Opposition Brief — Edward D. Jones & Co. v. Carter

Bupreme Court, WL |

FILED

4, JUN 12 1992

No. 91-1829 © OF THE CLERK

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1991

EDWARD D. JONES & CO., L.P.,

Petitioner,

STEVEN W. and LINDA K. CARTER,

WILBUR E. and CAROL FRUSHOUR,

LARRY E. and NORMA B. LEWELLEN,

FLOYD C. and NORMA J. SICKLER,

and EUGENE W. and DONNA L. SMITH,

Respondents.

BRIEF IN OPPOSITION TO

PETITION FOR WRIT OF CERTIORARI

TO THE COURT OF APPEALS OF INDIANA,

THIRD DISTRICT

DONALD J. TRIBBETT

Counsel of Record

Scott L. STARR

201 S. Third Street

P.O. Box 120

STARR AUSTEN & TRIBBETT Logansport, Indiana 46947

Of Counsel (219) 722-6676

Attorneys for

June 12, 1992 Plaintiffs-Respondents.

Washington. OC « THIEL PRESS » (202) 328-3286

(2)

TABLE OF CONTENTS

ARGUMENT:

1. Jones Fails to Present Any Question Warranting

this Court’s Exercise of Judicial Discretion

Pursuant to Supreme Court Rule 10.1.............

A. The Indiana Court of Appeals’ Discussion of

Mo.Rev.Stat. § 435.460 is Merely Obiter

Dictum Without Precedential Value ............

B. The Indiana Court Did Not Hold that Ambig-

uous Arbitration Clauses Should be Construed

pe Ne ee eee eee eee

II. Jones Misses the Point of the Indiana Court’s

III. The Indiana Court was Justified in Finding that

the Subject Agreements Were not Reasonably

Susceptible of an Interpretation Compelling

Arbitration.

CONCLUSION

-

(12)

TABLE OF AUTHORITIES Page

Cases:

Belke v. Merrill Lynch, Pierce, Fenner & Smith, 693 F.2d

ROR Lee es Ce 66 8 kG Ew Eek ene 12

Cincinnati Insurance Co. v. Mallon, 409 N.E.2d 1100

ror rere yee Ce re ee eee 7

Clark v. Kidder, Peabody & Co., 636 F.Supp. 195,

Cee CES 6 Rae ee wa ae Oe eee a ee 13

Frates v. Edward D. Jones & Co., 760 P.2d 748 (Mont.

rare ree Cee take pee ce ee 6, 14

Gilmore v. Shearson/American Express, Inc., 668 F.Supp.

RM 3 4 re se ee 13

Koske v. Townsend Engineering Co., 551 N.E.2d 437 (Ind.

1990) » S06 &-0 58 'e a oe ae be he a ae ea 6 5

Rand Bond of North America, Inc. v. Saul Stone & Co., 726

F.Sape, GOS Ek He See 66 ke kb eee ees Be 12

Volt Information Sciences, Inc. v. Board of Trustees, 489

U.S. 468, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1980) . .5, 6, 8,9

Statutes and Other Authontties:

Ma. Geviienk, SAGGGE 6 oisc ka bab eee ee ees bees 4

SUGGS. 8. ocd iw n nee 04de eee 8

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1991

EDWARD D. JONES & CO., L.P.,

Petitioner,

v.

STEVEN W. and LINDA K. CARTER,

WILBUR E. and CAROL F RUSHOUR,

LARRY E. and NORMA B. LEWELLEN,

FLOYD C. and NORMA J. SICKLER,

and EUGENE W. and DONNA L. SMITH,

Respondents.

BRIEF IN OPPOSITION TO

PETITION FOR WRIT OF CERTIORARI

TO THE COURT OF APPEALS OF INDIANA,

THIRD DISTRICT

STATEMENT OF THE CASE

Respondent’s counsel received Petition for Writ of

Certiorari to the Court of Appeals of Indiana, Third

District, on May 13, 1992. Accordingly, this brief is due

by June 12, 1992.

Petitioner Edward D. Jones & Co.’s (hereafter “ ones’’)

Statement of the Case is argumentative. Apart from that,

]

2

it omits several matters pertinent to consideration of its

petition for writ of certiorari.

The instant action arose out of allegations that Jones

sold Petro-Lewis oil and gas limited partnerships in viola-

tion of the Indiana Securities Act and the Indiana Rack-

eteer Influenced and Corrupt Organization Act. The com-

plaint also asserted that Jones committed fraud and con-

structive fraud in the sale of those securities.

The action was commenced by 68 individual plaintiffs.

However, with regard to 11 of those plaintiffs, Jones filed

a motion to compel arbitration. That motion was based

on Full Service Account Agreements signed by those 11

plaintiffs substantially after their Petro-Lewis invest-

ments. The trial court entered its order compelling arbi-

tration, which was followed by an appeal by the 11

affected plaintiffs, heretofore and hereafter referred to

as the “Account Agreement Plaintiffs.” !

The arbitration clause in question consisted of a few

lines in the middle of a two page, small-print Account

Agreement. (R. 38-49) Although Jones quotes a typical

arbitration clause in footnote 2 of its petition, it conven-

iently fails to note that portion of the Account Agree-

ments which governed the matters to which the entire

agreement applied. Specificaily, the Account Agreements

stated that:

1 Footnote 1 on page 2 of Jones’ Petition for Writ of Certior-

ari to the Court of Appeals of Indiana, Third District, refers to the

fact that a number of the original plaintiffs were not parties on

appeal and leaves the impression that the non-appealing plaintiffs

accepted the court’s arbitration order. In fact, the non-appealing

plaintiffs were unaffected by the arbitration order masmuch as

they did not sign Account Agreements. Their actions continued,

and on July 16, 1991, a judgment was entered in their favor and

against Jones for approximately $2.8 million which included $1.75

million in punitive damages.

3

“This agreement .. . shall cover. . . all accounts

which the undersigned may open or reopen with

ae

(R. 39, 41, 43, 45, 47, 49)

As already mentioned, Jones committed the acts com-

plained of in the complaint, resulting in the Account

Agreement Plaintiffs’ purchases of Petro-Lewis, substan-

tially before the signing of the Account Agreements con-

taining the arbitration clause. Specifically, four of the

Account Agreement Plaintiffs had purchased the security

approximately 6 years or more before they signed the

Account Agreement; two purchased the security about

4’2 years before signing the agreement; two signed the

agreement roughly 3% years after their purchases; and the

remaining two signed more than 1% years after they had

completed their purchases. (R. 3-15, 38-49) Jones made

no attempt to show that the accounts through which the

Petro-Lewis securities were purchased were opened or

reopened after the execution of the Account Agreements.

ARGUMENT

I.

JONES FAILS TO PRESENT ANY QUESTION WARRANT-

ING THIS COURT’S EXERCISE OF JUDICIAL DISCRE-

TION PURSUANT TO SUPREME COURT RULE 10.1

Rule 14.1(a) of the Rules of the Supreme Court require

a petition for writ of certiorari to state the questions pre-

sented for review. That rule also limits the Court’s exer-

cise of its discretionary review to the precise questions

stated in the petition for writ of certiorari by providing

that “[o]nly the questions set forth in the petition, or

fairly included therein, will be considered by the Court.”

4

Jones’ Petition for Writ of Certiorari to the Court

of Appeals of Indiana, Third District lists three ques-

tions presented to this Court. The first two questions as

stated by Jones relate to the discussion by the Court of

Appeals of Indiana of Mo.Rev.Stat. §435.460 and its

effect on the arbitration clause as contained in the var-

ious Account Agreements. The third question as stated

by Jones relates to what Jones claims was the Indiana

court’s adoption of a rule that ambiguities in an arbitra-

tion clause should be construed against the draftsman.

As discussed below, none of the questions presented

by Jones creates a special and important reason for grant-

ing a writ of certiorari.

A.The Indiana Court of Appeals’ Discussion of

Mo.Rev.Stat. §435.460 is Merely Obiter Dictum

Without Precedential Value.

Jones’ petition devotes significant attention to the dis-

cussion by the Court of Appeals of Indiana regarding

Mo.Rev.Stat. §435.460. Jones posits that the Indiana

court violated the supremacy clause by applying a state

statute precluding arbitration in violation of the federal

policy favoring arbitration.

In reality, the Indiana court’s discussion of Mo.Rev.-

Stat. §435.460 had virtually no impact on that court’s

holding. Although that court concluded that the arbi-

tration provision in question violated Mo.Rev.Stat.

§ 435.460, the court’s holding is not based on that viola-

tion. Rather, the Indiana court based its decision on the

well-recognized principle that arbitration should not be

required where no agreement to arbitrate exists; here the

Account Agreements did not cover the transactions at

issue. In short, the court’s discussion of the Missouri

5

statute was wholly unnecessary to its ultimate decision.

Accordingly, the court’s discussion of the Missouri stat-

ute is merely obiter dictum.

It is well settled in Indiana that obiter dictum has no

value as precedent. In Koske v. Townsend Engineering

Co., 551 N.E.2d 437 (Ind. 1990), the Supreme Court of

Indiana recently noted that:

“In appellate opinions, statements not necessary in

the determination of the issues presented are obiter

dictum. They are not binding and do not become

the law.”

Id. at 443.

Thus, Jones seeks a writ of certiorari based, in large

part, on a discussion which had no binding impact any-

where — not even in the State of Indiana. Regardless of

how the Supreme Court might answer Questions 1 and

2 presented by Jones’ petition, those answers can hardly

be construed as raising special and important reasons for

the writ sought inasmuch as the lower court’s holding was

not as Jones presupposes in the first two Questions Pre-

sented.

In view of the many cases which have discussed Volt

Information Sciences, Inc. v. Board of Trustees, 489 U.S.

468, 109 S.Ct. 1248, 103 LEd.2d 488 (1989), and its

effect on state statutes relating to arbitration of disputes,

it may be necessary for this Court some day to discuss

the scope of Volt. However, a case which was not decid-

ed on the basis of the state statute under attack hardly

presents the opportune occasion for such analysis.”

2The Account Agreement Plaintiffs disagree with Jones’

interpretation of Volt and its progeny. Jones’ argument fails to

consider the result in Volt, which is inextricably pertinent to its

[foomote continued |

6

B. The Indiana Court Did Not Hold that Ambiguous

Arbitration Clauses Should be Construed Against

the Drafter.

Paragraph 3 of the Questions Presented and the related

argument of Jones presumes that the Court of Appeals of

Indiana held that an ambiguous arbitration clause should

be construed against the draftsman. Jones then con-

cludes that the Indiana court’s opinion in that regard

contravenes ruling precedents of this Court.

The main problem with Jones’ argument in this regard

is that Jones attributes to the Indiana court a holding not

made by that court. In reality, the language regarding

ambiguities, which Jones attempts to attribute to the

Indiana court, is instead included within that court’s dis-

cussion of Frates v. Edward D. Jones & Co., 760 P.2d

748 (Mont. 1988). In discussing Frates, the Indiana

court noted that, among other things, the Frates court

stated that ambiguities should be construed against the

drafter. However, the Indiana court clearly did not

adopt or even approve of that particular language in

Frates. Instead that court held that:

“We agree with the Supreme Court of Montana’s

conclusion in Frates that the clear language of the

agreement requires prospective application of the

arbitration clauses.”

571 N.E.2d at 1334 (Emphasis supplied).

In interpreting contract provisions, the courts consider

the rule regarding construction of documents against the

drafter only where the contract is ambiguous; where the

holding. However, further analysis of Volt’s impact on the appli-

cation of state statutory provisions in an arbitration setting is

inappropriate here since the holding of the Indiana court was not

based on the application of the Missouri statute.

iain ealitnaninae ictal iniaiaaiaiiadiciiianiel

7

clear language of the agreement shows the intent of the

parties, there is no reason to resort to the rule regarding

construction of ambiguous documents against the drafter.

See, e.g., Cincinnati Insurance Co. v. Mallon, 409 N.E.2d

1100 (Ind.App. 1980). Thus, by holding that the “‘clear

language”’ of the agreements refuted Jones’ claim for arbi-

tration, the Indiana court had no occasion to decide what

happens in the event of an ambiguity in an arbitration

agreement. Jones’ mischaracterization of the opinion of

the Court of Appeals in this regard is an obvious attempt

to question the court’s opinion based on federal cases

which, in reality, are inapplicable. Even the federal cases

cited by Jones do not require arbitration where “the clear

language of the agreement” shows that the parties did not

agree to arbitrate the dispute at hand.

Jones’ argument in this regard is accordingiy based on

a false premise, 7.¢. that the Indiana court declared a rule

of law which it did not in fact so declare. Inasmuch as

the third question presented by Jones can warrant the

granting of the writ sought only by ignoring the actual

holding of the lower court, that question cannot form

the basis for a finding of a special and important reason

for the granting of the writ.

II.

JONES MISSES THE POINT OF THE INDIANA COURT’S

HOLDINC.

In its zeal to obtain a writ of certiorari, Jones either

intentionally or unwittingly misses the rationale behind

the holding of the Indiana court. Throughout its peti-

tion, Jones contends that the Court of Appeals of Indiana

“rejected” federal authorities by refusing to order arbitra-

tion. Jones’ argument results from a disregard of, or con-

fusion over, the federal scheme creating a dichotomy

8

between the standards applicable to construction of arbi-

tration clauses generally and the construction of specific

contract language pursuant to those federal standards.

Contrary to Jones’ argument, the Indiana court did not

“reject” any federal authority.

While the federal authorities are uniform in announc-

ing a healthy regard for arbitration, no case requires

arbitration in every situation. The Federal Arbitration

Act declares, and the federal authorities are consistent in

holding, that arbitration will only be ordered when an

agreement to arbitrate the particular dispute at hand

exists. 9 U.S.C. §2; Volt, supra. While federal author-

ities direct that contracts be interpreted with a preference

for arbitration, the very basic fact remains that someone

must apply some rules of contract construction in order

to make the threshold determination of whether or not

the agreement at hand meets the federal standard, ie.

whether it is reasonably susceptible of an interpretation

favoring arbitration.

A fundamental question is, “What rules of contract

construction should be applied in making the threshold

determination?” Volt, supra, clearly answers this ques-

tion by declaring that state law rules regarding contract

construction should be applied. /d. at 474, 109 S.Ct. at

1253. Even the dissent in Volt agreed that “the interpre-

tation of contracts is a matter of state law.” Jd. at 482,

109 S.Ct. at 1257. Thus, the threshold determination of

whether or not the agreement is reasonably suscep*ible of

an interpretation favoring arbitration is made in accord-

ance with state rules of contract construction. According-

ly, the Indiana court was warranted in looking “to Mis-

souri law in our construction of the contracts.” 571

N.E.2d at 1333 (Emphasis supplied).

9

In the instant case, there is absolutely nothing to indi-

cate that, in the application of state rules of contract

construction, the lower court failed to apply the federal

standard by giving a healthy preference to arbitration.

In effect, the Indiana court applied state rules of contract

construction and concluded that the language of the sub-

ject contract was not reasonably susceptible of an inter-

pretation calling for arbitration of the subject dispute.

As stated in Volt, “this Court does not sit to review”

such state court conclusions. /d. at 474, 109 S.Ct. at

1253.

Despite Jones’ protestations to the contrary, the

Indiana opinion does not contravene any ruling of this

Court or conflict with any other federal authority but is

instead consistent therewith.

Il.

THE INDIANA COURT WAS JUSTIFIED IN FINDING

THAT THE SUBJECT AGREEMENTS WERE NOT REAS.-

ONABLY SUSCEPTIBLE OF AN INTERPRETATION

COMPELLING ARBITRATION.”

Although it is questionable whether this Court should

ever become involved in an individual case of arbitration

contract construction where there is no indication that

the lower court violated principles favoring arbitration

(Volt, supra at 474, 109 S.Ct. at 1253.), a review of the

contract language involved in this case shows that the

3The interpretation of the specific language at issue in this

case is not fairly included in Jones’ questions presented for review.

However, Jones argues in its brief that the specific language of the

Account Agreement should be construed to apply retroactively.

While this Court can disregard an issue mentioned only in the argu-

ment, the Account Agreement Plaintiffs nonetheless respond to

Jones’ argument regarding the specific language involved in the

event the court considers that language.

10

Indiana court was warranted in construing that language

and concluding that “the clear language of the agree-

ment requires prospective application of the arbitration

clauses.” 571 N.E.2d at 1334.

A complete reading of the Account Agreements illus-

trates that the parties did not intend the agreements,

including the arbitration clause, to apply to the previous

purchases of the Petro-Lewis securities. The Account

Agreements stated that the arbitration clause applied to

controversies arising out of or relating to accounts. The

agreement then effectively defines “accounts” as used

throughout the agreement, including the arbitration

clause, by stating that the coverage of the agreement

extends to all accounts which the customer “may open or

reopen;” the definition of “accounts” makes no mention

of accounts that are already opened (except to the extent

those accounts may in the future be reopened) or of pre-

viously opened accounts which may have been closed at

the time of the execution of the Account Agreements.

Giving the words of the Account Agreements their

usual and common meaning, the only reasonable explana-

tion of that language is that the Account Agreements

were executed to cover, prospectively, accounts opened

or reopened in the future. Therefore, the Indiana court

correctly reasoned that compelling arbitration of the

Petro-Lewis purchases completed several years before

execution of the Account Agreements resulted in the

Account Agreement Plaintiffs being required to arbi-

trate claims which they had not agreed to arbitrate.

In an effort to avoid the language specifying pros-

pective application of the Account Agreements (i.e. to

accounts opened or reopened after the execution of the

agreements), Jones ignores that language and instead

11

argues that the “controversy” arose after the signing of

the Account Agreements. In essence, Jones seeks to

rewrite the agreements so as to require arbitration of

“disputes” arising after the execution of the Account

Agreements despite the fact that the Account Agree-

ments expressly limit their application to accounts

opened or reopened after their execution; the applicabil-

ity of the Account Agreements is not in any way gov-

erned by the date a dispute arises.

Further, this entire argument by Jones ignores the

procedural background of this case, further illustrating

the flaws in Jones’ argument. Procedurally, the instant

action was not the first filed against Jones as a result of

its conduct in the sale of Petro-Lewis securities. On

March 8, 1985, an initial action was filed on the same

matter, and that action sought class action certification

to include all Petro-Lewis purchasers including the

Account Agreement Plaintiffs. (R. 10) It was only after

class action certification was denied on May 5, 1988, that

the Account Agreement Plaintiffs ceased to be part of the

putative class, and this action followed. (R. 10) Eight of

the Account Agreement Plaintiffs signed their agreements

after the filing of the first lawsuit on March 8, 1985,

while they were still members of the putative class. (R.

38-49) Therefore, by Jones’ own definition the “con-

troversy” or “dispute” in the instant matter arose before

the execution of the Account Agreements, and the arbi-

tration clause was inapplicable thereto.

Finally, in an effort to avoid the clear impact of the

language used in the agreement as drafted, Jones cites

several federal court cases where the particular contract

language called for arbitration of past transactions. Jones

calls the contract language in those cases virtually ident-

ical to the contract language in the instant case. However,

12

an analysis of those authorities shows that they are dis-

tinguishable and that the reason arbitration may have

been proper there but not here is due to very significant

differences in the particular contract language at issue.

In Belke v. Merrill Lynch, Pierce, Fenner & Smith, 693

F.2d 1023 (11th Cir. 1982), the court was faced with an

arbitration clause which required arbitration of “‘any con-

troversy between us arising out of your business or this

agreement” [Id. at 1025, footnote 4 (Emphasis sup-

plied)], without any language of prospective application

as was involved in the instant case. Arbitration language

applying to “your business or this agreement,”’ without

language of prospective application, is clearly susceptible

of an interpretation that it applies to past transactions.

However, the clear distinction between the broad lan-

guage in Belke and the considerably narrower language

involved here is further indication of why arbitration

should not have been required in the instant case.

In Rand Bond of North America, Inc. v. Saul Stone &

Co., 726 F.Supp. 684 (N.D. Il. 1989), the court was not

dealing with the retroactive application of an arbitration

agreement — at least not in the same sense as in the

instant case. In Rand Bond the parties entered into a

commodities trading arrangement. Although the first

order was placed on April 27, 1987, the documentation

establishing the arrangement was not signed until May 4,

1987. However, it was apparent that the documents of

agreement signed May 4 governed the entire relationship

of the parties commencing April 27. Further, the Arbi-

tration Agreement, which was one of the documents

signed May 4, expressly applied to “[a] ny controversy or

claim arising out of or relating to your accounts” (/d. at

689) without any limitation whatsoever as to the accounts

or transactions governed by the agreement. The instant

pene eet

13

Account Agreements contained such a time limitation

inasmuch as they expressly applied only to accounts

thereafter opened or reopened.

The remaining cases relied upon by Jones contain arbi-

tration clauses which are significantly broader than in the

instant cases. Those clauses contain no limitation on the

accounts to which they apply, support retrospective

application, and are otherwise qualitatively distinguish-

able from the language in the instant case. Gilmore v.

Shearson/American Express, Inc., 668 F.Supp. 314,

(S.D.N.Y. 1987) [arbitration applying to “[a] ny contro-

versy arising out of or relating to the account of the

undersigned, to transactions with you for the undersigned

or to this agreement” (Emphasis supplied)]; Clark v.

Kidder, Peabody & Co., 636 F.Supp. 195 (S.D.N.Y.

1986) [arbitration prescribed for disputes “arising out of

or relating to accounts of or transactions with or for me

or to this agreement” (Emphasis supplied) without lang-

uage of prospective application] .*

Here, there was a significant break between the com-

pletion of the purchases out of which this action arose

and the date of execution of the Account Agreements

containing the arbitration clause. The least amount of

time which elapsed between those dates was one and a

half years with the greatest time elapsed being nearly

seven years. The average elapsed time between comple-

tion of the fraudulent sale of the Petro-Lewis security

4In fact, in Clark v. Kidder, Peabody, the court’s opinion

implies that arbitration for past transactions would not have been

ordered had the agreement containing the arbitration clause

resulted in the opening of a new account, such as was apparently

the situation in the instant case, rather than the restructuring of

an existing account. 636 F.Supp. at 197.

14

and the execution of the Account Agreements was in

excess of four years.

Jones has not cited, and is clearly unable to cite, any

authority where a contract or arbitration provision was

held retroactively applicable to a transaction completed

more than four years (much less to transactions com-

pleted nearly seven years) before the agreement was

signed, especially where the pertinent language is pros-

pective, rather than retroactive, in nature. In fact, the

only two appellate tribunals to consider the precise lang-

uage in the instant Account Agreements, namely the

Montana Supreme Court in Frates, supra, and the Court

of Appeals of Indiana in the instant case, have construed

the language contrary to Jones’ position.

CONCLUSION

Jones has failed to present any question warranting

the grant of the writ sought. Also, Jones has failed to

show any precedent established by the Court of Appeals

of Indiana which contravenes any holding of this Court.

Further, Jones has not established that the Indiana court

did anything other than construe the agreements at issue

under the standard of a healthy preference for arbitra-

tion. Instead, Jones seeks to involve this Court in vir-

tually every case of interpretation of specific contract

language and would have this Court hold that arbitration

is required virtually anytime the word “‘arbitration”’ is

used even though the clear intent of the parties, as ex-

pressed in their agreement, shows that arbitration was not

intended for the dispute at hand.

15

In view of the foregoing, the Account Agreement

Plaintiffs respectfully request that Jones’ petition for writ

of certiorari be denied.

Respectfully submitted,

DONALD J. TRIBBETT

Counsel of Record

ScoTT L. STARR

STARR AUSTEN & TRIBBETT

201 S. Third Street

P.O. Box 120

Logansport, Indiana 46947

(219) 722-6676

Attorneys for

Plaintiffs-Respondents.

June 12, 1992