Thayer v. American Financial Advisers, Inc.
| Decision Date | 06 August 1982 |
| Docket Number | No. 81-557.,81-557. |
| Citation | 322 NW 2d 599 |
| Parties | James THAYER, et al., Appellants, v. AMERICAN FINANCIAL ADVISERS, INC., et al., Defendants, and Merrill Lynch, Pierce, Fenner & Smith, Inc., et al., Respondents. |
| Court | Minnesota Supreme Court |
Gerald M. Fine, Wayzata, for appellants.
Dorsey, Windhorst, Hannaford, Whitney & Halladay and Stephen P. Kelley, Minneapolis, for Merrill Lynch, Pierce, Fenner & Smith, Inc., et al.
Heard, considered, and decided by the court en banc without oral argument.
This is an appeal from an order of the Hennepin County District Court, dated March 23, 1981, denying plaintiffs' motion for default judgment and staying further proceedings pending arbitration. Plaintiffs, James Thayer and Robert Gilbertson, brought this action against Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch), Robert Gustafson, a Merrill Lynch account executive, Robert Brandt, Robert Schneider, and American Financial Advisers, Inc., alleging violations of the Commodity Exchange Act, 7 U.S.C. §§ 1-24 (1976), and asserting common-law claims based on fraud, breach of fiduciary duty, and negligence.
None of the defendants1 interposed an answer to plaintiffs' complaint. Counsel for respondents Merrill Lynch and Gustafson was granted a number of extensions by plaintiffs' attorney to answer; finally, respondents demanded that plaintiffs submit the matter to arbitration. Defendants American Financial Advisers, Inc., Brandt, and Schneider are not represented by counsel, have not filed answers, and have not made appearances. These three defendants are not signators to the arbitration agreement.
This case arises out of a partnership commodity account that plaintiffs opened with Merrill Lynch on or about July 25, 1979. In June or July of 1979, plaintiffs responded to a newspaper advertisement placed by defendants Brandt, Schneider, and American Financial Advisers, Inc. Brandt allegedly advised them that a $25,000 minimum investment was required to earn 200% to 250% per year on the investment. Brandt then sent plaintiffs to the Merrill Lynch office, where they met with Robert Gustafson and the other defendants. They were advised that the investment involved commodities futures trading through an account with Merrill Lynch and that the trading would be done at the direction of defendant Schneider. Defendants allegedly made various representations to plaintiffs that Schneider and Brandt were 85%, 95%, or 100% successful in their trading of commodities futures. These alleged misrepresentations form the basis for plaintiffs' claims that they were fraudulently induced to enter into the commodity account agreement.
In connection with the opening of their commodity account, Thayer and Gilbertson each signed commodity account agreements. Clause 6 of those agreements contains arbitration agreements, which state in part that "Any claim, grievance or controversy between us arising out of your business or this agreement shall be settled by arbitration * * *." Clause 7 notifies the investor that he is not required to consent to the arbitration agreement as a condition of opening his account. Finally, there is a separate space in the contract where plaintiffs signed to indicate their consent to the arbitration agreement. The parties to the arbitration agreement are the two plaintiffs and Merrill Lynch and Gustafson.
After executing the commodity account agreements, plaintiff Thayer invested $15,000 and plaintiff Gilbertson invested $10,000. Subsequently, plaintiffs lost all or nearly all of their investment. Plaintiffs attribute this loss to the alleged misconduct of defendants; defendants assert the loss was due to unfavorable price fluctuations in the commodities market.
On February 19, 1981, plaintiffs brought a motion for an order staying arbitration and for default judgments against all the defendants. Respondents Merrill Lynch and Gustafson cross-moved to compel arbitration. The matter was heard at special term on March 3, 1981, following which the court issued an order denying plaintiffs' motion and granting respondents' motion. In addition, the special term judge ordered that the question whether plaintiffs' claims against the other three defendants were arbitrable should be decided by the arbitrators.
The following issues are presented by this appeal: (1) whether the trial court erred by failing to grant plaintiffs' motion for default judgment; and (2) whether plaintiffs' allegations of fraud in the inducement should be tried by the court or by arbitration.
1. Minn.R.Civ.P. 55.01 provides that "When a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend within the time allowed therefor by these rules or by statute, and that fact is made to appear by affidavit, judgment by default shall be entered against him * * *." Thus a party is technically in default if no defensive motion is pending and if the time for responsive pleading has expired. We have elaborated further the requirements for entry of default judgment under Rule 55.01:
Denial of a motion for a default judgment is proper when four requirements are met: defendant has a reasonable defense on the merits; defendant has a reasonable excuse for his failure to answer; defendant acted with due diligence after notice of the motion for default judgment; and no substantial prejudice will result to other parties.
Coller v. Guardian Angels Roman Catholic Church, 294 N.W.2d 712, 715 (Minn.1980).
In this case, respondents Merrill Lynch and Gustafson meet all four requirements for the denial of the motion for default judgment. Merrill Lynch and Gustafson have reasonable defenses on the merits. They argue that plaintiffs' losses were due to unfavorable price fluctuations in the commodities markets rather than to their own misconduct or negligence. Second, Merrill Lynch and Gustafson were not responsible for their failure to answer plaintiffs' complaint; the failure was due wholly to the inadvertance of their attorney. We have held that "default caused by a party's attorney rather than by the party himself should be excused." Id. at 715. See, e.g., Conley v. Downing, 321 N.W.2d 36 (Minn. 1982); Hinz v. Northland Milk & Ice Cream Co., 237 Minn. 28, 53 N.W.2d 454 (1952); In re Estate of Walker, 183 Minn. 325, 236 N.W. 485 (1931). Third, counsel for Merrill Lynch and Gustafson acted with due diligence once he received notice of plaintiffs' motion for default judgment. Plaintiffs served notice of their motion for default judgment on February 19, 1981. Merrill Lynch and Gustafson cross-moved to compel arbitration on February 26, 1981. Finally, plaintiffs were not substantially prejudiced by the delay in answering, nor do they argue that they have been prejudiced. For these reasons, we hold that the trial court acted within its discretion in denying plaintiffs' motion for default judgment as to respondents Merrill Lynch and Gustafson.
However, we also hold that the trial court erred in refusing to enter default judgments against defendants American Financial Advisers, Inc., Brandt, and Schneider. These defendants were served almost 2 years ago, and none of them has made an appearance or filed a formal answer.2 Unlike respondents Merrill Lynch and Gustafson, their failure to answer was the result of their own neglect. Neglect of the parties themselves that leads to entry of default judgment is inexcusable neglect, and we have held that such neglect is a proper ground for refusing to open a judgment. Whipple v. Mahler, 215 Minn. 578, 10 N.W.2d 771 (1943). Because defendants American Financial Advisers, Inc., Brandt, and Schneider, even if they were represented on this appeal, could not make the showing required by Coller to avoid entry of default judgment, we remand the matter to the trial court and order entry of default judgment against those defendants.
2. Plaintiffs alleged in their complaint that defendants made false misrepresentations and concealed material facts concerning the risks and profitability of commodity futures trading accounts and concerning defendants' experience and methods in commodity futures trading. These allegations of fraud relate undisputably to the principal contract of investment and not to the arbitration agreement. Plaintiffs claim that the allegation of fraud in the inducement should be tried before the court. Respondents Merrill Lynch and Gustafson contend that the agreements are severable because plaintiffs consented separately to the arbitration clause, that the arbitration clause itself is not tainted by fraud, and therefore that the trial court properly directed the parties to arbitration.
Both the issue of whether fraud in the inducement is subject to arbitration and the issue of severability were decided in Atcas v. Credit Clearing Corp., 292 Minn. 334, 197 N.W.2d 448 (1972). In Atcas, we held that the determination of whether fraud in the inducement is a proper subject for arbitration was dependent on the intention of the parties as expressed in the language of the arbitration agreement. Id. at 341, 197 N.W.2d at 452. We concluded that if the language in the arbitration agreement evinces a specific intent to arbitrate the issue of fraud in the inducement, or if the language is sufficiently broad to comprehend that the issue of fraudulent inducement be arbitrated, then that issue is a proper subject for arbitration. Conversely, if no such intent is expressed in the agreement or if the language is not sufficiently broad to comprehend arbitration of that issue, then the issue of fraudulent inducement should be decided by the court. Id.
In Atcas, the language "Any controversy whatsoever, relating to this Agreement shall be settled by arbitration" was held to express no intent to arbitrate the issue of fraudulent inducement; furthermore, the language was not deemed sufficiently broad to comprehend arbitration of that issue. Id. at 347-48, 197 N.W.2d at...
To continue reading
Request your trial