IN THE SUPREME = COURT OF TEXAS

IN THE SUPREME COURT OF TEXAS

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No. 04-0865

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In re Merrill = Lynch Trust=20 Company FSB, Merrill Lynch Life Insurance Company, and Henry Medina, = Relators

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On Petition for Writ of = Mandamus

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Argued March 23,=20 2005

Justice Hecht, joined by Justice Medina, and joined by = Justice O=92Neill as to Part = I, concurring=20 in part and dissenting in part.

&nbs= p;=20 By agreeing to arbitrate all controversies with their broker, Merrill = Lynch,=20 Pierce, Fenner & Smith, Inc. (=93Merrill = Lynch=94),=20 Juan and Norma Alaniz also agreed to = arbitrate claims=20 against Merrill Lynch employees, including Henry Medina, for which = Merrill Lynch=20 could be liable because of the employment relationship. But Merrill = Lynch cannot=20 be held vicariously liable for Medina=92s actions, as it might = ordinarily be,=20 because the Alanizes have affirmatively = disclaimed=20 such liability. And the record does not establish whether Merrill Lynch = would be=20 obliged to indemnify Medina for any liability he might = have to the=20 Alanizes. Even if his actions as a financial = analyst=20 were generally within the course and scope of employment, it is not = clear=20 whether the same can be said for his recommendation of a transaction = illegal=20 under Texas=20 law. The record provides no other basis for holding Merrill Lynch liable = for=20 Medina=92s actions=20 or for the actions of its affiliates, Merrill Lynch Trust Co., FSB = (=93ML Trust=94)=20 and Merrill Lynch Life Insurance Co. (=93ML Life=94), or for estopping the Alanizes = from=20 refusing to arbitrate their claims against those two companies. = Accordingly, I=20 would hold that the lower courts correctly refused to compel arbitration = of any=20 of the Alanizes=92 claims.[1]

&nbs= p;=20 I agree that if some of the Alanizes=92 = claims must be=20 arbitrated and some litigated, litigation must be stayed pending the = outcome of=20 the arbitration. Thus, I concur only in Parts I, III-A, and IV of the = Court=92s=20 opinion.

&nbs= p;=20 For estate planning purposes, the Alanizes = created an=20 irrevocable trust, designating their descendants as beneficiaries and ML = Trust=20 as trustee, to purchase and hold a $5 million insurance policy on their = lives.=20 ML Trust bought the policy from ML Life with funds from the Alanizes=92 Merrill Lynch accounts. Nine years = later, the=20 Alanizes sued ML Trust and ML Life for = self-dealing.=20 The two companies concede that because they are affiliated,[2] the purchase of the policy was = illegal=20 under Texas=20 law,[3] although they contend that they = did not=20 recognize the illegality at the time and that, in any event, the Alanizes benefitted = from the=20 transaction.

&nbs= p;=20 The Alanizes never agreed to arbitrate = disputes with=20 ML Trust and ML Life, but they did agree to arbitrate =93all = controversies=94 that=20 might arise with Merrill Lynch.[4] Their financial advisor, = Medina, a = Merrill Lynch=20 employee, recommended the creation of the trust and the purchase of the = ML Life=20 policy. As a licensed insurance agent, Medina sold the policy to the trust = and=20 received compensation in addition to his Merrill Lynch salary.

=20 The Alanizes could not evade their = arbitration=20 agreement with Merrill Lynch simply by suing its employee, Medina, who = was not a=20 party to the agreement. An agreement to arbitrate disputes with someone=20 necessarily includes claims against his agents if he can be held liable = for=20 those claims because of the agency relationship. The Court explained one = reason=20 for this rule last Term in In re = Vesta Insurance Group, Inc..[5] A person cannot avoid his = obligations=20 merely because they must be discharged by an agent. For example, a = company that=20 has contracted to sell six widgets cannot renege on that contract = because its=20 shipping clerk, who would actually see that those widgets are sent to = the buyer,=20 did not also sign the contract. To allow a person to avoid an agreement = to=20 arbitrate disputes with someone by suing only the agents whose actions = gave rise=20 to the dispute but who did not sign the agreement would be to give = arbitration=20 agreements less effect than other agreements.[6]

&nbs= p;=20 Another reason for the rule is that a party should not be permitted to=20 eviscerate his agreement to arbitrate disputes with a principal by = establishing=20 liability against the agent. As the Court explains, a principal=92s = liability for=20 his agent=92s action taken in the furtherance of the principal=92s = business does not=20 preclude action against the agent individually.[7] But establishing the agent=92s = liability=20 may be tantamount to establishing liability against the principal if the = agent=20 acted in the course and scope of his authority and the principal = provided his=20 defense. Further even if the claimant did not attempt to use a judgment = against=20 the agent to recover against the principal, the agent himself might be = entitled=20 to have the principal indemnify him for his liability.[8] In either situation, a party = could=20 effectively resolve the dispute that he had agreed to arbitrate with the = principal by litigating with the agent.

&nbs= p;=20 So the Alanizes are bound to arbitrate with = Medina any = claims they have=20 against Merrill Lynch. For example, they could allege that Medina was = negligent or=20 misleading in giving them financial advice. These claims would be arbitrable even if asserted against Medina only = because they=20 involve his conduct as a Merrill Lynch employee. But the Alanizes have tried very hard not to assert any = such claims.=20 Their original petition begins by complaining of Medina =93in his capacity as an agent = of Merrill=20 Lynch Trust Company and Merrill Lynch Life Insurance Company=94, not as = a Merrill=20 Lynch employee. The petition alleges that ML Trust =93as trustee used = the trust=20 funds to illegally engage in self-dealing by purchasing a life insurance = policy=20 from its own affiliate [ML Life] through its agent Henry Medina.=94 = Parts of the=20 petition can be read in isolation to assert claims against Medina beyond = his actions=20 on behalf of ML Life and ML Trust. For example, the petition alleges = generally=20 that =93Defendants=94, Medina included, breached their = fiduciary=20 duties, were negligent, and made negligent misrepresentations. But the = Alanizes tell this Court that their =93chief = complaint=94=20 against Medina=20 is =93in his capacity as a licensed insurance agent for Life Insurance = Company and=20 sale of the insurance policy at issue.=94 [9] Their =93chief allegation=94, = they say, is=20 that ML Trust and ML Life engaged in self-dealing.[10] They contend that =93Medina=92s actions as a licensed insurance agent = in the sale=20 of a life insurance policy in Texas are irrelevant and unconnected = to=20 [Merrill Lynch and the CMA agreements].=94 [11] Merrill Lynch, they say, =93is = not a=20 defendant in the lawsuit simply because it neither = acted as=20 trustee nor insurance salesman and thus cannot be legally = responsible for=20 the damages caused to [plaintiffs] for violations of the Texas Trust = Code or=20 Insurance Code.=94 [12] Merrill Lynch, they continue, = =93has no=20 potential liability for any of the claims in this case and [plaintiffs = have] not=20 alleged [that Merrill Lynch ] engaged in any = act or=20 omission in connection with the trust or insurance policy=94 that is the = basis of=20 the suit.[13] The Alanizes=92=20 counsel told the trial court that if they sued Merrill Lynch on the = claims they=20 had asserted against ML Trust, ML Life, and Medina, it would be entitled to = summary=20 judgment. The reason the parent company =93set up these three affiliated = companies=20 and made them distinct entities=94, he argued, is =93[b]ecause they do distinctly different things=94. = =93[T]here=92s no=20 evidence,=94 he stated, =93that my clients are attempting to hold = [Merrill Lynch]=20 liable for the acts of the trust company, the life insurance company, or = Medina.=94

&nbs= p;=20 Whether one can serve two masters,[14] the law allows it and = generally makes=20 both employers liable for the agent=92s actions.[15] But nothing requires a third = party=20 injured by the agent to hold both employers responsible. Ordinarily, the = claimant has every reason to do so, if not simply to assure full = recovery, then=20 to keep each employer from escaping liability by blaming the other. But = the=20 Alanizes face another consideration. ML = Trust and ML=20 Life have conceded that they violated Texas law in the purchase and sale = of the life=20 insurance policy. Merrill Lynch, on the other hand, does not admit that = it is=20 liable to the Alanizes for that reason or = any other.=20 The Alanizes must still prove that ML = Trust=92s and ML=20 Life=92s actions caused damages, which defendants adamantly deny, but = the Alanizes may consider that an easier burden than = taking on=20 Merrill Lynch. Regardless of their motivation, nothing prevents them = from=20 complaining of Medina=92s actions on behalf of ML = Trust and ML=20 Life while disclaiming any complaint about his action on behalf of = Merrill=20 Lynch. That is what the Alanizes have done. = It is not=20 merely artful pleading, as relators complain. The Alanizes have disclaimed liability by Merrill = Lynch.

Because=20 allegations in the Alanizes=92 petition can = be read to=20 assert claims other than self-dealing by ML Trust and ML Life, and the = Alanizes have not stipulated under oath or in = their=20 pleadings that they assert no other claims, the Court concludes that the = Alanizes=92 claims against Medina =93are in substance claims = against Merrill=20 Lynch=94.[16] But I would not ignore the = efforts to=20 limit their complaints that the Alanizes = have=20 made. The Court views their disclaimer as ineffective because it is not=20 iron-clad, and worries that the Alanizes = could still=20 pursue imposing liability on Merrill Lynch down the road. But any claim = they=20 make against Merrill Lynch must be arbitrated. Should the Alanizes prevail in this action, their recovery = would not=20 bind Merrill Lynch because it is not a party.

&nbs= p;=20 The Alanizes=92 arbitration agreement might = nevertheless=20 be circumvented if Merrill Lynch were obligated to indemnify Medina, because = he is an=20 employee, or ML Trust and ML Life, because they are affiliates, and a = judgment=20 against them were binding on Merrill Lynch. But nothing in the record = suggests=20 that Merrill Lynch has any obligation to indemnify its affiliates, and = it is=20 unclear whether it would be required to indemnify Medina, or whether his = recommendation of an illegal transaction, despite his claimed innocence, = is the=20 sort of conduct for which he is not due indemnification.[17] Also, while the Court states = that=20 =93[t]here is no question Medina was = acting in the=20 course and scope of his employment=94,[18] the only evidence comes from = Medina and the = Alanizes, who have every reason to think he was. = Merrill=20 Lynch has not been heard on the subject. For all we know, Merrill Lynch = had a=20 policy against recommending transactions like this one. The right to = arbitration=20 must be proved, not merely assumed.

&nbs= p;=20 It bears repeating that a party cannot avoid his agreement to arbitrate = by suing=20 the other party=92s employees instead of the employee himself. But that = is not the=20 case here. If Medina had acted only as a financial = analyst=20 employed by Merrill Lynch and not as a licensed agent selling insurance, = the=20 Alanizes would have no basis for a claim = against him=20 distinct from a claim against Merrill Lynch. But he played a separate = role, for=20 which he was separately compensated, and I would hold that the Alanizes, disavowing all claims against Merrill = Lynch, can=20 sue him separately in that role, as well as ML Trust and ML Life.

&nbs= p;=20 Estoppel sometimes requires a person to arbitrate even though he has not = agreed=20 to do so, as this Court observed just six months ago in Meyer v. = WMCO-GP,=20 LLC.[19] When, exactly, has been hard = to define.=20 Several years ago, the Eleventh Circuit stated:

application of equitable estoppel is warranted when the = signatory to the=20 contract containing the arbitration clause raises allegations of = substantially=20 interdependent and concerted misconduct by both the nonsignatory and one or more of the signatories to = the=20 contract. Otherwise the arbitration proceedings between the two = signatories=20 would be rendered meaningless and the federal policy in favor of = arbitration=20 effectively thwarted.[20]

The Fifth=20 Circuit endorsed this view in Grigson v.=20 Creative Artists Agency, L.L.C.,[21] and we referred to it as = =93substantially=20 correct=94 in Meyer.[22]

&nbs= p;=20 The Court criticizes estoppel based on =93substantially interdependent = and=20 concerted misconduct=94 because the theory =93is far from well-settled = in the=20 federal courts.=94 [23] The Court seems to think that = the=20 federal courts may be right in finding estoppel when arbitrable and nonarbitrable=20 claims are =93intertwined=94 as long as there is a =93close = relationship=94 component,[24] but the Court asserts that = Grigson does not have that = component. It is=20 not at all clear to me that Grigson=92s second=20 prong is much different from the rule for intertwined claims applied in = other=20 cases that the Court accepts, but the issue need not be decided here. = The Alanizes=92 claims against ML Trust and ML Life, = as I have=20 described them above, focus solely on the illegality of the = inter-affiliate=20 purchase and sale of the life policy. These claims are not intertwined = with any=20 claims that the Alanizes=92 might have = against Merrill=20 Lynch (which they have disavowed); they are not =93substantially = interdependent,=94=20 do not have a =93close relationship=94, and do not allege =93concerted = misconduct=94. No=20 estoppel theory prohibits the Alanizes from = refusing=20 to arbitrate the claims it has asserted in the circumstances of this = case.

* * *

&nbs= p;=20 The Alanizes are not required to arbitrate = their=20 claims. I would accordingly deny mandamus relief.

____________________________ &= nbsp; &n= bsp; &nb= sp; &nbs= p; =20

Nathan L.=20 Hecht

Justice

Opinion delivered: = August 24,=20 2007

^[1]=20 159 S.W.3d 162 (Tex. App.=97Corpus Christi = 2004).

^[2]=20 Merrill Lynch & Co., The = Merrill=20 Lynch 2004 Factbook 12 =96 13 (2005), = http://www.ml.com/media/47195.pdf=20 (last visited Aug. 22, 2007) (available in Clerk of Court=92s case file) = (excerpting information from public filings and stating that Merrill = Lynch Life=20 Insurance Co. is a subsidiary of Merrill Lynch Insurance Group, Inc., = which,=20 along with Merrill Lynch Trust Co., FSB, are subsidiaries of Merrill = Lynch=20 Group, Inc., which, along with Merrill Lynch, Pierce, Fenner & Smith Inc., are subsidiaries of = Merrill Lynch=20 & Co., Inc.).

^[3]=20 Tex. Prop. Code =A7 = 113.053(a)(1) (stating that with certain exceptions, =93a = trustee shall=20 not directly or indirectly buy or sell trust property from or to . . . = the=20 trustee or an affiliate=94); id. =A7 111.004(1)(A) (defining = =93affiliate=94 for=20 purposes of the Texas Trust Code as =93a person who directly or = indirectly,=20 through one or more intermediaries, controls, is controlled by, or is = under=20 common control with another person=94).

^[4]=20 The Alanizes=92 Cash Management Account = Agreements with=20 Merrill Lynch provided: =93I agree that all controversies which may = arise between=20 us, including but not limited to those involving any transaction or the=20 construction, performance, or breach of this or any other agreement = between us,=20 whether entered into prior, on or subsequent to the date hereof, shall = be=20 determined by arbitration.=94 The agreements further specified that = =93=91I,=92 =91me,=92=20 =91my=92 or =91accountholder=92 means each person who signs the CMA = Application and=20 Agreement form or the CMA SubAccount = Application and=20 Agreement form. =91You,=92 =91your=92 or =91MLPF&S=92 means Merrill = Lynch, Pierce, Fenner & Smith Incorporated. . . = .=94

^[5]=20 192 S.W.3d 759 (Tex. 2006) (per curiam).

^[6]=20 Id. at 762 (=93When contracting parties agree to arbitrate all = disputes=20 =91under or with respect to=92 a contract (as they did here), they = generally intend=20 to include disputes about their agents=92 actions because =91[a]s a = general rule,=20 the actions of a corporate agent on behalf of the corporation are deemed = the=20 corporation's acts.=92 If arbitration clauses only apply to contractual=20 signatories, then this intent can only be accomplished by having every = officer=20 and agent (and every affiliate and its officers and agents) either sign = the=20 contract or be listed as a third-party beneficiary. This would not place = such=20 clauses on an equal footing with all other parts of a corporate = contract.=94=20 (citations omitted)).

^[7]=20 Ante at ___ n.7 (citing authorities).

^[8]=20 See Oats v. Dublin Nat=92l Bank, 90 S.W.2d 824, 829 (Tex. = 1936)=20 (stating that =93an agent, who in the performance of his duties for his = principal=20 incurs liability for an act not morally wrong, may have indemnity from = the=20 principal=94); Aviation Office of Am., Inc. v. Alexander & = Alexander of=20 Tex., Inc., 751 S.W.2d 179, 180 (Tex. 1988) (stating that this rule = does not=20 apply in negligence cases governed by the comparative responsibility = statute);=20 see also Godwin v. Jessell, = No.=20 05-99-01824-CV, 2001 Tex. App. LEXIS 883, at *4-9 (Tex. App. =96 Dallas = 2001, no=20 pet.) (concluding that while =93there is = little case law=20 defining the term =91morally wrong=92 acts,=94 knowing dishonesty, = misrepresentation,=20 and deceit were, as a matter of law, among them).

^[9]=20 Responsive Brief of the Real Parties in Interest at 11.

^[10] Id. at 11.

^[11] Id. at 34.

^[12] Id. at 18.

^[13] Id. at 53.

^[14] Matthew 6:24 (=93=91No one = can serve two=20 masters. Either he will hate the one and love the other, or he will be = devoted=20 to the one and despise the other. You cannot serve both God and=20 Money.=92=94).

^[15] See Restatement (Second) of = Agency =A7 226=20 (1958) (=93A person may be the servant of two masters, not joint = employers, at one=20 time as to one act, if the service to one does not involve abandonment = of the=20 service to the other.=94), cited in Garza v. Excel Logistics, = Inc.,=20 100 S.W.3d 280, 287-88 (Tex.App.-Houston = [1st Dist.]=20 2002), rev=92d on other = grounds, 161=20 S.W.3d 473 (Tex. 2005); Restatement=20 (Third) of Agency =A7 7.03, reporters=92 note d (2).

^[16] Ante at ___.

^[17] Supra note 8.

^[18] Ante at ___.

^[19] 211 S.W.3d 302, 305 (Tex. 2006) = (=93As a rule,=20 arbitration of a claim cannot be compelled unless it falls within the = scope of a=20 valid arbitration agreement. But sometimes a person who is not a party = to the=20 agreement can compel arbitration with one who is, and vice versa.=94 = (footnotes omitted)).

^[20] MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942, 947 (11th = Cir.=20 1999) (citations, ellipses, brackets, and quotation marks = omitted).

^[21] 210 F.3d 524, 527 (5th Cir.=20 2000).

^[22] Meyer, 211 S.W.3d=20 at 306-308.

^[23] Ante at ___.

^[24] Ante at=20 ___.