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Customers’ Court Claims, Expelled from Arbitration as Ineligible, Survive Statute of Limitations Challenge: Gallier vs. Woodbury Financial Services, Inc.
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By Jack D. Ballard

Under Texas law, the discovery rule tolls the limitations period for investors’ claims of negligence and negligent representation against a securities brokerage, where the plaintiffs allege that they relied on the expertise of a broker employed by the brokerage and there are factual disputes as to when they knew or should have known of the negligence.

Gallier vs. Woodbury Financial Services, Inc., No. H-14-888 (S.D. Tex., 3/21/16).

An Ineligible Arbitration

Plaintiffs alleged that they cashed out their employer-sponsored retirement plans and invested the proceeds in variable annuities between 2003 and 2007 at the direction of David Mierendorf, a former broker at Woodbury Financial Services, Inc. (“Woodbury”), who assured them that the annuities would be secure investments with guaranteed lifetime income streams; instead, the annuities turned out to be high risk and lost much of their value. Plaintiffs first asserted their claims in a 2013 FINRA arbitration proceeding, but those claims were dismissed without prejudice as untimely under FINRA’s six-year eligibility rule (FINRA ID #13-00984 (Houston, 2/13/15). Plaintiffs then filed the present action in state court against Mierendorf, Woodbury and Mierendorf’s branch manager, Ted Ginsberg. Woodbury removed the case to federal court, which dismissed the case against Ginsberg (SLA 2015-23), and Plaintiffs dismissed the claims against Mierendorf without prejudice.

Timeliness and Tolling

Woodbury moved for summary judgment on the remaining claims against it: violations of the Texas Insurance Code, negligence, negligent misrepresentation, fraud and breach of oral contract. It first argued that all of the claims should be dismissed as untimely under the two- or four-year statutes of limitations applicable to the claims under Texas law. The Court first determines that competing evidence and factual disputes as to when the Plaintiffs knew or should have known about Mierendorf’s allegedly deceptive acts preclude dismissal of the fraud claims and the claims under the Texas Insurance Code. But Plaintiffs cannot rely on fraudulent concealment to toll the running of the statute of limitations on the other claims, because there is no evidence that Woodbury knew about Mierendorf’s misleading or untrue statements or worked to conceal the fraudulent nature of the representations from Plaintiffs. The discovery rule does toll the limitations periods for negligence and negligent misrepresentation, because Plaintiffs’ financial inexperience and Mierendorf’s repeated reassurances regarding the value of the investments made the Plaintiffs’ injuries “inherently undiscoverable” within the limitations period. The existence of factual disputes as to when Plaintiffs knew or should have known of the alleged negligence precludes summary judgment dismissal of the negligence claims.

The Court does not determine the limitations issue as to the breach of contract claims, because Plaintiffs presented no evidence that Plaintiffs entered an oral contract with Mierendorf, acting as Woodbury’s agent. The dismissal renders Woodbury’s final argument - that Plaintiffs’ tort-based claims must be dismissed under the economic-loss rule where they allege a breach of contract – moot.

(J. Ballard)

(SLC Ref. No. 2016-26-09)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA)from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis.

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