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Snead v. Wright

United States District Court, D. Alaska

July 28, 2019

MONIQUE R. SNEAD, Individually and as Personal Representative of the Estate of John H. Snead; JOHN G. SNEAD, Individually and as Trustee of the Snead Irrevocable Trust; MONIQUE R. SNEAD and JOHN G. SNEAD, both individually and as beneficiaries of the John H. Snead Revocable Trust and the Snead Irrevocable Trust, Plaintiffs,




         At docket 12 Defendant Merrill Lynch, Pierce, Fenner & Smith (Merrill Lynch) moves the court to compel arbitration and enter a stay of this federal action, relying on account agreements executed by the decedent, John H. Snead. Plaintiffs Monique R. Snead and John G. Snead, in their various capacities (collectively Plaintiffs or the Sneads), oppose the request at docket 24. Lynch replies at docket 29. Oral argument was requested but denied as unnecessary.


         This federal action involves a dispute about two Merrill Lynch accounts opened by John H. Snead, the father of Plaintiffs, who died in August of 2017. Plaintiffs allege that Defendant Guadalupe Wright, who had been in a long-term relationship with John H. Snead up through his death and an employee of Merrill Lynch at that time, unlawfully transferred funds from John H. Snead's Merrill Lynch trust accounts-the John H. Snead Revocable Trust (Revocable Trust) and the Snead Irrevocable Trust (Irrevocable Trust). The Sneads filed their complaint individually and as the beneficiaries of the Revocable Trust and Irrevocable Trust. John G. Snead also sued as the trustee of the Irrevocable Trust, and Monique Snead sued as the personal representative of her father's estate. This federal action includes one claim against Defendant Wright, alleging she unduly influenced John H. Snead near his death and wrongfully removed funds from the trusts. The other claims are brought against Merrill Lynch. The Sneads allege that Merrill Lynch breached its fiduciary duty and was negligent regarding the trusts, that it is vicariously liable for Defendant Wright's actions, and that it was negligent in hiring, training, and supervising Wright.

         Merrill Lynch now moves to have the case stayed for arbitration. It relies on account forms John H. Snead signed wherein he agreed that any controversies between himself and Merrill Lynch would be arbitrated. The first form is Cash Management Account (CMA) Application and Agreement Form (CMA Form) signed in 1998 when the decedent opened a CMA with Merrill Lynch. Merrill Lynch asserts that the account was opened for the Revocable Trust. The second form is a Client Relationship Agreement (Client Agreement) that decedent signed in 2016 in conjunction with the opening of another Merrill Lynch account. Merrill Lynch asserts that this second account was opened for the Irrevocable Trust. Plaintiffs oppose the request for arbitration, arguing that they are not bound to arbitrate pursuant to the forms that they did not sign.


         "A party seeking to compel arbitration has the burden under the [Federal Arbitration Act] to show (1) the existence of a valid, written agreement to arbitrate; and, if it exists, (2) that the agreement to arbitrate encompasses the dispute at issue."[1]Despite a "liberal federal policy favoring arbitration agreements, "[2] state law plays a role in federal arbitration analysis. The first element, whether a valid agreement to arbitrate exists between the parties, is determined by state law governing contract formation.[3]Therefore, "contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements without contravening [the Federal Arbitration Act]."[4] Relatedly, the question of who is bound by or can enforce an agreement to arbitrate is also a question determined by state law.[5]

         As for the second element, whether the dispute between the parties is within the scope of the arbitration agreement, the Federal Arbitration Act creates a substantive body of law to apply to disputes about what issues are subject to arbitration; however, it does not entirely displace state law.[6] The act requires courts to apply a presumption in favor of arbitration, but to apply state law principles of contract interpretation when analyzing the scope of the agreement.[7] "Under the federal presumption, if the arbitration provision is reasonably susceptible to an interpretation under which the dispute at issue is arbitrable, construed liberally but using state law principles of contract interpretation, then [the court] must grant [the motion to compel arbitration]."[8]


         Merrill Lynch asks the court to stay this federal case in favor of arbitration. As noted above, Merrill Lynch bears the burden of demonstrating that arbitration is warranted. It argues that John H. Snead had agreed to arbitrate all disputes with Merrill Lynch when he opened his various trust accounts with the company and that the Plaintiffs, as beneficiaries and/or trustees of those trusts, are bound by his agreement to arbitrate. A party generally cannot be required to arbitrate under an agreement which he did not sign.[9] However, "nonsignatories of arbitration agreements may be bound by the agreement under ordinary contract and agency principles."[10] Merrill Lynch argues that Plaintiffs are bound to arbitrate based on equitable estoppel and because they are third-party beneficiaries of the account relationship between their father and Merrill Lynch.

         As noted above, this court must look to state law when determining whether a nonsignatory can enforce or be bound by an agreement to arbitrate. Neither Merrill Lynch nor Plaintiffs adequately address the issue of which state law to apply and how to best apply that law to this situation. Plaintiffs cite a Ninth Circuit case, Comer v. Micor, Inc.[11] In Comer, the plaintiff was an ERISA-plan participant who sued the managers of the plan for breach of fiduciary duty. The managers had an agreement with the plan's trustees and that agreement contained an arbitration provision. The managers argued that the plaintiff should be bound by the arbitration provision in the agreement even though he was not a party to it based on equitable estoppel, which precludes parties from claiming the benefits of a contract while simultaneously avoiding its burdens.[12] They argued that the plaintiff should be precluded from avoiding arbitration because he was seeking to enjoy the benefit of a well-managed plan. The court rejected the managers' position holding that the non-signatory, who did not seek to enforce the terms of the management agreement and did not sue under its provisions, did not "knowingly exploit" the agreement and therefore could not be estopped from avoiding arbitration.[13]

         The managers also argued that the plaintiff could be bound by the agreement to arbitrate based on a third-party beneficiary theory. The court noted that an arbitration agreement could be enforced against a nonsignatory under such a theory where "the contract reflects the express or implied intention of the parties to the contract to benefit the third party."[14] The court concluded that the signatories to the investment management agreements did not intend to give the beneficiaries of the plan the right to enforce the agreements, and therefore the plaintiff was not bound to arbitrate under a third-party beneficiary theory.[15] The fact that the plaintiff's claim for breach of fiduciary duty generally arose out of the underlying investment management agreement did not create third-party beneficiary status or otherwise require plaintiff to arbitrate under the agreement.[16]

         Under Comer, Plaintiffs are correct that equitable estoppel does not require arbitration because they are not seeking to enforce the terms of the bank agreements, and they cannot be forced to arbitrate as third-party beneficiaries because there is no evidence that they are the intended beneficiaries of the agreements themselves. While Comer does in fact support Plaintiffs position that they cannot be required to arbitrate as non-signatories to the contract, federal common law is no longer applicable to the determination of who is bound by an arbitration agreement.[17]

         Merrill Lynch, however, does not point to governing state law that would allow the court to find in its favor. It cites cases from New Jersey, California, New York, and Texas to argue that Plaintiffs should be required to arbitrate as trustees, beneficiaries, and personal representatives. However, Merrill Lynch fails to conduct the choice of law analysis that must be done to determine which ...

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