UBS Wins FINRA Mandatory Arbitration Appeal

October 26, 2018

Few things are more frustrating for Wall Street's customers than to believe that they were victimized by one of the industry's large broker-dealers and then find out that their disputes must be adjudicated via mandatory arbitration before the Financial Industry Regulatory Authority ("FINRA"). For many investors the whole mandatory arbitration route comes as a surprise. Yes, as it turns out, there was a mandatory arbitration clause buried among many, many papers that were part of the new account onboarding package. Remember all those yellow-arrow-stickies indicating sign here, and here, and here, and here too, oh, and don't forget here too? Yup, you sorta signed away your right to sue in a court. Making matters worse, it turns out that the mandatory arbitration is going to be conducted by FINRA, which, after you do some belated online research, looks less like an independent industry regulator and more like a glorified trade group controlled by its large broker-dealers. All of which brings us to a recent lawsuit in which one angry UBS Financial Services customer was not prepared to go with the flow. Her lawyer truly came up with some clever and persuasive legal arguments against enforcing the mandatory arbitration agreement.  The thing with clever and persuasive legal arguments is that they don't always result in the desired verdict.

Case In Point

In a Complaint filed in the Oakland Circuit Court, Michigan, on May 26, 2017, Plaintiff Marjorie Lebenbom asserted statutory conversion and common law conversion against Defendant UBS Financial Services. Plaintiff  Lebenbom alleged that in 1979, she had created a revocable trust, which  proceeded to open a UBS account. 

Now, peel off about 37 years worth of calendar pages.

2016 NYS Tax Levy

On July 5, 2016, UBS received a New York State Department of Tax and Finance levy indicating that the judgment debtor was Plaintiff's husband, Milton Lebenbom. Without Plaintiff's authorization, on July 29, 2016, UBS allegedly removed $156,130.22 (purportedly double the amount of the levy) from Plaintiff's account. Plaintiff deemed the NYS levy as defective but Defendant restricted her access to all funds in the account despite efforts by her attorney to obtain a release of the freeze. 

2011 NYS Tax Levy

Plaintiff asserted that UBS had previously received a February 2011 levy from the New York State Department of Tax and Finance, and after freezing her assets at that time, Defendant expeditiously released her funds after determining that the levy was intended for her husband. Similarly, Plaintiff alleges that UBS had received identical, multiple levies prior to the July 5, 2016, one at issue and the broker-dealer consistently released her funds after determining that the levies were directed to her husband. 

NYS Lacks 2016 Attachment

On September 28, 2016, New York State concluded that the levy could not attach to Plaintiff's assets and released the levy. 

After Hell Froze Over and Then Thawed Out

As a result of UBS's imposition of the July 5, 2016, freeze, Plaintiff asserts that she did not have access to the funds in her account until September 29, 2016. During the period of UBS's account freeze, that firm allegedly did not provide any information with respect to when the hold on the account would be released. Plaintiffs asserted in her Circuit Court Complaint that during the relevant time in which her trust's account was frozen, she was left without monetary resources to pay her utility bills or other monthly expenses. 

Yes, But . . .

In response to Plaintiff's Circuit Court Complaint, Defendant UBS moved for summary disposition or, in the alternative, sought an order from the trial court compelling arbitration. Defendant cited a July 20, 2004, Account Services Selection form, which contained an arbitration agreement, which in part states:


* * *

that in accordance with the last paragraph of the Master Account Agreement entitled "Arbitration" the Account Holder agrees in advance to arbitrate any controversies which may arise with[,] among others[,] UBS Financial Services in accordance with the terms outlined therein.

Waive Bye-Bye (to court)

The Account Services Selection form included an affirmation by which Plaintiff acknowledged receipt and review of an attached Master Account Agreement, and further agreed to be bound by that agreement. In pertinent part, the Master Account Agreement states:


Arbitration is final and binding on the parties.

The parties are waiving their right to seek remedies in court, including the right to jury trial.

Pre-arbitration discovery is generally more limited than and different from court proceedings.

The arbitrator's award is not required to include factual findings or legal reasoning and any party's right to appeal or to seek modification of rulings by the arbitrators is strictly limited.

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

Client agrees, and by carrying an account for Client UBS Financial Services agrees that, any and all controversies which may arise between UBS Financial Services, any of UBS Financial Services' employees or agents and Client concerning any account, transaction, dispute or the construction,
performance or breach of this Agreement or any other agreement, whether entered into prior to, 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 by an arbitration panel convened by the New York Stock Exchange, Inc. or the National Association of Securities Dealers, Inc. Client may also select any other national securities exchange's arbitration forum in which UBS Financial Services is legally required to arbitrate the controversy with Client, including, where applicable, the Municipal Securities Rulemaking Board. Such arbitration shall be governed by the rules of the organization convening the panel. Client may elect in the first instance the arbitration forum, but if Client fails to make such election by certified mail, return receipt requested, or telegram addressed to UBS Financial Services at its main office, and to the attention of the Legal Department, before the expiration of five (5) days after receipt of a written request from UBS Financial Services to make such election then UBS Financial Services may make such election. The award of the arbitrators, or the majority of them, shall be final, and judgment on the award rendered may be entered in any court of competent jurisdiction.

An Authority Lacking Authority

In response to UBS's motion, Plaintiff Lebenbom asserted that FINRA lacked the authority to arbitrate her claims and that UBS's arbitration clause did not encompass her claims alleging wrongful conversion against UBS. Further, Plaintiff asserted that the terms of the UBS arbitration clause were ambiguous. 

SIDE BAR: FINRA Code of Arbitration Procedure for Customer Disputes Rule 12200: Arbitration Under an Arbitration Agreement or the Rules of FINRA

Parties must arbitrate a dispute under the Code if:
•  Arbitration under the Code is either:
(1) Required by a written agreement, or 
(2) Requested by the customer;
•  The dispute is between a customer and a member or associated person of a member; and
•  The dispute arises in connection with the business activities of the member or the associated person, except disputes involving the insurance business activities of a member that is also an insurance company

After conducting a hearing on Defendant UBS's motion, the trial court denied the motion. As matters stood, UBS was unable to compel arbitration before FINRA.

Court of Appeals

Defendant UBS appealed to the Michigan Court of Appeals. Marjorie Lebenbom, Plaintiff/Appellee, v. UBS Financial Services, Inc., Defendant/Appellant (Opinion, Michigan Court of Appeals, 340973 / October 23, 2018) On appeal, UBS argued that the Circuit Court erred in determining that the parties' arbitration clause does not encompass Plaintiff Lebenbom's claims alleging conversion. The Court of Appeals agreed with Defendant UBS's arguments and reversed the lower court and remanded.

In framing the issues on appeal, the Court of Appeals determined that the "pivotal issue to be resolved in this appeal is whether the arbitration clause in the parties' MAA encompasses plaintiff's claims against defendant to the extent that plaintiff's claims are barred by the agreement to arbitrate." Page 4 of the Court of Appeals Opinion. In considering that pivotal issue, the Court of Appeals characterized the Plaintiff's arguments as follows: 
  • her claims of wrongful conversion are not subject to arbitration because the parties' business relationship is not implicated; 
  • any disputes that arose between plaintiff and defendant involved "property" as opposed to her account; and
  • her allegations do not implicate a "transaction" as set forth in the arbitration clause, because a transaction did not occur because she did not alleged that UBS had exchanged or transferred funds between itself or Plaintiff or New York State.
Plain Speakin'

Initially, the Court of Appeals declines to engage in an exercise by which it would divine the meaning of various terms in the MAA from dictionaries and other examples of common usage. Eschewing any suggestion that it narrowly interpret terms and definitions, the Court of Appeals felt that the arbitration agreement was drafted is sufficiently "plain language" so as to cover the matters in dispute as arbitrable.  In reaching that conclusion, the Court of Appeals notes that:

After reviewing these dictionary definitions of "controversies," "account[,]"  transaction[,]" and "dispute[,]" it is evident to us that plaintiff's allegations in her complaint present claims that should be arbitrated. For example, there is a controversy with respect to transactions relating to plaintiff's brokerage account where the thrust of her allegations in her complaint pertain to defendant's handling of the funds in her account. More specifically, where plaintiff is alleging that defendant wrongfully froze and withheld funds held in her brokerage account from her after receiving the tax levy, and transferred a portion of those funds to another account, these allegations certainly present a disagreement between the parties with respect to whether defendant's actions were lawful and warranted. Put another way, both parties hold strong opposing views on the subject of defendant's actions with regard to plaintiff's account and
disagree with respect to whether defendant's actions were lawful and appropriate, particularly with regard to whether defendant ought to have taken such action when the name of plaintiff's husband, as opposed to plaintiff herself, was included on the tax levy. Accordingly, where the plain language of the arbitration agreement is clear concerning the issue of what matters are subject to arbitration, it is not open to question whether plaintiff's claims should be arbitrated. . .

Page 7 of the Court of Appeals Opinion

In similar fashion, the Court of Appeals dismissed Plaintiff's arguments that the arbitration clause's terms are ambiguous:

In the present case, the contractual terms at issue in the arbitration clause of the MAA are not equally susceptible to more than one meaning, and the contractual terms are not in irreconcilable conflict with each other. Barton-Spencer, 500 Mich at 40 n 18. Instead, a review of the MAA, read as a whole and affording the words used in the contract a contextual understanding, reflects that the parties, by entering into the agreement, did agree that any and all controversies that arose between plaintiff and defendant concerning any account, dispute or transaction would be submitted to and decided by arbitration. Under these circumstances, plaintiff's allegation that the contractual terms are ambiguous is unavailing.

Page 8 of the Court of Appeals Opinion

Displeasure Is Not Unconscionable

As to Plaintiff's contention that the arbitration clause should be deemed invalid because it is unconscionable, the Court of Appeals characterized the clause as containing "a mandatory arbitration provision;" however, absent proof of coercion, mistake or fraud, the Court admonished that parties who sign agreements are presumed to both know the nature of the document to be executed and to understand its contents. Moreover, the Court notes that:

[W]hile plaintiff may be now displeased with the fact that she agreed to this provision by signing the Account Selection Services form, there is nothing in the plain language of the arbitration clause that leads us to conclude that it is so "extreme" that it can be said to be substantively unconscionable. Id. Under such circumstances, while the plain language of the arbitration clause is not advantageous to plaintiff, her argument that the arbitration clause is substantively unconscionable is unavailing. . .

Page 9 of the Court of Appeals Opinion

An Open Question

In considering Defendant UBS's contention that the Circuit Court had erred in determining that FINRA did not have authority to arbitrate plaintiff's claims, a cautious Court of Appeals treads carefully:

[N]otably, while plaintiff and defendant hotly contest whether FINRA has the authority to consider and arbitrate plaintiff's claims against defendant, neither party has addressed the important, and preliminary issue, that being whether the trial court could decide the question of FINRA's authority to arbitrate the dispute. . .

Page 10 of the Court of Appeals Opinion

In gingerly addressing the so-called "gateway" or "threshold" question of who decides whether parties' claims are arbitrable, the Court allows that procedural matters that "arise out of the dispute and are relevant to its final disposition are considered subsidiary issues that are reserved to the arbitrator, unless there is language in the contract reflecting that the arbitrator is not to decide these issues." In working through its analysis, the Court references Howsam v Dean Witter Reynolds,
Inc, 537 US 79, 83; 123 S Ct 588; 154 L Ed 2d 491 (2002):

In Howsam, the United States Supreme Court was asked to consider an arbitration rule of the National Association of Securities Dealers (NASD). Howsam, 537 US at 81. The rule at issue provided that a dispute was not eligible for arbitration after six years had elapsed from the occurrence or event giving rise to the dispute. Id. In determining whether a court or an arbitrator should decide the issue, the United States Supreme Court ruled that the issue was reserved to the arbitrator. Id. The Howsam Court provided beneficial guidance with respect to deciphering between what constitutes a gateway question of arbitrability for the courts to decide as opposed to procedural issues that ought to be left to the arbitrator. Id. at 83-84. In setting forth principles regarding what constitutes a question of arbitrability, the Howsam Court ruled, in pertinent part, as follows:

Linguistically speaking, one might call any potentially dispositive gateway question a "question of arbitrability," for its answer will determine whether the underlying controversy will proceed to arbitration on the merits. The Court's case law, however, makes clear that, for purposes of applying the interpretive rule, the phrase "question of arbitrability" has a far more limited scope. See [First Options of Chicago, 514 US at 942]. The Court has found the phrase applicable in the kind of narrow circumstance where contracting parties would likely have expected a court to have decided the gateway matter, where they are not likely to have thought that they had agreed that an arbitrator would do so, and, consequently, where reference of the gateway dispute to the court avoids the risk of forcing parties to arbitrate a matter that they may well not have agreed to arbitrate. [Howsam, 537 US at 83-84.]

Page 11 of the Court of Appeals Opinion

In reconciling FINRA Rule 12200 with the issues on appeal, the Court of Appeals found as follows:

However, having considered the United States Supreme Court precedent, we conclude
that whether the dispute between plaintiff and defendant can be arbitrated pursuant to § 12200 is a question to be determined in the FINRA arbitration proceedings. Specifically, where the parties disagree regarding whether (1) the existence of a written agreement settles the question of whether the dispute should be arbitrated pursuant to § 12200 and (2) the dispute arises in connection with defendant's "business activities[,]" as set forth in § 12200, this Court has instructed that if there is a doubt concerning whether a matter presents a gateway issue or a procedural question, any doubt is resolved in favor of arbitration. Bienenstock, 314 Mich App at 516-517. Moreover, the interpretation of whether the requirements of § 12200 have been satisfied does not fall within "the . . . limited scope" of a question of arbitrability, and the present case does not present "narrow circumstance[s]" where the parties would likely have expected a court to decide this matter. Howsam, 537 US at 83. This is particularly so where the MAA is so  broadly worded to include "any controversies" that arise between the parties within its ambit. Additionally, where the parties' contract reflects their agreement to arbitrate all controversies arising between them, the risk of forcing the parties to arbitrate a dispute that they did not agree to arbitrate is simply not present in this case. Id. at 83-84. Also, the requirement that the parties establish that the dispute arose in conjunction with defendant's business activities before submitting the matter to arbitration can be characterized as a "procedural condition precedent" to arbitration, because such an inquiry will be determinative of when the contractual duty to arbitrate arises, not whether it exists at all. BG Group, PLC, 572 US at 35. Similarly, as the United States Supreme Court has recognized, a FINRA arbitrator is better equipped to determine whether plaintiff and defendant's dispute arose "in connection with" defendant's business activities, and therefore this recognition of the arbitrator's expertise provides further support for the conclusion that the interpretation of § 12200 is best left to the arbitrator. BG Group, PLC572 US at 40; Howsam, 537 US at 85. Accordingly, to the extent the trial court determined that FINRA did not have authority to arbitrate this dispute pursuant to FINRA Code of Arbitration, § 12200, which was not a "gateway" question reserved to the trial court, this determination was erroneous and warrants reversal. 

Pages 13 - 14 of the Court of Appeals Opinion

Accordingly, the Court of Appeals reversed  the Circuit Court's Order and remanded for entry of an order compelling the case to arbitration. 

Bill Singer's Comment

I'm still not understanding how or why Marjorie Lebenbom's trust was subjected to a NYS tax levy against her husband Milton. As a lawyer, of course I can imagine any number of circumstances that would justify such an outcome; but, the Court of Appeals Opinion fails to explain NYS's rationale for tagging the trust. That omission of facts in the Opinion is unfortunate. As such, I'm left to wonder whether NYS engaged in any tortious or criminal conduct -- and, again, I am not asserting that was the case but I'm just thinkin' out loud in light of the fact that the State eventually says "oops" and backed off. Keep in mind that we're told that this was not the first time NYS (and other tax authorities) had tried the same gambit of attaching Marjorie's trust's assets for her husband Milton's debts. At some point, perhaps, that annoying issue of "on notice" rears its ugly head? After all, if UBS had been through this same NYS-husband-levy-attachment crap as early as 2011 and if UBS unfroze its prior account freezes when it was apparently determined that a creditor could not levy against the wife's trust for her husband's debts, then why was the July 5, 2016, levy honored via yet another freeze? The simple answer from UBS is that it was served with a legally-binding levy and its hands were tied.  That may well be the firm's impenetrable defense.

Ultimately, the impact of the Court of Appeals' Opinion upon Marjorie Lebenbom comes off as abominable, even if it may arguably be legally correct. Put yourself in her place and imagine how frantic you would be if your assets were wrongly frozen for over two months and then, when those responsible sort of realized that the thin ice beneath their feet was cracking, their response was to say "never mind" and simply walk away. It may well be that both Marjorie Lebenbom and UBS were victimized by the shoddy and strong-arm practices of NYS. It may also be that UBS failed to do its due diligence and should not have honored the husband's levy as against his wife's account. I don't have the answers. What I do have is a strong sense that Marjorie Lebenbom was victimized by many parties on many levels. She did nothing wrong.

As a veteran litigator, I very much appreciate the effort and creativity of  Plaintiff's lawyer. Pointedly, I was intrigued by the issue alluded to in this extract from the Opinion:

[F]or example, there is a controversy with respect to transactions relating to plaintiff's brokerage account where the thrust of her allegations in her complaint pertain to defendant's handling of the funds in her account. More specifically, where plaintiff is alleging that defendant wrongfully froze and withheld funds held in her brokerage account from her after receiving the tax levy, and transferred a portion of those funds to another account, these allegations certainly present a disagreement between the parties with respect to whether defendant's actions were lawful and warranted. Put another way, both parties hold strong opposing views on the subject of defendant's actions with regard to plaintiff's account and disagree with respect to whether defendant's actions were lawful and appropriate, particularly with regard to whether defendant ought to have taken such action when the name of plaintiff's husband, as opposed to plaintiff herself, was included on the tax levy. . .

An interesting threshold question: Was there a "transaction" if the only purported activity at issue was UBS's allegedly wrongful freezing of Marjorie Lebenbom's funds in her UBS account? 

NYS levied against Milton Lebenbom. Milton Lebenbom's trust account was not frozen by UBS. Although Marjorie may be Milton's lawful wife, that does not, in and of itself, give UBS the right to freeze her account. Still . . . UBS acted in response to what likely was a bona fide levy ordered by a court. It's not as if UBS is a guilty party in all of this -- provided, however, it had done its due diligence and assured itself that it was complying with a lawful order. When pursuing such due dilly, however, UBS can't put on blinders and pretend that prior levies/judgments against Milton were not wrongfully presented for satisfaction against Marjorie's account(s) -- at least that seems to be what Marjorie argued. 

The interesting challenge raised by Plaintiff is whether a "wrongful" administrative act by a FINRA broker-dealer should be the basis for that firm's insistence on activating a mandatory arbitration clause as a vehicle for the defense against the customer's claim. Keep in mind that Marjorie Lebenbom is not litigating over a failed order execution or a sales practice violation -- which I would clearly recognize as transactions. Plaintiff is suing because she was deprived of her money in her trust account in response to a NYS levy against her husband AND she argues that UBS not only should not have frozen her account in response to such a flimsy legal notice but, further, that UBS had previously frozen and promptly unfrozen her account in response to prior, improper levies. UBS may have been placed in the awkward position of having to choose between "unfairly" freezing a customer's account or disobeying a facially sufficient NYS tax levy. I will not minimize that Hobson's Choice. On the other hand, UBS's uncomfortable choice is not, in and of itself, a reasonable excuse by which Marjorie Lebenbom should be forced to pursue her claims via mandatory FINRA arbitration. Moreover, if UBS was victimized by an improper NYS levy, then the broker-dealer is not without its own remedies against the State. Ultimately, Marjorie Lebenbom may still win an award against UBS, albeit in FINRA arbitration and not in state or federal court. Perhaps, all's well that ends well.