Smith Barney Inc. v. Harridge

• Court: Court of Appeals for the Tenth Circuit
• Decided: December 14, 1999
• Docket: 99-6086
• Status: Unpublished

Opinion

F I L E D United States Court of Appeals Tenth Circuit UNITED STATES COURT OF APPEALS DEC 14 1999 FOR THE TENTH CIRCUIT PATRICK FISHER Clerk

SMITH BARNEY INC.; KERRY GALE,

Plaintiffs-Appellees, No. 99-6086 v. (D.C. No. CIV-96-1771-L) (W.D. Okla.) THOMAS J. HARRIDGE,

Defendant-Appellant.

ORDER AND JUDGMENT *

Before ANDERSON , BARRETT , and BRISCOE, Circuit Judges.

After examining the briefs and appellate record, this panel has determined

unanimously that oral argument would not materially assist the determination of

this appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case is

therefore ordered submitted without oral argument.

* This order and judgment is not binding precedent, except under the doctrines of law of the case, res judicata, and collateral estoppel. The court generally disfavors the citation of orders and judgments; nevertheless, an order and judgment may be cited under the terms and conditions of 10th Cir. R. 36.3. Defendant Thomas J. Harridge appeals the district court’s order granting

the motion of plaintiffs Smith Barney Inc. and Kerry Gale (Smith Barney) to

enjoin the arbitration of Harridge’s claims filed with the National Association of

Securities Dealers (NASD). After conducting an evidentiary hearing, the district

court held that the parties had agreed to arbitrate all of Harridge’s claims, but that

under § 15 of the NASD Code of Arbitration Procedure, Harridge’s claims were

barred as untimely because the claims arose more than six years prior to the filing

of his NASD arbitration request. We review the district court’s factual findings

for clear error and review all legal issues de novo. See Cogswell v. Merrill

Lynch, Pierce, Fenner & Smith, Inc. , 78 F.3d 474, 476 (10th Cir. 1996), Metz v.

Merrill Lynch, Pierce, Fenner & Smith, Inc. , 39 F.3d 1482, 1491 (10th Cir. 1994).

We affirm in part, reverse in part, and remand for further proceedings.

I. Background

Harridge, who has a high school education, retired as an oil field worker

with Phillips Petroleum Company in 1986 at the age of 60. According to

Harridge, plaintiff Kerry Gale, an agent and employee of Smith Barney, visited

him at home prior to his retirement and recommended that he receive his

retirement benefits in the form of a lump sum distribution, rather than an annuity,

and that he invest this lump sum with Gale. Harridge agreed to the lump sum

distribution and signed a customer agreement investing this sum and his entire life

-2- savings in an account managed by Gale. Harridge claims that he was completely

inexperienced with respect to investment decisions and relied on Gale’s expertise

in electing the lump sum distribution and in investing his savings, a total of

$205,000.

Gale initially invested Harridge’s retirement funds in various government

securities and $50,000 of HCW Pension Real Estate Fund, a real estate limited

partnership interest. In 1987, Gale began liquidating Harridge’s investments in

government securities in favor of limited partnership interests. He invested

Harridge’s assets in $57,000 of Krup Insured Plus II, L.P. in July 1987, $60,000

in American Income Partners III-C in December 1987, and $4,500 in North Star

Income Fund in February 1989, all limited partnership interests. Harridge learned

these limited partnerships investments were nearly worthless in October 1995,

when he received offers to purchase these interests for a nominal sum.

On August 23, 1996, Harridge filed a claim with the NASD seeking

arbitration of his claim that Smith Barney mismanaged his account. The relevant

customer agreement provides in part that:

Any controversy arising out of or relating to any of my accounts, to transactions with you, your officers, directors, agents, and/or employees for me, or to this agreement, or the breach thereof, or relating to transactions or accounts maintained by me with any of your predecessor firms . . . shall be settled by arbitration, in accordance with the rules then in effect of the NASD. . . .

Appellant’s App. at 11.

-3- Smith Barney filed a complaint in federal district court seeking a

declaratory judgment and a permanent stay of the NASD arbitration, asserting that

Harridge’s claims arose more than six years after the date the limited partnership

interests were purchased and, therefore, the claims were not eligible for

submission to arbitration under § 15 of the NASD Code of Arbitration Procedure. 1

See PaineWebber Inc. v. Hartmann , 921 F.2d 507, 511 (3d Cir. 1990) (federal

court shall stay arbitration where claim falls outside six-year limitations period

under rule identical to § 15). Section 15 provides that “[n]o dispute, claim, or

controversy shall be eligible for submission to arbitration under this Code where

six (6) years have elapsed from the occurrence or event giving rise to the act or

dispute, claim or controversy.”

Harridge then filed counterclaims against Smith Barney for breach of

contract, interference with contractual relations, breach of fiduciary duty,

misrepresentation, fraud, intentional infliction of emotional distress, negligence,

and unsuitability. Harridge claims that the purchase dates of the limited

partnership interests are not the sole relevant occurrence giving rise to his NASD

arbitration claims. He received monthly account statements from Smith Barney,

1 The NASD Code was renumbered in 1996, and § 15 was renumbered § 10304. For purposes of consistency, we will refer to the section at issue as § 15.

-4- which he claims misrepresented and concealed the true value of his investments.

Specifically, Harridge claims that Smith Barney’s monthly statements were

misleading because a reasonable person would think that the “total value” given

on each statement for his investments represented the current fair market value.

He argued that each of these allegedly misleading monthly statements constituted

separate occurrences giving rise to his claims. Harridge also sought leave to file

amended counterclaims.

Smith Barney moved to dismiss Harridge’s counterclaims for failure to

state a claim. Smith Barney first argued that all of Harridge’s counterclaims

relate to his stock account and, therefore, are subject to arbitration in accordance

with the customer agreement. Smith Barney also denied that the monthly account

statements misrepresented the value of Harridge’s investments because each

statement informed Harridge that no current valuation was being given for any

limited partnership investments. Therefore, Smith Barney contends, the monthly

account statements could not be a triggering occurrence or event for Harridge’s

arbitration claims.

After conducting an evidentiary hearing, the district court granted Smith

Barney’s motion to dismiss the counterclaims, denied Harridge’s request to file

amended counterclaims, and dismissed the action. The district court first

determined that all of Harridge’s counterclaims were subject to NASD arbitration

-5- under the terms of the customer agreement. It then determined that the monthly

account statements could not be a triggering occurrence or event on which

Harridge’s arbitration claims were based because no reasonable person would find

them misleading. Because Harridge failed to provide evidence of any wrongful

conduct by Smith Barney that occurred within six years of the filing of his NASD

arbitration claim which could form the basis of a viable claim, the district court

determined that Harridge’s claims were ineligible for arbitration under § 15. The

district court subsequently denied Harridge’s motion for reconsideration under

Fed. R. Civ. P. 59(e).

II. Analysis

A.

In Cogswell v. Merrill Lynch, Pierce, Fenner & Smith, Inc. , 78 F.3d 474

(10th Cir. 1996), we ruled that § 15 is a substantive eligibility requirement for

arbitration and that the court, not the arbitrator, decides whether claims are timely

under that section of the NASD Code. See id. at 480. Harridge first contends on

appeal that the district court exceeded its authority under Cogswell when it

reached the merits of his claim and held that the monthly account statements were

not misleading. Harridge also contends that he presented prima facie evidence

that the account statements were misleading and, therefore, the district court erred

when it ruled no reasonable person would have been misled. We agree with

-6- Harridge that he arguably states a viable cause of action and that his allegations

that the account statements are misleading should be submitted to arbitration.

1.

In order to determine whether claims are within the six-year time limitation

provided by § 15 of the Code, the court must “examine each of

the . . . claims in order to determine what is the ‘occurrence or event’ giving rise

to that claim.” Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cohen , 62 F.3d

381, 385 (11th Cir. 1995). We noted in Cogswell that district courts may be

required “to hold ‘mini-trials’ to resolve factual disputes” in order to determine

when a particular claim arose. 78 F.3d at 481. We acknowledged that the district

courts might be “unable to decide such matters without becoming embroiled in the

merits of the claim.” Id. Where, as here, the court must decide the arbitrability

of a claim, it must make its determination “just as it would decide any other

question that the parties did not submit to arbitration, namely, independently.”

First Options of Chicago, Inc. v. Kaplan , 514 U.S. 938, 943 (1995).

Here, the district court could not determine whether Harridge’s claims were

time-barred under § 15 without first determining whether Harridge had presented

any evidence of wrongful conduct which could form the basis of a viable claim

that arose within six years of the filing of his arbitration claim. See Cogswell ,

78 F.3d at 481. Thus, we conclude that the district court acted properly under

-7- Cogswell in reviewing the merits of Harridge’s claim in order to determine

whether he had stated a viable claim that the monthly account statements were

misleading.

2.

We disagree, however, with the district court’s determination that Harridge

failed to state a viable claim that the monthly statements were misleading. Smith

Barney contends that the account statements informed Harridge that no current

market valuation was being given for the limited partnership interests and that any

given valuations of these securities only represented the original purchase price.

We cannot say that a reasonable person would have understood this explanation.

For example, the September 1994 account statement lists an amount of

$165,549.48 as the “Fair market value” of Harridge’s stock account and the

September 1996 account statement gives an amount of $153,947.92 as the “Fair

market value” of Harridge’s account. See Appellant’s App. at 44, 49. A

reasonable person might well have understood this to mean that these amounts

included a current fair market valuation of the limited partnership interests.

Indeed, these amounts must have included some valuation for the limited

partnership interests because Harridge’s other investments were only valued at

approximately $41,000. The account statements state that this amount does not

include “unpriced” securities, but we do not believe that a reasonable investor

-8- would necessarily have understood this language to mean that the amount listed as

the “Fair market value” did not include a current market valuation of the limited

partnership interests, particularly given the large amount of the valuation.

Similarly, these account statements list the total portfolio value as $197,726.71 in

September 1994 and as $196,786.67 in September 1996. See id . at 46, 52. Again,

a reasonable investor might not have understood that this amount, listed as “Total

portfolio value,” was actually only the original purchase price of the investments.

Harridge at least arguably states a viable claim that Smith Barney’s account

statements were misleading and reported false values for his limited partnership

investments. “[I]if a claim clearly or arguably states a genuine, independent

cause of action (that arises from an occurrence or event within six years of the

arbitration demand), it should be submitted to arbitration to allow the arbitrators

to determine the merits of the claim; i.e ., whether it states a cause of action on

which relief may be granted.” PaineWebber Inc. v. Hofmann , 984 F.2d 1372,

1382 (3d Cir. 1993). Accordingly, we conclude the district court should have

submitted to arbitration all of Harridge’s claims based on his assertion that the

monthly account statements received within six years of his arbitration filing

contained false or misleading information.

3.

-9- Harridge also contends that the district court ignored his claim that Smith

Barney breached its fiduciary duty to him by not affirmatively informing him of

the current market value of his limited partnership interests. Harridge fails to cite

where in the record he raised this issue below, see 10th Cir. R. 28.2(C)(2).

Although this claim is listed as one of Harridge’s counterclaims, our independent

review of the limited record on appeal does not reveal whether he ever argued this

issue before the district court. Therefore, we will not address this issue. See

Rademacher v. Colorado Ass’n of Soil Conservation Dists. Med. Benefits Plan , 11

F.3d 1567, 1571 (10th Cir. 1993) (issues raised, but not argued to the district

court, “ordinarily will not be considered on appeal”) (citation omitted).

B.

Alternatively, Harridge contends that the arbitration agreement should not

be enforced because it is a standardized, boilerplate arbitration agreement drafted

by Smith Barney and it failed to explain to him that there was a six-year time

limitation on bringing arbitration claims. We held in Adams v. Merrill Lynch

Pierce, Fenner & Smith , 888 F.2d 696, 700 (10th Cir. 1989) that brokerage

arbitration agreements are not adhesion contracts, are not inherently

unconscionable, and that the mere fact that arbitration contract language is

“boilerplate” does not render it without effect. The arbitration agreement at issue

here clearly informed Harridge that any arbitration would be settled in accordance

-10- with the NASD rules. See Appellant’s App. at 11. Thus, Harridge was on notice

that all of the NASD arbitration rules, including the six-year time limitation found

in § 15, would govern his claims. We agree with the district court that the

arbitration agreement is not unconscionable or otherwise unfair and is, therefore,

valid and enforceable. See Adams , 888 F.2d at 700.

The judgment of the district court is AFFIRMED IN PART and

REVERSED IN PART, and this matter is REMANDED to the district court for

further proceedings consistent with this opinion.

Entered for the Court

Mary Beck Briscoe Circuit Judge

-11-