Rosenthal v. Great Western Fin. Securities Corp.

• Citation: 58 Cal.Rptr.2d 875,926 P.2d 1061,14 Cal.4th 394
• Decision Date: 12 December 1996
• Docket Number: No. S050952,S050952
• Court: United States State Supreme Court (California)
• Parties: , 926 P.2d 1061, 65 USLW 2419, 96 Cal. Daily Op. Serv. 8963, 96 Cal. Daily Op. Serv. 9147, 96 Daily Journal D.A.R. 14,897 Ruby ROSENTHAL et al., Plaintiffs and Respondents, v. GREAT WESTERN FINANCIAL SECURITIES CORPORATION et al., Defendants and Appellants.

Page 875

58 Cal.Rptr.2d 875

14 Cal.4th 394, 926 P.2d 1061, 65 USLW 2419,

96 Cal. Daily Op. Serv. 8963,

96 Cal. Daily Op. Serv. 9147,

96 Daily Journal D.A.R. 14,897

Ruby ROSENTHAL et al., Plaintiffs and Respondents, v. GREAT WESTERN FINANCIAL SECURITIES CORPORATION et al., Defendants and Appellants.

No. S050952.

Supreme Court of California.

Dec. 12, 1996.

Morrison & Foerster, Shirley M. Hufstedler, Maren E. Nelson and David K. Barrett, Los Angeles, for Defendants and Appellants.

Michael B. Dashjian, Atascadero, Steven Drapkin, Lee W. Rierson, Proskauer, Rose, Goetz & Mendelsohn, Jeffrey A. Berman, Daniel E. Eaton, Paul, Hastings, Janofsky & Walker, Los Angeles, and Paul Grossman, as amici curiae on behalf of Defendants and Appellants.

Michael Linfield, Laurence B. Frank, Hadsell & Stormer, Dan Stormer, Virginia Keeny, Anne Richardson and Randy Renick, Pasadena, for Plaintiffs and Respondents.

The Sturdevant Law Firm, Ann Saponara, McGuinn, Hillsman & Palefsky, Cliff Palefsky and Keith Ehrman, San Francisco, as amici curiae on behalf of Plaintiffs and Respondents.

WERDEGAR, Justice.

In this case involving the enforcement of a predispute arbitration clause in a client agreement executed in the purchase of securities, we address the procedures by which petitions to compel arbitration (Code Civ.Proc., § 1281.2) are to be determined in the superior courts. We conclude that while the client agreements here are subject to the United States Arbitration Act (9 U.S.C. §§ 1-16), the federal provision for a jury trial of questions regarding the existence of an arbitration agreement (9 U.S.C. § 4) does not operate in California state courts. We further conclude the state constitutional guarantees of due process of law and jury trial (Cal. Const., art. I, §§ 7, 16) do not entitle a party opposing arbitration to a jury On the merits of defendants' petition to compel arbitration, plaintiffs claim the arbitration agreements are void for fraud in their execution. We hold most of the plaintiffs did not present legally sufficient evidence that they reasonably relied on fraudulent representations as to the essential character of the client agreements they signed, so as to render the agreements void for fraud in the execution. (C.I.T. Corporation v. Panac (1944) 25 Cal.2d 547, 548-549, 154 P.2d 710.) We will conclude the petition to compel arbitration should be granted as to these plaintiffs. A smaller number of plaintiffs have presented potentially sufficient evidence of fraud in the execution; as to these plaintiffs, we will conclude a remand for additional fact finding is required.

trial on the existence or validity of the arbitration agreement. Rather, these questions are to be resolved by the trial court in the manner provided for the hearing and decision of motions (Code Civ.Proc., § 1290.2), either on the basis of affidavits or declarations or, in the exercise of the court's discretion where necessary to resolve material conflicts in the written evidence, upon live testimony.

FACTUAL AND PROCEDURAL BACKGROUND

Plaintiffs are 24 individuals, 23 of whom, through defendant Great Western Financial Securities Corporation (GWFSC), invested in stock and bond mutual funds. (The remaining plaintiff, Michael Zinzun, sues "under Business & Professions Code §§ 17000, 17200 and 17500 on behalf of the general public.") Before making these investments, most plaintiffs were depositors with Great Western Bank (GWB), a separate corporation related to GWFSC. ¹ They allege representatives of both corporations led them to believe that the GWFSC representatives actually worked for GWB, that funds sold by GWFSC were, or were as secure as, insured deposits with GWB, and that the GWFSC funds were backed by GWB or by the United States Government. Plaintiffs allege the value of the GWFSC funds subsequently declined and they lost portions of their principal. The complaint names as defendants several individual GWFSC representatives, as well as GWFSC and GWB, and sets forth causes of action for breach of fiduciary duty, fraud, negligent misrepresentation, intentional and negligent infliction of emotional distress, unfair business practices and invasion of privacy.

GWFSC and four individual defendants employed by GWFSC (collectively GWFSC) petitioned the superior court for an order compelling arbitration of all claims made by most plaintiffs, on the ground these plaintiffs had executed client agreements containing a predispute arbitration clause. ² In opposition to the petition, plaintiffs asserted two grounds for not enforcing the arbitration agreement: "that there was fraud in the inception of the contract" and that "the contracts they signed were 'permeated with fraud.' "

While arguing fraud allegations alone were sufficient to avoid arbitration, plaintiffs each submitted, in addition, a declaration under penalty of perjury purportedly showing the existence of fraud in the inception of, or "permeating," the client agreements. These declarations will be reviewed in detail later in this opinion; in broadest outline, and as relevant to enforceability of the arbitration agreements, the declarations contain evidence plaintiffs, most of whom were longtime GWB depositors, were led to believe the GWFSC representatives worked for GWB; plaintiffs therefore placed trust and confidence in the representatives; the representatives materially misrepresented the nature of the investments being sold; the representatives did not tell plaintiffs the client agreement contained an arbitration clause; and the representatives assured plaintiffs, in various GWFSC, citing Strauch v. Eyring (1994) 30 Cal.App.4th 181, 35 Cal.Rptr.2d 747, argued that, although these agreements for the purchase of stock and bond funds were governed by the United States Arbitration Act, 9 United States Code sections 1-16 (the USAA), the USAA's provision for jury trial on the existence of an arbitration agreement (9 U.S.C. § 4) does not apply in state court. For that reason, GWFSC asserted, plaintiffs' allegations of fraud, by themselves, were an insufficient basis for denying the petition. GWFSC further maintained the facts alleged and shown by plaintiffs' declarations were insufficient, under the applicable federal substantive law of enforceability, to avoid arbitration on either asserted theory of fraud ("inception" or "permeation").

                ways, that the written client [14 Cal.4th 404] agreement was a mere formality needed to open the "account."   GWFSC countered these with declarations from the representatives who had sold plaintiffs the subject funds, and who denied making the claimed fraudulent statements
                

At a nonevidentiary hearing on the petition, the trial court questioned counsel as to whether and how it was to resolve the factual conflicts presented by the declarations. "[I]s it the court's role at this stage to resolve these factual issues or ... is it sufficient for the plaintiff to [raise] factual issues?" Ultimately, the trial court agreed with GWFSC that the USAA's provision for jury trial did not apply in state court. Nonetheless, without holding an evidentiary hearing, the court denied the petition to arbitrate as to all but one of the plaintiffs "on grounds that each of the above-named plaintiffs presented sufficient evidentiary support for their allegations of fraud in the inception of the arbitration agreement." The court granted the petition as to one plaintiff (Alfred Patrick), because he "did not present evidence of sufficient substantiality to support a claim of fraud in the inception of the arbitration clause."

GWFSC appealed the ruling denying its petition to compel as to 20 plaintiffs. (Code Civ.Proc., § 1294, subd. (a).) The Court of Appeal held the superior court erred in determining plaintiffs were not entitled to a jury trial under section 4 of the USAA. Relying on prior Court of Appeal decisions, beginning with Main v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1977) 67 Cal.App.3d 19, 136 Cal.Rptr. 378, and declining to follow what it deemed dictum in Strauch v. Eyring, supra, 30 Cal.App.4th 181, 35 Cal.Rptr.2d 747, the appellate court held the federal jury trial provision was applicable in a California court. The court did not address the merits of plaintiffs' fraud claims. Instead, it remanded for the trial court to determine whether plaintiffs have sufficiently alleged fraud in the making of the arbitration agreement, and if so to try, by jury if requested, the issue of whether the arbitration agreements were the result of fraud.

We granted GWFSC's petition for review.

DISCUSSION

I. Trial Court Procedure for Deciding a Petition to Compel Arbitration

A. Section 4 of the United States Arbitration Act

The parties correctly agree that because the transactions here involved interstate commerce, questions concerning arbitrability of the parties' dispute are governed by the USAA. (See 9 U.S.C. §§ 1, 2.) The primary substantive provision of the USAA is section 2, which provides: "A written provision in ... a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." (9 U.S.C. § 2.)

"Section 2 is a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary. The effect of the section is to create a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the [USAA]." (Moses H. Cone Hospital v. Mercury Construction Corp. (1983) 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (Moses H. Cone).) The rule of enforceability established by section 2 of the USAA preempts any contrary state law and is binding on The policy of enforceability stated in section 2 of the...