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Story v. Lynch

United States District Court, E.D. Louisiana

December 13, 2019


         SECTION “R” (1)



         The Court has received the motion to compel arbitration, or in the alternative to dismiss the petition for mandatory injunction and damages and the petition for authority, from defendants Merrill Lynch, Pierce, Fenner & Smith Incorporated and Bank of America Corporation.[1] The Court previously granted the motion to compel arbitration with regard to Merrill Lynch, but requested additional briefing before ruling on the remaining issues.[2] The Court now grants the motion to compel arbitration with regard to Bank of America.

         I. BACKGROUND

         This case arises from the freezing of trust accounts.[3] Michael P. Zauner, the husband of plaintiff Tricia Melerine Story, [4] created a trust to benefit his wife and children.[5] The trust assets include investment accounts with Merrill Lynch, a subsidiary of Bank of America.[6] Zauner died, [7] and his wife was to become the trustee.[8] But Zauner's children objected to Story as trustee.[9] As a result, Merrill Lynch restricted the trust accounts, [10] and did not follow Story's instructions to disburse the account funds.[11]

         Story therefore filed two suits in Louisiana, one asking the state court to mandate the distribution of the funds and award damages, [12] and one asking the state court to grant her authority over the accounts.[13] Defendants removed both suits to federal court, leading to the current action.[14]

         Defendants then filed a motion to compel arbitration.[15] The Court granted this motion in part, ordering arbitration with respect to Merrill Lynch.[16] Bank of America, though, had not addressed whether Story had to arbitrate her claims against it, instead arguing that Bank of America is not a proper party to the suit.[17] The Court therefore ordered the parties to brief whether an arbitration agreement exists between Bank of America and Story that would necessitate arbitration of the remaining disputes.[18]

         In a separate vein, after defendants filed their motion to compel, the Zauner children settled a suit in which they had attempted to remove Story as a trustee.[19] The Court therefore also ordered the parties to brief whether this settlement meant that a live dispute no longer existed in the current action.[20]

         In this additional briefing, Bank of America avers that, following the settlement, Merrill Lynch received a letter of authorization from Story and the Zauner children, which identified Story as trustee and allowed distributions from the account following approval of the respective counsel for Story and the children.[21] And distributions have been made pursuant to plaintiff's instructions.[22] Story nevertheless argues that she still has a live claim against Bank of America.[23] Bank of America, in turn, argues that Story herself has now signed a Client Relationship Agreement containing an arbitration clause, [24] and that she should be compelled to arbitrate any remaining dispute with Bank of America.[25]

         The Court now addresses the remaining arguments in defendants' motion to compel arbitration, or in the alternative, to dismiss the suit.[26]


         To determine whether to compel arbitration, the Court conducts a “two-step inquiry.” JP Morgan Chase & Co. v. Conegie ex rel. Lee, 492 F.3d 596, 598 (5th Cir. 2007). “Th[e] Court must first ascertain whether the parties agreed to arbitrate the dispute, ” which requires “determining . . . ‘(1) whether there is a valid agreement to arbitrate between the parties; and (2) whether the dispute in question falls within the scope of that arbitration agreement.'” Id. (quoting Will-Drill Res., Inc. v. Samson Res. Co., 352 F.3d 211, 214 (5th Cir. 2003)). As the Federal Arbitration Act (“FAA”) expresses a liberal policy in favor of arbitration, see AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 346 (2011), “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.” Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983). The Court next considers “whether any federal statute or policy renders the claims nonarbitrable.” JP Morgan Chase & Co., 492 F.3d at 598 (quoting Washington Mut. Fin. v. Bailey, 364 F.3d 260, 263 (5th Cir. 2004)).


         The Court previously examined whether an arbitration agreement bound Story and Merrill Lynch.[27] The Court now conducts a similar analysis to determine whether to compel arbitration of any remaining disputes between Story and Bank of America.

         A. Agreement to Arbitrate: Validity

         The first step of the arbitration analysis requires determining whether Story and Bank of America agreed to arbitrate this dispute, which in turn requires first determining whether a valid agreement to arbitrate exists between Story and Bank of America. As discussed in the Court's earlier order, [28] to have a valid agreement to arbitrate, the parties “must generally be [] signator[ies] to a contract containing an arbitration clause.” Bridas S.A.P.I.C. v. Gov't of Turkmenistan, 345 F.3d 347, 353 (5th Cir. 2003).

         Here, Bank of America argues-as Merrill Lynch did earlier[29]-that the Merrill Lynch Client Relationship Agreement contains such a clause.[30] In its earlier order, the Court addressed whether this Agreement bound Story as a nonsignatory.[31] But the supplemental briefing indicates that Story has now signed the Agreement.[32] Consequently, the Court no longer needs to consider whether this Agreement binds Story as a nonsignatory.

         The Court must still consider, though, whether Bank of America is a signatory to this Agreement. Although the Agreement purports to define a “household's relationship with Merrill Lynch, ”[33] it also mentions Bank of America. The first page, for example, bears the logo “Merrill Lynch Bank of America Corporation.”[34] And the terms and conditions begin:

For the purpose of this Client Relationship Agreement (“Agreement”), “you” and “your” refers to each person who has agreed to the terms in this Agreement. “Merrill Lynch, ” “we, ” “our” and “us” refer to Merrill Lynch, Pierce, Fenner & Smith Incorporated, a registered broker-dealer and a wholly owned subsidiary of Bank of America Corporation. “Account” refers to any securities account you open with Merrill Lynch.[35]

         The Agreement also mentions Bank of America elsewhere. For instance, when discussing Merrill Lynch's referral policy, the Agreement states that Merrill Lynch “is an affiliate of Bank of America, N.A. and other subsidiaries of Bank of America Corporation (collectively, ‘Merrill Lynch').”[36]

         But while this Agreement does name Bank of America, the Court does not find that the terms establish Bank of America as a signatory. Rather, the references to Bank of America merely identify Bank of America Corporation as the parent company of Merrill Lynch, and other subsidiaries of Bank of America as affiliates of Merrill Lynch. The Court therefore considers whether Bank of America Corporation, as a nonsignatory, can validly use the Agreement to compel arbitration.

         The Court's prior order addressed a related question. There, the Court found that Merrill Lynch, a signatory to the Agreement, could bind Story, a nonsignatory.[37] The Court now considers the reverse question: whether Bank of America, a nonsignatory to the Agreement, can bind Story, a signatory.

         “[S]tate law controls whether an arbitration clause can apply to nonsignatories.” Todd v. Steamship Mut. Underwriting Ass'n (Bermuda) Ltd., 601 F.3d 329, 336 (5th Cir. 2010); see also Halliburton Energy Servs., Inc. v. Ironshore Specialty Ins. Co., 921 F.3d 522, 529-32 (5th Cir. 2019) (looking to Texas law to determine whether a nonsignatory can enforce an arbitration clause); 1 Thomas H. Oehmke, Commercial Arbitration § 7:1 (Dec. 2019 update) (“While the FAA ‘creates substantive federal law regarding the enforceability of arbitration agreements, . . . background principles of state contract law' control the interpretation of the scope of such agreements ‘including the question of who is bound by them.'” (alteration in original) (quoting Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 630 (2009))).

         The defendants removed the plaintiff's action from state court to this Court on the basis of 28 U.S.C. § 1332 diversity jurisdiction.[38] A federal court sitting in diversity applies the choice of law rules of the state in which it resides. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). The Court therefore applies Louisiana law.

         Louisiana generally accepts parties' contractual choice of law. See La. Civ. Code art. 3540 (“All other issues of conventional obligations are governed by the law expressly chosen or clearly relied upon by the parties, except to the extent that law contravenes the public policy of the state whose law would otherwise be applicable under Article 3537 [providing the “[g]eneral rule” for choice of law in matters of conventional obligation].”); see also Todd v. Steamship Mut. Underwriting Ass'n, Ltd., No. 08-1195, 2011 WL 1226464, at *5 (E.D. La. Mar. 28, 2011) (“In Louisiana, choice-of-law clauses in contracts are given effect unless there is law or strong public policy justifying the refusal to enforce the contract as written.” (citing Prescott v. Northlake Christian Sch., 369 F.3d 491, 496 (5th Cir. 2004)).

         “Moreover, Louisiana courts have held that the validity of an arbitration agreement is determined by the law selected in the agreement itself.” Id. (citing Bolden v. FedEx Ground Package Sys., Inc., 60 So.3d 679, 684-85 (La.App. 4 Cir. Feb. 16, 2011)). Here, the Agreement chooses New York law, [39] which the Court follows.

         In determining whether a nonsignatory to an agreement can compel a signatory to arbitrate, New York law largely mirrors federal law. See Gov't Emps. Ins. Co. v. Grand Med. Supply, Inc., No. 11 Civ. 5339 (BMC), 2012 WL 2577577, at *3 (E.D.N.Y. July 4, 2012). And federal law has recognized multiple theories for applying arbitration agreements to nonsignatories. See Thomson-CSF, S.A. v. Am. Arbitration Ass'n, 64 F.3d 773, 776 (2d Cir. 1995); see also Arthur Andersen, 556 U.S. at 631 (“‘[T]raditional principles' of state law allow a contract to be enforced by or against nonparties to the contract through ‘assumption, piercing the corporate veil, alter ego, incorporation by reference, third-party beneficiary theories, waiver and estoppel.'” (quoting 21 Samuel Williston & Richard A. Lord, A Treatise on the Law of Contracts § 57:19 (4th ed. 2001)).

         Bank of America specifically argues that the theory of estoppel applies here.[40] Indeed, New York courts have previously applied this theory to arbitration. See Belzberg v. Verus Invs. Holdings Inc., 999 N.E.2d 1130, 1133 (2013) (noting that “New York courts have relied on the direct benefits estoppel theory, derived from federal case law, to abrogate the general rule against binding nonsignatories”).

         Estoppel, though, takes multiple forms. See Hoffman v. Finger Lakes Instrumentation, LLC, 789 N.Y.S.2d 410, 414 (N.Y. Sup. Ct. 2005). As applicable here, this theory permits a court to “estop a signatory from avoiding arbitration with a nonsignatory when the issues the nonsignatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed.” Id. at 415 (quoting Thomson-CSF, 64 F.3d at 779). Or, explained in the context of a nonsignatory parent company, “[i]n essence, a non-signatory voluntarily pierces its own veil to arbitrate claims against a signatory that are derivative of its corporate-subsidiary's claims against the same signatory.” E.I. DuPont de Nemours & Co. v. Rhone Poulenc Fiber & Resin Intermediates, S.A.S., 269 F.3d 187, 201 (3d Cir. 2001).

         This form of estoppel applies if one of two conditions is met. A nonsignatory can compel arbitration “when the signatory to the contract containing the arbitration clause raises allegations of substantially interdependent and concerted misconduct by both the nonsignatory and one or more of the signatories to the contract.” Hoffman, 789 N.Y.S.2d at 415 (quoting Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524, 527 (5th Cir. 2000)). Or a nonsignatory can compel arbitration “[w]hen each of a signatory's claims against a nonsignatory makes reference to or presumes the existence of the written agreement, the signatory's claims arise out of and relate directly to the written agreement, and arbitration is appropriate.” Hoffman, 789 N.Y.S.2d at 415 (quoting, Grigson, 210 F.3d at 527).

         Here, Story's claims require arbitration under either condition. First, Story raises allegations of substantially interdependent and concerted misconduct against both Bank of America, a nonsignatory, and Merrill Lynch, a signatory. Plaintiff's pleading, for instance, refers to a dispute regarding “certain investment accounts managed by ‘Merrill Lynch Bank of America Corporation.'”[41] Plaintiff specifically states she “has issued numerous directives and instructions to Merrill Lynch Pierce Fenner & Smith Inc. and Bank of America Corporation concerning the distribution of the funds held in the name of the Zauner Trust, ”[42] but “Merrill Lynch Pierce Fenner & Smith Inc. and Bank of America Corporation have failed and refused to follow [plaintiff's] instructions and have unlawfully withheld ...

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