Merrill Lynch Blindsided By Former Employee In Promissory Note Case

March 20, 2015

 The big boys just don't tend to lose their promissory note cases with any regularity: mostly because these cases are based upon executed ironclad agreements and irrefutable evidence of money owed. Every so often, however, a former employee is pissed off and refuses to go down quietly or quickly. In a recent effort by Merrill Lynch to collect nearly a quarter of a million dollars in a promissory note balance, the former employee counterclaimed for over $1 million in his own damages. The outcome may surprise you.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in July 2011, Claimant Merrill Lynch asserted breach of promissory note and unjust enrichment in connection with a promissory note executed by former employee Respondent Espinoza. Claimant sought the $247,999.96 principal balance on the note plus 2.95% per annum interest ($20.04 per day) from July 14, 2011; attorneys' fee, and costs. In the Matter of the FINRA Arbitration Between Merrill Lynch, Pierce, Fenner & Smith Incorporated, Claimant / Counter-Respondent, vs. Rene' Tapia Espinoza, Respondent / Counter-Claimant (FINRA Arbitration #11-02987, March 13, 2015).

 Counter Punching

Respondent Espinoza generally denied the allegations, asserted various affirmative defenses, and filed a Counterclaim asserting defamation and breaches of contract and the covenant of good faith and fair dealing. Espinoza also sought an expungement of disclosures on his Uniform Termination Notice for Securities Industry Registration ("Form U5").

In addition to attorneys' fee, interest, and costs, Respondent / Counter-Claimant Espinoz a sought $247,999.96 damages plus $20.04 interest from July 14, 2011, as damages for Merrill Lynch's alleged breaches. Espinoza further sought damages for losses he sustained as a result of Merrill Lynch's alleged solicitation of his clients. At the close of the hearing, Espinoza purportedly submitted revised damages estimates of $1,208,276 and/or $1,327,747 based upon two different sets of assumptions. Finally, Espinoza asked that his Central Registration Depository record ("CRD") be amended to note that:

  • The Reason for Termination was "Permitted to Resign"
  • The present termination commentary be revised to state: "Conduct in accordance with specific guidelines and instructions from Merrill Lynch, and through no wrongdoing of Broker"

SIDE BAR: Online FINRA BrokerCheck records as of March 20, 2015, disclose that Merrill Lynch 'Discharged" Espinoza on July 14, 2011.

Panel Findings

Generally, these promissory note arbitrations tend to be slam dunks for the former employer Claimant. In Espinoza, however, the arbitrators showed independence, as explained in the FINRA Arbitration Decision:

The Panel finds that Claimant terminated Respondent without cause. Pursuant to the employment contract, the balance owed on the promissory note that forms the basis of Claimant's claim is offset by an equal amount payable under the employment contract. Accordingly, Claimant recovers nothing on its claim and the parties will bear their own costs and attorneys' fees with respect to that claim.

On the counterclaim for breach of contract, the Panel finds that Claimant did not breach the contract. On the counterclaim for defamation, the Panel finds that the context of the reason for termination in the Form U5 was defamatory but that no damages were proven to have been caused by that defamation and the only relief to which Respondent is entitled is the expungement recommendation in the Award section below. In addition, the parties will bear their own costs and attorneys' fees incurred in connection with the counterclaim.

The Panel finds that although the reason given for Respondent's termination in Section 3 of his Form U5 is not defamatory when read in isolation, when it is viewed in context with Mernll Lynch's answers to Disclosure Questions 7B and 7F1, it is. The reason is that the evidence produced at the hearing did not support Merrill Lynch's contention that Respondent had acted dishonestly or had violated any statutes, regulations, rules, or industry standards in connection with the surrender of annuities and the submission of new or replacement annuity orders. Likewise, the evidence established that Merrill Lynch's written policy was not violated and that its system for regarding replacement orders for annuities was not designed to deal with new annuity orders for customers of a registered representative moving to Merrill Lynch who had previously owned proprietary annuities with the registered representative's previous firm, and who chose to surrender  them and have the proceeds deposited into their Merrill Lynch account, and then  purchase new annuities with issuers with which Merrill Lynch did business.

 In addition to denying Claimant Merrill Lynch's claims, The Panel recommended the expungement of Respondent Espinoza's August 11, 2011, Form U5 and recommended the following replacement language (and conforming language reflected in other pertinent parts of the U5):

THE REGISTERED PERSON WAS TERMINATED FOR CONDUCT RELATING TO THE SURRENDER OF ANNUITIES AND THE SUBMISSION OF ANNUITY ORDERS, EVEN THOUGH IT WAS SUBSEQUENTLY DETERMINED BY AN ARBITRATION PANEL NO REASONABLE BASIS EXISTED TO SUPPORT THE MEMBER'S DETERMINATION THAT SUCH CONDUCT HAD CONSTITUTED GROUNDS TO TERMINATE THE REGISTERED PERSON FOR CAUSE.

 As to the statement reflected on the Internal Review Disclosure Reporting Page, the Panel recommended the following replacement language (and conforming language reflected in other pertinent parts of the U5):

After an arbitration panel heard evidence on this matter, it determined that the customer complaint that led to the investigation was due both to the fault of Merrill Lynch's confusing policies and process relating to the purchase of replacement annuities as well as to the Registered Person's failure to adequately monitor the situation and advocate for the customer. However, this customer complaint was not asserted as the reason for terminating the Registered Person.

Bill Singer's Comment

Compliments to these FINRA arbitrators for providing us with excellent content and context -- and a most thoughtful rationale.  

Unusual within the context of these employment dispute arbitrations, the Panel found that Merrill Lynch had terminated Espinoza "without cause." That's dramatic because it technically deems that the employer was in breach of the employment contract and, accordingly, paves the way for the arbitrators to throw the agreement into the garbage, call an audible, and run wherever the hell they like -- okay, perhaps a bit of an exaggeration in terms of the legalese of these things but, you know, not all that off base. On the other hand, and this just proves that life and litigation is full of contradictions, this same Panel pointedly found that Merrill was NOT in breach of contract per Espinoza's counterclaim. Frankly, I'm not sure how to reconcile that dichotomy, so I'll leave it to you to deal with it as you wish.

As to Espinoza's defamation counterclaim, the Panel found that Merrill's "Reason For Termination" on his Form U5 was defamatory; however, the arbitrators found that Espinoza had failed to prove any damages on that cause of action. Accordingly, the arbitrators deemed that their recommendation of an expungement would redress that harm.

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