Bixler v. NEXT Financial Group, et al
Filing
92
ORDER granting 35 Motion to Compel Arbitration; granting 51 Motion for Protective Order; finding as moot 57 Motion for Extension of Time to File Response/Reply ; denying as moot 26 Motion for Leave to File Amended Complaint. This case is r eferred for arbitration to the Financial Industry Regulatory Authority, and all proceedings herein are STAYED pending conclusion of the arbitration. Clerk to notify counsel and FINRA of entry of this order. Signed by Judge Charles C. Lovell on 3/14/2012. (MKB) Modified on 3/14/2012 to indicate copy of Order mailed to FINRA in Chicago IL as instructed (DED, ).
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MONTANA
HELENA DIVISION
*******
JEANETTE BIXLER,
CV 11-2-H-CCL
Plaintiff,
vs.
NEXT FINANCIAL GROUP, INC., a
Virginia corporation, GARY FALBER,
RYAN FALBER,1 and
DOES 1 THROUGH 10,
OPINION & ORDER
Defendants.
*******
Before the Court is Defendants’ Motion to Compel Arbitration (Doc. 35).
Plaintiff opposes the motion. The Court has heard oral argument from counsel and
received testimony from the parties on December 14, 2011, and January 11, 2012.
Plaintiff dismissed the Complaint against Ryan Falber on January 7, 2011.
(Doc. 4.)
1
Defendants were represented at hearing by Michelle M. Arbitrio, and Plaintiff was
represented at hearing by John Morrison and Linda Deola. After reviewing the
briefs and arguments of counsel and all the record, the Court is prepared to rule on
the Motion.
In this case, the Court sits in diversity jurisdiction pursuant to 28 U.S.C.
§ 1332. This Court has subject matter jurisdiction to determine the threshold
question of whether a valid agreement to arbitrate exists.
The dispute in this case centers upon a Client Agreement between Plaintiff
Jeanette Bixler, an individual investor, and Defendant Gary Falber, a securities
broker and representative of NEXT Financial Group, Inc. The purpose of the
agreement was to establish a client-broker relationship between Gary Falber and
Jeanette Bixler. The first page is entitled “Account Information Form,” and it
incorporates by reference an attached privacy policy information sheet and a twopage document entitled “Client Agreement.”2 (Def. Ex. B.) Jeanette Bixler does
Def.’s Ex. B. Unless the reference to an exhibit is accompanied by a
docket entry, all further references to exhibits shall be understood to refer to those
2
2
not dispute that she signed the Account Information Form or that she intended to
make Gary Falber her broker. Plaintiff does dispute, however, that she ever
intended to purchase an annuity from him. However, Plaintiff did sign a “JNL
Fixed and Variable Annuity Application,” and as a result she purchased a variable
annuity from the Jackson National Life Insurance Company.
In her Complaint, Plaintiff claims that she was induced by actual fraud and
deceit to purchase the variable annuity. Plaintiff claims that Defendants breached
their fiduciary duty to her and were negligent in their conduct toward her, also
breaching the implied covenant of good faith and fair dealing and intentionally
and negligently inflicting emotion distress. Plaintiff claims that Defendants
violated the Securities Act of Montana. Plaintiff seeks to amend her Complaint in
order to assert Montana Insurance Code violations, and the Court will address this
request at the conclusion of this opinion. Plaintiff agrees to arbitrate all but her
claims grounded upon Montana insurance law. Plaintiff asserts that Montana law
exhibits admitted during the hearing on December 14, 2011, and its continuance
on January 11, 2012.
3
invalidates any agreement to arbitrate her insurance claims.
I.
Discussion.
The Federal Arbitration Act (“FAA”) governs this dispute. 9 U.S.C. § 1, et
seq. By enacting the FAA, Congress has set a policy favoring arbitration unless
grounds exist at law or in equity to revoke the contract. 9 U.S.C. § 2. In
Southland Corp. v. Keating, 465 U.S. 1, 4-5, 104 S.Ct. 852, 79 L.Ed. 1 (1984), the
United States Supreme Court held that the FAA “create[d] a body of federal
substantive law,” which was “applicable in state and federal courts.” 465 U.S. at
12, 104 S.Ct. 852 (internal quotation marks omitted). State law (even state claims
brought in state court) cannot bar enforcement of § 2 of the FAA. See id. at 10-14,
see also Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 270-73, 115 S.Ct.
834, 130 L.Ed.2d 753 (1995). Section 2 provides that
A written provision in . . . a contract ... to settle by arbitration a
controversy thereafter arising out of such contract ... or an agreement
in writing to submit to arbitration an existing controversy arising out
of such a contract ... shall be valid, irrevocable, and enforceable, save
upon such grounds as exist at law or in equity for the revocation of
4
any contract.
Challenges that go specifically to the making of the agreement to arbitrate itself
can be decided by a court. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388
U.S. 395, 403-04 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967). However, challenges
against the contract generally must be decided by an arbitrator. Buckeye Check
Cashing, Inc. v. Cardegna, 546 U.S. 440, 126 S.Ct. 1204, 163 L.Ed.2d 1038
(2006). Under state law, also, once an arbitration provision is determined to be
valid, “challenges to the contract as a whole are properly decided via arbitration,
given the existence of an arbitration clause.” Martz v. Beneficial Montana, Inc.,
135 P.3d 790, 794 (Mont. 2006); see also In re FirstMerit Bank, N.A., 52 S.W.3d
749, 756 (Tex. 2001).
II.
Arbitration Agreement in NEXT Client Agreement is Valid.
A.
Findings of Fact.
The contract in question in this case consists of a one-page “NEXT Account
Information Form” signed by Plaintiff (Doc. 37-2), that incorporates by reference
5
a two-page document titled “NEXT Client Agreement” (Doc. 37-4). The
arbitration clause is contained within the NEXT Client Agreement as ¶ 20(A)-(J).
It provides that:
20.
Arbitration: This agreement contains a pre-dispute
arbitration clause. By signing an arbitration agreement, the
parties agree as follows:
A.
All parties to this agreement are giving up the right to a
trial by jury, except as provided by the rules of the
arbitration forum in which a claim is filed.
B.
Arbitration awards are generally final and binding: a
party’s ability to have a court reverse or modify an
arbitration award is very limited.
C.
The ability of the parties to obtain documents, witness
statements, and other discovery is generally more limited in
arbitration than in court proceedings.
D.
The arbitrators do not have to explain the reason(s) for
their award.
E.
The panel of arbitrators will typically include a minority of
arbitrators who were or are affiliated with the securities
industry.
F.
The rules of some arbitration forums may impose time
limits for bringing a claim in arbitration. In some cases, a
claim that is ineligible for arbitration may be brought in
court.
G.
The rules of the arbitration forum in which the claim is
filed, and any amendments thereto, shall be incorporated
into this agreement.
H.
This agreement to arbitrate constitutes a waiver of the right
6
I.
J.
to seek a judicial forum unless such a waiver would be void
under the Federal securities laws.
Any controversy arising out of or relating to my accounts,
to transactions with you, your officers, directors, agents,
employees, clearing agent, this Agreement or the breach
thereof, whether such transaction or agreement was
entered in prior, on, or subsequent to the date hereof, shall
be settled by arbitration in accordance with the rules then
in effect of the Financial Industry Regulatory Authority
(“FINRA”). I understand that the FINRA eligibility
requirement bars claims brought more than six (6) years
after the event giving rise to the claim. Judgment upon any
award rendered by the arbitrators may be entered in any
court having jurisdiction thereof.
No person shall bring a punitive or certified class action to
arbitration, nor seek to enforce any pre-dispute arbitration
agreement against any person who has initiated in court a
punitive class action; or who is a member of a punitive class
action who has not opted out of the class with respect to any
claims encompassed by the punitive class action until: (I)
the class certification is denied; or (ii) the class is
decertified; or (iii) the client is excluded from the class by
the court. Such forbearance to enforce an agreement to
arbitrate shall not constitute a waiver of any rights under
this agreement except to the extent stated herein.
(Doc. 37-4 at 2-3 (bolded in original).)
The Court finds that after a lengthy discussion between
Defendant Gary Falber and Plaintiff Jeannette Bixler, the Plaintiff decided to make
7
the Defendant her investment adviser. Jeannette Bixler signed a form that she
knew meant that Gary Falber and NEXT Financial were going to handle certain
financial transactions for her. Bixler knew that the Client Agreement contained an
arbitration clause, which was explained in detail to her by Falber. She knew that
she was giving up her right to litigate in court any dispute that arose from her
relationship with Gary Falber and NEXT Financial.
Gary Falber was a credible witness. He was using the meeting with Bixler
to train his son (a newly licensed securities broker) in the proper techniques of
client interview and in the proper establishment of client relationship. He had an
extra incentive to follow proper procedures in signing up a new client. Falber
spent hours with Bixler and explained the Account Information Form and Client
Agreement in detail, including the arbitration provision. Falber did not apply
undue pressure upon Bixler or cause her to suffer duress. Having just experienced
a loss of over $150,000 in the value of her stocks in the previous 12 months,
Bixler brought into her meeting with Falber her keen desire to modify her
investment portfolio to prevent future losses.
8
The Court finds that Bixler is a sophisticated investor. She was not a
credible witness. Whenever Bixler was asked pointed questions on crossexamination, Bixler provided rambling, confusing, and non-responsive answers.
However, when asked peripheral, technical questions, Bixler demonstrated that her
mind was sharp and that she did, indeed, possess a sophisticated understanding of
her investments and the procedures related to purchasing and liquidating
investments. Bixler purchased stocks online utilizing the internet, and she had
invested aggressively in ADRs, limited partnerships, real estate investments, and
other investment vehicles that she learned about through friends, through her
investment club, and through watching financial programs on television. Bixler
demonstrated during her testimony a strong ability to read her financial documents
and to understand them. She has a prior history of writing clear letters to her
investment providers demanding changes to her accounts, as well as a history of
writing effective letters to government agencies demanding oversight of her
9
investment providers. Bixler declined to testify exactly to the extent of her assets,3
but her testimony indicated that even though she had no current earnings to speak
of (she is retired from all employment), she is by no means poor.
The Court finds that on March 9, 2009, the following occurred: Falber
explained the arbitration provision to Bixler, as well as the other significant
provisions of the Client Agreement, and Bixler understood both the arbitration
provision and the Client Agreement. The Court finds further that Falber explained
why he was recommending a variable annuity for Bixler, Bixler understood what a
variable annuity was,4 and Bixler agreed to purchase it. Falber gave the variable
annuity prospectus to Bixler on a CD. Bixler signed numerous documents
On direct examination, Bixler testified as follows:
Q. That says that your net worth was 500,000 about and your liquid net worth was
280,000?
A. Uh-huh.
Q. And are those numbers accurate, roughly?
A. It depends upon which day it is, I guess.
(TRI 143:5-9.)
3
Bixler had previous purchased annuities and had attended seminars
regarding annuities. (TRII 26:12-23; 27:9-10; 44:15-21.)
4
10
evidencing her understanding that she was going to liquidate her stock
investments at Charles Schwab and Waddell & Reed and use those funds to
purchase a variable annuity sold by Jackson National Life Insurance Company
(“JNL”). Bixler signed an “Account Transfer Form” transferring all of her Charles
Schwab account to NEXT Financial. (Ex. I.) Bixler signed another “Account
Transfer Form” transferring all of her Waddell & Reed accounts to NEXT
Financial. (Ex. J.) Bixler signed a JNL “Fixed and Variable Annuity Application”
(Ex. 5), which application listed her two daughters as her beneficiaries. Bixler
signed a JNL “Variable Annuity Non-Qualified Systematic Withdrawal Request.”
(Ex. 8) Bixler signed a JNL “Systematic Investment” form that provided for an
automatic transfer of premiums into selected funds. Bixler signed a JNL “Request
for Transfer or Exchange of Assets” (Ex. 11) into the JNL annuity. Bixler wrote a
check to “Jackson Natl Life” in the amount of $45,000 in order to bring the total
amount of the variable annuity to $210,000. Bixler had 30 days to reconsider and
dissolve her relationship with Falber and NEXT Financial, as established on
March 9, 2009. After she received her variable annuity contract confirmation
11
dated April 7, 2009, in the mail, she had a 10-day look-back period within which
to cancel that particular contract. Bixler did not reconsider her client agreement
with Falber/NEXT in the thirty day period. Bixler did not cancel her variable
annuity contract with JNL in the ten-day look-back period. The Court finds
Bixler’s testimony that she did not know what she was doing when she entered
into the JNL variable annuity contract not to be credible. Bixler did not have any
problem with the variable annuity until about two months after she purchased it,
when, as Falber testified, the stock market began to recover. (TRI 56:19-57:1.)
Bixler did not make a formal complaint about her purchase of the variable annuity
until July 2009. (TRI 56:10-57:1.)
There is no doubt that the Client Agreement between Plaintiff and
Defendants contains an arbitration clause. (Ex. D, Doc. 37-4, ¶ 20.) The Account
Information Form (AIF) signed by Plaintiff contains this sentence in bold just
above her signature:
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I acknowledge that the Client Agreement includes a pre-dispute arbitration clause located in paragraph 20.
/s/__________________________________________________
Client Signature (Client must also sign above)
________________
Date
(Ex. B, Doc. 37-2 (bolded in original).) Plaintiff does not dispute that she signed
the contract or that the sentence above her signature is an acknowledgment that the
contract includes an arbitration clause. The arbitration clause is applicable to both
parties and is even-handed, favoring neither party generally. It simply and
accurately explains how arbitration differs from court proceedings, including the
waiver of the right to jury trial. Under that arbitration clause, the time period for
initiating dispute resolution is six years. (Ex. D, ¶20(I), Doc. 37-4.)
B.
Texas Law.
The AIF/Client Agreement has a choice-of-law provision that identifies the
law of Texas as governing the contract’s interpretation. We begin by consulting
the law of our forum state, which is Montana. An application of §§ 187(2) of the
Restatement (Second) of Conflict of Laws, see Casarotto v. Lombardi, 868 P.2d
13
931, 934-35 (Mont. 1994), rev’d on other grounds, Doctor’s Assocs. Inc. v.
Casarotto, 517 U.S. 681, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996), leads to the
conclusion that Texas law governs the contract because the contract itself
identifies Texas as the choice of law, and it is an effective choice because Texas
has a substantial relationship to the parties and the contract, and Texas law would
not contravene any fundamental policy of the State of Montana. In this regard,
Montana does not possess a materially greater interest than Texas in the parties
and the contract.
The Court has examined the five § 188(2) factors used to determine which
state has a materially greater interest in the contract: (1) the place of contracting,
(2) the place of negotiation, (3) the place of performance, (4) the location of the
subject matter of the contract, and (5) the domicile, residence, nationality, place of
incorporation and place of business of the parties. See Keystone, Inc. v. Triad Sys.
Corp., 971 P.2d 1240, 1242 (Mont 1998) (citing § 188(2)(a)-(e) Restatement
(Second) of Conflict of Laws). These factors are not to be applied mechanistically
but qualitatively (based on the nature of the contract) in deciding which state has
14
the most significant relationship to the parties and the contract. See Berg Chilling
Systems, Inc. v. Hull Corp., 435 F.3d 455, 468 (3rd Cir. 2006) (citing Cipolla v.
Shaposka, 267 A.2d 854 (Pa. 1970)). The Court finds that (1) the contract was
prepared in Texas and signed in Montana, (2) there were no negotiations, (3) the
place of performance is both in Montana, where Plaintiff made one payment to
Defendants and where Plaintiff may receive future payments, and Texas, where the
initial administration of the contract occurred and the payment was received, (4)
the subject matter is not a specific physical thing having an actual location, and (5)
Plaintiff is a citizen of Montana, and NEXT is organized under the laws of Texas,
is headquartered in Texas, and has its principal place of business in Texas.
Not only does Texas have a substantial relationship to the parties and
transaction, as is required by the Restatement (Second) of Conflicts of Law
§ 187(2), but also, the application of Texas law would not contravene a Montana
fundamental policy. It is the fundamental policy of Texas to protect investors.
See In re Enron Corp. Secs., 235 F.Supp.2d 549 691-92 (S.D. Tex. 2002) (holding
that “the Texas [Securities Act] is a broad remedial statute intended not only to
15
protect Texas residents but also non-Texas residents from fraudulent securities
practices emanating from Texas.”). Furthermore, the Texas Securities Act is also
protective of investors, and arguably just as protective as the Montana Securities
Act. Tex. Rev. Civ. Stat. Ann. Art. 581-10-1B (general purpose of the Texas
Securities Act is to protect investors); Flowers v. Dempsey-Tegeler & Co., 472
S.W.2d 112, 115 (Tex. 1971) (holding the Texas Securities Act’s purpose is to
regulate securities’ sales and to protect investors from fraud). Thus, the Court
finds that both the State of Texas and the State of Montana have substantial
interests in this contract, that the law of Texas is not contrary to a fundamental
policy of Montana, and that the interests are relatively evenly balanced, neither
state having a materially greater interest than the other. In such a circumstance,
pursuant to the law of our forum state, Montana, as it has adopted § 187(2) of the
Restatement (Second) of Conflict of Laws, the choice-of-law provision of the
contract should govern, which means that the law of Texas should be consulted to
resolve the parties’ disputes.
The Court might add that, despite Plaintiff’s contention otherwise, even if
16
Montana law applied to this dispute, there would be no different outcome under
Montana law on the motion to compel arbitration than under Texas law. Montana
cases “have consistently held that arbitration agreements between two parties are
valid and enforceable.” Gordon v. Kuzara, 245 P.3d 37 (Mont. 2010) (citing
Burkhart v. Semitool, Inc., 5 P.3d 1031 (Mont. 2000)). It is true that Montana
public policy forbids enforcement of arbitration clauses in adhesion contracts
wherein the arbitration clause “lacks mutuality of obligation, is one-sided, and
contains terms that are unreasonably favorable to the drafter.” Ticknor v. Choice
Hotels Intern., Inc., 265 F.3d 931, 939 (9th Cir. 2001) (quoting Iwen v. U.S. West
Direct, 977 P.2d 989, 996 (1999)). However, in this case, the Court does not find
that Montana public policy is offended by this arbitration clause, because this
arbitration clause does not meet the Iwen criteria.
C.
Montana Law.
In considering the choice-of-law question, the Court has considered the
contract under Montana law and has concluded that even under Montana law the
17
agreement to arbitrate would be valid.
This contract is an adhesion contract in that the form of the contract was
prepared by Defendant NEXT, there was no negotiation as to its contents, and
Plaintiff only had the choice to accept or reject the contract. See Zigrang v. U.S.
Bancorp Piper Jaffray, Inc., 123 P.3d 237 (Mont. 2005) (citing Kloss v. Edward
D. Jones & Co., 54 P.3d 1 (Mont. 2002)). However, the fact that it is a contract of
adhesion does not thereby render it unenforceable. See, Iwen v. U.S. West Direct,
977 P.2d 989, ¶ 28 (Mont. 1999) (“the doctrine of adhesion itself does not
constitute a sufficient basis for invalidating a contract....”). Instead, a contract of
adhesion becomes unenforceable against the weaker party “if it is (1) not within
their reasonable expectations, or (2) within their reasonable expectations, but,
when considered in its context, proves unduly oppressive, unconscionable, or
against public policy.” Zigrang, 123 P.3d at ¶ 13. Because it is both a state and
federal policy to favor arbitration, however, it cannot be said that an arbitration
clause in an adhesion contract is per se unconscionable.
Under the particular circumstances of this case, it appears that Plaintiff
18
could have reasonably expected an arbitration clause when insurance and
investment sales contracts often contain arbitration clauses and Plaintiff had prior
experience with multiple investments. Moreover, the last bolded sentence above
her signature on the AIF informed her that the contract did, in fact, contain such a
clause. As to the general nature of the contract itself, Plaintiff actually knew that
Defendants were going to become her brokers and purchase a variable annuity
product for her because she signed the application to purchase a variable annuity,
signed the forms to liquidate and/or transfer her stocks to NEXT, and she gave
them a check made out to “Jackson Natl Life” for $45,000, post-dated for twentyfive days later. (Defendants agreed to, and did, hold the check for the requested
time period.) As to any defense of duress, it bears mentioning that Plaintiff was
unhappy with her current investment portfolio and wanted to make a change, and
she did have the option of not entering into the contract with Defendants at all,
thereby maintaining her investments with Charles Schwab and Waddell & Reed.
(Doc. 44-2, ¶ 10.) Clearly, the general features of this transaction were within
Plaintiff’s reasonable expectations.
19
The issue then becomes whether the contract was unconscionable, and,
indeed, Plaintiff stresses certain factors, such as her age, her low income, and the
long-term nature of the investment vehicle to argue that the contract is indeed
unconscionable. (Doc. 44-2.) In Montana, unconscionability in a contract turns
on whether “the contractual terms are unreasonably favorable to the drafter and
that there is no meaningful choice on the part of the other party regarding
acceptance of the provisions.” Iwen, 977 P.2d 989 at 521 (quoting Leibrand v.
National Farmers union Property & Casualty Co., 898 P.2d 1220, 1227 (citation
omitted)). Here the contract as a whole is not unreasonably favorable to the
drafter, and, in fact, the Client Agreement does not by its terms become
“conclusive” until 30 days after the contract is signed, presumably to grant the
investor a grace period within which to reject or modify the contract. Doc. 37-4 at
3. The arbitration clause also does not unreasonably favor the drafter. It is simple
and straightforward, and it applies to both parties evenly. Doc. 37-4 at 1-2.
Neither do the essentials of the transaction strike the Court as unreasonably
favoring the drafter: While Plaintiff was choosing an investment vehicle that had a
20
lengthy term prior to payout, the product would preserve the value of her initial
investment at a time when markets were volatile and investors were nervous. The
annuity gave her access to ten percent of the principal without penalty each year.
(TRI 53:22-25.) A program of ten percent withdrawal per year would have been
more than Plaintiff withdrew from her previous variable annuity (the AXA
annuity) in the prior decade, which annuity had now matured and was presumably
available for cash withdrawals if necessary. (TRI 54:3-5.) Meantime, Plaintiff
stated that she had assets of $500,000 and liquid assets of $260,000 with which to
make this purchase, so it does not seem to the Court that the investment vehicle
was so wildly unrealistic from Plaintiff’s perspective as to make the contract
patently unconscionable under Montana law.
Plaintiff contends that Montana law, namely, Mont. Code Ann. § 27-5-114,5
M.C.A. § 27-5-114 provides in pertinent part: “Validity of arbitration
agreement – exceptions. (2) A written agreement to submit to arbitration any
controversy arising between the parties after the agreement is made is valid and
enforceable except upon grounds that exist at law or in equity for the revocation of
a contract . . . this subsection does not apply to: . . . (c) any agreement concerning
or relating to insurance policies or annuity contracts except for those contracts
5
21
excludes disputes over annuity contracts from arbitration clauses. In this case,
however, the arbitration provision is contained in the AIF/Client Agreement,
which has nothing itself to do with variable annuities. Plaintiff’s arbitration
agreement centers upon her client relationship with NEXT and any disputes
related thereto. Therefore, Plaintiff’s reverse preemption argument based on § 275-114, Mont. Code Ann., is factually irrelevant because Plaintiff’s agreement is to
arbitrate disputes about and emanating from her client relationship with Falber and
NEXT Financial.
In addition, Plaintiff’s statutory argument must be rejected according to a
long line of Supreme Court cases, the last of which is the United States Supreme
Court’s recent opinion in AT&T Mobility, LLC v. Concepcion, 2011 WL 1561956,
131 S. Ct. 1740 (Apr. 27, 2011), which holds that a state law that stands as an
obstacle to the purpose of Congress in enacting the FAA, cannot be used to
override arbitration agreements. In Concepcion, the Court’s discussion
between insurance companies[.]”
22
encompasses state anti-arbitration statutes among those state laws preempted by
the FAA, and the Court states definitively that such laws are preempted: “When
state law prohibits outright the arbitration of a particular type of claim, the
analysis is straightforward: The conflicting rule is displaced by the FAA.”
Concepcion, 131 S. Ct. 1740, at *6; see also Volt Information Sciences v. Board of
Trustees, 489 U.S. 468, 474, 109 S. Ct. 1248, 1253, 103 L.Ed.2d 488 (1989) (FAA
preempts state legislative attempts to limit enforceability of arbitration
agreements).
Plaintiff also argues that the McCarren-Fergusen Act (“MFA”) requires a
reverse preemption of the FAA by § 27-5-114, because the MFA provides that
“[n]o Act of Congress shall be construed to invalidate, impair, or supersede any
law enacted by any State for the purpose of regulating the business of insurance . .
. unless such Act specifically relates to the business of insurance. . . .” 15 U.S.C.
§ 1012(b). Plaintiff argues that § 27-5-114 is a Montana law enacted for the
purpose of regulating the business of insurance, and therefore it reverse preempts
the FAA. In this case, the arbitration agreement does not pertain to an annuity
23
contract, and therefore it does not even implicate § 27-5-114, M.C.A. In addition,
this Montana statute is found in Montana’s Uniform Arbitration Act, not in the
Montana Insurance Code, and therefore the Court considers it highly unlikely that
this arbitration statute was enacted for the purpose of regulating the business of
insurance. See Northwestern Corp. v. Nat’l Union Fire Ins. Co., 321 B.R. 120
(2005)(holding that the Federal Arbitration Act trumps the McCarren-Fergusen
Act because Montana Insurance Code is Montana’s exclusive method of
regulation of business of insurance and § 27-5-114 not enacted for purpose of
regulating business of insurance in Montana).
In this case, the anti-arbitration statute applicable to annuity contracts found
in Mont. Code Ann. § 27-5-114(2)(c) is preempted by the FAA, and therefore
§ 27-5-114(2)(c), M.C.A., would have no application to the motion to compel
arbitration even were Montana law applied.
Likewise, Plaintiff’s reliance on Willems v. U.S. Bancorp Piper Jaffray, 107
P.3d 465 (Mont. 2005), and Kloss v. Edward Jones, 54 P.3d 1 (2002), to invalidate
the arbitration clause under Montana law runs afoul of the Supreme Court’s
24
preemption prescription in Concepcion. Citing Kloss, Defendant Falber
acknowledges that he had a fiduciary relationship with Plaintiff because he was
authorized to buy and sell in the client’s account. (Doc. 38 at 26.) Citing Willems,
Defendant Falber also acknowledges that Montana law requires a broker in a
fiduciary relationship to advise the customer of the arbitration agreement. (Id.)
Notice was indeed given by the AIF document signed by Plaintiff because the
arbitration notice was virtually impossible to miss. (Doc. 37-2 at 2.) The fact that
Plaintiff claims that Defendant Falber did not specifically discuss with her all the
details and ramifications of the arbitration clause (a claim that Defendant Falber
vigorously contests) and that he had to do so because it was an arbitration clause
creates the sort of obstacle to arbitration that Concepcion forbids. In addition, the
Court has found that Falber was a credible witness, and he testified that he did
indeed explain the arbitration clause in detail to Bixler, and the Court so finds.
The Court concludes that both Mont. Code Ann. § 27-5-114, which
excludes disputes over annuity contracts from arbitration clauses, and also the
Kloss rule invalidating arbitration clauses when a broker acting as a fiduciary does
25
not adequately explain an arbitration clause to the client, are preempted by the
FAA. Section 27-5-114 (2)(c) excludes annuity contract claims from arbitration,
and therefore it “appl[ies] only to arbitration....” See Concepcion, 131 S.Ct. at
1746. The Kloss rule is a “defense[] that ... derive[s] [its] meaning from the fact
that an agreement to arbitrate is at issue” and is therefore preempted. Id. at 1746.
III.
Whether the Client Agreement is Valid is an Issue for an Arbitrator to
Decide.
Having decided that the arbitration provision in the Client Agreement is
valid, and Plaintiff Bixler did agree to arbitrate her disputes connected to the
Client Agreement, this Court need not press on further to decide whether the
Client Agreement is a valid contract, because that is a question for an arbitrator to
decide. The issue of a contract’s validity is considered by the arbitrator in the first
instance. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct.
1801, 18 L.Ed.2d 1270 (1967) (noting that arbitration provisions are severable as a
matter of substantive federal arbitration law). Thus, any claims against the
26
contract as a whole, such as a claim of fraud in the inducement of the contract, are
to be decided by the arbitrator. Id. at 400, 402-43, 87 S.Ct. 1801. So, too, the
state law challenges against the contract in Southland (fraud, misrepresentation,
breach of contract, breach of fiduciary duty) were determined by the Court to be
arbitrable. Southland v. Keating, 465 U.S. 1 (1984). The U.S. Supreme Court
clarified in Buckeye Check Cashing v. Cardegna, 546 U.S. 440, 126 S.Ct. 1204
(2006), “that the Prima Paint rule permits a court to enforce an arbitration
agreement in a contract that the arbitrator later finds to be void.” Buckeye Check,
546 U.S. at 448-49 (holding that “a challenge to the validity of the contract as a
whole, and not specifically to the arbitration clause, must go to the arbitrator.”)
IV.
Arbitrability of Plaintiff’s Claims
The gateway issue of whether an arbitration clause applies to a particular
dispute are to be decided by courts. See Green Tree Fin. Corp. v. Bazzle, 539 U.S.
444, 452, 123 S.Ct. 2402, 156 L.Ed.2d 414 (2003) (plurality opinion). “Courts
should not assume that the parties agreed to arbitrate arbitrability unless there is
27
‘clear and unmistakable’ evidence that they did so.” First Options of Chicago,
Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995)
(quoting AT&T Techs., Inc. v. Commc’ns Workers of America, 475 U.S. 643, 649,
106 S.Ct. 1415, 89 L.Ed.2d 648 (1986)). In this case, there is no indication in the
arbitration provision that the parties agreed to arbitrate arbitrability. However,
“any doubts concerning the scope of arbitrable issues should be resolved in favor
of arbitration, whether the problem at hand is the construction of the contract
language itself or an allegation of waiver, delay, or a like defense to arbitrability.”
Moses H. Cone Mem’l Hosp. v. Mercury Const. Corp., 460 U.S. 1, 24-25, 103
S.Ct. 927, 74 L.Ed.2d 765 (1983). We “construe ambiguities concerning the scope
of arbitrability in favor of arbitration.” Mastrobuono v. Shearson Lehman Hutton,
Inc., 514 U.S. 52, 66, 115 S.Ct. 1212, 131 L.Ed.2d 76 (1995). So too, Montana’s
liberal policies favoring arbitration agreements include that of “resolving any
doubts concerning the scope of arbitrable issues in favor of arbitration.” Kingston
v. Ameritrade, Inc., 12 P.3d 929, 932 (Mont. 2000) (citing Vukasin v. D.A.
Davidson & Co., 785 P.2d 713, 718 (Mont. 1990)). Under Texas law, also, a party
28
asserting an arbitration agreement must show that the agreement exists and that the
claims fall within the scope of the agreement. In re Oakwood Mobile Homes, Inc.,
987 S.W.2d 571, 573 (Tex. 1999), abrogated in part on other grounds by In Re
Halliburton Co., 80 S.W.3d 566 (Tex. 2002).
Defendants assert that Plaintiff’s claims easily fall within the scope of the
arbitration clause because they fall under “any controversy arising out of or
relating to [Plaintiff’s] accounts, i.e., transactions with [NEXT Financial], [NEXT
Financial’s] officers, directors, agents, employees, clearing agent, this Agreement,
or the breach thereof, whether such transaction or agreement was entered in prior,
on, or subsequent to the date hereof....” (Doc. 37-4, ¶ 20(I).) Conceding that her
‘securities’ claims may be arbitrated, Plaintiff asserts nevertheless that her
‘insurance’ claims are not within the scope of the arbitration clause, arguing that
the clause explicitly states that it is governed by the arbitration rules of FINRA,6
and FINRA rules exclude insurance law claims. Defendants object to this
The Financial Industry Regulatory Authority (“FINRA”) is the arbitral
body of the National Association of Securities Dealers, Inc. (“NASD”).
6
29
reasoning, arguing that there is only one product that was sold (the variable
annuity product), and it is a registered security even though it also functions as
insurance in some respects.
The arbitration clause at issue here provides that “Any controversy . . . shall
be settled by arbitration in accordance with the rules then in effect of the Financial
Industry Regulatory Authority (“FINRA”).” (Doc. 37-4 at 3, ¶ 20(I).) Plaintiff
presents for the Court’s consideration FINRA Rule 12200, which excludes from
arbitration “disputes involving the insurance business activities of a member that
is also an insurance company.” (Doc. 44 at 6.) Plaintiff argues that because a
variable annuity product is both a security and insurance, it falls within a category
of claims that cannot be arbitrated by FINRA under its own rules. Plaintiff
implicitly acknowledges that Defendants NEXT and Falber are not “insurance
companies,” but Plaintiff asserts that they are “obviously associated with JNL
[which is an insurance company].” (Doc. 44 at 6.) The Court notes that JNL is
not a member of FINRA, however.
Doubt as to the scope of the arbitration clause should be resolved in favor of
30
arbitration. Raymond James & Assocs. v. Bowman, 196 S.W.3d 311, 319 (Tex.
App. Houston 1st Dist. 2006); see also Moses H. Cone Memorial Hosp. v. Mercury
Const. Corp., 460 U.S. 1, 24-25, 103 S. Ct. 927, 74 L.Ed.2d 765 (1983) (“The
Arbitration Act establishes that, as a matter of federal law, any doubt concerning
the scope of arbitrable issues should be resolved in favor of arbitration, whether
the problem at hand is the construction of the contract language itself or an
allegation of waiver, delay, or a like defense to arbitrability.”). Plaintiff’s
argument is not entirely persuasive. Variable annuity products are hybrid
investment vehicles, at once insurance contracts and, at the same time, registered
securities under the Securities Act of 1933. (Def.s’ Reply Brief, Doc. 47 at 8,
citing FINRA Notices To Members 99-35 and 96-86; U.S. Securities and
Exchange Commission, Annuities, http://www.sec.gov/answers/annuity.htm.)
Even when Plaintiff’s insurance code claims are taken into consideration, such
allegations still sound in tort and do not require special knowledge of insurance
law. (Doc. 47 at 8, citing IDS Life Ins. Co. v. Royal Alliance Assocs., Inc., 266
F.3d 645, 653 (7th Cir. 2001) (insurance business exception to arbitration not
31
applicable where no technical issue of insurance law).) Indeed, the IDS Life Ins.
Co. decision provides the further explanation that “[t]he purposes of the exclusion
are to keep arbitrators away from issues that are peculiar to insurance, such as
reserves, reinsurance, actuarial calculations, rates, coverage, and mandatory terms,
and to prevent arbitrators from being swamped with insurance claims, which are
apt to be more numerous than securities claims.” IDS Life Ins. Co., 266 F.3d at
652 (citing In re Prudential Ins. Co. of America Sales Practice Litigation All
Agent Actions, 133 F.3d 225, 232-34 (3rd Cir. 1997)). Even the insurance agents’
employment disputes that were referred to arbitration in the case of In re
Prudential Ins. Co. of Am. Sales Practice Litig., 133 F.3d 225, 232 (3rd Cir. 1998),
were not held to be within the “insurance business exception” because they were
not “insurance-only claims” or matters that were “intrinsically insurance”. Id.
(quoting 44 Fed.Reg. 75,255 (1979)).
The Court concludes that Plaintiff’s negligence and negligence per se
‘insurance’ claims are within the scope of the arbitration clause because the
Defendants are not insurance companies and because the claims pertain to the sale
32
of a hybrid security/insurance product, but do not import technical insurance
matters into the tort and contract claims. Although there may be some small doubt
as to the scope of arbitration, this Court must resolve that doubt in favor of
arbitration. See Raymond James & Assocs. v. Bowman, 196 S.W.3d 311, 319
(Tex. App. Houston 1st Dist. 2006); see also Moses H. Cone Memorial Hosp. v.
Mercury Const. Corp., 460 U.S. 1, 24-25, 103 S. Ct. 927, 74 L.Ed.2d 765 (1983).
Therefore, the Court will deny Plaintiff’s request to specifically exclude all her
insurance allegations from arbitration.
V.
Motion to Amend Complaint
The Court notes that currently Plaintiff has one count of Negligence (Count
VI) and one count of negligence per se (Count XIII), either of which can
encompass violations of Montana’s Insurance Code. However, Plaintiff seeks to
amend her Complaint and has filed a Motion for Leave to Amend in order to assert
these additional specific violations of the Insurance Code, such as Mont. Code
Ann. §33-1-302, prohibiting misrepresentations of material fact in the course of
33
selling insurance, and Mont. Code Ann. §33-18-201(6), which prohibits
misrepresentations of the facts of policy provisions concerning insurance
coverage. These two proposed statutory claims allege the same basic set of facts
as the existing negligence and negligence per se claims. “The application of the
United States Arbitration Act . . . should not defeat the application of state law
(including state regulatory legislation) to substantive issues. . . .” 1 Domke on
Comm. Arb. § 7.7. An arbitrator is thus perfectly capable of applying state
statutes (in this case, Texas statutes) that may be applicable to Plaintiff’s claims.
The Court therefore denies the Motion for Leave to Amend not in order to exclude
such statutory claims from arbitration but because the referral to arbitration makes
the motion to amend the complaint moot.
Accordingly,
IT IS HEREBY ORDERED that Defendants’ Motion to Compel Arbitration
and Stay Proceedings (Doc. 35) is GRANTED. This case is referred for
arbitration to the Financial Industry Regulatory Authority, and, pursuant to 9
U.S.C. § 3, all proceedings herein are STAYED pending conclusion of the
34
arbitration.
IT IS FURTHER ORDERED that Plaintiff’s Motion to Amend Complaint is
DENIED as moot, and Defendants’ Motion for Protective Order to stay expert
witness disclosure is GRANTED, for good cause shown.
The Clerk shall notify counsel and FINRA of entry of this order.
Done and Dated this 14th day of March, 2012.
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