Barrett v. McDonald Investments, Inc.

• Citation: 2005 ME 43,870 A.2d 146
• Parties: Laurence E. BARRETT et al. v. McDONALD INVESTMENTS, INC., et al.
• Decision Date: 29 March 2005
• Court: Supreme Judicial Court of Maine (US)

870 A.2d 146

2005 ME 43

Laurence E. BARRETT et al. v. McDONALD INVESTMENTS, INC., et al.

Supreme Judicial Court of Maine.

Argued: September 21, 2004.

Decided: March 29, 2005.

Paul F. Macri, Esq. (orally), Tyler N. Kolle, Esq., Berman & Simmons, P.A., Lewiston, for plaintiffs.

John J. Aromando, Esq., Clifford H. Ruprecht, Esq. (orally), Pierce Atwood, Portland, for defendants.

Panel: SAUFLEY, C.J., and CLIFFORD, RUDMAN, DANA, ALEXANDER, CALKINS, and LEVY, JJ.

Majority: SAUFLEY, C.J., and CLIFFORD, RUDMAN, DANA, ALEXANDER, CALKINS, and LEVY, JJ.

Concurrence: ALEXANDER, J.

SAUFLEY, C.J.

[¶ 1] McDonald Investments, Inc., and Kevin R. Sullivan, an advisor employed by McDonald, appeal from a decision of the Superior Court (Kennebec County, Marden, J.) denying their motion to stay and compel arbitration of tort claims brought by Laurence E. Barrett and Edna M. Barrett. McDonald and Sullivan contend that the language of their arbitration agreement with Laurence Barrett unambiguously mandates the arbitration of the Barretts' claims of negligence, negligent misrepresentation, fraud, and punitive damages based on alleged misrepresentations about a retirement annuity purchased by the Barretts on Sullivan's recommendation. Because we conclude that the arbitration agreement is ambiguous and must be construed against the drafter, McDonald, we affirm the denial of McDonald and Sullivan's motion to stay and compel arbitration.

I. BACKGROUND

[¶ 2] Laurence Barrett and his wife, Edna, allege the following facts. In 1999, Laurence was in his thirty-second year of employment and approached Key Bank for retirement advice. Key Bank referred Laurence to McDonald Investments, Inc., for investment advice. Kevin Sullivan, an investment advisor at McDonald, suggested to Laurence that he retire earlier than he had planned or increase his spending during retirement. Laurence decided to retire at his then current age of fifty-five.

[¶ 3] In February 2000, before McDonald accepted the Barretts' money for investment, Laurence Barrett and Sullivan executed an IRA Director Plan Agreement (the Agreement). Edna Barrett was listed as the sole beneficiary. The Agreement provided that Laurence would deposit funds with McDonald, which McDonald would invest in options selected by Laurence upon Laurence's instructions and direction. The Agreement disclaimed any fiduciary relationship and did not in any way describe McDonald or Sullivan as having any advisory roles. The Agreement provided for the arbitration of certain disputes:

The Custodian [McDonald] and the Depositor [Laurence Barrett] agree that by the Custodian opening and carrying an account for the Depositor, all controversies which may arise between us concerning any transaction or the construction, performance or breach of this or any other agreement between us pertaining to securities and any other property, whether entered into prior, on or subsequent to the date hereof, shall be determined by arbitration.

The Agreement required that arbitration be conducted "before the New York Stock Exchange, Inc., the National Association of Securities Dealers, Inc., The Municipal Securities Rulemaking Board, or other self-regulatory organization of which [McDonald] is a member" pursuant to the Federal Arbitration Act, 9 U.S.C.A. §§ 1-16 (West 1999 & Supp.2004) applying Ohio law.

[¶ 4] Sullivan then advised the Barretts to invest $505,379.87, the amount of their life savings from Laurence's 401k, in a Manulife individual retirement annuity contract with a Guaranteed Retirement Income Plan (GRIP) rider. Sullivan advised that the annuity with the GRIP rider would guarantee a minimum return of six percent on the initial investment regardless of the state of the stock market, minus the money the Barretts withdrew. Sullivan knew that there was a seven-year waiting period from the date of contract until annuitization, during which time the Barretts would have to withdraw funds annually to pay taxes and living expenses. Sullivan never advised the Barretts that there was a penalty for withdrawals or that the principal would be subject to market fluctuations. The Barretts followed Sullivan's advice and invested in the Manulife annuity.

[¶ 5] When the Barretts received the contract for the Manulife annuity in March 2000, it did not contain the GRIP rider. Nearly a year later, the Barretts also noticed that they did not receive any GRIP rider paperwork on the anniversary of their contract. They contacted Sullivan, who at that time discovered that Manulife had not issued the GRIP rider. Sullivan contacted Manulife, which agreed to allow the Barretts to elect the GRIP retroactive to the original contract date. The Barretts did not, however, receive a new contract and GRIP rider at that time.

[¶ 6] By November 2001, the account's value had diminished to $272,511.65 as a result of a drop in the market. When the Barretts contacted Sullivan to make sure the GRIP was operating as he had explained to them, Sullivan in turn contacted Manulife and learned that the GRIP did not function as Sullivan had represented to the Barretts. Sullivan and his supervisor met with the Barretts and a Manulife representative in December 2001. The Manulife representative explained that the GRIP rider did not guarantee six percent annual growth in the principal; rather, the principal was subject to variations in the stock market.

[¶ 7] In June 2003, the Barretts commenced the present action against McDonald, Sullivan, and Manulife.¹ The Barretts alleged claims of negligence, negligent misrepresentation, and fraud against McDonald and Sullivan. The Barretts also claimed they were entitled to punitive damages.

[¶ 8] In response, McDonald and Sullivan moved to stay and compel arbitration on the ground that the arbitration clause in their financial services contract with Laurence Barrett requires the submission of the present disputes to an arbitrator. See 14 M.R.S.A. § 5928 (2003). They attached the affidavit of McDonald's branch manager, who referred to and attached a copy of the Agreement containing the arbitration clause. [¶ 9] The Barretts objected to the motion to stay and compel arbitration. They argued that the dispute concerned the advice to purchase the Manulife policy, not conduct related to the Agreement by which the Barretts deposited their life savings into a custodial account with McDonald.

[¶ 10] After a hearing, the court denied the motion to stay and compel arbitration as to the tort claims against McDonald and Sullivan, reasoning that the language of the agreement does not communicate an express waiver of the Barretts' right to bring tort claims. McDonald and Sullivan have timely appealed.

II. DISCUSSION

[¶ 11] McDonald and Sullivan contend that the arbitration clause unambiguously provides for the arbitration of all disputes concerning any transaction that pertains to securities or other property. According to them, "all controversies" must be read to include tort disputes. They contend that even if the Agreement is ambiguous, the arbitration clause should be applied because it is susceptible to an interpretation that covers tort disputes.

[¶ 12] The Barretts contend that their tort claims have no nexus with the custodial Agreement and are not subject to the arbitration clause. The Barretts argue that the Agreement governs the administration of a custodial account, not misrepresentations about the nature and operation of the Manulife annuity and GRIP rider.

A. Appellate Jurisdiction and Standard of Review

[¶ 13] Though the court's order denying a motion to compel arbitration is interlocutory, we have jurisdiction to review it. 14 M.R.S.A. § 5945(1) (2003); Patrick v. Moran, 2001 ME 6, ¶ 4, 764 A.2d 256, 257.

[¶ 14] The initial determination of "whether the parties intended to submit this dispute to arbitration" must be resolved in court, not by an arbitrator. V.I.P., Inc. v. First Tree Dev. Ltd. Liab. Co., 2001 ME 73, ¶ 3, 770 A.2d 95, 96. The parties must have agreed to arbitrate in writing. Patrick, 2001 ME 6, ¶ 5, 764 A.2d at 257. We review the motion court's determination of substantive arbitrability for errors of law, V.I.P., 2001 ME 73, ¶ 3, 770 A.2d at 96, and for facts not supported by substantial evidence in the record, Saga Communications of New Eng., Inc. v. Voornas, 2000 ME 156, ¶ 7, 756 A.2d 954, 958.

B. Interpretation of the Arbitration Clause

[¶ 15] The issue before us presents a clear conflict between two established principles of contract interpretation. On one hand, Maine has a broad presumption in favor of arbitration. Roosa v. Tillotson, 1997 ME 121, ¶ 3, 695 A.2d 1196, 1197. On the other, we have long recognized that ambiguities in a contract are to be interpreted against the drafter. See, e.g., Bar Harbor & Union River Power Co. v. Found. Co., 129 Me. 81, 85, 149 A. 801, 803 (1930). The tension between these doctrines is heightened when, as in this case, the parties to the contract are in unequal bargaining positions.

[¶ 16] The presumption in favor of substantive arbitrability advances the Maine Legislature's "strong policy favoring arbitration." Westbrook Sch. Comm. v. Westbrook Teachers Ass'n, 404 A.2d 204, 207-08 (Me.1979). We first recognized this policy in Lewiston Firefighters Ass'n v. City of Lewiston, 354 A.2d 154 (Me.1976), a case that involved the arbitration of public employees' contract grievances. In that case, we found that the Legislature had determined that arbitration was the "`desirable method'" for settling such contract disputes.²Id. at 165-66. Although the genesis of the strong presumption in favor of arbitration springs from labor law, the presumption has been expanded to disputes about private agreements outside the employment context. See, e.g., Roosa, 1997 ME 121, ¶ 1,

695 A.2d at 1197. Thus, we have said that when two parties have included a provision requiring arbitration in their contract, a subsequent dispute should be deemed arbitrable ...