Hales v. ProEquities, Inc.

• Decision Date: 11 July 2003
• Citation: 885 So.2d 100
• Parties: Frank J. HALES and Iva Jean P. Hales v. PROEQUITIES, INC.
• Court: Alabama Supreme Court

885 So.2d 100

Frank J. HALES and Iva Jean P. Hales v. PROEQUITIES, INC.

1011015.

Supreme Court of Alabama.

July 11, 2003.

Rehearing Denied January 23, 2004.

David H. Marsh, Jeffrey C. Rickard, and Thomas M. Powell of Marsh, Rickard & Bryan, P.C., Birmingham; and Randy Beard of Beard & Beard, Guntersville, for appellants.

W. Stancil Starnes, John P. Scott, Jr., and Joshua H. Threadcraft of Starnes & Atchison, LLP, Birmingham, for appellee.

JOHNSTONE, Justice.

Appellants-plaintiffs Frank J. Hales and Iva Jean P. Hales appeal the order entered by the trial court compelling them to arbitrate their claims against appellee-defendant ProEquities, Inc., an investment company. We reverse and remand.

In July 1994, Wayne Gregory, an agent of ProEquities, convinced the Haleses to put their life savings of $430,000 in an investment account with ProEquities. On July 20, 1994, Frank Hales, alone, signed a "New Account Application," an individual retirement account ("IRA") application, and an IRA beneficiary designation form. The contractual documents include a pre-dispute arbitration agreement.

On August 5, 1999, in the Marshall County Circuit Court, the Haleses sued ProEquities and Gregory¹ for conversion, breach of contract, fraud, breach of fiduciary duty, and willfulness and wantonness. Specifically, the Haleses alleged that, following the defendants' advice to "re-invest $150,000 in InsNet, Inc. stock," and to invest $60,000 in "a viatical settlement contract issued by The Old Line Life Insurance Company of America," the Haleses instructed the defendants to make these investments on their behalf. The Haleses alleged that the defendants had not made these investments but had converted the $210,000.

On September 10, 1999, defendant Gregory moved to dismiss the complaint or, in the alternative, to transfer the case to Madison County. On September 14, 1999, ProEquities moved to dismiss the complaint on the ground of improper venue. On November 2, 1999, the Marshall County Circuit Court heard arguments by counsel on the motions to dismiss. On November 12, 1999, the Marshall County Circuit Court granted the motion to transfer and transferred the case to the Madison County Circuit Court.

On November 22, 1999, defendant Gregory moved for a stay of the case pending his appeal of his criminal convictions. The trial court purported to grant the motion.² On November 2, 2000, the Haleses' attorney noticed the deposition of Frank Hales for December 15, 2000. On December 5, 2000, the Haleses' attorney re-noticed the deposition of Frank Hales for January 16, 2001. The Haleses canceled the January 16, 2001 deposition at the request of the attorney for ProEquities in order for the attorneys for both parties to discuss a possible conflict of interest on the part of one of the Haleses' attorneys and to discuss a possible settlement of the case.

On January 31, 2001, the trial court ordered the parties to mediate the dispute and to report to the court the status of mediation by March 1, 2001. The trial court placed the case on its administrative docket while mediation occurred. The court further ordered that, if mediation failed to resolve the case, the case would be set for trial within 60 days. On March 27, 2001, ProEquities waived a possible conflict of interest affecting one of the Haleses' attorneys in his representation of the Haleses.

On May 24, 2001, the Haleses' attorney re-noticed the deposition of Frank Hales for June 6, 2001. On May 25, 2001, ProEquities noticed the deposition of Frank Hales for June 6, 2001 and included a request that he produce certain documents at his deposition. On May 25, 2001, ProEquities also noticed the deposition of Iva Hales for June 6, 2001 and included a request that she produce certain documents at her deposition. The parties canceled the Haleses' depositions to explore a settlement of the case. On May 31, 2001, ProEquities answered the complaint and asserted various affirmative defenses.

On June 20, 2001, the Haleses amended their complaint to assert claims against ProEquities for negligent and wanton hiring, training, monitoring, supervision, and retention, and for negligent and wanton failure to adopt, to promulgate, or to enforce policies and procedures in accordance with the "Alabama Securities Commission Code." On June 22, 2001, the Haleses served ProEquities with interrogatories and requests for production.

On July 10, 2001, the Haleses' attorney re-noticed the deposition of Frank Hales for August 13, 2001. On July 19, 2001, ProEquities re-noticed the deposition of Frank Hales for August 13, 2001 and included a request that he produce certain documents at his deposition. On July 19, 2001, ProEquities re-noticed the deposition of Iva Hales for August 13, 2001 and included a request that she produce certain documents at her deposition. On July 25, 2001, ProEquities answered the amended complaint and again asserted various affirmative defenses. On August 13, 2001, the parties deposed Frank Hales. Thereafter, the Haleses filed a second amended complaint substituting McDowell Enterprises stock for InsNet, Inc., stock. In a letter dated September 6, 2001, defendant Gregory told the trial court that, because of his incarceration, he could not attend the trial on the scheduled date, apparently during the first week of November 2001.³ He asked the court to delay the trial until he could obtain his records and prepare for trial.

On October 5, 2001, ProEquities answered the second amended complaint and again asserted various affirmative defenses. For the first time, ProEquities moved to compel the Haleses to submit their claims to arbitration pursuant to the pre-dispute arbitration agreement signed by Frank Hales and moved to stay the Haleses' action pending the arbitration. In its motion to compel arbitration, ProEquities claimed that the motion was timely because, ProEquities said, it had learned for the first time at Frank Hales's deposition that the Haleses' claims "relate[d] directly to plaintiff's account with ProEquities, Inc., which was opened in July 1994." ProEquities also filed evidentiary materials and a supporting brief.

On October 15, 2001, ProEquities filed a supplemental brief in support of its motion to compel arbitration. On October 29, 2001, the Haleses filed a memorandum and evidentiary materials in opposition to the motion to compel arbitration. The Haleses contended that ProEquities had waived its right to arbitration by waiting over two years to move to compel arbitration and by failing to assert arbitration as an affirmative defense in its initial answer to the complaint.

On November 6, 2001, the trial court heard arguments by counsel on the motion to compel arbitration. Thereafter, both ProEquities and the Haleses filed affidavits by their respective attorneys. The attorney for ProEquities states that over a two-year period he had engaged in discussions with one of the Haleses' attorneys about a possible conflict of interest in his representation of the Haleses. He states that in January and February 2001 he engaged in settlement discussions with one of the attorneys representing the Haleses. He advised the Haleses' attorneys that ProEquities had agreed to waive the possible conflict affecting the one attorney in his representation of the Haleses. One of the Haleses' attorneys states that the Haleses, through their attorneys, had expended "a great deal of time, money, and effort in preparing [the Haleses'] case for trial before a jury." The attorney specifically states that, during the pendency of the case, he and an attorney for ProEquities engaged in discussions about settling the Haleses' claims against ProEquities. "At no time during any of these discussions was arbitration mentioned. Arbitration was first raised over two years after the suit was filed and one month before the case was to be tried." On January 11, 2002, the trial court rejected the Haleses' assertion that ProEquities had waived its right to compel arbitration and granted the motion to compel arbitration.

On appeal, the Haleses raise one issue:

"[W]hether the trial court erred by granting the motion to compel arbitration ... given that ProEquities actively participated in the litigation for more than two years before moving to compel arbitration and given that ProEquities failed to raise the affirmative defense of arbitration until more than two years after ProEquities served and filed its initial Answer."

The Haleses' contend that they were prejudiced by the delay of ProEquities in invoking the arbitration agreement. They contend that they incurred considerable litigation expenses in preparing their case for trial. The expenses include the cost of videotaping the deposition of Frank Hales, whose health is failing, for use at trial.

Standard of Review

The parties have invoked two different arguably applicable standards of review. First, "the standard of review of a trial court's ruling on a motion to compel arbitration at the instance of either party is a de novo determination of whether the trial judge erred on a factual or legal issue to the substantial prejudice of the party seeking review." Ex parte Roberson, 749 So.2d 441, 446 (Ala.1999). Accord Lewis v. Conseco Fin. Corp., 848 So.2d 920, 922 (Ala.2002) ("[t]his Court reviews de novo the [grant] or denial of a motion to compel arbitration"). Second, "[o]rdinarily, we review issues regarding waiver of arbitrability under an abuse-of-discretion standard." Karl Storz Endoscopy-America, Inc. v. Integrated Med. Sys., Inc., 808 So.2d 999, 1008 (Ala.2001). However, in Karl Storz Endoscopy-America, because the defense of waiver was submitted entirely on documentary evidence, we conducted a de novo review of that defense. Id.

Because of the dichotomy in the two standards of review, we will clarify the standard of review applicable to trial court rulings on motions to compel arbitration opposed on the ground of waiver. The...