Wood v. Den Herder

No. 95-415
IN THE SUPREME COURT OF THE STATE OF MONTANA
1996
v.
ROBERT L. DEN HERDER,
Defendant and Respondent.
APPEAL FROM: District Court of the First Judicial District,
In and for the County of Lewis and Clark,
The Honorable Dorothy McCarter, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
John M. Morrison, Meloy & Morrison, Helena, Montana
For Respondent:
Linda M. Deola, Reynolds, Mot1 and Sherwood, Helena,
Montana
Submitted on Briefs: February 29, 1996
Decided: July 22, 1996
Filed:
Justice William E. Hunt, Sr. delivered the Opinion of the Court.
Orlan Wood, Appellant, filed a complaint against Robert Den
Herder, Respondent, in the First Judicial District Court, Lewis and
Clark County, for breach of contract. Respondent filed a motion to
dismiss which the District Court granted. Appellant appeals.
We reverse and remand.
Appellant raises the following issue:
Does an arbitration clause in a brokerage account agreement
preempt a breach of contract action by the client against the
broker on a subsequent promissory note that has nothing to do with
the brokerage agreement and contains its own dispute resolution
language?
FACTS
The facts, as set forth in the complaint, are as follows:
Appellant is a resident of Washington. In 1988, he retired from
the Boeing Corporation with an investment IRA worth approximately
$130,000. In early 1992, he decided to open an account with
Respondent, an investment broker and resident of Lewis and Clark
County, Montana.
Appellant sent Respondent $130,000 for the purpose of
purchasing low-risk, income-producing investments that would
provide for Appellant and his wife in their later years. After
opening the account with Respondent, Appellant selected four front-
load mutual funds and invested $90,000. The remaining $40,000 was
placed in a money-market fund.
In March 1992, Respondent advised Appellant that $15,622 from
his money-market fund had been invested in Performance Nutrition.
Appellant told Respondent that he could not afford any risk, and
Respondent assured him that there would be no loss.
In April 1992, without Appellant's consent, Respondent began
to invest money from Appellant's account in the Remington Financial
Group, Inc. Respondent continued to invest in this company through
July 1992. The total investment in Remington reached approximately
$23,437. After learning of the purchase of the Remington stock,
Appellant contacted Respondent and, again, Respondent assured him
both verbally and in writing that he would not incur any losses.
By September 1993, the value of the Performance Nutrition
position had deteriorated to $2,872, and the value of the Remington
position was listed as unavailable.
In October 1993, Respondent confessed to Appellant the loss of
approximately $38,927 from his money market fund. According to the
complaint, in consideration for Appellant's continued business and
trust, and to avoid criminal and civil prosecution, Respondent
signed a promissory note. The note promises Respondent will pay
Appellant $38,927 plus interest and reasonable attorney fees and
costs. The due date for final payment on the note was set for
January 1, 1995.
Appellant filed this complaint for breach of contract in April
1995, after Respondent had failed to pay all or any portion of the
obligation assumed in the promissory note. Appellant requested the
following in damages:
(1) $38,927, plus interest at 12%, calculated from
October 2, 1993; -
(2) Attorney's fees;
(3) costs;
(4) For any such other relief as [the] court may deem
just and proper.
In response to Appellant's complaint, Respondent filed a
motion to dismiss. In the brief supporting the motion, Respondent
alleged that in April 1994, Appellant had filed a claim with the
National Association of Securities Dealers, Inc. (NASD)
Respondent argues that by filing that claim, Appellant had agreed
to "submit the present matter in controversy" to NASD for
arbitration.
Respondent attached a copy of the 1994 NASD arbitration
agreement to his motion to.dismiss. According to the agreement,
the named respondents include Terrence Murphy, Del Mar Securities,
Cowles Sabol & co., Inc., and Respondent. The matter in
controversy was then described by Appellant in a "Statement of the
Claim," which requested the following relief:
(1) $40,000 returned for investments in high risk stock
of Performance Nutrition and Remington Financial,
(plus 12% interest beginning June 19921,
(2) $7,000 returned for Specialized Mobil Radio Station
license in Reno, Nevada due to high risk. (plus 12%
interest beginning January 1993),
(3) [This amount was paid by Schneider Securities, not
a party to this action in order to avoid
arbitration],
(4) $10,000 or, whatever is required for attorney and
expert witness fees,
(5) $20,000 compensatory award for mental anguish of
stress and worry created by these investments which
had lead [sic] to depressed feelings, nervousness
and an effect on my quality of life,
(6) Return of the NASD filing fee of $650.00.
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Respondent contends that when Appellant agreed to submit his claim
to arbitration, he agreed to submit &l-J matters relating to his
account, including the promissory note.
Respondent further argued that, in 1991, Appellant signed a
brokerage-account agreement that containedarbitrationdisclosures.
Respondent alleges that Appellant waived his right to proceed with
an action in court when he signed that agreement.
The District Court granted Respondent's motion to dismiss in
August 1995. In doing so, the court concluded that it was
evident from the pleadings and briefs that both actions
are based on the same investments and the same amount of
money. To permit both actions would enable the Plaintiff
[Appellant] to recover twice for the same loss.
Appellant appeals.
DISCUSSION
On appeal, Appellant has framed the issue as to whether or not
an arbitration clause in a brokerage-account agreement preempts a
breach of contract action by the client against the broker on a
subsequent promissory note that has nothing to do with the
brokerage agreement and contains its own dispute resolution
language. It is apparent, however, that the issue, as stated by
Appellant, does not directly address the propriety of the District
Court's dismissal of the action. We therefore restate the issue on
appeal as whether the District Court erred in dismissing
Appellant's complaint.
Respondent's motion to dismiss does not specify which of the
enumerated defenses contained in Rule 12(b), M.R.Civ.P, he is
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claiming as grounds for dismissal. Nevertheless, since none of the
other defenses apply in this case, it appears that the motion was
presented for failure to state a claim, under Rule 12(b) (6),
M.R.Civ.P.
Ordinarily, we would review an appeal from a district court's
order granting a motion to dismiss based on the sufficiency of the
complaint. Busch v. Kammerer (1982), 200 Mont. 130, 132, 649 P.2d
1339, 1340 (citing Conley v. Gibson (1957), 355 U.S. 41, 45, 78
s.ct. 99, 102, 2 L. Ed. 2d 80, 84). However, the court order
concluded that it was evident from the "pleadings and briefs" that
the promissory note and the arbitration actions were the same. In
order to come to this conclusion, the District Court must have
relied on allegations of arbitration found outside of the
complaint. There is no mention in appellant's complaint of the
arbitration agreement, and the agreement itself was submitted to
the court attached to Respondent's brief. If a court considers
matters outside of the pleadings on a Rule 12(b) (6) motion to
dismiss, that motion is constructively converted into a motion for
summary judgment. See Rule 12(b), M.R.Civ.P.
This Court reviews a district court's grant of summary
judgment decision de novo, and summary judgment is only proper when
there are no genuine issues of material fact and the moving party
is entitled to judgment as a matter of law. Rule 56(c),
M.R.Civ.P.; Eatinger v. Johnson (1994), 269 Mont. 99, 887 P.2d 231.
The facts, as alleged-by the Appellant, are that Respondent
signed a promissory note in 1993 in consideration for Appellant's
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continued business and trust, and to avoid criminal and/or civil
prosecution. This promissory note came due in January 1995, and
Respondent has failed to pay any portion of the assumed obligation.
On appeal, Respondent-does not contest the validity of the
promissory note. Instead, he argues that the 1994 agreement to
arbitrate necessarily includes any claim for breach of contract on
the promissory note. Therefore, Respondent asserts that it would
be inappropriate to allow Appellant to file the "same action" in
two separate forums.
We do not agree. The arbitration claim is expressly based
upon allegations that Respondent ignored the Appellant's investment
objectives and misled him while acting as his security broker. The
arbitration claim requests the return of the money given to
Respondent for investment and for attorney fees and experts
required in the securities arbitration and $20,000 for mental
anguish, stress and worry. He also requests the return of the NASD
filing fee.
The action before us is not here on the arbitration claim but
rather is based on a promissory note. Respondent agreed to pay
Appellant a certain amount of money with interest and costs in an
action to recover on the note. The complaint alleges the
promissory note was a contract between the parties. These
allegations were not controverted by Respondent. In his complaint,
Appellant seeks the amounts that were expressly assumed by the
Respondent on the promissory note.
The note has nothing to do with whether Respondent or anyone
else committed any improprieties prior to the execution of the
promissory note which is a matter to be dealt with in the
arbitration case. The brokerage agreement was signed July 18,
1991, and the promissory note was signed October 2, 1993, more than
two years after the brokerage account agreement.
Therefore, the arbitration matter in Washington state and the
breach of contract on the promissory note in Montana are separate
and distinct actions. As Appellant claims, the promissory note
case here is a simple contract action which turns upon the question
of whether the October 2, i993 promissory note is an enforceable
contract.
Accordingly, we conclude that, as the moving party, Respondent
was not entitled to dismissal as a matter of law pursuant to Rule
56(C), M.R.Civ.P. To the extent that any damages awarded in the
Montana contract action and in the Washington arbitration matter
are duplicative, double recovery can be avoided through an offset.
We take this opportunity to again remind the District Court
that prior to converting a motion to dismiss into a motion for
summary judgment, it is incumbent upon the District Court to notify
the parties of the court's intent. Rule 12(b), M.R.Civ.P. This
step is imperative to guarantee that the non-moving party
appreciates the consequences of the conversion. After notifying
the parties, the non-moving party has the option of coming forward
with affidavits to show that there are genuine issues for trial.
Gebhardt v. D.A. Davidson & Co. (19831, 203 Mont. 384, 391, 661
P.2d 855, 858.
Here, the District Court did not notify the parties of its
intent to convert the motion to dismiss into a motion for summary
judgment. Consequently, the appropriate procedures for a judgment
for dismissal were not followed for either Rule 12(b) (6) or Rule
56, M.R.Civ.P.
Summary judgment was not appropriate in this case because the
Respondent was not entitled to the ruling as a matter of law. We
reverse and remand for proceedings consistent with this opinion.
Reversed and remanded.
Justice
We Concur:
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