Foy v. Thorp

• Decision Date: 20 June 1996
• Docket Number: No. 1,CA-CV,1
• Citation: 920 P.2d 31,186 Ariz. 151
• Parties: William J. FOY, Plaintiff-Appellee, v. Stella THORP, a married woman, Defendant-Appellant. 95-0233.
• Court: Arizona Court of Appeals

Page 31

920 P.2d 31

186 Ariz. 151

William J. FOY, Plaintiff-Appellee, v. Stella THORP, a married woman, Defendant-Appellant.

No. 1 CA-CV 95-0233.

Court of Appeals of Arizona,

Division 1, Department E.

June 20, 1996.

Reconsideration Denied July 16, 1996.

[186 Ariz. 152] Roshka Heyman & DeWulf, PLC by John E. DeWulf and Paul J. Roshka, Jr., Phoenix, for Plaintiff-Appellee.

Byrnes & Himelrick by Richard G. Himelrick, Scottsdale, and Law Offices of Robert D. Mitchell, P.C. by Robert D. Mitchell, Scottsdale, for Defendant-Appellant.

OPINION

VOSS, Judge.

Stella Thorp appeals from the trial court's order staying an arbitration proceeding she initiated with the National Association of Securities Dealers (NASD) against William Foy. Holding the trial court correctly found the dispute does not come within NASD's arbitration provisions, we affirm.

Facts and Procedural History

The defendant, Stella Thorp, received an inheritance consisting of a ranch in Texas and certain oil and gas royalties. She was unsophisticated in investment and financial matters. In 1981, she met the plaintiff, William Foy, a financial planner and investment advisor. Foy solicited Thorp to become a client of his and of his firm, The Financial Forum.

Foy held a real estate license and a Series 6 registration with the NASD. He was affiliated with Anchor National Financial Services in Phoenix. The Series 6 NASD registration limited him to handling mutual fund transactions which, when held concurrently with a valid insurance license, permitted him to engage in variable annuity transactions. ¹ Under NASD rules, Foy was an "affiliated person," which is defined as

a sole proprietor, partner, officer, director, or branch manager of any member or any natural person occupying a similar status or performing similar functions, or any natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by such member ...

"Members" are "either any broker or dealer admitted to membership in the [National Securities] Corporation or any officer or partner of such a member...."

Following Foy's advice, Thorp exchanged the Texas property and a sum of cash for real property located in Tempe, known as Broadriver Plaza. The Broadriver Plaza was owned by Foy and his partners. In the transaction, it was sold to John Lloyd, who then exchanged it for Thorp's property. Thorp paid approximately $900,000.00 for the Broadriver Plaza investment. The purchase price consisted of $540,000.00 in cash and the assumption of an existing mortgage with Northwestern National Life. Foy was the listing broker for the transaction and received a real estate commission through The Financial Forum. Following the exchange, Foy managed the property, disbursed net operating income, and maintained the property with a view to eventual resale. Foy also arranged for Thorp to work with another principal of The Financial Forum, Nyles A. Gentry, who was properly licensed in connection with Thorp's investment of a substantial sum of money in stocks and other securities with Anchor National Financial Services.

Thorp filed a statement of claim with NASD, seeking arbitration. She alleged Foy should not have recommended the transaction to her and Foy had a conflict of interest in recommending the property for exchange because he owned other properties in the vicinity. She further alleged Foy had represented Broadriver Plaza would increase in value, but it did not. She also complained Foy managed the property poorly. However, regarding the money she invested in securities through Gentry, the statement of claim stated: "[s]he is not asserting a complaint in this arbitration regarding how that money was managed."

Foy then filed this action pursuant to Arizona Revised Statutes Annotated section (A.R.S. § ) 12-1502, seeking to have the superior court stay the arbitration. After briefing and argument the trial court granted the stay and entered its formal order. Thorp filed a timely notice of appeal. This court has jurisdiction over the appeal pursuant to A.R.S. § 12-2101.01(A)(2).

Discussion

Arizona law favors arbitration, both statutorily, see A.R.S. § 12-1501, and by the courts as a matter of public policy. Clarke v. ASARCO Inc., 123 Ariz. 587, 589, 601 P.2d 587, 589 (1979). "Notwithstanding such public policy, an arbitrator cannot resolve issues which go beyond the scope of the submission agreement." Id. Due to the public policy favoring arbitration, arbitration clauses should be liberally construed, and doubts regarding arbitrability should be resolved in favor of arbitration. U.S. Insulation, Inc. v. Hilro Constr. Co., 146 Ariz. 250, 258, 705 P.2d 490, 498 (App.1985); New Pueblo Constructors, Inc. v. Lake Patagonia Recreation Ass'n, 12 Ariz.App. 13, 16, 467 P.2d 88, 91 (1970).

I. WHO DETERMINES ARBITRABILITY?

Thorp argues the question of arbitrability should be decided initially by the arbitrators, not the court. She relies on City of Cottonwood v. James L. Fann Contracting, Inc., 179 Ariz. 185, 877 P.2d 284 (App.1994). In Cottonwood, we held the question of the timeliness of a party's demand for arbitration should be decided by the arbitrator. Id. at 192, 877 P.2d at 291. However, Cottonwood does not support Thorp's argument; in fact, it supports the contrary position.

We noted in Cottonwood the issue of the timeliness of a demand for arbitration is complicated: it can constitute any of three things: (1) repudiation/waiver of the arbitration clause; (2) failure of a procedural condition; or (3) failure of a condition precedent to activation of the clause. Id. at 189, 877 P.2d at 288. We held issues two and three were for the arbitrator, but issue one was for the court:

Untimeliness may constitute repudiation of the arbitration agreement if the repudiating party has acted so inconsistently with the arbitration agreement as to waive its right to proceed under the agreement.... Because repudiation calls into question the existence of the arbitration agreement, repudiation is an issue for the court.

Id. at 190, 877 P.2d at 289.

Cottonwood holds the court decides whether the parties have an agreement to arbitrate a particular dispute. The holding flows naturally from the statute under which this suit was filed originally.

On application, the court may stay an arbitration proceeding commenced or threatened on a showing that there is no agreement to arbitrate. Such an issue, when in substantial and bona fide dispute, shall be forthwith and summarily tried and the stay ordered if found for the moving party.

A.R.S. § 12-1502(B). Because the statute gives the court the power to try the issue of whether there is an agreement to arbitrate, and simultaneously gives the court the power to stay an arbitration proceeding that is already commenced, it necessarily gives the court the power to decide the issue in the first instance. Cottonwood, 179 Ariz. at 190, 877 P.2d at 289; Clarke v. ASARCO Inc., 123 Ariz. at 589, 601 P.2d at 589 (court decided which issues arbitrator was empowered to decide).

The issue here is whether Foy has agreed to arbitrate the controversy between him and Thorp. This became an issue for the court to decide when Foy filed this action under A.R.S. § 12-1502.

II. SCOPE OF ARBITRABILITY

The NASD Code of Arbitration Procedure provides in part:

Any dispute, claim or controversy eligible for submission under Part I[ ²] of this Code between a customer and a member and/or associated person arising in connection with the business of such member or in connection with the activities of such associated persons shall be arbitrated under this Code, as provided by any duly executed and enforceable written agreement or upon the demand of the customer.

NASD Code of Arbitration Procedure, § 12(a) (§ 12). The parties agree the arbitrability of Thorp's claim against Foy depends on the proper construction of the phrase: "in connection with the business of such member or in connection with the activities of such associated persons." Thorp argues the language of the section admits of practically no limitation: the controversy is NASD-arbitrable if it arises out of the business activities of the associated person.

We agree with Foy that the section applies only to NASD-related activities of the associated person. The only cited authorities addressing this question unanimously read § 12(a) as limited to NASD-related activity. In A.G. Edwards & Sons, Inc. v. Clark, 558 So.2d 358 (Ala.1990), the Alabama Supreme Court was faced with the question of whether a dispute was arbitrable. The issue involved section 8 of the NASD Code (§ 8), which deals with disputes between members and/or affiliated persons inter sese, as opposed to § 12, which includes customers. However, like § 12, § 8 requires the controversy "aris[e] in connection with the business of such member(s) or in connection with the activities of such associated person(s)" to be arbitrable. Id. at 359 (quoting NASD Code of Arbitration Procedure, § 8(a)). The court held the section must be limited to NASD-related activities:

The NASD Code does not mandate arbitration for "any claim against a member," as the defendants would have us interpret it; it mandates arbitration of any claim "arising in connection with the business" of a member or "in connection with the activities" of an associated person. The NASD Code does not define "business," but it does define "Investment banking or securities business" as "the business, carried on by a broker or dealer, of underwriting or distributing issues of securities, or of purchasing securities and offering the same for sale as a dealer therein, or of purchasing and selling securities upon the order and for the account of others...." "Member" is defined as "either any broker or dealer admitted to membership in the [National Securities Clearing] Corporation or any officer or partner of such a member...." "Person associated with a member," ......