Opinion
An investment advisor and related defendants appeal the order denying their petition to compel an investor’s successor in interest to arbitrate claims alleging the defendants mismanaged the investor’s accounts. The trial court denied the petition on the grounds that the claims against two of the six defendants were not subject to arbitration because those defendants were not parties to any arbitration agreement, and that there was a possibility of
I
FACTUAL AND PROCEDURAL BACKGROUND
A. The Arbitration Agreements
Before her death, Katherine W. Thomas, an elderly widow, opened three investment accounts with defendants Ameriprise Financial Services, Inc. (AFSI),
Katherine opened the first investment account in her capacity as trustee of the John W. and Katherine W Thomas Family Trust (the Family Trust). A form Katherine signed when she opened this account acknowledged she had received and read the “Brokerage Client Agreement” and agreed to abide by its terms and conditions. The Brokerage Client Agreement contains the following arbitration clause: “Any controversy arising out of, or relating to, my accounts, to transactions with you or your Broker and/or employees for me or to this agreement or the breach thereof, shall be settled by arbitration and conducted pursuant to the Federal Arbitration Act, before the American Arbitration Association or the National Association of Securities Dealers Inc., Chicago Stock Exchange Inc., the New York Stock Exchange, the American Stock Exchange to the extent you may be a member of such exchange or the Municipal Securities Rulemaking Board or the independent nonindustry arbitration forum as I may elect.” Katherine later signed a “Client Service Agreement” for this account. The Client Service Agreement contains an arbitration clause nearly identical to the one in the Brokerage Ghent Agreement quoted above; the only differences are that the arbitration clause of the Client Service Agreement substitutes “Client’s Service Account” for “my accounts” and “Sponsor or Sponsor’s agents” for “you or your Broker.”
Katherine opened the second investment account in her individual capacity. Katherine again signed a Client Service Agreement, which contained an arbitration clause identical to the one contained in the Client Service Agreement pertaining to the first account.
Katherine opened the third investment account in her capacity as trustee of the Family Trust. As part of the transaction, Katherine signed a form
B. The Complaint
After Katherine died, her son, plaintiff John D. Thomas, succeeded Katherine as trustee of the Family Trust; became her successor in interest (Code Civ. Proc., § 377.11); and filed this action. Initially, John sued only Westlake; Westlake’s firm, Westlake, Grahl and Glover (WGG); and AFSI. He later amended the complaint to add as defendants AFI; and two insurance companies, IDS Life Insurance Company (IDS) and RiverSource Life Insurance Company (RiverSource),
C. The Petition to Compel Arbitration
In response to the original complaint, Westlake, WGG and AFSI requested that John submit his claims to arbitration pursuant to the arbitration clauses in the account agreements Katherine signed, but John refused. Westlake, WGG and AFSI therefore petitioned the trial court to compel arbitration and also moved the court to stay proceedings until arbitration was completed. (See Code Civ. Proc., §§ 1281.2, 1281.4.) After John amended the complaint to add AFI, IDS and RiverSource as defendants, all defendants filed an amended petition to compel arbitration and again moved for a stay of proceedings. Defendants again sought an order “compelling [John] to submit all of his claims ... to binding arbitration”; and, in accordance with the terms of the various arbitration clauses authorizing AFSI to select a forum when the
In support of the amended petition, defendants submitted a declaration from Westlake which attached copies of the arbitration provisions described in part LA., ante. Defendants also submitted a declaration from their attorney which attached correspondence showing their attorney had asked John’s attorney to stipulate to arbitration, but he refused.
John opposed the amended petition primarily on the grounds that (1) his claims against WGG, AFI, IDS and RiverSource are not subject to arbitration because these defendants are not signatories to any arbitration agreement, and may not arbitrate before FINRA because they are not members of FINRA or associated persons of members, and (2) if arbitration of his claims against Westlake and AFSI were ordered, there would be a possibility of conflicting rulings on common questions of law and fact. (See Code Civ. Proc., § 1281.2, subd. (c).) John also argued he did not have to arbitrate because this case is a “technical insurance dispute,” and as such is expressly excepted from arbitration by FINRA’s rules.
In reply to John’s opposition to the amended petition to compel arbitration, defendants submitted various printouts from FINRA’s Web site, which purported to show that: Westlake is a broker registered with AFSI; AFSI and IDS are members of FINRA; and “a sister company” of RiverSource is regulated by FINRA. Defendants also argued that they were all subject to and entitled to enforce the arbitration clauses, regardless of their membership in FINRA.
The trial court denied the amended petition to compel arbitration. In its minute order, the court noted that the contractual right to compel arbitration “may have to yield if there is an issue of law or fact common to the arbitration and a pending action or proceeding with a third party and there is a possibility of conflicting rulings thereon.” (See Code Civ. Proc., § 1281.2, subd. (c).) Because IDS and RiverSource were not parties to any of the arbitration agreements and there was no evidence they were third party beneficiaries entitled to enforce the agreements, the trial court concluded, “The difficulty of splitting up the claims coupled with the potential for inconsistent rulings mandates denial of this motion in total.” The court did not specifically address the parties’ arguments concerning each defendant’s status as a member of FINRA or as an associated person of a member.
DISCUSSION
Defendants contend the trial court erred in denying the amended petition to compel arbitration. They rely on theories of agency,
A. The Trial Court Erred by Relying on Code of Civil Procedure Section 1281.2, Subdivision (c) to Deny the Amended Petition to Compel Arbitration Because All Defendants Are Entitled to Enforce the Arbitration Clauses as Parties to the Agreements Containing the Clauses or as Agents of Such Parties
The primary issue on appeal is whether the trial court properly refused to compel arbitration on the ground that “[a] party to the arbitration agreement is also a party to a pending court action . . . with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact.” (Code Civ. Proc., § 1281.2, subd. (c).) As used in section 1281.2, subdivision (c), the term “third party” means a party to the action that is not bound by or entitled to enforce the arbitration agreement. (See Laswell v. AG Seal Beach, LLC (2010)
As a threshold matter, the parties dispute the applicable standard of review. Defendants urge us to apply a de novo standard. John contends we must apply the substantial evidence standard to the trial court’s finding on whether an enforceable arbitration agreement exists and the abuse of discretion standard to the court’s decision not to order arbitration in reliance on Code of Civil Procedure section 1281.2, subdivision (c). We agree with defendants. To determine which defendants may enforce the arbitration clauses of the agreements Katherine signed, we need only examine those agreements and John’s complaint. Because the contents of these documents are not in dispute, whether defendants have a right to compel arbitration presents a question of law for us to decide de novo. (E.g., Molecular Analytical Systems v. Ciphergen Biosystems, Inc. (2010)
2. All Defendants Are Entitled to Enforce the Arbitration Agreements as Parties Thereto or as Alleged Agents of Such Parties
Turning to the merits, we begin by noting the general rule that only a party to an arbitration agreement is bound by
There are, however, “exceptions to the general rule that a nonsignatory . . . cannot invoke an agreement to arbitrate, without being a party to the arbitration agreement.” (Westra, supra,
John contended at oral argument, however, that the allegations of agency he made in the operative complaint cannot be used to require him to arbitrate his claims against the defendants which are not parties to any of the agreements Katherine executed. According to John, agency is only a theory of tort liability by which he may hold those defendants responsible for the wrongdoing that allegedly arose out of the relationship created by those agreements. We disagree. Having alleged all defendants acted as agents of one another, John is bound by the legal consequences of his allegations. (See Westra, supra,
3. All Defendants May Arbitrate Before FINRA
John also contended in his supplemental letter brief that the cases holding an agent may enforce an arbitration agreement of its principal “do not address the issue of FINRA rules and for that reason, they are not controlling.” According to John, even if the agency allegations would otherwise entitle defendants to compel arbitration, here arbitration cannot be ordered because defendants specifically requested arbitration before FINRA, but not all defendants are members of FINRA or associated persons of such members entitled to proceed in that fomm. In support of this contention, John cites rules Nos. 12200, 12201 and 12202 of FINRA’s Code of Arbitration Procedure for Customer Disputes (FINRA rules Nos. 12200, 12201, 12202).
The parties agreed in their written submissions that at least one defendant, AFSI, is a FINRA member. At oral argument, John conceded that AFI is also a FINRA member, and that Westlake and his firm, WGG, are “associated persons” within the meaning of FINRA’s arbitration rules. (See fn. 8, ante.) There is also no dispute that Katherine (whom John represents in this action) was a “customer” within the meaning of FINRA rule No. 12200, because she had an account with AFSI. (See Wachovia Bank, N.A. v. VCG Special Opportunities Master Fund, Ltd. (2d Cir. 2011)
Here, the operative complaint alleged that each defendant was the agent of every other defendant. For purposes of FINRA rule No. 12200, courts hold that “[w]hen an investor deals with a member’s agent or representative, the investor deals with the member.” (Multi-Financial Securities Corp. v. King (11th Cir. 2004)
We are not persuaded by John’s argument that IDS and RiverSource, being neither members of FINRA nor associated persons of members, have no right to compel arbitration because John has “not entered into a post-dispute agreement to arbitrate the dispute with them before FINRA.” In making this argument, John relies on inapplicable FINRA arbitration rules and a factually inapposite case applying a predecessor to one of those rules.
John first relies on FINRA rule No. 12201. That rale concerns elective arbitration and provides that a customer may arbitrate a dispute with a member, associated person or other related party before FINRA if, among other conditions, the parties agree in writing to submit the dispute to arbitration after the dispute arises. (See fin. 8, ante.) Thus, FINRA rale No. 12201 simply recognizes that under certain conditions, parties without an existing arbitration agreement are free to enter into an agreement to arbitrate a dispute before FINRA after a dispute arises. FINRA rale No. 12201 says nothing about the circumstances of this case, which involves the enforcement of existing agreements requiring arbitration of a dispute that arose after execution of the agreements. The situation presented by this case is governed by FINRA rale No. 12200, which concerns mandatory arbitration and does not require an additional postdispute agreement. (Fn. 8, ante-, see Code Civ. Proc., § 1281 [“A written agreement to submit to arbitration an existing controversy or a controversy thereafter arising is valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract.” (italics added)].)
John next relies on FINRA rale No. 12202 and the predecessor NASD rale considered in Provencio, supra,
Accordingly, we hold that all defendants are parties, or alleged agents of parties, to the various account agreements Katherine signed, and on that basis are entitled to enforce the arbitration clauses contained in those account agreements and to arbitrate before FINRA.
B. All of the Claims Pleaded in the Operative Complaint Are Arbitrable
John also argues we may affirm the order denying defendants’ amended petition to compel arbitration on the ground this case is a dispute over a
Under FINRA rule No. 12200’s exception for insurance disputes, “where the dispute is ‘insurance-only’ or even ‘intrinsically insurance’ it falls beyond the scope of arbitration.” (In re Prudential Ins. Co. of America Litigation (3d Cir. 1998)
To be sure, the investments of which John complains were replacement annuities and insurance policies purchased from IDS and RiverSource, both of which are insurance companies. But, “courts have determined that the exception may not be triggered simply because the dispute involves an insurance company.” (Wojcik v. Aetna Life Ins. & Annuity Co. (N.D.I11. 1995)
C. The Trial Court Must Order Arbitration and Also Stay Proceedings Pending Arbitration
For the reasons stated above, we hold the trial court erred in denying defendants’ amended petition to compel arbitration. Because defendants established “the existence of a written agreement to arbitrate a controversy” and John’s “refus[al] to arbitrate such controversy,” the trial was required to order arbitration. (Code Civ. Proc., § 1281.2; see Coast Plaza Doctors Hospital v. Blue Cross of California (2000)
We also hold the trial court must grant defendants’ related motion to stay the action. “If a court of competent jurisdiction . . . has ordered arbitration of a controversy which is an issue involved in an action . . . pending before a court of this State, the court in which such action ... is pending shall, upon motion of a party to such action . . . , stay the action . . . until an arbitration is had in accordance with the order to arbitrate . . . .” (Code Civ. Proc., § 1281.4, italics added.) This language requires a court to grant a party’s motion to stay when the court has ordered arbitration of an issue in the action. (Heritage Provider Network, Inc. v. Superior Court (2008)
DISPOSITION
The order denying defendants’ petition to compel arbitration is reversed. The matter is remanded to the trial court with directions to enter a new and
Haller, Acting P. J., and Aaron, J., concurred.
Notes
When Katherine opened the accounts, AFSI was known as American Express Financial Advisors, Inc.
According to the first amended complaint, IDS changed its name to RiverSource “and these companies are one and the same.”
FINRA is “the self-regulatory organization for securities broker-dealers and successor to the National Association of Securities Dealers (NASD).” (Valentine Capital Asset Management, Inc. v. Agahi (2009)
Because the agency issue appeared dispositive to us but was mentioned only in passing in defendants’ briefs, we requested and have considered supplemental briefs from the parties on the issue. (See Gov. Code, § 68081.)
John, who is acting as Katherine’s successor in interest and as successor trustee of the Family Trust, is bound by the arbitration provisions of the agreements Katherine signed. A decedent’s successor in interest steps into the decedent’s position as to a particular action. (Exarhos v. Exarhos (2008)
Code of Civil Procedure section 1281.2 provides: “On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless it determines” that a specified exception applies. (Italics added.) The statute thus presumes the party seeking arbitration and the party refusing to arbitrate are both parties to the arbitration agreement.
Some of the arbitration clauses introduced by defendants require arbitration be “conducted pursuant to the Federal Arbitration Act.” This does not require us to apply federal law in determining defendants’ right to compel arbitration, however. Even when the Federal Arbitration Act (9 U.S.C. § 1 et seq.) applies, state law governs such matters as who is bound by and who may enforce an arbitration agreement. (Arthur Andersen LLP v. Carlisle (2009)
FINRA rule No. 12200 (Arbitration Under an Arbitration Agreement or the Rules of FINRA) provides: “Parties must arbitrate a dispute under the Code if: HD [(a)] Arbitration under the Code is either: HQ (1) Required by a written agreement, or HQ (2) Requested by the customer; HQ [(b)] The dispute is between a customer and a member or associated person of a member; and HQ [(c)] The dispute arises in connection with the business activities of the member or the associated person, except disputes involving the insurance business activities of a member that is also an insurance company.”
FINRA rule No. 12201 (Elective Arbitration) provides: “Parties may arbitrate a dispute under the Code if: HQ [(a)] The parties agree in writing to submit the dispute to arbitration under the Code after the dispute arises; and HQ [(b)] The dispute is between a customer and a member, associated person of a member, or other related party; and HQ [(c)] The dispute arises in connection with the business activities of a member or an associated person, except disputes involving the insurance business activities of a member that is also an insurance company.”
FINRA rule No. 12202 (Claims Against Inactive Members) provides: “A claim by or against a member in one of the following categories is ineligible for arbitration under the Code unless the customer agrees in writing to arbitrate after the claim arises: HQ [(a)] A member whose membership is terminated, suspended, cancelled or revoked; HQ [(b)] A member that has been expelled from FINRA; or HQ [(c)] A member that is otherwise defunct.”
According to FINRA’s “Glossary of Arbitration Terms,” “associated person” means “any person engaged in the investment banking or securities business who is directly or indirectly controlled by a FINRA member, whether or not [the person is] registered or exempt from registration with FINRA.”
At oral argument John briefly suggested that participants in an arbitration before FINRA must execute a “uniform submission agreement” before proceeding. He has not directed us to, and we have not found, any reference to such an agreement in the arbitration provisions of the contracts Katherine executed, in the few FINRA arbitration rules John submitted to the trial court or elsewhere in the record. Nor has John cited any authority in support of an argument that execution of a separate “uniform submission agreement” is required before parties with a predispute arbitration agreement may arbitrate before FINRA. Such an argument would be contrary to the rule that although “generally a submission agreement is a prerequisite to the commencement of a valid arbitration proceeding,” where, as here, “ ‘the parties have executed an arbitration agreement, they undoubtedly may use it as a submission agreement as soon as the controversy arises.’ ” (Drake v. Stein (1953)
We note that even if FINRA were not available as an arbitral forum, such unavailability would not require denial of defendants’ amended petition to compel arbitration. What defendants asked the trial court for was an order “compelling [John] to submit all of his claims ... to binding arbitration.” Although defendants did specifically request arbitration before FINRA, they had a right to select that forum after John refused to arbitrate and select an arbitral forum as required under the applicable arbitration clauses. FINRA, however, is not the only potentially available arbitral forum. The arbitration clauses specify alternative forums, including the American Arbitration Association, the New York Stock Exchange, the American Stock Exchange, and an independent nonindustry arbitration forum. Hence, if the parties were unable to arbitrate before FINRA, the trial court could order them to proceed before one of the other forums designated in the arbitration clauses and thereby grant the relief defendants ultimately requested. (See, e.g., Reddam v. KPMG LLP (9th Cir. 2006)
The determination whether an arbitration provision covers a particular dispute presents a question of law, which we review de novo, where, as here, there is no factual dispute about the language of the provision. (E.g., Brookwood v. Bank of America (1996)