Opinion
C. A. PC-2016-3259
07-26-2017
ROBERT P. VERRI, QUA CO-TRUSTEE OF THE ROSE IZZI TRUST-1994, AND PATRICIA VERRECCHIA MOREAU, QUA CO-TRUSTEE OF THE VALENZIO IZZI TRUST-1994, Plaintiffs, v. RBC CAPITAL MARKETS, LLC. a/k/a RBC WEALTH MANAGEMENT, formerly known as and/or alias RBC Dain Rauscher Inc. and/or as the successor to Tucker Anthony Day and/or Tucker Anthony-also doing business as Freedom Trust Company, alias John Doe Corporations 1 through 10, as the case may be, Defendants.
For Plaintiff:Edward J. Mulligan, Esq. For Defendant: Rebecca M. Murphy, Esq.
Providence County Superior Court
For Plaintiff:Edward J. Mulligan, Esq.
For Defendant: Rebecca M. Murphy, Esq.
DECISION
LICHT, J.
This litigation focuses on one of two reciprocal trusts. Defendant RBC Capital Markets, LLC (RBC or Defendant) moves to stay the litigation and compel arbitration. Plaintiffs Robert Verri (Verri) and Patricia Verrecchia Moreau (Moreau) (together, Plaintiffs) object to this motion.
Various spellings of Verrecchia pervade the papers. This spelling comports with the case caption and the trust documents.
I
Facts and Travel
On September 12, 1994, Valenzio Izzi (Valenzio) and Rose Izzi (Rose), husband and wife, created two reciprocal, revocable trusts. Valenzio was the initial trustee of the Valenzio Izzi Trust (Valenzio Trust), which was administered for his benefit during his lifetime. Likewise, Rose was the initial trustee of the Rose Izzi Trust (Rose Trust), and the trust was administered for her benefit during her lifetime. The settlors also created trust accounts with Tucker Anthony under the guidance of financial planner Joseph A. Kumiega (Kumiega). Valenzio died on December 14, 1998, and, pursuant to the terms of his trust, Rose and Paul V. Verrecchia (Verrecchia) became the successor co-trustees of the Valenzio Trust and Rose became its income beneficiary. Rose died on July 16, 2012, and Moreau joined Verrechia as co-Trustee of the Valenzio Trust. At that time, Moreau and Kumiega became co-trustees of the Rose Trust.
Clarity dictates that the Court refer to certain individuals by their first names. The Court intends no disrespect.
The Complaint repeatedly spells Mr. Kumiega's name as "Kumeiga, " but the Court has adopted the spelling used in the trust documents and in his signature on various certifications.
After accepting his appointment, Kumiega's only action as co-trustee that is documented in the record was to appoint Verri as successor independent trustee. After doing this, Kumiega resigned. These three actions-acceptance, appointment, and resignation-all occurred on September 24, 2012.
Through merger and acquisition, Tucker Anthony became part of RBC. Per RBC's practices, clients must sign a series of Client Account Information forms. Rose alone signed two such forms on behalf of the Valenzio Trust, one on August 22, 2008, and another on June 30, 2009. Moreau and Verrecchia subsequently executed another Client Account Information form on behalf of the Valenzio Trust on December 7, 2012.
Plaintiffs, upon examining the financial history of the Valenzio Trust, believe that Rose was "without authority and in violation of her duties as Co-Trustee of her husband's estate [sic] had wrongfully, mistakenly, and/or negligently taken monies from the principal of her husband's Trust." Compl. ¶ 26. Plaintiffs further claim, inter alia, that RBC "wrongfully and in violation of its fiduciary and contractual duties allowed Rose Izzi, permitted, turned a blind eye, and/or acceded to Rose Izzi taking and misappropriating monies out of the Valenzio Trust." Id. ¶ 37.
RBC, in turn, claims that these allegations must be first submitted to arbitration, as required by the arbitration provisions from the Client Account Agreement incorporated by reference into the Client Account Information forms.
II
Standard of Review
"Arbitration is a desirable method of dispute resolution that long has been favored by the courts." Soprano v. American Hardware Mut. Ins. Co., 491 A.2d 1008, 1011 (R.I. 1985). "Nevertheless, '[n]o one is under a duty to arbitrate unless with clear language he [or she] has agreed to do so.'" School Comm. of Town of N. Kingstown v. Crouch, 808 A.2d 1074, 1078 (R.I. 2002) (quoting Stanley-Bostitch, Inc. v. Regenerative Envtl. Equip. Co., 697 A.2d 323, 326 (R.I. 1997) (citation omitted)).
III
Analysis
Plaintiffs argue that "by submitting to [m]ediation and the Providence County [Superior] Court to enforce mediation[, ] the [D]efendants have waived any right to arbitration." Pls.' Mem. 9. Before investigating whether this assertion is true, the Court must consider what state's law applies. The Client Account Agreement, which contains the arbitration clause at issue, also contains a choice-of-law provision stating that "this agreement and its enforcement will be governed by the substantive laws of the State of Minnesota." Ex. B to Def.'s Mem. 8, 36. "As a general rule, parties are permitted to agree that the law of a particular jurisdiction will govern their transaction." Sheer Asset Mgmt. Partners v. Lauro Thin Films, Inc., 731 A.2d 708, 710 (R.I. 1999). RBC is based in Minnesota. Its residence in the chosen state creates a sufficient relationship to warrant adherence to this choice-of-law clause. See McBurney v. The GM Card, 869 A.2d 586, 589 (R.I. 2005); Sheer Asset Mgmt. Partners, 731 A.2d at 710.
Portions of the Client Account Agreements are in boldface and uppercase. When quoted, this formatting will be removed.
However, Rhode Island "appl[ies] our own procedural law, however, 'even if a foreign state's substantive law is applicable.'" DeFontes v. Dell, Inc., 984 A.2d 1061, 1067 (R.I. 2009) (quoting McBurney, 869 A.2d at 589). The question before this Court is whether RBC has "manifested a willingness . . . to have the courts resolve the controversy" through their conduct. North Smithfield Teachers Ass'n v. North Smithfield Sch. Comm., 461 A.2d 930, 934 (R.I. 1983). It is unclear whether waiving arbitration is procedural or substantive. However, Minnesota and Rhode Island law are substantially similar on this topic, and application of either state's law leads to the same result.
A party can waive their right to arbitration in a number of ways. For instance, if the party seeking arbitration failed to raise it as an affirmative defense in their responsive pleadings, that defense may be waived. CACH, LLC v. Potter, 154 A.3d 939, 942 (R.I. 2017) ("It has been our consistent holding that arbitration is an affirmative defense and that 'a defending party seeking arbitration must specifically plead the right to arbitrate in its answer or the defense will be deemed waived.'" (quoting Soprano, 491 A.2d at 1010)); West St. Paul Fed'n of Teachers v. Indep. Sch. Dist. No. 197, 713 N.W.2d 366, 377 (Minn.Ct.App. 2006) ("Minn. R. Civ. P. 8.03 requires a party to set forth in its answer any affirmative defenses, including arbitration. Failure to do so may constitute a waiver of the defense."). Here, Defendant has yet to answer the complaint, and so this method of waiver is not applicable.
A more relevant manner by which parties can waive their right to arbitration is by substantially engaging the judicial machinery, essentially going along with court proceedings for a substantial period of time. See, e.g., North Smithfield Teachers Ass'n, 461 A.2d at 933 (right to arbitration waived when defendant answered and participated in discovery); Brothers Jurewicz, Inc. v. Atari, Inc., 296 N.W.2d 422, 428 (Minn. 1980) (right to arbitration waived when defendant answered and participated in discovery).
The question here, then, is whether RBC "call[ed] on upon the courts of this state to resolve the merits of the dispute" by its actions. Illinois Farmers Ins. Co. v. Glass Service Co., 683 N.W.2d 792, 800 (Minn. 2004). This Court concludes that it did not. According to the record, no answer has yet been filed. No discovery has been conducted. In fact, the only activity on the docket prior to RBC's motion to compel arbitration is an agreement between the parties to engage in mediation. Contrary to Plaintiffs' suggestions, this was not "Superior Court mediation." Pls.' Mem. 9. There was no order of this Court mandating mediation. The mediation was simply agreed to by the parties. This conduct cannot be said to manifest intent-or even a suggestion-that RBC was waiving its rights to arbitration or wanting this Court to resolve this dispute. Accord Langfitt v. Jackson, 644 S.E.2d 460, 464 (Ga.Ct.App. 2007) ("While they did participate in court-ordered mediation before moving to arbitrate, we find no waiver in their participation in that form of alternative dispute resolution."); In re Medallion, Ltd., 70 S.W.3d 284 (Tex. Ct. App. 2002) ("Medallion engaged in mediation which is not sufficient to support a finding of waiver."); Adler v. Fred Lind Manor, 103 P.3d 773, 790 (Wash. 2004), as corrected (Jan. 7, 2005) (while defendant participated in mediation, court found they "ha[d] not acted in a manner here which suggests waiver"). Further, the lack of activity before this Court indicates arbitration would waste neither time nor money, resulting in no prejudice to the Plaintiffs. See Soprano, 491 A.2d at 1011; North Smithfield Teachers Ass'n, 461 A.2d at 933; Fedie v. Mid-Century Ins. Co., 631 N.W.2d 815, 820-21 (Minn.Ct.App. 2001). Therefore, this Court finds that RBC has not waived its right to arbitration through its limited participation in this lawsuit.
Finally, this Court must determine whether the arbitration clause is applicable to the dispute at hand. With respect to the arbitration provision, the parties agreed not only to Minnesota law, but the Federal Arbitration Act (FAA) as well. Ex. B to Def.'s Mem. 8-9, 35-36."Therefore, the applicable substantive law is federal law and that of the State of" Minnesota. McBurney, 869 A.2d at 589 (applying Nevada and federal law to determine the applicability of an arbitration agreement per a choice-of-law provision); see also Onvoy, Inc. v. SHAL, LLC, 669 N.W.2d 344, 351 (Minn. 2003) ("Minnesota courts must apply the FAA to transactions that affect interstate commerce."). In Minnesota, "[a]rbitration is a proceeding favored by the law as an efficient and inexpensive means of resolving disputes between contracting parties." Community Partners Designs, Inc. v. City of Lonsdale, 697 N.W.2d 629, 632 (Minn.Ct.App. 2005). "When considering a motion to compel arbitration, [Minnesota courts] must determine only (1) whether a valid arbitration agreement exists, and (2) whether the dispute falls within the scope of the arbitration agreement." Cargill, Inc. v. Jorgenson Farms, 719 N.W.2d 226, 234 (Minn.Ct.App. 2006).
There are, in fact, two slightly different versions of the clause. One was in effect when Rose signed the Client Account Agreements, and the other was in effect when Plaintiffs signed them. The Court finds that the latter clause, which was agreed to by both Plaintiffs as the co-trustees of the Valenzio Trust, is sufficient to bind the Valenzio Trust to arbitration, and thus not need consider the earlier clause.
The Court must first determine whether the Trusts are bound by the arbitration provisions incorporated by reference in the Client Account Information forms. Plaintiffs suggest that there "is not a valid agreement" because "RBC sits on both sides" of the transaction. Pls.' Mem. 8. They contend that "Mr. Kumiega was a co-trustee, " and thus "RBC was not a different party." Id. at 7. This argument fails. The core disagreement that needs initial resolution is whether RBC violated any duties to the Valenzio Trust. Mr. Kumiega was a Trustee of the Rose Trust for a brief time, but he was never a Trustee of the Valenzio Trust. The Rose Trust, while party to this lawsuit, has no relevance to this threshold question. Plaintiffs do not allege in their complaint that RBC breached any duty toward the Rose Trust. Plaintiffs also do not allege that the Rose Trust was enriched in any way by Rose's activity or as a result of RBC's alleged misconduct.
Instead, the sole relief Plaintiffs seek vis-à-vis the Rose Trust is "[t]hat RBC indemnify and hold harmless and indemnify [sic] the Rose Trust for the received principal monies taken or allowed to be taken by Rose Izzi[] as a result" of RBC's alleged misconduct. Compl. ¶ 43A. Plaintiffs seemingly contemplate a situation in which either an arbitrator or this Court would deem Rose to be partially liable for the alleged misconduct, thus somehow exposing the Rose Trust to liability. The Court leaves aside the question of whether the Rose Trust would, indeed, be exposed to liability if Rose were found to have acted inappropriately-Rose's estate might be liable instead. The Court further ignores the question of whether Rose's personal liability is before the Court at all-the complaint is devoid of any request for such a determination. Even if the answers to those questions were yes, the Rose Trust has no interest in whether RBC breached a duty to the Valenzio Trust by allowing Rose to allegedly commit wrongdoing in her individual capacity. The Valenzio Trust is the only trust required to answer that question, and since the Valenzio Trust has agreed to the arbitration provision, the first prong of the inquiry conducted on a motion to compel arbitration-that a valid arbitration agreement exists-has been satisfied.
Rose's will, if one existed, is not in the record.
The second prong of such an inquiry is whether the dispute-here the existence and violation of RBC's fiduciary duty to the Valenzio Trust-is encompassed by the arbitration clause. The arbitration clause is very broad, covering "all controversies" between the signer and RBC "concerning any transaction(s), or the construction, performance, or breach of this or any other agreement . . . whether entered into prior, on or subsequent to the date hereof." Ex. B to Def.'s Mem. 9, 36. The complained-of behavior involved transactions-namely, allegedly-illegitimate withdrawals by Rose. The allegations also involve an alleged breach of RBC's fiduciary duties as imposed by their contractual relationship.
In cases with similar facts and similar agreements, courts have commonly compelled arbitration. In Rodriguez de Quijas v. Shearson/American Express, Inc., the Supreme Court dealt with an arbitration clause agreeing to arbitrate any controversies "relating to [the] accounts." 490 U.S. 477, 478 (1989). Customers sued, "alleging that their money was lost in unauthorized and fraudulent transactions." Id. The Supreme Court found that all their claims, including those under the Securities Exchange Act of 1934, must go to arbitration. Id. at 483. Similarly, in Shearson Lehman Hutton Inc. v. Wagoner, the Second Circuit found that a customer agreement relegating "any controversy arising out of or relating to [the customer's] account, to transactions with [the brokerage house] for [the customer] or this authorization or the breach thereof" was sufficient to encompass churning the account. Shearson Lehman Hutton, 944 F.2d 114, 121 (2d Cir. 1991). See also Andrews v. TD Ameritrade, Inc., 596 F.App'x 366, 368, 371 (6th Cir. 2014) (holding that a client agreement submitting "any controversy . . . arising out of or relating to this Agreement, our relationship, any services provided by you, or the use of the Services" to arbitration was sufficiently broad to encompass the question of whether a father had authorization to exercise control over his son's account).
Plaintiffs argue that "[t]he wrongful taking of funds from the trust is not a transaction, " and is thus not contemplated by the arbitration clause. Pls.' Mem. 8. This argument belies the plain meaning of the word transaction: "The act or an instance of conducting business or other dealings." Transaction, Black's Law Dictionary 1726 (10th ed. 2014). Perhaps more importantly, however, the Client Account Agreement is not solely about securities transactions, as Plaintiffs claim. The Client Account Agreement also covers the corresponding checking accounts and the check writing features thereof. Ex. B to Def.'s Mem. 14-16, 49-51. Use of the checking account is described there by the word "transactions." Id. at 14, 49. The withdrawal of funds from the account is thus a transaction. Whether RBC enabled the wrongful taking of funds is a question of RBC's performance. Both transactions and the performance of any agreements are explicitly covered by the arbitration clause. Thus, because there is a binding arbitration clause that covers the issue in question, the matter is arbitrable.
In their response memorandum, Plaintiffs cite to Citigroup, Inc. v Amodio, 894 So.2d 296 (Fla. Ct. App. 2005). There, the Court found the arbitration agreement not to cover "breaches of law imposed generally to enforce public policy creating duties owed to the public at large." Id. at 300. However, as a subsequent decision noted, the "dispute in Amodio did not arise from an 'order or transaction' or 'performance of the investment agreement.'" Medanic v. Citicorp Inv. Servs., 954 So.2d 1210, 1212 (Fla. Ct. App. 2007). The Plaintiffs here, much like in Medanic, are "challenging the suitability of [] particular transaction[s], " and thus "the arbitration provision applies." Id. at 1213.
Plaintiffs' other claims, some raised for the first time in their response to RBC's supplemental memorandum, are all without merit. First, while Plaintiffs describe RBC's motion in part as a motion to dismiss and want the Court to apply the standard of review for a Super. R. Civ. P. 12(b)(6) motion, that is incorrect. There is no motion to dismiss before this Court-only motions to stay and compel arbitration.
Next, the Plaintiffs observe that the beneficiaries to the trust have not themselves agreed to any arbitration clause. Of course, the beneficiaries are not parties to this case, and thus are not being compelled into arbitration. Plaintiffs also contend that their claims under G.L. 1956 § 7-11-212 "fall outside of the terms of the Agreement" because they deal with RBC's failure to supervise Kumiega in the performance of his duties. Pls.' Response Mem. 8. Putting aside the fact that Plaintiffs did not mention § 7-11-212 in their complaint, the question of whether RBC adequately supervised would be one of how well RBC fulfilled its contractual obligations to the trusts vis-à-vis Kumiega. This, again, is part and parcel of the arbitration clause.
It is also unclear whether § 7-11-212 provides a private right of action.
IV
Conclusion
Based on the foregoing analysis, the Court finds that the question of whether RBC breached any duty they owed to the Valenzio Trust is arbitrable. The Court, therefore, stays the instant matter and sends it to arbitration. Counsel shall prepare an appropriate order for entry.
While the Court need not determine whether the Rose Trust is subject to arbitration, the question of whether the Rose Trust must send their claims to arbitration can also be presented to the arbitrator if such evidence arises. Nothing in this Decision should be construed as preventing the arbitrator, if presented with appropriate evidence and based in law, from tackling questions other than the one addressed here.