Johannsen et al v. Morgan Stanley Credit Corportion et al

Filing 26

MEMORANDUM and ORDER signed by Judge Morrison C. England, Jr on 1/10/12; Based on the foregoing, Defendants Motion to Compel Arbitration (ECF No. 8) is GRANTED. Plaintiffs are ordered to submit their claims to arbitration, under the auspices of FINRA , within thirty (30) days. Since arbitration proceedings would appear to resolve most if not all of Plaintiffs claims as set forth in the Complaint herein, the proceedings in this Court are stayed pending completion of arbitration, or upon further order of the Court.(Matson, R)

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UNITED STATES DISTRICT COURT

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EASTERN DISTRICT OF CALIFORNIA

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JOANNE JOHANNSEN, individually
and as TRUSTEES of The
JOHANNSEN FAMILY TRUST Dated
October 18, 1988, and The
JOHANNSEN FAMILY SURVIVORS
TRUST Dated October 18, 1988,

No. 2:11-cv-01516-MCE-KJN

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Plaintiffs,
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v.

MEMORANDUM AND ORDER

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MORGAN STANLEY CREDIT
CORPORATION, a Delaware
corporation; et al.,

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Defendants.
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Presently before the Court is Defendants’ motion seeking an

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order compelling Plaintiffs (both Joanne Johannsen individually

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and in her capacity as trustee of two family trusts) to submit

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their claims, as set forth in the complaint on file herein, to

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arbitration under the auspices of the Financial Regulatory

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Authority, Inc. (“FINRA”).

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Defendants further request an order staying all proceedings in

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this matter pending completion of that arbitration.

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below, Defendants’ motion will be granted.1

As set forth

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BACKGROUND

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In approximately 2002, following the death of her husband,

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Plaintiff Joanne Johannsen (“Plaintiff” or “Ms. Johannsen”) met

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Russell Abbott, a representative for Morgan Stanley Smith

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Barney,2 at an investment seminar in Rocklin, California.

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Ms. Johannsen subsequently engaged Mr. Abbott’s assistance in

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handling certain of her investments.

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On November 21, 2002, Plaintiff opened an Individual

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Retirement Account with Morgan Stanley by executing an IRA

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Adoption Agreement.

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Immediately above Plaintiff’s signature on that document, a

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statement in bold type memorialized Ms. Johannsen’s understanding

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that the account was governed by a predispute arbitration clause,

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a copy of which she acknowledged receiving.

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See Decl. of Russell Abbott, Ex. 1.

In 2006, Plaintiff decided to purchase real property in

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Rocklin and was advised by Mr. Abbott that Morgan Stanley could

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provide the necessary financing for that transaction.

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Decl., ¶ 7.

Pl.’s

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Because oral argument will not be of material assistance,
the Court ordered this matter submitted on the briefs. E.D. Cal.
Local Rule 230(g).
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Plaintiffs have sued Morgan Stanley Smith Barney along
with several Morgan Stanley affiliates. For purposes of this
order the Court will refer to Defendants collectively as “Morgan
Stanley” unless otherwise indicated.
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In order to arrange that financing, Plaintiff, as Trustee of the

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so-called Survivor’s Trust, executed on October 26, 2006 an

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Active Assets Account Agreement.

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Account Agreement, in turn, incorporated the terms of the Morgan

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Stanley Active Assets Account Client Agreement.

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Ex. 6 to Abbott Decl.

That

Id. at Ex. 7.

The Account Agreement contained a boldfaced admonition, also

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above Plaintiff’s signature and further highlighted by placement

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in a box format, that confirmed Plaintiff’s understanding that

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the Survivor’s Trust Account was governed by a predispute

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arbitration clause, as stated within the Client Agreement, which

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Plaintiff acknowledged receiving.

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Agreement provided for arbitration as follows:

Ex. 6 at p. 11.

The Client

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Arbitration of Controversies*

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You*** agree that all controversies between you and
your principals or agents and Morgan Stanley or any of
its agents (including affiliated corporations) arising
out of or concerning any of your accounts, order or
transactions, or the construction, performance, or
breach of this or any other agreement between the
parties, whether entered into before or after the date
the Account is opened, shall be determined by
arbitration only. Such arbitration shall be conducted
before the National Association of Securities Dealers,
Inc., the New York Stock Exchange, Inc., or any other
self-regulatory organization’s arbitration forum before
which the controversy may be arbitrated, as you may
elect. If you make no written election addressed to
Morgan Stanley at 2000 Westchester Avenue, Purchase, NY
10577, Attn: Law Department by registered mail within
five days after receiving a written demand for
arbitration from Morgan Stanley, then you authorize
Morgan Stanley to elect one of the above-listed forums
for you.

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The rules of the selected forum, as such rules may be
amended from time to time, shall govern any arbitration
proceeding between the parties any interpretation of
this arbitration agreement.

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* [Omitted]
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*** “You” for purposes of this provision shall mean
you, your heirs, successors, assigns, agents,
principals and/or any other persons having or claiming
to have a legal or beneficial interest in your Account,
including any court appointed trustees or receivers.

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Id. at Ex. 7, p. 20 (emphasis added).

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Following execution of the account agreement, Plaintiff

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executed three documents on November 17, 2006, for purposes of

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consummating the real estate transaction in her capacity as

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Trustee of the Johannsen Family Trust.

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Pledge and Security Agreement providing the Survivor’s Trust

First, she signed a

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Account as collateral for the $371,500 loan she received.

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Decl. Of David L. Price, Ex. 4.

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signature to an Adjustable Rate Note that also referred to the

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Pledge and Security Agreement as providing additional rights in

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the form of a secured interest in favor of the Morgan Stanley

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Credit Corporation, Morgan Stanley’s lending affiliate, as to the

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Survivor’s Trust Account.

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Trust on the Rocklin property Plaintiff purchased again refers to

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the Pledge and Security Agreement as furnishing additional

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recourse.

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See

Second, Plaintiff appended her

See id. at Ex. 1.

Third, the Deed of

Id. at Ex. 3.

On September 26, 2007, after she purchased the property but

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well before the February 25, 2011 commencement of this case,

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Plaintiff executed an additional document pertaining to her IRA,

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entitled as a Morgan Stanley Advisory Program Client Services

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Agreement.

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Controversies provision that Plaintiff had previously

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acknowledged in the Active Assets Account Client Agreement signed

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in 2006 before she purchased the Rocklin property.

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That Agreement included the same Arbitration of

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Although that 2007 Agreement, like its 2006 predecessors,

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referred to either the National Association of Securities

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Dealers, Inc. (“NASD”) or the New York Stock Exchange, Inc.

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(“NYSE”) as the appropriate venue for arbitration, in 2009 the

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arbitration functions of both entities were combined within

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FINRA.

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2008); Valentine Capital Asset Mgt., Inc. v. Agahi, 174 Cal. App.

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4th 606, 608 n.2 (2009).

See Karsner v. Lothian, 532 F.3d 876, 879 n.1 (D.C. Cir.

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Plaintiff, as Trustee of the Johannsen Family Trust,

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ultimately defaulted on the loan provided by the Morgan Stanley

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Credit Corporation and foreclosure proceedings were commenced.

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As indicated above, on February 25, 2011, Plaintiff, in both her

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individual capacity and as a trust fiduciary, filed the present

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case in state court.

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removed here on diversity grounds, seeks, inter alia, to have the

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security interest provided as to the Survivor’s Trust deemed void

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and ineffective.

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claim a security interest both in the real property and the

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Survivor’s Trust Account as collateral for the subject loan.

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Plaintiffs also allege, on a more general level, that Morgan

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Stanley mismanaged the securities accounts opened by Plaintiffs

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(whether by Ms. Johannsen individually or in her capacity as

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Trustee of the Family Trust or the Survivor’s Trust) ever since

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those accounts were opened beginning in 2002.

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Plaintiffs’ lawsuit, as subsequently

Plaintiffs claim that Morgan Stanley cannot

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Morgan Stanley subsequently demanded that Plaintiffs submit

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their claims to arbitration pursuant to the various agreements to

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that effect referenced above.

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therefore prompting the motion to compel now before the Court for

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disposition, along with Defendants’ request that the matter be

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stayed pending arbitration.

Plaintiffs have refused to do so,

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STANDARD

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Where agreements to arbitrate are found in written

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agreements pertaining to securities accounts, as they are here,

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such agreements are per se evidence of transactions in interstate

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commerce and are accordingly subject to the Federal Arbitration

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Act, 9 U.S.C. § 1, et seq. (“FAA”).

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Secur., Inc. v. NASD, 757 F.2d 676, 697 (5th Cir. 1985).

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See, e.g., Austin Municipal

Section 4 of the FAA authorizes a motion to compel as
follows:

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A party aggrieved by the alleged failure, neglect, or
refusal of another to arbitrate under a written
agreement for arbitration may petition any United
States district court.... for an order directing that
such arbitration proceed in the manner provided for in
such agreement.

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9 U.S.C. § 4.

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The FAA goes on, at Section 3, to provide authority for

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staying an action pending arbitration:

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If any suit or proceeding be brought in any of the
courts of the United States upon any issue referable to
arbitration under an agreement in writing for such
arbitration, the court in which such suit is pending,
upon being satisfied that the issue involved in such
suit or proceeding is referable to arbitration under
such an agreement, shall on application of one of the
parties stay the trial of the action until such
arbitration has been had in accordance with the terms
of the agreement...

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Id. at § 3.

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In accordance with Section 3, then courts have recognized

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three prerequisites that must be satisfied in order to compel

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arbitration: 1) there must be a valid arbitration agreement;

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2) the dispute at issue must fall within its terms; and 3) a

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party to the agreement must have refused to arbitrate.

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e.g., Zurich Am. Ins. Co. v. Watts Indus., Inc., 417 F.3d 682,

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687 (7th Cir. 2005); Collins v. Int’l Dairy Queen, Inc., 2 F.

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Supp. 2d 1465, 1468 (M.D. Ga. 1998).

See,

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ANALYSIS

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As set forth above, in 2006, immediately before entering

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into the real estate transaction at issue in this case,

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Mrs. Johannsen, as Trustee of the Survivor’s Trust, agreed to a

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provision whereby all controversies that “arise out of or

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concern” Plaintiffs’ “accounts, orders or transactions, or the

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construction, performance, or breach of this or any other

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agreement between the parties, whether entered into before or

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after the Date the Account is opened, shall be determined by

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arbitration only.”

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Ex. 7 to Abbott Decl., p. 20.

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That arbitration clause extended by its express terms to Morgan

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Stanley and its agents, including affiliated corporations.

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Therefore, by its terms, the agreement applied to all of the

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Morgan Stanley entities sued by Plaintiffs herein.

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Id.

Because the language employed in the arbitration agreement

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is sweeping in effect (both with respect to its subject matter

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and the parties covered), it must be considered a broad

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arbitration provision.

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147 Cal. App. 4th 1055, 1067 (2007) (“A ‘broad’ clause includes

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those using language such as ‘any claim arising from or related

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to this agreement”, emphasis in original).

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as that employed by Morgan Stanley covers any claims rooted in

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the relationship created by the contract containing the

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arbitration clause.

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150 Cal. App. 4th 1311, 1323 (2007); Shepard v. Edward Mackay

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Enterprises, Inc., 148 Cal. App. 4th 1092, 1096 (2007).

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See, e.g., Bono v. David,

Broad language such

See EFund Capital Partners v. Pless,

Moreover, Plaintiffs cannot reasonably claim any surprise at

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the arbitration clause.

The Active Assets Account Application

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signed by Mrs. Johannsen, as Trustee of the Survivor’s Trust, in

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2006 contained a conspicuous notification as to arbitration

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immediately above her signature.

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It should also be mentioned that Mrs. Johannsen’s very first

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agreement with Morgan Stanley in 2002 also contained a

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notification that the account was governed by arbitration.

Ex. 6 to Abbott Decl., p. 11.3

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Given that conspicuous notification (as well as the fact
that Mrs. Johannsen signed numerous Morgan Stanley documents
containing arbitration provisions), Plaintiffs’ claim that the
arbitration clauses are procedurally unconscionable is hereby
rejected.
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Id. at Ex 1.

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real estate transaction but before any lawsuit was filed

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reiterated the same broad arbitration provision Plaintiff agreed

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to in 2006.

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Further, additional documents executed after the

Plaintiffs’ primary dispute with Morgan Stanley appears to

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be whether or not Morgan Stanley’s mortgage affiliate can claim a

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security interest in both the real property Plaintiffs purchased,

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and in the Survivor’s Trust to the extent funds in that Trust

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were pledged as additional collateral for the loan taken out to

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purchase the real property.

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a broad arbitration clause that extended, by its express terms,

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to Morgan Stanley affiliates like its lending company.

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property purchase transaction explicitly included a Pledge and

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Security Agreement providing the Survivor’s Trust as further loan

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collateral.

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that the Pledge did not “arise out of or concern” the Survivor’s

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Trust, any disagreements as to which were deemed subject to

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arbitration.

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The Survivor’s Trust was governed by

The real

Consequently, Plaintiffs cannot realistically argue

Therefore, arbitration is indicated.

While Plaintiffs argue that the Pledge was substantively

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unconscionable, and that Defendants cannot seek recourse both in

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the real property itself and in Plaintiff’s Morgan Stanley

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accounts, whether or not the Pledge is ultimately unenforceable

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goes beyond the initial question as to whether arbitration should

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be compelled.

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arguing unconscionability in the context of arbitration

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proceedings in this matter.

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Nothing in this order precludes Plaintiffs from

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Finally, while Plaintiffs allege that forcing Plaintiffs to

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arbitrate this matter before FINRA is fundamentally unfair and

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should not be enforced, California Courts have long found that

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FINRA (as the successor to NASD and NYSE) rules for arbitrating

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disputes between brokerage firms and their customers are not

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unconscionable.

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pursuant to FINRA is rejected.

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Bank, N.A., 168 Cal. App. 4th 938, 957-58 (2008); Parr v.

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Superior Court, 139 Cal. App. 3d 440, 446-47 (1983).

Therefore Plaintiffs’ objection to arbitration
See, e.g., Brown v. Wells Fargo

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CONCLUSION

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Based on the foregoing, Defendants Motion to Compel

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Arbitration (ECF No. 8) is GRANTED.

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submit their claims to arbitration, under the auspices of FINRA,

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within thirty (30) days.

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appear to resolve most if not all of Plaintiffs’ claims as set

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forth in the Complaint herein, the proceedings in this Court are

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stayed pending completion of arbitration, or upon further order

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of the Court.

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Plaintiffs are ordered to

Since arbitration proceedings would

IT IS SO ORDERED.
Dated: January 10, 2012

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_____________________________
MORRISON C. ENGLAND, JR.
UNITED STATES DISTRICT JUDGE

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