Chris Lazarini Analyzes Claims of Fraud in Arbitration Inducement

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Bass, Berry & Sims attorney Chris Lazarini analyzed a case in which a plaintiff sued Ameriprise, its broker (Evans), and her step-children, seeking the proceeds of two accounts she claimed Ameriprise improperly paid to the children when her husband died. Following the plaintiff’s refusal to arbitrate, the court finds plaintiff is estopped to deny arbitration ruling that claims of fraud in the inducement of an arbitration clause are for the courts to decide, while claims for fraud in the inducement of a contract generally are for the arbitrators.

Chris provided the analysis for Securities Online Litigation Alert (SOLA). The full text of the analysis is below and used with permission from the publication. 

Bayles vs. Evans, Nos. 18-0871 & 18-0876 (W. Va., 4/24/20)

*A non-signatory is estopped from cherry-picking parts of a contract she finds beneficial, while ignoring those she would prefer not apply, such as an arbitration clause.

**Claims of fraud in the inducement of an arbitration clause are for the courts to decide, while claims for fraud in the inducement of a contract generally are for the arbitrators.

***If a court compels a matter to arbitration, it may not weigh in on the merits of the dispute.

Plaintiff Bayles sued Ameriprise, its broker (Evans), and her step-children, seeking the proceeds of two accounts she claimed Ameriprise improperly paid to the children when Mr. Bayles died. Plaintiff alleged Evans fraudulently induced her to consent to the roll-over of Mr. Bayles’ 401(k) account to an IRA account at Ameriprise by telling her Mr. Bayles could not undo his designation of her as beneficiary without her consent.

She also claimed, unbeknownst to her, Mr. Bayles later opened a second IRA account and transferred some assets to it from the original account. He designated Plaintiff as beneficiary on the second account, but changed the designation on the original account to his children. Finally, she claimed Ameriprise sent Mr. Bayles a confirming, negative-consent letter; however, it erroneously indicated he had designated his children as beneficiaries on both accounts when that was not his intent. After Mr. Bayles’ death, and absent any corrections by him of the alleged errors, Ameriprise determined to give the proceeds of the accounts to the children.

The trial court ordered arbitration under Ameriprise’s Brokerage Account Agreements (“BAA’s”) and dismissed the case. Bayles appealed on three grounds. First, she argued arbitration should not be required because she was a non-signatory to the BAA’s. Second, she argued any contract between Mr. Bayles and Ameriprise was a byproduct of the fraud perpetrated on her, which fraud invalidated the contract. Finally, she argued her claims were beyond the scope of the arbitration clauses in the BAA’s.

The Court finds Plaintiff is estopped to deny arbitration, even though she is a non-signatory, because she seeks to enforce her claimed understanding that Mr. Bayles’ initial beneficiary designation could not be changed without her consent. The Court concludes this effort to cherry-pick the benefits of the BAA’s, including Mr. Bayles’ designations of her as beneficiary, estops her from denying arbitration.

The Court also rejects Plaintiff’s argument that the BAA’s were vitiated by fraud. While fraud may invalidate an arbitration agreement, the Court finds Plaintiff’s claims go to the overall existence of a contract. Such a claim is left to the arbitrators, the Court concludes, citing Prima Paint Corp. v Flood & Conklin Mfg. Co., 388 U.S. 395 (1967) (claims of fraud in the inducement of an arbitration clause are for the courts to decide, while claims for fraud in the inducement of a contract generally are for the arbitrators).

Finally, the Court finds Plaintiff’s claims are inextricably intertwined with the Ameriprise accounts and, therefore, fall within the scope of the BAA’s arbitration clauses. Defendants also appealed because the trial court’s order included findings that Plaintiff was the sole beneficiary of the second IRA account and Ameriprise’s confirming letter did not modify that designation. The Court agreed with Defendants that these factual findings should be reversed because the lower court was prohibited from ruling on the merits of Plaintiff’s claims.

(C. Lazarini: In SOLA Ref. No. 2016-23-01, we reported on the Court’s determination that an arbitration agreement existed between Ameriprise and Mr. Bayles, even though Mr. Bayles had not signed Ameriprise’s Brokerage Account Agreement. The Court found Mr. Bayles’ signature on the IRA Application, in which he acknowledged having received and read the Brokerage Account Agreement and that it was governed by an arbitration clause, sufficient to require arbitration. However, the Court remanded on the issues of unconscionability and whether Mrs. Bayles’ claims fall within its scope of the clause.)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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