Curtis v Merrill, Lynch, Pierce, Fenner & Smith, Inc.

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Curtis v Merrill, Lynch, Pierce, Fenner & Smith, Inc. 2018 NY Slip Op 31011(U) May 25, 2018 Supreme Court, New York County Docket Number: 655921/2016 Judge: O. Peter Sherwood Cases posted with a "30000" identifier, i.e., 2013 NY Slip Op 30001(U), are republished from various New York State and local government sources, including the New York State Unified Court System's eCourts Service. This opinion is uncorrected and not selected for official publication. [* 1] INDEX NO. 655921/2016 NYSCEF DOC. NO. 36 RECEIVED NYSCEF: 05/25/2018 SUPREM~: COURT OF 1,HE STATI~~ OF·NEW YORK COUNTY OF NEW YORK: C0!\1MERCIAI.., IJIV.ISION PAllT49 -------------------------------··----------X RON . ~LD ClJRTIS, individually and as trustee of the S'l'lJART CURTIS FAMILY TRlJST, llF:CISlON AND ORDER Index N·o.: 655921/2016 Plaintiffs, -against- Motion Sequence No~: 001 1\1ERRl.l.1L LYN.CH, PIEl~CE, FENNER & SMITH, INC., l)efendan·ts. . . - - .. .. . . . - - .. ... - - . . -· - - .,. . . .. .. - - - - . . - ... ... .. .. - -19 -- WI} - .-. - - _.. ... .... ~ x o. Pl~"fER SHERwoo·o, J.: In this motion sequence 001, defendant moves to compel .arbitration and stay this action ttndcr 9 lJ.S.C. §§ 3 and 4. For the foUo,ving reasons, the motion shall be I. granted~ BACKGROlJNll A. Allegations o.f.the Complaint ;w .Plaintiff Ronald Curtis (HCurtis") maintained an account at defendant's predecessor in interest, Banc of America Investment Services,·lnc~ (''BAI"), with Micha.el Stern (-~stern") serving as financial advisor (complaint it 39). In October 2009, Bryce S. Wilinski ('~Wilinski"~) i11formcd Cunis that he \vould be scrvici11g the account due to Stern's departure to work \Vith Wells Fargo (id. il~I 41, 45). Atlcr Curtis inior1ned \l/ilinski that he intended to close the account and transfer his assets to a new account at Well Fargo, Wilinski represented that. if Curtis refrained tron1 moving his account., Wilinski should be able to extend Curtis a better offer once the anticipated n1ergcr betvv'een B.AI and defendant vvas conipleted (id if1 47-49). Aller the n1crger \Vas completed, Wili11ski offered that if plaintiff~ open.ed new accounts with Wilinski nam.ed as the fi11ancial advisor, plaintitls \vould never be charged any undisclosed fees, and the only fees plaintiffs vvould be charged would be a $5 processing tee for any bond transaction, a $5 processing fee plus a disclosed 1naxi1num .2o/o. con1mission on any equity transaction (the ~~ML Offer'') (id. ,, Page lof9 2 of 20 [* 2] INDEX NO. 655921/2016 NYSCEF DOC. NO. 36 RECEIVED NYSCEF: 05/25/2018 51-55). After Stem at Wells Fargo failed to match the Mf., ()ffer, Curtis accepted the ML Oiler ai1d subsequently opened accounts on behalf of himself (the the Stuart Curtis F~an1ily Trust (respectively, the '~Trust" '~Curtis Account'') and on behalf of and the "''fr\lst 1\ccounf'') (iti. ilif 62-67). In discovery d\tring a f'lNIV\ Arbitration over certain unat1thorized trades, plaintitTs discovered that defendant had charged them previously undisclosed fees in contravention "\vith the ML Oiler (id ,~ 10-12). PlaintifTs nO\V assert nine causes of action arising out of the ·undisclosed fees defendm1t purportedly charged. B. Provisions Relevant to tlte 1\-folion Curtis execttted a Brokerage i-\ccount Application in conn-ectio.n with th.e ~rrust Ac.count on Decc1nbcr 4, 2009 (NYSCEF Doc. No. 10 ["Brokerage l\ccount Applicatio11'')). In relevant l'ortion, that application states that Curtis "acknowledge[s] that [he] ha[s] received, read, understands and agrcefs l to ... the terms set 1ortl1 in the separate Custo1ner Agreement, and agree[ s] to be bound by such terms and conditions as are currently in effect and 1nay be amended fron1 time to tin1c \.Vith or \Vithout prior notice," (icl. at 4). The application also stated that Curtis understood that Customer Agreen1ent contains a pre-dispute arbitration clause requiring al1 disputes under [the Custon1er Agreement] to be settled by binding arbitration" and. that Curtis had hrcccivcd, read, understands and agrcc[s] to such arbitration provisions and ... [that he has] receive[d] a copy of the agreement'' (it-/.). t~fhe Customer Agreement, in turn, provides that: ~'[a]ll controversies that may arise between me, ·Ml~PF&S and N·f~S concerning any su~ject n1atter., issue or circumstance whatsoever (including~ but not lin1ited to controversies c,onccrning any account, order or transaction, or the co11tinuati.on, performance· or breach of this or any other agree111ent bet\veen n1c, Ml~PF&S a11d Nf~S \vhether entered into or arising before, on or after the date this account is opened) shall be determined by arbitration in accordance with the rules then prevailing of the r;inancial Industry ·Regulator)' Authority (FTNRA) or any lJnited States securities self-regulatory organization or ·united Stales . Page 2of9 3 of 20 . [* 3] INDEX NO. 655921/2016 NYSCEF DOC. NO. 36 RECEIVED NYSCEF: 05/25/2018 securities exchange of which the person, entity or entities against \vl1om the claim is made is a member, as I may designate" (NYSCEI7 l)oc. No. 11 [4'Custon1cr AgreementH] § 16 at 3). C~urtis also executed Standard Option Agreements in co1mection witl1 both the Trust Account and the Individual Account which, in relevant portion~ provided that C~urtis:. ''agrec[d] that a11 controversies that n1ay arise bct\veen us shall be determined by arbitration. Such c.ontroversies include, but are not limited to, those involving any transactio11 in any of my accounts with MLPF&S, or the constructi9n, perfonnance or breacl1 of any agreement between us, whether e.ntered into or occurring prior, on or subsequent to the date hereof. Any arbitration pursuant to thisprovisi<)n shall be co11ductcd only before the Fina11cial Industry ·Regtdatory Authority, Inc. (FINRA) or an arbitrati()J1 facility provided by any other exchange of which MLP.F&S is a member, and in accordance w·ith its arbitration rules then in effe.ct at FINRA or any such other exchange ... '' (NYSCEF Doc. Nos. 12, l 3 at 3). C~urtis claims that durii1g the process of opening the Trust Account, Wilinski represented that the 13rokerage Account Appliction \Vas meant merely to gather ~"biographical information" needed to open the Trust Account.. Curtis also states that the Trust never received a copy of the Customer Agreement II. (NYSC~Ef' Doc. No. 20 [''Curtis aff~] iI 28.) ARGlJMENTS Defendant notes tl1e broad scope of the operative arbitration clauses and argu·es that plaintiffs' claims fall squarely within their ambit (NYSCEF Doc~ No. 14 at 7-9). Defendant also notes that, if the arbitration provisions apply, under 9 USC § 3, th.is action must be stayed while the claims are resolved in arbitration (id at 9-10). In opposition, plaintifls first contend tl1at tl1e Optio.n AbJteen1ents are not. bonding .since the Ml.1 Offer was represented as having the only governing tcrn1s, and didn't have an at,Jteen1cnt to arbitrate. Since defendant purportedly stated that only the terms of the ML O.fler would bind., the ()ption Agreen1ent docs not contr()l (NYSCEF Doc~ No. 29 ["pls' mem''] at 6-9}. Plaintiffs also Page 3·Of9 4 of 20 [* 4] INDEX NO. 655921/2016 NYSCEF DOC. NO. 36 RECEIVED NYSCEF: 05/25/2018 note that the Optio11 Agreement makes no reference to ru1y other types of transaction subject to the Curtis Account, other than options, ru1d add. that those agreements do not apply because plaintiffs have not asserted any claims concerning the Opti{>n Agreement (id. at 9). l>laintif1s also argue that the parties never excl1anged consideration~ nor perfQm1.ed under the agreen1ent, and that.because tl1ere is another agreement tl1at is the subject of plaintiffs' claims, the Option i\greemcnts' arbitration clauses are unenforceable (itf. citing 1'NfP Wor/m11ide inc. v frc1nzino, 269 AD2d 332, 332 [1st Dept 20001 [finding arbitration provision in stock option agreements was not enforceable against party that l1ad never exercised the subject stock optio11s and·thus was terms of the agreement p11rsuant to which theo_ptions \.Vere ·~not bou11d by the ofler~d"]). Witl1 respect to the l3rokcrage Account Applicatio11, plaintiffs argue that, based on Wilinski's representations, the terms of the ML Offer should govern instead. PlaintiffS also contend that the Trust never consented to the arbitration provision contained in tl1e Custon1er Agreement since Wilinski indicated that the forms were only to be used to gather biographical information~ Morco·vcr, the ·rrust never received the Customer Agreeme11t, (id at 9-1 t ). Plaintiffs also argue that the l3rokcragc Account Application does. not concern Curtis in his individual capacity and. thus c.annot bind hin1 as such (id at 6- 7). Plaintif1s assert that, while fraud in the inducen1ent is typically arbitrable, there arc two means by whic.h .fraud can defeat an arbitration clause: (J) where the fraud in the inducement goes to the arbitration clause itself~ and (2) where fraud permeates the entire agree1nent (id at 12-13, citing, e.g., llousekeeper v Lourie, 39 AD2d 280, 283 [ l st l)ept 1972]). Plaintiffs argue the arbitration provision in the Brokerage Account Application. falls under the first category since \\'ilinski n1isrcpresented the purpose of the docun1ent (id at 13-14). ·with respect to all arbitration provisio11s, plai.nti1Ts argu.e that fraud permeates all agreements involved and that the arbitration Page 4of 9 5 of 20 [* 5] INDEX NO. 655921/2016 NYSCEF DOC. NO. 36 RECEIVED NYSCEF: 05/25/2018 claUSCS Were inserted to help Hkeep [defendant'~~ actions in the dark and encourager defendant] to JJerpetrate its schen1cs on other unkno\ving victims'' (id at 17~ 14-18). Plaintillsarguc further tl1at, at minin1um, tl1is court should hold an cvidentiary hearing (id at 18, citing e. g. Burbar1k Broadcasting l~o. v Ros/in Radio i<;alesJ Inc., 99 AD2d 976, 977 11st . Dept 1984] [noting that "[i]t is \\ Cll settled tl1at on an application to :stay arbitration, a trial or 7 cvidcntiary hearing is required if there is any disputed issue of Jac.t~'.f) . . Finally, plaintiffs contend thatthc.ir claims are n.ot arbitrable W1dc.r .FINRA Rulc· 12206 (a) of the Code of Arbitration Procedure, which provides that . ,fn]o claim shall be eligible for submission to arbitration under the Code where six years l1ave elapsed from the occurrence or event giving rise to the clain1.'.I' More than six years have elapsed since the alleged fraud occurred (id. at 18... 19). In reply, defendant argues tl1at plaintiffs' reliance on the purported ML Offer is defeated by the tern1s of the arbitration agree1nents (NYS(~E·F Doc. No. 31 .Julius Bt.1er & c:l>.~ Ltd v fVa~field Lltl, r~def's. reply"] at 6~ citing Bank 424 F3d 278, 284 [2d Cir 2005] [rejecting argument that foru1n selection clause constituted a waiver of agreement to arbitrate 011 basis that '"',ve cannot 11ullify a11 arbitration clat1sc unless tl1e forutn selection clause specifically precludes arbitration~' and the foru~ selectio11 clause "'[ n ]either specifically precludes arbitration [ n]or contains a positiv·c assurance that this dispute is not governed by the Arbitration Agree.ment'~] [it1ternal quotation marks a11d citation ornitted] [abrogated on other grounds by Goldrnan, '"'iachs & l~o·. v (r<)/den E,1npire .~cht>ols Fin. Auth., 764 F3d 210, 215 n 3 [2d. (~ir 2014]]). Regarding the Brokerage Account i\pplication, defendant contends the arbitration provision contained therein is broad enough to cover claims arising out of both t11e ~l . rust Acc<>unt and the c:urtis Acc.()tlnt (id. at 6-7). Defe11dai1t additionally argues that .the parties did in fact Page Sof 9 6 of 20 [* 6] INDEX NO. 655921/2016 NYSCEF DOC. NO. 36 RECEIVED NYSCEF: 05/25/2018 perform and exchange cor1sideration und·er the Standard Option Agreen1ents since plaintitT obtained the right to trade options and even engaged in options transactions in the Individual Account (id. at 7~8; Curtis afl: exhibit 5). Regarding plaintiffs' claims that they were fraudulently induced to enter into the arbitration provision, defendant contends that the. allegations of fraud in the complaint relate, not to an inducement to enter into ge.nerally. As such~ th~ arbitration prov.ision, but rather to induce1nent of the contract defendant contends these claims arc for the arbitrator to decide, not this court (id at 8-9, citing l)rilna Pai11t (~'orp. v Fl11od & (~onklin }.t1jg. (::'o., 388 US 395, 403---404 [1967] [noting that •"if the clai1n is fraud in the inducen1cnt of the arbitration clause itself-an issue \vhich goes to the "making' of the agreement to arbitrate-the federal court n1ay :proceed to adjudicate it" but that ''tl1e federal C{lUrl [may notl consider claims of traud in th~ i11duce.ment of the contract gcncrall y"]). Finally, with respect to plaintiffs' argun1ent that their claims are not eligible tor arbitration under FINRA Rule 12206 (a), defendant notes that this rule also provides that the '•pa11el will resolve any questions regarding the eligibility of a claim under this rule" (it.l at 9). III. DISCUSSION As a prcli1ninary n1atter, plaintiffs" argun1ents that this court should not compel arbitration because (a) plaintiffs have 11ol asserted any claims relating to those agreen1ents, (b) the forn1s were tised only t<> gatl1er biograph:ica1 infor1nation, and (c) the ·rrust never received the Custo1ner Agreement~ arc belied by the text of the agree111ents. Additionally, a5 defendant i1otes, plaintiffs' attempt to rely on the terms of tl1e purported M~ Oil.er fails in that plaintiffs allege only that the ML Offer did not itself contain an arbitration clause, and not that the terms of the ML Oi1er Page 6of9 7 of 20 [* 7] INDEX NO. 655921/2016 NYSCEF DOC. NO. 36 RECEIVED NYSCEF: 05/25/2018 specifically ·precluded arbitrati<.Jn (see Bank tlu/ius Beier&· Co~424 F3d at 284; see also Gold1nat1, .f)achs &: <: 0. 1 v Golc;len Em.JJire 5chools Fi11. Auth., 764 F3d. 210, 215 [2d Cir 2t)l 4]J. Plaintifls claim that fhe:re ·has been 110 c:onsideration ·or pcrtormai1ce st1tticieht to· make the Option Agreements binding. Ho\vcver, this argum.ent confuses the parties' agreen1ents to aUovv plaintiff:c; tl1e right to trade opinions transactions \\rith defendant (e.g:. put I call optio·ns), ''tith an '"option contract,"' or ''.is an a.green1ent to hold an oller open [ wl1ich] confers· upon the .optionee, for consideration paid, ll1e right to purchase at a later date'' (Ka1Jlt1n v Lippman, 75 N'l'2d 320, 32425 [ 1990]). Wl1i1e in the case of an option contract, <1;tl1e optionec is not bo·und until the option is actually exercised'' (id.) plaintiffs .have cited to no authority which states that th.cir contracts \vith defendant, labeled ~'Option Agreements," \vere not bi~ding until plaintifls executed a trade under those agreen1ents. Additionally, as defendant notes, the ability to engage in options transactio11s ·\\~ith defendant provides sufficient consideration (see11Rfel v Prudential'"" Bache i.S~ec. inc., 81 N"\'2d 470~ 476 [ 1993] su~ject ["Absent fraud or unconscionability, the adequacy of co11sideration is not a proper f<)r judicial scrutiny .... It is enough that something of real ''aluc in the eye of the law vv-as exchanged"] [internal quotation marks and citation omitted]). Additionally, under FINI(A llule 12206 (a), plaintifls' argument that these claitns are not arbitrable under that same rule is left for the arbitrator to decide. ' : Tun1ing to plaintiils' fraud~-bascd argu1nent.s, all llarties aclcnowledge that, ltnder the doctrine -of ~(>separability,'' plai11tiffs ~ allcgati()ns c>f fraud \Vill not de.feat the arbitration provisions in question unless the allege,d fraud either goes hto tl1e arbitratjon pro~risiQn itscl.f/' or "\;vas part of a grand schc1ne that pern1eated the ·entire contract~ including tl1e arbitration provision,'' (1Veinrolt v (~T(Jrp~ 32 NY2d 190, 197 [ 1973 ]). Witl1 respect. to the latter,. ~'it 111ust be established that t.he · agreement was not the result of an arn1' s length negotiation., or the ar·bitration clattse was inserted Page 7of 9 8 of 20 [* 8] INDEX NO. 655921/2016 NYSCEF DOC. NO. 36 RECEIVED NYSCEF: 05/25/2018 i11to the co11tract to accomplish a fraudulent schen1en (l'errarella v (Iodl, 131 AD3d 563, 566-67 [2d Dept 2015]~ Iv to tzppeal denied, 26 NY3d 913 [2015]). Plaintiffc; do not dispute that the agreements \Vere a result of an arm's length negotiation, thus their argu1nent that 1raud pern1eatcd the entire agreements reduces to· an argument that the arbitration clause.s were. inserted into· the agreements to accon1plish the purported fraudulent schc1ne. J>Iaintiffs~ argum.cnt that the fraud went to the arbitration provision itself contravenes the al lcgatio11s of the complaint, \Vhich relate to induce1nent to contract generall)' (see e...fi. complaint ,, 121-130). Additionally, although plaintiffs argue the arbitration clauses will 11elp defendant conceal its fraudulent sche111e from the eyes of the p.ublic, and thus aid defendant in repeating this sche1ne, plaintiffs have made no allegations that the arbitration clauses were inserted in the contract to help accomplish tl1e fraudule11t scheme alle,ged in the con1plaint - that is, the fraudule,nt sche1ne perpetrated against· them. Plaint.ills have cited i10 case i11 which a c.ourt found that the potential use of an arbitration clause in the ex post cover-up of a fraudulent sc.heme is su1l1cient to tind that tl1e arbitration clause \Vas ~'inserted i11to the contract to accomplish a fraudulent scheme.'' Indeed, if such an argument were sufficient., it would be difficult to imagine a scenario in which an allegation of fraud did not render an arbitration clause unenforceable~ 1 Plainti11s' argun1ent that, at n1inimun1 . this court should 110.ld an evidentiary hearing tails as well. Although '-li]t is \vell settled tl1at on an application to stay arhitration~a trial or evidentiary hearing is required if there is any disputed issue of fact," (Burbank Broadcc1sting Co~ v Ros/in Rc1dio Sa/est Inc ... 99 ,Al)2d 976, 977 [1st Dept 1984])., as discussed above, even accepting To the extent that plaintiffs rely on LOO/} Prod v c·apita/ (~onneclions LLt.-: (797 F Supp 2d318~ 347-348 [SD NY 2011 for the proposition that an Hintcntional scarn" in ard of itself is sufficient to constitute a "grand scheme that permeatef s] the entire contract~'~ thal statement of law docs not comport with the doctrine of separability, as discussed above. It see1ns that in arriving at this statement of ta\v, the c.ourt relied on /Jongo-AslieJ' v (~ar~free L~festyles. Inc. (27 Misc 3d 12 ·11 (A) fC:iv Ct 20 tO]), which discussed the,enfbrceabHity of torum selection ·clauses, not arbitration clauses. The doctrine of separability app'lies ~-pccH1cally to arbitration clauses (see lf'einrvtt, 32 I n NY2d at 197). Page 8of9 9 of 20 [* 9] INDEX NO. 655921/2016 NYSCEF DOC. NO. 36 RECEIVED NYSCEF: 05/25/2018 plaintiffs' allegations as true,. plaintiffs have alleged no facts that w·ould i~validate the arbitration provisions in question. Accordingly~ it is hereby ORDERED that defendants n1otio11 to cotnpcl arbitration and to-stay this action is granted; and it is further <)lIDEll.D that plaintif1s Ronald C:urtis and the Stuart Curtis Family Trust shall arbitrate their clailns against defendant Merril1 Lynch, Pierce, Fen11er & S1nith, Inc., in acc.ordance \Vit.h FINllAagreements; and it is further o·Rl>EREI> that all proceedings in this action arc hereby stayed, except tor an application to vacate or n1odify said stay; and it is further OliDEREI> that either party may n1ake an application by order to show cat1se to vacate or tnodify this stay upon the final determination of the arbitration. This constitutes the decision and order of the court. DATED: May 25, 2018 Page 9of9 10 of 20

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