NO. 88-120

IN THE SUPREME COURT OF THE STATE OF MONTANA 1988

ONATA FRATES, Plaintiffand Respondent,-VSEDWARD D. JONES & CO., a limited partnership, LAWRENCE SOBOL its general partner and LARRYRICHARDSON, Defendantsand Appellants.

APPEAL FROM: District Court of theThirteenth Judicial District, In and for the County ofYellowstone, TheHonorableG. Todd Baugh, Judgepresiding.

COUNSEL OF RECORD:

ForAppellant: Moulton,Bellingham, Longo & Mather;Doug James, Billings, Montana

For Respondent: Howard Strauseand LawrenceAnderson, Great Falls, Montana

- Submitted on Briefs: July 14, 1988

ClerkMr. Justice L. C. Gulbrandson delivered the Opinion of the Court.

This is an appeal and alternative application for Writ of SupervisoryControlby appellant/relatorsEdward 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 SecuritiesAct. These claims are allbased on the purchase of limitedpartnership interestsby 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 arbitrationagreement? 3. Did the DistrictCourt exceed its jurisdictionwhen it considered the issues of fiduciary relationshipand fraud in theprocurementof 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, 1984through 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 (purchasedDecember, 1982)

## , WRM 82-B (purchased December, 1982), NRM 83-B (purchased June, 1983), and NRM 84-C (purchasedJuly, 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. InMarch 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 shedid not read the agreement. [Nloone 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 importanceof the agreement, nor did anyone explain what was in the agreement. Richardson claims that he "reviewed" the agreement with Fratesbut he does not claim that he discussed any of 

### the 19 

### paragraphs. No further investmentswere 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 - 

### - settledby arbitrytion in accordancewith 

## - 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 Imay elect. If Idonotmake such an election by registeredmail 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 reopenwith

### youand 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 theundersigned. (Emphasisadded.) Subsequent to the signingof 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

novalue. 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 andbecause of the express languageof the contract. The court stated: The language of the agreement itself refers topresent 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, theprovisions apply to themargin account and future transactions only.

From this order, defendants appealed. In addition, they have requested a writ of supervisory control in thealternative 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 compelarbitration. Further,under federal law, 28 U.S.C. S 1292(a)(l) permits appeal of an order denying arbitration as an interlocutoryappeal. SeePiersonv. 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 Passagev. Prudential-Bache Securities, Inc. (Mont. 1986), 727P.2d 1298,43 St.Rep. 1532,this Courtheld 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 StateUniform ArbitrationAct.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." TheDistrict Court left the claims for future determination: "[i]f this was a fiduciary relationship and there was constructive fraud, the agreementand the arbitration clausewould 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 ArbitrationAct in § 

### 27-5-114(1), MCA. TheDistrict Court in this case appropriately looked atboth federal and state law and stated that an arbitration agreementmay 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 thereforeprinciples of contract interpretation are applicable. Frates contends,and we agree, that the contract isnot clearlydrafted 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 againstJonesbecause it, in essence, drafted the contract. St. Paul 

### ire and Marine Ins. Co. v. Cumiskey (1983),204Mont. 350, 665 P.2d 223; Shanahanv. Universal TavernCorp. (1978),179Mont. 36, 585 P.2d 1314, see § 

### 28-3-206,MCA. The District Court also followed this line of reasoning and stated "[tlhis 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 transactionsat issue in this case. We agree. The above underlined language of paragraph (17)is probably themost compelling languageused to support the inferenceof apresent 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 DistrictCourtpointed 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 casehas been limited to the application of the arbitration clause to this case and because this is an interlocutory matter only, Jones' rights havenotbeen extinguished. Frates andher husband purchased the interests at issue here prior to the time Mrs. Frates signed the agreementto open themargin 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 theprospective nature ofparagraph (17)and the contract in its entirety, the District Courtproperly denied Jones' motion to compelarbitration. Affirmed.

Justic 

# 2'We concur:

C

# /

/ iefJustice

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