Vicki Berryman, 5/5/04, Cause No. DV-02-78; James Leary,
4/7/04, Cause No. DV-02-91; John P. Daly and Audrey M. Daly, 4/22/04,
Cause No. DV-02-14; John D. Shea and Brenda Shea, 4/7/04, Cause No.
DV-02-207; and the Estate of Alice A. Franey, 4/22/04, Cause No. DV-02-
36.
3
Supreme Court. In those six-decisions, there were no
dissenting opinions filed by any of the justices.
In rejecting Piper’s appeal, the Montana Supreme
Court held that based upon the factual circumstances of
each case and the particular language of the broker
contracts, a fiduciary duty existed between the broker and
the Respondents. The language of the broker contracts
granted brokers unfettered discretion to buy, sell, or trade
securities in customer accounts under certain circum-
“stances. Pursuant to this fiduciary duty, defined by state
law, the broker had a duty to explain the essential contract
terms.
Included within those essential terms, which the
Montana Supreme Court held the broker had a fiduciary
duty to explain to the Respondents, was a pre-dispute
arbitration provision as well as a unique “opt-out” policy.
Within the opt-out policy, Respondents could decline to
arbitrate disputes by requesting to cross out that provi-
sion. This opt-out policy is an “internal policy” of Piper and
is not mentioned on the face of the broker agreements. It
was basically conceded, and the court found, that no one
had discussed or offered the “opt-out” policy to Respon-
dents.’ Such a policy is most unusual in the securities
industry and, because the broker did not explain the
predispute arbitration provision and the related opt-out
* The local Piper manager, English, and another local Piper broker
admitted their local branch did not have a custom or practice of
explaining the opt-out policy to customers. The broker who opened the
accounts at issue herein, O'Neill, under indictment for a host of
violations of federal securities laws, refused to testify, on Fifth Amend-
ment grounds, in any subsequent civil proceedings or administrative
actions.
S
policy to the Respondents in violation of his fiduciary duty,
the Montana Supreme Court held that the arbitration
provision was not enforceable.
Each of the decisions for which Piper has filed a
Petition for Certiorari incorporates the reasoning of the
Montana court in Willems v. USBancorp Piper Jaffray, Inc.
et al., 2005 MT 37, 326 Mont. 103, 107 P.3d 465 (decided
February 22, 2005) (App. 23-25),‘ which has settled. Piper
is seeking review of six of the unpublished decisions of the
Montana Supreme Court which addressed the scope of the
fiduciary duty arising under state law between securities
brokers and their customers in instances where the
agreement between the parties grants the brokers unfet-
tered authority to buy, sell, or trade securities in a cus-
tomer’s account.
*
-
SUMMARY OF ARGUMENT
Certiorari is not appropriate in the instant cases
because no federal question was addressed by the Mon-
tana court; rather, the court clarified the scope of the
fiduciary duty which arose under state law from the
unique factual circumstances of these cases. Moreover,
even if a federal question is implicated, this Court should
decline to exercise its discretion in granting review be-
cause compelling reasons do not exist for certiorari in
these inimitable, fact-driven cases where Piper, at best,
* Willems had been settled in principal by Piper Jaffray shortly
before the opinion was issued but before the parties had moved to
dismiss the appeal as moot. As a result, Willems is not one of the cases
for which review by this Court may be sought.
5
seeks to challenge the state court’s application of the facts
to the law. The Montana Supreme Court simply applied
Montana state law regarding the duty of a fiduciary to the
Respondents in this case. Because Piper fell short of that
duty, the Montana Supreme Court appropriately found
Piper’s arbitration provision to be unenforceable. Having
appropriately applied Montana law regarding fiduciary
duties to these brokerage accounts, and in compliance with ~
the express provisions of the Federal Arbitration Act
requiring states to apply state law, certiorari is not appro-
priate. This is a simple, unpublished state law matter of
no precedential value beyond its peculiar facts. Piper has
attempted to dress up the issue as a federal one, which it
decidedly is not.
,%
vv
REASONS FOR DENYING
PETITION FOR CERTIORARI
Section 2 of the Federal Arbitration Act (FAA) pro-
vides that written arbitration agreements “shall be valid,
irrevocable, and enforceable, save upon such grounds as
exist at law or in equity for the revocation of any contract.”
9 U.S.C. §2. This provision of the FAA “provides the
touchstone for choosing between state-law principles and
principles of federal common law envisioned by the pas-
sage of that statute.” Perry v. Thomas, 482 U.S. 483, 492,
n.9 (1987). “An agreement to arbitrate is valid, irrevocable,
and enforceable, as a matter of federal law. ... State law,
whether of legislative or judicial origin, is applicable if
that law arose to govern issues concerning the validity,
revocability, and enforceability of contracts generally.” Id.
“States may regulate contracts, including arbitration
clauses, under general contract law principles and they
6
may invalidate an arbitration clause ‘upon such grounds
as exist at law or in equity for the revocation of any
contract.’” Allied-Bruce Terminix Cos. v. Dobson, 513 U.S.
265, 281 (1995).
This principle comports with the general rule that
contract law is typically the domain of the state. See
Aronson v. Quick Point Pencil Co., 440 U.S. 257, 262
(1979); Erie R. Co. v. Tompkins, 304 U.S. 64, 78 (1938).
Thus, generally applicable state law contract defenses,
such as fraud, duress, or unconscionability, may be applied
to invalidate arbitration agreements without contravening
Section 2 of the FAA. Doctor’s Associates, Inc. v. Casarotto,
517 U.S. 681, 687 (1996). In short, state law governs
contract formation and revocation questions, and also is
applied to determine questions of validity. Id.
What states may not do is invalidate arbitration
agreements under state laws applicable only to arbitration
agreements. Doctor’s Associates, Inc., 517 U.S. at 687
(citing Allied-Bruce, 513 U.S. at 281; Perry, 482 U.S. at
492, n.9). “By enacting § 2, Congress precluded States
from singling out arbitration provisions for suspect status,
requiring instead that such provisions be placed ‘upon the
same footing as other contracts.’” Id. (citing Scherk v.
Alberto-Culver Co., 417 U.S. 506, 511 (1974)). In fact, one
of the fundamental tenets of the FAA is that arbitration
provisions should exist “upon the same footing” as all
other provisions in a contract. Volt Information Sciences,
Inc. v. Board of Trustees of Leland Stanford Junior Uni-
versity, 489 U.S. 468, 474 (1989).
The issues presented herein arise under state law. Piper
identifies no Montana state laws applicable only to arbitra-
tion agreements which would invoke federal jurisdiction, or
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