Dagostino v. LPL Fin., LLC

Decision Date06 December 2016
Docket NumberD069541
CourtCalifornia Court of Appeals Court of Appeals
PartiesJAMES J. DAGOSTINO, Individually and as Trustee, etc., et al., Plaintiffs and Respondents, v. LPL FINANCIAL, LLC, Defendant and Appellant.


California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

(Super. Ct. No. 37-2014-00037482-CU-FR-CTL)

APPEAL from an order of the Superior Court of San Diego County, Joel M. Pressman, Judge. Affirmed.

Markun Zusman Freniere & Compton, David S. Markun, Edward S. Zusman and Kevin K. Eng for Defendant and Appellant.

Law Offices of Timothy C. Karen and Timothy C. Karen for Plaintiffs and Respondents.

Plaintiffs, investors with accounts at LPL Financial, LLC (LPL), allege they loaned $375,000 to their financial adviser, Daniel Schmidt, who said he would use the money to develop a resort in Hawaii. After Schmidt defaulted on the loans, plaintiffs filed a first amended complaint for alleged financial elder abuse and related causes of action against Schmidt and LPL. Almost nine months later, LPL petitioned to compel arbitration of plaintiffs' claims. The court denied the petition, finding LPL waived its contractual right to arbitrate by unreasonably delaying its arbitration demand and by seeking to litigate plaintiffs' claims on the merits, causing plaintiffs prejudice. LPL contends the court erred by denying its petition to compel arbitration, primarily asserting (1) the claims alleged in the first amended complaint were not within the scope of the arbitration provision, and (2) plaintiffs were not prejudiced by the delay in seeking arbitration. We disagree and affirm.

A. Loans to Schmidt

As alleged in the first amended complaint, LPL is a broker-dealer and registered investment adviser, having approximately 13,300 brokers, 6,500 offices, and 4.3 million customers nationwide. Schmidt held securities licenses, was a branch manager for LPL, and was authorized by LPL to provide investment and financial advice.

Plaintiffs, who are over 65 years old, allege they were clients of Schmidt and LPL for retirement planning and investment management.

Plaintiffs allege that while acting as their LPL adviser, Schmidt solicited them to loan him a total of $375,000. Schmidt told plaintiffs he needed the money to develop a resort in Hawaii, called the " 'Pakalana Sanctuary.' " He said the project would generateincome from vacation and event rentals, and their loans would be secured by the property.

In June 2012, Leslie and Marilyn Wyman loaned Schmidt $25,000 at 6 percent interest, under a promissory note entitled "Mortgage Loan Note," but which was actually unsecured. In September 2012, the Wymans loaned Schmidt another $175,000, at 5 percent interest, in another unsecured note also entitled "Mortgage Loan Note." The first amended complaint alleges, "Schmidt liquidated securities the Wyman Plaintiffs' [sic] had on account with LPL . . . in order to generate the cash necessary for this investment." (Some capitalization omitted.)

In November 2012, James J. Dagostino and Carolyn Steeves loaned Schmidt $175,000 at 5 percent interest, under an unsecured promissory note entitled "Mortgage Loan Note." The first amended complaint alleges that "Schmidt liquidated securities the Dagostino Plaintiffs' [sic] had on account with LPL . . . in order to generate the cash necessary for this investment." (Some capitalization omitted.)

B. Plaintiffs' Theories Against LPL as Alleged in the First Amended Complaint

Plaintiffs allege they were not provided with risk disclosures or financial statements for these loans. They contend the loans were "a highly speculative securities investment" because repayment depended "entirely upon the financial condition of Schmidt, who was in the process of a divorce, and the success of Pakalana Sanctuary, which had no track record or earnings history." (Some capitalization omitted.) Plaintiffs allege that unbeknownst to them, Schmidt "had developed a substance abuse problem and a drug dependency, and this addiction further increased the risk that the investment wouldfail." They allege these investments were unsuitable for them in light of the "high degree of risk."

Plaintiffs allege LPL "knew, or should have known" that Schmidt was engaged in these loan transactions. They further allege Schmidt was "a management level agent of LPL," such that "his actions were those of LPL . . . regardless of whether or not other person affiliated with LPL . . . knew about Schmidt's actions." (Some capitalization omitted.) Plaintiffs also allege LPL "recklessly failed to exercise adequate supervision over Schmidt and that this failure was symptomatic of lax supervision and compliance at the firm at the time of the transaction[s] . . . ." (Some capitalization omitted.)

Plaintiffs allege Schmidt defaulted on the notes. They assert LPL is liable for their losses on the following legal theories: breach of fiduciary duty, constructive fraud, tort of another (for attorney fees), professional negligence, breach of a duty to supervise Schmidt, and violation of certain provisions in the Corporations Code and "California's Blue Sky laws."

C. The Arbitration Provision

In establishing accounts at LPL, plaintiffs "reviewed and accept[ed] the Master Account Agreement . . . ." The master account agreement contains an arbitration provision, stating in part:

"In consideration of opening one or more accounts for you, you agree that any controversy between LPL arising out of or relating to your account, transactions with or for you, or the construction, performance, or breach of this agreement, whether entered into prior, on or subsequent to the date hereof, shall be settled by arbitration inaccordance with the rules, then obtaining of the National Association of Securities Dealers, Inc."1

In an apparent attempt to plead around this arbitration provision, plaintiffs' first amended complaint contains a cause of action entitled "Declaratory Relief." There, plaintiffs allege the Schmidt promissory notes state that upon default, "Lender may file a lawsuit . . . to collect the unpaid principal amount of the loan plus unpaid interest." Plaintiffs allege Schmidt was a "management level agent" of LPL, "empowered to bind" LPL to these terms. Plaintiffs sought a judicial declaration "that the terms quoted above amount to a waiver of any contractual arbitration . . . ."

D. Case Management—No Motion to Compel Arbitration

LPL did not respond to the first amended complaint with a motion to compel arbitration. Instead, in February 2015 it answered with a general denial and 18 affirmative defenses. LPL did not plead the arbitration agreement as an affirmative defense.2

In April 2015, the court conducted a case management conference. Although the case management statement form contains a space for requesting binding arbitration, LPL instead requested a court trial. LPL indicated it would participate in a settlement conference or neutral evaluation, but not arbitration. LPL indicated it expected to movefor summary judgment and planned to depose plaintiffs within four months. The court set trial for December 11, 2015.

Discovery ensued. Plaintiffs propounded and LPL responded to form interrogatories, special interrogatories, and requests for admission. LPL deposed the four plaintiffs.

E. Plaintiffs File a Motion for Summary Adjudication

In July 2015, plaintiffs filed a motion for summary adjudication. Plaintiffs sought adjudication of 37 issues, including that the Schmidt notes were unregistered securities, and LPL was therefore liable for selling unregistered securities. They also sought summary adjudication that LPL owed them a fiduciary duty. Further, plaintiffs sought summary adjudication against LPL on its 18 affirmative defenses. The accompanying memorandum of points and authorities contain an eight-page legal analysis to support plaintiffs' theory the Schmidt loans were securities and LPL violated corporate securities law.

F. LPL Files a Motion for Summary Judgment

In August 2015, LPL filed a motion for summary judgment or, in the alternative, summary adjudication. LPL sought summary judgment on the grounds: (1) the undisputed evidence showed LPL did not participate in Schmidt's loans, did not know about them, and did not take part in any sale of any securities and, in any event, the loans were not securities; (2) as a matter of law, it had no duty to supervise the Schmidt loans; and (3) the declaratory relief cause of action should be dismissed because "[i]t is based on an issue that has not been raised in this action . . . ." LPL supported its motion withexcerpts of plaintiffs' deposition testimony, a declaration by Schmidt, and a 170-page statement of undisputed material facts.

In September 2015, after contentious discovery disputes arose, the court continued the parties' respective motions for summary adjudication and summary judgment to January 2016 and continued the trial to March 25, 2016. The discovery disputes were complex and according to the court, involved "potentially a million documents as well as protocols and methods of obtaining electronically stored information in a reasonable and expedited manner." In November 2015, the court appointed a referee to "hear and determine any and all discovery motions and disputes relevant to discovery in this action and to report findings and make a recommendation thereon."

G. Plaintiffs File a Second Amended Complaint

In October 2015, while LPL's summary judgment motion was pending, plaintiffs sought leave to file a second amended complaint. The first 99 allegations in the proposed second amended complaint are identical to the entire first amended complaint. In the proposed...

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