BROWN v. BANK

• Decision Date: 25 November 2008
• Docket Number: No. B196258.,B196258.
• Citation: 85 Cal.Rptr.3d 817,168 Cal.App.4th 938
• Parties: Ronnie C. BROWN, Individually and as Trustee, etc., Plaintiff and Respondent, v. WELLS FARGO BANK, NA et al., Defendants and Appellants.
• Court: California Court of Appeals Court of Appeals

168 Cal.App.4th 938

85 Cal.Rptr.3d 817

Ronnie C. BROWN, Individually and as Trustee, etc., Plaintiff and Respondent,

v.WELLS FARGO BANK, NA et al., Defendants and Appellants.

No. B196258.

Court of Appeal, Second District, Division 3, California.

Nov. 25, 2008.

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Kessal, Young & Logan, Neal S. Robb, Evelyn A. Christensen, Long Beach; Wells Fargo Bank, National Association and Thomas O. Jacob, San Francisco, for Defendants and Appellants.

Courteau & Associates and Diana L. Courteau, El Segundo, for Plaintiff and Respondent.

Munger, Tolles & Olson, George M. Garvey and Jeffrey Y. Wu, Los Angeles, for the Securities Industry and Financial Markets Association, the Chamber of Commerce of the United States of America, the American Bankers Association, the ABA Securities Association, the Clearing House Association and the Financial Services Roundtable as Amici Curiae, upon the request of the Court of Appeal.

Reed Smith, James C. Martin, David C. Powell and Raymond A. Cardozo, San Francisco, for Amicus Curiae, upon the request of the Court of Appeal.

Kreindler & Kreindler and Gretchen M. Nelson, Los Angeles, for Amicus Curiae, upon the request of the Court of Appeal.

CROSKEY, J.

This case comes to us on an appeal from the trial court's order denying a motion to compel arbitration. While this case arises in the context of an attempt to enforce an arbitration clause, the dispositive issue is whether there was fraud in the execution of the entire brokerage account agreement, of which the arbitration clause was only a part. This case, therefore, is not really about arbitration but rather involves a bank's creation of a fiduciary relationship with one of its customers and the consequences that flow therefrom.

The defendants are various Wells Fargo entities; the plaintiffs are elderly Wells Fargo customers with substantial assets. In order to ensure that Wells Fargo managed all of plaintiffs' assets, Wells Fargo assigned a “relationship manager” to plaintiffs. The relationship manager was a Wells Fargo vice president, who made biweekly visits to the plaintiffs' home office in order to manage their financial paperwork. She also introduced the plaintiffs to an estate attorney, an accountant, and a Wells Fargo financial consultant. In short, the relationship manager induced the plaintiffs to rely on her to help provide for their financial well being.

At the relationship manager's urging, the plaintiffs met with the Wells Fargo financial consultant, and opened a brokerage account with him. That brokerage account agreement contains the arbitration clause which led to the trial court's ruling. In executing the agreement, Wells Fargo treated the plaintiffs as any other customers opening a brokerage account. In other words, Wells Fargo approached the execution of the brokerage account agreement as though it were part of an arm's-length transaction.

The trial court denied Wells Fargo's motion to compel arbitration on the basis that the arbitration clause was procedurally unconscionable. While we do not disagree with that conclusion, an agreement must also be substantively unconscionable in order for it to be unenforceable for unconscionability. The agreement, which provided for arbitration conducted by the National Association of Securities Dealers, Inc. (NASD), is not, as a matter of law, substantively unconscionable.

Significantly, the trial court also concluded that Wells Fargo had established a fiduciary relationship with the plaintiffs, and that this relationship may have given rise to a fiduciary duty on the part of Wells Fargo to make certain that the plaintiffs understood the material terms of the contract they were signing. We agree. The trial court, however, failed to consider and rule upon the consequences of this conclusion. That is, whether, under the circumstances, there was fraud in the execution of the brokerage account agreement, which conclusion would necessarily preclude enforcement of any part of that agreement, including the arbitration clause. We will therefore reverse the trial court's order and remand for further proceedings.

FACTUAL AND PROCEDURAL BACKGROUND ¹

1. The Parties

Plaintiffs and respondents are the Brown Family Trust and Ronnie C. Brown, individually and as trustee of the Brown Family Trust. Defendants and appellants are Wells Fargo Bank, NA and certain related entities. ² Also included as defendants and appellants are two Wells Fargo employees, Jack Harold Keleshian (Keleshian) and Lisa Jill Tepper (Tepper).

On June 7, 2004, plaintiff Ronnie Brown and her now deceased husband, Ira Brown, executed an “Acknowledgement/Agreement” (the Acknowledgement), by which they entered into a Brokerage Account Agreement (the Agreement) with Well Fargo Investments as co-trustees for the Brown Family Trust. The Agreement allowed Wells Fargo to make stock trades requested by the Browns.

Plaintiff Ronnie Brown was born in 1922. At the time that she signed the Agreement, she was 81 years old. ³ Ira Brown was a co-founder of Sav-On Drug Store in the 1940's. He had amassed more than 100,000 shares of Sav-On stock, which was valued at more than $1.8 million as of June 2004. At the time he signed the Agreement, he was 93 years old, in failing health and legally blind.

Tepper was a Wells Fargo vice president and senior trust administrator from October 2001 to August 2006. In June 2004, Tepper was also a licensed stock broker and a “relationship manager.” In deposition testimony, Tepper stated, “[t]he relationship manager oversees the relationship and as needs are uncovered or requests are made by clients, I would introduce another employee of Wells Fargo that could address that particular need.” Although Tepper herself did not manage the assets in trust accounts, she received additional compensation when the Browns opened a brokerage account for the Brown Family Trust.

Keleshian was a licensed stock broker as well as senior vice president and senior financial consultant for Wells Fargo. Keleshian assisted the Browns with opening the Brokerage Account for the Brown Family Trust.

2. Plaintiffs' Relationship With Defendants Prior to the Execution of the Agreement

The Browns were customers of Wells Fargo Bank prior to the June 7, 2004 meeting (the Meeting) with defendants. They had accounts at Wells Fargo and a branch manager, David Whitesell, assisted Ronnie Brown with paying the Browns' bills.

In late 2003 or early 2004, the Browns met Tepper, who was assigned to assist them as their relationship manager. During the initial meeting, Tepper learned that Ira Brown had limited vision. Tepper testified that when she met Mr. Brown, he was a “little slow.”

Beginning in early 2004, Tepper worked in the Browns' home office on a biweekly basis and organized and managed their significant financial paperwork. The Browns provided Tepper with access to all of their financial information. ⁴ While the Browns believed that Tepper had been assigned simply to assist them with the management of their financial paperwork, Tepper's actual job was “to gather information” about the Browns, and to make certain all of their assets remained under the management of Wells Fargo.

Tepper introduced the Browns to an estate attorney ⁵ and a certified public accountant. As Tepper started to learn about the Browns' investments, she did not agree with the Browns' investment choices. She then began giving the Browns advice as to their investments. Tepper advised the Browns to change their investment strategy because she did not think their investments were appropriate for people the Browns' age.

Tepper advised the Browns that the easiest method for straightening out their investment portfolio was to open a brokerage account with Wells Fargo. She represented that Keleshian was a stock expert who could handle the Browns' stock portfolio. “At the insistence and repeated urging of ... Tepper over the months,” the Browns ultimately agreed to meet with Keleshian.

During this time period, Tepper also helped the Browns with organizing their documents. As she worked in their home office, she helped them decide which documents to keep and which to shred.

3. The June 7, 2004 Meeting and the Execution of the Agreement

Prior to the Meeting, the Browns had met with Keleshian on one prior occasion for an introduction. Following that introductory meeting, Tepper then set up the Meeting to open the Brokerage Account.

On June 7, 2004, Tepper and Keleshian traveled to the Browns' office in El Segundo, California, and met with the Browns for 30 minutes. At that time, the Browns opened three investment accounts: (1) the Brown Family Trust, (2) the Ira D. Brown Trust, and (3) the Ronnie C. Brown Trust. This litigation concerns the Brown Family Trust. Defendants assert, and plaintiffs do not dispute, that the relevant documents establishing the Ira D. Brown Trust and the Ronnie C. Brown Trust contained arbitration provisions identical to the one at issue in this litigation.

At the Meeting, the Browns signed the Acknowledgement and a Trust Certificate of Investment Power. The Acknowledgement, a one-page document, provided that the Browns had read the terms and conditions of the Wells Fargo Investments Brokerage Account Agreement and agreed to be bound by them. The Acknowledgement also stated at paragraph 5 in single-spaced fine print capital letters: “BY SIGNING BELOW I/WE ACKNOWLEDGE RECEIPT OF A COPY OF THE WELLS FARGO INVESTMENTS BROKERAGE ACCOUNT AGREEMENT WHICH CONTAINS A PRE-DISPUTE ARBITRATION CLAUSE IN SECTION 1, NUMBER 14. MY SIGNATURE ALSO ACKNOWLEDGES THAT I HAVE READ AND UNDERSTAND THE DISCLOSURES STATED ABOVE.”

Page three, section 14 of the corresponding Agreement included the arbitration provision entitled “Pre-Dispute Arbitration Agreement.” ⁶ In single-spaced fine print capital letters, the arbitration...