Barney v. Henderson

• Decision Date: 23 February 2011
• Docket Number: CV07120045; A139707.
• Parties: CITIGROUP SMITH BARNEY, Plaintiff–Appellant,v.Clay HENDERSON, an individual; Doby Woodley, an individual; Corey Henderson, an individual; and Madge Henderson, an individual, Defendants–Respondents.
• Court: Oregon Court of Appeals

241 Or.App. 65

250 P.3d 926

CITIGROUP SMITH BARNEY, Plaintiff–Appellant,

v.Clay HENDERSON, an individual; Doby Woodley, an individual; Corey Henderson, an individual; and Madge Henderson, an individual, Defendants–Respondents.

CV07120045; A139707.

Court of Appeals of Oregon.

Argued and Submitted April 9, 2010.Decided Feb. 23, 2011.

Bruce L. Campbell, Portland, argued the cause for appellant. With him on the briefs were Miller Nash LLP, and Elisa J. Dozono.Andrew T. Reilly, Portland, argued the cause for respondents Clay Henderson, Doby Woodley, and Corey Henderson. With him on the brief was Black Helterline LLP.J. Kevin Shuba argued the cause and filed the briefs for respondent Madge Henderson.Before SCHUMAN, Presiding Judge, and WOLLHEIM, Judge, and ROSENBLUM, Judge.WOLLHEIM, J.

This is an interlocutory appeal of an order denying plaintiff's motion to compel arbitration. The trial court concluded that defendants' counterclaims were not subject to mandatory arbitration. We agree with plaintiff that the court erred in denying the motion, and we therefore reverse and remand.

The relevant facts are not disputed. Lyle Henderson opened an individual retirement account (IRA) with plaintiff, Citigroup Smith Barney. At the same time, Henderson entered into an IRA agreement with plaintiff that required arbitration of all claims and controversies between them:

“I agree that all claims or controversies, whether such claims or controversies arose prior, on or subsequent to the date hereof, between me and [plaintiff] and/or any of its present or former officers, directors, or employees concerning or arising from (i) any account maintained by me with [plaintiff] individually or jointly with others in any capacity; (ii) any transaction involving [plaintiff] or any predecessor firms by merger, acquisition or other business combination and me, whether or not such transaction occurred in such account or accounts; or (iii) the construction, performance or breach of this or any other agreement between us, any duty arising from the business of [plaintiff] or otherwise, shall be determined by arbitration before, and only before, any self-regulatory organization or exchange of which [plaintiff] is a member.”

Immediately following the arbitration clause is a choice of law provision selecting New York law to govern and construe the IRA agreement.

Sometime later, Henderson completed two forms to designate beneficiaries of the IRA. One form designates his personal trust as the beneficiary of the IRA. Henderson's second wife, Madge Henderson, is the successor trustee to the personal trust. The second form, which is not dated, designates the children of Henderson's first marriage as beneficiaries of that same IRA. After Henderson died, plaintiff discovered the conflicting forms. Accordingly, plaintiff sent a letter to Madge and the children, stating that it had received two IRA beneficiary forms, it could not determine which form superseded the other, and “[a]s a result, we are not in a position to determine who has the better claim to the [IRA]. As a consequence, we recommend and encourage you to attempt to resolve this yourselves or through mediation, arbitration, or the probate court.” Further, plaintiff advised Madge and the children that if they were unable to resolve their competing claims to the IRA, plaintiff “will be inclined to file an action to determine the rightful owner of the [IRA].”

Madge and the children did not resolve their competing claims to the IRA, and plaintiff filed an interpleader action. It alleged that it was subject to competing claims to the IRA, moved to deposit the proceeds of the IRA with the court, and moved to obtain an order relieving it of any further liability for the IRA. Madge objected to plaintiff's motion to be dismissed from the interpleader action, arguing that she intended to file a counterclaim against plaintiff and dismissal could affect that counterclaim. The trial court granted plaintiff's motion to interplead the IRA funds but denied its motion to be dismissed. Further, the court ordered that “defendants must interplead and litigate any claims in this action.”

Madge filed an answer and counterclaim, alleging that plaintiff breached fiduciary duties that it owed to Henderson in accepting two contradictory beneficiary designations. Similarly, the children filed an answer and counterclaim alleging that plaintiff breached its contract with Henderson by failing to manage Henderson's file and that the children were intended beneficiaries of the contract between plaintiff and Henderson.

After the children filed their answer and counterclaim, plaintiff filed a motion to compel arbitration of the counterclaims brought by defendants. Plaintiff contended that the counterclaims were subject to the arbitration clause in the IRA agreement. In response, Madge argued that the arbitration clause required arbitration of all claims, including plaintiff's interpleader action, and therefore plaintiff waived its right to arbitrate by filing the interpleader action. For their part, the children adopted Madge's waiver argument but also argued that they could not be compelled to arbitrate because they—unlike Henderson—never agreed to arbitrate with plaintiff. The trial court denied plaintiff's motion to compel arbitration.

Plaintiff assigns error to the trial court's denial of its motion to compel arbitration. It argues that Henderson agreed to arbitrate as part of the IRA agreement; that all defendants, by claiming to be third-party beneficiaries of the IRA agreement, are subject to the arbitration clause; and that plaintiff did not waive its right to arbitrate by filing an interpleader action. Madge and the children renew the arguments that they made to the trial court. We review the trial court's denial of plaintiff's motion to compel arbitration for errors of law, see The Hays Group, Inc. v. Biege, 222 Or.App. 347, 350, 193 P.3d 1028 (2008) (so reviewing), and reverse and remand.

We begin by determining which law applies. Section 2 of the Federal Arbitration Act (FAA), 9 USC sections 1 to 16, provides:

“A written provision in any * * * contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract * * * shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”

That section creates a federal substantive law of arbitrability that not only declares “ ‘a national policy favoring arbitration,’ but actually ‘withdrew the power of the states to require a judicial forum for resolution of claims which the contracting parties agreed to resolve by arbitration.’ ” Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 56, 115 S.Ct. 1212, 131 L.Ed.2d 76 (1995) (quoting Southland Corp. v. Keating, 465 U.S. 1, 10, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984)). That expansive reach of the FAA, however, does not “negate an agreement between contracting parties to apply a particular state's substantive contract law to their dispute or a state's procedural rules to their arbitration hearing.” Industra/Matrix Joint Venture v. Pope & Talbot, 341 Or. 321, 330, 142 P.3d 1044 (2006). That is because arbitration under the FAA “is a matter of consent, not coercion, and parties are generally free to structure their arbitration agreements as they see fit.” Volt Info. Sciences v. Leland Stanford Jr. U., 489 U.S. 468, 479, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989). Thus, a contractual provision selecting a particular state's law to govern the parties' agreement is valid, so long as it does not “undermine the goals and policies of the FAA.” Id. at 478, 109 S.Ct. 1248; see also Industra/Matrix Joint Venture, 341 Or. at 330, 142 P.3d 1044 (describing Volt Info. Sciences ).

Here, the parties agree that the IRA agreement involves interstate commerce. We concur. Plaintiff has a multistate nature and maintained securities for Henderson, and the parties agreed to apply the law of another state—New York—to their agreement. See Allied–Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 282, 115 S.Ct. 834, 130 L.Ed.2d 753 (1995) (FAA applied to agreement between a corporation with a multistate nature and aspects of the agreement required efforts from different states).

Next, we consider whether the children, as third-party beneficiaries, are bound by the arbitration clause in the IRA agreement. To determine whether parties agreed to arbitrate a certain matter, we apply “ordinary state-law principles that govern the formation of contracts.” First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995). Accordingly, state law governs the question of whether the arbitration provision in the account agreement is binding on the children as third-party beneficiaries to the account agreement. See Arthur Andersen LLP v. Carlisle, 556 U.S. ––––, ––––, 129 S.Ct. 1896, 1902, 173 L.Ed.2d 832 (2009) (directing courts to apply state contract law to determine whether a third-party beneficiary theory is applicable to bind a party to an arbitration agreement); Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83, 123 S.Ct. 588, 154 L.Ed.2d 491 (2002) (describing the question of “whether the parties have submitted a particular dispute to arbitration” as a dispute for courts to decide); Mastrobuono, 514 U.S. at 58, 115 S.Ct. 1212 (whether the parties agreed to include claims for punitive damages within their arbitration agreement is a question of contract interpretation).

As to the state law governing our interpretation of the account agreement, the parties agree that Henderson and plaintiff validly chose New York law to govern the IRA agreement. New York law establishes that a third-party beneficiary is bound by an arbitration clause contained in the contract from which the third party benefits. It is well established under New York law that a party who has not signed an...