Opinion
2d Civil No. B229431
12-28-2011
AGRIS PETERSONS et al., Plaintiffs and Respondents, v. FILIPPINI FINANCIAL GROUP, INC. et al., Defendants and Appellants.
Amyx Merrill, Monty H. Amyx for Plaintiffs and Respondents. Reicker, Pfau, Pyle & McRoy, Timothy J. Trager for Defendants and Appellants.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
(Super. Ct. No. 1340544)
(Santa Barbara County)
Appellants Filippini Financial Group, Alfred Filippini and Ian Filippini are financial advisors who counseled respondents to purchase an investment which caused them to incur significant financial loss. Respondents filed a damage action against appellants, who moved to compel arbitration pursuant to an arbitration agreement in a client application form. The trial court denied the motion, finding the arbitration clause unenforceable because appellants concealed its existence. We affirm.
FACTS
Respondents Agris Petersons and Elza Petersons are senior citizens living on a fixed monthly income of $5,000. Their financial advisor, Alfred Filippini, president of Filippini financial Group (FFG), advised them to refinance their condominium in order to purchase a security with the loan proceeds. They did so, and later learned that their investment was part of a Ponzi scheme. Respondents lost $330,000 in principal and were without sufficient income to pay their increased mortgage. They were forced to sell other assets and to place their home on the market. Respondents filed an action against appellants, who moved to compel arbitration pursuant to an arbitration clause in a "New Account Application" respondents had signed prior to obtaining their loan. The trial court found the arbitration clause unenforceable and denied the motion.
First Amended Complaint and Petition to Compel Arbitration
The operative pleading is the first amended complaint, which respondents filed against FFG, Alfred Filippini, Ian Filippini (aka Iaian Filippini), Deborah Filippini and Lawyers Investment & Mortgage Corporation (collectively appellants). Deborah Filippini and Lawyers Mortgage & Investment Corporation are not parties to this appeal. Alfred Filippini died several months after respondents filed their original complaint. Ian Filippini, a licensed broker, was Alfred Filippini's son and employed by FFG. Respondents alleged causes of action for negligence, misrepresentation, financial elder abuse and breach of fiduciary duty.
Respondent Agris Petersons stated that Alfred Filippini and FFG had served as his investment, tax and insurance advisor from 2002 to 2009. In a subsequently filed declaration, Agris Petersons declared that he and his wife had a variable rate mortgage of $360,000 on their condominium, which cost them approximately $2,100 per month. In 2006, respondents told Alfred Filippini that they were concerned that the interest rate on their mortgage would increase, causing an increase in their monthly payments. Alfred Filippini advised them to refinance their condominium and increase their mortgage to $737,000. With the additional funds they would realize, he represented that he would assist respondents in purchasing a suitable real estate investment for approximately $350,000 which would pay for the increased mortgage and give them extra spending money.
FFG prepared a loan application for respondents' signature. Once it was funded, the loan would be secured by their condominium. When Agris Petersons read the application, he saw that FFG had misrepresented respondents' monthly income as $13,500 per month, but it was actually $5,000. Agris Petersons spoke to Alfred Filippini by telephone and he advised him to sign the application because, once the new investment was purchased, respondents would have enough income to make the application "acceptable." The loan was approved and funded. FFG billed respondents $8,000 for their services, which they paid.
In January 2007, Alfred Filippini told respondents that the $350,000 real estate investment that he had earlier recommended was no longer available. Instead, he suggested that his son, Ian Filippini, had an investment opportunity that would pay a return of 9.75 percent per annum and produce income of $34,100 per year. Respondents alleged in their complaint that the investment was represented to be a secured note, in the amount of $330,000, offered by Medical Provider Financial Corporation IV (MedCap IV). Respondents asserted that FFG represented that MedCap IV was a safe and secure investment, suitable for their financial needs.
After January 2009, MedCap IV ceased making payments on the note. Respondents have had to sell other assets in order to make their mortgage payment, and have placed their condominium on the market. Respondents alleged in their complaint that they have suffered substantial financial losses, which include the loss of a comfortable retirement, the impending loss of their home and have incurred attorney's fees in prosecuting the action.
As the trial court noted, the parties made a "procedural mess" of their pleadings, filing numerous motions, oppositions and responses. We will not address the pleadings in detail, but instead summarize the arguments made in the moving and responsive papers.
Appellants filed a petition to compel arbitration and to stay the proceedings. The petition was based upon an arbitration clause set forth in a document entitled "New Account Application," dated January 23, 2007. Displayed on the top of the document was the logo "ePlanning."
The New Account Application contained respondents' handwritten personal data and their signatures. Directly above their signatures was a paragraph certifying that the information was correct. The final sentences made reference to the ePlanning Securities, Inc. Client Agreement and stated that the agreement was located on the reverse side of the form. The paragraph also contained the statement that, "I understand [that the Client Agreement] contains a pre-dispute arbitration clause in section 10 of said Agreement. By signing below I/we hereby acknowledge receipt of this document, that the information contained herein is true and correct, and that I/we have read and understand ePLANNING's Privacy Policy."
On the reverse side of the New Account Application was a heading that read, "Client Agreement," followed by 14 paragraphs in fine print. Paragraph 10 read, "ARBITRATION. YOU AGREE THAT ANY AND ALL CONTROVERSIES ARISING BETWEEN YOU AND ePLANNING (including ePLANNING Advisors, Inc., ePLANNING Inc., and/or any of their control persons, parents, employees, agents, representatives, predecessors, subsidiaries, affiliates, successors and assigns), WHETHER ARISING BEFORE OR AFTER EXECUTION OF THIS AGREEMENT, SHALL BE DETERMINED BY ARBITRATION." The paragraph contained additional language specifying the terms of the arbitration.
The additional language read, "You further acknowledge and agree that: 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 arbitrators' 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. [¶] No person shall bring a putative or certified class action to arbitration, nor seek to enforce any pre-dispute arbitration agreement against any person who has initiated in court a putative class action; or who is a member of a putative class who has not opted out of the class with respect to any claims encompassed by the putative class action until: (i) the class certification is denied; or (ii) the class is decertified; or (iii) the customer is excluded from the class by the court. Such forbearance to enforce an agreement to arbitrate shall not constitute a waiver of any rights under this agreement except to the extent stated herein. [¶] Any arbitration under this agreement shall be held at the facilities and before an arbitration panel appointed and acting under the Arbitration Rules of the National Association of Securities Dealers, Inc., or such other arbitration forum as may be required under the Bear Stearns Customer Agreement, if applicable."
Appellants alleged in their petition that Ian Filippini sold the MedCap IV Securities product through ePlanning Securities, Inc., a registered broker-dealer with the National Association of Securities Dealers (NASD), now the Financial Industry Regulatory Authority (FINRA). Ian Filippini alleged that he was a registered representative of ePlanning and licensed to sell securities.
Respondents' declarations were attached to their response to the petition to compel arbitration. Agris Petersons acknowledged that it was his signature that appeared on the New Account Application, but stated that he believed he had signed a blank document. He declared that the document misrepresented respondents' annual income, their net worth and the length and quality of his investment experience. He would never have signed a document containing this false information. Agris Petersons stated that no one gave them a copy of the New Account Application or drew their attention to the language on the back of the form. They were not made aware of the name ePlanning or the existence of an arbitration clause. Agris Petersons was later informed by the Securities and Exchange Commission and a receiver that their $330,000 investment had been used to operate a Ponzi scheme.
In her declaration, Elza Petersons stated that she was handed forms and told to sign them. The handwritten entries concerning respondents' net worth and income were added after they signed the documents and were incorrect. Elza Petersons declared that she would not have signed such a form. Further, she was never given a copy of the documents. No one told her that the New Account Application had contractual terms or that she was waiving her right to have a judge decide their case.
In an amended declaration in support of the petition, Ian Filippini stated that he witnessed respondents signing the New Account Application. He told them that the MedCap IV note could be purchased through ePlanning and made it clear that he was associated with ePlanning. He declared that respondents' assertion that they signed blank forms was "false and outrageous."
Respondents filed a supplemental response to the petition to compel arbitration indicating they had found another elderly couple with similar claims against appellants in a pending lawsuit, Decker v. Filippini Financial Group, Inc., Santa Barbara Superior Court Case No. 1343045.)
Respondents alleged that FFG fraudulently induced Mr. and Mrs. Decker to apply for an $850,000 loan, without being allowed to read the documents. They were not provided with copies or informed of an arbitration clause. The couple invested $450,000 of the proceeds into two unsecured notes offered by MedCap III and IV. The investments appear lost and they have been forced to list their home for sale. The Deckers cannot afford the mortgage, which now exceeds the amount of their monthly social security income.
In his declaration, Mr. Decker stated that they had lived in their home for 50 years, and had social security income of $1,975 per month. In January 2007, Alfred Filippini suggested that they refinance their home. He prepared a loan application representing that the Deckers' monthly income as $14,000. The Deckers signed a stack of papers but were never given a chance to read them, nor were they given copies.
Respondents' lawsuit was subsequently stayed due to the bankruptcy filing of Ian Filippini. When the U.S. Bankruptcy Court lifted the stay, appellants filed their reply to respondents' supplemental opposition. Ian Filippini argued that Agris Petersons had signed a document in 2005 entitled "Annuity Contract Delivery Receipt with Binding Arbitration and Client Agreement and Understanding." The parties to the 2005 agreement were Agris Petersons, FFG, Alfred Filippini and Ian Filippini. It contained an arbitration clause, which Agris Petersons had initialed, and he signed an acknowledgement that he had received a copy of the document. Ian Filippini reasons that Agris Petersons was therefore also bound by the arbitration clause in the 2007 New Account Application.
ePlanning had also filed for bankruptcy protection.
Ian Filippini declared that it was his standard business practice, then and now, to point out arbitration clauses to clients, give them all the time necessary to review a document before signing, and to provide clients with copies of all documents. Ian Filippini failed, however, to attach a copy of the 2005 annuity contract delivery receipt to his declaration.
Respondents filed opposition to the motion to compel. They argued that appellants breached their fiduciary duty, rendering the arbitration clause unenforceable. Specifically, appellants had failed to explain that respondents were signing a contract rather than an application form; and failed to inform them of the existence and meaning of the arbitration clause.
In support of respondents' opposition were their declarations, and those of the Deckers and three additional investors: Edward Withey and Warren Elliott and Mary Griscom (husband and wife). The Deckers' declarations were substantially the same as their earlier declarations, but they reported that they had recently been forced to move into a mobile home park because that is all they can now afford. All the declarants were investors who had placed a great deal of trust in Alfred Filippini. All had been introduced to Ian Filippini, who sold them MedCap notes through ePlanning, which were lost in a Ponzi scheme. All alleged that Ian Filippini had them sign documents which they had not read, and he did not provide them with copies nor discuss an arbitration clause.
Appellants' final reply to respondents' opposition argued that it was not timely filed and should not be considered. Several days later, they filed an errata to the declaration of Ian Filippini. Attached was the 2005 "Annuity Contract Delivery Receipt with Binding Arbitration and Client Agreement and Understanding." Appellants acknowledged that they had failed to attach a copy of this document to Ian Filippini's declaration, and asked the court to accept the errata. After a hearing, the court took the matter under submission.
DISCUSSION
Trial Court's Ruling
The trial judge issued a comprehensive nine-page order, detailing the facts surrounding the investment and respondents' resulting loss. It began its analysis by stating that appellants had an opportunity to respond to the pleadings filed by respondents, and it would consider all the pleadings to be timely. The court refused to consider the arbitration clause from 2005 Annuity Contract Delivery Receipt because it was not stated verbatim within the petition to compel arbitration, nor was a copy attached, as required by Cal. Rules of Court, rule 3.1330. The court also noted that the document was signed only by Agris Petersons, but not Elza Petersons, thus arbitration could not be compelled given the possibility of differing results on an arbitrated claim (of Agris Petersons) and a court claim (of Elza Petersons). (Code Civ. Proc., § 1281.2, subd. (c).)
The parties agreed in their pleadings that California law applies to the arbitration agreement. For this reason, the court only analyzed the agreement pursuant to state law. The trial court found that Alfred Filippini and Ian Filippini owed fiduciary duties to respondents that pre-dated execution of the 2007 New Account Application. This included, at the very least, the duty to identify the existence of the arbitration agreement. It noted that there was conflicting evidence concerning whether appellants had disclosed the existence of the arbitration clause. It chose, however, to credit respondents' version of events over that of appellants.
The trial court concluded that the declarations of the plaintiffs in the related cases were factually consistent with the respondents' declaration. All showed a pattern of failing to explain and failing to provide documentation, contrary to Ian Filippini's declared practices. The court determined that Ian Filippini's failure to alert his clients to the contents of the documents, or to provide copies, was evidence of a broader intent to conceal the nature and extent of the terms of the agreements. Although FFG denied completing a blank form, it is undisputed that respondents did not enter their own financial information in the New Account Application, and their net worth and annual income was significantly overstated.
The court concluded that, under the circumstances present here, respondents' trust in appellants was reasonable and their reliance on appellants as well as their failure to read the arbitration agreement was justifiable. Appellants' fraudulent conduct rendered the arbitration clause unenforceable. The motion to compel arbitration was denied.
Standard of Review
An order denying a motion to compel arbitration is reviewed for substantial evidence where it is based on a question of fact; questions of law are reviewed de novo. (Duick v. Toyota Motor Sales, U.S.A., Inc. (2011) 198 Cal.App.4th 1316, 1320; Robertson v. Health Net of California, Inc. (2005) 132 Cal.App.4th 1419, 1425.) The burden is on the party seeking to compel arbitration to prove the existence of an arbitration agreement by a preponderance of the evidence. (Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 413-414; Hotels Nevada v. L.A. Pacific Center, Inc. (2006) 144 Cal.App.4th 754, 765.) "[F]acts are to be proven by affidavit or declaration and documentary evidence, with oral testimony taken only in the court's discretion. [Citations.]" (Rosenthal, at pp. 413-414.) The issues before us are whether the parties occupied a fiduciary relationship; application of the statutory authority governing arbitration; and whether appellants' conduct was fraudulent.
Existence of Fiduciary Relationship
Appellants first argue that any fiduciary relationship was with Alfred Filippini, who is now deceased. They assert that, because Ian Filippini and FFG were not respondents' fiduciaries, appellants were not obligated to make them aware of the arbitration clause. This argument fails.
The relationship between a stockbroker and his customer is fiduciary in nature. (Duffy v. Cavalier (1989) 215 Cal.App.3d 1517, 1533, 1535-1537.) Respondents became FFG's clients in 2002. They were initially counseled by Alfred Filippini. By appellants' admission, FFG, Alfred Filippini and Ian Filippini were parties to an agreement executed in 2005. The court correctly determined that both Alfred Filippini and Ian Filippini's fiduciary relationships with respondents predated the execution of the 2007 New Account Application.
Statutory Basis to Deny Arbitration
Code of Civil Procedure section 1281 provides that an arbitration agreement is "valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract." Under section 1281.2, the court may order a matter to arbitration if it determines an agreement to arbitrate exists, unless, "(a) The right to compel arbitration has been waived by the petitioner; or [¶] (b) Grounds exist for revocation of the agreement. [¶] (c) A party to the arbitration agreement is also party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact."
All further statutory references are to the Code of Civil Procedure.
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The enforceability of an arbitration agreement within the context of a brokerage relationship was recently addressed in Brown v. Wells Fargo Bank, N.A. (2008) 168 Cal.App.4th 938. There, an elderly couple signed forms prepared by Wells Fargo, believing they were only opening a brokerage account. One of the documents they signed was an arbitration agreement. The defendants did not explain the documents' purpose or alert the Browns to the arbitration provision. They did not give the Browns an opportunity to read the documents or allow them to take them home to review them. (Id. at pp. 949-950.) The Browns subsequently filed a lawsuit and the defendants moved to compel arbitration.
The trial court found that the parties occupied a fiduciary relationship, and denied the motion. Defendants appealed, and the appellate court concluded that, "[i]f the defendant is in a fiduciary relationship with the plaintiff which requires the defendant to explain the terms of a contract between them, the plaintiff's failure to read the contract would be reasonable. [Citations.] In such a situation, the defendant fiduciary's failure to perform its duty would constitute constructive fraud [citation], the plaintiff's failure to read the contract would be justifiable [citation], and constructive fraud in the execution would be established." (Brown v. Wells Fargo Bank, N.A., supra, 168 Cal.App.4th at p. 959.)
Evidence of Fraudulent Conduct
Alfred Filippini gave respondents a stack of documents to sign without explaining their import. Sometime later, an unknown individual added their personal information, overstating their financial data. Ian Filippini failed to explain that respondents were signing a contract rather than an application form, did not give them an opportunity to read or review the documents, and failed to inform them of the existence and meaning of the arbitration clause. Appellants did not make respondents aware of the name ePlanning or that Ian Filippini was associated with that organization.
These acts show an intent to conceal the nature and terms of the agreements. Evidence of this fraudulent practice was further demonstrated by the declaration of the plaintiffs in the related actions. When the parties are dealing at arm's length, a greater degree of diligence is required of the non-fiduciary party. (Brown v. Wells Fargo Bank, NA, supra, 168 Cal.App.4th at p. 959.) Here, however, appellants were respondents' fiduciaries and owed them a special duty of care. They breached this duty by actively concealing the contents of the documents that respondents signed. Their argument that respondents' signatures somehow validate the arbitration clause is specious. Since respondents were unaware they were signing a contract, it cannot be said that they were agreeing to an arbitration agreement--contained within the same document.
Given the parties' seven-year relationship and the degree of trust and confidence that respondents had reposed in FFG, respondents' failure to read and become aware of the arbitration agreement was justifiable. Substantial evidence supports the trial court's finding that appellants knowingly concealed the terms of the arbitration agreement, which constituted fraud, and rendered the arbitration clause unenforceable. The petition to compel arbitration was properly denied pursuant to section 1281.2.
We also observe that arbitration would have been improper under section 1281.2, subdivision (c). FFG and Ian Filippini, parties to the alleged arbitration agreement, are also parties to three other lawsuits arising from a series of related transactions. Arbitration could create "a possibility of conflicting rulings on a common issue of law or fact." (Ibid.)
We need not address appellants' contentions regarding the disclosure requirements of the Security Exchange Commission and application of the Federal Arbitration Act (9 U.S.C. § 1 et seq.) The issue before us is whether there was evidence of fraud; the correctness of the disclosure language under federal law is irrelevant to our analysis.
DISPOSITION
The judgment is affirmed. Costs on appeal are awarded to respondents. We deny their request to impose sanctions.
NOT TO BE PUBLISHED.
COFFEE, J. We concur:
GILBERT, P.J.
YEGAN, J.
James W. Brown, Judge
Superior Court County of Santa Barbara
Amyx Merrill, Monty H. Amyx for Plaintiffs and Respondents.
Reicker, Pfau, Pyle & McRoy, Timothy J. Trager for Defendants and Appellants.