X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Click here for the full text of this decision FACTS:Juan Alaniz was severely injured in a refinery explosion. He and his wife filed suit and recovered a settlement of more than $2 million. To preserve this recovery, they engaged Merrill Lynch, Pierce, Fenner & Smith Inc. through its employee Henry Medina to provide financial and investment services. In September 1993, the Alanizes opened a series of cash and investment accounts with Merrill Lynch. For each account, the Alanizes agreed to arbitrate any disputes that might arise with Merrill Lynch. As a part of their financial plan, the Alanizes set up an irrevocable life insurance trust with Merrill Lynch Trust Co. as trustee, which then purchased a variable life policy from Merrill Lynch Life Insurance Co. Both of these Merrill Lynch affiliates had their own contracts with the Alanizes, neither of which contained an arbitration clause. The Alanizes transferred more than $200,000 from their Merrill Lynch accounts to ML Trust to pay premiums to ML Life. ML Life paid a commission on the sale to Merrill Lynch, which then paid Medina, a licensed agent for ML Life and other insurers. In April 2003, the Alanizes sued ML Trust, ML Life and Medina but not Merrill Lynch alleging a dozen multifarious claims, all related to the insurance trust and all asserted against the defendants collectively without differentiating the actions of each. The defendants moved to stay the litigation and compel arbitration, which the trial court denied. The 13th Court of Appeals denied mandamus relief. HOLDING:The court conditionally granted the writ of mandamus. The parties, the court stated, agreed that the Federal Arbitration Act applies. Accordingly, mandamus relief was appropriate if the trial court abused its discretion in failing to stay the litigation and compel arbitration. First, the court stated that “parties to an arbitration agreement may not evade arbitration through artful pleading, such as by naming individual agents of the party to the arbitration clause and suing them in their individual capacity.” The substance of the plaintiffs’ suit, the court stated, was against Merrill Lynch, even though it had not been named as a party. Because the plaintiffs’ claims against Medina were in substance claims against Merrill Lynch, the court stated that the plaintiffs must abide by their agreement to arbitrate those claims. Next, the court noted that Merrill Lynch’s cash management agreements referred to some affiliates and third parties, but not ML Trust or ML Life. Those affiliates signed their own contracts with the plaintiffs, which had no arbitration clauses. Allowing those affiliates to compel arbitration would effectively rewrite their contracts, the court stated. Thus, the court held that ML Trust and ML Life were not covered by the plaintiffs’ arbitration agreements with Merrill Lynch. ML Life and ML Trust also asserted that they could invoke Merrill Lynch’s arbitration agreements through an estoppel theory based on substantially interdependent and concerted misconduct. But the court noted that the U.S. Supreme Court “has never construed the Federal Arbitration Act to go this far.” Thus, as other contracts do not become binding on nonparties due to concerted misconduct, allowing arbitration contracts to become binding on that basis would make them easier to enforce than other contracts, contrary to the Arbitration Act’s purpose. Accordingly, the court found nothing in Texas contract law and no settled principles of federal arbitration law, that would require the plaintiffs to arbitrate with Merrill Lynch’s affiliates. In addition to moving to compel arbitration, ML Trust and ML Life moved to stay the plaintiffs’ litigation against them. Assuming the same issues must be decided both in arbitration against Medina and in court against the affiliates, the court held that the latter must be stayed until the former is completed. OPINION:Brister, J., delivered the opinion of the court, in which Jefferson, C.J., and Green and Willett, JJ., joined, and in which Hecht and Medina, JJ., joined as to parts I, III-A and IV, O’Neill, J., joined as to parts I, III and IV, and Wainwright and Johnson, JJ., joined as to parts I, II and IV. CONCURRENCES AND DISSENTS:Hecht, J., filed an opinion concurring in part and dissenting in part, in which Medina, J., joined, and in Part I of which O’Neill, J., joined. “By agreeing to arbitrate all controversies with their broker, Merrill Lynch, Pierce, Fenner & Smith, Inc. (‘Merrill Lynch’), Juan and Norma Alaniz also agreed to arbitrate claims against Merrill Lynch employees, including Henry Medina, for which Merrill Lynch could be liable because of the employment relationship. But Merrill Lynch cannot be held vicariously liable for Medina’s actions, as it might ordinarily be, because the Alanizes have affirmatively disclaimed such liability. And the record does not establish whether Merrill Lynch would be obliged to indemnify Medina for any liability he might have to the Alanizes. Even if his actions as a financial analyst were generally within the course and scope of employment, it is not clear whether the same can be said for his recommendation of a transaction illegal under Texas law. The record provides no other basis for holding Merrill Lynch liable for Medina’s actions or for the actions of its affiliates, Merrill Lynch Trust Co., FSB (‘ML Trust’) and Merrill Lynch Life Insurance Co. (“ML Life’), or for estopping the Alanizes from refusing to arbitrate their claims against those two companies. Accordingly, I would hold that the lower courts correctly refused to compel arbitration of any of the Alanizes’ claims. “I agree that if some of the Alanizes’ claims must be arbitrated and some litigated, litigation must be stayed pending the outcome of the arbitration. Thus, I concur only in Parts I, III-A, and IV of the Court’s opinion.” Johnson, J., filed an opinion concurring in part and dissenting in part, in which Wainwright, J., joined. “I would follow the stated position of the Federal Fifth Circuit Court of Appeals that equitable estoppel is applicable in cases where a signatory to a contract containing an arbitration clause alleges substantially interdependent and concerted misconduct by both a nonsignatory and one or more of the signatories to the contract. On that basis, I would hold that the trial court abused its discretion in failing to . . . equitably estop the Alanizes from refusing to arbitrate claims against ML Trust and ML Life to the extent the claims are based on Medina’s alleged misconduct.”

Want to continue reading?
Become a Free ALM Digital Reader.

Benefits of a Digital Membership:

  • Free access to 3 articles* every 30 days
  • Access to the entire ALM network of websites
  • Unlimited access to the ALM suite of newsletters
  • Build custom alerts on any search topic of your choosing
  • Search by a wide range of topics

*May exclude premium content
Already have an account?

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.