Title: Shearson Lehman Bros., Inc. v. Crisp

State: alabama

Issuer: Alabama Supreme Court

Document:

646 So. 2d 613 (1994)
SHEARSON LEHMAN BROTHERS, INC.
v.
Charles R. CRISP, et al.
1910090.

Supreme Court of Alabama.
August 19, 1994.
*614 A. Inge Selden III, Mark Strength, Steven T. Marshall and John N. Bolus of Maynard, Cooper, Frierson & Gale, P.C., Birmingham, for appellant.
Mac M. Moorer and E. Glenn Waldrop, Jr. of Lightfoot, Franklin, White & Lucas, Birmingham, for appellees.
COOK, Justice.
The opinion of August 14, 1992, is withdrawn, and the following is substituted therefor.
Shearson Lehman Brothers, Inc. ("Shearson"), appeals from a judgment denying Shearson's motion to compel arbitration in an action filed by Charles R. Crisp, Wendell Dunaway, Gino Fedeli, W. C. Henry, Jr., James P. Powell, and Richard F. Powell ("plaintiffs"). We vacate the judgment and remand the cause with directions.
In a series of transactions from October 4, 1989, until August 27, 1990, Edward L. Pope III, Shearson's employee and financial consultant, sold to the plaintiffs "working interest securities" in a project involving the development of coalbed methane gas wells in St. Clair County. In connection with these transactions, the plaintiffs executed a number of "client agreements" containing the following provisions:
(Executed by Crisp on August 1, 1988, and by Henry on February 29, 1988, emphasis added.)
(Executed by James Powell on August 24, 1987, and by Richard Powell on September 6, 1987, emphasis added.)
(Executed by Fedeli on June 15, 1987, and by Dunaway on April 22, 1985, emphasis added.) The plaintiffs allege that Pope assured them that he would contribute his personal influence and financial support in order to acquire the capital necessary to complete the project.
On February 8, 1990, David Prince, a Shearson vice-president, sent James Powell a letter stating in pertinent part:
(Emphasis added.)[1]
The plaintiffs allege that Shearson ultimately caused Pope to terminate his involvement with the project, resulting in the project's failure and, consequently, financial loss to the plaintiffs.[2]
On May 7, 1991, the plaintiffs sued Shearson and Edward L. Pope III. The plaintiffs alleged, among other things, that Shearson, "by and through" its agent Edward Pope, fraudulently issued the securities to the plaintiffs, breached fiduciary duties, interfered with the plaintiffs' contracts, and violated various sections of the securities statutes of Alabama and Georgia.
On June 21, 1991, Shearson moved to compel arbitration pursuant to clauses contained in agreements executed by the plaintiffs incident to the opening of their accounts. On September 6, 1991, the plaintiffs offered to arbitrate the dispute, subject to the following stipulation:
(Emphasis added.) Shearson refused the plaintiffs' offer to arbitrate subject to the proposed stipulation, and, on September 9, 1991, the trial court overruled Shearson's motion to compel arbitration; the plaintiffs appealed.
The plaintiffs contend, in effect, that an order compelling arbitration is inappropriate absent a finding or stipulation that Pope acted in a representative capacity in effecting the transactions involving the working interest securities. As they point out, Shearson, by soliciting stipulations that the "investment[s]... [were] not made through the participation or interests of Shearson Lehman" and that the plaintiffs had not relied "on any representations of Mr. Pope in his capacity as an agent of Shearson," and by rejecting the plaintiffs' arbitration offer containing the plaintiffs' affirmative agency stipulation, have, in effect, declared that, as to the transactions involving the working interest securities, no contractual relationship *616 ever existed between the plaintiffs and Shearson.
Indeed, Shearson urges a construction of the contracts that is broad enough to invoke the arbitration clauses on the basis of Pope's working-interest securities transactions, but, at the same time, narrow enough to preclude the application of respondeat superior or principal-and-agent rules based on the same transactions. Shearson contends, in other words, that the disputed transactions were independent of its contractual relationship with the plaintiffs for the purposes of its liability to the plaintiffs. This argument differs little in substantive effect from an assertion that Pope lacked the authority to bind it in a contractual agreement with the plaintiffs. In a class of cases involving the issue of a signatory's authority, and, consequently, the existence vel non of a contract that encompasses the disputed subject matter, a number of well-reasoned authorities have held that the question of the signatory's authority and agency is a threshold issue that must be adjudicated before arbitration can proceed.
More specifically, in Prima Paint Corp. v. Flood & Conklin Manufacturing Co., 388 U.S. 395, 87 S. Ct. 1801, 18 L. Ed. 2d 1270 (1967), the United States Supreme Court, construing the Federal Arbitration Act, 9 U.S.C. §§ 1-16 (1982), held that a claim of fraud in the inducement of a contract that does not place in issue the making of the arbitration clause itself, is subject to arbitration. Prima Paint, 388 U.S.  at 403-04, 87 S. Ct.  at 1805-06. Although Prima Paint has ostensibly been construed to require the arbitration of any claim "unless there has been an independent challenge to the making of the arbitration clause itself," Unionmutual Stock Life Insurance Co. of America v. Beneficial Life Insurance Co., 774 F.2d 524, 529 (1st Cir.1985); Rhoades v. Powell, 644 F. Supp. 645, 653 (E.D.Cal.1986), aff'd sub nom., Rhoades v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 961 F.2d 217 (9th Cir.1992), it appears that the majority of courts have, on better reasoning, read Prima Paint more narrowly. In this connection, Three Valleys Municipal Water District v. E.F. Hutton & Co., 925 F.2d 1136 (9th Cir. 1991), stated:
"Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., 636 F.2d 51 (3d Cir.1980), is directly on point. There the documents in question were signed by the production manager of the appellant. The appellant argued that the contracts were not binding on it because they were not signed by a corporate officer. `If the production manager did not have the actual or apparent authority to execute the contract, the corporation cannot be bound....' Id. at 55. The Third Circuit reversed the district court's order staying the federal court proceeding pending completion of arbitration. The court explained:
Three Valleys Municipal Water Dist., 925 F.2d  at 1140-41 (emphasis in original) (footnotes omitted); see also Interocean Shipping Co. v. National Shipping & Trading Corp., 462 F.2d 673, 676 (2d Cir.1972) (issue regarding the "very existence" of a contract is justiciable); cf. Camaro Trading Co., Ltd. v. Nissei Sangyo America, Ltd., 577 So. 2d 1274, 1275 (Ala.1991) (question of the validity of a contract involving a corporation not qualified to transact business in Alabama is to be judicially determined). The analysis in Three Valleys Municipal Water District, in which the plaintiffs sought to avoid arbitration on the ground that the signatory lacked the authority to execute the contracts, is instructive in this case, in which the defendant Shearson is attempting to compel the arbitration of a dispute arising out of transactions that, it contends, Pope was not authorized to initiate.
As Shearson properly recognizes, its liability to the plaintiffs turns on whether Pope was acting in a representative or employee capacity in involving the plaintiffs with the working interest securities. A negative answer to this question would, it appears, effectively eliminate Shearson's involvement in the action and would also obviate its demand for arbitration. The question of Pope's representative capacity or authority in effecting these transactions is, therefore, a threshold issue requiring resolution before an order compelling arbitration would be appropriate. In other words, as Three Valleys Municipal Water District succinctly illustrates *618 in an analogous situation, this question is precedent and justiciable. See also Republic of Nicaragua v. Standard Fruit Co., 937 F.2d 469, 480 (9th Cir.1991), cert. denied, ___ U.S. ___, 112 S. Ct. 1294, 117 L. Ed. 2d 516 (1992) (the issue of agency "is properly before the court rather than before an arbitrator").
But there is an additionaland, perhaps, more compellingrationale for denying arbitration at this stage in the controversy. Specifically, a finding that Pope was not acting in a representative capacity or within the scope of his employment when he effected the disputed transactions would place the plaintiffs' claims outside the scope of the arbitration provisions. Indeed, Pope's bare status as an employee does not, of itself, provide a nexus with Shearson's business sufficient to invoke the application of the arbitration clauses. Cf. A.G. Edwards & Sons, Inc. v. Clark, 558 So. 2d 358, 361 (Ala. 1990) (dispute between a plaintiff stockbroker and the employer of a defendant stockbroker, based on a claim of defamation was not arbitrable, where the "alleged defamation did not arise in connection with any business between" the parties).
As a general rule, an employer or principal incurs vicarious liability to third parties only for the acts of an employee that are performed within the scope of the employment, Chamlee v. Johnson-Rast & Hays, 579 So. 2d 580 (Ala.1990); Hendley v. Springhill Memorial Hosp., 575 So. 2d 547 (Ala. 1990); or for the acts of an agent that are performed within the scope of the agency. Standard Oil Co. of Kentucky v. Gunn, 234 Ala. 598, 176 So. 332 (1937); 3 C.J.S. Agency § 390 (1986). Thus, in the absence of express language indicating a contrary intention, the signatories to these contracts cannot be deemed to have contemplated that the arbitration provisions would apply to actions of Pope taken "individually and not in his capacity as a representative of Shearson," or to transactions in which Shearson had no "participation or interests." On the contrary, the provisions must be understood as applying only to transactions involving Shearson's "agents and/or employees" qua agents and/or employees. Cf. Old Republic Ins. Co. v. Lanier, 644 So. 2d 1258 (Ala.1994) (construction of the scope of an arbitration provision must reflect Alabama's "strong public policy against arbitration").
Like agency questions generally, whether Pope was acting in an agency capacity is a disputed factual issue that requires a jury's resolution. See Joseph Land & Co. v. Gresham, 603 So. 2d 923, 926 (Ala.1992); Secor Bank v. Bailey, 596 So. 2d 900, 901 (Ala. 1992); Merrell v. Joe Bullard Oldsmobile, Inc., 529 So. 2d 943, 945 (Ala.1988). For this reason, we cannot, as Shearson asks us to do, "simply `ascertain whether the parties intended the particular dispute to be arbitrable as evidenced by the language contained in the arbitration agreement.'" Reply Brief of Appellant, at 6 (quoting A.G. Edwards & Sons, Inc. v. Clark, 558 So. 2d 358, 361 (Ala. 1990), emphasis supplied by appellant).
We wish to emphasize at this point, however, that the question of capacity is only a threshold issue; therefore, if the jury should resolve it adversely to Shearson, the dispute must proceed to arbitration. In other words, the absence of such a finding is the only apparent impediment to the arbitration of this dispute.
For these reasons, the judgment of the trial court is vacated and the cause is remanded with directions to submit to a jury the questions whether, as the plaintiffs alleged in their conditional offer to arbitrate, the "[p]laintiffs' dealings with [Pope], in connection with [their] investments in the coalbed methane project ... constituted dealings with Pope in his capacity as an agent and employee of [Shearson]," and, therefore, whether the "plaintiffs' investments in the project constituted a transaction and a dealing with Shearson."
APPLICATION FOR REHEARING GRANTED; ORIGINAL OPINION WITHDRAWN; OPINION SUBSTITUTED; JUDGMENT VACATED; REMANDED WITH DIRECTIONS.
MADDOX, SHORES, HOUSTON, STEAGALL, KENNEDY and INGRAM, JJ., concur.
[1]  During February 1990, all of the plaintiffs received substantially identical correspondence from Mr. Prince.
[2]  These particular allegations were specifically set out in the plaintiffs' complaint, count five, which alleged that Shearson had intentionally interfered with the plaintiffs' contractual relationships.