Title: MTA, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc.

State: alabama

Issuer: Alabama Supreme Court

Document:

REL: 12/07/2012
Notice: This opinion is subject to formal revision before publication in the advance
sheets of Southern Reporter.  Readers are requested to notify the Reporter of Decisions,
Alabama Appellate Courts, 300 Dexter Avenue, Montgomery, Alabama 36104-3741 ((334) 229-
0649), of any typographical or other errors, in order that corrections may be made before
the opinion is printed in Southern Reporter.
SUPREME COURT OF ALABAMA
OCTOBER TERM, 2012-2013
____________________
1111167
____________________
MTA, Inc.
v.
Merrill Lynch, Pierce, Fenner & Smith, Inc., a division of
Bank of America Corporation
Appeal from Madison Circuit Court
(CV-11-900827)
STUART, Justice.
MTA, Inc., appeals the order of the Madison Circuit Court
holding that MTA's claims against Merrill Lynch, Pierce,
Fenner & Smith, Inc., a division of Bank of America
1111167
Corporation ("Merrill Lynch"), were subject to an arbitration
agreement and compelling MTA to arbitrate those claims.  We
reverse and remand.
I.
On January 21, 1994, MTA entered into a deferred-
compensation agreement ("the DCA") with its employee, Yvonne
Sanders.  Pursuant to the terms of the DCA, MTA was obligated
to pay Yvonne $270,000 in 120 equal monthly installments
beginning the month following her 50th birthday or, in the
event Yvonne died before reaching her 50th birthday, to pay
her children, Tiffany Sanders and Roderick Dedrick, a total of
$750,000 in 120 equal monthly installments beginning the 
month
after her death.  MTA thereafter obtained a $1,000,000 life-
insurance policy on Yvonne to fund the death benefit provided
in the DCA in the event it became payable.
On October 22, 1999, Yvonne died at the age of 43.  For
all that appears, MTA thereafter received the $1,000,000 it
was owed under the life-insurance policy; however, MTA did not
promptly begin making payments to Tiffany and Roderick as
called for by the DCA.  Instead, it appears that MTA was asked
on behalf of Tiffany and Roderick to establish a rabbi trust
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1111167
to handle the payments, presumably to allow for more favorable
tax treatment for Tiffany and Roderick.   Accordingly, MTA
1
thereafter executed a trust agreement with Thomas W. Dedrick,
Sr., Tiffany and Roderick's uncle and a licensed broker
employed by Merrill Lynch, establishing the trust and
depositing into it an initial sum of $506,450.  The trust
agreement also provided that Thomas would act as trustee of
the trust.
On January 18, 2001, Thomas opened a brokerage account
(the 
working-capital-management 
account 
or 
"the 
WCMA 
account")
with Merrill Lynch to house and manage the assets of the
trust.  The account-authorization form states on its face that
it was entered into by Merrill Lynch and "Thomas W. Dedrick,
Sr. TTEE UAD 1/1/2000 by MTA, Inc." on behalf of the entity
identified as "Trust –– Deferred Comp[ensation] Plan" and
"A rabbi trust is a commonly-used mechanism for deferred
1
compensation and deferred taxation, in which '[f]unds held by
the trust are out of reach of the employer, but are subject to
the claims of the employer's creditors in the event of
bankruptcy or insolvency.'" Kadillak v. Commissioner of
Internal Revenue, 534 F.3d 1197, 1201 n. 2 (9th Cir. 2008)
(quoting In re IT Group, Inc., 448 F.3d 661, 665 (3d Cir.
2006)).
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1111167
executed by Thomas as the trustee.   The account-authorization
2
form also provided that Thomas agreed, on behalf of the trust,
to all the terms and conditions of the agreement governing the
WCMA account ("the WCMA agreement") and specifically states
that, "in accordance with paragraph 16 on page 9 of the WCMA
agreement, we agree, on behalf of the above named entity [the
trust] to arbitrate any controversies which may arise with
[Merrill Lynch]."  Paragraph 16 of the WCMA agreement
specifically states that "[t]he parties are waiving their
right to seek remedies in court, including the right to jury
trial" and that
"[t]he customer agrees that all controversies that
may arise between the customer and [Merrill Lynch],
including, but not limited to, those involving any
transaction or the construction, performance or
breach of this or any other agreement between the
customer and [Merrill Lynch], whether entered into
prior to, on or subsequent to the date hereof, shall
be determined by arbitration."
The WCMA agreement further defines "the customer" as "the
business or organization on whose behalf the WCMA account
authorization form is signed" –– in this case, the trust. 
MTA asserts, and Merrill Lynch does not dispute, that the
2
phrase "Thomas W. Dedrick, Sr. TTEE UAD 1/1/2000 by MTA, Inc."
is commonly understood in this context to mean that Thomas is
the "trustee" "under agreement dated" 1/1/2000 by MTA.
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1111167
That same day, Thomas also executed a client agreement with
Merrill 
Lynch that 
contained a 
substantially 
similar
arbitration 
provision, 
the 
only 
potentially 
relevant
difference being that it was between "the client" and Merrill
Lynch.  The agreement did not define "the client"; however,
the signature block contained a line for the "Name of Client
if different from name of signatory."  This line was not
filled out on the client agreement completed by Thomas, which
he executed in his own name, noting his title as "trustee." 
It is undisputed that nobody affiliated with MTA signed any
documents with Merrill Lynch.
It appears that, subsequent to the creation of the trust,
some intermittent payments were made from the trust to Tiffany
and Roderick before payments ceased in approximately October
2009.  However, the sum total of the payments made did not
equal $750,000, and, on June 28, 2011, Tiffany and Roderick
filed an action against MTA asserting breach-of-contract and
unjust-enrichment 
claims 
and 
seeking 
$213,777, 
the 
amount 
they
allege was still due them pursuant to the DCA.  On November
27, 2011, MTA filed a third-party complaint against Thomas and
Merrill Lynch, asserting claims for indemnification and
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1111167
alleging 
breach 
of 
fiduciary 
duty, 
negligence, 
and 
wantonness. 
The gravamen of those claims was described in the third-party
complaint as follows:
"MTA has discovered that [Thomas] has breached
the trust agreement and his obligations thereunder
by among other matters investing in products which
given the requirements of the trust were improper. 
Specifically, [Thomas] with knowledge of the purpose
and payout obligations of the trust breached this
trust by failing to abide by the payment schedule
and by choosing to invest in products which caused
unnecessary loss of income to the trust.  Instead of
choosing an investment approach which could have
achieved the goals and purposes of the trust,
[Thomas], through his acts or omissions or a
combination of both breached the trust.  Moreover,
[Thomas] breached the trust agreement by failing to
report the payments made from the trust as income
and failed to provide the necessary tax statement to
MTA."
On February 3, 2012, Merrill Lynch moved the trial court
to compel arbitration of MTA's claims against it pursuant to
the arbitration provisions in the account-authorization form,
the WCMA agreement, and the client agreement.  MTA opposed
that motion, arguing that it was not a party to those
contracts, and, following a hearing on the matter, both
Merrill Lynch and MTA submitted additional briefs in support
of their positions.  On March 29, 2012, the trial court
granted Merrill Lynch's motion to compel arbitration and
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1111167
dismissed MTA's third-party claims against Merrill Lynch. 
MTA's subsequent motion to alter, amend, or vacate the trial
court's order was denied on April 30, 2012, and MTA thereafter
filed a timely notice of appeal to this Court.
II.
The standard of review we apply to an order granting a
motion to compel arbitration is well settled:
"We conduct a de novo review of a trial court's
order compelling arbitration.  Smith v. Mark Dodge,
Inc., 934 So. 2d 375, 378 (Ala. 2006).
"'The party seeking to compel arbitration
must first prove both that a contract
calling for arbitration exists and that the
contract evidences a transaction involving
interstate commerce ....  Once this showing
has been made, the burden then shifts to
the nonmovant to show that the contract is
either invalid or inapplicable to the
circumstances presented.'
"Smith, 934 So. 2d at 378."
Ritter v. Grady Auto. Group, Inc., 973 So. 2d 1058, 1060-61
(Ala. 2007).  Neither MTA nor Merrill Lynch disputes that the
identified contracts containing arbitration provisions –– the
account-authorization 
form, 
the 
WCMA 
management 
agreement, 
and
the 
client agreement 
–– 
involve 
interstate 
commerce;
therefore, the only issue before this Court is whether MTA,
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1111167
which is not a signatory to those contracts, should be bound
by those contracts.
III.
In Custom Performance, Inc. v. Dawson, 57 So. 3d 90, 97
(Ala. 2010), this Court noted that arbitration is a matter of
contract and, accordingly, that a court cannot require a party
to arbitrate claims the party has not previously agreed to
arbitrate.  Hence, the general rule that "'"a nonsignatory to
an arbitration agreement cannot be forced to arbitrate [its]
claims."'"  Id. (quoting Edward D. Jones & Co. v. Ventura, 907
So. 2d 1035, 1042 (Ala. 2005), quoting in turn Cook's Pest
Control, Inc. v. Boykin, 807 So. 2d 524, 526 (Ala. 2001)). 
Nevertheless, we did recognize two exceptions to this general
rule.   The first is the third-party-beneficiary exception,
3
We also noted in Custom Performance that a nonsignatory
3
to an arbitration agreement may compel a signatory to that
agreement 
to 
arbitrate 
claims "'where 
arbitrable and
nonarbitrable claims are so closely related that the party to
a controversy subject to arbitration is equitably estopped to
deny the arbitrability of the related claim.'"  57 So. 3d at
99 (quoting Conseco Fin. Corp. v. Sharman, 828 So. 2d 890, 893
(Ala. 2001)).  However, this "intertwining-claims doctrine"
does not provide an exception to the general rule that a
nonsignatory to an arbitration agreement will not be forced to
arbitrate its claims because the doctrine can be asserted only
by a nonsignatory against a signatory and not vice versa.  See
Ex parte Tony's Towing, Inc., 825 So. 2d 96, 97 (Ala. 2002)
(explaining the rationale for allowing only nonsignatories to
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1111167
which provides that "[a] nonsignatory can be bound to an
arbitration agreement if 'the contracting parties intended,
upon execution of the contract, to bestow a direct, as opposed
to incidental[,] benefit upon the third party.'" Custom
Performance, 57 So. 3d at 97 (quoting Dunning v. New England
Life Ins. Co., 890 So. 2d 92, 97 (Ala. 2003)).  The second
exception is closely related and provides that a nonsignatory
to a contract having an arbitration agreement will be treated
as a third-party beneficiary of the contract regardless of
whether the nonsignatory meets the legal definition of a
third-party beneficiary "when he or she asserts legal claims
to enforce rights or obtain benefits that depend on the
existence of the contract that contains the arbitration
agreement."  Custom Performance, 57 So. 3d at 98 (emphasis
omitted).  This exception is referred to as the equitable-
estoppel exception because of the inequity that would result
if a party were allowed to simultaneously claim the benefits
of a contract while repudiating its burdens and conditions.
In the instant case, Merrill Lynch has argued to both the
trial court and this Court that MTA should be required to
assert the intertwining-claims doctrine).
9
1111167
arbitrate its claims against Merrill Lynch based on the
equitable-estoppel exception.  
MTA argues that it 
has 
asserted
only tort claims against Merrill Lynch and that it accordingly
would be inappropriate to apply the equitable-estoppel
exception because MTA is not suing to enforce a contract while
simultaneously disclaiming a contractual provision requiring
the arbitration of such claims.  As an initial matter, we note
that this Court has on some previous occasions applied the
equitable-estoppel exception to require the arbitration of
claims asserted by a nonsignatory to a contract calling for
arbitration even when the nonsignatory's claims sound 
in 
tort. 
See, e.g., Olshan Found. Repair Co. of Mobile, LP v. Schultz,
64 So. 3d 598, 609 (Ala. 2010), in which this Court held that
a nonsignatory plaintiff's negligence and wantonness claims
were 
nevertheless 
dependent 
on 
contracts 
containing
arbitration 
provisions 
executed 
by 
the 
nonsignatory
plaintiff's husband.  Indeed, in Olshan we held that a factual
determination must be made in each case to determine whether
a nonsignatory's claims, though at least nominally tort
claims, depend upon the existence of a related contract
containing an arbitration provision.  64 So. 3d at 609. 
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1111167
Nevertheless, in this case it is ultimately unnecessary for us
to conduct that inquiry because, even if we were to conclude
that MTA's claims against Merrill Lynch were dependent on one
of the identified contracts containing an arbitration
provision, none of those arbitration provisions are broad
enough to encompass this dispute.
In Cook's, a pest-control company moved the trial court
to require a patient in a hospital who was bitten by fire ants
while in the hospital to arbitrate her claims against the
pest-control company based on an arbitration provision in the
contract between the hospital and the pest-control company. 
807 So. 2d at 525.  The trial court denied the motion, and, on
appeal, this Court affirmed that decision, declining to apply
the third-party-beneficiary or equitable-estoppel exception
and noting that, "under the facts of this present case, it
appears [the nonsignatory hospital-patient plaintiff] relies
on theories of recovery that do not depend upon the existence
of the contract."  807 So. 2d at 527.  However, the Court
further explained that the narrow scope of the arbitration
provision in the contract between the pest-control 
company 
and
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1111167
the hospital also precluded enforcing that provision against
the plaintiff, stating:
"The narrow scope of the arbitration agreement
serves as an independent basis for affirming the
trial court's order denying [the pest-control
company's] motion to compel arbitration of [the
plaintiff's] 
claims 
against 
[the 
pest-control
company].  The text of the arbitration clause limits
its application to disputes arising between [the
pest-control company] and the 'customer' ([the
hospital]). ...  This Court has held that a
nonsignatory cannot require arbitration of a claim
by the signatory against the nonsignatory when the
scope of the arbitration agreement is limited to the
signatories themselves.  See Southern Energy Homes,
Inc. v. Gary, 774 So. 2d 521 (Ala. 2000).  Here, a
signatory ([the pest-control company]) is trying to
require 
arbitration 
by 
a 
nonsignatory 
([the
plaintiff]), where the scope of the arbitration
agreement can be read as being limited to disputes
between 
[the 
pest-control 
company] 
and 
[the
hospital].  We have recognized that the rule
requiring that a contract be construed most strongly
against the party who drafted it applies to an
agreement to arbitrate.  See Homes of Legend, Inc.
v. McCollough, 776 So. 2d 741 (Ala. 2000).  We
conclude 
that 
[the 
pest-control 
company] 
is
attempting to enforce the clause beyond its scope,
and the motion to compel arbitration fails for this
reason."
807 So. 2d at 527.  See also Porter Capital Corp. v. Thomas,
[Ms. 2101203, August 3, 2012] ___ So. 3d ___, ___ (Ala. Civ.
App. 2012) (holding that an arbitration agreement limited to
disputes between "lender" and "borrower" was not susceptible
to an interpretation that would have the agreement cover a
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1111167
dispute between the lender and the borrower's shareholder or
the lender and the borrower's guarantor), and Ex parte Stamey,
776 So. 2d 85, 90-91 (Ala. 2000) (comparing limiting
arbitration provision 
applying 
to 
"'all disputes 
and
controversies of every kind between buyer and seller arising
out of or in connection with  [this transaction]'" with
broader nonlimiting provision applying to "'[a]ll disputes,
claims or controversies arising from or relating to this
Contract or the relationships which result from this
Contract'" (some emphasis omitted)).
In the instant case, the arbitration provisions in the
identified contracts are broad in the sense that they apply to
"any controversies" and "all controversies," but narrow 
in 
the
sense that they apply only to controversies between "the
parties," "the customer" and Merrill Lynch, or "the client"
and Merrill Lynch.    The contracts containing the arbitration
provisions do not define the terms "the customer" or "the
client" in such a way that would encompass MTA, and although
Merrill Lynch argues that MTA is effectively a party to the
contracts 
containing 
the 
arbitration 
provisions 
because 
it 
was
a party to the DCA and the grantor of the trust, we disagree. 
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1111167
Regardless of MTA's 
involvement in establishing or 
funding 
the
trust, it is neither the trust nor the trustee and is
accordingly a nonsignatory to the contracts and can be held
subject to the arbitration provisions only as set forth supra. 
See also Porter Capital Corp., ___ So. 3d at ___ (arbitration
agreement entered into by borrower did not apply to borrower's
shareholder or borrower's guarantor).  Thus, regardless of
whether the third-party-beneficiary or equitable-estoppel
exception might otherwise apply, the narrow scope of the
arbitration provisions in the account-authorization form, the
WCMA agreement, and the client agreement precludes this Court
from requiring MTA to arbitrate its third-party 
claims 
against
Merrill Lynch.  The trial court accordingly erred by granting
Merrill Lynch's motion to compel arbitration.
IV.
After Tiffany and Roderick sued MTA alleging that it had
failed to fulfill its obligations under the DCA it had entered
into with their deceased mother, MTA asserted third-party
claims 
against 
Thomas 
and 
Merrill 
Lynch 
alleging, 
essentially,
that Thomas had mismanaged funds MTA had placed into a trust
established on behalf of Tiffany and Roderick.  The trial
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court subsequently entered an order granting Merrill Lynch's
motion to compel MTA to arbitrate its claims against Merrill
Lynch on the basis of arbitration provisions in multiple
contracts Thomas had executed with Merrill Lynch on behalf of
the trust and dismissing MTA's third-party claims against
Merrill Lynch.  We now reverse that order, holding that MTA
was not a signatory to those contracts and that the scope of
the arbitration provisions in those contracts is too narrow to
encompass disputes between Merrill Lynch and other entities
not a party to those contracts.  The cause is accordingly
remanded 
for 
further 
proceedings 
consistent 
with 
this 
opinion.
REVERSED AND REMANDED.
Malone, C.J., and Parker, Shaw, and Wise, JJ., concur.
15