In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in May 2015, Claimant Wells Fargo Advisors asserted breach of a promissory note dated August 4, 2006, in connection with Respondent Agre's alleged failure to pay its outstanding balance. As of the close of the hearing, Claimant sought $146,090.85 in damages and interest. In the Matter of the FINRA Arbitration Between Wells Fargo Advisors, LLC, Claimant/Counter-Respondent, vs. Mark F. Agre, Respondent/Counterclaimant (FINRA Arbitration 15-01073, March 23, 2017). http://www.finra.org/sites/default/files/aao_documents/15-01073.pdf
Respondent Agre generally denied the allegations, asserted various affirmative defenses, and filed a Counterclaim and an Amended Counterclaim asserting wrongful/constructive discharge; breaches of the terms of the employment relationship and compensation agreements, of implied covenants of good faith and fair dealing, and of compensation agreements; restitution; unjust enrichment. Two additional causes of action for defamation; and breach of FINRA Rule 2010 were asserted via the Amended Counterclaim and raised in connection with Wells Fargo's alleged settlement of a customer complaint which arose after Agre's termination. Agre sought at least $375,000 in compensatory damages, interest, costs, attorneys' fee, forum fees, and charges; and in the Amended Counterclaim sought at least $150,000 in additional compensatory damages and an expungement of the customer complaint from his Central Registration Depository records ("CRD").
The FINRA Arbitration Panel conducted an expungement hearing at which Claimant Wells Fargo participated but did not contest the request relief. The complaining customer appeared and contested Respondent's expungement request.
The FINRA Arbitration Panel recommended the expungement of the customer complaint from Agre's CRD based upon a Rule 2080 finding that the claim, allegation, or information is factually impossible or clearly erroneous and false. In offering its rationale for recommending expungement, the noted that Agre did not contribute to the settlement and the Panel stated in part that:
The loss in the Customer's account had not reached $5,000.00 as of the time Respondent left Claimant's employ. Thus, it is impossible for the loss to be Respondent's responsibility, especially since after Respondent left, Claimant ignored the Customer and did nothing to stem the loss in the Customer's account. The settlement of the Customer Complaint was not related to the instant arbitration case, but, rather was related to Respondent's alleged mishandling of the Customer's account.
The FINRA Arbitration denied Claimant Wells Fargo Advisors, LLC's claims. As set forth in the FINRA Arbitration Decision:
a) The majority of the Panel finds the February 2, 2010, Amendment to Promissory Note ("Amendment"), to be unenforceable. Arbitrator Glick dissents. His explanation is included in this Award on pages 8 and 9.
- Substance over form was an important factor.
- Promissory notes for upfront bonuses, an industry practice, are an instrument to tie a Financial Advisor ("FA") to the company for sufficient time to recover the value of the upfront bonus. There is no option for the FA to have the total upfront bonus taxed in the first year.
- Claimant solely initiated the Amendment to the Promissory Note and Respondent had no input into its terms.
- Respondent was circumstantially pressured to take the Amendment.
- Claimant was disingenuous to argue there was no benefit for Claimant with the Amendment. The Amendment added about four additional years of lender control over Respondent. Respondent was one of the newly acquired FAs from the takeover of Wachovia Securities, LLC ("Wachovia"). The majority of the Panel does not agree that the Amendment was offered solely because Claimant's FAs generally were "choking on taxes" because of the 08-09 downturn in the market. Moreover, Claimant presented no evidence that Respondent specifically was "choking on taxes" or that he had any other reason to want to amend the Promissory Note.
- The Amendment is significantly unbalanced in Claimant's favor and, most importantly, places Respondent in a worse position than under the Promissory Note. There was no new bonus money with the Amendment and the extended deferral of taxes was no detriment to Claimant. In fact, Claimant's monthly payment was reduced from $5720.73 to $2992.37. With the Amendment, Respondent incurred approximately four more years of loan risk and control by Claimant. FAs leaving/switching companies is a relatively common occurrence. The drop in the interest rate has a de minimus impact, unless the loan principal becomes due. Even then, the effect is speculative and would be minor at best. The extended deferral of taxes is insignificant compared to the increased length of "loan" risk over the Promissory Note. This case is an example of that risk.
- Respondent fulfilled his obligation under the Promissory Note. That is, he worked for Wachovia and then Claimant for more than the "eighty-eight (88) months" set forth in the Promissory Note.
b) Claimant, as relief, is ordered to revise its records for Respondent's income for the years 2010-14 based on the Promissory Note. In other words, as if the Amendment never occurred. Claimant is ordered to report these changes to the IRS.
Concurring in Part Dissenting in Part Arbitrator
I respectfully dissent from the majority of the Panel's decision in Paragraph 1 of the Award. I would award the full amount requested by Claimant. I do agree with the majority that the Respondent's counterclaims are denied. I also agree with the majority that there was no constructive discharge of the Respondent.
The business deal here was a loan of $415,870.00 in August of 2006, when Respondent joined Claimant's predecessor, Wachovia. (It should be noted that Respondent could have accepted bonus payments as earned instead of receiving an upfront bonus-related loan). The loan was to pay, in advance, a bonus to be earned over the ensuing eighty-eight (88) months. The loan was to be repaid on a fixed schedule out of income earned by Respondent as an employee, and those payments were to be reimbursed to Respondent under a bonus plan. However, if the bonus payments were no longer being earned (and quitting would end bonus payments), the loan was to be repaid anyway. For several years all went well, thus reducing the loan balance to $131,119.84 when Respondent quit his employment by Claimant. The Loan Payment Authorization Agreement signed in 2006, provided that, in the event of employment termination for any reason, "...I agree that I will immediately pay you the remaining balance owed". Thus, when the majority of the Panel ruled that when Respondent remained employed for over eight-eight (88) months, he "fulfilled his obligation", that ignores the actual transaction and substitutes a nonexistent business understanding.
The documents referred to above were amended in 2010 to reduce the payments, reduce the interest rate, and reduce the bonus payments. Such Amendment did not cancel the obligation to repay.
As stated above, the panel unanimously ruled that there was no constructive discharge. Respondent's Statement of Answer and Counterclaim states that constructive discharge means that Claimant breached the employment relationship, thereby forfeiting any claim of right to recover any form of damages. On the contrary, the Panel unanimously agreed that Claimant could change its business model without asking for Respondent's approval, thus no constructive discharge occurred.
Respondent's Statement of Answer and Counterclaim also alleges unclean hands, but there is no such finding by the majority of the Panel. The majority of the Panel does state that the agreements were unfair, but unclean hands requires serious wrongdoing, like fraud or dishonesty. Indeed, in many contract cases, one party does not like the deal, but that does not necessarily create unclean hands. Respondent's Statement of Answer and Counterclaim also questions whether or not there was a valid assignment of the note to Claimant. There is no finding that the assignment to Claimant by predecessor Wachovia is defective, and adequate proof of a valid assignment was reviewed at the hearing.
The majority of the Panel finds that the Amendment is not enforceable. Before discussing that issue, I observe that, if that is correct, then the Promissory Note was never amended and a balance is still owing under it. The amount would exceed Claimant's claim because there was a higher interest rate before the Amendment.
I believe the Amendment is valid. It is signed by both parties and supported by consideration (lower payments, longer term and the interest rate substantially reduced). At the time of the Amendment, the amended note balance was $278,155.92. It was paid down to the claimed amount of $131,119.84 when Respondent quit, refusing to make any more payments. Thus, payments exceeding $147,000 were paid under the Amendment. That is ratification if there ever was any doubt about enforceability. As stated above, even if the Amendment is invalid, the Promissory Note, without the Amendment, should be enforced.
The majority of the Panel comments on tax treatment. While I believe that is outside our authority, I would note that if Claimant has to recast previous bonus payments at a higher amount, Respondent needs to file amended returns showing higher income for those years.
I believe that FINRA arbitrators are bound by fact and law. While we are free to interpret law in ways a court might not agree with, I believe we need to decide awards that consider the transaction structure and legal elements we are examining.
Bill Singer's Comment: The FINRA Arbitration
The FINRA Arbitration Decision is somewhat disjointed because of its combination of a customer-complaint expungement with a disputed promissory note. Further, the dramatic disagreement between the two arbitrators who drafted the majority award ("FINRA Majority") and the dissenting arbitrator contributes to murkiness about the parties' conduct attendant to that disputed agreement and its amendment. As the expungement request was not opposed by Wells Fargo and the FINRA Arbitration Panel's recommendation is thoughtfully set forth in the FINRA Arbitration Decision, the balance of this blog will focus on the promissory note dispute.
Agre's Employment and Registration History
According to FINRA's online BrokerCheck records as of February 26, 2018, Agre was first registered in 1993 with H&R Block Financial Advisors, Inc., where he remained until he purportedly joined "Wells Fargo Advisors, LLC" in August 2006. Under Agre's BrokerCheck heading "Registration History," FINRA asserts that Agre was registered with Wells Fargo Advisors, LLC from "08/226 - 11/2014"). That representation conflicts with Agre's BrokerCheck heading "Employment History," in which FINRA asserts that he was "employed" from "08/2006 - 05/2009" by "Wachovia Securities, LLC" and, thereafter, from "05/2009 - 11/2014" by "Wells Fargo Advisors LLC."
2008 Wachovia/Wells Fargo Merger
On December 23, 2008, Wachovia's shareholders approved a merger proposal from Wells Fargo, and the merger was effective on December 31, 2008. When Agre signed the August 4, 2006, promissory note for a $415,870 loan, he was employed and registered with Wachovia. When Wells Fargo amended Agre's Wachovia promissory note on February 2, 2010, that amendment took place about 3 1/2 years after the note was signed and about 14 months after Wells Fargo acquired Wachovia.
The August 4, 2006, Wachovia Promissory Note was to be earned over the ensuing eighty-eight (88) months, which would reached term in December 2013. Consequently, by the November 2014 date on which Agre's registration with Wells Fargo was terminated, he should have termed-out on the note per the original, un-amended agreement. As a result of Wells Fargo's February 2, 2010, amendment, that firm extended the term of the note by four years, which effectively extended the firm's control of Agre by confronting him with possible legal liability should he resign from the employer prior to the extended term: a classic example of "moving the goal line."
I reject the Dissent's analysis and rationale but applaud him for presenting a thoughtful statement of his position.
The FINRA Majority noted that Wells Fargo has "solely initiated the Amendment to the Promissory Note and Respondent had no input into its terms," and that Agre had been "circumstantially pressured" to accept the revisions. The FINRA Majority characterized the Amended Promissory Note as "significantly unbalanced in Claimant's favor" and placed Agre in a worse position without any additional financial inducement.
The Dissent seems overly focused on whether there was a "constructive discharge" and whether Wells Fargo "could change its business model without asking for Respondent's approval." Absent from Dissent's concern about Wells Fargo's rights is any similar consideration of Agre's rights. Pointedly, did Agre not have the right to expect good faith from his employer Wells Fargo when it came to honoring the contractual commitment made to him by Wachovia? As the FINRA Majority found, Wells Fargo preferred to engage in what comes off as strong-arm tactics that presented neither the form nor substance of a freely-negotiated extension of the repayment term. Notably absent from the Dissent's rationale is an acceptance, grudging as it may be, that although Wells Fargo had the right to request amended terms of pre-existing Wachovia loans, such a desire to revise agreements acquired via the merger were not without cost or consequence. The Dissent's cynical characterization of the core issue as "one party does not like the deal" comes off as specious and disingenuous.
Nothing better demonstrates the chasm between the FINRA Majority and the Dissent, than the latter's conclusion that the "[A]mendment is valid. It is signed by both parties and supported by consideration . . ." Does the Dissent not recall the Great Recession? Does the Dissent not recall the nature of the economy and the broker-dealer business when Wells Fargo unilaterally amended Agre's agreement in February 2010? Does the Dissent not comprehend that Agre's refusal to sign the amended agreement would likely have resulted in his termination at a time when job prospects were dim -- and that he would have been forced into this take-it-or-leave-it Hobson's Choice through no misconduct of his own but simply because Wells Fargo deemed it had the right to demand the amended terms? Putting a gun to a contra-party's head is not benefiting from the bargain of a freely negotiated deal. I am compelled by the FINRA Majority's depiction of an employer using a dire economy and the prospect of termination as a club with which to bludgeon a grandfathered employee into submission.
State Court Motions To Confirm and Motion to Modify
Following the FINRA Arbitration, Agre sought to confirm the FINRA Arbitration Award in the District Court of Johnson County, Kansas, and, in response, Wells Fargo sought to modify the Award. Mark F. Agre, Plaintiff, v. Wells Fargo Advisors Financial Network, LLC and Financial Industry Regulatory Authority, Defendants (Order Denying Motion to Modify and Confirming Arbitration Award; District Court of Johnson County, Kansas, Case No. 17-CV-1974, February 22, 2018). http://brokeandbroker.com/PDF/AgreCt.pdf
The Court Order is an admirable example of a judge who has taken the time to think through the facts and issues, knows his craft, and discharges his duty to the parties and the public with admirable excellence. As set forth in part in the Court Order:
[T]he gist of this motion to modify is that a majority of the three-person arbitration panel ordered Wells Fargo to report as income to the Internal Revenue Service monies that defendant now says would be false, because it never did so, and this remedy or relief violates the crime exception to confirming such Awards.
In part, the Court Order framed the core issue before it, as on in which:
SIDE BAR: As set forth in the FINRA Majority's Rationale under the "Award" Section 1 (b):
Claimant, as relief, is ordered to revise its records for Respondent's income for the years 2010-14 based on the Promissory Note. In other words, as if the Amendment never occurred. Claimant is ordered to report these changes to the IRS.
Wells Fargo initiated the claims process by contending that Mr. Agre owed it money under a promissory note that he initially signed on August 4, 2006. At oral argument, the parties characterized this "loan" as an obligation to payback, over time, an upfront signing bonus of $415,000. The Award itself explains this arrangement as "[s]ubstance over form" and an industry practice that exchanged upfront bonuses for promissory notes that allowed the company to recoup its payment from its financial advisors ("FAs") over a sufficient period of time. Thereby, the note obligated the FA to continue working for the company, receiving commensurate monthly payment bonuses to pay the note. Leaving the company before the end of the stipulated 88-month term triggered an acceleration of the "loan." Until this, Wells Fargo booked monthly payment bonuses as income on its books but never paid the same to the FA. It merely applied them to the loan. Award Page 4 of 9.Under the original promissory note, Wells Fargo paid monthly $5,720.73 to Mr. Agre that it then used to reduce the "loan." That changed, at some point, so that both the loan payment and the payment bonuses were reduced to $2,992.37, but the consequence of this reduction, which the panel said only benefitted Wachovia/Wells Fargo, but to extend the working commitment of the FA. Exhibit A at Award Page 4 of 9.The panel observed that Agre continued to work for defendant by another four years before he decided to quit. Wells Fargo justified the extension because its "FAs generally were 'choking on taxes' or that he [Agre] had any other reason to want to amend the Promissory Note." The panel majority determined, however, that the amendment was "significantly unbalanced . . . and, most importantly, places [Agre] in a worse position than under the Promissory Note." Id. It rejected any benefit to the FA either in terms of the interest rate or the deferral of taxes as "insignificant" when compared with Agre's "loan" risk and further control by Wells Fargo over him.Ultimately, the panel concluded that Mr. Agre fulfilled his obligation "under the Promissory Note. That is, he worked for Wachovia (the predecessor company) and then or more than the 'eighty-eight (88) months' set forth in the Promissory Note." Award Page 4 of 9. The panel's remedy, beyond discharging any obligation owed to Wells Fargo (on the amended promissory note) was to find, effectively that Mr. Agre's service to the company had effected payment of the original note. Thereby, the Award ordered Wells Fargo to "revise its records for Respondent's income for the years 2010-14 based on the Promissory Note. In other words, as if the Amendment never occurred. Claimant is ordered to report these changes to the IRS." Id. (emphasis added). The foregoing appears under paragraph 1 of the Award, the finding in response to defendant's original claim. Other than expungement, all other damage claims and counterclaims of the parties were denied. Award Page 5 of 9.Now, defendant contends it would commit a false reporting (a crime) to alter its records to show that the original note had been paid off by income it never paid Mr. Agre. . .
Principally, Wells Fargo's argument goes, employers must report and withhold taxes on only those wages that are paid. 26 U.S.C. 3402. A W-2 must be provided that contains an employee's wages and tax information. 26 U.S.C. 6501(a). Finally, an employer is required to furnish such W-2 information and one "who willfully furnishes a false or fraudulent statement . . . shall, for each such offense, upon conviction thereof, be fined not more than $1,000, or imprisoned not more than 1 years, or both." 26 U.S.C. 7204. Section 7206(1), defendant complains, makes it a felony to report something on a return that is false.5 It argues that forcing it to report income that it "knows [was] not, in fact, actually paid would place Wells Fargo in violation of sections 7204 and/or 7206(1) of the Internal Revenue Code." Doc. 22 at 8-9.
Defendant now complains that either its failure to make sufficient bonus payments or underpaying Mr. Agre such payments now forces it to commit a crime because it will have to effectively recharacterize its FA transaction to reflect the Award's findings. In reality, it is complaining that the consequence of its "amendment" of the promissory note is that it was not enforced, much less believed and that Mr. Agre will be getting away with something. In other words, it refuses to acknowledge the result of the Award.
Page 8 of the Court OrderThe panel majority, however, sought to impute income that paid off the original promissory note because Mr. Agre had fulfilled the service obligation that should have resulted in monthly bonus compensation to pay off the debt. But Wells Fargo reveals its motive here, which is less about reporting false income, and more about seeking to impute a "cancelled debt" that would force Mr. Agre to pay taxes on the same. But the Award itself rejected the existence of such a debt. Thus, defendant's position is precisely contrary to the Award.It is apparent the arbitrators sought to avoid any real monetary recovery for damages by either party. It rejected Wells Fargo's principal claim of a debt and it rejected Mr. Agre's claim for monetary damages, except in the limited remedy of ensuring that no debt was owed. Implicit in the Award, however, is that Mr. Agre should have been paid under a bonus plan to ensure he would not have to pay any debt at the end of the original duration for service.
Page 8 of the Court Order[T]he arbitral remedy and Award that requires Wells Fargo to report income related to Mr. Agre's services during the relevant tax years with defendant does not violate public policy or justify modifying the Award. Rather, it is within arbitral authority to order such a remedy. Accordingly, the Court confirms the arbitration Award in all respect.