David v. Merrill Lynch, Pierce, Fenner and Smith, Inc.

• Decision Date: 24 April 1989
• Docket Number: No. 880234,880234
• Citation: 440 N.W.2d 269
• Parties: Loren G. DAVID, Plaintiff and Appellant, v. MERRILL LYNCH, PIERCE, FENNER AND SMITH, INC., Merrill Lynch Commodities, Inc., and Edward Williams, Defendants and Appellees. Civ.
• Court: North Dakota Supreme Court

Page 269

440 N.W.2d 269

Loren G. DAVID, Plaintiff and Appellant, v. MERRILL LYNCH, PIERCE, FENNER AND SMITH, INC., Merrill Lynch Commodities, Inc., and Edward Williams, Defendants and Appellees.

Civ. No. 880234.

Supreme Court of North Dakota.

April 24, 1989.

Edmund G. Vinje II, of Vinje Law Office, Fargo, for plaintiff and appellant.

James B. Vessey (argued), of Dorsey & Whitney Law Firm, Minneapolis, Minn., and Vogel, Brantner, Kelly, Knutson, Weir & Bye, Ltd., Fargo, for defendants and appellees.

VANDE WALLE, Justice.

Loren G. David appealed from a summary judgment granted in favor of Merrill Lynch, Pierce, Fenner, and Smith, Inc., Merrill Lynch Commodities, Inc. [hereinafter collectively referred to as Merrill Lynch], and Edward Williams. The district court determined that there was no genuine issue of material fact as to David's claim that he was fraudulently induced to enter into an arbitration agreement, concluded that the arbitration agreement complied with applicable statutes and regulations, and ordered that all other claims be compelled to arbitration. We affirm.

In May 1981 David, then a 26 year-old farmer from Lidgerwood, visited Merrill Lynch's Fargo office and opened a commodity trading account with $5,000. He met with Bruce Pearson, a broker with the company. Pearson provided David with a "Commodity Account Agreement" and a "Risk Disclosure Statement." One page of the documents contained three separate lines for the customer's signature. Above the first signature line was an acknowledgment that the customer had received and understood the "Risk Disclosure Statement" and the "Commodity Account Agreement." Above the second signature line was an authorization to transfer funds from the customer's commodity account to the customer's other accounts. Above the third signature line was an "Arbitration Agreement" providing in part that "[a]ny controversy arising out of or relating to my account, to transactions with you for me or to this agreement or the breach thereof, shall be settled by arbitration in accordance with the rules, then in effect, of the contract market upon which the transaction giving rise to the claim was executed or the New York Stock Exchange, Inc. as I may elect." Printed in boldface type below this language but above the third signature line appears the following:

"While the Commodity Futures Trading Commission (CFTC) encourages the settlement of disputes by arbitration, it requires that your consent to such an agreement be voluntary. You need not sign this Arbitration Agreement to open an account with Merrill Lynch Pierce Fenner & Smith, Inc. (See 17 CRF [sic] 180.1-180.6)

"By signing this Arbitration Agreement, you may be waiving your right to sue in a court of law. But you are not waiving your right to elect later to proceed pursuant to Section 14 of the Commodity Exchange Act to seek damages sustained as a result of a violation of the Act. In the event a dispute arises you will be notified that Merrill Lynch Pierce Fenner & Smith, Incorporated intends to submit the dispute to arbitration. If you believe a violation of the Commodity Exchange Act is involved and you prefer to request a Section 14 'Reparations' Proceeding before the CFTC, you will still have 45 days in which to make that election."

According to David, Pearson did not explain the documents to him during their 20-minute meeting but merely placed an "X" by each signature line and told him to sign the document. David did so. David began trading on a regular basis and, at David's request, Edward Williams took over the account from Pearson. According to David, in December 1981 he suffered a $30,000 loss allegedly caused by Williams's mishandling of a trade and thereafter discontinued doing business with Merrill Lynch.

David brought this action against Merrill Lynch and Williams in April 1982 alleging breach of contract, negligence, fraud, and deceit. He also claimed that he had been fraudulently induced to enter into the arbitration agreement. David sought actual damages in the amount of $30,000, damages for physical and emotional distress, and punitive damages. Merrill Lynch counterclaimed for a $7,339 debit in David's account. In August 1982 Merrill Lynch moved to compel arbitration in accordance with the parties' agreement. The district court denied the motion, concluding that State law controlled and that an arbitration agreement could not be specifically enforced under North Dakota law. ¹

In 1984 Merrill Lynch, relying upon the United States Supreme Court's decision in Southland Corp. v. Keating, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984), again moved to compel arbitration. The district court denied the motion. The court held that although the Federal Arbitration Act, 9 U.S.C. Sec. 1 et seq., preempts contrary State law under Southland Corp. v. Keating, 7 U.S.C. Sec. 7a(11) of the Commodity Exchange Act prohibits arbitration of commodity disputes involving claims in excess of $15,000. The court also determined that under 9 U.S.C. Sec. 2, it had jurisdiction to resolve David's fraud-in-the-inducement claim.

In 1988 Merrill Lynch sought reconsideration of the district court's holding that 7 U.S.C. Sec. 7a(11) precluded enforcement of the arbitration agreement and moved for summary judgment on the issue of fraud in the inducement. The district court reversed its prior decision ² and held that 7 U.S.C. Sec. 7a(11) did not void the parties' arbitration agreement. The court also held that the arbitration agreement complied with applicable Commodity Futures Trading Commission [CFTC] regulations. The court further determined that there was no genuine issue as to any material fact with regard to David's fraud-in-the-inducement claim. The court ordered the matter compelled to arbitration and David appealed.

Summary judgment is appropriate when there is no dispute as to material facts, or when, although factual disputes exist, the law is such that resolution of the factual disputes will not change the result. Russell v. Bank of Kirkwood Plaza, 386 N.W.2d 892 (N.D.1986). On appeal we determine whether the information provided to the trial court, when viewed in the light most favorable to the losing party, precludes the existence of a genuine issue of material fact and entitles the moving party to judgment as a matter of law. Union State Bank v. Woell, 434 N.W.2d 712 (N.D.1989).

I

David asserts that arbitration is improper in this case because his claim against Merrill Lynch exceeds $15,000. Prior to 1983, 7 U.S.C. Sec. 7a(11) provided:

"Sec. 7a. Duties of contract markets ³

"Each contract market shall--

* * * * * *

"(11) provide a fair and equitable procedure through arbitration or otherwise (such as by delegation to a registered futures association having rules providing for such procedures) for the settlement of customers' claims and grievances against any member or employee thereof: Provided, That (i) the use of such procedure by a customer shall be voluntary, (ii) the procedure shall not be applicable to any claim in excess of $15,000, ..." [Emphasis in original.] ⁴

David relies on Breyer v. First Nat'l Monetary Corp., 548 F.Supp 955 (D.N.J.1982), in which the court determined that 7 U.S.C. Sec. 7a(11) precluded any claim in excess of $15,000 from being subject to arbitration. However, this narrow view of the pre-1983 version of the statute has not been adopted by most courts or the CFTC itself. In 1975 the CFTC interpreted this statute as follows:

"The Commission interprets section 5a(11) of the Commodity Exchange Act [7 U.S.C. Sec. 7a(11) ] as not prohibiting a contract market from establishing arbitration or other procedures for the resolution of customer claims involving amounts over $15,000. Any such arbitration or other procedures must be a separate procedure which is independent of, and should not interfere with or delay the resolution of customer claims that are submitted under section 5a(11)...." CFTC, Exchange Arbitration Procedures, Interpretation and Request for Comments, 40 Fed.Reg. 29122 (July 10, 1975).

The Commission proceeded to promulgate regulations that allowed such agreements regardless of the amount in controversy. See 17 C.F.R. Sec. 180.5 (1983). ⁵ The rationale for this position is that the intent of former Sec. 7a(11) was to require contract markets to establish arbitration procedures only for claims under $15,000 by customers who voluntarily chose to arbitrate but not to prohibit arbitration of claims exceeding $15,000. See generally, Geldermann, Inc. v. C.F.T.C., 836 F.2d 310 (7th Cir.1987), cert. denied, --- U.S. ----, 109 S.Ct. 54, 102 L.Ed.2d 33 (1988). In compelling a $24,000 claim to arbitration, the First Circuit Court of Appeals in Ingbar v. Drexel Burnham Lambert Inc., 683 F.2d 603, 605 (1st Cir.1982), stated:

"This provision ... merely requires 'contract markets,' such as Comex, to establish arbitration procedures for settling small disputes. It does not preclude claimants from going to court, from invoking CFTC reparations proceedings under 7 U.S.C. Sec. 18, or from using (or agreeing in advance to use) other, 'off-market' procedures to settle their disputes if they so choose. Indeed, the CFTC has promulgated regulations that specifically permit the use of pre-dispute arbitration procedures that meet certain conditions...."

Accordingly, most courts have either explicitly or implicitly recognized that the former version of 7 U.S.C. Sec. 7a(11) did not bar arbitration of disputes in excess of $15,000. See, e.g., Tamari v. Bache & Co. (Lebanon) S.A.L., 565 F.2d 1194 (7th Cir.1977), cert. denied, 435 U.S. 905, 98 S.Ct. 1450, 55 L.Ed.2d 495 (1978); Corcoran v. Shearson/American Exp. Inc., 596 F.Supp. 1113 (N.D.Ga.1984); Hagstrom v. Breutman, 572 F.Supp. 692 (N.D.Ill.1983); Milani v. Conticommodity Serv., Inc., 462 F.Supp. 405 (N.D.Cal.1976).

We agree with this view. Therefore, we conclude that David's $30,000 claim against Merrill Lynch does not render the...