Goldsmith v. Merrill Lynch, Pierce, Fenner, and Smith, Inc.

• Court: Superior Court of Maine
• Decided: November 15, 2013
• Docket: CUMcv-13-314
• Status: Unpublished

Opinion

STATE OF MAINE CUMBERLAND, ss

JEROME B. GOLDSMITH and !AMI B. GOLDSMITH, Plaintiffs ORDER ON MOTION TO v. COMPEL ARBITRATION

MERRILL LYNCH, PIERCE, FENNER, :.:·~' .-"~"­ .~

AND SMITH, INC. and ALEKSANDAR ACIMOVIC Defendants NOV 15 2013

Before the Court is the defendants' motion to compel arbitration and to dismiss or

stay plaintiff's suit.

FACTUAL AND PROCEDURAL BACKGROUND

In June 2007, the Goldsmiths opened an "Unlimited Advantage" account with

Defendant Merrill Lynch. (Compl. ~ 11, 15.) Defendant Aleksandar Acimovic became

the Goldsmiths' broker on the account. (Compl. ~ 12.) The Goldsmiths claim they

invested their money with Merrill Lynch to get the benefit of the company's investment

advisory services. (Compl. ~ 19.) The Goldsmiths allege that they were led to believe

their Merrill Lynch account was an investment advisory account, but the Goldsmiths had

actually signed up for a brokerage account. (Com pl. ~~ 15-16.)

On July 27, 2007, Mr. Acimovic invested $500,000 of the Goldsmiths' savings

into a single IPO, the Cohen & Steers Global Income Builder Fund ("INB Fund").

(Compl. ~ 23.) The Goldsmiths allege that Mr. Acimovic made various positive

representations about the fund, including that the Goldsmiths could expect a 10% yield.

(Compl. ~ 27.) The fund started trading at $20 a share, but in 2008, the price collapsed to $6 a share. (Compl. ~~ 34-35.) Since 2008, the INB Fund has traded at between $9 and

$11 per share. (Compl. ~ 36.) The Goldsmiths have since learned that Merrill Lynch was

the principal underwriter for the INB Fund IPO and needed to sel113,810,000 shares to

investors. (Compl. ~ 28.) The Goldsmiths allege that Merrill Lynch stood to make

significant fees as underwriter for the IPO and offered its brokers incentives and

commissions to sell the INB Fund to client-investors. (Compl. ~ 29.)

On July 19, 2013, the Goldsmiths filed a five-count complaint including: count I:

negligence; count II: negligent supervision; count III: negligent misrepresentation; count

IV: intentional misrepresentation; and count V: breach of fiduciary duty. On August 20,

2013, Defendants filed a motion to compel arbitration pursuant to 9 U.S.C. § 3 (2012).

The signed agreement does contain an arbitration provision. Plaintiffs rely on Barrett v.

McDonald Investments, Inc. 2005 ME 43, 870 A.2d 146, a Law Court case with similar

facts in which the court construed an ambiguous arbitration provision against the drafter

and held it inapplicable to investment advice not covered under the agreement.

DISCUSSION

The Court must decide whether the parties intended to submit the current dispute

to arbitration under their agreement. VIP., Inc. v. First Tree Dev., LLC, 2001 ME 73, ~

3, 770 A.2d 95. In Barrett, the Law Court grappled with two competing rules of

construction: the strong presumption in favor of arbitration and the principle that

ambiguities in a contract must be construed against the drafter. Barrett, 2005 ME 43, ~

15,. 870 A.2d 146. The Barrett Court held, "when a party drafts an agreement requiring

arbitration, and offers it to individuals on a take-it-or-leave-it basis, the drafter bears the

risk if its chosen language is found to be ambiguous." I d. ~ 22. The Court must therefore

2 decide whether the arbitration agreement is ambiguous as to whether the current dispute

must be arbitrated.

1. Governing Law

When an arbitration clause is part of a contract that involves interstate commerce,

"the FAA governs." Stenzel v. Dell, Inc., 2005 ME 37, ~ 7, 870 A.2d 133. However,

"[w]hen deciding whether the parties agreed to arbitrate a certain matter ... , courts

generally ... should apply ordinary state-law principles that govern the formation of

contracts." First Options a/Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995).

Defendants argue that New York law applies to the Court's interpretation of the

contract. Defendants rely on Stenzel v. Dell, Inc., but in that case, the Law Court merely

"assume[d), without deciding, that the agreement's choice oflaw provision controls and

that Texas law governs the determination of all of the issues presented by the appeal."

Stenzel, 2005 ME 37, ~ 8, 870 A.2d 133. The court explained, without citing to Texas

law, that "if the agreement is ambiguous, the reservation clause must be construed against

Dell ... ."/d. ~ 22. The agreement in Barrett specified that Ohio law applied to the

arbitration agreement. Barrett, 2005 ME 43, ~ 3, 870 A.2d 146. Nevertheless, the court

decided "whether to construe an ambiguity in an arbitration clause in favor of arbitration

or against the drafter pursuant to Maine law." /d. ~ 22 n.4.

Even if the Court were to apply New York law, the same principles of contract

interpretation would apply to this case. Defendants rely on Paine Webber, Inc. v. Bybyk,

81 F.3d 1193 (2d. Cir. 1996), to establish that the Goldsmiths' claims are within the

scope of the arbitration provision. That case also involved clients and a broker, but the

defendant broker there wanted the court, as opposed to the arbitrator, to decide whether

3 the client had a valid claim. Paine Webber, 81 F.3d at 1197. The Second Circuit Court of

Appeals specifically found that "the common-law rule of contract interpretation that 'a

court should construe ambiguous language against the interest of the party that drafted it'

applies in interpreting arbitration agreements." ld at 1199. Furthermore, the clients

alleged that Paine Webber failed to supervise the account and breached a fiduciary duty-

claims that were directly governed by the investment agreement and not distinct tort

claims as the Goldsmiths allege here. ld at 1195.

Finally, Defendants only raised their argument that New York law should apply in

their reply brief. In their initial brief supporting their motion to compel arbitration,

Defendants cite to Maine law, including Barrett, and fail to mention the agreement's

choice of law provision. Under Rule 7(e), "the moving party may file a reply

memorandum, which shall be strictly confined to replying to new matter raised in the

opposing memorandum." M.R. Civ. P. 7(e). Neither the Defendants in their initial brief

nor the Plaintiffs in their opposition mentioned the governing law provision, and

therefore, the Court finds that Defendants cannot raise this issue in their reply brief. See

Moriarty Water Works, Inc. v. Portland Water Dist., 2003 WL 23109990 (Me. Super.

Nov. 3, 2003).

2. Interpretation of Arbitration Clause

a. Scope of the Arbitration Provision

Defendants attempt to distinguish Barrett on the grounds that the agreement the

Goldsmiths signed contains a much broader arbitration provision than the one at issue in

Barrett. In Barrett, the Law Court described the agreement at issue as follows:

The Agreement provided that Laurence would deposit funds with McDonald, which McDonald would invest in options selected by Laurence upon Laurence's

4 instructions and direction. The Agreement disclaimed any fiduciary relationship and did not in any way describe McDonald or Sullivan as having any advisory roles.

Id. ~ 3. The Barrett arbitration provision used broad language:

The Custodian [McDonald] and the Depositor [Laurence Barrett] agree that by the Custodian opening and carrying an account for the Depositor, all controversies which may arise between us concerning any transaction or the construction, performance or breach of this or any other agreement between us pertaining to securities and any other property, whether entered into prior, on or subsequent to the date thereof, shall be determined by arbitration.

!d. The Law Court found that despite this broad language, the agreement at issue

described McDonald as performing purely custodial duties, and it was therefore

ambiguous "whether the giving of investment advice constitutes a 'transaction' within the

meaning ofthe arbitration clause." !d.~ 19.

The agreement that the Goldsmiths signed on June 1, 2007 is similarly broad:

You agree that all controversies that may arise between us shall be determined by arbitration. Such controversies include, but are not limited to, those involving any transaction in any of your accounts with Merrill Lynch, or the construction, performance or breach of any agreement between us, whether entered into or occurring prior, on or subsequent to the date hereof.

(First Brady Aff. ~ 4; Exhibit A, p. 2.) Defendants rely on the "not limited to" language to

distinguish the arbitration provision from the one in Barrett. The examples that follow,

however, concern controversies arising out of the agreement. A reasonable interpretation

is that "all controversies" includes everything within the scope of the agreement. See

Penobscot Nation v. Stilphen, 461 A.2d 478,489 (Me. 1983) ("[A] general term followed

by a list of illustrations is ordinarily assumed to embrace only concepts similar to those

illustrations."). If, as in Barrett, "it is unclear whether the giving of investment advice

constitutes a 'transaction' within the meaning of the arbitration clause," the "not limited

to" language does not save the arbitration clause here. Barrett, 2005 ME 43, ~ 3, 870

5 A.2d 146. To hold otherwise would require an interpretation that renders the examples

surplusage. See Perry v. Wolaver, 506 F.3d 48, 55 (1st Cir. 2007) ("While it is

conceivable that this is a conditional catchall provision, we will not rush to such an

interpretation, which would render the language surplusage .... ").Accordingly, unless

the agreement the Goldsmiths entered into includes advisory services, the Court must

apply the holding in Barrett.

b. Brokerage Account

The agreement, dated June 1, 2007, describes the Unlimited Advantage account

the Goldsmiths opened as follows:

If you are enrolling an account in the Unlimited Advantage service, please note that the account is a brokerage account and not an advisory account. Merrill Lynch's interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligation to disclose conflicts of interest and to act in your best interest.

(First Brady Aff. ~ 4; Exhibit A, p. 1.) This is the first agreement that the Goldsmiths

signed. The agreement is called the Merrill Lynch Client Relationship Agreement

("Client Relationship Agreement"). The Client Relationship Agreement, by its express

terms, is limited to brokerage services and does not include investment advice. Similar to

the institution in Barrett, Merrill Lynch is disclaiming any advisory role for this account.

In an attempt to escape this conclusion, Defendants offer two arguments.

First, the Goldsmiths signed up for an advisory account on November 29, 2007,

six months after they signed up for the Unlimited Advantage account. (Second Brady

Aff. ~ 2; Exhibit A.) The agreement the Goldsmiths signed on November 29, 3007 is

called the Client Agreement. The Goldsmiths signed this agreement after Mr. Acimovic

invested the bulk of the Goldsmiths' money in the INB Fund. (Compl. ~ 23.) The

6 language in the arbitration clause contained in the Client Agreement is almost identical to

that in the first:

You and we agree that all controversies that may arise between us shall be determined by arbitration. Such controversies include, but are not limited to, those involving any transaction or the construction, performance or breach of this or any other agreement between us, whether entered into or occurring prior, on or subsequent to the date hereof.

(Second Brady Aff. ~ 2; Exhibit A, p. 24.). Defendants claim that because the Client

Agreement clearly includes investment advice, the Goldsmiths agreed to arbitrate any

disputes concerning investment advice, even if that advice was offered and acted upon

prior to the Client Agreement. This arbitration clause, however, could reasonably be

interpreted to apply to conduct arising out of the agreements between the parties. The

Goldsmiths' claims do not arise out of any conduct contemplated by any of the

agreements because they concern investment advice given prior to the date the

Goldsmiths opened their advisory account.

Second, Defendants argue that the description of the Unlimited Advantage

account in the Unlimited Advantage Disclosures and Agreement ("Unlimited Advantage

Agreement") demonstrates that investment advice was part of the original agreement.

Defendants rely on part of the Unlimited Advantage Agreement that states:

Unlimited Advantage is a non-discretionary brokerage service from Merrill Lynch that allows you to consult with a Financial Advisor, buy and sell securities and make other financial decisions all for an annual asset-based fee ... just like commission-based brokerage accounts, any investment advice we provide in connection with your investment activity is part of, and incidental to, the brokerage services we provide to you.

(Second Brady Aff. ~ 6; Exhibit B, p. 1.) There are two problems with this argument.

First, this description was not in the original client agreement that the Goldsmiths

signed on June 1, 2007. This description is contained in the Unlimited Advantage

7 Disclosures and Agreement (Unlimited Advantage Agreement) describing the Unlimited

Advantage program that the Goldsmiths agreed to on July 1, 2007. This document does

not contain an arbitration provision. Defendants argue that the Unlimited Advantage

program description must be read in conjunction with the initial client agreement the

Goldsmiths signed. Only by reading the two documents together can the Defendants

show both an arbitration provision and a description of investment services. That it takes

two distinct documents to illuminate the scope of the arbitration clause goes a long way

to showing that it is ambiguous.

Second, directly under the paragraph that mentions investment advice, the

Unlimited Advantage Agreement states that "[a]n account enrolled in the Unlimited

Advantage services is a brokerage account and not an advisory account." (Second Brady

Aff. 1 6; Exhibit B, p. 1.) Furthermore, the document reads:

Unlimited Advantage is a full-service brokerage pricing alternative, not an investment advisory service, and neither we nor any employee intends to act or is acting as an investment advisor or investment manager.

(Second Brady Aff. 1 6; Exhibit B, p. 16.) Thus, it is reasonable to conclude that advisory

services are outside the scope ofthe agreement with the Goldsmiths.

Merrill Lynch is trying to have it both ways: it provides a brokerage account that

does not include investment advisory services, but it wants its arbitration provision to

apply to any investment advice its employees might render to clients. In walking this fine

line, Merrill Lynch has drafted an ambiguous arbitration provision. It would be

reasonable for the Goldsmiths to believe that the arbitration provision in an agreement

limited to brokerage services does not apply to investment advice. Accordingly, the Court

finds that the arbitration clause is ambiguous as to whether the Goldsmiths must arbitrate

8 their tort claims. Under Barrett, this ambiguity must be construed against Merrill Lynch,

and the Goldsmiths are therefore not required to arbitrate their tort claims.

3. Unconscionability

The Goldsmiths argue in the alternative that the arbitration clause is

unconscionable. Because the Court finds in the Goldsmiths' favor under their ambiguity

argument, the Court need not address whether the arbitration clause is unconscionable.

The entry is:

Defendants' motion to compel arbitration is DENIED.

Date: November 15,2013 ~A. Wheeler Justice, Superior Court

Plaintiffs-Eben Albert Knopp Esq Defendants-Mark Porada Esq