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An arbitration clause isn’t binding when one party is accused of seriously egregious conduct, a Philadelphia Common Pleas Court has suggested in a recent opinion. In Handel v. Schwartz, Judge Nitza Quinones Alejandro said because the defendant was accused of embezzling more than $1 million from the plaintiffs, brothers George and Samuel Handel, he had waived his right to compel arbitration. The Handels jointly operated a business in New Jersey and held a number of joint ventures in an investment company. At some point, Samuel met John Ludlam, who in turn introduced him to Steven Schwartz. Ludlam told Samuel that Schwartz was a skilled financial planner and investment adviser, according to Alejandro’s opinion. Allegedly persuaded by Schwartz and Ludlam, Samuel transferred $150,000 of his own money to an account with Legg Mason Wood Walker. Schwartz later allegedly persuaded both Handels to also invest money from the company and their personal accounts to eight other accounts at Legg Mason. Schwartz was named their investment adviser. Those accounts, Alejandro said, contained consent to arbitrate provisions. Through later agreements, signed in September 1998, Schwartz was designated as the Handels’ agent and attorney-in-fact. The agreements also stipulated that any notice of transaction, reports or other information regarding the accounts be sent to the Handels’ New Jersey business address and to Schwartz. Also pursuant to the agreements, Schwartz was not authorized to withdraw any funds from the accounts. The Handels’ accounts contained a total of approximately $1.1 million, Alejandro said. In November 1998, Samuel and George granted Schwartz limited power of attorney, giving him the power to make investments in stocks, bonds, options, commodities and securities on their behalf. The Handels retained the power to revoke these privileges at any time. Without the Handels’ consent or knowledge, the address used to receive information on their accounts was changed from their New Jersey business to an unfamiliar Pennsylvania address. After that happened, the Handels alleged, Schwartz started a pattern of reckless trading in option and Internet stocks, causing their accounts to lose a substantial amount of money. The Handels also alleged Schwartz transferred money between their accounts and into accounts held by other individuals, including Schwartz’s mother. They accused Schwartz of embezzling $1,892,853 from their accounts; Schwartz denied the allegations. George ended the agency agreements with Schwartz and Legg Mason in early 1999. The Handels sued the defendants for negligence, fraud, breach of fiduciary duty, breach of contract, conversion and embezzlement. Schwartz filed a petition to compel arbitration, which was denied. Schwartz then appealed. Alejandro acknowledged that the law favors arbitration, but a court must be careful not to extend an arbitration agreement beyond its intended terms. Schwartz argued the Handels’ claim must go to arbitration because they had signed the trading authorization agreements, which included the consent to arbitration clause. Schwartz said even though he was not a signatory of the agreements, he was a party to them because he was appointed as the Handels’ agent. “Defendants Schwartz contend that since the numerous account agreements provide that ‘this agreement will not be affected by my death, disability, incompetence, or incapacity and is binding on me, my estate and those with authority to act on my behalf,’ he has standing to compel arbitration,” Alejandro said. The judge noted Schwartz did not acknowledge that the agreements also contained a provision that they could be terminated at any time, and the Handels’ revoked his authority in 1999. Those factors were key, the judge said. “At the time plaintiff Handel filed the complaint in 2000, the agency agreement between the Handels, defendant Steven Schwartz and defendant Legg Mason was successfully terminated,” Alejandro said. “Thus, in this motion judge’s opinion the above-cited arbitration provisions creased to be in effect as of 1999, and have no relevance in the instant action.” Moreover, Alejandro said that by his conduct, Schwartz waived whatever right to enforce arbitration he had. “Here, defendant Schwartz is accused of embezzling over a million dollars from the Handels’ accounts,” the judge said. “This behavior forced the Handels to revoke the agency relationship with defendant Steven Schwartz in early 1999, and to file a civil action against him and the other defendants in 2000. “In this motion judge’s opinion, this alleged egregious conduct constitutes a waiver of any right to compel arbitration that defendant Steven Schwartz had.”

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