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Matched Legal Cases: ['§ 17000', '§ 4', '§ 1294', '§ 3', '§ 4', '§ 1290', '§ 4', '§ 3', '§ 7', '§ 425', '§ 1714', '§ 425', '§ 425', '§ 1714', '§ 115', '§ 1290', '§ 2009', '§ 95', '§ 407', '§ 407', '§ 172', '§ 164', '§ 166', '§ 172', '§ 163', '§ 163', '§ 164', '§ 1573', '§ 400', '§ 358', '§ 166', '§ 6', '§ 5', '§ 1282', '§ 1281', '§ 164', '§ 403']

Rosenthal v. Great Western Fin. Securities Corp. (1996) :: :: Supreme Court of California Decisions :: California Case Law :: California Law :: US Law :: Justia
Justia › US Law › Case Law › California Case Law › Cal. 4th › Volume 14 › Rosenthal v. Great Western Fin. Securities Corp. (1996)
Rosenthal v. Great Western Fin. Securities Corp. (1996)
Michael Linfield, Laurence B. Frank, Hadsell & Stormer, Dan Stormer, Virginia Keeny, Anne Richardson and Randy Renick for Plaintiffs and Respondents. [14 Cal. 4th 402]
On the merits of defendants' petition to compel arbitration, plaintiffs claim the arbitration agreements are void for fraud in their execution. We hold most of the plaintiffs did not present legally sufficient evidence that they reasonably relied on fraudulent representations as to the essential character of the client agreements they signed, so as to render the agreements void for fraud in the execution. (C. I. T. Corporation v. Panac (1944) 25 Cal. 2d 547, 548-549 [154 P.2d 710, 160 A.L.R. 1285].) We will conclude the petition to compel arbitration should be granted as to these plaintiffs. A smaller number of plaintiffs have presented potentially sufficient evidence of fraud in the execution; as to these plaintiffs, we will conclude a remand for additional fact finding is required.
Plaintiffs are 24 individuals, 23 of whom, through defendant Great Western Financial Securities Corporation (GWFSC), invested in stock and bond [14 Cal. 4th 403] mutual funds. (The remaining plaintiff, Michael Zinzun, sues "under Business & Professions Code §§ 17000, 17200 and 17500 on behalf of the general public.") Before making these investments, most plaintiffs were depositors with Great Western Bank (GWB), a separate corporation related to GWFSC. fn. 1 They allege representatives of both corporations led them to believe that the GWFSC representatives actually worked for GWB, that funds sold by GWFSC were, or were as secure as, insured deposits with GWB, and that the GWFSC funds were backed by GWB or by the United States Government. Plaintiffs allege the value of the GWFSC funds subsequently declined and they lost portions of their principal. The complaint names as defendants several individual GWFSC representatives, as well as GWFSC and GWB, and sets forth causes of action for breach of fiduciary duty, fraud, negligent misrepresentation, intentional and negligent infliction of emotional distress, unfair business practices and invasion of privacy.
While arguing fraud allegations alone were sufficient to avoid arbitration, plaintiffs each submitted, in addition, a declaration under penalty of perjury purportedly showing the existence of fraud in the inception of, or "permeating," the client agreements. These declarations will be reviewed in detail later in this opinion; in broadest outline, and as relevant to enforceability of the arbitration agreements, the declarations contain evidence plaintiffs, most of whom were longtime GWB depositors, were led to believe the GWFSC representatives worked for GWB; plaintiffs therefore placed trust and confidence in the representatives; the representatives materially misrepresented the nature of the investments being sold; the representatives did not tell plaintiffs the client agreement contained an arbitration clause; and the representatives assured plaintiffs, in various ways, that the written client [14 Cal. 4th 404] agreement was a mere formality needed to open the "account." GWFSC countered these with declarations from the representatives who had sold plaintiffs the subject funds, and who denied making the claimed fraudulent statements.
GWFSC, citing Strauch v. Eyring (1994) 30 Cal. App. 4th 181 [35 Cal. Rptr. 2d 747], argued that, although these agreements for the purchase of stock and bond funds were governed by the United States Arbitration Act, 9 United States Code sections 1-16 (the USAA), the USAA's provision for jury trial on the existence of an arbitration agreement (9 U.S.C. § 4) does not apply in state court. For that reason, GWFSC asserted, plaintiffs' allegations of fraud, by themselves, were an insufficient basis for denying the petition. GWFSC further maintained the facts alleged and shown by plaintiffs' declarations were insufficient, under the applicable federal substantive law of enforceability, to avoid arbitration on either asserted theory of fraud ("inception" or "permeation").
GWFSC appealed the ruling denying its petition to compel as to 20 plaintiffs. (Code Civ. Proc., § 1294, subd. (a).) The Court of Appeal held the superior court erred in determining plaintiffs were not entitled to a jury trial under section 4 of the USAA. Relying on prior Court of Appeal decisions, beginning with Main v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1977) 67 Cal. App. 3d 19 [136 Cal. Rptr. 378], and declining to follow what it deemed dictum in Strauch v. Eyring, supra, 30 Cal. App. 4th 181, the appellate court held the federal jury trial provision was applicable in a California court. The court did not address the merits of plaintiffs' fraud claims. Instead, it remanded for the trial court to determine whether plaintiffs have [14 Cal. 4th 405] sufficiently alleged fraud in the making of the arbitration agreement, and if so to try, by jury if requested, the issue of whether the arbitration agreements were the result of fraud.
[1] "Section 2 is a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary. The effect of the section is to create a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the [USAA]." (Moses H. Cone Hospital v. Mercury Const. Corp. (1983) 1, 24 [74 L. Ed. 2d 765, 785, 927] (Moses H. Cone).) The rule of enforceability established by section 2 of the USAA preempts any contrary state law and is binding on state courts as well as federal. (Southland Corp. v. Keating (1984) 1, 10-16 [79 L. Ed. 2d 1, 11-16, 852] (Southland Corp.).)
The policy of enforceability stated in section 2 of the USAA is implemented in the remaining sections of the USAA, especially sections 3 and 4, which concern attempts to resist arbitration or to litigate an issue subject to arbitration. Section 3 requires any court "of the United States" to grant a party's request for a stay of litigation on an arbitrable issue, pending completion of the arbitration. (9 U.S.C. § 3.) Section 4 requires a "United [14 Cal. 4th 406] States district court" to entertain an application to compel arbitration. (9 U.S.C. § 4.) Five days' notice of the application is required, to be served on the party in default "in the manner provided by the Federal Rules of Civil Procedure." (Ibid.) The court is to order arbitration if satisfied "that the making of the agreement for arbitration or the failure to comply therewith is not in issue." If such an issue is presented, the court is to "proceed summarily to the trial thereof." (Ibid.) Despite the summary nature of the proceeding, the party resisting arbitration may demand a jury trial on issues of the existence of the arbitration agreement or the party's default thereunder. Upon this demand, the court is to refer the matter to a jury "in the manner provided by the Federal Rules of Civil Procedure, or may specially call a jury for that purpose." (Ibid.) fn. 3
In most important respects, the California statutory scheme on enforcement of private arbitration agreements is similar to the USAA; the similarity is not surprising, as the two share origins in the earlier statutes of New York and New Jersey. (See Recommendation and Study Relating to Arbitration (Dec. 1960) 3 Cal. Law Revision Com. Rep. (1961) p. G-28 (Law Revision Commission Study); Feldman, Arbitration Law in California: Private Tribunals for Private Government (1957) 30 So.Cal.L.Rev. 375, 388, fn. 45.) Code of Civil Procedure section 1281, like section 2 of the USAA, provides that predispute arbitration agreements are "valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract." Code of Civil Procedure section 1281.2 (hereafter section 1281.2), like the USAA's section 4, provides a procedure by which a party may petition the court to order arbitration of a controversy. Under section 1281.2, as under section 4 of the USAA, the court may deny the application if it finds the party resisting arbitration did not in fact agree to arbitrate. fn. 4 Like section 3 of the USAA, Code of Civil Procedure section 1281.3 provides that when a court has ordered arbitration of a controversy, any pending litigation on the same [14 Cal. 4th 407] controversy is to be stayed. fn. 5 [2a] In one important respect, however, section 1281.2 differs from section 4 of the USAA: The California statute does not provide for a jury trial of issues as to the making of the arbitration agreement or the resisting party's default thereunder. Instead, our statutory scheme requires petitions to compel arbitration to be determined "in the manner ... provided by law for the making and hearing of motions." (Code Civ. Proc., § 1290.2 (hereafter section 1290.2).)
The question thus arises whether section 4 of the USAA, or sections 1281.2 and 1290.2, provide the procedure to be followed in a California court in a case where the USAA governs arbitrability of the controversy. As noted, the Courts of Appeal have reached differing results on this question. (Compare Strauch v. Eyring, supra, 30 Cal.App.4th at p. 186 [jury trial provision of the USAA's section 4 "does not apply in state court proceedings"] with Main v. Merrill Lynch, Pierce, Fenner & Smith, Inc., supra, 67 Cal.App.3d at pp. 24-25 [noting the USAA "provides for a 'trial,' by jury if requested," and that "[t]he proceedings below ... were controlled by the [USAA]"], Rice v. Dean Witter Reynolds, Inc. (1991) 235 Cal. App. 3d 1016, 1025, fn. 4 [1 Cal. Rptr. 2d 265] [State court litigant "is entitled to a jury trial on the issue of fraud. (9 U.S.C. § 4.)"], and Strotz v. Dean Witter Reynolds, Inc. (1990) 223 Cal. App. 3d 208, 210, fn. 1 [272 Cal. Rptr. 680] [Under the USAA, as applicable in state court, "the parties are entitled to a jury trial of the issue whether a valid agreement to arbitrate exists."].) In light both of the specific language of the USAA and of general principles of federal preemption, we conclude the USAA does not require California courts to hold a jury trial on the existence of an arbitration agreement. fn. 6 The Court of Appeal decisions just cited are disapproved to the extent they reach the opposite conclusion.
Section 4 of the USAA does not explicitly govern the procedures to be used in state courts. As already noted, the statute contemplates a petition in "United States district court," and provides that certain steps are to be taken "in the manner provided by the Federal Rules of Civil Procedure." This [14 Cal. 4th 408] language has led the United States Supreme Court to express its doubt that section 4 is applicable in state courts. Thus, in Southland Corp., supra, 1, 16, footnote 10 [79 L. Ed. 2d 15], the court explained: "In holding that the Arbitration Act preempts a state law that withdraws the power to enforce arbitration agreements, we do not hold that §§ 3 and 4 of the Arbitration Act apply to proceedings in state courts. Section 4, for example, provides that the Federal Rules of Civil Procedure apply in proceedings to compel arbitration. The Federal Rules do not apply in such state-court proceedings." In Volt Info. Sciences v. Leland Stanford Jr. U. (1989) 468, 477 [103 L. Ed. 2d 488, 498-499, 1248], the high court again declined to decide the issue, which it stated had been "expressly reserv[ed]" in Southland Corp. The court remarked that sections 3 and 4 "by their terms appear to apply only to proceedings in federal court." (Volt Info. Sciences v. Leland Stanford Jr. U., supra, 489 U.S. at p. 477, fn. 6 [103 L.Ed.2d at p. 499].)
The question whether a jury trial is called for thus requires us to go beyond the language of section 4 of the USAA and apply broader principles [14 Cal. 4th 409] of federal preemption. [3] It is a "general and unassailable proposition ... that States may establish the rules of procedure governing litigation in their own courts," even when the controversy is governed by substantive federal law. (Felder v. Casey (1988) 131, 138 [101 L. Ed. 2d 123, 137, 2302].) "By the same token, however, where state courts entertain a federally created cause of action, the 'federal right cannot be defeated by the forms of local practice.' " (Ibid.) Thus, as we have previously recognized, a state procedural rule must give way "if it impedes the uniform application of the federal statute essential to effectuate its purpose, even though the procedure would apply to similar actions arising under state law." (McCarroll v. L.A. County etc. Carpenters (1957) 49 Cal. 2d 45, 61, 62 [315 P.2d 322].) At a minimum the state procedure must be neutral as between state and federal law claims. (Howlett v. Rose (1990) 356, 372 [110 L. Ed. 2d 332, 350-351, 2430].) More exactingly, the state rule may be preempted if it would stand " ' "as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." ' " (Felder v. Casey, supra, 487 U.S. at p. 138 [101 L.Ed.2d at p. 138].) Uniform national application of a federal substantive law requires, in particular, that state courts not apply procedural rules that would "frequently and predictably produce different outcomes ... based solely on whether the [federal] claim is asserted in state or federal court." (Ibid.)
[2b] Like other federal procedural rules, therefore, "the procedural provisions of the [USAA] are not binding on state courts ... provided applicable state procedures do not defeat the rights granted by Congress." (McClellan v. Barrath Constr. Co., Inc., supra, 725 S.W.2d at p. 658, italics added.) We think it plain the California procedures for a summary determination of the petition to compel arbitration serve to further, rather than defeat, the enforceability policy of the USAA. Sections 1281.2 and 1290.2 are neutral as between state and federal law claims for enforcement of arbitration agreements. They display no hostility to arbitration as an alternative to litigation; to the contrary, the summary procedure provided, in which the existence and validity of the arbitration agreement is decided by the court in the manner of a motion, is designed to further the use of private arbitration as a means of resolving disputes more quickly and less expensively than through litigation. fn. 7 Finally, having a court, instead of a jury, decide whether an arbitration agreement exists will not "frequently and predictably produce different outcomes." (Felder v. Casey, supra, 487 U.S. at p. 138 [101 [14 Cal. 4th 410] L.Ed.2d at p. 138].) Because the California procedure for deciding motions to compel serves to further, rather than defeat, full and uniform effectuation of the federal law's objectives, the California law, rather than section 4 of the USAA, is to be followed in California courts.
In a distinct, but related, argument, plaintiffs maintain the use of a motion procedure to decide the petition to compel arbitration violates the USAA because it constitutes a special rule for arbitration agreements, not applicable to contracts generally. As the United States Supreme Court has explained on several occasions, section 2 of the USAA, where applicable, precludes states from "singling out arbitration provisions for suspect status, requiring instead that such provisions be placed 'upon the same footing as other contracts.' " (Doctor's Associates, Inc. v. Casarotto (1996) 517 U.S. ___, ___ [134 L. Ed. 2d 902, 909, 1652, 1656].) Thus, a substantive state law rule may be applied to agreements subject to the USAA only if the state law "arose to govern issues concerning the validity, revocability and enforceability of contracts generally." (Perry v. Thomas (1987) 483, 492, fn. 9 [96 L. Ed. 2d 426, 437, 2520]; see also Southland Corp., supra, 465 U.S. at p. 16, fn. 11 [79 L.Ed.2d at pp. 15-16].) Contrary to plaintiffs' claim, however, nothing in the California procedures violates this principle. Sections 1281.2 and 1290.2 establish no special rule of nonenforceability applicable only to arbitration agreements. Nor do the California procedures place arbitration agreements at a disadvantage compared to other contracts, or single them out for suspect status. Our statutes do establish procedures for determining enforceability not applicable to contracts generally, but they do not thereby run afoul of the USAA's section 2, which states the principle of equal enforceability, but does not dictate the procedures for determining enforceability. Moreover, section 2, as part of a statutory scheme establishing special procedures for deciding enforceability of arbitration agreements, could not reasonably be interpreted as forbidding the use of such procedures.
[4] Plaintiffs contend that if, as we hold above, section 4 of the USAA does not apply in California courts, then the California statutes (sections 1281.2 and 1290.2) must be construed to mandate the trial court make only a preliminary determination of sufficiency of evidence to void the arbitration agreement, with a jury trial of the issue to follow if the evidence of fraud is deemed sufficient. Plaintiffs maintain that allowing the court finally to decide whether the arbitration agreement is void for fraud would deprive [14 Cal. 4th 411] them of their state constitutional rights to due process and a jury trial. (Cal. Const., art. I, §§ 7, 16.) We find no violation of state constitutional rights in the summary procedure for decision, without a jury, of whether a valid arbitration agreement exists.
A petition to compel arbitration " 'is in essence a suit in equity to compel specific performance of a contract.' " (Spear v. California State Auto. Assn. (1992) 2 Cal. 4th 1035, 1040 [9 Cal. Rptr. 2d 381, 831 P.2d 821]; Freeman v. State Farm Mut. Auto. Ins. Co. (1975) 14 Cal. 3d 473, 479 [121 Cal. Rptr. 477, 535 P.2d 341]; Trubowitch v. Riverbank Canning Co. (1947) 30 Cal. 2d 335, 347 [182 P.2d 182].) Because actions for specific performance were not recognized at common law, the California Constitution does not guarantee the parties to such a proceeding a jury trial. (Hastings v. Matlock (1985) 171 Cal. App. 3d 826, 835 [217 Cal. Rptr. 856].) Moreover, "[t]he fact that in an action for specific performance of an agreement the court must determine the existence of the agreement does not itself transform the action into one at law." (Ibid.; Walton v. Walton (1995) 31 Cal. App. 4th 277, 288 [36 Cal. Rptr. 2d 901].) Under these principles, plaintiffs are not constitutionally entitled to a jury trial on whether the arbitration agreements should be specifically enforced, including the question whether they are void for fraud.
The petition for an order of arbitration here was not a new, independent action; rather, it was filed in response to a complaint seeking, among other forms of relief, money damages, and was coupled with a request that litigation of the complaint be stayed pending completion of the arbitration. Plaintiffs therefore compare this case to those in which a plaintiff's release of liability is raised as a defense in an action for damages from personal injury. In such cases courts have held the issue of fraud in the inception or inducement of the release is for the jury in the underlying action. (Palmquist v. Mercer (1954) 43 Cal. 2d 92, 100 [272 P.2d 26]; Frusetta v. Hauben (1990) 217 Cal. App. 3d 551, 558-560 [266 Cal. Rptr. 62].) Neither of the cited decisions, however, considered any constitutional issue; the question was simply whether, under the particular facts of the case, the trial court properly removed an issue of fraud from the jury by an order for nonsuit (Palmquist) or summary judgment (Frusetta). Neither stands for the proposition the Legislature is constitutionally barred from establishing a nonjury procedure for deciding whether to order specific enforcement of a particular type of contractual agreement.
Plaintiffs also compare sections 1281.2 and 1290.2 to various statutes creating barriers to pleading specific causes of action or claims for damages. (E.g., Code Civ. Proc., §§ 425.13 [punitive damages against health care [14 Cal. 4th 412] provider], 425.14 [punitive damages against religious corporation], 425.16 ["SLAPP" (strategic lawsuits against public participation) suits], Civ. Code, § 1714.10 [action for civil conspiracy against attorney for conspiring with client to contest or compromise dispute].) This court and the Courts of Appeal, noting the potential deprivation of jury trial that might result were these statutes construed to require the plaintiff first to prove the specified claim to the trial court, have instead read the statutes as requiring the court to determine only if the plaintiff has stated and substantiated a legally sufficient claim. (See, e.g., College Hospital, Inc. v Superior Court (1994) 8 Cal. 4th 704, 719 [34 Cal. Rptr. 2d 898, 882 P.2d 894] [Code Civ. Proc., § 425.13]; Lafayette Morehouse, Inc. v. Chronicle Publishing Co. (1995) 37 Cal. App. 4th 855, 866-867 [44 Cal. Rptr. 2d 46] [Code Civ. Proc., § 425.16]; Hung v. Wang (1992) 8 Cal. App. 4th 908, 926-934 [11 Cal. Rptr. 2d 113] [Civ. Code, § 1714.10].)
In support of their claim the summary procedure of sections 1281.2 and 1290.2 deprives them of due process, plaintiffs assert the hearing and determination of a petition to compel "could take place early on in the proceedings, without the opportunity for discovery." Plaintiffs do not, however, assert they actually had insufficient time to conduct discovery before hearing of the petition, or that they sought and were refused discovery of any matter pertinent to the enforceability of the arbitration clause. Plaintiffs, of course, have full access to, and have made full use of, their own recollections of the transactions, the principal evidence upon which their claim of fraud in inception of the arbitration agreement is based. GWFSC has provided pertinent written evidence (the client agreements and other account forms), as well as declarations of its representatives, in support of its petition. These circumstances do not establish plaintiffs have been unfairly [14 Cal. 4th 413] denied discovery of anything they need to oppose the petition to compel arbitration.
Defendants urge us to hold a party opposing arbitration must show fraud not only by a preponderance of evidence, but by clear and convincing evidence. We are not persuaded such a rule does or should exist. Except as the law otherwise provides, the burden of proof is by a preponderance of the evidence. (Evid. Code, § 115.) Section 1281.2, which sets forth the bases for granting or denying an application to compel, neither states nor suggests any other burden of proof. We have, moreover, previously rejected the suggestion that allegations of fraud, in a civil action, must be proven by clear and convincing evidence. (Liodas v. Sahadi (1977) 19 Cal. 3d 278, 286-291 [137 Cal. Rptr. 635, 562 P.2d 316].) Defendants' invocation of the general policy favoring enforcement of valid arbitration agreements is insufficient to warrant imposing a higher burden on a party opposing arbitration, especially when the existence and enforceability of the agreement to arbitrate is the very issue before the trial court.
We consider next the means to be used by the trial court in finding the facts relevant to enforcement of the arbitration agreement. As both parties acknowledge, hearing and determination "in the manner ... provided by law for the ... hearing of motions" (§ 1290.2) would ordinarily mean the facts are to be proven by affidavit or declaration and documentary evidence, [14 Cal. 4th 414] with oral testimony taken only in the court's discretion. (Code Civ. Proc., § 2009; Cal. Rules of Court, rules 303(a)(2), 323(a); Strauch v. Eyring, supra, 30 Cal.App.4th at p. 184; Reifler v. Superior Court (1974) 39 Cal. App. 3d 479, 483-484 [114 Cal. Rptr. 356]; Haldane v. Haldane (1962) 210 Cal. App. 2d 587, 593 [26 Cal. Rptr. 670].)
GWFSC contends plaintiffs' declarations are legally insufficient to raise a nonarbitrable issue because their claims of fraud, even if believed, are not [14 Cal. 4th 415] directed specifically at the arbitration clauses. GWFSC relies on Prima Paint v. Flood & Conklin (1967) 395, 404 [18 L. Ed. 2d 1270, 1277-1278, 1801] (Prima Paint), in which the high court held that under the USAA, unless the parties have agreed otherwise, "claims of fraud in the inducement of the contract generally," that is, fraud claims not going "to the 'making' of the agreement to arbitrate," are to be decided by the arbitrator rather than the court. We have interpreted section 1281.2 to embody the same standard of enforceability. (Ericksen, Arbuthnot, McCarthy, Kearney, & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal. 3d 312, 322-323 [197 Cal. Rptr. 581, 673 P.2d 251] (Ericksen).) fn. 8
[6] California law distinguishes between fraud in the "execution" or "inception" of a contract and fraud in the "inducement" of a contract. In brief, in the former case " 'the fraud goes to the inception or execution of the agreement, so that the promisor is deceived as to the nature of his act, and actually does not know what he is signing, or does not intend to enter into a contract at all, mutual assent is lacking, and [the contract] is void. In such a case it may be disregarded without the necessity of rescission.' " (Ford v. Shearson Lehman American Express, Inc. (1986) 180 Cal. App. 3d 1011, 1028 [225 Cal. Rptr. 895].) Fraud in the inducement, by contrast, occurs when " 'the promisor knows what he is signing but his consent is induced by fraud, mutual assent is present and a contract is formed, which, by reason of the fraud, is voidable. In order to escape from its obligations the aggrieved party must rescind ....' " (Ibid.)
[7] GWFSC asserts Prima Paint mandates arbitration of any fraud claim, even one going to the execution of the contract, except an "independent" or "separate and distinct" challenge to the arbitration clause itself. Statements to that effect appear in some decisions applying Prima Paint. (See, e.g., [14 Cal. 4th 416] Rowland v. Paine Webber, Inc. (1992) 4 Cal. App. 4th 279, 285 [6 Cal. Rptr. 2d 20] ["independent challenge"]; Union Mutual Stock Life Ins. v. Beneficial Life. (1st Cir. 1985) 774 F.2d 524, 529 [same]; see also R. M. Perez & Associates, Inc. v. Welch (5th Cir. 1992) 960 F.2d 534, 537-538 [holding "fraud in the factum," as well as in the inducement, subject to Prima Paint].) fn. 9
We do not believe, however, the language or logic of Prima Paint compels such a reading. To the contrary, we conclude claims of fraud in the execution of the entire agreement are not arbitrable under either state or federal law. If the entire contract is void ab initio because of fraud, the parties have not agreed to arbitrate any controversy; under that circumstance, Prima Paint does not require a court to order arbitration. (Accord, Rice v. Dean Witter Reynolds, Inc., supra, 235 Cal.App.3d at p. 1024; Strotz v. Dean Witter Reynolds, Inc., supra, 223 Cal.App.3d at pp. 217-218; Three Valleys Mun. Water Dist. v. E.F. Hutton, supra, 925 F.2d at pp. 1140-1141; Cancanon v. Smith Barney, Harris, Upham & Co. (11th Cir. 1986) 805 F.2d 998, 999-1000; see also Rush v. Oppenheimer & Co., Inc. (S.D.N.Y. 1988) 681 F. Supp. 1045, 1049 [allegations of fraud need not be directed "exclusively" at the arbitration clause].)
Where, however, a party's apparent assent to a written contract is negated by fraud in the inception, there is simply no arbitration agreement to be enforced. As one Court of Appeal recently explained, Prima Paint does not require "allegations directed specifically and solely at the agreement to [14 Cal. 4th 417] arbitrate. Prima Paint, rather, requires some allegation [and, as we held earlier, evidence] from which it may be determined that the parties in fact did not intend to arbitrate the issues set forth in the pleadings. The allegation may be directed solely at the 'making' of the agreement to arbitrate or, as recognized by the doctrine of fraud in the inception, it may be directed at the 'making' of the contract as a whole." (Hayes Children Leasing Co. v. NCR Corp. (1995) 37 Cal. App. 4th 775, 784 [43 Cal. Rptr. 2d 650].)
In the absence of a contrary agreement, parties to a predispute arbitration agreement are presumed to have intended arbitration of controversies, including allegations of fraud in the inducement of the contract generally, that may allow rescission or reformation of the contract or part of it. They cannot, however, have intended arbitration under a contract wholly void for fraud in its execution. We therefore conclude Prima Paint does not preclude the court from deciding claims of fraud in the execution of the entire contract. The same is true of California law under our decision in Ericksen, supra, 35 Cal. 3d 312, in which we explicitly distinguished cases where the party opposing arbitration " 'denied ever agreeing to anything.' " (Id. at p. 323, fn. 8.)
In Ericksen, supra, 35 Cal.3d at page 323, footnote 8, this court mentioned Main's analysis briefly, but with apparent approval. In doing so, however, [14 Cal. 4th 418] we apparently understood the "permeation doctrine" to be identical or very similar to fraud in the inception or execution of a contract: we held it inapplicable because " 'this is not a case ... where the defendant denied ever agreeing to anything.' " (Ibid.; see also Hayes Children Leasing Co. v. NCR Corp., supra, 37 Cal.App.4th at p. 784 [Ericksen treated permeation as "identical to the doctrine of fraud in the inception"]; Herman Feil, Inc. v. Design Center of Los Angeles (1988) 204 Cal. App. 3d 1406, 1416 [251 Cal. Rptr. 895] ["As was observed in Ericksen, however, the 'permeation' claim is applicable only where the party seeking to avoid arbitration denies having agreed to anything."].)
As another Court of Appeal has since explained, the Ford court appears to have "ignore[d] the rule in Prima Paint that the arbitration agreement is severable from the principal contract. [¶] The Supreme Court in Prima Paint did not hold that fraud which goes to the making of the contract is for the court and fraud related to the performance of the contract is for the arbitrator. Rather, the court specifically and expressly made a distinction between fraud which is directed at the arbitration agreement and fraud directed at the principal contract. The court quite clearly held that only fraud directed at the making or performance of the arbitration agreement is to be determined by the court. (Prima Paint Corp. v. Flood & Conklin, supra, 395, 403-404 [18 L. Ed. 2 1270, 1277-1278].)" (Strotz, supra, 223 Cal.App.3d at p. 217.)
Thus, the permeation doctrine conflicts with Prima Paint "to the extent it indicates that an agreement to arbitrate may be found invalid simply because the contract as a whole was induced by fraud." (Hayes Children Leasing Co. v. NCR Corp., supra, 37 Cal.App.4th at p. 784.) To the extent, on the other hand, the permeation doctrine is merely another name for fraud in the [14 Cal. 4th 419] execution of a contract, it is unnecessary. Seeing, therefore, no legally valid use for the theory, we decline further to recognize it. Claims that a party has employed fraud in inducing consent specifically to the arbitration agreement (e.g., by actively concealing its existence or misrepresenting its meaning or value) are, under Prima Paint, to be decided by the court, because they go to the validity of the making of the arbitration clause itself. Claims that, due to fraud in the execution of the agreement as a whole, the parties reached no contract containing an arbitration clause, are also to be decided by the court. But claims that the contract as a whole was obtained through fraud in the inducement are, in the absence of evidence of the parties' contrary intent, arbitrable under Prima Paint. Included in this rule of arbitrability are claims of a "grand scheme" of fraud, or fraud "permeating" the transaction. B. Reasonableness of Reliance as an Element of Fraud in the Inception
The parties dispute whether plaintiffs' declarations, even if believed, show fraud in the inception or execution of the client agreements sufficient to render the agreements entirely void. In assessing the legal sufficiency of plaintiffs' claims, we apply the California law of contracts generally, rather than any rules uniquely tailored to enforcement of arbitration agreements. We are precluded under section 2 of the USAA from "singling out arbitration provisions for suspect status." (Doctor's Associates, Inc. v. Casarotto, supra, 517 U.S. ___, ___ [134 L. Ed. 2d 902, 909, 1652, 1656].) fn. 10
[8a] The central disputed question is whether plaintiffs could justifiably rely on GWFSC's misrepresentations without themselves ascertaining the nature of the documents they signed. GWFSC argues plaintiffs had a reasonable opportunity to know the terms of the client agreements, but failed through their own neglect to read them. Plaintiffs, however, claim their failure to read the client agreements is legally excused by virtue of GWFSC's asserted fraud. They rely on Lynch v. Cruttenden & Co. (1993) 18 Cal. App. 4th 802, 807 [22 Cal. Rptr. 2d 636] (Lynch), in which the court stated, "The general rule in California is that even in the absence of a fiduciary relationship plaintiff's failure to read a contract is excusable where reliance is placed on the misrepresentations of the other party." (Accord, Strotz, supra, 223 Cal.App.3d at pp. 218-219.)
California law supports GWFSC's position that fraud does not render a written contract void where the defrauded party had a reasonable opportunity [14 Cal. 4th 420] to discover the real terms of the contract. A contract may, however, be held wholly void, despite the parties' apparent assent to it, when, " 'without negligence on his part, a signer attaches his signature to a paper assuming it to be a paper of a different character.' " (C. I. T. Corporation v. Panac, supra, 25 Cal.2d at p. 549, quoting 1Williston on Contracts (3d ed.1957) § 95A, pp. 350, 351, italics added; see also Gardner v. Rubin (1957) 149 Cal. App. 2d 368, 372 [308 P.2d 892] [negotiable instrument not enforceable even by holder in due course where executed through fraud and "in the absence of negligence on the part of the maker" (italics added)]; Ramirez v. Superior Court (1980) 103 Cal. App. 3d 746, 756, fn. 3 [163 Cal. Rptr. 223] ["no agreement exists unless the parties signing the document act voluntarily and are aware of the nature of the document and have turned their attention to its provisions or reasonably should have turned their attention to its provisions" (italics added)].) A release of a liability claim, for example, "may be rendered void on the grounds of fraud or misrepresentation regarding the nature of the claim covered by the release so long as the releasor's failure to learn the nature of the terms was not attributable to his own negligence." (Frusetta v. Hauben, supra, 217 Cal.App.3d at p. 557, italics added; see also Casey v. Proctor (1963) 59 Cal. 2d 97, 103 [28 Cal. Rptr. 307, 378 P.2d 579] [release not binding if releaser's misapprehension of nature or scope caused by other party's misconduct and "not due to his own neglect" (italics added)].)
The Lynch and Strotz courts relied for their contrary statements of the law on 1 Witkin, Summary of California Law (9th ed. 1987) Contracts, section 407, pages 366-367. In that section Witkin asserts that, while misrepresentations were once regarded as an excuse for failure to read a contract only within a fiduciary relationship, "[i]t is now settled ... that the excuse may be asserted even in the situation where the parties are in no such relationship." (Id. at p. 366.) Upon examination of the authorities, we conclude [14 Cal. 4th 421] Witkin and the courts in Lynch and Strotz state the rule of excuse too broadly. While some prior cases have held equitable relief, such as rescission or reformation of the contract, may be available despite the defrauded party's failure to read the contract, our law is clear that misrepresentation does not render the contract void unless the misled party, before making the agreement, lacked a reasonable opportunity to learn its terms.
Aside from a case stating a special rule for insurance policies, Witkin relies principally on two decisions of this court: California Trust Co. v. Cohn (1932) 214 Cal. 619 [7 P.2d 297] (Cohn) and Van Meter v. Bent Construction Co. (1956) 46 Cal. 2d 588 [297 P.2d 644] (Van Meter). (1 Witkin, Summary of Cal. Law, supra, Contracts, § 407, pp. 366-367.) Both cases, however, involve reformation of contracts, rather than the determination a contract is void for fraud in the execution.
Thus, in Cohn, this court allowed equitable relief for fraud, through reformation of the written contract, despite a party's failure to read the [14 Cal. 4th 422] writing. We did not hold a party who had reasonable opportunity to learn the terms of a contract before executing it but failed to do so, could, because of another party's misrepresentations, obtain a judgment the contract was completely void for lack of assent.
Witkin also cites a section of the Restatement as treating the same subject, i.e., negligence of the defrauded party. (1 Witkin, Summary of Cal. Law, supra, Contracts, § 407, p. 367.) Notably, however, the section cited is section 172, which deals only with fraud as grounds for avoidance or reformation of a contract (Rest.2d Contracts, § 172 & com. a, p. 469), rather than section 163, which, as discussed earlier, concerns fraud negating assent to a contract and thereby rendering it void. Section 172 provides that a defrauded party's "fault in not knowing or discovering the facts before making the contract does not make his reliance unjustified unless it amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing." Comment a to the section explains it as an elaboration of the rule that "[t]he recipient's reliance on the misrepresentation must be justified in order to entitle him to avoidance (§ 164) fn. 11 or reformation (§ 166)." (Rest.2d Contracts, § 172, com. a, p. 469.) When the defrauded party seeks such equitable relief, relief will not be barred by "the mere fact that he could, by the exercise of reasonable care, have avoided the mistake." (Ibid.) [14 Cal. 4th 423] As the comment further explains, however, such negligence does bar the defrauded party from claiming the contract is void for lack of assent: "However, the recipient's fault will prevent application of the rule stated in § 163, under which a misapprehension as to the very nature of a proposed contract makes his apparent manifestation of assent ineffective. That rule applies only if he has neither knowledge nor reasonable opportunity to obtain knowledge of the character or essential terms of the proposed contract." (Ibid.) The same contrast between the standards for equitable relief and a finding of voidness is made in comment b to section 163. (Rest.2d Contracts, § 163, com. b, p. 444; see also id., § 164, com. a, p. 445.)
It remains only to apply the foregoing test to the facts shown by the plaintiffs' declarations. We first examine the evidence common to most or all plaintiffs. [10] Many plaintiffs in the instant case declare GWFSC [14 Cal. 4th 424] representatives told them the written client agreements were unimportant, or that plaintiffs need not read them. (See, e.g., declarations of Allen [" 'it's not necessary to read them' "]; Fitzgerald ["documents just restated what he had already told me"]; George Lampel ["documents were necessary for us to open our account" but were "merely standard forms" and "just repeated what he told us"]; Pupo [" 'just a formality for opening your account' "]; Rosenthal ["just a formality and they just restated what he had already told me"]; and Warren ["not necessary to read the form"].) Such statements, even if falsely and fraudulently made, do not void a written contract, because it is generally unreasonable, in reliance on such assurances, to neglect to read a written agreement before signing it. One party's making of such an assurance does not, by itself, deprive the other party to a prospective contract of the reasonable opportunity to discover the character and essential terms of the agreement. fn. 12
Floyd Allen, for example, declares he had banked at the same GWB branch for 30 years and believed the woman who sold him the funds to be an employee of GWB, "since her desk was near the tellers [one of whom referred Allen to her] and was in the same room as the other bank operations." Betty Connolly banked at the same GWB branch for more than 25 years. A GWFSC representative called her from the GWB branch to discuss her GWB certificate of deposit, which was expiring. Because he had information regarding her GWB account, and because his desk was in the branch along with other banking operations desks, she thought he was a GWB employee. She signed the client agreement without reading it, because "I trusted Great Western and its employees and he [the representative] had said that the forms just repeated what he had told me ...." Ruby Rosenthal, 94 years old, had banked at GWB for about 30 years. She thought the GWFSC representative worked for GWB because he worked in the same area as GWB staff, and had her telephone number and access to her bank records. She relied on the representative, signing the client agreement without reading it. Other plaintiffs make similar declarations. [14 Cal. 4th 425]
Granting the existence of a fiduciary relationship between securities brokers and their customers, the scope of the duty varies with the facts of the relationship. (See Duffy v. Cavalier (1989) 215 Cal. App. 3d 1517, 1535 [264 Cal. Rptr. 740] ["The question is not whether there is a fiduciary duty, which there is in every broker-customer relationship; rather, it is the scope or extent of the fiduciary obligation, which depends on the facts of the case."].) Plaintiffs, according to their declarations, were given reason to believe the GWFSC representatives worked for GWB, an institution with which they had long acquaintance, and therefore might reasonably have regarded the representatives as generally trustworthy. Nonetheless, they had no ongoing relationship with GWFSC or its representatives. At the times the claimed nondisclosures occurred, no agency relationship had yet been formed, and those aspects of a broker's duty that derive from his or her role as the investor's agent are therefore not applicable. Under these circumstances, we find no authority for the proposition the fiduciary obligations of a broker extend to orally alerting the customer to the existence of an arbitration clause or explaining its meaning and effect. (See Gouger v. Bear, Stearns & [14 Cal. 4th 426] Co., Inc. (E.D.Pa. 1993) 823 F. Supp. 282, 286-288; Castro v. Marine Midland Bank, N.A. (S.D.N.Y. 1988) 695 F. Supp. 1548, 1551; Rush v. Oppenheimer & Co., Inc., supra, 681 F.Supp. at p. 1052.) As to other terms of the agreement, such as the risks and benefits of the investments, the question of a breach of fiduciary obligations is a separate matter-in this case for the arbitrators-which we do not address.
We conclude that the statements of GWFSC representatives to the effect the client agreements were merely a formality, or did not need to be read, were insufficient, even in light of the parties' relationship, to warrant a finding of fraud in the inception of the agreements. As to those plaintiffs [14 Cal. 4th 427] whose declarations disclose no additional evidence of fraud, the petition to compel should have been granted. fn. 14 The remaining plaintiffs' declarations require individual discussion.
Greco continues, "After describing what the documents supposedly said, he said, 'you just need to sign this to open the account.' He explained that the documents he wanted me to sign 'just repeat what I told you and your sister [sic].' Because I trusted him to have correctly described the documents to me, I signed them where he pointed for me to sign." Several months later, according to Greco, she and Kasbarian returned to the branch to "deposit" more money in their new "account," and met with a different representative, Nina Daikovich. Daikovich, like Divine, purported to describe the investment accurately for them, but did not mention arbitration and urged them to [14 Cal. 4th 428] " 'just sign here.' " Kasbarian's narration of the interactions with Divine and Daikovich is consistent with Greco's.
[13] Plaintiff Jodie Anne Rosen, 30 years old, is legally blind as a result of a 1989 industrial injury. She initially placed her workers' compensation settlement of $125,000 in a short-term GWB certificate of deposit. She chose GWB, where she herself had banked for "several years," because "my family had banked with Great Western for decades." Shortly thereafter, a GWB [14 Cal. 4th 429] employee referred her to Carlos Ferlini, a GWFSC representative, whom the employee described as "Great Western's Investment Counselor." Because she recognized Ferlini as a former GWB teller, because Ferlini had access to her account, and because Ferlini's desk was right next to the loan department, she "never doubted" he was a GWB employee.
Rosen's declaration is contradicted by evidence submitted by GWFSC. Although Ferlini did not provide a declaration, GWFSC representative Bret [14 Cal. 4th 430] Davidson declares it was he, not Ferlini, who initially met with Rosen. Davidson then introduced Rosen and her sister to Ferlini, who gave them "a full presentation." Finally, Davidson filled out the paperwork, reviewed it with her, and obtained her signature. According to Davidson, Rosen never said or demonstrated she was visually impaired. She signed the client agreement and other documents without his aid and without saying she could not read them. The trial court, as discussed above, must resolve these testimonial conflicts.
Talsky's declaration provides no evidence any GWFSC representative made any fraudulent statement to Bied in the course of securing her apparent assent to the investments. It is possible, however, that Bied, in light of her asserted disability, can establish constructive fraud in GWFSC's abuse of a confidential or fiduciary relationship. (Civ. Code, § 1573; 1 Witkin, Summary of Cal. Law, supra, Contracts, §§ 400-401, pp. 360-362.) The parties have not specifically briefed this point with regard to Bied, and the facts of her case are so unclear and in such dispute that legal analysis of the question would be premature. fn. 15 In any event, Talsky's declaration, if believed, raises a factual issue as to Bied's capacity to contract; if extreme enough, her mental deficiency could render void any contract to which she apparently [14 Cal. 4th 431] assented, including client agreements containing the arbitration clause. (See 1 Witkin, supra, § 358, p. 326.) On remand, the trial court must find the facts and decide whether they render the contract void under either theory.
As explained by the majority, claims that an arbitration clause is unenforceable because of fraud are to be decided by the court if the fraud would render the entire contract void or if the fraud was specifically directed at the arbitration clause. Thus, claims of fraud in the execution of the entire contract (because they would show the contract to be void) and claims of fraud in the execution or the inducement of the arbitration clause itself (because they are directed at the arbitration clause), must be decided by the court in the first instance before it can compel arbitration. (Prima Paint v. [14 Cal. 4th 432] Flood & Conklin (1967) 395, 403-404 [18 L. Ed. 2d 1270, 1277-1278, 1801]; Hayes Children Leasing Co. v. NCR Corp. (1995) 37 Cal. App. 4th 775, 783-784 [43 Cal. Rptr. 2d 650].) By contrast, a claim that a contract containing an arbitration clause is unenforceable because of fraud in the inducement of the contract as a whole is for the arbitrator and not the court to decide (because such a fraud would make the contract voidable but not void). (Prima Paint v. Flood & Conklin, supra, 395, 403-404 [18 L. Ed. 2d 1270, 1277-1278]; Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal. 3d 312, 323-324 [197 Cal. Rptr. 581, 673 P.2d 251].)
In this case, plaintiffs claim that the arbitration clause is unenforceable because defendants fraudulently misrepresented the contract's written terms. This type of claim can be either for the court or the arbitrator depending on whether the party objecting to arbitration presents evidence that it lacked a reasonable opportunity to learn of the written terms, and therefore reasonably relied on the other party's misrepresentations. If the party lacked a reasonable opportunity to learn of the contract's written terms, then the contract may be void, making the issue of fraud one for the court. (See maj. opn., ante, at pp. 419-420 and authorities cited thereat.) If the party had a reasonable opportunity to learn the terms of the contract but did not, then the contract is subject to reformation or other equitable relief although it is not void (California Trust Co. v. Cohn (1932) 214 Cal. 619, 627 [7 P.2d 297]; Van Meter v. Bent Construction Co. (1956) 46 Cal. 2d 588, 593-595 [297 P.2d 644]; Rest.2d Contracts, §§ 166, 172 & com. a, pp. 450, 468-469), making the issue of fraud one for the arbitrator.
An arbitrator presented with a claim that the arbitration agreement is unenforceable because of fraudulent misrepresentation of the terms of the [14 Cal. 4th 433] written contract that contains it should decide that question first, for it potentially affects the arbitrator's jurisdiction to decide the merits of the other disputes between the parties. If the arbitrator decides that the contract should be rescinded or reformed to delete the arbitration clause because of fraud, then there is no enforceable agreement to arbitrate any further claims between the parties. (Because courts have the power to reform a contract or provide other equitable relief on this ground, an arbitrator has that power as well. Advanced Micro Devices, Inc. v. Intel Corp. (1994) 9 Cal. 4th 362 [36 Cal. Rptr. 2d 581, 885 P.2d 994] [arbitrators have greater remedial powers than courts]; see also id. at p. 391 (dis. opn. of Kennard, J.) [arbitrators should have same remedial powers as courts].)
FN 1. The exact corporate relationship between GWB and GWFSC is not clear from the briefing, and is not important to this appeal. Plaintiff's counsel represented below that both are owned by a parent corporation, Great Western Financial Corporation (GWFC), which is also a defendant here. The complaint alleges GWFSC is a subsidiary of GWFC, which in turn is an "independent affiliate" of GWB.
FN 2. GWFSC did not seek arbitration as to plaintiffs Zinzun (the public plaintiff) and Lee and Maxwell Trent, and did not claim they had signed arbitration agreements.
FN 3. Section 5 of the USAA concerns court appointment of an arbitrator upon failure of the agreed method. Section 6 provides that "[a]ny application to the court hereunder shall be made and heard in the manner provided by law for the making and hearing of motions, except as otherwise herein expressly provided." (9 U.S.C. § 6.) Section 7 provides for court enforcement of arbitrators' summonses of witnesses. Section 8 concerns proceedings in admiralty cases. Sections 9 through 13 set standards and procedures for court confirmation, correction and vacation of arbitrators' awards. Section 14 limits retroactivity of the USAA. Section 15 concerns the Act of State doctrine. Section 16 provides for an appeal from specified orders made under the USAA. (9 U.S.C. §§ 5-16.)
FN 4. Section 1281.2 also makes explicitly clear that the petition may be denied, as well, if the petitioner has waived its right to compel arbitration, or if grounds exist for revocation of the arbitration agreement.
FN 5. Unlike the federal law, however, section 1281.2 allows the court, in certain circumstances, to instead deny or stay arbitration pending completion of related litigation.
FN 6. Appellate courts in several other states have similarly found various of the USAA's procedural provisions inapplicable in state court. (See Atlantic Painting & Contracting Inc. v. Nashville Bridge Co. (Ky. 1984) 670 S.W.2d 841, 846; Martin v. Norwood (1985) 395 Mass. 159 [478 N.E.2d 955, 958]; McClellan v. Barrath Constr. Co., Inc. (Mo.Ct.App. 1987) 725 S.W.2d 656, 658-659; Jack B. Anglin Co., Inc. v. Tipps (Tex. 1992) 842 S.W.2d 266, 268, 272; but see Merrill Lynch Pierce etc. v. Melemed (Fla.Dist.Ct.App. 1981) 405 So. 2d 790, 793 [pre-Southland Corp. decision holding USAA section 3 applicable in state court].) The parties have not cited, and we have not discovered, any foreign decisions holding section 4's jury trial provision applicable in state court.
FN 7. Prior to the Legislature's general revision of our arbitration law in 1961, the California statute on petitions to compel (Code Civ. Proc., former § 1282) closely paralleled section 4 of the USAA, including the jury trial provision. (See Historical Note, 19A West's Ann. Cal. Code Civ. Proc. (1982 ed.) § 1281.2, p. 247.) The Law Revision Commission's recommendation to eliminate the jury trial provision was based on a conclusion in its commissioned study that jury trial of the preliminary issues could frustrate the use of arbitration as a speedy means of resolving controversies. (Law Rev. Com. Study, supra, at p. G-38.)
FN 8. The Prima Paint court restricted its discussion to the standard to be applied in federal court. For that reason, and because the decision relies on language in section 4 of the USAA, rather than section 2 (see Prima Paint, supra, 388 U.S. at pp. 403-404 [18 L.Ed.2d at pp. 1277-1278]), one might question whether its rule applies in state courts even in transactions subject to the USAA. However, because the holding of Prima Paint is a substantive one limiting the circumstances under which arbitration clauses may be refused enforcement, it would appear to preempt contrary state law under the analysis of Southland Corp., supra, 465 U.S. at pages 10-16 [79 L.Ed.2d at pages 11-16], and would apply in both state and federal courts. In any event, as noted above, California follows the same rule.
FN 9. GWFSC also relies upon Teledyne, Inc. v. Kone Corp. (9th Cir. 1989) 892 F.2d 1404, 1410, in which the court referred to the need for a "separate and distinct" challenge to the arbitration clause. The court that decided Teledyne, however, has since explained that its decision rested on other grounds and does not apply when the party opposing arbitration "den[ies] the existence of the contracts containing the arbitration provisions." (Three Valleys Mun. Water Dist. v. E.F. Hutton (9th Cir. 1991) 925 F.2d 1136, 1142.)
FN 10. Our reference to the federal rule embodied in the USAA, which governs this case, should not be taken to suggest California law is any different. Like section 2 of the USAA, Code of Civil Procedure section 1281 mandates the enforcement of arbitration agreements not be denied except on grounds applicable to "any contract."
FN 11. Restatement Second of Contracts section 164 delineates, inter alia, the circumstances under which a contract is "voidable" because one party's assent was induced by the other's fraudulent misrepresentation. (Rest.2d Contracts, § 164, com. a, pp. 445-446.) It describes, in other words, fraud in the inducement, which allows the defrauded party to avoid the contract by rescinding it. (See 1 Witkin, Summary of Cal. Law, supra, Contracts, § 403, p. 363.)
FN 12. Some plaintiffs also declare that the GWFSC representative "did not give me any time" to read the agreement (Allen), or that they felt "rushed" (Carcano) or "pressured" (Rosenthal). Without evidence the representative actually took some action or said something to hurry or pressure the prospective client, however, these claims add nothing to plaintiffs' showing.
FN 13. Plaintiffs' brief leaves unclear whether the existence of a fiduciary duty is intended to show fraud in the execution, fraud in the inducement "permeating" the contract, or both. As we concluded earlier, only the former theory is, under Prima Paint, a viable theory for opposing arbitration. In the discussion immediately above, we hold the circumstances of the described relationships insufficient to justify plaintiffs' failure to read the contracts, and hence insufficient to show constructive fraud in the execution. To the extent plaintiffs also intend the asserted fiduciary relationship to serve as the premise for a showing of constructive fraud in the inducement, aimed specifically at the arbitration clauses, the showing fails because any duty on the representatives' part, in the circumstances, did not extend to drawing plaintiffs' attention to, or explaining the meaning of, the arbitration clauses.
FN 14. The plaintiffs referred to are Floyd Allen, Michael Carcano, Betty Connolly, Almada Didio, Thomas Fitzpatrick, George and Veronica Lampel, Pearl Mitchell, Alfred Nabeta, Norma and Noel Resnick, Ruby Rosenthal, Birdie Vaughn, and Phillip Warren.
FN 15. Declarations of GWFSC representatives, and accompanying documents, would, if believed, establish: (1) that the GWFSC account opened in January 1994 was opened jointly by Bied, Talsky, and Talsky's brother, Neal Rayburn; (2) that the October 1994 transaction was not an additional investment of Bied's savings in mutual funds but a sale of mutual fund shares at Bied's request and the reinvestment of those moneys in an annuity; and (3) that the October 1994 transaction was canceled at Talsky's request in December 1994 and the money returned to Bied.