Franda Webb v. First Tennessee Brokerage, Inc. ( 2013 )

IN THE COURT OF APPEALS OF TENNESSEE
AT KNOXVILLE
March 5, 2013 Session
FRANDA WEBB, ET AL. v. FIRST TENNESSEE BROKERAGE, INC., ET
AL.
Appeal from the Circuit Court for Knox County
No. 2-548-09 Harold Wimberly, Judge
No. E2012-00934-COA-R3-CV - Filed June 18, 2013
In this appeal, we are asked to determine whether the trial court properly denied the
defendants’ motion to compel arbitration and to stay proceedings. The defendants assert that
Ms. Webb signed an agreement to arbitrate “all controversies” when she opened the
brokerage account with them. The trial court determined, inter alia, that the arbitration
agreement was not enforceable under state law, that Ms. Webb did not agree to arbitration,
and that the account representative fraudulently induced Ms. Webb to enter into the
agreement. We affirm the decision of the trial court only as to arbitration; we vacate any
findings that go to the merits of the underlying case and remand for further proceedings.1
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court
Affirmed in Part and Vacated in Part; Case Remanded
J OHN W. M CC LARTY, J., delivered the opinion of the Court, in which D. M ICHAEL S WINEY
and T HOMAS R. F RIERSON, II, JJ., joined.
Mark D. Griffin, Kristine L. Roberts, and William E. Routt, III, Memphis, Tennessee, for the
appellants, First Tennessee Brokerage, Inc., and Michael Conaty.
John A. Lucas and Lane E. McCarty, Alcoa, Tennessee, for the appellees, Franda Webb, and
D.P., a minor, by and through his legal custodian, Franda Webb, citizens and Residents of
Knox County, Tennessee.
1
Our first opinion in this case was filed on April 23, 2013. The appellants thereafter filed a petition
to rehear that contained a meritorious assertion. Accordingly, we granted the petition, withdrew our original
opinion, and now submit this substitute opinion.
OPINION
I. BACKGROUND
In early 2008, Franda Webb had an account at First Tennessee Bank (“FTB”) holding
money saved from her earnings as a nurse and as an office administrative worker.2
According to Ms. Webb, she had set aside these funds to provide for the special educational
needs of her son, D.P.3 She previously had invested the money at issue in FDIC insured FTB
certificates of deposit (“CDs”) and savings accounts. Seeking higher interest rates, she asked
employees at her FTB branch whether there were any safe, conservative investment options
that would produce higher income than a savings account or a CD. She was directed to the
defendant, Michael Conaty, a financial advisor at First Tennessee Brokerage, Inc. (“FTBR”),
FTB’s wholly owned subsidiary.
Ms. Webb and her husband, David Everhart, first talked on the telephone with Mr.
Conaty on January 8, 2008. According to Ms. Webb and Mr. Everhart, during this
conversation, they emphasized to Mr. Conaty the special needs of D.P. and their desire to
invest the money to be held for his educational needs. They repeatedly stressed, however,
that the principal had to be fully protected and not put at risk. Between that initial call and
February 14, 2008, Ms. Webb had several other conversations with Mr. Conaty, but she
stated they never discussed any specific investment. She contends that in each of the
conversations, she repeatedly emphasized D.P.’s disabilities, that his educational needs were
quite expensive, and that she wanted any investment of the funds for him to be totally secure.
Ms. Webb stated that Mr. Conaty always assured her, as he had her husband, that he would
take special care to make sure that their objectives and D.P.’s needs were met.4
Ms. Webb contends that on the morning of February 14, 2008, Mr. Conaty called her
to inform her that he had found a suitable investment vehicle – an investment in Lehman
Brothers bonds (“the Bonds” or “Lehman Brothers Bonds”). According to Ms. Webb, Mr.
Conaty stated: “I have something that I think will suit you just fine. It has an income
component to it, it will preserve your princip[al], and it’s the safest thing that I’ve been able
2
The defendants contend that at the time the Bonds were purchased, Ms. Webb and her husband were
multi-millionaires and that the amount in the account at issue constituted well below 10 percent of the
couple’s net worth.
3
D.P. suffers from severe disabilities and extreme emotional problems. He is in his mid teens, but
can only read and write at the second grade level. His special educational needs can only be met through
expensive private schooling.
4
Mr. Everhart’s testimony mirrored that of his wife.
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to locate for you.” Ms. Webb further testified regarding her discussion with Mr. Conaty:
A. He told me that they were Lehman Brothers bonds; that Lehman
Brothers was one of the most secure houses in the United States; that
they were old; they were reputable; they were safe; they were paying
this high interest rate over six percent5 on the amount of money that I
had to invest; that they would return me almost $19,000 a year. And
that there was a one-day window of opportunity for me to invest, and
that I would need to make a decision as early as possible.
Q. Did you understand what he meant by one-day window of opportunity?
A. To me that meant get it today or you don’t get it.
Mr. Conaty acknowledged during his hearing testimony that he told Ms. Webb the Bonds
were a “one-day opportunity”:
Q. Now, let’s turn to the 14th of February. I take it we can now agree on
the fact that you did tell her essentially that these bonds were – in words
to this effect, they were a one-day opportunity?
A. Yes, sir.
***
A. I said she had a one-day opportunity to buy these bonds.
Mr. Conaty went on to explain that because February 14th was the final day of the initial
public offering for the Bonds, in his view it was a true statement that Ms. Webb had one day
to get the bonds at the offered price.
Later in the day on February 14th, Ms. Webb decided to purchase the Bonds described
by Mr. Conaty. Because she understood that she had to purchase the Bonds that day, she
went to a branch of FTB and told an employee that she wanted to buy the Bonds Mr. Conaty
had recommended to her. Around 4:00 p.m., Ms. Webb met with Mr. Conaty. She testified
that she agreed to invest $300,000, emphasizing to him once again that the investment had
to be totally secure in order to be available to meet D.P.’s special educational needs.
According to Ms. Webb, Mr. Conaty recommended concentrating the entire $300,000 in only
5
The Bonds were offered at 6.25%.
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one investment – the Lehman Brothers Bonds. As it was late in the day, Ms. Webb stated
she grew concerned that she might miss the “one-day window of opportunity,” but Mr.
Conaty assured her that she did not have to worry and that he would “take care of that.”
To initiate the investment process, Mr. Conaty downloaded a 14-page document from
a computer. Ms. Webb recalled that as Mr. Conaty went through the pages, he would ask her
questions and fill in the blanks. He handed Ms. Webb the pages that required her signature.
The first five pages were the “Personal Brokerage Account Application.” Those pages relate
to the customer’s background and investment objectives and do not contain an arbitration
clause.6 Pages 6 and 7, the “Customer Agreement,” are identical. They are the only pages
signed where the customer states that he/she has “agreed to the terms set forth in the
Customer Agreement herein . . . .” One copy is kept by FTBR; the other copy is the
customer’s copy. Pages 8-10 and the top of page 11 reflect the “Brokerage Account
Customer Agreement.” The arbitration clause appears on page 11. Pages 12-14 are not
relevant to the present dispute.
According to Ms. Webb, the documents Mr. Conaty gave her to sign did not include
an arbitration agreement. She testified unequivocally that she had never seen and did not
receive an arbitration agreement and that they never discussed one. Ms. Webb further noted
that at no time prior to the collapse of Lehman Brothers did Mr. Conaty or anyone at FTBR
give her a prospectus for the Bonds.
Mr. Conaty testified that neither Ms. Webb nor her husband ever told him that the
investment was for their son. He noted that Ms. Webb first mentioned D.P. when Mr. Conaty
was gathering the account information, but she did not indicate she was investing the money
for the benefit of her son. He claimed to not recall whether Ms. Webb told him that she
desired a “very safe investment.” According to Mr. Conaty, prior to February 14, 2008, he
recommended a “variety of investment options” to Ms. Webb, including the Lehman
Brothers Bonds at issue. Mr. Conaty specifically related as follows:
Q. Can you tell the Court anything today that you told her about what risk
went along with these bonds?
A. That these were issued by the Lehman Brothers Corporation; they
carried a coupon of six and quarter percent, and I would have
mentioned the expiring date. And I’m sure that’s – I mentioned that.
I don’t recall whatever else we talked about.
6
Ms. Webb stated Mr. Conaty answered the questions regarding her purported investment knowledge.
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Q. Did you tell her that it could be difficult [to] sell these bonds if she
decided she wanted to?
A. No, sir.
Q. Did you tell her there was no established trading market for –
A. I would not have told her that, no, sir.
Q. And you wouldn’t have told her, I think you may have earlier, that they
weren’t listed on any securities exchange. You did tell her that?
A. No, sir.
Q. And did you tell her that there was no assurance that they would ever
be sold in the secondary market?
A. I would not have told her that, no, sir.
Q. And you didn’t give her a prospectus?
A. No, sir.
Q. And you did not give her any written promotional or sales materials that
disclosed the risk, did you?
A. The prospectus and those details were not available at the time.
Q. Well, did you give her any written sales materials that disclosed the risk
of bonds just generally?
A. No, sir.
Q. Did you give her any written sales or promotional materials that had
caveats or warnings in it about the risk of having 100 percent of this
investment in one product?
A. I don’t believe I did.
According to Mr. Conaty, after the documents were completed, Ms. Webb took all 14
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pages home with her, as the account was apparently initially set up to list her husband as a
joint tenant, and Mr. Everhart’s signature was required. The defendants note that Ms. Webb
therefore had the rest of the day and night to review the documents. The following day, Ms.
Webb appeared at the FTB branch, gave the documents to an employee with instructions to
send them to Mr. Conaty, and drafted a note to Mr. Conaty that indicated she desired the
account to be opened as an individual account in her name only rather than a joint one. The
FTB employee sent the materials to Mr. Conaty’s office via fax and interoffice mail.
Over the months that followed the purchase of the Bonds, other than providing a
monthly account statement in the mail, FTBR and Mr. Conaty never advised Ms. Webb to
cut her losses and sell the Bonds. Ms. Webb stated that Mr. Conaty assured her the
investment was safe.7 After the bankruptcy filing by Lehman Brothers on September 14,
2008, the majority of Ms. Webb’s investment was lost.
Prior to filing this action, Ms. Webb went to FTBR twice to retrieve copies of the
account documents in her file. In late July 2009, she requested her entire file from Mr.
Conaty’s office. She was given seven pages. No arbitration agreement was included in the
pages she received. Further, upon reviewing the file, Ms. Webb realized that there was a gap
in the numbered pages. She thereafter returned to FTBR to again ask for her complete file.
FTBR responded that it did not have any additional documents related to her account. Thus,
no copy of the arbitration agreement was in Ms. Webb’s file.8
After Ms. Webb initiated this lawsuit, the defendants filed a motion to compel
arbitration. The trial court conducted two extensive hearings on the motion. Ms. Webb
testified that she did not understand that the Bonds were just promissory notes by Lehman
Brothers. She related that she did not know what “par” meant and she had no grasp of the
relationship between risk and reward. She told the court the following:
Q. If it had been disclosed to you that these bonds were a more risky
investment than your certificates of deposit, would you have signed an
7
The defendants note that in early September 2008, Ms. Webb worked with Mr. Conaty to use her
FTBR brokerage account to post a bond in connection with a lawsuit. They observe that by this action, she
subjected the account to loss pending the outcome of the litigation. The defendants contend that it was only
after this lawsuit was instituted that Ms. Webb claimed D.P. had some interest in the account.
8
According to the defendants, it was their customary practice to provide the customer with a copy
of the entire account document once it was completed, excepting only duplicative brokerage copies of the
Customer Agreement and certification of disclosure, and to maintain for FTBR’s records only those pages
executed or otherwise filled out by the customer. Accordingly, pages one through six and page 12 were the
only pages kept in Ms. Webb’s file by FTBR.
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account agreement with First Tennessee Brokerage?
A. No, sir.
Q. Okay. On that, do you understand -- tell the Court, what is your
understanding about the correlation in investments between risk and
reward?
A. I have no understanding of that as it relates to investments or accounts
or stuff.
Q. Did you have any understanding from your conversations with Mr.
Conaty or anyone else, that by investing in Lehman Brothers notes or
bonds with a higher interest rate, that that was a more risky investment
than your CDs had been?
A. No, sir.
Q. You didn’t know that?
A. No. He did not explain anything to me about the risk. He kept telling
me how safe they were; what a good house Lehman Brothers was; what
a good return; that it met everything that I needed for [D.P.].
Q. If you had known that you could have purchased these bonds after
February 14th or 15th, how would that have affected your decision to
sign this document?
A. I would have waited until David [Everhart] got home and we could
look it up and we could find out more about it.
The lengthy order denying the defendants’ arbitration request was issued on March
30, 2012, and provided as follows:
The claims against Mr. Conaty are not arbitrable.
1. The claims against the Defendant Michael Conaty (“Conaty”) are not
arbitrable for the following reasons:
a. Conaty is not a party to the alleged arbitration agreement. The arbitration
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clause relied upon by the Defendants provides as follows:
All controversies that may arise between Customer and FTBR
(including, but not limited to controversies concerning any
brokerage account, order or transaction, or the continuation,
performance, interpretation or breach of this or any other
agreement between Customer and FTBR, whether 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 New York Stock Exchange, Inc., or
FINRA, Inc.,9 as Customer may designate. If Customer does not
notify FTBR in writing of Customer’s designation within five
(5) days after Customer receives from FTBR a written demand
for arbitration, then Customer authorizes FTBR to make such
designation on Customer’s behalf. Customer understands that
judgment upon any arbitration award may be entered in court of
competent jurisdiction.
b. On its face, the arbitration clause does not require arbitration of
controversies between the customer and a sales representative such as Mr.
Conaty and does not include agents, employees or sales representatives such
as Mr. Conaty. “FTBR” is defined in multiple places in the agreement as First
Tennessee Brokerage, Inc. This omission contrasts sharply with agreements
used by other brokerage firms. See, e.g., Morgan Keegan New Account Client
Agreement (Tab 4 to Exhibit 15) (“You agree and, by accepting, opening or
maintaining any account for you, Morgan Keegan agrees that all controversies
between you and Morgan Keegan (or any of Morgan Keegan’s present or
former officers, directors, agents, or employees) . . . shall be resolved by
arbitration.”); Schwab One Brokerage Account Application (tab 6 to Exhibit
15) (“This arbitration agreement will be binding upon and inure to the benefit
of the parties hereto and their respective representatives, attorneys in-fact,
successors, assigns and any other persons having or claiming to have legal or
beneficial interest in the Account, including court-appointed trustees and
receivers.”).
c. The Defendants rely upon p. 12 of Exhibit 3 which reads as follows: “I am
purchasing a product from a representative of First Tennessee Brokerage, Inc.
(FTBR). The Court finds, however, that as a matter of contract construction,
9
[Financial Industry Regulatory Authority].
-8-
this reference to “FTBR” does not include account representatives such as Mr.
Conaty for several reasons. First, the context shows that “FTBR” refers to
First Tennessee Brokerage, Inc. Even if the document is ambiguous, the
ambiguity must be construed against the drafter, FTBR. Moreover, the
following sentences on the same page make clear that “FTBR” refers to the
corporation, not to individual representatives: “FTBR, a wholly owned
subsidiary of FTB, is a member of the FINRA and SIPC . . . . First Horizon
Investment Services is a division of FTBR.” Similarly, another paragraph on
the same page makes clear that FTBR and its registered representative are not
the same: “FTBR and its registered representatives will receive compensation
in connection with the sale of mutual funds to its customers. Compensation
to FTBR and/or its registered representatives may vary depending upon the
specific mutual fund investment purchased.” (emphasis added). Finally, as
noted above, “FTBR” was defined previously in the same document to include
only First Tennessee Brokerage, Inc., not account representatives. Those
definitions all precede the arbitration clause relied upon by FTBR. The
language on p. 12, however, follows the arbitration clause.
d. There is a lack of mutuality in that there is nothing in the alleged arbitration
agreement that would require Mr. Conaty to arbitrate all disputes with Ms.
Webb. Because of this lack of mutuality, the Plaintiffs cannot be forced to
arbitrate their claims against Conaty. C.O. Christian & Sons Co. v. Nashville
P.S. Hotel, Ltd., 765 S.W.2d 754, 757 (Tenn. Ct. App. 1988) (“An arbitration
clause does not bind one not a party to the contract. An arbitration agreement
does not bind either party unless both parties are bound.”).
e. Because Conaty was not a party to the arbitration agreement, the claims
against him are not required to be arbitrated. Frizzell Constr. Co. v.
Gatlinburg, LLC, 9 S.W.3d 79, 84 (Tenn. 1999); C.O Christian & Sons Co. v.
Nashville P.S. Hotel, Ltd., 765 S.W.2d 754, 757 (Tenn. Ct. App. 1988); River
Links at Deer Creek, LLC v. Melz, 108 S.W.3d 855, 860 (Tenn. Ct. App.
2002); Lee Brown and GutterShutter of Nashville, LLC v. David Styles, (TCA
Nashville, No. M2010-024-3-COA-R3-CV, August 18, 2011).
f. FTBR gave a deposition pursuant to Rule 30.02(6), T.R.C.P., in which its
designated representative [Paul H. Mann, President and Chief Compliance
Officer] testified unambiguously that claims against account representatives
such as Conaty were not required to be arbitrated:
Q. Does this agreement require arbitration of claims against
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account representatives?
A. No.
Mann. Dep. at 30.
Q. Is it First Tennessee’s position that claims relating to
brokerage accounts that are made against account
representatives are required to be arbitrated?
THE WITNESS: No.
Id. at 39.
At the hearing, Mr. Mann testified that he had misunderstood the question.
See Transcript of October 14, 2011 hearing at 180. However, the Court does
not accept that testimony. The questions noted above are clear and
unambiguous on their face. In addition, the Court noted that Mr. Mann first
claimed that this testimony was a mistake and that he had misunderstood the
question only after taking a break and consulting with counsel. Mr. Mann
claimed in his testimony at the hearing that he “knew as soon as I answered it,
it was incorrect.” Transcript at 178. His deposition testimony, however,
refutes this testimony. After first testifying very clearly that the agreement did
not require arbitration of the claims against account representatives, 9 pages
later he testified consistent with his first answer that FTBR’s position was that
claims against account representatives were not required to be arbitrated. It
was only after that testimony that a break was taken, Mr. Mann consulted with
counsel, and then changed his testimony.
For the next 10 pages of his deposition, he was questioned about this change
in testimony. Mann Dep. at 41-51. Suffice it to say that in spite of numerous
(17) objections by his counsel, Mr. Mann could not defend his abrupt change
of position or reconcile it with the language of the agreement, including the
repeated definitions of “FTBR.”
The alleged arbitration agreement is not enforceable under Tennessee law.
2. As discussed below, the Court finds that Ms. Webb did not sign an
arbitration agreement with FTBR. Even if she had signed the agreement as
contended by FTBR, however, it is not an enforceable arbitration agreement
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under Tennessee law for the reasons set forth below.
An unconscionable contract of adhesion.
3. The alleged arbitration agreement in this case clearly is a contract of
adhesion. It was a standard form agreement prepared by First Tennessee
Bank’s in-house attorneys. Transcript at 154. It was presented to customers
on a take-it-or-leave-it basis. If the customer did not sign FTBR’s form, FTBR
would not do business with them. Transcript at 71-73. There was no
bargaining over the terms of the contract; the agreement is not something that
a customer can negotiate with FTBR. Id. at 54-55. Hill v. NHC
Healthcare/Nashville, LLC, 2008 Tenn. App. LEXIS 265 (Tenn. Ct. App.
April 30, 2008); Brown v. Karemor Intl., Inc., 1999 Tenn. App. LEXIS 249
(Tenn. Ct. App. 1999) (A contract of adhesion is a “standardized contract form
offered to consumers of goods and services on essentially a ‘take-it-or-leave-it’
basis, without affording the consumer a realistic opportunity to bargain.”);
Buraczynski v. Eyring, 919 S.W.2d 314 (Tenn. 1996).
4. When the Court is faced with contracts of adhesion such as the one at issue
here, the Court must “closely scrutinize” such contracts to determine if they
include terms that are “unconscionable or oppressive.” Raiteri v. NHC
Healthcare/Knoxville, Inc., 2003 Tenn. App. LEXIS 957 (Tenn. Ct. App. Dec.
30, 2003). Their enforceability “generally depends upon whether the terms of
the contract are beyond the reasonable expectations of an ordinary person, or
oppressive or unconscionable.” Howell v. NHC Healthcare - Fort Sanders,
Inc., 109 S.W.3d 731, 734 (Tenn. Ct. App. 2003).
5. The burden is on FTBR “to show that the parties actually bargained over
the arbitration provision or that it was a reasonable term considering the
circumstances.” Brown v. Karemor Intl., Inc., 1999 Tenn. App. LEXIS 249
(Tenn. Ct. App. 1999). FTBR has not carried this burden.
6. In determining whether an arbitration provision is enforceable, in Raiteri,
supra, the Tennessee Court of Appeals has considered a number of factors that
are also present in this case:
* The contract was a contract of adhesion because it was
presented on a take-it-or-leave-it basis. The same is true in this
case.
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* The agreement was eleven pages long. The alleged
agreement in this case is 14 pages long.
* The ADR provisions were on p. 10 of the lengthy agreement.
The arbitration clause in this agreement was on p. 11 of a 14
page document.
* The A[DR] procedures were not “set forth in a separate stand-
alone document.” The same is true in this case. Transcript at
65-66. It is not a stand-alone document, but like the agreement
in Howell, is “buried within the larger document.”
* The agreement did not contain an explanation of how
mediation and arbitration worked. Any such explanation is also
absent from the arbitration clause in this case. The claimed
agreement in this case does not tell the customer how to initiate
arbitration. Transcript at 180-81. In fact, as discussed below,
it is affirmatively misleading.
* The patients’ husband was handed a form contract that he
needed to sign very quickly. As discussed below, in this case
Ms. Webb was told that her opportunity to purchase these bonds
was a “one-day only opportunity.” She was pressured by Mr.
Conaty to buy the bonds that same day (February 14, 2008).
Because of her desire to protect the educational and health
needs of her son she was under substantial pressure to complete
the transaction on February 14, 2008. Time was of the essence
in Howell, because Mrs. Howell had to be placed in a nursing
home expeditiously. In this case Mr. Conaty created a false
sense of urgency by deceiving Ms. Webb into thinking that the
bonds were a “one-day-only” opportunity.
* The A[DR] procedures did not contain any type of “short
explanation” encouraging the patient/consumer to ask questions.
The same is true of the agreement in this case.
* The provision regarding the waiver of a jury trial “is buried --
and in no way highlighted.” The same is true in this case. In
addition, the arbitration clause implies that there might be a
right to trial by jury in the arbitration forum (FINRA) when it
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states that the parties waive the right to a trial by jury “except
as provided by the rules of the arbitration forum in which a
claim is filed.” In FINRA arbitrations, however, there is no
right to a jury. Transcript at 159.
* The ADR procedures seem to imply that the defendant alone
is responsible for choosing the arbitrator. The same is true in
this case. The arbitration clause appears to contemplate only
FTBR making a written demand for arbitration, and the
customer then designating the appropriate arbitration forum.
There is no reference in the arbitration clause to the customer
making a demand for arbitration.
* The waiver of a jury trial was “printed in the same font size,
type and color as the rest of the agreement.” The same is true in
this case. The reference to waiving the right to a jury trial
except as provided by the rules of the arbitration forum is in the
same small font size, type and color, as the preceding three
pages, and most of the remainder of the agreement. Although
certain language is in larger font size and bold-face font, the
language about the jury waiver is not.
See also Howell, supra, where the Court held:
The foregoing authorities support the Trial Court’s
determination that the arbitration clause should not be enforced
under the circumstances. The Agreement is eleven pages long,
and the arbitration provision is on page ten. Rather than being
a stand-alone document, it is ‘buried’ within the larger
document. It is written in the same size font as the rest of the
agreement, and the arbitration paragraph does not adequately
explain how the arbitration procedure would work, except as
who would administer it.
Contrast Buraczynski v. Eyring, 919 S.W.2d 314 (Tenn. 1996) where the
Supreme Court held:
[t]he patient is clearly informed by a provision in 10-point
capital red type directly above the signature line, that ‘by signing
this contract you are giving up your right to a jury or court trial’
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on any medical malpractice claim.
7. As noted above, the Tennessee Appellate Courts have considered as a
factor whether an arbitration agreement adequately informs the consumer
about how to commence arbitration. See Howell v. NHC Healthcare - Fort
Sanders, Inc., 109 S.W.3d 731, 734 (Tenn. Ct. App. 2003); Raiteri v. NHC
Healthcare/Knoxville, Inc., 2003 Tenn. App. LEXIS 957 (Tenn. Ct. App. Dec.
30, 2003). The alleged arbitration agreement in this case contains no such
instruction or explanation. Moreover, the agreement is affirmatively
misleading. The directions in FTBR’s standard form to call one of two
telephone numbers [are] also misleading. On p. 6, it states:
TO FILE A COMPLAINT, CONTACT
FIRST TENNESSEE BROKERAGE, INC., 530 OAK COURT DRIVE, SUITE 200, MEMPHIS,
TN 38117, 800-238-1111 OR 901-818-6000
Coupled with the language in the arbitration clause on p. 11, this language
would lead a reasonable customer to think that to file a complaint to initiate
arbitration the customer should follow those directions. That is, however,
misleading.
8. As noted above, the reference to the waiver of a right to a jury trial is
misleading. In Hill, supra, the Court of Appeals examined a nursing home’s
admissions contract which included an arbitration clause and waiver of jury
trial. The Court of Appeals noted that it was not clear that the “text indicating
the patient’s surrender of her right to a jury trial was sufficiently distinct from
the rest of the contract to alert her to the fact that she was giving up such an
important right.” The same is true here.
9. FTBR’s chief of compliance, Mr. Mann, testified that if you call that
number, FTBR would not initiate arbitration. Ms. Webb indicated that she did
call the 1-800 number, but received no help. They first referred her to Mr.
Conaty. When she told them that the complaint concerned Mr. Conaty, they
referred her to his supervisor. She told them that the complaint also concerned
his supervisor. They did not refer her to Mr. Mann or offer any other help.
10. The Court also must consider the oppressive nature of the fees that the
Claimant would have to pay in order to engage in arbitration in this case. As
the Court of Appeals held in Hill v. NHC Healthcare/Nashville, LLC, 2008
Tenn. App. LEXIS 265 (Tenn. Ct. App. April 30, 2008):
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Thus, we conclude that an agreement to arbitrate that . . . places
excessive cost on the claimant as a precondition to arbitration
may be unconscionable because of the inequality of the bargain,
the oppressiveness of the terms, or the one-sided advantage to
the drafter. Consequently, the cost to initiate or pursue
arbitration of the wrongful death claim in the case before us is
a factor to be considered in determining whether the agreement
to arbitrate is enforceable.
The Court declined to consider whether such costs could be shifted to the
losing party, on the grounds that the mere payment of the up-front costs,
regardless of any later cost-shifting, could be a deterrent to filing an arbitration
claim.
11. The cost of arbitration was also considered by the Court in Cooper v.
MRM Investment Co., 199 F. Supp. 2d 771 (M.D. Tenn. 2002). Like the court
in Hill, the Court also placed great weight upon the large fees that the plaintiff
would have to pay for arbitration under the rules of the AAA. The Court noted
that the “AAA rules impose a number of fees and costs that Plaintiff would
have to bear as the ‘initiating party.’ Requiring a party to pay fees and costs,
over and above what that party would have to pay in a court, may deprive that
party of the right to vindicate his or her rights.” The Court also noted that the
plaintiff would have had to pay at least a part of the arbitrator’s fees, as well
as “various other fees that surpass the modest filing fees charge by the Federal
Courts.” The same is true in this case. Based upon reasonable assumptions of
a 3-day hearing, an initial and final status conference, and two contested
motions, the arbitration fees would exceed $13,000. Transcript at 187-92.
12. These significant fees do appear to be a deterrent to filing claims. Mr.
Mann testified that FTBR had only been involved in two or three customer
arbitrations during the 25-year period of its existence. It is inconceivable to
the Court that a company in the securities business such as FTBR would only
have two or three disputes over the course of its 25 year existence. Although
it is impossible to know how many customers had complaints against FTBR
over a 25-year period, and how many might have asserted lawsuits if they
thought that option were available to them, the Court can reasonably infer from
these statistics that customers are discouraged from filing arbitration claims
because of the high out-of-pocket cost of filing and pursuing such claims. In
this case, the filing fee alone would have been $1,575.00. Transcript at 188.
As noted above, even under a relatively conservative estimate, the arbitration
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fees would exceed $13,000. Transcript at 184-91.
Fraud in the inducement.
13. Claims of fraud in the inducement are not arbitrable. Frizzell
Construction Co., Inc. v. Gatlinburg, L.L.C., 9 S.W.3d 79 (Tenn. 1999); City
of Blaine v. John Coleman Hayes & Associates, Inc., 818 S.W.2d 33, 37
(Tenn. Ct. App. 1991).
14. The Court finds that Ms. Webb was fraudulently induced to enter into the
agreement with FTBR, which it contends includes the arbitration clause.
15. Conaty fraudulently induced Ms. Webb into signing the contract based
upon the representation that the opportunity to purchase a Lehman Brothers
bond was a “one-day only opportunity,” and that she needed to make a quick
decision. Transcript at 58, 64, 203. This was not true. This was a new issue
of Lehman Brother[s] bonds, and the Initial Offering Period (“IOP”) expired
on February 14. It is undisputed, however, that after that date the same bonds
could be purchased on the secondary market, although the price might vary.
Transcript at 58-60 (Conaty testimony); 153 (Mann testimony); 289-90 (Harr
testimony). Mr. Conaty admits that he did not tell Ms. Webb that she could
buy the same bonds on the secondary market after February 14, 2008. Id. at
60. Conaty’s representation that the bonds were a “one-day only opportunity”
was a false representation of material fact that fraudulently induced Ms. Webb
into entering into the agreement. In addition, his failure to disclose that the
same bonds could be purchased on the secondary market after [the] IOP was
a material omission that also fraudulently induced her to enter into the
agreement.
16. Mr. Conaty attempted to justify his statement about the “one-day only
opportunity” by claiming that the expiration of the IOP was a material fact that
he was obligated to disclose. In the Court’s view, that is highly questionable.
It amounts to a claim that the price of the bonds could be different the next
day. It is well known that the price of bond or any security can fluctuate daily,
or even hourly. The Court therefore has substantial questions about whether
the fact that the IOP would expire and that the price for the bonds would
fluctuate thereafter was a material fact that a sales representative was obligated
to disclose. Nevertheless, even if that were true, Mr. Conaty’s disclosure was
incomplete and misleading. If it was material that February 14 was the last day
of the IOP when the bonds could be bought at par, then it was equally material
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to disclose that the bonds could still be purchased after the close of the IOP at
a price that might be higher, might be lower, or might even be the same as the
price during the IOP. Mr. Conaty’s failure to disclose this created a false sense
of urgency that was fraudulent and induced Ms. Webb into signing the
agreement at issue.
17. Mr. Conaty’s explanation that he presented the bonds as a “one-day only”
opportunity because the opportunity to buy them at par expired on February 14
also appears to have been contrived after the fact. At his deposition Mr.
Conaty was specifically asked, “What was the advantage to her purchasing
from the issuer as opposed to the secondary market?” Mr. Conaty’s answer
was, “The advantage to her is that she could buy them that day from me.” He
did not mention that the advantage that she could purchase them that day at par
value. See Transcript at 64.
18. Conaty also fraudulently induced Ms. Webb to enter into the agreement
that FTBR contends contained the arbitration clause by representing that the
bonds were a suitable investment for her and her son’s needs. Contrary to his
representations, the bonds were not a suitable investment, and his
representations that they were suitable were fraudulent and induced Ms. Webb
into making this investment under the false time pressure created by Mr.
Conaty.
19. Both Ms. Webb and her husband, Mr. Everhart, testified extensively that
both of them repeatedly advised Mr. Conaty about their son’s special
educational and medical needs. Transcript at 208, 227 and 253 (Webb
testimony); 304 and 307 (Everhart testimony). Mr. Conaty denied knowing
this. His denial, however, is not credible in view of Ms. Webb and Mr.
Everhart’s extensive testimony to the contrary.
20. Because of her son’s special needs, Ms. Webb repeatedly advised Mr.
Conaty that this investment had to be completely safe. Here the Court notes
that there is a contradiction between Ms. Webb’s desire for a higher rate of
return and a completely safe investment. Based upon her testimony, however,
it is obvious that she did not understand the relationship between risk and
reward. See Transcript at 273-74. She obviously was not an experienced or
sophisticated investor and Mr. Conaty did not explain to her that her stated
investment objectives were not realistic. He admits that he never discussed
anything about the risk of these bonds with her. Transcript at 261-62. The
bonds at issue were rated “A,” which is the third tier of investment grade
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bonds.10 In view of Ms. Webb’s stated investment objectives that the bonds
had to be completely safe in order to provide for her son’s special education
and health needs, an investment in a single A rated bond was inappropriate and
unsuitable.
21. In addition, the 100% investment in a single series of bonds was an
unsuitable investment because of the concentration and lack of diversification.
It is akin to “putting all of your eggs in one basket.” This violates a
fundamental principle of investing. Transcript at 290-91. Even Mr. Conaty
admitted that putting 100% of a client’s investment in bonds was not suitable
if the client’s investment objective was capital appreciation. In Ms. Webb’s
account application the indicated investment objective was capital
appreciation. Transcript at 49.11
Ms. Webb did not agree to arbitration.
22. The burden is on the Defendants to show that Ms. Webb agreed to
arbitrate this dispute. They have not done so.
23. The Defendants did not introduce an arbitration agreement signed by Ms.
Webb. She testified that she never saw an arbitration agreement, and that Mr.
Conaty did not discuss it with her. Transcript at 265-66. Mr. Conaty
downloaded the account application form from a computer. The pages were
loose, not stapled together. Id. at 265. Mr. Conaty testified that his normal
practice is to keep a copy of the pages that are the “brokerage copy” and that
the customer takes the “customer copy” pages. Transcript at 22. Somewhat
inconsistent with that, he testified that in this case he gave the complete
agreement to Ms. Webb for her to take home to obtain her husband’s signature.
Ms. Webb testified that the arbitration agreement was not part of the package
that she reviewed and that she never saw it and never discussed it with Mr.
Conaty. Transcript at 265-66.
24. The next day (February 15, 2008), Ms. Webb went to First Tennessee
Bank and gave it the documents that she had been given by Mr. Conaty to take
home with her. The Bank faxed [s]ome of these documents to Mr. Conaty’s
10
The Moody’s rating for investment grade bonds are AAA, AA, A and BBB. The bonds rated below
BBB are considered “junk bonds.” Transcript at 286-87.
11
Ms. Webb testified that Mr. Conaty completed this portion of the application.
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assistant, Diana Gonzales. No one, however, was able to testify what
documents were faxed to FTBR to enable it to open the account. Transcript
at 106, 108-10 and 128. However, it is undisputed that the fax, which
consisted of either 3 or 4 pages, did not include all of the pages that were
necessary to properly open the account. Transcript at 127-28. The account
therefore had not been properly opened when the bonds were purchased. Stacy
Anderson Madar, a bank employee, testified that she put certain documents in
the interoffice mail and sent them to Mr. Conaty at FTBR. She does not know,
however, what pages she included in the interoffice mail. Id. at 113.
25. Ms. Webb testified unequivocally that she had never seen and did not have
an arbitration agreement. FTBR has been unable to produce an arbitration
agreement that she signed, or that was even a part of the package of documents
that she signed. It therefore has not carried its burden of proof to show that
there was a binding arbitration agreement.
FTBR’s forms are not a binding, enforceable agreement to arbitrate.
26. Strangely, FTBR’s form agreement does not contain any language where
the customer expressly agrees to arbitrate. The arbitration clause, which
appears on p. 11, does not contain a place for the customer to sign. Neither on
that page nor elsewhere in FTBR’s form, does the customer expressly say that
she agrees to arbitrate. This omission contrasts with agreements used by other
brokerage firms. See, e.g., Tabs 4, 5, and 6 to Exhibit 15. The closest that
FTBR’s form agreement comes to language expressly agreeing to be bound is
on p. 7 (customer copy) which states: “I REPRESENT THAT I HAVE READ
THE TERMS AND CONDITIONS GOVERNING THIS ACCOUNT AND
AGREE TO BE BOUND BY SUCH TERMS AND CONDITIONS AS
CURRENTLY IN EFFECT AND AS MAY BE AMENDED FROM TIME
TO TIME.” (emphasis added). It is undisputed, however, that “terms and
conditions” refers to pp. 8-10 and the top portion of p. 11, and does not include
the “Brokerage Account Pre-dispute Arbitration Agreement” discussed below.
Transcript at 67-68. Notably, that portion of p. 11 indicates that the customer
must sign an arbitration agreement. Ms. Webb, however, has not done so.
27. The only other language in which the customer expressly agrees to
anything in FTBR’s form is on p. 6 where the customer acknowledges “that I
have read, understood and agreed to the terms set forth in the Customer
Agreement herein . . . .” (emphasis added). The remainder of the form makes
clear that the “Customer Agreement” which begins on p. 8 is different from the
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“Pre-dispute Arbitration Agreement” which is on p. 11.
28. Page 6 also states “THIS ACCOUNT IS GOVERNED BY A PRE-
DISPUTE ARBITRATION AGREEMENT, WHICH APPEARS ON PAGE
10 (Customer Copy).” Page 10, of course, does not include the Pre-dispute
Arbitration Agreement. The reference to page 10 obviously is an error. More
importantly, however, this sentence lacks the language of the preceding
sentence where the customer expressly “agree[s] to be bound.” The Court
believes that when a party is foregoing a right as fundamental as a right to a
trial by jury, there should be an express agreement to waive that right, which
is absent here. See Cooper v. MRM Investment Co., 199 F. Supp. 2d 771 (M.D.
Tenn. 2002) (holding that the waiver of the right to a jury trial “must be both
knowing and clear. If the employee is not clearly made aware of [his/her]
rights [he/]she is waiving, that waiver is not only invalid, but the entire
agreement is rendered unduly oppressive.”).
29. Finally, p. 6 includes the following language: “I ACKNOWLEDGE
RECEIPT OF THE BROKERAGE ACCOUNT CUSTOMER AGREEMENT
ON PAGE 8, PRE-DISPUTE ARBITRATION AGREEMENT ON PAGE 11
. . . .” This acknowledgment of receipt falls short of an express agreement to
arbitrate.
The claims by the minor Plaintiff are not arbitrable under any
circumstances.
30. It is well established that in Tennessee, that arbitration clauses are not
binding on third parties who are not parties to the contract. Cocke County Bd.
of Highway Comm’rs v. Newport Utilities Bd., 690 S.W.2d 231, 237 (Tenn.
1985) (“However, arbitration clauses are not binding on third parties who are
not parties to the contract.”); Jackson v. Chambers, 510 S.W.2d 74 (Tenn.
1974) (“The defendant . . . was not a party to the lease contract and was not
bound by the agreement to arbitrate.”). The minor plaintiff, D.P., was not a
party to any arbitration agreement, and it would not be binding even if he were.
31. The minor Plaintiff is a third-party beneficiary of the agreement to
purchase the Lehman Brothers bonds to provide for his medical and
educational needs. He is entitled to assert claims and, as a minor, is not bound
by the arbitration clause. Even an adult third-party beneficiary is not bound by
an arbitration clause when he sues on legal theories not seeking to enforce the
terms of the contract. See Benton v. Vanderbilt University, 137 S.W.3d 614,
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620 (Tenn. 2004).
(Emphasis in original.). From the trial court’s order, the defendants filed this timely appeal.
II. ISSUE
The defendants assert the issue on this appeal is whether the trial court erred in
denying the motion to compel arbitration. The defendants make several arguments.
III. STANDARD OF REVIEW
When ruling on the appeal of a denial of a motion to compel arbitration, we must
follow the standard of review that applies to bench trials. Spann v. American Express Travel
Related Servs. Co., 224 S.W.3d 698, 706-07 (Tenn. Ct. App. 2006). Under that standard,
review of the trial court’s findings of fact are “de novo upon the record of the trial court,
accompanied by a presumption of the correctness of the finding unless the preponderance of
the evidence is otherwise.” Tenn. R. App. P. 13(d). Questions of law are reviewed de novo
without a presumption of correctness. Johnson v. Johnson, 37 S.W.3d 892, 894 (Tenn.
2001).
We afford great deference to the trial court’s assessment of the credibility of the
witnesses, and we will not reassess factual findings on witness credibility unless clear and
convincing evidence supports a different finding. Coleman Mgmt., Inc. v. Meyer, 304
S.W.3d 340, 348 (Tenn. Ct. App. 2009).
IV. DISCUSSION
The defendants initially note that in this action the trial court adopted verbatim the
proposed 16-page order drafted by the plaintiffs’ counsel. They assert the order was drafted
by counsel prior to the ruling after the evidentiary hearing. The defendants argue the trial
court’s order contains numerous errors.
The issue of party-prepared orders has been addressed recently by this court. See
Smith v. UHS of Lakeside, Inc, No. W2011-02405-COA-R3-CV, 2013 WL 210250, at *8-11
(Tenn. Ct. App. Jan. 18, 2013); Beach Cmty. Bank v. Labry, No. W2011-01583-COA-R3-
CV, 2012 WL 2196174, at *5 (Tenn. Ct. App. June 15, 2012). In Labry, we observed that
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after the adoption of the Tennessee Rules of Civil Procedure, the Supreme
Court, in Delevan-Delta Corp. v. Roberts, 611 S.W.2d 51 (Tenn. 1981),
recognized that “the thorough preparation of suggested findings and
conclusions by able counsel can be of great assistance to the trial court.” Id.
at 52-53. Accordingly, the Supreme Court held that “although it is improper
for the trial court to require counsel to prepare findings, it is permissible and
indeed sometimes desirable for the trial court to permit counsel for any party
to submit proposed findings and conclusions.” Id. at 53.
The decision in Roberts was discussed in detail by this Court in Madden
Phillips Const., Inc. v. GGAT Development Corp., 315 S.W.3d 800 (Tenn. Ct.
App. 2009). According to this Court:
The Roberts court offered guidance to lower courts when
establishing findings of fact. The court maintained a clear
preference for factual findings that are a product of the judge’s
own labor. Id. The Roberts court recognized, however, that
other procedures sufficiently maintain the independence and
impartiality of courts that adopt party-prepared findings. The
court stated that trial judges may rely on party-prepared findings,
so long as they carefully review proposed findings to ensure that
the findings reliably reflect the court’s opinion based on the
testimony and evidence produced at trial. Id. The court also
recognized a need to ensure that the proposed findings dispose
of all relevant issues. Id. The court advised trial courts to
“ascertain that [party-prepared findings] adequately dispose of
all material issues, and to assure that matters not a proper part of
the determination have not been included.” Id.
Id. at 810-11.
Labry, 2012 WL 2196174, at *5. Accordingly, party-prepared orders are allowable under
the following circumstances: (1) the trial court does not require counsel to prepare the
orders; (2) the trial court carefully reviews the orders to ensure that the conclusions reliably
reflect the court’s opinion; (3) the orders dispose of all relevant issues; and (4) no matters not
a proper part of the determination are included. Id. (citing Madden Phillips, 315 S.W.3d at
811). See also Airline Constr., Inc. v. Barr, 807 S.W.2d 247, 253 (Tenn. Ct. App. 1990)
(noting that the chancellor’s opinion reproduced verbatim the proposed findings of
defendant).
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We find nothing in the record indicates that the order entered does not reflect the trial
court’s view of the case. There is no indication that the trial court did not review the findings
to ensure that they disposed of all the issues before it. Accordingly, we hold that the trial
court’s decision to adopt the proposed order of the plaintiffs was not reversible error. The
findings are entitled to the ordinary presumption of correctness.
A.
ARBITRATION AGREEMENT
The defendants contend that the trial court erred when it failed to enforce the
arbitration provision in the agreement. They argue that “[b]ecause the sale of bonds involves
interstate commerce, the FAA [Federal Arbitration Act] governs the contract in this case.”
See Morgan Keegan & Co. v. Smythe, No. W2010-01339-COA-R3-CV, 2011 WL 5517036,
at *6 (Tenn. Ct. App. Nov. 14, 2011) (“Numerous courts have concluded that securities
transactions clearly involve interstate commerce and that, therefore, the arbitration
agreements connected with such transactions are subject to enforcement under the FAA.”).
The defendants further assert that the arbitration agreement is a separate document from the
provisions of the Customer Agreement governed by the Tennessee choice-of-law provisions
and that the arbitration agreement provides it is governed by the Federal Arbitration Act.
The Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 2, et seq., “is a congressional
declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any
state substantive or procedural policies to the contrary.” Asplundh Tree Expert Co. v. Bates,
71 F.3d 592, 595 (6th Cir. 1995) (quoting Moses H. Cone Mem’l Hosp. v. Mercury Constr.
Corp., 460 U.S. 1, 24, 103 S. Ct. 937 (1983)). It mandates that arbitration clauses in
commercial contracts “shall be valid, irrevocable, and enforceable, save upon such grounds
as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. The FAA
applies to all state and federal cases in which the contract at issue requiring arbitration
involves or affects interstate commerce. Southland Corp. v. Keating, 465 U.S. 1, 10, 104
S. Ct. 852 (1984); Frizzell Constr. Co. v. Gatlinburg, LLC, 9 S.W.3d 79, 83-84 (Tenn. 1999)
(discussing the interstate commerce requirement). Accordingly, the defendants argue that
the FAA is the controlling law in this case and that under it, the trial court did not have
jurisdiction to determine the validity of the agreement.
In a contest involving an arbitration agreement, a court has to decide “certain gateway
matters, such as whether the parties have a valid arbitration agreement at all or whether a
concededly binding arbitration clause applies to a certain type of controversy.” Green Tree
Fin. Corp. v. Bazzle, 539 U.S. 444, 452, 123 S. Ct. 2402 (2003) (citations omitted).
“Generally, whether a valid agreement to arbitrate exists between the parties is to be
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determined by the courts, and if a complaint specifically challenges the arbitration clause on
grounds such as fraud or unconscionability, the court is permitted to determine it[s] validity
before submitting the remainder of the dispute to arbitration.” Taylor v. Butler, 142 S.W.3d
277, 283-84 (Tenn. 2004) (citations omitted).
Both federal and state law allow courts to apply applicable state law defenses to
contract enforcement of arbitration provisions and to decline to enforce such a provision
“upon such grounds as exist at law or in equity for the revocation of any contract.” Tenn.
Code Ann. § 29-5-302; Doctor’s Assoc., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S. Ct. 1652(1996) (holding that generally applicable contract defenses may be applied to invalidate
arbitration agreements without contravening the FAA). Applicable grounds for refusing
enforcement may include the defenses of laches, estoppel, waiver, fraud, duress, and
unconscionability. Spann, 224 S.W.3d at 711.
The documents at issue in this matter stipulated that “[t]his Agreement and its
enforcement shall be governed by the laws of the State of Tennessee[.] . . .” “Tennessee law
contemplates judicial resolution of contract formation issues.” Frizzell Constr. Co., 9
S.W.3d at 85. Accordingly, the trial court properly concluded that it had jurisdiction to
address the issues regarding whether the agreement (including the arbitration agreement) was
unenforceable.
Similarly, the trial court had jurisdiction to determine the contract formation issue of
whether Ms. Webb was fraudulently induced to enter into the agreement with FTBR. When
the parties have agreed that Tennessee law governs the agreement, an agreement to arbitrate
procured by fraudulent inducement is not enforceable. Id. Accordingly, in this case, the
agreement would allow for arbitration of “all controversies that may arise between” the
parties “but only to the extent allowed by Tennessee law.” Because Tennessee law
“contemplates judicial resolution of contract formation issues,” the inclusion of the
Tennessee choice-of-law provision requires us to find that the parties “indicated their
intention not to submit such issues to arbitration.” Id. Thus, the issue of fraudulent
inducement was not required to be arbitrated. Id.
The defendants direct us to a federal district court case, SL Tennessee, LLC v. Ochiai
Georgia, LLC, No. 3:11-CV-340, 2012 WL 381338 (E.D. Tenn. Feb. 6, 2012), in which that
district court found that fraudulent inducement must be arbitrated under the rules of the FAA,
even in the face of Frizzell and a Tennessee choice-of-law provision. Ochiai, 2011 WL
381338, at *4. The court observed that “although the Contract in this case contains a choice-
of-law provision providing that the contract is to be governed and interpreted under
Tennessee law, there is no clear and unequivocal indication that Tennessee law should
displace the federal standard on arbitration.” Id. at *6. We are obligated to follow Frizzell,
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not Ochiai.
In support of our conclusion, we note that in River Links at Deer Creek, LLC v. Melz,
108 S.W.3d 855 (Tenn. Ct. App. 2002), we previously observed that fraudulent inducement
claims are not subject to arbitration:
Further, our courts have declared that claims of fraud in the inducement are not
subject to arbitration. This court held that when a contract has been procured
through fraud then “unless a defrauded party elects to affirm it, there is
absolutely no contract, nothing to be arbitrated.” Our Supreme Court more
broadly stated that “Tennessee law does not allow arbitration of contract
formation issues.”
108 S.W.3d at 859 (citations omitted). We reached a similar result in Howell v. NHC
Healthcare-Fort Sanders, Inc., 109 S.W.3d 731 (Tenn. Ct. App. 2003). In Howell, the
defendant contended that the FAA controlled because the contract involved interstate
commerce, and that the enforceability of the arbitration clause therefore had to be determined
by the arbitrators, not the court. We concluded:
[W]hile courts are required to give an arbitration agreement “as broad a
construction as the words and intentions of the parties will allow,” this applies
to the scope of the agreement, and not whether grounds exist to deny
enforceability of the agreement.
109 S.W.3d at 733 (citations omitted).
We find that pursuant to controlling authority from both the United States Supreme
Court and the Tennessee Supreme Court, the interpretation of the customer agreement,
including the enforceability of the arbitration clause, is governed by state law. Further, under
Tennessee law, claims of fraudulent inducement are not arbitrable but are for judicial
determination. The trial court correctly retained jurisdiction of this dispute.
B.
UNCONSCIONABLE CONTRACT OF ADHESION
The trial court found that the agreement in this case was an unconscionable contract
of adhesion. The relevant definition of an adhesion contract was set out in Buraczynski v.
Eyring, 919 S.W.2d 314 (Tenn. 1996):
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An adhesion contract has been defined as “a standardized contract form
offered to consumers of goods and services on essentially a ‘take it or leave it’
basis, without affording the consumer a realistic opportunity to bargain and
under such conditions that the consumer cannot obtain the desired product or
service except by acquiescing to the form of the contract.” Professor
Henderson has observed that “the essence of an adhesion contract is that the
bargaining position and leverage enable one party to select and control risks
assumed under the contract.” Courts generally agree that “[t]he distinctive
feature of a contract of adhesion is that the weaker party has no realistic choice
as to its terms.”
Buraczynski, 919 S.W.2d at 320 (citations omitted). FTBR’s agreement is a standard form
document. No negotiation is permitted. It is essentially presented on a take-it-or-leave-it
basis. Mr. Conaty admitted that if someone wanted to do business with FTBR, the form
agreement had to be used.
If a contract is one of adhesion, the next question is whether it contains such
unconscionable or oppressive terms as to render it unenforceable. Buraczynski, 919 S.W.2d
at 320. The Tennessee Supreme Court has held that a contract is not enforceable if its terms
are “beyond the reasonable expectations of an ordinary person,” or it is “oppressive,” or it
is “unconscionable.” Buraczynski, 919 S.W.2d at 320. In determining whether a contract
is unconscionable, the Taylor court held:
A determination of unconscionability must focus on the relative positions of
the parties, the adequacy of the bargaining position, the meaningful
alternatives available to the plaintiff, and the existence of unfair terms in the
contract.
Taylor, 142 S.W.3d at 285. “In determining whether a contract is unconscionable, a court
must consider all the facts and circumstances of a particular case. If the provisions are then
viewed as so one-sided that the contracting party is denied any opportunity for a meaningful
choice, the contract should be found unconscionable.” Haun v. King, 690 S.W.2d, 869, 872
(Tenn. Ct. App. 1984). As noted in Hill v. NHC Healthcare/Nashville, LLC, No. M2005-
01818-COA-R3-CV, 2008 WL 1901198 (Tenn. Ct. App., Apr. 30, 2008), “the question of
unconscionability requires courts to consider all the facts relating to a contract’s purpose and
effect as well as to the setting in which it was signed. One particular fact may not be the
determinative factor; instead, it is the overall situation that must be considered.” Hill, 2008
WL 1901198, at *17.
As observed by the trial court, a significant circumstance is that the agreement was
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signed under compelling time constraints and that it did not afford the customer the right to
revoke the arbitration provisions within a reasonable period of time. See Buraczynski, 919
S.W.2d at 320-21. Further, that one party is more sophisticated than the other must be taken
into consideration. See Taylor, 142 S.W.3d at 285. Additionally, in this case, the arbitration
clause was not contained in a separate document, but was contained on page 11 of a lengthy
agreement. There was no explanation of binding arbitration, “nor any language that would
encourage the customer to ask questions about the process.” See Hill, 2008 WL 1901198,
at *9. Also, the costs involved in arbitration was a proper consideration in assessing
unconscionability. It was FTBR’s burden “to show that the parties actually bargained over
the arbitration provision or that it was a reasonable term considering the circumstances.”
Brown v. Karemor Intl., Inc., (Tenn. Ct. App. 1999). The record shows that the trial court
correctly found that FTBR did not carry its burden.
C.
BINDING AGREEMENT WITH MS. WEBB
The trial court concluded that the defendants had failed to carry their burden of
proving that Ms. Webb entered into a valid and enforceable agreement to arbitrate this
dispute. The defendants argue that this finding is “not supported by the evidence.” They
note that Ms. Webb, just above her signature, expressly represented that she “READ THE
TERMS AND CONDITIONS GOVERNING THIS ACCOUNT,” that she agreed “TO BE
BOUND BY SUCH TERMS AND CONDITIONS AS CURRENTLY IN EFFECT,” that the
“ACCOUNT IS GOVERNED BY A PRE-DISPUTE ARBITRATION AGREEMENT,” and
that she “ACKNOWLEDGE[D] RECEIPT OF THE . . . PRE-DISPUTE ARBITRATION
AGREEMENT.”
The plaintiffs contend that the defendants did not introduce an arbitration agreement
signed by Ms. Webb. They assert she never received an arbitration agreement. Ms. Webb
testified that she never saw such an agreement when she was signing the documents and Mr.
Conaty did not discuss an arbitration agreement with her.
Mr. Conaty testified that he gave Ms. Webb a package of documents to take home.
According to Ms. Webb, when she returned to FTB the next day, she had not even opened
the packet she took away from her meeting with Mr. Conaty the day before. She related that
she gave the FTB employee all the papers she had received the previous day and did not keep
any. The FTB employee subsequently faxed some of these documents to Mr. Conaty’s office
and put all documents that Ms. Webb had in the inter-office mail to send to FTBR. No one,
however, can identify the documents that were faxed to FTBR to enable it to open the
account, and FTBR has never been able to locate and identify the documents sent to it that
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same day in the interoffice mail. It therefore has no evidence to refute Ms. Webb’s testimony
that she gave everything back to FTB and that her package of documents did not include an
arbitration agreement. FTBR therefore has not carried its burden of proof to show that Ms.
Webb agreed to arbitrate.
In view of our holdings that the trial court properly determined that the arbitration
agreement is unenforceable in this matter, we pretermit consideration of the remaining
arguments raised by the defendants.
V. CONCLUSION
We affirm the decision of the trial court only as to arbitration; we vacate any findings
that go to the merits of the underlying case and remand for further proceedings. The costs
on appeal are assessed to the appellants, First Tennessee Brokerage, Inc. and Michael
Conaty.
_________________________________
JOHN W. McCLARTY, JUDGE
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