Gilman v. Wheat, First Securities, Inc.

• Citation: 345 Md. 361,692 A.2d 454
• Decision Date: 01 September 1996
• Docket Number: No. 53,53
• Parties: Michael G. GILMAN v. WHEAT, FIRST SECURITIES, INC. ,
• Court: Maryland Court of Appeals

Page 361

345 Md. 361

692 A.2d 454

Michael G. GILMAN v. WHEAT, FIRST SECURITIES, INC.

No. 53, Sept.Term, 1996.

Court of Appeals of Maryland.

April 15, 1997.

Reconsideration Denied May 5, 1997.

Richard M. Meyer (Milberg Weiss Bershad Hynes & Lerach LLP; Mitch Kalcheim, New York City; John B. Isbister, Melissa G. Brault, Michael H. Tow, Tydings & Rosenberg LLP, Baltimore), on brief, for Appellant.

Jack E. McClard (Mark E. Herrmann, Hunton & Williams, Richmond, VA; John Jay Range, Michael P. McQuillen, Hunton & Williams, Washington, DC), on brief, for Appellee.

Argued before BELL, C.J., and ELDRIDGE, RODOWSKY, CHASANOW, KARWACKI, RAKER and WILNER, JJ.

WILNER, Judge.

Appellant, Michael Gilman, had a brokerage account with appellee, Wheat, First Securities, Inc. He filed a class action complaint in the Circuit Court for Montgomery County charging Wheat with violations of Maryland securities laws, breach of fiduciary duty, breach of contract, and conversion. The court dismissed the complaint based on a forum-selection clause in the contracts governing the brokerage account, which required that all actions arising under those contracts be conducted in a Federal or State court in Richmond, Virginia.

Gilman acknowledges the forum selection clause but contends that it should not be enforced because (1) his damages from the alleged misconduct of appellee are minuscule, (2) the only practical way he has of recovering his small loss is through a class action proceeding, and (3) such a proceeding is not available to him in Federal court or in the Virginia State courts. We find no error and shall therefore affirm.

I. UNDERLYING FACTS

Gilman is a Maryland resident. He is also an attorney and a member of the Virginia Bar and had previously been an instructor at a Virginia law school. Wheat is a securities brokerage firm. It is a Virginia corporation, headquartered in Richmond, but has offices in a number of States, including Maryland.

Gilman opened an account with Wheat at the latter's branch office in Bethesda, Maryland, in April, 1992. Two Securities Account Agreements were signed--one pertaining to a cash account, the other governing a margin account. Both contracts were signed by Gilman at Wheat's Bethesda office; they were then sent to Richmond, where they were accepted and signed by Wheat.

Each contract contained a choice-of-law clause stating that the agreement and all transactions made in the account were to be governed by Virginia law. More importantly, for purposes of this appeal, each agreement contained a prominently displayed dispute resolution provision, printed in capital letters. Under that provision, the parties agreed that all controversies arising between them concerning any transaction or concerning the construction, performance, or breach of the contract were to be determined by arbitration. Indeed, as part of that provision the parties acknowledged that they were "waiving their right to seek remedies in court, including the right to jury trial." The arbitration was to take place, at Gilman's election, before the New York Stock Exchange, Inc., the National Association of Security Dealers, Inc., or any other national securities exchange forum of which Wheat was a member and on which a transaction giving rise to the claim took place. The provision went on to set forth some of the preliminary procedures for the arbitration and ended with this statement:

"ANY JUDICIAL PROCEEDING RELATING TO THE ARBITRATION OR TO THIS AGREEMENT SHALL BE

CONDUCTED IN A STATE OR FEDERAL COURT IN RICHMOND, VIRGINIA AND I AGREE (A) TO SUBMIT TO THE JURISDICTION OF SUCH COURTS (B) THAT SUCH COURTS CONSTITUTE A CONVENIENT FORUM AND (C) THAT PROCESS MAY BE SERVED BY CERTIFIED MAIL RETURN RECEIPT REQUESTED AT MY LAST ADDRESS KNOWN TO YOU."

The record indicates that this provision is standard in Wheat's securities account agreements and is included in the agreements with each member of the class Gilman attempted to create. The record also indicates that all of Gilman's orders for the purchase or sale of securities on the account were executed by Wheat's trading desk in Richmond and that confirmations of those transactions were mailed to Gilman from Richmond. Records of the transactions are maintained at both the Richmond and Bethesda offices.

In May, 1994, Gilman filed a class action lawsuit against Wheat in the Supreme Court of New York, complaining about what has become known in the industry as order flow payments, i.e., the practice of a broker routing customer buy and sell orders through a particular dealer, who compensates the broker for that business. The essence of the complaint, as characterized by Gilman, was that "in return for cash payments and other inducements, Wheat directed its customer orders, including those of the plaintiff, to market makers who paid Wheat ... kickbacks." The most common of those "kickbacks," according to Gilman, was the payment of two cents a share by the dealer to Wheat in return for Wheat's executing the customer's order with that dealer. He complained that Wheat kept the two cents and failed to disclose these "secret profits," although he acknowledged that Wheat did disclose, on the confirmation notices sent after the transaction, that it "receives remuneration on the transaction and that the source and amount of such remuneration would be disclosed upon request."

The class asserted by Gilman consisted of "all persons who maintain, or have maintained [since January 1, 1990] brokerage accounts at Wheat and for whom Wheat executed transactions in securities with Wheat receiving kickbacks from the market makers with whom Wheat executed those transactions." He averred that there were several thousand such persons. Alleging that a broker engaged in such activity forfeits its right to compensation, Gilman sought not just the allegedly unlawful secret profits but the full amount of all commissions paid by the class members, along with punitive damages and attorneys' fees. Seven causes of action were pled: breach of a fiduciary relationship, commercial bribery in violation of § 180.05 of the New York Penal Law, fraud or deception in violation of art. 23-A of the New York General Business Law, breach of contract, common law fraud, conversion, and breach of fiduciary duty.

On November 30, 1994, the court dismissed the complaint on the ground that New York was an inconvenient forum. Without definitively resolving the validity of the forum-selection clause (much less the exclusivity of the arbitration provision) the court simply held that "the action lacks any connection to the New York forum chosen by plaintiff." Although an appeal was noted, it was not perfected.

In March, 1995, Gilman filed a similar class action lawsuit in the Circuit Court for Montgomery County. In contrast to the New York action, in which jurisdiction and venue were founded principally upon Wheat being a member of the New York Stock Exchange, in this action, he stressed the Maryland connections--his being a resident of the State, Wheat having an office and doing business here, the account being maintained in Bethesda, and the orders being placed at that office. The factual averments, however, were nearly identical to those stated in the New York action. Five causes were pled--two for fraud, in violation of Maryland Code, § 11-301 of the Corporations and Associations article, and one each for breach of fiduciary duty, breach of contract, and conversion. He sought as relief a declaratory judgment that Wheat had engaged in fraudulent and deceptive activities, an injunction to prohibit it from continuing to do so, and damages "in an amount as yet undetermined." In contrast to the relief sought in the New York case, he did not seek the return of all commissions paid by the class members.

Wheat responded to the Maryland complaint by having it removed to the U.S. District Court, alleging both Federal question and diversity jurisdiction. That court found neither and therefore remanded the case back to the circuit court. Gilman v. Wheat, First Securities, Inc., 896 F.Supp. 507 (D.Md.1995). The finding of no diversity jurisdiction was based, not on the residences of the parties, but on Gilman's failure to state a claim for at least $50,000 in damages. In that regard, and in clear contrast to both the relief sought in New York and the information report he filed in the circuit court pursuant to Maryland Rule 2-111(a), he did "not dispute that the actual damages claims are for one to two cents per share traded, amounting to a total of a few dollars per plaintiff." Id. at 510. ¹ Judge Motz concluded that, even in a class action, the requisite amount in controversy "cannot be met by aggregating the separate claims of individual class plaintiffs." Id. at 509. Nor could the $50,000 threshold be met by the cost of injunctive relief to Wheat, as that cost also would be insignificant as to any one plaintiff. Federal question jurisdiction hinged on Wheat's assertion of Federal preemption, which Judge Motz rejected.

When the case returned to the circuit court, Wheat moved to dismiss the complaint on the grounds (1) of improper venue, based on the forum-selection clause in the two contracts, and (2) res judicata, based on the New York decision. With respect to the forum-selection clause, Wheat argued that the clause was valid, that there was no fraud or duress in its inclusion, that Gilman, as a Virginia lawyer, was aware of the clause and what it required, that Gilman did not have to deal with Wheat if he objected to that provision, and that the Virginia courts will afford him an appropriate remedy if he proves his claim. The only ground for ignoring the clause asserted by Gilman was that Virginia did not have a class action procedure, which Wheat urged was an insufficient basis for not enforcing the clause.

Gilman argued in response that the class action procedure is in the nature of a remedy, one that is unavailable in...