Alan v. Superior Court

3 Cal.Rptr.3d 377

111 Cal.App.4th 217

Jordan ALAN, Petitioner, v. The SUPERIOR COURT of Los Angeles County, Respondent UBS PaineWebber Inc. et al., Real Parties in Interest.

No. B164153.

Court of Appeal, Second District, Division 1.

August 14, 2003.

Review Denied October 29, 2003.

Overland & Borenstein, Mark E. Overland, Mark A. Borenstein, Santa Monica, and Kelley B. Poleynard for Petitioner.

No appearance for Respondent.

Keesal, Young & Logan, Stephen Young, Thomas R. Trainor, Long Beach, and Dawn M. Schock for Real Parties in Interest UBS PaineWebber Inc. and Correspondent Services Corporation.

Hamburg, Karic, Edwards & Martin, Steven S. Karic and Fredric R. Brandfon, Los Angeles, for Real Party in Interest Bradford A. Phillips.

Bill Lockyer, Attorney General, David S. Chaney, Assistant Attorney General, Lawrence K. Keethe, Supervising Deputy Attorney General, and Amy J. Winn, Deputy Attorneys General for the State of California as Amicus Curiae.

MALLANO, J.

The heir of a deceased investor filed this civil action against the investor's brokers, alleging mismanagement of the investor's accounts. The investment agreements signed by the investor required that all controversies be decided by arbitration before one of the securities industry self-regulatory organizations (SRO's). But all of the SRO's refuse to conduct arbitrations in California because they do not want to comply with the ethical standards for arbitrators recently promulgated by the California Judicial Council. The SRO's take the position that the standards are preempted by federal law.

Yet, after this action was filed, the brokers moved to compel arbitration. They assert that an SRO would arbitrate the dispute if the heir waives the Judicial Council's ethical standards or agrees to hold the arbitration outside California. The heir has declined both options. On motion by the brokers, the trial court ordered the case to arbitration. The heir challenges that order.

We conclude that the trial court should first decide if California is a proper location for the arbitration, applying principles that determine whether a forum selection clause is valid. If California is the proper location, the dispute should be tried in a court in California because the SRO will not arbitrate the matter here. But if an out-of-state location is proper, the dispute should be resolved through arbitration there.

I BACKGROUND

This case is before us by way of a petition for writ of mandate seeking to overturn the trial court's order directing plaintiff to arbitrate claims against the brokers for unlawful trading practices.

A. The Petition

The petition alleges as follows. In 1991, Beth Lobel inherited a stock portfolio valued between $700,000 and $800,000. By 1995, she had become a successful trader in her own right. She opened several brokerage accounts and individual retirement accounts (IRA's) at Interfirst Capital Corporation (Interfirst). Her broker was James Copping, who was supervised at Interfirst by Brett Briggs and Bradford Phillips.

Correspondent Services Corporation (CSC) and UBS PaineWebber Inc. (PaineWebber), the parent company of CSC, processed the trades made by Interfirst on Lobel's accounts. CSC "carried" those accounts. PaineWebber was also the trustee for Lobel's IRA's. PaineWebber acted as a clearinghouse for the trades made from Lobel's Interfirst accounts. Interfirst and Copping initiated several unauthorized trades that were processed through CSC and PaineWebber.

With respect to each account, Lobel signed a customer agreement requiring the arbitration of disputes between the parties. The arbitration provisions read as follows or in similar language: "I agree and by carrying an account for me, CSC agree(s) that any and all controversies which may arise between me and CSC or between me and the organization that has introduced my account(s) carried by CSC Corporation concerning any account, transaction, dispute or the construction, performance or breach of this or any other agreement whether entered into prior, on, or subsequent to the date hereof, shall be determined by arbitration. Any arbitration under this agreement shall be held under and pursuant to and be governed by the Federal Arbitration Act, and shall be conducted before an arbitration panel convened by the New York Stock Exchange, Inc. (N.Y.SE), or the National Association of Securities Dealers, Inc. (NASD). I may also select any other national securities exchange's arbitration forum upon which CSC is legally required to arbitrate the controversy with me.... Such arbitration shall be governed by the rules of the organization convening the panel. I may elect in the first instance the arbitration forum, but if I fail to make such election ... then you may make such election. The award of the arbitrators, or of the majority of them, shall be final and judgment upon the award rendered may be entered in any court of competent jurisdiction."

Lobel died intestate on September 25, 2000. Lobel's son and sole heir, plaintiff Jordan Alan, was named the administrator of her estate. At the time of Lobel's death, her accounts totaled $1.5 million. Thereafter, Interfirst and Copping made questionable trades that reduced the value of the accounts to $700,000. PaineWebber and CSC processed the trades.

B. The Complaint

On September 24, 2002, plaintiff filed this action against Interfirst, PaineWebber, CSC, Copping, Phillips, and Briggs. (For convenience, we sometimes refer to all defendants as the brokers.) The complaint asserts causes of action for negligence, breach of fiduciary duty, breach of contract, and a violation of the California unfair competition law (Bus. & Prof.Code, § 17200 et seq.). In essence, the complaint alleges that defendants churned Lobel's accounts and made unauthorized, risky investment decisions that increased their commissions and substantially reduced the value of the accounts.¹

C. California's Ethical Standards for Arbitrators

While plaintiff was contemplating litigation against the brokers, the California Legislature was considering new ethical standards for arbitrators who hear cases pursuant to the terms of an arbitration agreement. As provided by section 1281.85, subdivision (a), of the Code of Civil Procedure: "Beginning July 1, 2002, a person serving as a neutral arbitrator pursuant to an arbitration agreement shall comply with the ethics standards for arbitrators adopted by the Judicial Council pursuant to this section. The Judicial Council shall adopt ethical standards for all neutral arbitrators effective July 1, 2002.... The standards shall address the disclosure of interests, relationships, or affiliations that may constitute conflicts of interest, including prior service as an arbitrator or other dispute resolution neutral entity, disqualifications, acceptance of gifts, and establishment of future professional relationships."

The Judicial Council fulfilled its statutory mandate, promulgating ethical standards for arbitrators effective July 1, 2002. The standards address, among other things, the disclosures to be made by arbitrators to avoid doubts of impartiality, the disqualification of arbitrators, conducting the arbitration hearing, ex parte communications, confidentiality, compensation, and marketing. (See Cal. Rules of Court, appen., div. VI, Ethics Standards for Neutral Arbitrators in Contractual Arbitration, 23 pt. 2 West's Ann.Code Civ. Proc. (2003 supp.) pp. 527-542.)

In response to the ethical standards, the NYSE and the NASD announced that, as applied to them, the standards were preempted by federal law, namely, the Securities Exchange Act of 1934 (15 U.S.C § 78a et seq.) and the Federal Arbitration Act (9 U.S.C. § 1 et seq.). They are litigating that issue in federal court. (See, e.g., NASD Dispute Resolution v. Judicial Council of CA (N.D.Cal.2002) 232 F.Supp.2d 1055; Mayo v. Dean Witter Reynolds, Inc. (N.D.Cal.2003) 258 F.Supp.2d 1097.) The NYSE and the NASD have refused to hear cases in California unless the claimant waives the ethical standards. In the alternative, the NYSE and the NASD will arbitrate disputes if the claimant agrees to hold the hearing outside California. In his amicus curiae brief filed in this appeal, the California Attorney General states, "[The] NASD and NYSE contend that the [Ethical] Standards do not apply in SRO arbitrations and have, since July of last year, unilaterally suspended hundreds of securities arbitrations in the State...."

D. SRO Arbitrations

Both the NYSE and the NASD are SRO's "registered with the [Securities Exchange Commission] pursuant to the Securities Exchange Act of 1934 ... (`the Exchange Act'). As part of the comprehensive system of federal regulation of the securities industry, the Exchange Act authorizes SROs within the securities industry to self-regulate their members subject to oversight by the United States Securities and Exchange Commission (SEC). SROs are subject to extensive oversight, supervision, and control by the SEC on an ongoing basis....

"The Exchange Act directs SROs to adopt rules and by-laws that conform with the Exchange Act.... With some exceptions ..., the SEC must approve all SRO rules, policies, practices, and interpretations prior to their implementation.... Each SRO must comply with the provisions of the Exchange Act as well as its own rules....

"One of the functions of the SROs is to provide arbitral fora for the resolution of securities industry disputes.... Securities broker-dealers routinely include arbitration clauses in their customer agreements .... As a result, both the NYSE and the NASD ... provide arbitration services to their members. The SEC has expansive power to regulate the SRO arbitration programs." (Mayo v. Dean Witter Reynolds, Inc., supra, 258 F.Supp.2d at pp. 1101-1102, citations and fn. omitted.)

Here, plaintiff chose to file a civil action to resolve the parties dispute and did not elect an SRO forum in the first instance. De...