485 F.3d 35 (1st Cir. 2007), 06-1112, Berenson v. National Financial Services LLC

Docket Nº:06-1112.
Citation:485 F.3d 35
Party Name:Joan BERENSON, David Berenson Plaintiffs, Appellees v. NATIONAL FINANCIAL SERVICES LLC, Fidelity Brokerage Services LLC Defendants, Appellants.
Case Date:April 27, 2007
Court:United States Courts of Appeals, Court of Appeals for the First Circuit

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485 F.3d 35 (1st Cir. 2007)

Joan BERENSON, David Berenson Plaintiffs, Appellees


NATIONAL FINANCIAL SERVICES LLC, Fidelity Brokerage Services LLC Defendants, Appellants.

No. 06-1112.

United States Court of Appeals, First Circuit.

April 27, 2007

Heard Oct. 4, 2006.

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David C. Frederick, with whom F. Andrew Hessick, Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C., Nicholas C. Theodorou, John A. Shope, William W. Fick, David E. Cole, and Foley Hoag LLP were on brief, for appellants.

Douglas A. Rubel, with whom Johanson Berenson LLP were on brief, for appellees.

Before LIPEZ, Circuit Judge, CYR, Senior Circuit Judge, and SINGAL, [*] District Judge.

LIPEZ, Circuit Judge.

This case concerns the proper boundary between the courts and arbitrators in some novel circumstances. We must determine whether the district court effectively denied the right of appellants National Financial Services and Fidelity Brokerage Services (collectively "Fidelity") 1 to arbitrate a dispute with their customers, Joan and David Berenson, when it opined on the merits of the Berensons' claims after granting appellants' motion to compel arbitration.

The arbitration agreement in this case requires the arbitration of individual claims between Fidelity and its customers but exempts class actions from the arbitration requirement. The Berensons brought a putative class action against Fidelity. For reasons described below, the district court determined that it would adjudicate the merits of the Berensons' claims before addressing the issues of class certification. All parties agreed to this arrangement.

Fidelity filed several motions for summary judgment, whittling away the Berensons' claims while class certification was pending. In response to the final such motion, the district court granted the motion in part and denied it in part, dismissing the class claims and declaring that an opinion would follow. With the class claims dismissed, Fidelity moved to compel arbitration on the Berensons' remaining claims, and the district court granted the motion. Shortly thereafter, the district court issued its summary judgment memorandum and order, explaining its earlier ruling.

Fidelity now claims that the district court effectively rescinded its arbitration order when it addressed the merits of the Berensons' remaining claims in its summary judgment memorandum, justifying an interlocutory appeal from the denial of an application to compel arbitration. Fidelity urges us to either vacate the ruling, on the basis that the district court had no authority to issue it, or to reverse the ruling on its merits. Because we do not agree with Fidelity's claim that the district court effectively denied its motion to compel arbitration, we conclude that we have no jurisdiction to entertain Fidelity's appeal.

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A. Factual Background

Joan and David Berenson opened a brokerage account at Fidelity in the early 1980s. Since at least the mid-1980s, they have used the company's electronic bill payment service, BillPay, to make payments from an interest-earning account comprised of mutual funds. At first, Fidelity operated the service itself; over time, it contracted with different companies to provide the service.

In June 2000, Fidelity contracted with CheckFree, whose electronic bill payment service used the "good funds" method. In that system, the customer's request for payment triggers a debit against the payor's account at 10 p.m. on the day the request is made; the money is then held in a Fidelity account until 1 p.m. the next day, when it is wired to CheckFree. If CheckFree has an agreement with the designated payee, it then wires the money directly to the payee; if there is no such agreement, CheckFree issues and mails a CheckFree corporate check to the payee. This method is known as the "good funds" model because debiting the payor's account immediately assures that a payment is not made unless the customer has sufficient funds, eliminating the possibility that the payment will "bounce." This benefit comes at a cost: the payor loses the opportunity to earn interest on the funds it has scheduled for payment during the period between 10 p.m. on the day payment is initiated and when it is received by the payee, i.e. the "float."

In August 2000, the Berensons began using Fidelity's electronic bill payment service to transfer money from their primary account into another Fidelity account held by Berenson & Company International, which was owned by David Berenson. Because there was no agreement between Fidelity and CheckFree to directly transfer money, CheckFree issued corporate checks to effect those transfers, resulting in a delay between when the primary account was debited and the corporate account was credited. 2

In early 2002, Mr. Berenson called Fidelity to complain about this delay, arguing that he believed the interest earned on his money during the period of delay belonged to him and not to Fidelity. He reiterated his complaint in a letter dated September 17, 2002. A Fidelity representative called Mr. Berenson in response to his letter to explain the "good funds" system, but was unsuccessful in his attempt to resolve the Berensons' complaint.

B. Early Procedural Background

On September 26, 2003, the Berensons filed a putative class action in the United States District Court for the District of Columbia. 3 Significantly, a customer agreement they signed when they opened their Fidelity account contained a provision requiring arbitration of "all controversies

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that may arise between us." However, a limiting clause stated:

No person shall bring a putative or certified class action to arbitration, nor seek to enforce any pre-dispute arbitration agreement against any person who has initiated in court a putative class action ... until: (a) the class certification is denied; (b) the class is decertified; or (c) the customer is excluded from the class by the court.

The Berensons alleged multiple grounds for Fidelity's liability: (1) Fidelity violated the Electronic Funds Transfer Act, 15 U.S.C. § 1693 ("EFTA") both (a) because the interest it gained on the "float" constituted a "fee" that the EFTA requires be disclosed, and (b) because Fidelity failed to respond to the Berensons' complaint in writing within ten days, as required by the EFTA's error resolution provision; (2) Fidelity's failure to disclose this "fee" amounted to either intentional or negligent misrepresentation; (3) Fidelity's collection of this "fee" breached its contract with the Berensons; (4) collection of the "fee" breached Fidelity's fiduciary duty to the Berensons; (5) Fidelity violated the Massachusetts Truth in Savings Law ("MTiSL"), Mass. Gen. Laws ch. 140E, which requires "financial institutions" to disclose certain information to customers when they open an account; and (6) Fidelity's failure to disclose that the Berensons would not receive interest on the "float" of their funds constituted a violation of the Massachusetts Consumer Protection Act, Mass. Gen. Laws ch. 93A ("chapter 93A"). 4

On November 7, 2003, Fidelity responded by filing a motion to dismiss and for summary judgment on all claims; that motion reserved the right to compel arbitration if class certification was denied. After a hearing in October 2004, the district court granted summary judgment in an oral ruling for Fidelity on the contract and MTiSL claims. It found no contract language promising that the payor would continue to earn interest on its funds up to the point when the payee received them and concluded that the MTiSL provides no private right of action. It denied the motion as to all other claims, without prejudice. Fidelity filed its second motion for summary judgment on February 8, 2005, alleging that the Berensons' EFTA claims were barred by the statute of limitations.

C. Class Certification

While the renewed motion for summary judgment was pending, the court held a hearing on the Berensons' motion for class certification. Under the Federal Rules of Civil Procedure, individuals who wish to represent a class of litigants must meet several qualifications. The prerequisites include:

(1) the class is so numerous that joinder of all members is impracticable ["numerosity"], (2) there are questions of law or fact common to the class ["commonality"], (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class ["typicality"], and (4) the representative parties will fairly and adequately protect the interests of the class ["adequacy"].

Fed.R.Civ.P. 23(a).

During the hearing, Fidelity argued that the Berensons could not fairly and adequately protect the interests of the class. Specifically, Fidelity asserted a potential conflict of interest because Mr. Berenson's son was a partner in the law firm representing

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the Berensons. While the Berensons had a fiduciary duty to the class to ensure a maximum return, they would also have an interest in the law firm maximizing its fees. Consequently, Fidelity argued, they might be unable to represent the true interests of the class.

To deal with this issue, the district court suggested that it try the Berensons' claims on the merits before certifying the class: "Why don't we try the case without it being a class action, win, lose or draw. If [the Berensons] lose, well, you know that. But if [the Berensons] win, then [Fidelity is] collaterally estopped, res judicata, and then we'll see if any class wants to come out of the woodwork and pile on that." Turning to counsel for Fidelity, the court asked: "You're not hurt by that. If I simply ... try this case as an exemplar case. They lose it, then it's lost and we'll see where we are. Then surely their interests won't be typical. But if they win it, then we'll see where we are, too. Doesn't that make sense?" Fidelity replied: "I think that there would be a definite...

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