Case Information
*1 Before: DAUGHTREY and SUTTON, Circuit Judges; FORESTER, Chief District Judge. [*] _________________
COUNSEL ARGUED: P. Benjamin Duke, COVINGTON & BURLING, New York, New York, H. Nicholas Berberian, NEAL, GERBER & EISENBERG, Chicago, Illinois, for Appellants. Robert P. Duvin, DUVIN, CAHN & HUTTON, Cleveland, Ohio, for Appellee. ON BRIEF: P. Benjamin Duke, Laurence A. Silverman, Aaron R. Marcu, COVINGTON & BURLING, New York, New York, H. Nicholas Berberian, NEAL, GERBER & EISENBERG, Chicago, Illinois, Douglas V. Bartman, KAHN KLEINMAN, Cleveland, Ohio, Mark O’Neill, WESTON, HURD, FALLON, PAISLEY & HOWLEY, Cleveland, Ohio, for Appellants. Robert P. Duvin, Kenneth D. Schwartz, DUVIN, CAHN & HUTTON, Cleveland, Ohio, for Appellee.
_________________
OPINION
_________________
KARL FORESTER, Chief District Judge. The Defendants-Appellants appeal the District Court’s denial of their motion to compel arbitration. The District Court held that the arbitration provisions contained in five agreements between the Plaintiff-Appellee and the Defendants- Appellants were not enforceable because four of those provisions were fraudulently induced, based on oral representations made by a broker who worked for Appellants, and because a fifth agreement was superseded by subsequent criminal conduct and the other four agreements. We AFFIRM , in part, REVERSE , in part, and REMAND for further proceedings consistent with this opinion.
OVERVIEW
This appeal asks this Court to again review the Supreme Court’s decision in
Prima Paint
Corp. v. Flood & Conklin Mfg. Co.
,
JURISDICTION
We have jurisdiction over this interlocutory appeal pursuant to 28 U.S.C. §§ 1331, 1332 and 1367(a). Further, because the District Court denied the Appellants’ motion to stay this action pending arbitration pursuant to section 3 of the Federal Arbitration Act (“FAA”), 9 U.S.C. § 3, we also have jurisdiction under 9 U.S.C. § 16(a)(1)(A).
While a “claim of fraud in the inducement of the
entire contract
” is a matter to be resolved
by an arbitrator, “a claim of fraud in the inducement
of the arbitration clause itself
. . . the federal
court” has jurisdiction to adjudicate it.
Prima Paint Corp. v. Flood & Conklin Mfg. Co.
, 388 U.S.
at 402-04 (emphasis added).
C.B.S. Employees Fed. Credit Union v. Donaldson, Lufkin &
Jenrette Sec. Corp.
,
BACKGROUND
The Appellee, Samuel Glazer (“Glazer” or “Appellee”), brought this action against Appellants Lehman Brothers, Inc. and affiliated investment companies (the “Lehman Brothers” companies) and Appellants SG Cowen Securities Corp. and Societe Generale (the “SG Cowen” companies) (collectively, the “Appellants”) [1] based on the alleged theft of Frank Gruttadauria (“Gruttadauria”), a former employee and broker with the Appellants. Glazer had several investment accounts with the Appellants through Gruttadauria. [2] Gruttadauria engaged in a complex system of fraud and theft as an investment broker during his approximately fifteen years working for the Appellants and has previously pled guilty to criminal charges relating to this wrongdoing.
In 1998, Glazer established investment accounts with the Appellants through Gruttadauria. In doing so, Glazer signed four contracts with SG Cowen: an account agreement, a margin agreement, an option contract, and an account agreement in connection with a prior, 1996 Option Agreement (collectively, the “Account Agreements”). Prior to the creation of those accounts with Gruttadauria, Glazer signed an Option Agreement with SG Cowen through broker David Tissue in 1996 (the “Tissue Account” or the “1996 Option Agreement”). Each of these five agreements contain broad arbitration provisions [3] that are now at issue.
Glazer filed this action in 2002, seeking damages from the Appellants for Gruttadauria’s misconduct and theft. Specifically, Glazer brings claims under the Securities and Exchange Act, 15 U.S.C. § 78j(b), other federal securities laws and Ohio state law. The Appellants claim that Glazer’s claims should be submitted to arbitration pursuant to arbitration clauses contained in the five agreements.
This is the second time Glazer’s claims have been presented to this Court. Previously, his
claims were heard with six similar actions in a consolidated appeal,
Fazio v. Lehman Brothers, Inc.
,
In the prior appeal, a panel of this Court reversed the District Court’s refusal to enforce the various arbitration agreements contained in the investment contracts with the Appellants. . at 395. The only question presented in that interlocutory appeal was whether similarly worded arbitration clauses in the various plaintiffs’ brokerage account agreements mandated arbitration of their claims. . at 391. Because the panel could not reach the “fact-intensive issues” regarding whether the arbitration clauses were enforceable, it remanded each action for a case-by-case “determination of whether the arbitration clauses, analyzed independently from the account agreements, are valid.” . at 397-98. Thus, this Court specifically remanded with instructions to consider the particular claims of the plaintiffs regarding the validity of the arbitration clauses standing apart from the account agreements as a whole. . at 392.
Turning to the instant action, upon remand and following a period of discovery, the District Court held an evidentiary hearing on September 3, 2003, pursuant to 9 U.S.C. § 4. Subsequent to the hearing, on October 3, 2003, the District Court issued an Order and Memorandum Opinion that again denied the Appellants’ motions to stay pending arbitration. Specifically, the District Court held that: (1) the parol evidence rule did not bar consideration of Gruttadauria’s alleged oral promise to Glazer that SG Cowen would not enforce the arbitration provisions; (2) Glazer proved the elements of fraud in the inducement by clear and convincing evidence; and (3) the 1996 account agreement was superseded by Gruttaduaria’s subsequent fraud and, therefore, the arbitration provision therein was not binding upon Glazer. [J.A. at 244-261]
In reaching its decision, the District Court held that “the arbitration provisions must be treated as contracts separate and distinct from the broader account agreements.” [J.A. at 254] Yet, in reaching this conclusion, the District Court merely adopted Glazer’s position without explaining how or why it reached this conclusion; nor did the District Court cite any authority for this legal proposition. Notably, the District Court framed the issue as:
if an issue arises as to whether the parties intended to be bound by an alleged written contract, parol evidence is admissible to show that despite the writing, the parties did not enter any agreement. . . . [H]owever, if the parties generally intended to be bound by a written agreement, parol evidence is inadmissible to directly contradict one of its terms. The parties essentially dispute which situation is present in the current case.
[J.A. at 254] We find that the District Court properly identified the main issue, but, as discussed infra , engaged in an improper application of the appropriate rules.
Relying on
Prima Paint Corp. v. Flood & Conklin Mfg. Co.
,
Appellants SG Cowen filed a timely Notice of Appeal on October 6, 2003, and Appellants Lehman Brothers timely filed their Notice of Appeal on October 21, 2003.
LEGAL STANDARD
We review
de novo
the district court’s conclusions of law and determination on whether to
compel arbitration pursuant to the FAA.
Burden v. Check into Cash of Kentucky, LLC
, 267 F.3d
483, 487 (6th Cir.2001). A district court’s findings of fact are reviewed for clear error.
Great Earth
v. Simons
, 288 F.3d 878, 888 (6th Cir.2002). However, it is well-established that any doubts
regarding arbitrability must be resolved in favor of arbitration,
Fazio v. Lehman Bros., Inc.
, 340 F.3d
at 392, because there is a strong presumption in favor of arbitration under the FAA.
O.J. Distrib.,
Inc. v. Hornell Brewing Co.
,
Before this Court can send a case to arbitration, we must first determine whether a valid
agreement to arbitrate exists. 9 U.S.C. § 2;
Fazio v. Lehman Bros., Inc.
340 F.3d at 393. An
arbitration agreement may be voided for the same reasons for which any contract may be
invalidated, including forgery, unconscionability, and lack of consideration. . In making this
determination, “ordinary state-law principles that govern the formation of contracts” will apply to
this analysis. . at 394 (citing
First Options of Chicago, Inc. v. Kaplan
,
In this appeal, the Court is called upon, yet again, to examine
Prima Paint
and its application
to the validity of arbitration clauses when claims of fraudulent inducement are raised concerning the
making of those clauses, as opposed to the entire agreement. “[T]here is a general presumption of
arbitrability, and any doubts are to be resolved in favor of arbitration ‘unless it may be said with
positive assurance that the arbitration clause is not susceptible of an interpretation that covers the
asserted dispute.’”
Highlands Wellmont Health Network, Inc. v. John Deere Health Plan, Inc.
, 350
F.3d 568, 576-77 (6th Cir.2003) (quoting
AT & T Techs., Inc. v. Communications Workers of Am.
,
ANALYSIS
A. Overview Of The Federal Arbitration Act.
The Federal Arbitration Act (“FAA”) provides that arbitration clauses in commercial contracts “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. If a plaintiff’s cause of action is covered by an arbitration clause, the court must stay the proceedings until the arbitration process is complete. 9 U.S.C. § 3. In order to compel arbitration, a court must conduct a hearing, and:
upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement. . . . If the making of the arbitration agreement or the failure, neglect, or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereof.
9 U.S.C. § 4. Under this statutory scheme, the district court must make a number of threshold determinations before compelling arbitration:
[w]hen considering a motion to stay proceedings and compel arbitration under the Act, a court has four tasks: first, it must determine whether the parties agreed to arbitrate; second, it must determine the scope of that agreement; third, if federal statutory claims are asserted, it must consider whether Congress intended those claims to be nonarbitrable; and fourth, if the court concludes that some, but not all, of the claims in the action are subject to arbitration, it must determine whether to stay the remainder of the proceedings pending arbitration.
Stout v. J.D. Byrider
,
It is well-established that any doubts regarding arbitrability should be resolved in favor of
arbitration.
Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp.
,
In this case, the crux of the District Court’s decision was its legal conclusion that the arbitration provisions of the Account Agreements “must be viewed as distinct contracts subject to invalidity independent of the broader account agreements.” [J.A. at 254] Based on that finding, the District Court then decided that parol evidence, therefore, was admissible to show fraudulent inducement to be bound by the arbitration provisions. [J.A. at 254-55] Then, relying on Glazer’s oral testimony, the court found, by clear and convincing evidence, that Glazer proved his fraudulent inducement claim and the arbitration provisions could not be enforced. This appeal followed. [4]
Accordingly, the first issue presented is whether an arbitration clause itself constitutes an independent contract isolated from the agreement in which it is contained or whether such clause should be considered a “separate” contract. No panel of this Court has yet addressed this narrow question directly and, thus, the issue is one of first impression.
B. The District Court Erred By Concluding That The Arbitration Clauses Contained In The Account Agreements Are “Separate And Independent Contracts.” Section 2 of the FAA, 9 U.S.C. § 2, provides that an arbitration clause “shall be valid, irrevocable, and enforceable save upon such grounds as exist at law or in equity for the revocation of any contract .” . (emphasis added). The question presented in this appeal is whether this mandate, that an arbitration provision can be invalidated on the same grounds as the revocation of a contract, means that the arbitration provision is actually a “separate contract” or is merely to be examined “separate” from the overall contract at issue for the limited purpose of determining arbitrability.
The leading Supreme Court decision on this issue is
Prima Paint Corp. v. Flood & Conklin
Mfg. Co.
,
Under [section] 4, with respect to a matter within the jurisdiction of the federal courts save for the existence of an arbitration clause, the federal court is instructed to order arbitration to proceed once it is satisfied that “the making of the agreement for arbitration or the failure to comply (with the arbitration agreement) is not in issue.” Accordingly, if the claim is fraud in the inducement of the arbitration clause itself--an issue which goes to the “making” of the agreement to arbitrate--the federal court may proceed to adjudicate it.... We hold, therefore, that in passing upon a [section] 3 application for a stay while the parties arbitrate, a federal court may consider only issues relating to the making and performance of the agreement to arbitrate . Id . (footnotes omitted) (emphasis added).
In other words, a district court is instructed to order arbitration to proceed once it is satisfied
that “the making of the agreement for arbitration or the failure to comply (with the arbitration
agreement) is not in issue.”
Id
. at 403. Thus, even if there was fraudulent inducement to sign the
contract as a whole, by the terms of Sections 3 and 4 of the FAA, the arbitration clause is severable
and will only be voided for some error in its making.
Fazio v. Lehman Bros., Inc.
,
This Circuit has interpreted
Prima Paint
to mean that arbitration clauses are “separable” from
the contracts in which they are included when examining whether those provisions were fraudulently
induced. ,
e.g.
,
Burden v. Check into Cash
,
For the reasons discussed herein, arbitration provisions, although severable insofar as they are considered in determining whether a contractual dispute should be submitted to arbitration, are not “separate, independent and distinct contracts.” Although Prima Paint clearly requires courts to separately examine arbitration clauses, those clauses should not be considered as “separate contracts” outside of the underlying agreement.
To begin, various courts have routinely discussed why arbitration provisions are not subject
to scrutiny as independent contracts in other contexts. For example, in
Wilson Electrical
Contractors, Inc. v. Minnotte Contracting Corp.
,
Similarly, other circuits have held that “mutuality” is not a requirement of a valid arbitration
clause. ,
e.g.
,
Harris v. Green Tree Financial Corp.
,
indicated only that arbitration clauses are ‘separable’ from void or voidable provisions of a contract – not that they are independent contracts . Although we consider an arbitration clause separately for the limited purpose of evaluating a claim of fraudulent inducement, we do not do so for all purposes. . (emphasis added). Thus, the Court ultimately decided that mutuality of obligation was not
required to enforce an arbitration agreement if the underlying contract is supported by consideration. . at 451-53.
Similar decisions implying that arbitration provisions are not separate, independent contracts
were reached in
Barker v. Golf U.S.A., Inc.
,
If arbitration clauses cannot be considered “independent contracts” when examining contractual formation issues, like mutuality or consideration, how much more so should such provisions not be considered “separate contracts” when examining other enforceability issues, such as when examining whether an arbitration clause was fraudulently induced. In other words, based on the foregoing, it is clear to us that arbitration clauses should not be considered “separate contracts” at all. Rather, in accordance with Prima Paint , arbitration agreements contained in larger contracts should be considered “separate” from the contract only insofar as a federal court (as opposed to the arbitrator) can examine whether the arbitration clause was fraudulently induced or is otherwise unenforceable.
C. The District Court Erred In Deciding That The Parol Evidence Rule Did Not Bar Glazer’s Testimony.
During the evidentiary hearing before the District Court, Glazer testified that Gruttadauria promised or represented to him that the arbitration provisions contained in the Account Agreements would not be enforced against him, as the Account Agreements were mere formalities to the creation of the accounts with the Appellants. Based on this extrinsic evidence, Glazer now asserts that the arbitration provisions in the Account Agreements are not enforceable because they were fraudulently induced.
Conversely, the Appellants argue that allegations of fraudulent inducement of a specific provision in an agreement, such as those made by Glazer herein, cannot be used to contradict the terms and provisions of a signed, written contract. They further argue that the parol evidence rule bars Glazer’s evidence of fraudulent inducement as a matter of law. Specifically, they contend that testimony and extrinsic evidence regarding Gruttadauria’s alleged oral assurances that SG Cowen would not enforce the arbitration clauses, which directly contradicts the written terms of the executed account agreements, are not admissible to prove any agreement that contradicts the written terms of the Account Agreements.
Generally,
[w]hen two parties have made a contract and have expressed it in a writing to which they have both assented as the complete and accurate integration of that contract, evidence, whether parol or otherwise, of antecedent understandings and negotiations will not be admitted for the purpose of varying or contradicting the writing. 3A Corbin, Contracts § 573 at 357 (1960). The parol evidence rule, as construed by Ohio courts, states “absent fraud, mistake or other invalidating cause, the parties’ final written integration of their agreement may not be varied, contradicted or supplemented by evidence of prior or contemporaneous oral agreements, or prior written agreements.” Galmish v. Cicchini , 734 N.E.2d 782, 788 (Ohio 2000) (citing 11 Williston on Contracts 569-70, § 33.4 (4 Ed.1999)). Thus, absent fraud, mistake or some other invalidating cause, prior or contemporaneous oral agreements may not be used to alter, contradict, contest, or vary an integrated written agreement. Galmish , at 788. Contrary to its name, this rule is one of substantive contractual, not evidentiary, law. .
In Galmish , the most recent Ohio opinion discussing the parol evidence rule at length, the Ohio Supreme Court considered whether the plaintiff’s claims were barred by that rule. Specifically, the issue in Galmish was whether parol evidence was admissible to prove a breach of contract claim when the written contract at issue imposed no affirmative duties to engage in certain performance. The court ultimately found that the parol evidence rule did not bar evidence of the breach of contract claim because the extrinsic evidence went to the making of the contract, not to a provision of that contract. Explaining the nature, history and application of this rule, the court stated:
The parol evidence rule, as is now universally recognized, is not a rule of evidence
but is one of substantive law. It does not exclude evidence for any of the reasons
ordinarily requiring exclusion, based on the probative value of such evidence or the
policy of its admission. The rule as applied to contracts is simply that as a matter of
substantive law, a certain act, the act of embodying the complete terms of an
agreement in a writing (the ‘integration’), becomes the contract of the parties. The
point then is, not how the agreement is to be proved, because as a matter of law the
writing is the agreement. Extrinsic evidence is excluded because it cannot serve to
prove what the agreement was, this being determined as a matter of law to be the
writing itself. The rule comes into operation when there is a single and final
memorial of the understanding of the parties. When that takes place, prior and
contemporaneous negotiations, oral or written, are excluded; or, as it is sometimes
said, the written memorial supersedes these prior or contemporaneous negotiations.
. at 788-89 (citation omitted);
accord Watkins & Son Pet Supplies v. Iams Co.
,
of terms of the agreement; instead, it provides that parol terms are not terms of the agreement at all”). The principle policy behind the rule is to protect the integrity and purpose of written agreements. Galmish , at 789 (citation omitted).
However, under Ohio law, “the parol evidence rule does not prohibit a party from
introducing parol or extrinsic evidence for the purpose of proving fraudulent inducement.” .
But
cf. Coal Resources, Inc. v. Gulf & Western Indus., Inc.
,
[t]he principle which prohibits the application of the parol-evidence rule in cases of fraud inducing the execution of a written contract* * * has been regarded as being as important and as resting on as sound a policy as the parol-evidence rule itself. It has been said that if the courts were to hold, in an action on a written contract, that parol evidence should not be received as to false representations of fact made by the plaintiff, which induced the defendant to execute the contract, they would in effect hold that the maxim that fraud vitiates every transaction is no longer the rule; and such a principle would in a short time break down every barrier which the law has erected against fraudulent dealing.
Fraud cannot be merged; hence the doctrine, which is merely only another form of
expression of the parol-evidence rule, that prior negotiations and conversations
leading up to the formation of a written contract are merged therein, is not applicable
to preclude the admission of parol or extrinsic evidence to prove that a written
contract was induced by fraud.
. at 789 (citation omitted) (emphasis added). In other words:
It was never intended that the parol evidence rule could be used as a shield to prevent
the proof of fraud, or that a person could arrange to have an agreement which was
obtained by him through fraud exercised upon the other contracting party reduced
to writing and formally executed, and thereby deprive the courts of the power to
prevent him from reaping the benefits of his deception or chicanery.
. (citation omitted).
also F.W. Dodge Corp. v. Fultz
,
(“it is nevertheless clear that the parol evidence rule does not preclude a party from s[h]owing that a writing which apparently constitutes a contract, was not intended or understood by either party to be binding upon them”).
Yet, notwithstanding the foregoing principles, this rule may not be side-stepped by a fraudulent inducement claim which alleges that the inducement to sign the writing was a promise, the terms of which are directly contradicted by the signed writing . Accordingly, an oral agreement cannot be enforced in preference to a signed writing which pertains to exactly the same subject matter, yet has different terms. Galmish , at 790 (citation omitted) (emphasis added). Stated differently, under Ohio law,
[t]he Parol Evidence Rule will not exclude evidence of fraud which induced the written contract. But, a fraudulent inducement case is not made out simply by alleging that a statement or agreement made prior to the contract is different from that which now appears in the written contract. Quite to the contrary, attempts to prove such contradictory assertions is exactly what the Parol Evidence Rule was designed to prohibit.
Id
. (citation omitted). Accordingly, “the parol evidence rule does apply ‘
to such promissory fraud
if the evidence in question is offered to show a promise which contradicts an integrated written
agreement. Unless the false promise is either independent of or consistent with the written
instrument, evidence thereof is inadmissible.’”
Id
. at 790-91 (citation omitted)(emphasis added).
See Watkins & Son Pet Supplies v. Iams Co.
,
As in
Watkins
, Glazer’s claim is not one alleging a fraudulent misstatement of fact, but one
alleging “a fraudulent promise of future performance that is within the scope of the subject matter
of the written contract but that was not included in it.”
Watkins
,
In
Watkins
, this Court examined a promissory fraud claim in which the plaintiff alleged that
it was fraudulently induced into signing an agreement based on a promise of future performance by
the defendant which was not included in the contract and which the defendant failed to fulfill.
Id
.
Relying on
Galmish
, the Court held that parol evidence was not admissible to show “a promise
which contradicts an integrated written agreement.”
Id
. (quoting
Galmish
,
Similarly, in
Coal Resources
, 756 F.2d 443, this Court held that parol evidence was
admissible to show that the promisor had no intention of performing the promises that
were included
in the agreement
, but was not admissible to show that the promisor had no intention of performing
the promise that
was not included in the agreement
. . at 446-47. Finally, the parol evidence
admitted in
Galmish
,
In reaching its decision in this case, the District Court relied on
F.W. Dodge Corp. v. Fultz
,
Similarly, in
Donaldson
,
In this case, Glazer seeks to introduce evidence of a promise that directly contradicts a term
of the integrated written agreement. Here, the parties have not disputed, and we therefore assume,
that the Account Agreements at issue are integrated contracts.
[6]
Further, Glazer is not asking us to
invalidate the contract on the ground that SG Cowen had no intention of performing it. Instead, he
is asking us to admit evidence to show that Gruttaduaria made an oral promise not to enforce the
arbitration clause - a promise directly contradicted by the language of the agreement.
See Galmish
,
Thus, the distinction regarding whether an arbitration provision is a separate, distinct contract or whether it is merely “severable” in determining whether to send a dispute to arbitration, as discussed supra , becomes critical. In this case, it is undisputed that Glazer freely signed the Account Agreements that contained arbitration clauses allowing the Appellants to elect to arbitrate any controversy or claim arising out of or relating to the contracts or the breaches thereof. [J.A. at 811-18] Further, the Account Agreements also each contain a clause providing that these “Agreement[s] [are] not subject to any oral modification and it may only be amended or modified in a writing signed by [SG Cowen].” [J.A. at 811-18]
It is clear that, under Ohio law, the parol evidence rule prohibits a party from challenging the terms of a written contract through the use of extrinsic evidence, such as that proffered by Glazer in this case. Accordingly, based upon Ohio law and the facts of this case, Glazer cannot challenge the enforceability of the arbitration provisions within the Account Agreements through the use of parol evidence. See Galmish , at 791. As a result, the District Court erred as a matter of law when it held that parol evidence was admissible to prove that Glazer was fraudulently induced to agree to the Account Agreements containing the arbitration clauses at issue. Thus, it was also error when it considered Glazer’s testimony regarding Gruttadauria’s oral promises that the arbitration provisions would not be enforced. D. The District Court Erred In Finding That Glazer Was Fraudulently Induced To Sign The Account Agreements Containing Arbitration Clauses.
As a result of the District Court’s reliance upon Glazer’s oral testimony, it concluded that
Glazer had sufficiently proven that he was fraudulently induced to sign the arbitration provisions
at issue. [J.A. at 250-61] In reaching its decision, the District Court relied wholly upon that oral
testimony. [J.A. at 246, 248-49, 250-51, 255, 256-61] As stated above, Glazer’s oral testimony,
being parol evidence, was inadmissible and should not have been relied upon in examining the
Appellants’ motion to stay pending arbitration. Absent this inadmissible parol evidence, there is
insufficient evidence in the record for any factual finding of fraudulent inducement
[7]
in the making
of the arbitration provision. In fact, this parol evidence appears to be the
only
evidence relied upon
by the District Court in reaching its decision. As a result, the elements of fraudulent inducement
cannot be satisfied. The Court thus finds that the District Court’s factual findings as to the
fraudulent inducement claim were clearly erroneous.
See
,
e.g., Great Earth v. Simons
,
Accordingly, there being no admissible evidence to support the fraudulent inducement claim,
a valid agreement to arbitrate exists pursuant to the arbitration clauses contained in the four Account
Agreements. As a result, Glazer’s claims against the Defendants-Appellants are covered by
enforceable arbitration clauses, and the District Court should have stayed this matter until the
arbitration process was complete.
See
9 U.S.C. § 3. Its decision was not in accord with the FAA’s
mandate and innumerable decisions from this Circuit favoring arbitration agreements and resolving
doubts about arbitrable issues in favor of arbitration and, therefore, cannot be sustained. ,
e.g.
,
Masco Corp. v. Zurich North American Ins. Co.
,
E. The District Court Did Not Err In Holding That The Arbitration Clause Contained In The 1996 Option Agreement Was Rendered Unenforceable Because It Was Modified And/Or Superceded By Subsequent Events And/Or Conduct.
The Appellants also contend that the District Court erred in holding that the 1996 Option Agreement and the arbitration provision contained therein was not applicable to this case. [J.A. at 260] The District Court found that “[w]hatever obligations [the 1996 Options Agreement] may have imposed initially, this agreement was superseded by Gruttadauria’s conduct in 1998. In 1998, the Tissue account was effectively closed and all the assets were transferred to the new Gruttadauria account.” As a result, the court held that the Options Agreement for the defunct Tissue Account cannot be used to side step Gruttadauria’s later representations. [J.A. at 260.]
It is undisputed that the 1998 Account Agreements effectively closed the Tissue Account and transferred the Tissue Account assets into new accounts with the Appellants under Gruttadauria’s management. It is a fundamental precept of contract law that parties may agree to discharge or terminate a contract in favor of creating a second agreement to replace the former, and, when that occurs, the initial agreement is superceded and is no longer enforceable as to any party thereto. See 3A Corbin on Contracts § 574 (1960); Restatement (Second) of Contracts §279 (1979); 17A Am.Jur.2d Contracts § 539 (2004). Thus, as noted in the Restatement, parties may substitute one contract for another, thereby discharging the pre-existing duty of the one party and extinguishing the other’s right to enforce the original duty. Restatement (Second) of Contracts § 279.
In the case sub judice , when the parties agreed to close the Tissue Account and terminate the 1996 Option Agreement, the parties substituted one of the 1998 Account Agreements for the 1996 Option Agreement. The arbitration clause contained in the 1996 Option Agreement was legally substituted, and therefore superseded, by the subsequent Account Agreements. Thus, any arbitration provision in the 1996 Option Agreement is no longer enforceable and is inapplicable to this action. As a result, the Court need not address whether Gruttadauria’s subsequent criminal conduct superceded the 1996 Option Agreement because the substitution of the four Account Agreements supercedes the 1996 arbitration provision.
Therefore, the District Court’s decision on this issue must be sustained.
CONCLUSION
Accordingly, for the reasons discussed supra , we will AFFIRM, in part, REVERSE, in part, and REMAND this case for proceedings not inconsistent with this opinion.
Notes
[*] The Honorable Karl S. Forester, Chief United States District Judge for the Eastern District of Kentucky, sitting by designation.
[1] Lehman Brothers purchased the assets and accounts of SG Cowen’s Cleveland, Ohio office, including those owned by Glazer, in October 2000.
[2]
Under Ohio law, “a fiduciary relationship is ‘a relationship in which ... [one reposes] special confidence and trust
... in the integrity and fidelity of another,’ thereby creating ‘a position of superiority or influence, acquired by virtue of
this special trust.’”
Andersons, Inc. v. Consol, Inc.
,
[3] The broad arbitration clauses in the Account Agreements provide that “[a]ny controversy arising out of or relating to [Appellee Glazer’s] accounts . . shall be settled by arbitration.” [J.A. at 811-18] The 1996 Option Agreement contains similar language. [J.A. at 809]
[4]
Unfortunately, this case is indicative of the exact problem that Congress intended to eliminate by passing the FAA.
Specifically, Congress intended that arbitration “be speedy and not subject to delay and obstruction in the courts.”
Prima
Paint
,
[5]
For a discussion of the distinction between fraud in the factum and promissory fraud in the inducement under Ohio
law
see Williams v. Edwards
,
[6] The parties have not raised any issue regarding whether the agreements are integrated, written contracts. While a prerequisite to the parol evidence rule is that the contract must be a complete and accurate integration of the parties’ agreement, a document that appears, on its face, to be a complete and accurate integration will sufficiently meet this requirement. , e.g. , National City Bank, Akron, v. Donaldson ,642 N.E.2d at 60 .
[7]
Under Ohio law, a Plaintiff must prove six elements in order to prove fraudulent inducement. He must prove by
clear and convincing evidence that: (1) a representation, or where there is a duty to disclose, a concealment of fact; (2)
which is material in nature; (3) was made falsely with knowledge of its falsity or with utter disregard or recklessness as
to whether it is true or false that knowledge may be inferred; (4) with the intent of misleading another to rely upon said
misrepresentation or concealment; (5) which results in justifiable reliance upon that representation or concealment; and
(6) proximately causing some injury.
Davis v. Sun Refining and Marketing Co.
,