Mta, Inc. v. Merrill Lynch

• Citation: 114 So.3d 27
• Decision Date: 07 December 2012
• Docket Number: 1111167.
• Parties: MTA, INC. v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., a division of Bank of America Corporation.
• Court: Supreme Court of Alabama

114 So.3d 27

MTA, INC.

v.MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., a division of Bank of America Corporation.

1111167.

Supreme Court of Alabama.

Dec. 7, 2012.

Kevin D. Heard and Adam C. Duaro of Heard Ary, LLC, Huntsville, for appellant.

Joshua D. Jones and Joel M. Everest of Maynard, Cooper & Gale, P.C., Birmingham, for appellee.

STUART, Justice.

MTA, Inc., appeals the order of the Madison Circuit Court holding that MTA's claims against Merrill Lynch, Pierce, Fenner & Smith, Inc., a division of Bank of America Corporation (“Merrill Lynch”), were subject to an arbitration agreement and compelling MTA to arbitrate those claims. We reverse and remand.

I.

On January 21, 1994, MTA entered into a deferred-compensation agreement (“the DCA”) with its employee, Yvonne Sanders. Pursuant to the terms of the DCA, MTA was obligated to pay Yvonne $270,000 in 120 equal monthly installments beginning the month following her 50th birthday or, in the event Yvonne died before reaching her 50th birthday, to pay her children, Tiffany Sanders and Roderick Dedrick, a total of $750,000 in 120 equal monthly installments beginning the month after her death. MTA thereafter obtained a $1,000,000 life-insurance policy on Yvonne to fund the death benefit provided in the DCA in the event it became payable.

On October 22, 1999, Yvonne died at the age of 43. For all that appears, MTA thereafter received the $1,000,000 it was owed under the life-insurance policy; however, MTA did not promptly begin making payments to Tiffany and Roderick as called for by the DCA. Instead, it appears that MTA was asked on behalf of Tiffany and Roderick to establish a rabbi trust to handle the payments, presumably to allow for more favorable tax treatment for Tiffany and Roderick.¹ Accordingly, MTA thereafter executed a trust agreement with Thomas W. Dedrick, Sr., Tiffany and Roderick's uncle and a licensed broker employed by Merrill Lynch, establishing the trust and depositing into it an initial sum of $506,450. The trust agreementalso provided that Thomas would act as trustee of the trust.

On January 18, 2001, Thomas opened a brokerage account (the working-capital-management account or “the WCMA account”) with Merrill Lynch to house and manage the assets of the trust. The account-authorization form states on its face that it was entered into by Merrill Lynch and “Thomas W. Dedrick, Sr. TTEE UAD 1/1/2000 by MTA, Inc.” on behalf of the entity identified as “Trust—Deferred Comp[ensation] Plan” and executed by Thomas as the trustee.² The account-authorization form also provided that Thomas agreed, on behalf of the trust, to all the terms and conditions of the agreement governing the WCMA account (“the WCMA agreement”) and specifically states that, “in accordance with paragraph 16 on page 9 of the WCMA agreement, we agree, on behalf of the above named entity [the trust] to arbitrate any controversies which may arise with [Merrill Lynch].” Paragraph 16 of the WCMA agreement specifically states that “[t]he parties are waiving their right to seek remedies in court, including the right to jury trial” and that

“[t]he customer agrees that all controversies that may arise between the customer and [Merrill Lynch], including, but not limited to, those involving any transaction or the construction, performance or breach of this or any other agreement between the customer and [Merrill Lynch], whether entered into prior to, on or subsequent to the date hereof, shall be determined by arbitration.”

The WCMA agreement further defines “the customer” as “the business or organization on whose behalf the WCMA account authorization form is signed”—in this case, the trust. That same day, Thomas also executed a client agreement with Merrill Lynch that contained a substantially similar arbitration provision, the only potentially relevant difference being that it was between “the client” and Merrill Lynch. The agreement did not define “the client”; however, the signature block contained a line for the “Name of Client if different from name of signatory.” This line was not filled out on the client agreement completed by Thomas, which he executed in his own name, noting his title as “trustee.” It is undisputed that nobody affiliated with MTA signed any documents with Merrill Lynch.

It appears that, subsequent to the creation of the trust, some intermittent payments were made from the trust to Tiffany and Roderick before payments ceased in approximately October 2009. However, the sum total of the payments made did not equal $750,000, and, on June 28, 2011, Tiffany and Roderick filed an action against MTA asserting breach-of-contract and unjust-enrichment claims and seeking $213,777, the amount they allege was still due them pursuant to the DCA. On November 27, 2011, MTA filed a third-party complaint against Thomas and Merrill Lynch, asserting claims for indemnification and alleging breach of fiduciary duty, negligence, and wantonness. The gravamen of those claims was described in the third-party complaint as follows:

“MTA has discovered that [Thomas] has breached the trust agreement and his obligations thereunder by among other matters investing in products which given the requirements of the trust were improper. Specifically, [Thomas] with knowledge of the purpose and payout obligations of the trust breached this trust by failing to abide by the payment schedule and by choosing to invest in products which caused unnecessary loss of income to the trust. Instead of choosing an investment approach which could have achieved the goals and purposes of the trust, [Thomas], through his acts or omissions or a combination of both breached the trust. Moreover, [Thomas] breached the trust agreement by failing to report the payments made from the trust as income and failed to provide the necessary tax statement to MTA.”

On February 3, 2012, Merrill Lynch moved the trial court to compel arbitration of MTA's claims against it pursuant to the arbitration provisions in the account-authorization form, the WCMA agreement, and the client agreement. MTA opposed that motion, arguing that it was not a party to those contracts, and, following a hearing on the matter, both Merrill Lynch and MTA submitted additional briefs in support of their positions. On March 29, 2012, the trial court granted Merrill Lynch's motion to compel arbitration and dismissed MTA's third-party claims against Merrill Lynch. MTA's subsequent motion to alter, amend, or vacate the trial court's order was denied on April 30, 2012, and MTA thereafter filed a timely notice of appeal to this Court.

II.

The standard of review we apply to an order granting a motion to compel arbitration is well settled:

“We conduct a de novo review of a trial court's order compelling arbitration. Smith v. Mark Dodge, Inc., 934 So.2d 375, 378 (Ala.2006).

“ ‘The party seeking to compel arbitration must first prove both that a contract calling for arbitration exists and that the contract evidences a transaction involving interstate commerce .... Once this showing has been made, the burden then shifts to the nonmovant to show that the contract is either invalid or inapplicable to the circumstances presented.’

“Smith, 934 So.2d at 378.”

Ritter v. Grady Auto. Group, Inc., 973 So.2d 1058, 1060–61 (Ala.2007). Neither MTA nor Merrill Lynch disputes that the identified contracts containing arbitration provisions—the account-authorization form, the WCMA management agreement, and the client agreement—involve interstate commerce; therefore, the only issue before this Court is whether MTA, which is not a signatory to those contracts, should be bound by those contracts.

III.

In Custom Performance, Inc. v. Dawson, 57 So.3d 90, 97 (Ala.2010), this Court noted that arbitration is a matter of contract and, accordingly, that a court cannot require a party to arbitrate claims the party has not previously agreed to arbitrate. Hence, the general rule that “ ‘ “a nonsignatory to an arbitration agreement cannot be forced to arbitrate [its] claims.” ’ ” Id. (quoting Edward D. Jones & Co. v. Ventura, 907 So.2d 1035, 1042 (Ala.2005), quoting in turn Cook's Pest Control, Inc. v. Boykin, 807 So.2d 524, 526 (Ala.2001)). Nevertheless, we did recognize two exceptions to this general rule.³The first is the third-party-beneficiary exception, which provides that “[a] nonsignatory can be bound to an arbitration agreement if ‘the contracting parties intended, upon execution of the contract, to bestow a direct, as opposed to incidental[,] benefit upon the third party.’ ” Custom Performance, 57 So.3d at 97 (quoting Dunning v. New England Life Ins. Co., 890 So.2d 92, 97 (Ala.2003)). The second exception is closely related and provides that a nonsignatory to a contract having an arbitration agreement will be treated as a third-party beneficiary of the contract regardless of whether the nonsignatory meets the legal definition of a third-party beneficiary “when he or she asserts legal claims to enforce rights or obtain benefits that depend on the existence of the contract that contains the arbitration agreement.” Custom Performance, 57 So.3d at 98 (emphasis omitted). This exception is referred to as the equitable-estoppel exception because of the inequity that would result if a party were allowed to simultaneously claim the benefits of a contract while repudiating its burdens and conditions.

In the instant case, Merrill Lynch has argued to both the trial court and this Court that MTA should be required to arbitrate its claims against Merrill Lynch based on the equitable-estoppel exception. MTA argues that it has asserted only tort claims against Merrill Lynch and that it accordingly would be inappropriate to apply the equitable estoppel exception because MTA is not suing to enforce a contract while simultaneously disclaiming a contractual provision requiring the arbitration of such claims. As an initial matter, we note that this Court has on some previous occasions applied the...