Thompson v. Witherspoon

KEHOE, J. In Case Handyman & Remodeling Servs., LLC v. Schuele, 183 Md.App. 44, 62 , 959 A.2d 833 , vacated on other grounds, Schuele v. Case Handyman & Remodeling Servs., LLC, 412 Md. 555, 567 , 989 A.2d 210 (2010), 1 we held that principles of estoppel permitted a non-signatory to a contract with a mandatory arbitration provision to enforce the arbitration clause against a signatory to the agreement “when the signatory’s claims rely on the written agreement.n” Id. (footnote omitted). The appeal sub-judice presents the mirror image to Case Handyman, as we now consider the circumstances under which a signatory to a contract with an arbitration clause can enforce those provisions against a non-signatory to that agreement. On August 29, 2008, Nancy Lee Kathryn Thompson, Barbara Thompson Clements and Karen Thompson Karlin, on ⁷⁴ their own behalf and for the use of Susan Witherspoon, Carol Lareuse and the Estate of Albert E. Thompson, III, appellants, filed a complaint in the Circuit Court for Baltimore City against Manufacturer’s Life Insurance Company (“Manulife”), 2 UBS Financial Services, Inc. and various affiliates (“UBS”) and Gordon H. Witherspoon (‘Witherspoon”), alleging negligent misrepresentation, deceit, conversion, negligence and breach of contract.

UBS and Witherspoon each filed motions to stay the proceedings and the motions to compel arbitration. On February 2, 2009, the circuit court granted motions. Appellants have appealed that order, presenting the following question, which we have reworded: Did the circuit court err when it granted UBS’s and Wither-spoon’s motions to compel arbitration? 3 We answer the question in the affirmative and reverse the decision of the circuit court. Factual and Procedural Background There is no factual dispute between the parties as to whether appellants are required to submit their claims to arbitration.

The following picture emerges from the allegations in the complaint. On or about September 28, 1990, Nancy Lee Thompson and Albert E. Thompson, Jr. (the “Thompsons”), obtained a second-to-die life insurance policy from Manulife (the “policy”), insuring their lives for four million dollars ($4,000,000). 4 The ⁷⁵ Thompsons’ children, Nancy Lee Kathryn Thompson, Barbara Ann Clements, Karen Thompson Kirlin, Susan Witherspoon, Carol Lareuse and Albert E. Thompson, III, were the named policy owners and beneficiaries. Witherspoon, the Thompsons’ son-in-law, was an employee of Paine Webber, Incorporated 5 and was an individual insurance producer, broker and agent for Manulife. Appellants contend that Witherspoon was the producer/broker of the policy and that he represented the Thompsons and appellants in its acquisition.

Appellants, pursuant to the original policy application, authorized all correspondence regarding the policy to be sent to Witherspoon. The policy required yearly premium payments in the amount of $105,000, which the Thompsons, at least initially, paid as gifts on behalf of appellants. However, the premiums were not paid from 1996 through 2003. Appellants allege that the Thompsons did not pay the policy premiums during those years “based on the continuing advice and/or action of Wither-spoon.” Appellants allege that “the gift monies [formerly] used to pay the premiums were diverted to pay other expenses, including private school education for Witherspoon’s children.” As a result, unbeknownst to appellants, Manulife borrowed against the value of the policy to pay the annual premiums plus accruing interest.

Mr. Thompson died in 2005. Shortly thereafter, appellants became aware that approximately $900,000 had been borrowed against the policy to pay the premiums and interest. On August 29, 2008, appellants filed a complaint against appellees, and Manulife, alleging negligent misrepresentation (Witherspoon), deceit (all parties), conversion (Witherspoon and Manulife), negligence (all parties) and breach of contract (Manulife). Appellants filed an amended complaint on Octo ⁷⁶ ber 1, 2008.

The amended complaint alleges that Witherspoon negligently misrepresented to appellants, the owners of the policy, that the insurance premiums were being paid, a material fact, when he knew that they were not being paid. The non-payment of the premiums led to Manulife’s borrowing against the policy, which damaged appellants by decreasing the amount they will receive under the policy. Appellants assert that their reliance on Witherspoon’s representations was reasonable in light of their familial and professional relationship with Witherspoon. Appellants also claim that Witherspoon’s concealment of the fact that the premiums were not being paid amounted to deceit.

In regard to the conversion count, appellants contend that Witherspoon exercised absolute control over the policy and its cash value when he, “without the authority or permission of [appellants], intentionally initiated, facilitated, and/or applied for automatic premium loans or automatic dividend loans, against the available cash value and cash value of the paid-up dividends generated by the life insurance policy, without the consent of the policy owners.” Appellants contend that With-erspoon’s intentional actions interfered with their ability to manage and control their policy rights. Appellants assert that Witherspoon owed a duty to them as the owners of the policy. They contend that he breached that duty by failing to notify them that the Thompsons were not paying the insurance premiums. Additionally, appellants contend that Witherspoon breached his duty to them “by initiating and facilitating policy loans without the knowledge and consent of the policy owners and/or by allowing the Thomp-sons, contrary to their right and authority, to initiate loans without the knowledge and consent of the policy owners.” The constructive fraud count again alleges that Witherspoon owed appellants a duty arising out of “their broker-client relationship, as well as personal familial relationship.” They contend that Witherspoon breached this duty when he “misrepresented the consent of the policy owners to Manulife to institute the policy loans.” ⁷⁷ Appellants allege that UBS is liable to them for the negligent actions and deceit of Witherspoon through the theory of respondeat superior: 6 They also contend that UBS, as successor to PaineWebber, had a duty to them to “protect and preserve [their] interest in the policy and to act in a prudent and lawful manner.” Appellants assert that UBS breached that duty by “allowing unauthorized loans to be taken against the policy.” On November 26, 2008, Witherspoon filed a motion to compel arbitration and to stay proceedings in the case pending completion of the arbitration process.

UBS filed a similar motion shortly thereafter. Appellees’ contentions were premised on the fact that, in 2003, the Thompsons established accounts at UBS. At that time, UBS and each of the Thompsons, signed a Master Account Agreement and an InsightOne Brokerage Account Agreement (the “UBS Agreements”). The agreements contain clauses providing that any and all controversies which may arise between UBS PaineWebber, any of UBS PaineWebber’s employees or agents and Client concerning any account, transaction, dispute or the construction, performance or breach of this Agreement or any other agreement, whether entered into prior to, on or subsequent to the date hereof, shall be determined by arbitration.

Appellees argued that, because appellants were suing as owners and beneficiaries of the policy, a transaction accomplished through Witherspoon, appellants’ claims must be decided by arbitration because the arbitration clause provision extends to disputes arising prior to the dates of the UBS Agreements. Finally, appellees contended that appellants ⁷⁸ were equitably estopped from claiming otherwise because they were seeking to benefit from a contract (the policy obtained through Witherspoon), while attempting to disavow the arbitration provision in the UBS Agreements. 7 Appellants argued that they were neither parties to, nor bound by, the UBS Account Agreements. They asserted that the Thompsons were never the owners of the policy and that appellants’ rights in the policy, thus, do not flow from their potential status as heirs, beneficiaries, successors or assigns. Appellants asserted that there is no contract between them and appellees and that the policy itself does not contain an arbitration clause.

As such, appellants contended that they could not be compelled to arbitrate their claims. The circuit court held a hearing on appellees’ motions to compel on January 23, 2009. Following oral arguments by the parties, the circuit court granted appellees’ motion, stating: [I]f there was no contract or no basis of an understanding that Mr. Witherspoon would serve as the financial advisor, then he would owe no duty to [appellants], and therefore no cause of action against him would exist in the absence of the contractual agreement between the [Thompsons] and Mr. Witherspoon. In short, I do find that [appellants’] causes of action are so intertwined with the contractual relationship by and between the Thompsons and UBS that the court must grant [appellees’] Motion to Compel Arbitration.

The circuit court also stayed all proceedings against the other defendants pending arbitration. Appellants filed a timely notice of appeal from the circuit court’s decision. ⁷⁹ Discussion I. Appellate Jurisdiction A court’s order granting an order to compel arbitration is an appealable final judgment because it has “ ‘the effect of putting the parties out of court....’” Rourke v. Amchem, 153 Md.App. 91, 104 , 835 A.2d 193 (2003) (quoting Horsey v. Horsey, 329 Md. 392, 401 , 620 A.2d 305 (1993)). The posture of the case before us is complicated because there is another party, Manulife, who was not affected by the order compelling arbitration. Appellants’ claims against Manulife have not been resolved by the circuit court.

At first glance, then, the arbitration order is not a final, appealable judgment. See Maryland Rule 2-602(a) (an order that “adjudicates the rights and liabilities of fewer than all parties” is not a final judgment.) In Amehem\, the circuit court granted a motion requiring the plaintiffs to submit their claims against some, but not all, of the defendants to arbitration. The court stayed proceedings against the remaining defendant pending completion of the arbitration process. 153 Md.App. at 101-02 , 835 A.2d 193 . The circuit court did not certify the order compelling arbitration as an appealable final judgment pursuant to Maryland Rule 2-602(b).

Writing for this Court, Judge Sally Adkins explained that, because an action to compel arbitration may be filed as a separate action against a party refusing to submit a dispute to arbitration, and does not relate to the underlying claim, an order compelling arbitration, even one directed at some but not all parties, is an appealable judgment “on the question of whether the issues raised in appellants’ suit ... were arbitrable.” Id. at 107 , 835 A.2d 193 . In this regard, the case before us is factually and procedurally indistinguishable from Amehem, and we reach the same conclusion.

II

Standard of Review and Applicable Law As a general rule, a circuit court’s decision whether a dispute is subject to arbitration is a matter of contract interpretation and is reviewed de novo. Walther v. Sovereign ⁸⁰ Bank, 386 Md. 412, 422 , 872 A.2d 735 (2005); Case Handyman, 183 Md.App. at 53 , 959 A.2d 833 . Absent a dispute of fact, we apply the same standard of review to cases, such as the one before us, that involve contentions that a party is estopped from denying that an agreement to arbitrate is applicable to them. Id. at 54 , 959 A.2d 833 .

We begin our analysis by determining the applicable law. There are two aspects to this threshold issue. The arbitration clauses in the UBS Agreements state that “[the] Agreements], [their] enforcement and the relationship between Client and UBS Financial Services shall be governed by the laws of the State of New York, including the arbitration provisions contained herein____” Neither party has presented an argument, to either the circuit court or to us, based upon New York law or asserted that the law of New York is different from Maryland’s in any material respect. Therefore, to the extent that we apply state law, we will apply the law of Maryland.

Cf. Frericks v. GMC, 274 Md. 288, 296-97 , 336 A.2d 118 (1975) (appellate courts will generally not apply foreign law if a case was presented to trial court on the assumption that Maryland law was applicable). The second issue is whether state law, in the form of the Maryland Uniform Arbitration Act, Courts and Judicial Proceedings Article § 3-201 et seq. (the “MUAA”), or the Federal Arbitration Act, 9 U.S.C. § 1 et seq.

(the “FAA”), applies. Both the Court of Appeals and this Court have noted that the MUAA and the FAA were adopted to achieve the same goals and both the MUAA and the FAA reflect legislative policies in favor of enforcing arbitration agreements. See, e.g., Walther, 386 Md. at 424 , 872 A.2d 735 ; Case Handyman, 183 Md.App. at 56 , 959 A.2d 833 . As a result, when construing the MUAA, Maryland courts look to federal decisions interpreting the FAA.

Walther, 386 Md. at 424 , 872 A.2d 735 ; Holmes v. Coverall North America, Inc., 336 Md. 534, 541 , 649 A.2d 365 (1994). The FAA applies when the contract at issue affects interstate commerce. Mattingly v. Hughes Elecs. Corp., 147 ⁸¹ Md.App. 624, 632, 810 A.2d 498 (2002).

While the issue was not raised before the circuit court, we note that the UBS Agreements certainly appear to affect interstate commerce as UBS conducts operations throughout the country. See Walther, 386 Md. at 423 , 872 A.2d 735 (the FAA applies to “nearly all arbitration agreements.... ”). Under the FAA, courts look to substantive provisions of state law regarding threshold issues of the validity, revocability, or enforceability of contracts, but to federal law to resolve issues as to whether a non-signatory to a contract can enforce, or be bound by, an arbitration provision in a contract signed by other parties. Int’l Paper Co. v. Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d 411, 416-17 (4th Cir.2000) (citing, among other cases, Moses H. Cone Memorial Hosp. v. Mercury Constr.

Corp, 460 U.S. 1, 24 , 103 S.Ct. 927 , 74 L.Ed.2d 765 (1983) and J.J. Ryan & Sons v. Rhone Poulenc Textile, S.A., 863 F.2d 315 , 320-21 (4th Cir. 1988)); Case Handyman, 183 Md.App. at 56 , 959 A.2d 833 . In the case before us, there is no contention that the UBS Agreements are invalid; the issue is whether the arbitration provisions of those agreements can be enforced against appellants even though they are not signatories. Therefore, we look to the “ ‘body of federal substantive law of arbitrability.’ ” Case Handyman, 183 Md.App. at 56-57 , 959 A.2d 833 (quoting Moses H. Cone Memorial Hosp., 460 U.S. at 24 , 103 S.Ct. 927 ).

III

Analysis Appellants’ position can be succinctly summarized: they are not parties to the UBS Agreements and the insurance policy (to which they are parties) does not contain an arbitration provision. Thus, they never consented to arbitration and the arbitration provisions in the UBS Agreements are not enforceable against them. Appellees present a number of grounds in support of their position. Before turning to their principal contention, we will discuss their preliminary arguments. ⁸² (A) Appellees first assert that the arbitration provisions in the UBS Agreements “encompass more than just disputes that are based on breaches of the [Agreements themselves].

Rather, the arbitration clauses apply to ‘any and all controversies’ with UBS and its employees that concern any: (i) account; (ii) transaction; (iii) dispute; or (iv) the performance or breach of services under the account agreements or any other agreement entered into between the parties[,]” whether such disputes arose prior to or after the execution of the UBS Agreements. Appellees frame the crux of appellants’ claims against them as arising out of Witherspoon’s “failure to give proper financial advice to the Thompsons” and assert that it is “almost inconceivable” that appellants could argue that a controversy arising out of that advice does not fall within the “incredibly broad spectrum of arbitral disputes” encompassed by the arbitration provisions of the UBS Agreements. The argument misses the mark. The arbitration clauses in the UBS Agreements are indeed expansive.

But the issue in this case is not whether otherwise enforceable arbitration clauses extend to the particular claims raised by appellants but rather whether the arbitration provisions of the UBS Agreements can be enforced against appellants at all. Second, appellees state that [e]ven if there were some ambiguity within the arbitration clauses, ... this action must still be submitted to arbitration to determine whether the parties’ dispute comes within the ambit of arbitral disputes. This is because all questions concerning the ambiguity of arbitration clauses must be resolved by the arbitrator. The statement of the law is correct but inapplicable to the present case.

Again, the question here is not whether the arbitration clauses in the UBS Agreements are ambiguous but whether the appellants have consented to, or are estopped from avoiding, the terms of those agreements. Whether or not a matter is to be compelled to arbitration is an ⁸³ issue for the court, not the arbitrator. Howsam v. Dean Witter Reynolds, 537 U.S. 79, 83 , 123 S.Ct. 588 , 154 L.Ed.2d 491 (2002) (“‘the “question of arbitrability,” is “an issue for judicial determination [ujnless the parties clearly and unmistakably provide otherwise.” ’ ”) (quoting AT & T Techs. Inc. v. Communic’ns Workers, 475 U.S. 643, 649 , 106 S.Ct. 1415 , 89 L.Ed.2d 648 (1986)) (Emphasis added in Howsam.) Maryland law" is to the same effect.

See Walther, 386 Md. at 418 n. 2, 872 A.2d 735 (citing Allstate v. Stinebaugh, 374 Md. 631, 644 , 824 A.2d 87 (2003)). (B) We now turn to appellees’ principal contention, namely, that appellants are equitably estopped from avoiding the arbitration requirement. In Case Handyman , Judge Graeff summarized the starting point of our analysis: Generally, arbitration is a matter of contract and a party cannot be