Opinion ID: 4528740
Heading Depth: 3
Heading Rank: 2

Heading: Plaintiff’s claims of fraud

Text: The plaintiff’s second argument is that any agreement that purports to exist between her and the defendants is a byproduct of fraud or constructive fraud. The plaintiff correctly notes that “[n]othing in the Federal Arbitration Act, 9 U.S.C. § 2, overrides normal rules of contract interpretation. Generally applicable contract defenses—such as laches, estoppel, waiver, fraud, duress, or unconscionability—may be applied to invalidate an arbitration agreement.” Syllabus Point 9, Brown ex rel. Brown v. Genesis Healthcare Corp., 228 W. Va. 646, 724 S.E.2d 250 (2011), cert. granted, judgment vacated sub The plaintiff also complains that it is unfair that her husband’s children 13 (defendants Kristina Nicholls and Stephen Bayles) are being compelled to arbitrate, because they too never signed any arbitration agreement. We reject this general argument because these defendants are in the same position as the plaintiff: their claim to any benefits from defendants Ameriprise and Evans is founded exclusively on the brokerage and portfolio contracts signed by their father. Moreover, the children have, throughout this litigation, consented to have their defense arbitrated with Ameriprise and Evans. 19 nom. Marmet Health Care Ctr., Inc. v. Brown, 565 U.S. 530 (2012) (“Brown I”) (emphasis added). 14 The plaintiff asserts that her husband could not have moved the money out of his 401(k) plan (where federal law guaranteed her a survivor’s benefit) and into the Ameriprise brokerage account without receiving her consent. She further asserts that defendant Evans made misleading or fraudulent statements that induced her to consent to the transfer of money to the Ameriprise brokerage account. The plaintiff contends that, but for Evans’s misstatements, her husband never could have entered into the brokerage contract, and hence, any arbitration clause in that contract must be invalidated as a direct byproduct of fraud, constructive fraud and/or material misrepresentation. In sum, the plaintiff asserts the circuit court erred in finding the arbitration clauses were not void or unenforceable because of the defendants’ fraud. We reject the plaintiff’s argument because, unfortunately, her approach violates a basic rule of federal arbitration law: the doctrine of severability. The doctrine requires a party resisting arbitration to exclusively challenge the enforceability of the arbitration clause, and not the overall contract: When a lawsuit is filed implicating an arbitration agreement, and a party to the agreement seeks to resist “To be clear, this list is not exclusive. Misrepresentation, duress, mutuality 14 of assent, undue influence, or lack of capacity, if the contract defense exists under general common law principles, then it may be asserted to counter the claim that a . . . provision binds the parties. Even lack of consideration is a defense.” Geological Assessment & Leasing v. O’Hara, 236 W. Va. 381, 387, 780 S.E.2d 647, 653 (2015) (citation omitted). 20 arbitration, the Supreme Court has interpreted the FAA to require application of the doctrine of “severability” or “separability.” The gist of the doctrine is that an arbitration clause in a larger contract must be carved out, severed from the larger contract, and examined separately. The doctrine treats the arbitration clause as if it is a separate contract from the contract containing the arbitration clause, that is, the “container contract.” Under the doctrine, arbitration clauses must be severed from the remainder of a contract, and must be tested separately under state contract law for validity and enforceability. Schumacher Homes of Circleville, Inc. v. Spencer, 237 W. Va. 379, 387-88, 787 S.E.2d 650, 658-59 (2016) (quotes and footnotes omitted). In Syllabus Point 4 of State ex rel. Richmond Am. Homes of W. Virginia, Inc. v. Sanders, 228 W. Va. 125, 129, 717 S.E.2d 909, 913 (2011), we said in part: Under the Federal Arbitration Act, 9 U.S.C. § 2, and the doctrine of severability, only if a party to a contract explicitly challenges the enforceability of an arbitration clause within the contract, as opposed to generally challenging the contract as a whole, is a trial court permitted to consider the challenge to the arbitration clause. When the United States Supreme Court first adopted the severability doctrine, it did so in a case with an argument like that posed by the plaintiff. In Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403 (1967), Prima Paint signed a contract with Flood & Conklin. Shortly after performance of the contract began, Prima Paint discovered Flood & Conklin was insolvent and unable to perform. Prima Paint then sued seeking to rescind the entire contract on the ground it had been misled and fraudulently induced to sign. 21 The Prima Paint contract contained an arbitration clause. The Supreme Court concluded that under Section 2 of the Federal Arbitration Act, courts should presume an arbitration clause is “valid, irrevocable, and enforceable” until proven otherwise. See 9 U.S.C. § 2. Accordingly, if the claim is fraud in the inducement of the arbitration clause itself—an issue which goes to the ‘making’ of the agreement to arbitrate—the federal court may proceed to adjudicate it. But the statutory language does not permit the federal court to consider claims of fraud in the inducement of the contract generally. . . . [A] federal court may consider only issues relating to the making and performance of the agreement to arbitrate. Prima Paint, 388 U.S. at 403-04. Stated simply, the severability doctrine adopted in Prima Paint stands for the principle that when a party raises claims of fraud, those claims must be directed solely to the making and performance of the agreement to arbitrate. Claims of fraud in the inducement of the contract in general must be resolved by an arbitrator. Because Prima Paint sued to rescind the entire contract, the Supreme Court presumed the arbitration agreement was valid and enforceable. Prima Paint was, therefore, compelled to arbitrate its fraudulent inducement claim. In the instant case, the plaintiff did not argue to the circuit court that the arbitration agreement was procured by fraud. Instead, she asserted that the entire contractual relationship between her deceased husband, on the one hand, and Ameriprise and Evans on the other, was induced by fraud. The plaintiff argued that if she had not been misled or defrauded by Evans, no contractual relationship would have been formed with Ameriprise – and therefore, there would be no arbitration agreement. 22 Because the plaintiff’s claims of fraud go to the overall existence of a contract, we are required – because of the doctrine of severability – to presume that a valid arbitration agreement was formed by the parties. Accordingly, the question of fraud posed by the plaintiff must be weighed by the arbitrator. Therefore, we find no error by the circuit court on this point.