Title: Investment Management & Research, Inc. v. Hamilton

State: alabama

Issuer: Alabama Supreme Court

Document:

727 So. 2d 71 (1999)
INVESTMENT MANAGEMENT & RESEARCH, INC.
v.
Douglas HAMILTON.
1960138.

Supreme Court of Alabama.
January 8, 1999.
Carl S. Burkhalter of Maynard, Cooper & Gale, P.C., Birmingham, for appellant.
W. Kirk Davenport of Davenport & Willingham, L.L.C., Birmingham, for appellee.
Evan M. Tager and Andrew A. Nicely of Mayer, Brown & Platt, Washington, D.C.; and Phillip E. Stano, American Council of Life Insurance, Washington, D.C., for amicus curiae American Council of Life Insurance, in support of the application for rehearing.
H. Hampton Boles and Gregory C. Cook of Balch & Bingham, L.L.P., Birmingham, for amicus curiae Alabama Bankers Ass'n, in support of the application for rehearing.
Robert H. Huffaker and William H. Webster of Rushton, Stakely, Johnston & Garrett, P.A., Montgomery; and Matthew C. McDonald of Miller, Hamilton, Snider & Odom, Mobile, for amici curiae Automobile Dealers Ass'n of Alabama, Inc., Alabama Retail Ass'n, Alabama Civil Justice Reform Committee, and Business Council of Alabama, in support of the application for rehearing.
Jere L. Beasley, Thomas J. Methvin, and Andy D. Birchfield, Jr., of Beasley, Wilson, Allen, Crow & Methvin, P.C., Montgomery, for amicus curiae Alabama Trial Lawyers Ass'n, in opposition to the application for rehearing.
Corrie Haanschoten, Alabama Education Ass'n, Montgomery, for amicus curiae Alabama *72 Education Ass'n, in opposition to the application for rehearing.
Joe R. Whatley of Cooper, Mitch, Crawford, Kuykendall & Whatley, Birmingham, for amicus curiae American Federation of LaborCongress of Industrial Organizations (AFL-CIO), in opposition to application for rehearing.
Phillip W. McCallum of McCallum & Associates, Birmingham, for amicus curiae "We the Jury," in opposition to the application for rehearing.
Katy Smith Campbell of Chestnut, Sanders, Sanders & Pettaway, Selma, for amicus curiae Alabama New South Coalition, in opposition to the application for rehearing.
Joe M. Reed, Montgomery, for amicus curiae Alabama Democratic Conference, in opposition to the application for rehearing.
E.J. "Mac" McArthur, Alabama State Employees Ass'n, Montgomery, for amicus curiae Alabama State Employees Ass'n, in opposition to the application for rehearing.
COOK, Justice.
The opinion of March 20, 1998, is withdrawn and this opinion is substituted therefor.
The defendant appeals from the denial of its request to compel arbitration.
Charles Brashier, a registered representative of Investment Management & Research, Inc. ("IMR"), approached Douglas Hamilton about Hamilton's opening a securities investment account with IMR. Hamilton signed a "customer agreement" form authorizing IMR to serve as his introducing broker (the broker who deals with and places orders for Hamilton), and authorizing Raymond James & Associates to serve as his clearing broker (the broker who takes IMR's order for Hamilton, executes the order through the stock exchange, and holds the securities in Hamilton's portfolio). Brashier managed Hamilton's account. Hamilton claimed that Brashier stole $200,000 that Hamilton had given to Brashier for securities investments.
Hamilton sued IMR and Brashier, alleging a violation of the Alabama Securities Act; a breach of fiduciary duty; conversion; theft; and misrepresentation. Hamilton later amended his complaint to add a claim alleging fraud in the inducement.[1] Specifically, Hamilton alleged that he was fraudulently induced to sign the customer agreement, to open and maintain his IMR account, and to continue to invest moneys through Brashier. Hamilton claimed that he had been damaged as a result of the alleged fraudulent inducement, and he sought "rescission, revocation and/or avoidance of the customer agreement" that he had signed. Hamilton also claimed compensatory and punitive damages.[2]
The customer agreement Hamilton signed contained an arbitration agreement, which provided, in pertinent part, as follows:
IMR moved to compel arbitration. Hamilton opposed IMR's motion, claiming that he had been fraudulently induced to sign the customer agreement; therefore, argued Hamilton, he was not bound by an arbitration clause in a contract that, as a result of fraud, was due to be rescinded, revoked, or voided.
The trial court denied IMR's motion to compel arbitration and to stay the action pending arbitration, and entered the following order:
IMR appealed.[3]
We agree with the trial court that there is no dispute that the customer agreement is a contract evidencing a transaction involving interstate commerce and is, therefore, governed by the Federal Arbitration Act ("FAA") (9 U.S.C. § 1 et seq.). We also agree that the threshold question is whether the customer agreement is a legally enforceable contract. Hamilton and IMR offer conflicting answers to this question, each finding support in decisions of the United States Supreme Court and in decisions of this Court.
*74 Citing Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S. Ct. 1801, 18 L. Ed. 2d 1270 (1967), and the Alabama decisions that have applied the holding in Prima Paint, IMR argues that whether the customer agreement, including the arbitration provision contained therein, is a valid, enforceable contract must be resolved by arbitration.
In Prima Paint, the Court considered the question "whether the federal court or an arbitrator is to resolve a claim of `fraud in the inducement,' under a contract governed by [the FAA] where there is no evidence that the contracting parties intended to withhold that issue from arbitration." 388 U.S.  at 396-97, 87 S. Ct. 1801.
Flood & Conklin Manufacturing Company's paint business was purchased by Prima Paint Corporation. The documents evidencing this transaction were a purchase contract and a "consulting agreement," which provided that it "`embodie[d] the entire understanding of the parties on the subject matter.'" 388 U.S.  at 397-98, 87 S. Ct. 1801. The consulting agreement contained an arbitration clause that provided, in part:
388 U.S.  at 398, 87 S. Ct. 1801.
Prima Paint sued Flood & Conklin ("F & C"), alleging fraud in the inducement of the contract and seeking rescission of the contract, and it petitioned the trial court for an order enjoining F & C from proceeding with arbitration. F & C cross-petitioned for a stay of the court action and for an order compelling arbitration, claiming that the issue of fraud in the inducement of the contract was a question for an arbitrator and not for the court. The trial court granted F & C's motion to stay, "holding that a charge of fraud in the inducement of a contract containing an arbitration clause as broad as this one was a question for the arbitrators and not for the court." 388 U.S.  at 399, 87 S. Ct. 1801.
The United States Court of Appeals for the Second Circuit dismissed Prima Paint's appeal. The United States Supreme Court granted Prima Paint's petition for certiorari review, but affirmed the Court of Appeals' judgment of dismissal:
Prima Paint, 388 U.S.  at 402-04, 87 S. Ct. 1801 (first and third emphases added; second emphasis original).
In Jones v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 604 So. 2d 332, 337 (Ala.1991), we held:
(Citations omitted.)[4]
Relying on Prima Paint and Merrill Lynch, this Court, in Old Republic Ins. Co. v. Lanier, 644 So. 2d 1258 (Ala.1994), reversed the trial court's denial of the motion to compel arbitration as to the claim of fraud in the inducement of the contract, because that claim did not "place in issue the making of the arbitration clauses themselves." 644 So. 2d  at 1263.
In Ex parte Lorance, 669 So. 2d 890 (Ala. 1995), this Court followed the rationale of Prima Paint and affirmed the trial court's order compelling arbitration in a tort/breach-of-contract action:
669 So. 2d  at 892-93 (emphasis added).
Hamilton maintains, however, that First Options of Chicago, Inc. v. Kaplan, supra, reflects the current state of the law in this area and requires this Court to affirm the trial court's denial of IMR's request to compel arbitration. First Options, decided nearly 30 years after Prima Paint, does not expressly overrule, nor does it refer to, Prima Paint. Hamilton maintains, however, that the rationale and holding of First Options are applicable whenever the preliminary question of arbitrability must be decided.
In First Options, the respondentsthe Kaplans, individually, and the investment company they owned, MK Investments, Inc. ("MKI")were indebted to the petitioner, First Options of Chicago. The parties negotiated a "workout agreement" for repayment of the respondents' debt, and the terms of that agreement were set out in four documents. The debt was not paid, and First Options sought arbitration pursuant to an arbitration provision contained in one of the four "workout agreement" documents. The document containing the arbitration provision was signed by MKI, but not by the Kaplans individually. The Kaplans opposed arbitration; however, the arbitration panel ruled that it had the power to conduct the requested arbitration and ruled in favor of First Options on the merits of the parties' dispute.
The Federal district court confirmed the arbitrators' award, but the United States Court of Appeals for the Third Circuit, holding that the Kaplans' dispute with First Options was not subject to arbitration, reversed the district court's judgment confirming the arbitration award in favor of First Options and against the Kaplans.
The United States Supreme Court granted certiorari review, and a unanimous Court held:
514 U.S.  at 942-47, 115 S. Ct. 1920 (some citations omitted; some emphasis original, other emphasis added).
Under the facts of this case, Hamilton's reliance on First Options is misplaced.
In First Options, the Kaplans did not claim that the contracts evidencing their "workout agreement" with First Options were fraudulently induced or were, for that matter, deficient in any way. Nor did the Kaplans challenge the validity of the arbitration clause contained in the one document signed by MKI but not signed by them. Rather, the Kaplans based their opposition to arbitration, as to their individual claims, on the fact that nothing they had signed evidenced any intent on their part to agree to submit their differences with First Options to arbitration; because they had not signed anything indicating such an intent, they claimed the arbitrator did not have the power to decide arbitrability.
In First Options, the only document containing an arbitration provision was the one signed by MKI; the documents signed by the Kaplans did not contain an arbitration clause. Under the facts in First Options, where the contract between the parties did not address or decide who would decide the question of arbitrability, the dispute as to whether the Kaplans's individual claims were subject to arbitration was one for a court to decide.
The facts of this present case, however, place it within the application of the principles *78 announced in Prima Paint. Hamilton did not assert a claim of fraud in the inducement as to the arbitration clause; rather, Hamilton challenged the IMR customer agreement as having been fraudulently induced. In other words, Hamilton did not contend that the execution of the arbitration provision itself (i.e., apart from the execution of the other provisions of the customer agreement) was induced by fraud.
To reiterate, when a claim of fraud in the inducement is directed toward the arbitration clause itself, the issue is adjudicated by the court. On the other hand, when a claim of fraud in the inducement is directed toward the entire contract, as in this case, the issue is subject to arbitration. Because Hamilton claimed fraud in the inducement of the customer-agreement contract generally, as opposed to the arbitration clause specifically, Hamilton's claims against IMR are subject to arbitration according to the terms of the customer agreement he signed.
OPINION OF MARCH 20, 1998, WITHDRAWN; OPINION SUBSTITUTED; APPLICATION FOR REHEARING GRANTED; REVERSED AND REMANDED.
HOOPER, C.J., and HOUSTON, SEE, and LYONS, JJ., concur.
MADDOX, J., concurs in the result.
ALMON, J., dissents.
[1]  In an affidavit filed in support of his amended complaint, Hamilton stated that he was inexperienced in securities dealings and that he was "not a gambler." Hamilton claimed that Brashier told him he would handle Hamilton's money conservatively. Hamilton then stated that he did not know at the time he signed the customer agreement that he was authorizing a "margin account," that he did not know what a "margin account" was, and that it was never explained to him.
[2]  Brashier is no longer employed by IMR. On March 13, 1996, Hamilton filed a motion for a default judgment against Brashier, stating that Brashier "ha[d] failed and refused to answer and/or respond to the summons and complaint which was served on him October 18, 1995." The motion to enter a default judgment was granted on April 1, 1996; Hamilton's proof of damages with regard to Brashier is still pending in the trial court.
[3]  The denial of a motion to compel arbitration is appealable. 9 U.S.C. § 15 (Federal Arbitration Act); A.G. Edwards & Sons, Inc. v. Clark, 558 So. 2d 358 (Ala.1990).
[4]  In A.G. Edwards & Sons, Inc. v. Syvrud, 597 So. 2d 197 (Ala.1992), the plaintiff did not attack the arbitration provision itself until after the defendant had moved to compel arbitration. Although Syvrud addressed issues not presented here, we note the following discussion from that case:

"[I]f fraud is alleged with respect to an arbitration provision itself [emphasis added in Syvrud], rather than toward the entire customer agreement that encompasses it, the claimant is not forced to arbitrate this claim under the FAA. Simply stated, if the fraud question relates solely to the valid creation of the requirement of arbitration, rather than the entire customer agreement, this claim can be litigated on state law contract principles to determine if the arbitration provision is to be rescinded. See, Jones v. Merrill Lynch, Pierce, Fenner & Smith, Inc., [604 So. 2d 332] (Ala.1991).
". . . .
"In Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S. Ct. 1801, 18 L. Ed. 2d 1270 (1967), the United States Supreme Court stated that `if the claim is fraud in the inducement of the arbitration clause itself an issue which goes to the "making" of the agreement to arbitratethe federal court may proceed to adjudicate it.' [Emphasis added in Syvrud.] In Jones, we stated that where this is the claim, `the party opposing arbitration is entitled to a trial involving state law issues relating to the making of the arbitration clause.' [Emphasis added in Syvrud.] Jones, [604 So. 2d  at 337]."
597 So. 2d  at 199-201.