Brown v. Wells Fargo Bank, N.A.

Dist., Second B196258. Div. Three. Nov. [No. 2008.] BROWN, etc., Trustee, RONNIE C. as Plaintiff Individually Respondent, N.A., al., BANK,

WELLS FARGO et Defendants and Appellants.

Counsel Kessal, Robb, Christensen; & S. Young Neal A. Logan, Evelyn Thomas O. Jacob for Defendants and Appellants. Olson, &

Munger, Tolies M. Y. for the George Garvey Jeffrey Wu Association, Industry Securities and Financial Markets Chamber of America, Commerce the United States of the American Bankers Association, Association, the ABA Securities the Clearing House Association Curiae, and the Financial Services Roundtable as Amici upon request the Court of Appeal.

Courteau & Associates and Diana L. Courteau for Plaintiff and Respondent. Smith, Martin, Powell, Cardozo; Reed James C. C. Raymond David A. Curiae, Kreindler & Kreindler and Gretchen M. Nelson as Amicus upon of the Court request of Appeal.

Opinion

CROSKEY, J. on an from case comes to us the trial court’s appeal This order a motion to arbitration. While case in the denying compel this arises clause, context of an to enforce an arbitration the issue is attempt dispositive whether there was fraud in the of the execution entire account brokerage case, This clause a only part. which the arbitration

agreement, of therefore, a bank’s creation not arbitration but rather involves really is about and the consequences one of its customers of a with fiduciary relationship flow therefrom. that Bank, N.A., entities; are Fargo plaintiffs

Defendants are various Wells In order to ensure that Wells with substantial assets. elderly Fargo customers assets, a “rela- assigned Wells all of Wells Fargo managed Fargo plaintiffs’ to was a Wells Fargo The manager” plaintiffs. relationship manager tionship who visits to home office in order to biweekly made vice-president, plaintiffs’ to an their financial She also introduced estate manage plaintiffs paperwork. short, accountant, In an and a financial consultant. the attorney, Fargo Wells on for induced their manager rely help provide her relationship plaintiffs well-being. financial the Wells

At the met with relationship manager’s urging, plaintiffs Fargo consultant, him. That broker- financial a account with brokerage opened led to the account contains the arbitration clause which trial age agreement the treated as ruling. agreement, Fargo plaintiffs court’s Wells executing words, other customers In other Wells account. any brokerage opening account agreement execution as Fargo approached brokerage it were of though arm’s-length an transaction. part The trial court denied motion arbitration on the Fargo’s Wells to compel that the basis arbitration clause was unconscionable. While we procedurally conclusion, do not with an also be disagree agreement that must substantively unconscionable in order for it to be unenforceable for unconscionability. which for arbitration conducted National agreement, provided not, law, Dealers, (NASD), a matter of Association of Securities Inc. is as unconscionable. substantively had the trial court also concluded that Wells estab-

Significantly, Fargo lished a with and that this fiduciary plaintiffs, relationship may relationship make certain have rise to on Wells given fiduciary duty part terms of were they signing. understood the material the contract plaintiffs however, court, The trial failed to and rule upon We consider agree. circumstances, is, whether, of this conclusion. That under consequences which brokerage agreement, there was fraud in the execution of the account of that any would enforcement necessarily part conclusion preclude clause. We will therefore reverse trial including the arbitration agreement, order and remand for further proceedings. court’s 946

FACTUAL AND PROCEDURAL BACKGROUND1 1. The Parties and

Plaintiffs and are the Brown Ronnie C. respondents Family Trust Brown, and as individually trustee of the Brown Trust. Defendants Family N.A., Bank, and are Wells and certain Fargo related entities.2 Also appellants included as defendants and are two Wells Jack appellants Fargo employees, Harold (Keleshian) Keleshian and Lisa Jill Tepper (Tepper). husband,

On June Ronnie Brown and her now deceased plaintiff Brown, Ira an (the executed Acknowledge- “Acknowledgement/Agreement” ment), which entered by they brokerage agreement (the into a account Agreement) with Wells Investments as cotrustees for Brown Fargo the Family Trust. The allowed Wells to make stock Agreement Fargo trades requested by the Browns.

Plaintiff Brown At Ronnie was bom in 1922. the time she the signed that 81 Agreement, she was old.3 Ira Brown was a of years cofounder Sav-On 100,000 Dmg Store in the 1940’s. He had amassed more than shares of stock, Sav-On $1.8 which was valued at than of June more million as 2004. At old, the time he he was 93 health signed Agreement, years failing in blind. legally was a Wells and senior trust administrator

Tepper Fargo vice-president from to August October 2001 2006. In June also a licensed Tepper stockbroker and a stated, In testimony, “relationship manager.” deposition Tepper manager oversees and as needs are relationship relationship

“[t]he clients, uncovered or are made I would introduce another requests of employee Fargo Wells could address that need.” particular Although accounts, herself did not in Tepper manage assets trust she received additional when the brokerage Browns account compensation opened for the Brown Tmst. Family

Keleshian licensed as was a stockbroker well as senior vice-president senior financial consultant for Fargo. Wells Keleshian assisted Browns with account for the Brown opening brokerage Trust. Family many parties dispute underlying particular, they whether dispute facts. certain 7, 2004, events occurred June We prior when the contract issue was executed. summarize light respondents. the facts in a favorable plaintiffs most LLC; Fargo Fargo Company; Management, Those entities are Wells & Wells Wells Funds LLC; Investments, convenience, Fargo Fargo Capital Management, and Wells LLC. we For collectively include all these entities in our use of the term Wells unless otherwise indicated. years Ronnie time Brown stated her declaration that she was 82 old at the June meeting; she bom in however also stated that she was October 1922. the Execution Prior to With Relationship

2. Defendants Plaintiffs’ the Agreement to the June Bank of Wells Fargo prior were customers The Browns accounts at Wells had They defendants. (the with Meeting) meeting Whitesell, with Brown paying assisted Ronnie David manager, and a branch bills. the Browns’ assigned who was the Browns met Tepper, or early

In late 2003 meeting, the initial Tepper manager. During their relationship assist them as that when she met limited testified vision. Tepper that Ira Brown had learned Brown, a “little slow.” Mr. he was a home office on in the Browns’ worked

Beginning early Tepper financial paper- their significant and managed basis and biweekly organized all of their financial access to with Tepper work. The Browns provided assigned had been believed that Tepper While the Browns information.4 of their financial paperwork, the management to assist them with simply Browns, and to about the “to information” gather actual was job Tepper’s of Wells under the management their assets remained make certain all of Fargo. and a certified attorney5 public the Browns to an estate introduced

Tepper investments, she did the Browns’ started to learn about accountant. As Tepper the then began giving choices. She not with the Browns’ investment agree the Browns to change their investments. advised Browns advice as to Tepper their investments were she did not think their investment because strategy for the Browns’ age. appropriate people out the easiest method for straightening advised the Browns that

Tepper with Wells Fargo. account brokerage was to open their investment portfolio the who could handle Keleshian was a stock expert that She represented .of . . urging Tepper “At the insistence and repeated stock Browns’ portfolio. months,” to meet with Keleshian. Browns ultimately agreed over the the Browns with organizing time also Tepper helped this During period, office, decide them in their home she helped documents. As she worked their and which to shred. documents to keep which that Fargo did not inform the Browns from Wells During period, representatives this time an administrative- Tepper that was The Browns believed Tepper was licensed stockbroker. Fargo. employee of Wells type recommended, Schulz, attorney the estate she closely Charles Tepper worked with the Browns present when Tepper and the Browns. meetings between Schulz attended they wanted in the trust.” discussed “what Meeting and the the Agreement

3. Execution of Prior to the had met with on one Meeting, Browns Keleshian prior occasion for an introduction. that Following meeting, introductory Tepper then set Meeting account. up open brokerage 7, 2004,

On June traveled Tepper Keleshian to the Browns’ office in California, El Segundo, met with Browns for minutes. At accounts; time, three Browns investment the Brown opened Family Trust, Trust, (3) Brown Ira D. and the Ronnie Trust. C. Brown This assert, the Brown litigation concerns Trust. Defendants Family plaintiffs do not that relevant documents Ira D. dispute, establishing the Brown and the C. Trust Ronnie Brown Trust contained arbitration identi- provisions cal to the one at issue in this litigation.

At the the Browns Meeting, a Trust signed Acknowledgement Certificate of Investment Power. The Acknowledgement, docu- one-page ment, Browns provided had read terms and conditions of the Wells Fargo Investments Account Brokerage Agreement agreed to be bound them. The also stated at 5 in Acknowledgement paragraph single- letters; fine “BY spaced print SIGNING BELOW I/WE ACKNOWL- capital EDGE A RECEIPT OF COPY OF THE WELLS FARGO INVESTMENTS BROKERAGE ACCOUNT AGREEMENT WHICH CONTAINS A PRE- DISPUTE ARBITRATION CLAUSE IN SECTION 14. MY NUMBER SIGNATURE ALSO ACKNOWLEDGES THAT I HAVE READ AND UN- DERSTAND THE DISCLOSURES STATED ABOVE.” three,

Page section 14 of the included the corresponding Agreement arbitration entitled provision Arbitration “Pre-Dispute Agreement.”6 single- letters, fine spaced the arbitration the follow- print capital provision provided ing statements: “ARBITRATION AND introductory IS FINAL BINDING PARTIES, THE ON THE ARE [f] PARTIES WAIVING THEIR RIGHT TO COURT, SEEK REMEDIES IN INCLUDING THE RIGHT TO JURY TRIAL, PRE-ARBITRATION DISCOVERY IS GENERALLY MORE [f] PROCEEDINGS, LIMITED AND THAN DIFFERENT FROM COURT ffl THE AWARD REQUIRED ARBITRATORS’ IS NOT TO INCLUDE FAC- LEGAL TUAL FINDINGS OR REASONING AND ANY PARTY’S RIGHT APPEAL, TO TO SEEK BY OR MODIFICATION OF RULINGS THE LIMITED, ARBITRATORS STRICTLY THE OF ARBITRA- IS PANEL [f] TORS WILL A TYPICALLY INCLUDE MINORITY OF ARBITRATORS

WHO WERE OR ARE AFFILIATED THE INDUSTRY.” WITH SECURITIES Agreement The pages. pages Agreement of 17 Eleven contain two columns consists single-spaced provision text. The third appears page small size arbitration on the of text. appearing appeal The text in the record on is to read. difficult CLAIMS, “I AGREE THAT ALL then arbitration provided: provision BETWEEN ME AND DISPUTES AND OTHER

CONTROVERSIES DIRECTORS, OF- OF ITS AND ANY FARGO INVESTMENTS WELLS EMPLOYEES, OF OR RELATING FICERS, ARISING OUT OR AGENTS TRANSAC- OR OR ANY ORDERS ACCOUNT TO THE BROKERAGE CONTINUATION, OR PERFORMANCE THE THEREIN OR TIONS OR ANY AGREEMENT ACCOUNT OF THE BROKERAGE BREACH ME, ENTERED AND WHETHER BETWEEN YOU AGREEMENT OTHER IS BEFORE, ON, DATE THIS ACCOUNT OR AFTER THE INTO OPENED, CONDUCTED BY ARBITRATION SHALL BE DETERMINED THEN IN EFFECT BY, RULES TO THE ARBITRATION AND SUBJECT ASSO- OF, OR THE NATIONAL STOCK EXCHANGE THE NEW YORK DEALERS, I MAY ELECT. IF INC. AS I SECURITIES CIATION OF FARGO ADDRESSED TO WELLS ELECTION MAKE NO WRITTEN I AUTHORIZE MAIL . . . THEN BY REGISTERED INVESTMENTS ABOVE- ELECT ONE OF THE FARGO INVESTMENTS TO WELLS TO ARBITRATE FOR ME. THIS AGREEMENT REFERENCED FORUMS UNDER PREVAILING ENFORCEABLE SHALL BE SPECIFICALLY ARBI- RENDERED BY THE THE AWARD LAW AND PROCEDURES. FINAL, MAY BE ENTERED BE AND JUDGMENT TRATORS SHALL PAR- OVER THE COURT HAVING JURISDICTION UPON IT IN ANY MAY HOW THIS PROVISION CAN ADVISE ME ON TIES. COUNSEL AFFECT ME.” documents, Wells Fargo

The Browns did not read the preprinted apparently immediately the documents almost They signed the including Agreement. that, by The Browns believed received them from Keleshian. they after only. accounts brokerage the were to agreements, they agreeing open signing knew, that, Indeed, the Browns the signed far as she as Tepper agreed accounts. that were they opening agreement believing Ira Brown in the Agreement. The Browns were unable to read the fine print Keleshian where indicated.7 frail and could not his name sign was visibly documents, been told of the and had that Ira Brown was unable to read knew the during meeting. Ira Brown’s limitations

Keleshian, however, the documents to be the of did not explain purpose did Keleshian also about the arbitration provision. and said signed nothing offer to read and did not the Browns whether had they any questions not ask to them.8 of the any Agreement portions line, signature but is written Acknowledgement is not on the signature Ira on the Brown’s angle.

below the line at a downward blind; (1) legally was he not aware that Ira Brown position the that was Keleshian took (3) the agreement; and he told an arbitration clause in the he told the Browns there was Ronnie Brown was unaware of the existence of the arbitration provision until to after this commenced and defendants filed a motion litigation compel Brown me a arbitration. Ronnie claims: “Keleshian did not chance to give read of the outside his us any asking documents of before to presence sign them, nor us we did he tell could take the documents home review them rushed, before To the them. seemed as if all. . . signing contrary, everything Keleshian wanted was ‘close the deal.’ Wells intent on Fargo seemed turned ensuring signed agreement we and then over the brokerage stock to their custody.” certificates

Keleshian testified that at the present Meeting was because the Tepper be Browns “felt it would more comfortable for them if was at the [she] meeting.” During Meeting, took the Browns’ Sav-On Tepper custody stock later certificates and them the Wells vault. did placed Tepper not think it inform the Browns to have an at the prudent attorney present think it Nor did she advise the to have their Meeting. Browns prudent read not attorney Agreement to execution. did read prior any Tepper to the Browns nor did she Agreement’s language any out point particular to the She did not that the portions Agreement Browns. ensure Browns had their determine could glasses they or whether read the documents. She did not ask the if had they Agreement Browns about the before any questions it. Counsel for the they signed Browns asked “So what Tepper deposition: did do to you Agreement?” Browns this protect regarding purported “I didn’t do Tepper responded: anything.”

4. Allegations Plaintiffs’ commenced their May operative lawsuit. In plaintiffs present first amended seven assert causes of action: breach of plaintiffs complaint, contract, fraud, duty, breach of negligent misrepresentation, fiduciary unjust enrichment, and negligence. negligence professional

Plaintiffs that in Ira Brown care and hospice was allege September that he was was the Ronnie dying. caregiver, sick and Because she primary Brown was and mentally fatigued weary. physically

At 8:00 one Keleshian approximately p.m. night, allegedly telephoned Browns at home and to the Browns that must represented they immediately 80,000 sell Sav-On stock it would be within days. shares of or that worthless The were Sav-On shares held in the Brown Trust. Family

Ronnie should in the Brown stated this be handled allegedly morning. Keleshian, however, her to consent for allegedly pressured provide telephonic they any The Agreement questions. Browns to read the later and call him if had trial court was testimony contrary. free to accept Ronnie Brown’s to the to cancel the sale sale, tried allegedly did. Ronnie Brown which she Defendants, however, the sale had her that informed morning. following occurred. already 74,600 at a of stock price sold shares that Wells allege Fargo

Plaintiffs following the week that the allege during $24.71 share. also They per never decreased that the sale, $25.40 a share and price the stock rose to price in the next two weeks. $25.30 than a share to less with duties to breached its Fargo plaintiffs Plaintiffs that Wells allege had almost no claim that they Sav-On stock. Plaintiffs to the sale of respect stock, gains significant capital thus them suffer causing cost basis in the on the the commission that was enriched Fargo unjustly taxes and Wells trade. stock million, $1 as well as in excess of damages

Plaintiffs seek compensatory fees, all damages penalties damages trebling attorney punitive to Civil Code section 3345. pursuant Arbitration Motion to Compel

5. Defendants’ Defendants defendants filed motion July compel arbitration. and enforceable contract. that the was a binding asserted arbitration provision claims fell within scope Defendants further asserted that all of plaintiffs’ of the arbitration provision. that the arbitration provision

In their asserted opposition, plaintiffs unconscionable. Plaintiffs also argued and substantively procedurally were Wells Tepper their with relationship Tepper, based upon prior them duty protect the Browns’ fiduciaries and that owed they plaintiffs Trust. Family with to the Brown when into the entering Agreement respect that the motion to the trial was of the tentative opinion court Initially, further sought discovery, arbitration should be Browns granted. compel however, the motion in order to continued the on hearing and the trial court on the relevant issues. discovery Specifically, allow the Browns to conduct the circumstances discovery regarding the Browns were to conduct permitted to determine whether arbitration in order agreement, of the execution of the or unconscionability. there was evidence of fraud in the motion to compel, then filed a further to The Browns opposition with had established the fiduciary relationship Tepper which they emphasized addition to in relied on from Tepper’s deposition, them. They excerpts set forth six-month Brown. This evidence Tepper’s declaration from Ronnie course of in which she activity established a purportedly with the relationship Browns which by became they on her to handle their dependent financial needs. Plaintiffs claimed that defendants’ failure to disclose the orally arbitra- tion constituted constructive fraud. provision

In their supplemental of the motion to reply support compel, defendants that the dealt at responded “arm’s parties length.” They also submitted the Maine, declaration of John D. an in the expert securities to the effect industry, that it would be to “contrary for a stock accepted industry practice broker or other investment to read a professional customer aloud agreement to a customer prospective before the customer signs agreement, to attempt customer, it to the explain and/or advise the customer to consult with an attorney before it.” As signing investment “are not professionals usually licensed he attorneys,” took the that “it would be a position mistake to suggest that should they to attempt contracts for custom- interpret prospective ers. In so could create more doing they problems—by misinterpreting phrases or out essential leaving terms—than they be to solve.” might expected

A was held on hearing 2007. At the January hearing, court stated its conclusion that there awas fiduciary between the relationship Browns and stated, however, Wells The court Fargo. “I don’t think that I’m in a position to make any relative to constructive rulings fraud. I think that is to a jury up to decide.” The panel court also did not state expressly whether it found the arbitration Instead, provision unconscionable. substantively the court ruled that “this arbitration agreement under the facts this case is unfair and it is facts,” procedurally unconscionable.” Under the “unusual particular court concluded that Wells had been required more” to assist the “do[] Browns in reviewing understanding documents were they signing. On basis, the court denied the motion to arbitration. compel Defendants filed a notice timely of appeal.

CONTENTIONS Defendants contend that the trial court erred the motion by denying arbitration. The compel Browns that the motion to respond compel denied unconscionable; because the properly arbitration clause was (2) void for fraud in the execution.

DISCUSSION

1. Standard Review

A trial court on a ruling arbitration petition must resolve compel the factual issues raised not determine whether petition, factual simply

953 Inc. Medical Group, (1997) 15 Cal.4th v. Permanente (Engalla exist. disputes 843, to a 951, 903].) jury There is no right P.2d 938 Cal.Rptr.2d 972-973 [64 be should specifically of whether arbitration agreements trial on issue (Rosenthal Corp. Fin. Securities (1996) 14 Cal.4th v. Great Western enforced. Thus, (Rosenthal).) 875, the trial 394, P.2d 412 926 Cal.Rptr.2d 1061] [58 a exist with to respect that factual court errs if it determines only disputes v. (Engalla for fraud. clause is void that an arbitration argument plaintiff’s Inc., 972-973; Medical Group, 15 Cal.4th at pp. supra, Permanente Rosenthal, 414.) a to supra, petition compel 14 Cal.4th at p. “[W]hen a written facie evidence of is filed and by prima arbitration accompanied itself must determine the court controversy, to arbitrate agreement raised, and, enforcement is exists if defense to its agreement any whether 413.) (Rosenthal, 14 Cal.4th at supra, p. whether it is enforceable.” “are to an arbitration agreement The issues of the existence of validity hearing be resolved the trial court in the manner for by provided [citation], either on the of affidavits or declarations decision motions basis or, to resolve necessary in the exercise of the court’s discretion where (Rosenthal, evidence, testimony.” material conflicts in the written live upon supra, 402.) 14 Cal.4th at p. to the

We review an order a motion to arbitration denying pursuant compel & Architects Assn. v. (Engineers substantial evidence standard of review. 644, Community (1994) 653 Development Dept. 30 Cal.App.4th [35 facts, Architects).) & (Engineers If there are no Cal.Rptr.2d disputed 800] (Szetela v. Discover Bank (2002) standard of review is de novo. Builders, 1094, (Szetela); CPI Inc. v. Cal.App.4th Cal.Rptr.2d [118 862] Inc. Impco Technologies, (2001) 1171-1172 94 Cal.App.4th [114 851].) the extent there are facts in we accept To material Cal.Rptr.2d dispute, trial court’s resolution of facts when substantial disputed supported evidence; we the court found fact and drew every every permissible presume Architects, supra, & judgment. (Engineers inference its necessary support 30 Cal.App.4th

2. State and Federal In Favor Arbitration Policy to arbitrate this whether the are deciding parties required dispute, arbitration relating we bear in mind the state and federal schemes statutory the California and the were to further. they designed Through policies section et “the (CAA), Arbitration Act Code of Civil Procedure seq., in favor of arbitration as ‘strong has Legislature expressed public policy means of resolution.’ relatively dispute speedy inexpensive [Citations.] ‘ effect to such will intendment “indulge every give courts Consequently, ’ ” (Moncharsh & Blase Heily 3 Cal.4th proceedings.” [10 (Moncharsh).) P.2d Cal.Rptr.2d 899] 954

Likewise, (FAA), Federal Arbitration Act 9 U.S.C. 1 et seq., § intended to reverse long-standing judicial to arbitration. hostility (Shearson/American Inc. Express McMahon 220, (1987) 482 U.S. 225 185, 2332, 2337].) L.Ed.2d 107 S.Ct. FAA establishes federal [96 policy (482 favoring 226.) arbitration. U.S. at p.

3. The Court Cannot Treat the Arbitration Provision Differently Than

Other Contract Provisions Section 2 of the FAA that written arbitration provides agreements valid, irrevocable, enforceable, “shall be save such as upon grounds exist any 2, at law or in (9 for revocation of contract.” equity U.S.C. italics § added.) defenses, fraud, duress, “[Generally contract such as applicable or be unconscionability, may to invalidate applied arbitration with agreements not, however, out 2. contravening Courts may § invalidate [Citations.] [][] only to arbitration arbitration agreements under state laws applicable provi Associates, (Doctor’s Inc. v. Casarotto 681, sions.” (1996) 517 U.S. 687 (Doctor’s Associates).) 1652, L.Ed.2d 116 S.Ct. [134 By enacting 1656] FAA, section of the “Congress precluded States from out arbitra singling status, tion for provisions instead that such suspect requiring be provisions ” the same as other placed ‘upon footing (517 687.) contracts.’ U.S. at p. Associates, In Doctor’s the United States Court struck down a Supreme “ Montana statute which arbitration required to be provisions ‘typed ” (Doctor’s underlined letters on the first of the capital contract.’ page Associates, supra, 683.) 517 U.S. at The court held that because the p. statute contracts, treated arbitration contracts than other it differently was preempted (517 by section of the FAA. U.S. at 683.) p.

“The rule of established enforceability by section of the preempts [FAA] state law and any contrary is on state binding courts as well as federal.” (Rosenthal, supra, 405.) Cal.4th at In most the CAA is similar p. respects, (14 to the FAA. Cal.4th at Code of Civil particular, Procedure FAA, section like section 2 that arbitration provides agreements “valid, irrevocable, are enforceable and save such as exist for grounds upon the revocation of contract.” any

4. NASDArbitration The arbitration states that provision Agreement must parties submit their claims to arbitration conducted the NASD or the New York (NYSE). Stock Exchange Defendants moved for an order NASD compelling arbitration. (SRO)

NASD is a “self-regulatory organization licenses and broker-dealers in the national regulates securities its industry. Through wholly owned ... it has subsidiary, (the a Code of Arbitration Procedure adopted Code) NASD the arbitration govern between its members and disputes (Jevne v. Superior Court their customers.” 35 Cal.4th 940 [28 (Jevne).) 685, 111 P.3d Cal.Rptr.3d Under the of the Securities authority 954] Act Exchange (SEA), of 1934 15 U.S.C. et 78a United States seq., § Securities and Exchange (SEC) Commission has the NASD code approved (NASD Code).9 Jevne, supra, 35 941.) Cal.4th at p. of the SEA are primary purposes fair and investor dealing protection Jevne, supra,

in securities transactions. 953.) 35 Cal.4th at To the extent p. SEA, the NASD Code furthers the intended primary purposes effect, to have state laws which preemptive conflict with the NASD Code are (35 the SEA. preempted by 953.) Cal.4th at p.

5. The Arbitration Provision in the WasNot Agreement

Unconscionable constitutes Unconscionability a generally defense to en applicable Code, forcement (Civ. 1670.5.) contracts. Courts have held specifically § that unconscionability constitutes a defense to arbitrate. against agreements Szetela, supra, (See, e.g., Plaintiffs, 1099.) 97 at as the Cal.App.4th p. party arbitration, had the opposing burden of the arbitration establishing (Ibid.) provision was unconscionable. has

Unconscionability and a procedural substantive element. (Armendariz Services, v. Foundation Health Psychcare Inc. (2000) 24 Cal.4th “ 83, (Armendariz).) 745, 114 6 P.3d Cal.Rptr.2d [99 ‘The prevailing 669] must both be view is that [procedural substantive unconscionability] in order present for a court to exercise its discretion refuse to enforce a ’ ” (Armendariz, contract or clause under the doctrine of unconscionability. supra, (USA), 114; Ontiveros v. DHL Express 24 Inc. Cal.4th at see also p. (2008) 164 501 Cal.App.4th 471].) Cal.Rptr.3d [79

In Parr Court Superior 801], 139 440 Cal.App.3d Cal.Rptr. [188 rules, the court reviewed NYSE arbitration which it found to be essentially (Id. identical to the NYSE, NASD, NASD Code. 446.) at “The p. like the is an SRO that administers an arbitration under program rules approved by Jevne, Parr, supra, 3; SEC.” 35 supra, Cal.4th at fn. see also p. 139 Jevne Rules, At the time of the opinion, the NASD Code was set forth in NASD rule 16, 2007, Rules, et seq. April As of superseded by these rules were NASD rule 12000 Rules, seq. et for customer disputes and NASD seq. industry rule 13000 et for disputes. Rules, The arbitration governed by in this case would be NASD rule seq., 12000 et which Rules, materially are the same as NASD rule et seq. purposes for of substantive unconscionability. The Parr doing some basis for court held: “Without at Cal.App.3d p. been which have so, find procedures are reluctant unconscionable we rules outlined in NYSE We find that the procedures the SEC. approved minimal integrity.” than the doubt much more requisite beyond any display Perry also Thomas v. (Id. 447; (1988) 200 Cal.App.3d [246 see 156].) Cal.Rptr. NASD Code find that the SEC-approved are reluctant

We likewise below, that the we find procedures For the reasons stated is unconscionable. unconscionable. substantively on their face the NASD Code are not the arbitration provision need not address whether of this we light finding, unconscionable. is Agreement procedurally in of the term dis- addresses the fairness unconscionability “Substantive that involves contract terms unconscionability ‘traditionally Substantive pute. conscience,” harsh or or that impose as to “shock the are so one-sided ” (Szetela, supra, 1100.) at p. Cal.App.4th terms.’ oppressive substantive make findings regarding The trial court did not any express However, concerned with did that it was the court state unconscionability. that the arbitrators’ award namely certain of the arbitration provision, aspects and that the reasoning or findings legal to include factual any is not required limited. is right strictly parties’ appeal contain, alia, inter a Code must issued under the NASD

An award resolved, of issues, and a statement of the issues of the statement summary award, Code, 12904(e).) An (NASD rule or other relief awarded. the damages however, But this does reasoning. or findings legal need not include factual side, one contend, make the NASD not, and thus does not as plaintiffs favor CAA, an worth that under noting unconscionable. It is substantively Code award cannot be vacated on an that an arbitrator made the grounds arbitration the arbitrator’s insufficient evidence to support in law or that there was error Moncharsh, supra, Proc., 1286.2; 3 Cal.4th (Code fact. Civ. of findings § 11.) award does not Likewise, an limited ability parties appeal A limitation on appeals one-sided. make the arbitration necessarily provision of encouraging expeditious, the California policy consistent with public is Moncharsh, (See arbitration. through and final resolutions binding disputes supra, 8-10.) 3 Cal.4th at pp. unconscionable substantively NASD arbitration is

Plaintiffs argue Code, be affiliated may of arbitrators minority under NASD because result, contend, with the securities This will industry. in a lack of plaintiffs of some NASD arbitrators and an impartiality unfair bias in defendants’ favor.10

The NASD Code that a provides of the arbitration majority panel not from Code, must be comprised (NASD the securities people industry. 12402.) rule have a to strike and rank parties right arbitrators from Code, a list of arbitrators potential (NASD NASD. rules produced by 12403-12405.) are Arbitrators to disclose conflicts of interest required arising from direct or indirect financial or in interest the outcome of the personal arbitration and other Code, circumstances (NASD their affecting impartiality. rule The Director of NASD Resolution Dispute remove an may bias, arbitrator for conflict of interest or either of a or on upon request party Code, (NASD director’s own initiative. 12410(a).) rule We do not find these so one-sided provisions as to shock to conscience.

Plaintiffs argue that the arbitration clause is one-sided because they cannot allegedly their Civil pursue Code section 3345 and punitive damages claims in Code, NASD however, arbitration. Under the NASD arbitrators may Code, award “damages (NASD and other relief.” rule 12904(e).) Inter- preting Code, this same language NASD predecessor United States Court stated: Supreme “While not a clear authorization of punitive damages, this provision broad at appears enough least to such a contemplate remedy.” (Mastrobuono Hutton, Shearson Lehman Inc. 514 U.S. L.Ed.2d 115 S.Ct. 1218].) [131

Finally, plaintiffs that the argue “discouragement in depositions” NASD arbitration makes NASD arbitration substantively unconscionable. Code, Under the NASD are depositions allowed to generally only preserve testimony, to accommodate essential witnesses who are unable or unwilling to travel long distances for a or if other hearing, exceptional circumstances Code, (NASD exist. rule 12510.) however, Such limitations on depositions, do not make NASD arbitration substantively unconscionable. Under CAA, these arbitrations, same restrictions to all apply .nonpersonal injury unless the (See Proc., otherwise. parties agree Code Civ. 1283-1283.1.) §§ sum,

In the arbitration clause the Browns was not signed substan such, tively unconscionable. As finding procedural is unconscionability irrelevant. Without substantive unconscionability, unconscionabil procedural is an insufficient ity basis on which to a motion to deny arbitration. compel Jevne, Supreme our Court reviewed NASD provisions relating Code to arbitrator impartiality compared demanding them to the more provisions in the California Judicial Council ethical standards for arbitrators. The court held that provisions NASD Code relating SEA, to arbitrator impartiality furthered the primary purposes of the and thus the (Jevne, California supra, preempted by 958-960.) standards were SEA. pp. Cal.4th at Fraud Decide the Browns’ Constructive The Trial Court Must

6. Defense in the clause is void for fraud next that the arbitration argue

The Browns a fidu- that Wells had established execution. they argue Specifically, them, attention to that the failure to draw their with such ciary relationship constructive fraud. at the time of execution constituted the arbitration clause Court’s the California by Supreme This is argument governed case, between in Rosenthal. In that the court the difference explained decision fraud in the inducement fraud, fraud in the different theories of two inducement, is fraud in the execution. alleges plaintiff When a plaintiff it but that its consent signing, it understood the contract was asserting contrast, fraud alleges induced fraud. In when by plaintiff the contract was execution, very as to the that it was deceived asserting in the is plaintiff execution, A did not know what it was signing. contract nature of voidable; executed but a contract fraudulently contract induced is fraudulently (Rosenthal, 14 Cal.4th void, an supra, because there never was agreement. is 415.) at p. clause, are with to an arbitration

When these theories asserted respect are considered is because arbitration clauses different This procedures apply. (Rosenthal, supra, they from the which agreements appear. separable clause contract an arbitration containing Cal.4th at When a to a party is no generally, of the contract the assertion fraud in the inducement asserts clause is arbitration of the contract. The separable bar to the arbitration valid, the contract and the must arbitrate whether considered parties may of fraud in the inducement (even finding induced fraud though 415-417.) (14 whole).11 the contract as a Cal.4th pp. result in rescission of are not However, agreement fraud in the execution of the entire “claims of is void If the entire contract either state or federal law. arbitrable under fraud, arbitrate any ab initio because of the have not to agreed parties Thus, are (Id. in the execution 416.) at claims of fraud . . . .” controversy p. (Ibid.) court, the trial not an arbitrator. to be resolved by the execution is the of fraud in A element of defense necessary is, the defendant reliance. That a asserts that reasonable when plaintiff contract, void the contract is not considered the nature of the misrepresented discover the to if the had a reasonable opportunity due to the fraud plaintiff when the considered void contract. The contract is only true terms of the 11 however, clause If, of the arbitration asserting fraud in the inducement party the is court, validity of the goes it to the specifically, the assertion is to be resolved by the trial as Inc., Group, supra, 15 Cal.4th at (Engalla Medical v. Permanente itself. arbitration clause Rosenthal, 960, 973; supra, 14 Cal.4th at p. pp.

959 failure to discover the true nature the plaintiff’s of document executed was (Rosenthal, without on the supra, negligence 14 Cal.4th at plaintiff’s part. 419-420, 423.) pp.

This issue the arises when failed to read the of the usually plaintiff terms contract, instead on the relying defendant’s as to the effect of representation it is not reasonable to fail to read a contract; the contract. Generally, this is true even if the relied on the defendant’s assertion that it plaintiff was not (Rosenthal, to read the contract. supra, necessary 423-424.) 14 Cal.4th at pp. Reasonable a diligence to read contract before it. requires party signing (Brookwood v. Bank America 1667, (1996) 45 1674 Cal.App.4th [53 of 515].) however, at This Cal.Rptr.2d that the were presumes, parties dealing arm’s length. When the are in a parties the same fiduciary relationship, v. degree diligence is not (Stafford required nonfiduciary party. Shultz 767, 777 (1954) 42 Cal.2d P.2d 1].) If the defendant is in a fiduciary [270 with the which relationship plaintiff the defendant the requires explain them,12 terms of a contract between the failure to read the contract plaintiff’s would be reasonable. (Lynch v. Cruttenden & Co. 802, (1993) 18 Cal.App.4th 636]; also Bruni v. 808-809 see Didion Cal.Rptr.2d (2008) [22 160 Rosenthal, 395]; Cal.App.4th 1291 supra, cf. Cal.Rptr.3d Cal.4th [73 situation, no [finding such fiduciary obligation].) In such a defendant failure to fiduciary’s its would perform constitute constructive duty (Van de fraud v. Bank Kamp America (1988) Cal.App.3d [251 530]), the Cal.Rptr. failure to read plaintiff’s the contract would be justifiable Mitchum, (Twomey Jones & Inc. Templeton, 262 Cal.App.2d 222]), and Cal.Rptr. [69 constructive fraud in the execution would be established. case,

In this the trial court found a existed fiduciary between relationship such that parties, Wells to “do more” to make required certain However, Browns understood Agreement. the court did not expressly make a existed, on finding whether constructive fraud stating this was an error; issue for the This was jury. court was to resolve the factual required arbitration, issues raised petition not compel determine simply whether sufficient evidence existed to to a We will go jury. therefore remand for the trial court to determine whether there was constructive fraud in the execution of the Agreement.

Wells that remand Fargo suggests is as there is unnecessary insuffi cient evidence to establish that it owed plaintiffs fiduciary duty explain First, the terms of the We agreement. there was disagree. sufficient evidence to the trial court’s of a support finding fiduciary relationship. “Fiduciary” 12 (Duffy v. scope fiduciary’s obligations of a vary according to the facts of the case. Cavalier 1517, (1989) 740].) Cal.App.3d 215 Cal.Rptr. 1535 [264 960 a between to existing parties are relationships

“confidential” relationships faith good to act with the utmost wherein one is bound duty transaction party when one arises ordinarily for the benefit of the other. Such a relationship other, and the other a confidence in integrity party reposes (Richelle Archbishop L. v. Roman Catholic that confidence. voluntarily accepts “ 601].) a (2003) person 106 270 Cal.Rptr.2d Cal.App.4th ‘[B]efore [130 he must either knowingly can be with a charged fiduciary obligation, another, or must enter into a act on behalf and for the benefit of undertake to ” (City as a matter of law.’ undertaking which relationship imposes Genentech, (2008) 43 Cal.4th Medical Center v. Inc. National Hope a as a matter of 142].) 181 P.3d An is agent fiduciary Cal.Rptr.3d [75 Inc., Mitchum, at v. Jones & (Twomey Templeton, supra, Cal.App.2d law. Cavalier, 709.) a as well. v. (Duffy supra, A stockbroker is fiduciary, p. “ relation- 1531.) ‘The essence of a or confidential fiduciary at p. Cal.App.3d terms, do not deal on because person is that the parties equal ship that trust and and confidence is and who accepts whom trust reposed exert influence over confidence is in a to superior position unique ” (Richelle L. v. Roman Catholic Archbishop, supra, dependent party.’ come into when 271.) at Fiduciary obligations “generally play Cal.App.4th p. concerns as to rise to give one is so substantial vulnerability equitable party’s (City afforded the law fiduciaries.” governing underlying protection Genentech, Inc., 43 Cal.4th at Medical Center v. supra, National Hope a set of factors rise 389.) single giving While it is impossible identify p. used to (id. 387-388), at some reasons generally fiduciary relationship pp. advanced that a to such a is vulnerable include demonstrate party relationship education, health, L. (Richelle lack of ill and mental weakness. age, youth, at Roman Catholic Archbishop, supra, Cal.App.4th p. fiduciary that a

Wells relies on stockbroker’s authority providing has been not until the brokerage agreement does arise relationship after executed, the time of additional and therefore does not disclosures require 425.) Yet (Rosenthal, 14 Cal.4th at the execution of that agreement. supra, case. of this factual circumstances argument this overlooks unique to the (1) months introduced evidence that for six prior Specifically, plaintiffs at Wells Fargo; had been the Browns’ manager Meeting, Tepper relationship declining limited and that his (2) knew that Ira Brown had vision Tepper slow”; him at the (3) biweekly health rendered “little worked Tepper office; to all of the (4) with access home Tepper provided Browns’ information, and their financial significant paper- Browns’ financial managed work; and an (5) attorney the Browns to an estate introduced Tepper advice; accountant; (7) the Browns investment gave Tepper Tepper handle their to retain Keleshian to insisted and the Browns urged repeatedly trial constitute sufficient evidence support stock These facts portfolio. court’s conclusion that Wells induced the Fargo, through Tepper,13 knowingly and elderly frail to on it to handle their financial increasingly rely couple affairs, thus a and creating fiduciary between Wells the relationship Fargo Browns. fraud,

We turn now to the issue of constructive or whether the scope of Wells Fargo’s fiduciary duty oral disclosure of the arbitration encompassed clause. A fiduciary owes an of the generally obligation highest faith. good Cavalier, v. (Duffy supra, at of a Cal.App.3d p. scope (Id. on fiduciary’s obligations facts of the depends case. specific include, 1535.) Such factors for may relative example, sophistication of the vulnerable (Apollo Fund LLC v. Roth Capital experience party. Partners, LLC Capital (2007) 246-247 Cal.App.4th Cal.Rptr.3d [70 case, 199].) In had, this introduced (1) evidence that Wells plaintiffs Fargo through taken on the Tepper, fiduciary handling Browns’ responsibility needs; months, financial (2) for Wells assisted the Browns in Fargo paying bills, their and therefore can be inferred to have understood that the Browns tasks; assistance with even required (3) financial rudimentary Wells Fargo knew of Ira Brown’s increasing that his limited frailty vision rendered him unable to read the document Wells Fargo was him to asking sign; (4) Wells knew that the Browns did not read the Agreement before execution; (5) who had Tepper, encouraged Browns to trust her to act interests, in their best at the in order to present Meeting make the facts, Browns feel “more court, comfortable.” These if the trial accepted by would the conclusion support that Wells Fargo’s to the fiduciary duty Browns not encompassed to treat the execution duty as an Agreement arm’s-length transaction and to instead the material terms of the explain Agreement to them.14 Maine,

The concerns raised Wells Fargo’s securities industry do not expert, a different result. compel Maine stated that it would be to contrary for a accepted industry practice stockbroker to read an agreement customer; aloud or it to a explain he also prospective asserted that it would be a mistake to require these nonattomeys contracts for interpret prospective customers. Our conclusion here does not that stockbrokers require generally read or customers; their initial explain agreements the decision prospective we reach in this matter involves no from law. We departure existing simply conclude that when the facts establish that an investment has professional 13When an employee fiduciary relationship establishes with a third party, employee’s Shearson, (See Black employer fiduciary. is also a Hammill & Co. 266 Cal.App.2d 157].) Cal.Rptr. 367 [72 remand, determine, On should the trial court resolving the motion compel arbitra tion, execution, Agreement is void for fraud in the this determination would not jury foreclose a trial on the Browns’ regarding Fargo’s causes of action allegedly Wells improper sale of the Sav-On stock. 962 induced a vulnerable voluntarily individual to trust and repose

previously has a toward fiduciary duty in the that confidence professional, professional disclose, in a individual, that to duty fully be may required by that understands, material terms of a contract between the individual the manner them.

DISPOSITION to arbitration is reversed The order defendants’ motion compel denying views with the remanded for further consistent the matter proceedings on shall bear their own costs appeal. in this parties expressed opinion. J., Klein, P. concurred.

KITCHING, J., arbitration the that the with Concurring. I agree majority the reasons stated was not unconscionable for at issue this case provision that the order the majority in the I also with majority’s agree opinion. reversed, and be defendants’ motion to arbitration should denying compel can adjudicate be remanded so that the trial court that the matter should I write separately constructive fraud defense to defendants’ motion. plaintiffs’ (brokers) to the of the duty to make clear views on of stockbrokers my scope I limit this opinion documents to their clients. would legal orally explain case. the unusual facts of this formed, not are generally

Where no has been brokers agency relationship or clause out to the customer the existence of an arbitration required point Fin. (Rosenthal v. Great Western the clause. the of explain consequences 875, 394, Securities Corp. 926 (1996) 14 Cal.4th 425-426 Cal.Rptr.2d [58 Co., Inc. see Rush v. & Oppenheimer (S.D.N.Y. 1988) (Rosenthal); P.2d 1061] Bank, N.A. (Rush); Castro v. Marine Midland F.Supp. Bear, & (Castro); Stearns Gouger (S.D.NY. 1988) 695 F.Supp. Rosenthal, Co., (Gouger).) Inc. 1993) In (E.D.Pa. 286-288 F.Supp. and its firm brokerage between a there was no “ongoing relationship” circumstances, we find “Under Our Court stated: these customers. Supreme extend to a broker fiduciary obligations no for authority proposition or clause to the existence of an arbitration the customer orally alerting (Rosenthal, of this 425.) at In its and effect.” meaning p. support explaining Rush, and Gouger. Castro statement, cited three federal cases: the court Castro, (Rosenthal, at In Rush whether 425-426.) the issue was pp. the initial arbitration clause in broker to disclose or an obligated explain cases, are held that “brokers In both court contract between parties. clauses to law to disclose or arbitration explain not as a matter of required Castro, (Rush, 1052; at customer.” at see p. p. an into entered Gouger, and a married couple firm brokerage clause choice of law and a arbitration clause an containing agreement to the services began the firm providing one year approximately after held 284.) The court nevertheless husband. (Gouger, supra, at 823 F.Supp. p. the consequences firm to explain of the brokerage the failure its a breach of clients was not clauses to the and choice of law arbitration (Id. 288.) Under Gouger, when brokers have even fiduciary duty. clients, necessarily do not their they with a fiduciary relationship developed an arbitration provision. have a to duty orally explain the rule, to orally not be obligated explain brokers should As a general a clients. “The broker has clause to their and effects of an arbitration meaning of a and management the investment regarding high degree expertise vast.” account; of the law is not as knowledge the broker’s discretionary Moreover, to (Gouger, supra, 288.) brokers requiring F.Supp. the to litigation lead to fact-intensive prior arbitration clauses could explain in writing clearly agreed arbitration even when the parties commencement of oral the broker provided could also arise as to whether to arbitrate. Disputes and, so, and fairness of if the adequacy disclosure of the arbitration provision could increase the door to such litigation the disclosure.1 Opening This would of the NASD arbitration process. cost and uncertainty complexity, with NASD brokers. or her not benefit investor his average disputes 935, Jevne v. Court Superior (2005) 35 Cal.4th (See Cal.Rptr.3d 959-960 [28 685, and it further the federal state 954].) policies 111 P.3d Nor would a relatively expeditious favoring resolving inexpensive disputes Inc. McMahon v. Express Shearson/American (See arbitration process. Moncharsh 185, 2332, 2337]; 220, v. S.Ct.

482 U.S. 225-226 L.Ed.2d [96 Heily 899].) & Blase 832 P.2d (1992) 3 Cal.4th Cal.Rptr.2d 9 [10 reasons, a on duty we be cautious before imposing For all of these should and other material to disclose arbitration orally brokers their firms When, however, a brokerage facts establish that to their clients. clauses a the firm regarding individual to trust in firm induced a vulnerable repose matters, an include may the firm’s fiduciary duty wide of financial range understands, disclose, in a manner the individual obligation fully the individual. Whether a between the firm and material terms of contract facts of the case. a arises on the particular such to disclose duty depends Act, when seq., 1 et United States Code section “[e]ven Under the Federal Arbitration employ general those general permitted courts are not using applicability, doctrines of state Bureau, (Iberia Credit scrutiny.” ways subject special arbitration clauses to doctrines in Therefore, (5th 2004) adjudicate when we Cingular Wireless Inc. Cir. 379 F.3d contract, we provision of a the enforcement of an arbitration constructive fraud defense to unless we also orally explain provision, the arbitration impose duty cannot on brokers to every provision material of the contract. duty to each and other impose respect the same with case, In this as in the explained majority’s opinion, relationship between defendants was far plaintiffs more extensive than the typical between a firm and relationship brokerage its clients. Under the facts unique case, Bank, N.A., of this Wells and its had a professional employees duty orally contract, disclose to the Browns material terms of the the arbitration including provision.

Case Details

Case Name: Brown v. Wells Fargo Bank, N.A.

Court Name: California Court of Appeal

Date Published: Nov 25, 2008

Citation: 85 Cal. Rptr. 3d 817

Docket Number: B196258

Court Abbreviation: Cal. Ct. App.