NO. 88-120 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1988 

ONATA FRATES, 

Plaintiff and Respondent, 

-VSEDWARD D. JONES & CO., a limited 

partnership, LAWRENCE SOBOL its 

general partner and LARRY RICHARDSON, 

Defendants and Appellants. 

APPEAL FROM: District Court of the Thirteenth Judicial District, 

In and for the County of Yellowstone, 

The Honorable G. Todd Baugh, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Moulton, Bellingham, Longo & Mather; Doug James, 

Billings, Montana 

For Respondent : 

Howard Strause and Lawrence Anderson, Great Falls, 

Montana 

- 

Submitted on Briefs: July 14, 1988 

Clerk 
Mr. Justice L. C. Gulbrandson delivered the Opinion of the 

Court. 

This is an appeal and alternative application for Writ 

of Supervisory Control by appellant/relators Edward Jones and 

Co., et al. (Jones) from a January 7, 1988, order of the 

Thirteenth Judicial District Court, Yellowstone County, 

denying Jones' motion to compel arbitration of a claim filed 

by plaintiff/respond.ent Onata Frates (Frates) . Individuals 

named in the suit are Lawrence Sobol, a general partner of 

Jones, and Larry Richardson (Richardson) , a registered 

representative of Jones. We affirm. 

Frates filed a complaint on April 21, 1987 against 

Jones. In the claim, Frates presented eight counts of 

liability against Jones alleging breach of fiduciary duty; 

enforcement of an oral promise; fraud; constructive fraud; 

bad faith; negligent misrepresentation; negligence; and 

violations of the Montana Securities Act. These claims are 

all based on the purchase of limited partnership interests by 

Frates and her deceased husband through their accounts with 

Jones in 1982, 1983, and 1984. 

Jones presents the following issues for our 

consideration: 

1. Whether the District Court's order denying Jones' 

motion to compel arbitration is an appealable order? 

2. Whether the District Court erred by following 

Montana law rather than Missouri law when it construed the 

arbitration agreement? 

3. Did the District Court exceed its jurisdiction when 

it considered the issues of fiduciary relationship and fraud 

in the procurement of the agreement signed by Frates? 

4. Did the District Court err as a matter of law in 

failing to compel arbitration? 
Frates began purchasing securities with her husband, 

who died in 1985, from Jones in May of 1981. The Frates 

opened a joint cash account and began dealing with 

Richardson, an individual broker-dealer of Jones. After a 

number of successful investments, Mr. Frates complained that 

the couples' income taxes were too high and therefore they 

began delving into certain tax-advantage investments. In 

addition to securities not at issue in this case, Mr. and 

Mrs. Frates invested $58,000 between October 12, 1982 and 

July 23, 1984 through their Jones' account in Petro-Lewis and 

NRM securities. The securities that are the subject of the 

complaint were limited partnership interests known as 

Petro-Lewis (purchased December, 1982) , WRM 82-B (purchased 

December, 1982), NRM 83-B (purchased June, 1983), and NRM 

84-C (purchased July, 1984). 

Prior to making each of the investments, the Frates 

received prospectus statements on the securities they 

purchased. Further, according to an affidavit filed by 

Richardson, they were also advised of the risk associated 

with the investments. The Frates signed a Petro-Lewis and 

NRM application form acknowledging receipt of the prospectus 

and representing that they understood the risks associated 

with the investments. 

After Eugene Frates' death in 1985, Mrs. Frates 

continued to invest through her account at Jones. In March 

of 1986, she contacted Richardson because she wanted to 

borrow money against the investments for the purpose of 

making loans to her son. Mrs. Frates, then age 78, was 

advised by Richardson to open a "margin account." Mrs. 

Frates opened the margin account by executing a document 

entitled "Edward D. Jones & Co. 'Full Service Account' 

Customer Loan Agreement and Loan Consent." Richardson 
presented the agreement to her but she stated in her 

affidavit that she did not read the agreement. 

[Nlo one asked me to read the agreement, 

no one encouraged me to read the 

agreement, no one read the agreement to 

me, no one told me the importance of the 

agreement, nor did anyone explain what 

was in the agreement. 

Richardson claims that he "reviewed" the agreement with 

Frates but he does not claim that he discussed any of the 19 

paragraphs. No further investments were made by Mrs. Frates 

after the margin account was opened. 

Paragraphs 16 and 17 are important to this case. Those 

clauses read: 

16. In the event at [sic] any claim or 

controversy between you and the 

undersigned arising under the federal 

securities laws, you have the right to 

submit such matter before a judicial 

forum. Any other controversy arising out 

- of - or relating to accounts shallbe 

settled by - arbitrytion in accordance with 

the rules, then in effect, of the 

National Association of Securities 

Dealers, Inc. or the Boards of Directors 

of the New York Stock Exchange, Inc. 

and/or the American Stock Exchange, Inc. 

as I may elect. If I do not make such an 

election by registered mail addressed to 

you at your main office within 5 days 

after demand by you that I make such 

election, then you may make such 

election. Judgment upon any award 

rendered by the arbitrators may be 

entered in any court having jurisdiction 

thereof. 

17. This agreement and its enforcement 

shall be governed by the laws of the 

State of Missouri and its provisions 

shall be continuous; shall cover 

individuallv .. and collectivelv - all 

accounts which the undersigned may open 

- or reopen with you and shall insure [sic] 
to the benefit of your present 

organization, and any successor 

organization, . . . and shall be binding 

upon the undersigned and/or estate, 

executors, administrators and assigns of 

the undersigned. (Emphasis added.) 

Subsequent to the signing of the agreement, the limited 

partnership interests, which were based on oil and gas 

development, declined in value. Richardson never informed 

Frates of the decrease in value of the investments until 

after her husband had died. Presently, the investments have 

no value. 

The arbitration clause was discovered by Jones when 

responding to Frates' initial discovery requests. Jones 

served Frates with a demand for arbitration but she refused 

to consent. On September 28, 1987, Jones filed a motion in 

the District Court requesting dismissal of the claim or, in 

the alternative, to stay all litigation pending outcome of 

compelled arbitration. In its memorandum and order dated 

January 7, 1988, the District Court stated that the motion 

was denied because of the possibility of fraud or 

constructive fraud and because of the express language of the 

contract. The court stated: 

The language of the agreement itself 

refers to present and future transactions . . . Paragraph (17) states: " It] his 

agreement . . . shall cover . . . all 

accounts which the undersigned may open 

or reopen with you . . . " which clearly 

refers to future transactions and not 

those occurring prior to the date of the 

agreement. Reading the document as a 

whole, the provisions apply to the margin 

account and future transactions only. 

From this order, defendants appealed. In addition, 

they have requested a writ of supervisory control in the 
alternative if it is determined that the court's order is 

nonappealable. 

Frates initially argues that the order is nonappealable 

because it is "unauthorized under the list of appealable 

orders set out in Rule l(b), M.R.App.P." Frates argues that 

the order denying the motion to compel arbitration is a 

motion to dismiss "which is in reality [because of reliance 

on matters outside the pleadings] a motion for summary 

judgment." Therefore, Frates relies on the rule that orders 

denying summary judgment are not appealable. Nutter v. 

Permian Corp. (Mont. 1986), 727 P.2d 1338, 1340, 43 St.Rep. 

2027, 2028. 

Section 27-5-324(1) (a), MCA, permits appeal from "an 

order denying an application to compel arbitration." We read 

this statute to allow appeal when a district court denies a 

motion to compel arbitration. Further, under federal law, 28 

U.S.C. S 1292(a)(l) permits appeal of an order denying 

arbitration as an interlocutory appeal. See Pierson v. Dean, 

Witter, Reynolds, Inc. (7th Cir. 1984), 742 F.2d 334, 

(holding issue of arbitration was appealable as an 

interlocutory matter, 28 U.S.C. S 1292(a)(l)); Ford v. 

Shearson Lehman/American Express, Inc. (Cal. 1986), 180 

Cal.App.3d 1011, 225 Cal.Rptr. 895. 

In Passage v. Prudential-Bache Securities, Inc. (Mont. 

1986), 727 P.2d 1298, 43 St.Rep. 1532, this Court held that a 

state court "clearly has jurisdiction to order arbitration 

under the Federal Arbitration Act" relying on the United 

States Supreme Court decision of Southland Corp. v. Keating 

(1984), 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1. Therefore, 

we will review the trial court's decision in this case 

denying arbitration even though the District Court did not 

specifically rely on the Federal Arbitration Act but more so 

on the State Uniform Arbitration Act. 
Frates' next claim is that the District Court properly 

had jurisdiction to decide the issue of fraud in the 

inducement. We note that the District Court's order does 

address the possibility that fraud, constructive fraud and a 

fiduciary relationship between Frates and her broker may be 

present in this case, but the court properly did not make a 

determination in regard to the issues. The court stated only 

that it would analyze the "broker's control, the investment 

sophistication of the customer, the trust and confidence the 

customer places with the broker, and whether the customer 

invariably followed the broker's advice." The District Court 

left the claims for future determination: " [i] f this was a 

fiduciary relationship and there was constructive fraud, the 

agreement and the arbitration clause would be void." 

The gravamen of the District Court's opinion was the 

fact that the arbitration clause's specific language, when 

read in light of the whole contract, did not apply to past 

transactions, but was prospective only. We hold this was a 

proper finding. We note that the existence of the 

arbitration clause was not known by Jones until after 

discovery commenced in this case. The District Court 

nonetheless stated that it did not believe that Jones had 

"substantially utilized the litigation machinery'' thereby 

constituting a waiver of its right to assert the arbitration 

clause. Citing, Maxum Foundations, Inc. v. Salus Corp. (4th 

Cir. 1985), 779 F.2d 974. 

The federal policy is that arbitration is favored when 

a question of arbitration is raised and a contractual clause 

is present. Shearson/American Express, Inc. v. McMahon 

(1987), U.S. , 107 S.Ct. 2332, 96 L.Ed.2d 185. The 

United States Supreme Court stated in McMahon that this 

policy is based on 9 U.S.C. 5 2 that mandates that 

arbitration agreements "shall be valid, irrevocable, and 
enforceable, save upon such grounds - as exist - at law or in - 

equity for the revocation of - any contract." (Emphasis 

added. ) A similar policy is expressed in the Montana 

Arbitration Act in § 27-5-114(1), MCA. The District Court in 

this case appropriately looked at both federal and state law 

and stated that an arbitration agreement may be unenforceable 

where grounds existed either in law or equity to revoke the 

entire contract. 

Here, the issue of revocation of the entire contract 

need not be decided. A plain reading of the agreement is 

sufficient to dispose of this case. We begin with the 

determination that arbitration clauses are creatures of 

contract and therefore principles of contract interpretation 

are applicable. 

Frates contends, and we agree, that the contract is not 

clearly drafted with numerous typographical errors, confusing 

and complex language, and unclear construction. Any 

ambiguity in the arbitration clause or other aspects of the 

agreement are to be construed strictly against Jones because 

it, in essence, drafted the contract. St. Paul ire and 

Marine Ins. Co. v. Cumiskey (1983), 204 Mont. 350, 665 P.2d 

223; Shanahan v. Universal Tavern Corp. (1978), 179 Mont. 36, 

585 P.2d 1314, see § 28-3-206, MCA. The District Court also 

followed this line of reasoning and stated "[tl his rule of 

construction must be balanced against the federal policy 

favoring arbitration . . . " 

The District Court held that the language of the 

agreement was not applicable to the transactions at issue in 

this case. We agree. The above underlined language of 

paragraph (17) is probably the most compelling language used 

to support the inference of a present or future transaction. 

That language states " [tlhis agreement . . . shall cover 

. . . all accounts which the undersigned may open or reopen 
with you . . . ' The contract, as the District Court pointed 

out, also refers to a future debtor/creditor relationship 

between Frates and Jones in paragraphs (41, (51, (71, (81, 

(91, (111, and (121. 

We are aware of the federal policy favoring 

arbitration, but our review in this case has been limited to 

the application of the arbitration clause to this case and 

because this is an interlocutory matter only, Jones' rights 

have not been extinguished. Frates and her husband purchased 

the interests at issue here prior to the time Mrs. Frates 

signed the agreement to open the margin account. 

Jones argues that even though the purchases by Frates 

occurred in 1982, 1983, and 1984, prior to the execution of 

the arbitration agreement, the District Court erred as a 

matter of law. Jones cites Gilmore v. Shearson/American 

Express, Inc. (S.D.N.Y. 19871, 668 F.Supp. 314, for the 

proposition that an arbitration agreement signed after 

specific transactions occurred can be retroactively applied 

to those transactions. However, we note that the clause 

involved in Gilmore stated all "transactions" rather than 

"accounts" as in this instance. Therefore, the District 

Court appropriately determined that the Gilmore clause was 

broader than the clause involved in this case. 

Due to the prospective nature of paragraph (17) and the 

contract in its entirety, the District Court properly denied 

Jones' motion to compel arbitration. 

Affirmed. 

2' Justic 
We concur: 

C / / 

ief Justice 

Mr. Justice John C. Sheehy did not participate in this 

decision.