Shearson Lehman Bros., Inc. v. Crisp

• Decision Date: 19 August 1994
• Citation: 646 So.2d 613
• Parties: SHEARSON LEHMAN BROTHERS, INC. v. Charles R. CRISP, et al. 1910090.
• Court: Alabama Supreme Court

Page 613

646 So.2d 613

SHEARSON LEHMAN BROTHERS, INC. v. Charles R. CRISP, et al.

1910090.

Supreme Court of Alabama.

Aug. 19, 1994.

A. Inge Selden III, Mark Strength, Steven T. Marshall and John N. Bolus of Maynard, Cooper, Frierson & Gale, P.C., Birmingham, for appellant.

Mac M. Moorer and E. Glenn Waldrop, Jr. of Lightfoot, Franklin, White & Lucas, Birmingham, for appellees.

ON APPLICATION FOR REHEARING

COOK, Justice.

The opinion of August 14, 1992, is withdrawn, and the following is substituted therefor.

Shearson Lehman Brothers, Inc. ("Shearson"), appeals from a judgment denying Shearson's motion to compel arbitration in an action filed by Charles R. Crisp, Wendell Dunaway, Gino Fedeli, W. C. Henry, Jr., James P. Powell, and Richard F. Powell ("plaintiffs"). We vacate the judgment and remand the cause with directions.

In a series of transactions from October 4, 1989, until August 27, 1990, Edward L. Pope III, Shearson's employee and financial consultant, sold to the plaintiffs "working interest securities" in a project involving the development of coalbed methane gas wells in St. Clair County. In connection with these transactions, the plaintiffs executed a number of "client agreements" containing the following provisions:

"Any controversy arising out of or relating to any of my accounts, to transactions with you, your officers, directors, agents and/or employees for me, or to this agreement, or the breach thereof, or relating to transactions or accounts maintained by me with any of your predecessor firms by merger, acquisition or other business combination from the inception of such accounts, shall be settled by arbitration, in accordance with the rules then if effect of the NASD, or the Boards of Directors of the NYSE or the American Stock Exchange, Inc., as I may elect."

(Executed by Crisp on August 1, 1988, and by Henry on February 29, 1988, emphasis added.)

"Unless unenforceable due to federal or state law, any controversy arising out of or relating to my accounts, to transactions with you, your officers, directors, agents and/or employees for me or to this agreement or the breach thereof, shall be settled by arbitration in accordance with the rules then in effect, of the National Association of Securities Dealers, Inc. or the Boards of Directors of the New York Stock Exchange, Inc. and/or the American Stock Exchange, Inc. as I may elect."

(Executed by James Powell on August 24, 1987, and by Richard Powell on September 6, 1987, emphasis added.)

"Any controversies arising out of or relating to any of my accounts, to transactions with Shearson Lehman and/or its employees and/or agents for me or to this agreement or the breach thereof, shall be settled by arbitration in accordance with the rules, then in effect, of any contract market where the transaction(s) giving rise to the controversy were or could have been executed or of the National Futures Association or of the Board of Directors of the New York Stock Exchange, Inc."

(Executed by Fedeli on June 15, 1987, and by Dunaway on April 22, 1985, emphasis added.) The plaintiffs allege that Pope assured them that he would contribute his personal influence and financial support in order to acquire the capital necessary to complete the project.

On February 8, 1990, David Prince, a Shearson vice-president, sent James Powell a letter stating in pertinent part:

"It has recently come to our attention that you may have invested in Jenco Petroleum, Inc. or a related entity. This investment may have been the result, directly or indirectly, of Edward L. Pope individually and not in his capacity as a representative of Shearson Lehman.... Attached please find an acknowledgment form which we request you sign and return. This document states, briefly, that your investment into Jenco was not made through the participation or interests of Shearson Lehman ..., and that you have not relied on any representations of Mr. Pope in his capacity as an agent of Shearson.

"While this release, among other things, holds Shearson Lehman ... harmless from resultant action involving Jenco, it would not limit or preclude the signatory from pursuing any of the parties who do have a connection to Jenco Petroleum."

(Emphasis added.) ¹

The plaintiffs allege that Shearson ultimately caused Pope to terminate his involvement with the project, resulting in the project's failure and, consequently, financial loss to the plaintiffs. ²

On May 7, 1991, the plaintiffs sued Shearson and Edward L. Pope III. The plaintiffs alleged, among other things, that Shearson, "by and through" its agent Edward Pope, fraudulently issued the securities to the plaintiffs, breached fiduciary duties, interfered with the plaintiffs' contracts, and violated various sections of the securities statutes of Alabama and Georgia.

On June 21, 1991, Shearson moved to compel arbitration pursuant to clauses contained in agreements executed by the plaintiffs incident to the opening of their accounts. On September 6, 1991, the plaintiffs offered to arbitrate the dispute, subject to the following stipulation:

"Plaintiffs' dealings with Edward L. Pope, III ('Pope') in connection with the plaintiffs' investments in the coalbed methane project that is the subject of this suit constituted dealings with Pope in his capacity as an agent and employee of Shearson-Lehman Brothers, Inc., and plaintiffs' investments in the project constituted a transaction and a dealing with Shearson. This stipulation applies to all named plaintiffs, and all named plaintiffs agree to submit to arbitration claims relating to or arising out of their transactions and dealings with Shearson, relating in any way to the said coalbed methane project."

(Emphasis added.) Shearson refused the plaintiffs' offer to arbitrate subject to the proposed stipulation, and, on September 9, 1991, the trial court overruled Shearson's motion to compel arbitration; the plaintiffs appealed.

The plaintiffs contend, in effect, that an order compelling arbitration is inappropriate absent a finding or stipulation that Pope acted in a representative capacity in effecting the transactions involving the working interest securities. As they point out, Shearson, by soliciting stipulations that the "investment[s] ... [were] not made through the participation or interests of Shearson Lehman" and that the plaintiffs had not relied "on any representations of Mr. Pope in his capacity as an agent of Shearson," and by rejecting the plaintiffs' arbitration offer containing the plaintiffs' affirmative agency stipulation, have, in effect, declared that, as to the transactions involving the working interest securities, no contractual relationship ever existed between the plaintiffs and Shearson.

Indeed, Shearson urges a construction of the contracts that is broad enough to invoke the arbitration clauses on the basis of Pope's working-interest securities transactions, but, at the same time, narrow enough to preclude the application of respondeat superior or principal-and-agent rules based on the same transactions. Shearson contends, in other words, that the disputed transactions were independent of its contractual relationship with the plaintiffs for the purposes of its liability to the plaintiffs. This argument differs little in substantive effect from an assertion that Pope lacked the authority to bind it in a contractual agreement with the plaintiffs. In a class of cases involving the issue of a signatory's authority, and, consequently, the existence vel non of a contract that encompasses the disputed subject matter, a number of well-reasoned authorities have held that the question of the signatory's authority and agency is a threshold issue that must be adjudicated before arbitration can proceed.

More specifically, in Prima Paint Corp. v. Flood & Conklin Manufacturing Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967), the United States Supreme Court, construing the Federal Arbitration Act, 9 U.S.C. §§ 1-16 (1982), held that a claim of fraud in the inducement of a contract that does not place in issue the making of the arbitration clause itself, is subject to arbitration. Prima Paint, 388 U.S. at 403-04, 87 S.Ct. at 1805-06. Although Prima Paint has ostensibly been construed to require the arbitration of any claim "unless there has been an independent challenge to the making of the arbitration clause itself," Unionmutual Stock Life Insurance Co. of America v. Beneficial Life Insurance Co., 774 F.2d 524, 529 (1st Cir.1985); Rhoades v. Powell, 644 F.Supp. 645, 653 (E.D.Cal.1986), aff'd sub nom., Rhoades v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 961 F.2d 217 (9th Cir.1992), it appears that the majority of courts have, on better reasoning, read Prima Paint more narrowly. In this connection, Three Valleys Municipal Water District v. E.F. Hutton & Co., 925 F.2d 1136 (9th Cir.1991), stated:

"We do not read Prima Paint so broadly. The plaintiffs in Rhoades and Unionmutual did not challenge the making of a contract, but sought to rescind a contract that admittedly existed. Despite the broad dicta in those cases suggesting that Prima Paint extends to 'all challenges to the making of a contract,' we read Prima Paint as limited to challenges seeking to avoid or rescind a contract--not to challenges going to the very existence of a contract that a party claims never to have agreed to. A contrary rule would lead to untenable results. Party A could forge party B's name to a contract and compel party B to arbitrate the question of the genuineness of its signature. Similarly, any citizen of Los Angeles could sign a contract on behalf of the city and Los Angeles would be required to submit to an arbitrator the question whether it was bound to the contract, even if its charter prevented it from engaging in any arbitration.

"Under this view, Prima Paint applies to 'voidable' contracts--those 'where one party was an infant, or where the contract was induced by fraud, mistake, or...