The 90 Year Old Customer, The Trust Account, Merrill Lynch, the Asset Sale, and the Margin Trade

April 7, 2022

Perhaps the last thing that Plaintiff in a federal lawsuit wants to hear from the judge is "I don't care." In a recent bit of federal litigation, the public customer Plaintiff sort of got that response twice. Once, the Court didn't care if the customer did or didn't sign certain new account agreements. Second, the Court didn't care if the customer had intended to sign or not sign the agreements. Sometimes you sort of get the feeling that your case ain't going well.

The CMA Asset Sales

As we ease our way into a recent federal lawsuit, we come upon a 90-year-old Plaintiff suing a Merrill Lynch. Robert A. White, Plaintiff, v. Merrill Lynch Pierce Fenner & Smith Incorporated, Defendant (Order, United States District Court for the District of Arizona, 21-CV-00941 / March 31, 2022)
Rather than attempt to paraphrase the relatively short and concise background of the case as presented by the D. Ariz, let me just set it out here in pertinent part:

Plaintiff holds a Self-Directed Trust Cash Management Account ("CMA") with Defendant. (Mot. at 1; see also Compl. Ex. 3.) This account is a margin account, meaning that Plaintiff is able to purchase securities using money borrowed from Defendant against the account, with such borrowing subject to interest. (Compl. ¶¶ 8, 9.) Defendant alleges, and Plaintiff disputes, that both the Client Relationship Agreement and Margin Agreement Mr. and Mrs. White signed upon opening the account included arbitration agreements, and both documents were provided to Plaintiff in their entirety. (Mot. at 3-4; Resp. at 4.) 

Plaintiff alleges that on June 11, 2020, he sold assets in the account in order to fully pay off the then-existing margin liability, leaving an asset value of $397,973 and a cash value of $105,987.63. (Compl. ¶ 13.) The next day, Plaintiff purchased shares of IBM and Tesla for $906,939. (Compl. ¶ 14.) The cash value in the account was credited against the purchase price, leaving an outstanding purchase price of $800,948. (Compl. ¶¶ 2, 15.) Plaintiff argues that, pursuant to Regulation T, only the difference between the outstanding purchase price and the account asset value should have been charged as margin borrowing. (Compl. ¶¶ 2, 15.) Plaintiff asserts that Defendant disregarded the asset value of $397,973 and instead charged the entire $800,948 on margin. (Compl. ¶¶ 2, 15.) Plaintiff further contends that the asset value has vanished from his account and Defendant has refused to explain to Plaintiff what happened to it, despite Plaintiff's repeated requests for information. (Compl. ¶¶ 2, 15.) 

On May 5, 2021, Plaintiff filed a Complaint in this Court invoking both diversity and federal question jurisdiction and seeking actual and punitive damages. Plaintiff alleges that Defendant breached the terms of the margin account contract (Compl. ¶¶ 19-26), and also that Defendant committed fraud in connection with the purchase and sale of securities (Compl. ¶¶ 27-35), conversion (Compl. ¶¶ 37-42), fraudulent concealment (Compl. ¶¶ 43- 47), and negligent misrepresentation (Compl. ¶¶ 48-54), resulting in Plaintiff's loss of at least $397,973. Defendant now moves to dismiss this suit under Rule 12(b)(1), contending that Plaintiff has failed to allege facts sufficient to establish Article III standing. (Mot. at 5-6.) In the alternative, Defendant argues that the Court should order joinder of the White Living Trust pursuant to Rules 12(b)(7) and 19, compel arbitration pursuant to Rule 12(b)(1), and either dismiss or stay the case pending the completion of arbitration. (Mot. at 6.)

at Page 2 - 3 of the D. Ariz Order

Oh my!  We got a 90-year-old Merrill Lynch customer with a self-directed CMA, and the customer and brokerage firm disagree about whether the customer signed agreements with arbitration provisions --  and there's the allegedly missing $397,973 in asset value and the justification for placing $800,948 on margin. Pursuant to Federal Rule of Civil Procedure 12(b)(1), Defendant Merrill Lynch filed a Motion to Dismiss citing "lack of subject-matter jurisdiction;" and, in the alternative, the firm also filed a Motion to Compel Arbitration. 

Not Standing Still 

In arguing for dismissal/remand, Defendant Merrill Lynch asserted that Plaintiff lacks the necessary standing to proceed: 

Defendant argues that Plaintiff has not suffered an injury in fact as required to establish Article III standing, because the owner of the account at issue is the White Living Trust, not Plaintiff in his individual capacity. (Mot. at 5-6.) In support of its argument, Defendant cites several exhibits that indicate the White Living Trust is the account owner. (Mot. at 5-6.) For example, Defendant asserts that Plaintiff signed a Trustee Certification Form for the Trust CMA Account, and the signatures were notarized. (Mot. Ex. 3 at 3.) Defendant further argues that this matter should be determined by arbitration before the Financial Industry Regulatory Authority ("FINRA"), due to arbitration provisions incorporated in both the CMA Application and the Margin Account Application and Agreement ("Margin Application"). (Mot. at 2-3; Mot. Ex. A ¶¶ 3-4, 6-7; Mot. Ex. 1 at 2, 8, 17-18; Mot. Ex. 2 at 2, 8; Mot. Ex. 4 at 3, 6-7; Mot. Ex. 5 at 3.)

at Pages 5 - 6 of the D. Ariz Order

Not My Signature 

Confronted with Defendant's allegation that the actual account owner is the Trust and not White the individual, Plaintiff White argued that:

[H]e executed the account documents in his individual capacity, not as a trustee, so it follows that he is indeed the proper plaintiff. (Resp. at 3.) Plaintiff explains that in 1990, he opened a stock account with the non-party Scottrade. (Resp. at 1.) He asserts that Scottrade handled the transfer of his account to Merrill Lynch. (Resp. at 1.) He also notes that the Margin Account Application states that the "Primary Account Holder" is "Robert A. White," not "Robert A. White, Trustee." (Resp. at 3; Resp. Ex. 1 at 3.) Finally, Plaintiff claims that the Trustee Certification Form contains errors, was not completed in his handwriting, and the initials on the second page of the document are forgeries. (Resp. at 2; Mot. Ex. 3 at 2.) He also alleges that the signatures appearing on a document used to transfer assets into Plaintiff's account with Merrill Lynch are forged. (Doc. 19, Notice of Filing Declaration in Support of Request for Hearing at 1.) Finally, Plaintiff argues that his claims are not subject to arbitration, because he never received a document with an arbitration clause. (Resp. at 4.) 

at Page 6 of the D. Ariz Order

Forged or Not -- Court Doesn't Care

In response to Plaintiff's contention that his signature/initials were forged, D. Ariz bluntly says it doesn't care and, frankly, it doesn't matter:

[T]hese alleged forgeries have no bearing on whether Plaintiff opened the account in his capacity as a trustee or consented to arbitration. Even if the forgeries were material, the Court found credible the testimony of Michael Penney ("Mr. Penney"), the Financial Solutions Advisor who worked with Mr. and Mrs. White in opening the Merrill Lynch Account. (Doc. 38, Tr. 86:8, 87:1-6.) Mr. Penney testified that he filled out the Trustee Certification Form in the presence of Mr. and Mrs. White in his own handwriting. (Tr. 90:1-15, 92:8-93:9; Hr'g Ex. 7.) He further testified that he has never altered a document after it has been signed by a client, and he most likely witnessed Mr. and Mrs. White sign and initial the document. (Tr. 91:12-22; 93:10-19; Hr'g Ex. 7.) 

at Page 6 of the D. Ariz Order

Okay, so, the Court doesn't give a crap but even if it did, the Court found credible the testimony that Plaintiff likely signed the document at issue. Ummm, okay, but, you know, if you don't care about the authenticity of the signature, why are you going into this detail? Then again, my curiosity may explain why I'm not wearing black robes and sitting on a bench. In addition to not caring whether Plaintiff actually signed the documents, the Court also finds it irrelevant as to whether White also "intended to sign the documents." We don't care what you did or didn't do. We don't care what you intended to do or not do. Got it?

Now You See It, Now You Don't

Working our way through the Order, we come across this Zen-like bit of jurisprudence:

While these facts suggest the trust is the appropriate plaintiff in this litigation, the Court also acknowledges that Plaintiff insists the trust does not exist. (See, e.g., Tr. 18:5-16.) Accordingly, the Court will not make any determination regarding the status of the trust in the instant case.1 Nonetheless, upon consideration of the parties' briefs and the evidence presented during the February 25 hearing, the Court finds that Plaintiff held himself out as a trustee, and it was reasonable for Defendant to rely on the previously referenced documentation, including account statements from Scottrade, and a clearly labeled "Trustee Certification Form" with signatures in reaching the conclusion that it was doing business with Mr. White as a trustee, and that as a trustee, Mr. White consented to arbitration.
= = = = =
Footnote 1: The Court takes judicial notice of Mr. White's litigation regarding the existence of the trust, currently pending in Maricopa County Superior Court, and acknowledges that the determination is outside the scope of the present matter. See Robert A. White v. Empire West Title Agency Inc., No. CV2021-012556.

at Pages 7 - 8 of the D. Ariz Order

Does Arbitration Agreement Exist?

All of which brings us to the threshold of the thorny issue as to whether a valid arbitration exists -- after all, we got a whole lot of arguing about who did or didn't sign what and who was or wasn't the actual account holder and what did and didn't actually exist and -- wow, if a lawsuit falls in the forest and no one hears it does a lawyer still get to submit a billable? While you work your way through that question, D. Ariz found that:

[P]laintiff's claims are subject to arbitration. 

When a court "determines that all of the claims raised in the action are subject to arbitration," the court "may either stay the action or dismiss it outright." Johnmohammadi v. Bloomingdale's Inc., 755 F.3d 1072, 1074 (9th Cir. 2014). Because the Court has found that all of Plaintiff's claims are subject to arbitration, it finds no reason to stay the proceedings. See, e.g., Mediterranean Enters., Inc. v. Ssangyong Corp., 708 F.2d 1458, 1465 (9th Cir. 1983) (affirming district court's decision to stay lawsuit pending an arbitration that "might well decide issues which bear in some way on the court's ultimate disposition" of nonarbitrable claims). Accordingly, Defendant's Motion to Dismiss is granted, and Plaintiff must submit to arbitration. 

at Page 11 of the D. Ariz Order

D. Ariz Order

The Court granted Defendant Merrill Lynch's Motion to Dismiss and ordered Plaintiff to submit to arbitration.