Mueske v. Piper, Jaffray & Hopwood, Inc.
| Decision Date | 27 August 1993 |
| Docket Number | No. 92-539,92-539 |
| Citation | 260 Mont. 207,859 P.2d 444 |
| Parties | , Fed. Sec. L. Rep. P 97,762 Leroy E. MUESKE, Plaintiff and Respondent, v. PIPER, JAFFRAY & HOPWOOD, INCORPORATED, John Lawrence Schultz, Terran Financial Group, Inc., Terran Securities, Inc., Terran Partners 1, Daniel E. Halligan, Ronald G. Heppner and Maurice F. Bolgen, Defendants and Appellants. |
| Court | Montana Supreme Court |
John G. Crist and James L. Jones, Dorsey & Whitney, Billings, for defendants and appellants.
Daniel R. Sweeney, Butte, A. Clifford Edwards and Kevin M. Funyak, Edwards Law Firm, Billings, for plaintiff and respondent.
Defendant, Piper, Jaffray & Hopwood, Incorporated (Piper, Jaffray & Hopwood), appeals the Order of the District Court of the Second Judicial District, Silver Bow County, which denied its Motion to Compel Arbitration in an action brought by plaintiff alleging negligence and violations of the Montana Securities Act in relation to investments purchased through Piper, Jaffray & Hopwood. We affirm.
Piper, Jaffray & Hopwood has raised several questions on appeal including the correctness of the District Court's findings of constructive fraud, admissions against interest of Piper, Jaffray & Hopwood's employees and the plaintiff's intent to be bound by a Margin Agreement. However, the District Court stated that these factual findings made by the court are not the law of the case. The sole issue before the District Court in the evidentiary hearing was the validity of the arbitration clause Piper, Jaffray & Hopwood sought to enforce. The sole issue for our review is:
Does Piper, Jaffray & Hopwood's failure to comply with the rules of the New York Stock Exchange and the National Association of Securities Dealers render the predispute arbitration clause within Piper, Jaffray & Hopwood's Margin Agreement invalid?
The following findings of fact of the District Court and testimony presented provide the foundation for our review: Leroy E. Mueske (Mueske) operated a dental practice in Butte, Montana. He contacted defendant John Lawrence Schultz (Schultz) who was a broker employed by Piper, Jaffray & Hopwood. On September 13, 1989, Mueske purchased one unit of Terran Partners I limited partnership through Schultz.
On November 8, 1989, Schultz obtained Mueske's signature on a "Margin Agreement" with Piper, Jaffray & Hopwood. The Margin Agreement contained the following extensive provision with regard to arbitration on the last page of the Margin Agreement just above the signature line on which Mueske signed:
11. Customer Agrees to Arbitrate.
* Arbitration is final and binding on the parties.
* The parties are waiving their right to seek remedies in court, including the right to jury trial.
* Pre-arbitration discovery is generally more limited than and different from court proceedings.
* The arbitrators' award is not required to include factual findings or legal reasoning and any party's right to appeal or to seek modification of rulings by the arbitrators is strictly limited.
* The panel of arbitrators will typically include a minority of arbitrators who were or are affiliated with the securities industry.
I agree to arbitrate any disputes between PJH and me. I specifically agree and recognize that all controversies which may arise between PJH its agents, representatives or employees and me concerning any transaction, account or the construction, performance or breach of this or any other agreement between us, whether entered into prior, on, or subsequent to the date hereof, shall be determined by arbitration to the full extent provided by law. Such arbitration shall be in accordance with the rules then in effect, of the Arbitration Committee of the New York Stock Exchange, Inc. or the National Association of Securities Dealers, Inc. as I may elect. I authorize PJH, if I do not make such election by registered mail addressed to PJH at its main office within 15 days after receipt of notification form PJH requesting such election, to make such election on my behalf. (Emphasis supplied.)
On December 26, 1989, again through Schultz, Mueske purchased additional units of the Terran investments for $50,000. On August 23, 1990, the Securities Department of the State Auditor's office sought a cease and desist order of all the named defendants in this action, except Piper, Jaffray & Hopwood, based on fraud and misrepresentation to the Terran investors.
Mueske contends that he lost his entire $75,000 investment in the Terran investments. Mueske brought this action against Piper, Jaffray & Hopwood concerning the Terran transactions. Piper, Jaffray & Hopwood filed a Motion to Compel Arbitration based on the above-outlined arbitration clause in the Margin Agreement.
After a hearing on Piper, Jaffray & Hopwood's motion, the District Court concluded that the arbitration clause was severable from the Margin Agreement as a whole based on incorporated choice of law provisions relating solely to arbitration requirements and procedures. In adjudicating the validity of the arbitration clause, the court relied on the "doctrine of incorporation of extrinsic documents" where reference is made within the contract to such documents. The arbitration clause contains specific language, which provides that arbitration shall be in accordance with the rules then in effect of the New York Stock Exchange, Inc. (NYSE) and the National Association of Securities Dealers, Inc. (NASD). The rules of the NYSE and NASD were thus incorporated into the contract.
The stipulation by Piper, Jaffray & Hopwood that it did not fully comply with NASD Rules of Fair Practice, Art. III, Sec. 21, and NYSE Rule 637 is crucial to the District Court's conclusion that the arbitration clause was invalid. The specific section of NASD Section 21 with which Piper, Jaffray & Hopwood did not comply provides:
Requirements When Using Predispute Arbitration Agreements With Customers
(f) ... (3) A copy of the agreement containing any such clause shall be given to the customer who shall acknowledge receipt thereof on the agreement or on a separate document. (Emphasis supplied.)
NASD Manual--Rules of Fair Practice (CCH) p 2171, Art. III, Sec. 21(f)(3) (1991). The District Court concluded that compliance with the above rule was a condition precedent to a valid arbitration clause, stating:
... [Piper, Jaffray & Hopwood] ... has clear, mandated obligations of disclosure regarding the use of pre-dispute arbitration clauses. Failure to comply with such rules is a failure to abide by the explicitly incorporated terms of the agreement.
This Court finds that the May 10, 1989 changes in the rules incorporated within the arbitration clause were deliberate and purposeful actions of the Securities Exchange Commission which require proper recognition from the Court....
. . . . .
[Piper, Jaffray & Hopwood's] failure to adequately correct its procedures and amend its account forms to reflect the new disclosure requirements is a failure to provide the Plaintiff with due and proper notice/disclosure as determined by the Securities and Exchange Commission as evidenced by the May 10, 1989 adoption of rule changes.
The District Court further noted that the burden of showing satisfaction of the notice/disclosure requirements was on Piper, Jaffray & Hopwood and that Piper, Jaffray & Hopwood had failed to show that Mueske had received a copy of the agreement or that he had acknowledged receipt of a copy of the agreement. The court then stated that the requirements are not unduly burdensome, but that even if they were, Piper, Jaffray & Hopwood nevertheless designated the applicable rules and was bound by them.
Piper, Jaffray & Hopwood contends that the District Court incorrectly concluded that the terms of the arbitration clause clearly establish a choice of law election to be bound by the rules of the NYSE or the NASD. They contend this was wrong for three reasons: (1) Piper, Jaffray & Hopwood's minor variance from the industry self-regulating rule did not prejudice Mueske, (2) the arbitration clause is not a choice of law provision for the purposes of determining what law governs the provision's enforceability, and (3) nothing in the NASD rules mandates that the clause is void if the rules are not followed.
First, we agree with the District Court that Piper, Jaffray & Hopwood's noncompliance with the rules relating to disclosure and notice is not a "minor" triviality. The District Court noted that the changes in the NYSE and NASD rules, which were incorporated in the Piper, Jaffray & Hopwood arbitration clause, resulted from deliberate and purposeful actions of the Securities and Exchange Commission (SEC) which require proper recognition from the court. The key question is whether the arbitration clause is a choice of law provision for the purposes of determining what law governs the validity of the arbitration clause. We will uphold the District Court's conclusions of law if they are correct. Steer, Inc. v. Department of Revenue (1990), 245 Mont. 470, 474, 803 P.2d 601, 603.
Piper, Jaffray & Hopwood claims that the NASD rules control only the arbitration process, not the validity of the clause itself. As noted by Piper, Jaffray & Hopwood, the last paragraph of the arbitration clause as reprinted above provides in the first two sentences that the parties are to arbitrate all disputes to the "full extent provided by law." As further noted by Piper, Jaffray & Hopwood, no reference is made in the first two sentences to NYSE or NASD rules--it is only further along in the clause (in the third sentence) that it provides that any arbitration shall be in accordance with the rules of the NASD or NYSE. Piper, Jaffray & Hopwood admits that it did not strictly comply with all the requirements of NASD Section 21. Mueske contends that it is inconsistent for Piper, Jaffray & Hopwood to argue that the arbitration clause should be found valid...
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