CONSUMER LAW

SPRING 2008

In re Merrill Lynch Trust Co., 235 S.W.3d 185 (2007)

Affiliates and Arbitration: The dispute arose out of an investment account that the Alanizes opened with Merrill Lynch, Pierce, Fenner & Smith, Inc. (“Merrill Lynch”), through its employee Medina. In connection with their investment account, the Alanizes established an irrevocable life insurance trust for which Merrill Lynch Trust (“ML Trust”) served as the trustee. ML Trust purchased from its affiliate, Merrill Lynch Life Insurance Company (“ML Life), a life insurance policy for the Alanizes’ trust. ML Life paid a commission on the sale to Merrill Lynch, which then paid its employee, Medina, who was a licensed agent for ML Life and other insurers. Subsequently, the Alanizes sued ML Trust, ML Life, and Medina in his capacity as insurance agent, alleging self-dealing. However, the Alanizes did not sue Merrill Lynch. The issue before the court involved which of the Alanizes’ claims were subject to arbitration. The only agreement that contained an arbitration provision was the one with Merrill Lynch–the one party that had that the Alanizes had not sued. The Alanizes had signed separate agreements with ML Trust and ML Life, but neither of those contracts contained an arbitration provision. The defendants took the position that the all claims had to be raised in arbitration. Ultimately, the court concluded that some of the claims were subject to arbitration–namely those against Medina–but others were not. Everyone agreed that the Federal Arbitration Act applied. Moreover, there was little dispute that if the arbitration provision in the Merrill Lynch agreement applied, its terms would require arbitration of any claims made against Merrill Lynch.

The court analyzed the claims against Medina, the Merrill Lynch employee, separately from those against ML Life and ML Trust. As to the claims against Medina, the court characterized those as claims actually against Merrill Lynch inasmuch as that Merrill Lynch could act only through its employees. Thus any claims of wrongdoing by Medina were subject to arbitration. The court noted that a plaintiff could not avoid arbitration by artfully pleading his case to sue the employee rather than the company itself. To allow a plaintiff to choose between suing a corporation or suing an employee as a means to avoid arbitration would render the agreement to arbitrate illusory. Moreover, the court noted that the Alanizes’ claims were really against Merrill Lynch even though it had not been sued. The court rejected Alanizes’ argument that their suit was against Medina in his capacity as an insurance agent because ML Life paid the insurance commission to Merrill Lynch, suggesting that an agency relationship existed between Merrill Lynch and ML Life. Because Medina was acting within the scope of his employment, Merrill Lynch would be liable for his torts. In other words, the court addressed an issue not actually before the court, involving an entity that was not a party to the litigation. In any event, the end result is that the complaints against Medina will be resolved by an arbitrator. The court concluded, however, that the claims against ML Trust and ML Life were not subject to arbitration because these parties were not signatories to an agreement to arbitrate. The Merrill Lynch agreement referred to some affiliates, but not to either ML Trust or ML Life. The fact that ML Life and ML Trust were corporate affiliates of Merrill Lynch, but not alter egos, was insufficient to support their attempt to compel arbitration. The court further rejected the claims of ML Trust and ML Life that the Alanizes’ causes of action all arose out of the same set of facts, such that it would be inefficient to have two proceedings. The court noted that arbitration cannot be compelled simply because the claims arise from the same transaction. While other courts have compelled arbitration based on an “intertwined claims” theory, the court noted that conspiracy or concerted conduct has never justified compelling arbitration of a non-signatory’s claims in Texas, and until the U.S. Supreme Court decided the issue, it would not do so either. Recognizing that its ruling will result in two proceedings, the court stayed the litigation proceedings against ML Trust and ML Life until the arbitration is complete.

Note: Justice Hecht filed an opinion concurring in part and dissenting in part. He disagreed with the court’s characterization of the Alanizes’ complaint as artful pleading, noting that their claims all stemmed from the purchase of the life insurance policy as opposed to the investment services Merrill Lynch agreed to provide. Justice Hecht saw Medina as acting in a separate role, for which he was separately compensated, and for which he could be separately liable without necessarily making Merrill Lynch vicariously liable. He would have held that by impliedly disavowing all claims against Merrill Lynch, the Alanizes could sue Medina separately, and because he was not signatory to an arbitration agreement, arbitration could not be compelled. Justice Hecht was in agreement with the conclusions reached regarding ML Trust and ML Life.  On the other hand, according to the opinion filed by Justice Johnson, concurring in part and dissenting in part, he would have ordered the Alanizes to arbitrate all of their claims. He agreed with the majority opinion that the claims against Medina were subject to arbitration. He would have also compelled arbitration of the claims against ML Trust and ML Life on the basis of an equitable estoppel theory, i.e. that the Alanizes are equitably estopped from asserting the lack of an agreement for those claims against a nonsignatory that depend on the actions or omissions of a party that is subject to arbitration. This outcome would certainly solve many of the problems that theoretically can occur with separate proceedings for issues arising out of the same facts. Nonetheless, this would result in compelling arbitration in a situation where there was no agreement to do so on little more than a boot-strap argument.

DaimlerChrysler Corp. v. Inman, W.L. 274903; LEXIS 91 (Tex. 2008)

Class Certification—Standing: The Court declined to answer the most interesting issue in this case, that is, the degree to which a defect must manifest itself in a product before a warranty is breached. Rather, the court concluded that because the plaintiff’s claim of injury was “extremely remote,” the plaintiffs lacked standing to raise a claim that the product was defective. The plaintiffs were owners of new or used Chrysler cars who brought a class action suit, claiming that the seatbelts installed in their cars were defective because they were prone to unlatching too easily. None of the would-be class representatives had suffered a seatbelt failure or any other actual injury. However, they alleged that a defect existed because it was possible that users of the seatbelts might inadvertently unlatch the buckles. The trial court certified the class. The appellate court reversed the class certification and remanded the case to the trial court for consideration of various issues related to the class certification. Nonetheless, the defendant sought review by the supreme court, arguing that the plaintiffs lacked standing because they had suffered no injury. In analyzing the standing issue, the court reviewed the number of complaints made to Chrysler about the seatbelts as compared to the number of Chrysler cars that contained the allegedly defective seatbelts. It found that only one complaint had been lodged for every 200,000 owners. The court compared this complaint rate to that in Cole v. General Motors, 484 F.3d 717 (5th Cir. 2007), in which the plaintiffs complained of allegedly defective airbags installed in General Motors cars. In that case, one in every 732 owners or lessees complained. Compared to Cole, the court found the number of complaints about the seatbelt defect paltry. The court further distinguished Cole by noting that the risk of an airbag failure existed because the airbags could deploy during normal usage; injury was just a matter of time. On the other hand, the court likened the present case to Rivera v. Wyeth-Ayerst Laboratories, 283 F.3d 315 (5th Cir. 2002), in which the plaintiffs alleged that a prescription painkiller could cause liver damage. She, however, had suffered no liver damage and likely would not have if she followed the manufactured instructions to use the medication for a limited period of time. Either way, the main question, i.e. the law regarding unmanifested defects, remains undecided in Texas, as is the case in most other states as well.

Note: The dissenters have a more principled opinion, raising questions that are clearly unaddressed in the majority opinion. The majority never addressed the economic injury that the plaintiffs may have experienced because of the allegedly defective seatbelts. While the plaintiffs have never suffered physical injury, arguably they may have suffered economic injury if their claims were true because their cars were worth less than they would be if no defect existed. Moreover, the supreme court seemed to ignore the procedural posture of this case. The issue was raised in connection with the review of class certification issues. Yet it relied on a rather odd concept of standing, seemingly requiring proof of the plaintiff’s case at the class certification stage. The court also seemed to suggest that if actual injury was more likely or evidence of a defect, in the form of complaints, was more prevalent, then the plaintiffs would have standing. How many complaints must the plaintiff plead before there are enough to conclude that there is an injury such that there is standing? The majority opinion left this question unanswered. Overall, the supreme court tantalized us by dangling before us an interesting issue, namely the degree to which a defect must manifest itself to become actionable, but failed to answer whether economic damages could constitute an injury sufficient to give standing. As of the time of this summary, the final opinion had not been released for publication, and thus it is possible that the court may address some of these issues before releasing the final opinion.

Eads v. Wolpoff & Abramson,LLP, W.L. 555518 (W.D. Tex. 2008)

Fair Debt Collection Act: Lawyers who regularly collect debts on behalf of clients, such that they might be subject to either the federal or state Fair Debt Collection Acts, should take special notice of this case in which the court sided with the plaintiff debtor on all but one of his claims.

Wolpoff & Abramson, a law firm that regularly collects debts for its clients, filed suit in state court to recover an amount awarded in an arbitration proceeding. The firm included in its sprayer an amount that included the arbitration award, plus an additional $225 that represented the filing fee incurred by the client for the arbitration. The firm subsequently amended its pleading, seeking to recover only the arbitration award. Nonetheless, that error resulted in the plaintiff-debtor filing this suit. The court concluded that the corrected complaint did not defeat the plaintiff’s claim that the firm violated §1692(f)(1) of the federal Act, which prohibited a debt collector from collecting or attempting to collect any amount unless such amount was authorized by agreement. In other words, the amended complaint could not cure the alleged violation; the debtor had a cognizable complaint, and thus the court denied the firm’s Rule 12(b)(6) motion to dismiss. Moreover, the court concluded that the plaintiff stated a claim for a violation of §1692(e)(5), which prohibited threatening to or actually taking an act in violation of the law. The basis for the alleged wrongdoing was again the first complaint that included the incorrect amount of the debt. Finally, the court concluded that the plaintiff stated a claim that the firm violated the law by communicating with the plaintiff with knowledge that he was represented by counsel, as prohibited by §§1692b and 1692c. The alleged improper communication was the service on the plaintiff, as opposed to his attorney of record, of a motion for summary judgement in the state court action to collect the debt. The court rejected the firm’s argument that it was immune from suit because the actions occurred in the context of a judicial proceeding, distinguishing the cases cited by the firm in support of its argument. Those cases involved claims of libel or slander based on statements made in the context of a judicial proceeding. Rather, the court relied on other cases that addressed the liability of attorneys for federal FDCA violations, including actions taken in connection with judicial proceedings. Consequently, the court denied the firm’s motion to dismiss this claim as well. In fact, the court refused to dismiss any of the plaintiff’s FDCA claims.

The firm did prevail on its motion to dismiss the plaintiff’s Deceptive Trade Practices Act claim. The Texas Fair Debt Collection Act was a DTPA tie-in statute. Therefore, based on the firm’s alleged state FDCA violation, the plaintiff pleaded a DTPA claim. However, the plaintiff failed to plead that he was a consumer, as defined by the DTPA, and thus he lacked standing to raise a DTPA claim. Apparently, the plaintiff had taken the position that the credit transaction that formed the basis of the arbitration award was not authorized by him, and logically he provided no information about the purpose of the transaction such that his consumer status might have been supported. Lacking any basis to claim consumer status, the court correctly dismissed the plaintiff’s DTPA claim.