Norman E. Welch, Jr. v. Sterne, Agee & Leach, Inc.

STATE OF LOUISIANA
COURT OF APPEAL, THIRD CIRCUIT

04-218

NORMAN E. WELCH, JR.

VERSUS

STERNE, AGEE & LEACH, INC., ET AL.

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APPEAL FROM THE
NINTH JUDICIAL DISTRICT COURT
PARISH OF RAPIDES, NO. 213,215
HONORABLE WILLIAM ROSS FOOTE, DISTRICT JUDGE

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ELIZABETH A. PICKETT
JUDGE

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Court composed of Sylvia R. Cooks, Elizabeth A. Pickett, and Billy Howard Ezell,
Judges.

AFFIRMED.

Gregory Scott Erwin
Attorney at Law
16828 Amberwood Dr.
Baton Rouge, LA 70810
(225) 753-6303
Counsel for Plaintiff/Appellant:
Norman E. Welch, Jr.

Edward Frances Harold
Fisher & Phillips LLP
201 St. Charles Ave. # 3710
New Orleans, LA 70170
(504) 522-3303
Counsel for Defendant/Appellee:
Sterne, Agee & Leach, Inc.
G. Bradley Harrison

PICKETT, Judge.

Norman E. Welch, Jr., appeals a judgment of the trial court granting a motion

to stay the proceedings in his suit against the defendants pending arbitration.

FACTS

Norman Welch, Jr., was forced into early retirement from his job at

International Paper Company. He received a severance payment in the amount of

$203,458.51. He contacted G. Bradley Harrison, a broker with Sterne, Agee & Leach,

Inc., (Sterne) an Alabama corporation. Welch invested the entire amount with Sterne

in July 1999.

On December 8, 2000, Welch executed a Client Agreement sent to him by

Harrison. The agreement contained two provisions relevant to this appeal. Paragraph

22 contains an arbitration clause, reproduced here (bold in original):

22. ARBITRATION
• ARBITRATION IS FINAL AND BINDING ON THE
PARTIES.
• THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK
REMEDIES IN COURT, INCLUDING THE RIGHT TO A
JURY TRIAL.
• PRE-ARBITRATION DISCOVERY IS GENERALLY
MORE LIMITED THAN AND DIFFERENT FROM COURT
PROCEEDINGS.
• THE ARBITRATORS’ AWARD IS NOT REQUIRED TO
INCLUDE FACTUAL FINDINGS OR LEGAL REASONING
AND ANY PARTY’S RIGHT TO APPEAL OR TO SEEK
MODIFICATION OF RULINGS BY THE ARBITRATORS
IS STRICTLY LIMITED.
• THE PANEL OF ARBITRATORS WILL TYPICALLY
INCLUDE A MINORITY OF ARBITRATORS WHO WERE
OR ARE AFFILIATED WITH THE SECURITIES
INDUSTRY.

Any controversy: (1) arising out of or relating to any of my accounts
maintained individually or jointly with any other party, in any
capacity, with you; or (2) relating to my transactions or accounts
with any of your predecessor firms by merger, acquisition or any
other business combination from the inception of such accounts; or
(3) with respect to transactions of any kind executed by, through or

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with you, your officers, directors, agents and/or employees; or (4)
with respect to this agreement or any other agreements entered into
with you relating to my accounts, or the breach thereof, shall be
resolved by arbitration conducted only at the NYSE, NASD, or
AMEX or any self-regulatory organization (“SRO”) subject to the
jurisdiction of the Securities and Exchange Commission and
pursuant to the arbitration procedures then in effect of any such
exchange or SRO as I may elect. If I do not make such election by
registered mail addressed to you at your main office within 5 days
after demand by you that I make such an election, then you will have
the right to elect the arbitration tribunal of your choice. Judgment
upon any award rendered by the arbitrators may be entered in any
court having jurisdiction thereof. [Remainder omitted.]

(The omitted text relates to class actions, which is not relevant in this proceeding.)

The second pertinent clause is in Paragraph 23, which specifies that the contract

will be governed by the laws of the state of Alabama “without giving effect to the

choice of law or conflict of laws provisions thereof.”

In January 2002, Welch became dissatisfied with Sterne’s investments and its

failure of Harrison to answer his queries and withdrew all of the remaining money

from his account. On May 3, 2003, Welch filed a Petition for Damages, naming as

defendants Sterne and Harrison. He claimed that Harrison made misrepresentations

about the performance and warranties of certain investments which led him to lose a

large portion of his investment. Sterne and Harrison responded by filing an Exception

of Prematurity or Alternative Motion to Stay Pending Arbitration. The trial court held

a hearing on the Exception/Motion on September 19, 2003. The trial court granted the

motion to stay and dismissed as moot the exception of prematurity by judgment dated

October 7, 2003. Welch now appeals that judgment.

ASSIGNMENTS OF ERROR

Welch alleges two assignments of error:

1. The Trial Court erred in its conclusion that federal law as expressed in the

Federal Arbitration Act (FAA), 9 U.S.C. §4, preempts Alabama state law of

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contract interpretation concerning the retroactive application of an agreement

to arbitrate.

2. The Trial Court erred in staying the district court proceedings and forcing the

appellant Welch to proceed in arbitration.

DISCUSSION

Both parties agree that Alabama law governs their relationship by the terms of

Paragraph 23 of the Client Agreement. Welch argues that the arbitration clause that

he signed December 8, 2000, is not retroactive to the date he invested his money with

Sterne, July 1999, citing Alabama law of contract interpretation. Sterne argues in

support of their position that the Federal Arbitration Law preempts Alabama’s law of

contract interpretation, and the arbitration clause is retroactive under federal law.

Alternatively, they argue that even if Alabama law is not preempted, the rules of

contract interpretation support a finding that the arbitration clause is retroactive. The

trial court found that federal law applies and stayed the matter pending arbitration.

We begin our review of this issue with a recitation of basic Alabama law. The

Supreme Court of Alabama laid out the general provisions regarding the interpretation

of arbitration agreements and contracts in Homes of Legend, Inc. v. McCollough, 776

So.2d 741, 745-46 (Ala.2000) (footnote omitted):

Section 2 of the FAA, 9 U.S.C. § 2, provides in pertinent part:

“A written provision in . . . a contract evidencing a
transaction involving commerce to settle by arbitration a
controversy thereafter arising out of such contract or
transaction . . . shall be valid, irrevocable, and enforceable,
save upon such grounds as exist at law or in equity for the
revocation of any contract.”

Section 2 (except for certain employment contracts, see 9 U.S.C. § 1) has
the effect of preempting conflicting Alabama law, in particular Ala.Code
1975, § 8-1-41(3), and thereby making enforceable a predispute
arbitration agreement in a contract evidencing a transaction that involves
interstate commerce. See Allied-Bruce Terminix Companies, Inc. v.

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Dobson, 513 U.S. 265, 273-74, 277, 281, 115 S.Ct. 834, 130 L.Ed.2d
753(1995); Crown Pontiac, Inc. v. McCarrell, 695 So.2d 615, 617
(Ala.1997). As the United States Supreme Court explained inMoses H.
Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-
25, 103 S. Ct. 927, 74 L. Ed. 2d 765(1983):

“Section 2 is a congressional declaration of a liberal federal
policy favoring arbitration agreements, notwithstanding any
state substantive or procedural policies to the contrary. The
effect of the section is to create a body of federal
substantive law of arbitrability, applicable to any arbitration
agreement within the coverage of the Act. ... The
Arbitration Act establishes that, as a matter of federal law,
any doubts concerning the scope of arbitrable issues should
be resolved in favor of arbitration, whether the problem at
hand is the construction of the contract language itself or
an allegation of waiver, delay, or a like defense to
arbitrability.”

(Emphasis added.) Questions of arbitrability--that is, whether the parties
agreed to submit their particular dispute to arbitration–“must be
addressed with a healthy regard for the federal policy favoring
arbitration,” id. at 24, 103 S.Ct. 927; but, in determining whether the
parties agreed to arbitrate a dispute, this Court “should apply ordinary
state-law principles that govern the formation of contracts.” First
Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920,
131 L.Ed.2d 985 (1995); accord Quality Truck & Auto Sales, Inc. v.
Yassine, 730 So.2d 1164, 1167-68 (Ala.1999). Consequently, “in
applying general state-law principles of contract interpretation to the
interpretation of an arbitration agreement within the scope of the Act,
due regard must be given to the federal policy favoring arbitration, and
ambiguities as to the scope of the arbitration clause itself resolved in
favor of arbitration.” Volt Information Sciences, Inc. v. Board of
Trustees of Leland Stanford Junior Univ. , 489 U.S. 468, 475-76, 109
S.Ct. 1248, 103 L.Ed.2d 488 (1989) (citation omitted).

However, the federal policy favoring arbitration does not require
this Court to ignore the contractual intentions of the parties. See Volt
Information Sciences, Inc., 489 U.S. at 478-79; Mastrobuono v.
Shearson Lehman Hutton, Inc., 514 U.S. 52, 57, 115 S.Ct. 1212, 131
L.Ed.2d 76 (1995). Instead, “[t]his Court has clearly and consistently
held that a party cannot be required to submit to arbitration any dispute
he has not agreed to submit.” Ex parte Stallings & Sons, Inc., 670 So.2d
861, 862 (Ala.1995) (internal quotation marks and citations omitted);
accord AT&T Technologies, Inc. v. Communications Workers of
America, 475 U.S. 643, 648, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986).
The FAA “simply requires courts to enforce privately negotiated
agreements to arbitrate, like other contracts, in accordance with their
terms,” and “parties are generally free to structure their arbitration
agreements as they see fit.” Volt Information Sciences, Inc., 489 U.S. at

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478-79. Accordingly, “as with any other contract, the parties’ intentions
control, but those intentions are generously construed as to issues of
arbitrability.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.,
473 U.S. 614, 626, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985).

Under general Alabama rules of contract interpretation, the intent
of the contracting parties is discerned from the whole of the contract.
See Loerch v. National Bank of Commerce of Birmingham, 624 So.2d
552, 553 (Ala.1993). Where there is no indication that the terms of the
contract are used in a special or technical sense, they will be given their
ordinary, plain, and natural meaning. See Ex parte Dan Tucker Auto
Sales, Inc., 718 So.2d 33, 36 (Ala.1998). If the court determines that the
terms are unambiguous (susceptible of only one reasonable meaning),
then the court will presume that the parties intended what they stated and
will enforce the contract as written. See id. at 36; Voyager Life Ins. Co.
v. Whitson, 703 So.2d 944, 948 (Ala.1997). On the other hand, if the
court determines that the terms are ambiguous (susceptible of more than
one reasonable meaning), then the court must use established rules of
contract construction to resolve the ambiguity. See Whitson, 703 So.2d
at 948. Under those established rules of contract construction, where
there is a choice between a valid construction and an invalid construction
the court has a duty to accept the construction that will uphold, rather
than destroy, the contract and that will give effect and meaning to all of
its terms. See id. at 948-49; Sullivan, Long & Hagerty v. Southern Elec.
Generating Co., 667 So.2d 722, 725 (Ala.1995). Additionally, “if there
exists inconsistency between two clauses of a contract which cannot be
reconciled, the inconsistency must be resolved in favor of the prior
clause, unless an intention to thereafter qualify is plainly expressed.”
City of Fairhope v. Town of Daphne , 282 Ala. 51, 58, 208 So.2d 917,
924 (1968); see Whitson, 703 So.2d at 949. Last, if all other rules of
contract construction fail to resolve the ambiguity, then, under the rule
of contra proferentem, any ambiguity must be construed against the
drafter of the contract. See Lackey v. Central Bank of the South, 710
So.2d 419, 422 (Ala.1998).

As the Alabama supreme court has made clear, while the FAA does not

necessarily preempt state laws concerning contract interpretation, any ambiguity

should be resolved in favor of arbitrability. Thus, preemption is not really an issue.

Alabama law simply recognizes that arbitration agreements in contracts involving

interstate commerce must be construed in light of the federal policy which favors

arbitration.

Applying the facts in the instant case to these principles, the first critical inquiry

is whether or not we are faced with a predispute arbitration clause. There is no doubt

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that this transaction involves interstate commerce. The contract, however, was not

entered into between the parties until seventeen months after the misrepresentations

which Welch alleges in his petition. Thus, we must apply Alabama contract law to

determine if the arbitration clause is retroactive.

In Kenworth of Dothan, Inc. v. Bruner-Wells Trucking, Inc., 745 So.2d 271

(Ala.1999), the Alabama supreme court was faced with the issue of the retroactivity

of an agreement to arbitrate. When the plaintiff purchased a used truck from the

defendant, the buyer’s order did not contain an arbitration agreement. Soon afterward,

the plaintiff purchased reflectors for the truck, and the invoice for the purchase

included an agreement to arbitrate “[a]ny controversy or claim arising out of or

relating to this Invoice or otherwise relating in any fashion to the purchase or sale of

equipment, parts or service thereon[.]” Id. at 273. Later, the plaintiff sued the

defendant alleging fraud in the sale of the truck. The defendant sought to compel

arbitration on the basis of the arbitration agreement in the invoice for the reflectors.

The supreme court held that the arbitration clause contemplated a claim arising out of

the sale of the reflectors, not the truck, and found that arbitration was not mandated.

In reaching their conclusion, the court made the following statement:

We recognize the broad language of the arbitration provision
before us, specifically the phrase “relating in any fashion to the purchase
or sale of equipment, parts or service thereon.” In reviewing arbitration
provisions, we apply contract principles. Thus, we must determine if
there was a “meeting of the minds.” The dispute in this case did not
arise from the purchase of the reflectors; it arose from the purchase of
the truck. Arguably, the dispute related in some fashion to the purchase
of the reflectors, but we must draw a line somewhere in order to prevent
the definition of the word “related” from being stretched beyond all legal
recognition. In other words, there must be some legal and logical nexus
between the source of the dispute and the arbitration provision at issue
in order for a court to say that the parties intended a retroactive
application of that provision. The word “related,” as used in such an
arbitration provision, should not be defined to include any form of
relation, even with the words “in any fashion” attached. For example, if
in the future Bruner-Wells purchases another set of emergency reflectors

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for a truck, would that second purchase be related to the purchase of the
emergency reflectors in this case? Certainly it would involve the same
two parties engaged in the first transaction, and it would involve the
same kind of reflector. Is there not a relationship there? Yes, but it is
not such a close relationship that one reading the arbitration clause in the
first invoice would assume or understand that it covered disputes arising
out of the second purchase of reflectors. That is why retroactive
agreements to arbitrate require closer scrutiny than agreements calling
for arbitration of disputes relating to future activities.

One must conclude, by logical inference, that when the parties
engaged in the activities involved in this case they had no intention of
applying an arbitration agreement that did not yet exist. However, if the
arbitration clause contains retroactive time-specific language, e.g., a
phrase reading “this agreement applies to all transactions occurring
before or after this agreement,” then we may apply the arbitration
provision to disputes relating to past events. Or, if the arbitration
clause contains language stating that it applies to “all transactions
between us” or “all business with us,” then we may apply the
arbitration clause retroactively. The arbitration clause in this case
contains no such language. If Bruner-Wells had a dispute with Kenworth
concerning the emergency reflectors and that dispute arose after the
purchase of the reflectors, then Bruner-Wells would be compelled to
arbitrate if the invoice be deemed a binding contract. However, the
emergency reflectors are merely one piece of evidence in Bruner-Wells's
overall dispute with Kenworth; they are not at the heart of the dispute.
The reflectors are akin to a peripheral issue; their sale did not precipitate
the dispute, because the sale came after the transaction that has led to the
dispute. In applying such an analysis, we cannot conclude that the
arbitration provision on the invoice relating to the reflectors would cover
a dispute over the previous purchase of the used truck.

Id. at 275-276. (Emphasis added.)

The clause at issue in the instant case states that arbitration applies to:

Any controversy: (1) arising out of or relating to any of my accounts
maintained individually or jointly with any other party, in any capacity,
with you; or . . . .(3) with respect to transactions of any kind executed by,
through or with you, your officers, directors, agents and/or employees;
or (4) with respect to this agreement or any other agreements entered into
with you relating to my accounts, or the breach thereof[.]

The trial court found that given the dynamic nature of securities, and the federal policy

favoring arbitrability, this language was broad enough to apply retroactively. This

decision is consistent with Alabama law.

We find no error in the trial court’s determination that the arbitration clause

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contained in the Client Agreement is retroactive and is applicable to the dispute at

issue. The trial court’s order of October 7, 2003, which granted the defendant’s

Motion to Stay Proceeding Pending Arbitration is affirmed. All costs of this appeal

are cast against the plaintiff.

AFFIRMED.

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