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Arbitration Attempt Is Annulled by Inconsistent Activity: Dagostino v. LPL Financial, LLC
Posted on Categories Court Decisions, Securities ArbitrationTags , ,

By Paul J. Dubow

A party who engages in extensive motion practice, takes depositions, and seeks production of documents before filing a motion to compel arbitration waives the right to arbitration.

Dagostino vs. LPL Financial, LLC, No. D069541 (Cal. App., 4Dist., 12/6/16).

The Litigation

In February 2015, plaintiffs filed a first amended complaint against LPL and Daniel Schmidt, a former LPL branch manager, alleging that Schmidt defrauded them by inducing them to liquidate their holdings at LPL and invest in the construction and ownership of a resort in Hawaii. LPL did not move to compel arbitration of the complaint and even indicated that it was not interested in arbitration in its case management statement. In the next nine months, it engaged in extensive discovery practice, took the depositions of the four plaintiffs, filed a motion for summary judgment and agreed to a December 2015 trial date.

In October 2015, plaintiffs filed a second amended complaint and LPL responded by filing a motion to compel arbitration in November. LPL explained that it did not file the motion earlier because the original complaint was outside the scope of the arbitration agreement between the parties and did not contain any allegations implicating securities transactions through LPL. Plaintiffs argued that LPL made a tactical decision to litigate and waive arbitration because it believed that it could succeed on a motion for summary judgment because this was a “selling away” case. The trial court denied the motion on grounds of waiver.

Is the Case An Arbitrable Controversy?

LPL appeals and the Court of Appeal affirms. The LPL arbitration agreement encompasses “any controversy” with LPL “relating to transactions with or for you.” The first amended complaint alleges at least two such transactions: (1) loans plaintiffs made to Schmidt are transactions “with” plaintiffs, and (2) liquidation of securities in plaintiffs’ accounts to fund the loans are transactions “for” plaintiffs. LPL argues that these transactions were not “transactions with or for you” because Schmidt’s activities had no connection to LPL. However, the first amended complaint alleges such a connection, because it alleges that Schmidt liquidated plaintiffs’ LPL accounts to generate the cash necessary for this investment, that Schmidt was a management level agent of LPL and that LPL failed to adequately supervise Schmidt.

Did Defendant Lose Its Opportunity to Arbitrate?

LPL acted inconsistently with arbitration by: (1) asking for a court trial, (2) indicating in its case management statement it would not consent to binding arbitration, (3) taking all four plaintiffs’ depositions and propounding other discovery, including a request for production of documents, and (4) bringing a motion for summary judgment. Plaintiffs were prejudiced by LPL’s actions, a necessary element in finding waiver. By litigating the case in court instead of arbitration, LPL was able to depose the plaintiffs. Under applicable FINRA arbitration rules, depositions are not permitted except in limited circumstances. Moreover, by deposing plaintiffs, LPL was able to gauge their strengths and weaknesses as witnesses, and therefore was able to obtain an unfair advantage that would not have been available in arbitration proceedings. LPL’s motion for summary judgment (also not generally available in arbitration) extensively cited and relied on the plaintiffs’ deposition testimony.

From this evidence, the court could reasonably infer that LPL chose to conduct discovery and file a summary judgment motion because it saw an advantage in pursuing that course of action in the judicial forum. Accordingly, LPL’s nine-month delay in seeking to compel arbitration was unreasonable and unexcused, because it resulted from conduct neither consistent with the right to arbitrate nor compelled by any law. Under these circumstances, the court could properly consider whether the expenditure of attorney time deprived plaintiffs of the benefits of arbitration and was sufficiently prejudicial to amount to a waiver of LPL’s right to arbitrate.

(P. Dubow)

(SLC Ref. No. 2017-04-01)

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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