Lenz v. FSC Sec. Corp.

391 Mont. 84

414 P.3d 1262

2018 MT 67

Beverly LENZ, Darinda Williams, Terrance Brady, Dean A. Hoistad, Larry Vervick and Richard W. Horton, Plaintiffs and Appellants,

v.FSC SECURITIES CORPORATION, Rocky Mountain Financial Advisors, LLC, f/k/a Rocky Mountain Financial, LLC, Eric D. Rolshoven and John Does 1-10, Defendants and Appellees.

DA 17-0124

Supreme Court of Montana.

Submitted on Briefs: November 8, 2017

Decided: April 3, 2018

For Appellant: John M. Morrison, Linda Deola, Morrison Sherwood Wilson & Deola, PLLP, Helena, Montana

For Appellee: Charles H. Carpenter, Carpenter Law Firm, Missoula, Montana (for Eric D. Rolshoven), Kevin D. Feeback, Toole & Feeback, PLLC, Lincoln, Montana, Edward S. Zusman, Amir Tadjedin, Ryan Probstfeld, Markun Zusman Freniere and Compton, LLP, Portland, Oregon

Justice Dirk Sandefur delivered the Opinion of the Court.

¶1 Beverly Lenz, Darina Williams, Terrance Brady, Dean A. Hoistad, Larry Vervick, and Richard W. Horton (collectively Investors) appeal the order of the Montana Fourth Judicial District Court staying proceedings and compelling them to submit all asserted claims against FSC Securities Corporation (FSC) and Rocky Mountain Financial Advisors, L.L.C. (f/k/a/ Rocky Mountain Financial, L.L.C.), and Eric D. Rolshoven (collectively RMF) to arbitration. We affirm and restate the dispositive issues as:

1. Did the District Court erroneously conclude that Investors knowingly and voluntarily assented to the subject arbitration agreements and validly waived their rights to full legal redress and jury trial?

2. Did the District Court correctly conclude that the subject arbitration agreements were not unconscionable?

BACKGROUND

¶2 FSC is a Delaware-chartered, Georgia-based corporation registered with the United States Securities and Exchange Commission (SEC) to provide interstate securities brokerage and investment advisory services. RMF is a Montana-registered, limited liability company, that was engaged in the business of providing licensed financial and securities brokerage services as registered representatives of FSC. Eric Rolshoven (Rolshoven) and broker Barry Hartman (Hartman) were agents of RMF, and registered representatives of FSC, doing business in Missoula, Montana. Invizeon was a Missoula-based corporation engaged in raising investment capital, purportedly to support business plans to aid in the marketing of various security-related technology products.

¶3 Between 2003 and 2014, on the recommendation of RMF brokers and advisors, a number of investors, including Investors, purchased securities in Invizeon Corporation through FSC.¹ In 2015, Invizeon failed, causing Investors to sustain substantial losses. Investors promptly sued FSC and RMF in the Montana Fourth Judicial District Court, alleging that FSC failed to adequately supervise its registered RMF representatives and that RMF wrongfully induced Investors to invest in Invizeon on various grounds including misrepresentation, fraud, and undisclosed self-dealing. Eight months into the litigation, FSC and RMF separately moved to stay proceedings and compel arbitration before the Financial Industry Regulatory Authority (FINRA).² Following briefing and oral argument on the motions, the District Court conducted a supplemental evidentiary hearing.

¶4 Over the course of multiple, day-long hearings, the District Court heard testimony from each Investor regarding his or her recollection of the specific contract documents and related circumstances. All Investors testified that they did not recall reading or receiving a standard-form FSC customer agreement that included a detailed arbitration agreement. Each Investor described his or her educational background and prior investment experience. Though several Investors recalled receiving significant paperwork when they opened their RMF accounts, none recalled reading or receiving the customer agreement form. However, all Investors recalled seeing and reading an arbitration notice printed above the signature block on the separate client application form. The Investors testified that they had no recollection of anyone at RMF advising them of the legal significance of the arbitration agreement.

¶5 FSC's Senior Litigation Counsel Greg Curley (Curley) testified as to the standard FSC protocol followed by FSC representatives in opening brokerage accounts. Each FSC brokerage agreement consisted of a separate client application form, customer agreement form, signature page form, and an account worksheet generated and maintained by FSC's computerized account management system. Whether viewed in electronic or hard-copy form, the transaction documents for each FSC brokerage agreement were readily identifiable by account name, number, and cross-referenced transaction forms identified by version reference. Initiating RMF representatives opened each account through the FSC account management system by selecting the constituent transaction forms from a menu screen which then set up an electronic account record for each client. Upon initiation of each new client account, the system generated a hard copy of all initial transaction documents for client review and signature in the form of a single document print-out. Pursuant to standard FSC policy and procedure, RMF retained each client's signed application signature form and provided a hard-copy of all transaction documents to the client.

¶6 The three-page customer agreement form contained detailed language explaining the arbitration process relative to litigation, stated the parties' agreement to resolve any and all disputes through binding arbitration, and declared that the agreement effected a waiver of the client's litigation rights, including, inter alia , the right to a jury trial. Though FSC did not require Investors to initial or sign the customer agreement form, the application signature page forms conspicuously referenced the customer agreement form as part of the agreements and conspicuously stated in bold-print directly above one of two customer signature blocks that:

The Customer Agreement contains a pre-dispute Arbitration Provision. This Provision is contained in this agreement and appears in bold print. I hereby acknowledge by my signature below, receipt of a copy of this agreement .

(Emphasis added.) FSC did not require the initiating RMF representative to further discuss or explain the arbitration agreements with clients beyond the express language of the transaction forms.

¶7 Kay Hartman (Kay), wife of RMF broker and registered FSC representative Barry Hartman, assisted with clerical duties, including preparing, printing, and providing account packets to clients upon opening of new accounts at RMF. Kay testified that she assisted with new accounts by obtaining and inputting client information into the FSC system. Kay also printed the various transaction documents for client review, verified social security numbers, and obtained client signatures. Kay testified that, if she had any reason to believe that a client did not receive or leave the office with copies of all transaction documents, it was her practice to mail copies to the client with a note to contact her or Mr. Hartman with any questions. Kay further testified that it was her standard practice to tell clients that the account application documents made them FSC clients and that the referenced customer agreement form provided for mandatory arbitration of any dispute related to the account. There is no evidence that any of the Investors ever questioned, objected to, or stated any concern about the arbitration provisions referenced in any of the FSC account documents. Kay testified that she mailed complete transaction document packets to two of the Investors after signing.

¶8 Although the language of the customer agreements forms varied slightly over time, Curley testified that the arbitration agreement language remained substantially similar at all times pertinent. Inter alia , the customer agreement forms included the following arbitration agreement and disclosure in bold type:

Arbitration

1. Arbitration Disclosure

This agreement contains a pre-dispute arbitration clause. By signing an arbitration agreement the parties agree as follows:

• All parties to this agreement are giving up the right to sue each other in court, including the right to a trial by jury, except as provided by the rules of the arbitration forum in which a claim is filed.

• Arbitration awards are generally final and binding; a party's ability to have a court reverse or modify an arbitration award is very limited.

• The ability of the parties to obtain documents, witness statements and other discovery is generally more limited in arbitration that in court proceedings.

• The arbitrators do not have to explain the reason(s) for their award.

• The panel of arbitrators will typically include a minority of arbitrators who were or are affiliated with the securities industry.

• The rules of some arbitration forums may impose time limits for bringing a claim in arbitration. In some cases, a claim that is ineligible for arbitration may be brought in court.

• The rules of the arbitration forum in which the claim is filed, and any amendments thereto, shall be incorporated into this agreement.

2. Agreement to Arbitrate Controversies

You agree that any and all controversies which may arise between you, FSC, Pershing LLC, and/or any of FSC's employees, agents, or officers concerning any account, transaction, dispute or the construction, performance, breach, or termination of this Agreement or any other agreement, whether entered into prior to, on or subsequent to the date hereof, shall be determined and resolved by arbitration. Any arbitration under this Agreement shall be held under and pursuant to and governed by the Federal Arbitration Act, and shall be conducted before an arbitration panel convened by the American Arbitration Association or NASD Dispute Resolution.³ You may also select any other national securities exchange's arbitration

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