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,=20 Relators

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On Petition for Writ of = Mandamus

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Argued March 23,=20 2005

&nbs= p;=20 Justice=20 Johnson, joined by Justice=20 Wainwright, concurring in part and dissenting in part.

&nbs= p;=20 As the Court notes, arbitration is a matter of consent and the Federal=20 Arbitration Act generally does not require parties to arbitrate when = they have=20 not agreed to do so. Volt Info. = Scis.,=20 Inc. v. Bd. of Trs. of Leland Stanford = Junior=20 Univ., 489 U.S. 468, 478-79 (1989). = But parties=20 should be required to arbitrate disputes which, according to law, they = have=20 agreed to arbitrate. Our decisions relating to arbitration should = facilitate=20 prompt, final resolution of those disputes to the extent reasonably = possible. To=20 that end, I agree that the trial court abused its discretion in failing = to=20 require Juan and Norma Alaniz to arbitrate = their=20 claims against Henry Medina. While I agree that arbitration must be = based on an=20 agreement to arbitrate by the parties and no such agreement exists or = can be=20 relied on by ML Trust and ML Life, I do not consider that we write on a = clean=20 slate with these facts and this issue.

&nbs= p;=20 In this case to which the FAA applies, I would follow the stated = position of the=20 Federal Fifth Circuit Court of Appeals that equitable estoppel is = applicable in=20 cases where a signatory to a contract containing an arbitration clause = alleges=20 substantially interdependent and concerted misconduct by both a nonsignatory and one or more of the signatories to = the=20 contract. On that basis, I would hold that the trial court abused its = discretion=20 in failing to apply the second prong of Grigson v. Creative Artists Agency, = L.L.C.,=20 210 F.3d 524, 527 (5th Cir. 2000), to equitably estop=20 the Alanizes from refusing to arbitrate = claims against=20 ML Trust and ML Life to the extent the claims are based on Medina=92s = alleged=20 misconduct. I would grant relief accordingly.

&nbs= p;=20 The Alanizes=92 petition alleges that, in = early 1994,=20 Medina, as agent=20 for ML Life and ML Trust, approached them regarding the creation of an=20 irrevocable trust. The petition then alleges that the wrongful actions = of=20 =93Defendants=94 improperly induced the Alanizes to create=20 an irrevocable trust and name ML Trust as trustee, which in turn allowed = self-dealing among =93Defendants=94 by ML Trust purchasing life = insurance from ML=20 Life with Medina=20 acting as agent. The petition further alleges that =93Defendants=94 = violated various=20 provisions of the Property Code, Insurance Code, and Business and = Commerce Code;=20 committed breaches of fiduciary duties, fraudulent conversion, theft, = negligent=20 misrepresentation, and negligence generally; and were unjustly enriched = from the=20 payments made by the Alanizes to ML Trust.=20 Specifically, for example, the Alanizes = allege:

12. . . .=20 Defendants, including Mr. Medina in his capacity as an agent of Merrill = Lynch=20 Trust Company and Merrill Lynch Life Insurance Company, represented to=20 Plaintiffs that Defendants were sophisticated, skilled and experienced = in the=20 areas of trusts and life insurance. Defendants also represented to = Plaintiffs=20 that they would act in a manner consistent with Plaintiffs [sic] best = interests=20 . . . .

13. In=20 April, 1994 Defendants arranged for an attorney to draft the Alaniz Irrevocable Trust Agreement at Plaintiffs = [sic]=20 expense. Defendants exerted inappropriate and undue influence over the = drafting=20 . . . .

14.=20 Defendants knowingly made false and misleading statements of material = facts and=20 law to Plaintiff . . .

15.=20 Defendants=92 actions were done with reckless and intentional disregard = of the=20 rights and well being of Plaintiffs . . . [and] to unjustly enrich = Defendants .=20 . . .

&nbs= p;=20 . . . .

20.=20 Plaintiff [will show] that the acts, errors, and omissions of Defendants = have=20 amounted to the following . . .

21. . . .=20 [T]he acts, errors, and omissions of Defendants have been a = producing/proximate=20 cause of Juan Alaniz=92 and Norma Alaniz=92 damages . . . .

The gravamen of the pleaded complaints against ML = Trust and ML=20 Life is that the companies acted both through Medina=92s actions as the = companies=92=20 agent and in concert with Medina and each other to induce the Alanizes to transfer funds to ML Trust, and that = ML Trust=20 then paid life insurance premiums to its affiliate ML Life and paid fees = to all=20 defendants.

&nbs= p;=20 Several months before the Alanizes even = considered=20 purchasing life insurance and setting up an irrevocable life insurance = trust=20 they began dealing with Medina as a financial advisor who = worked for=20 Merrill Lynch. The scope of the arbitration provision the Alanizes signed when they first began dealing with = Medina is = broad. It=20 encompasses =93all controversies which may arise between us, including = but not=20 limited to those involving any transaction or the construction, = performance, or=20 breach of this or any other agreement between us, whether entered into = prior, on=20 or subsequent to the date hereof.=94 As the Court holds, the pleadings = and=20 evidence, together with the scope of the arbitration clause, compel the=20 conclusion that, as to Medina, the Alanizes=20 must arbitrate the claims on which they sued. ___ S.W.3d ___; see In = re Vesta Ins. Group, Inc., 192 S.W.3d 759, 762-63 = (Tex. 2006).=20 As the Court also holds, ML Trust and ML Life are not entitled to = enforce the=20 arbitration agreement as =93affiliates=94 of Merrill Lynch. But ML Trust = and ML Life=20 further urge that the Alanizes should be = compelled to=20 arbitrate on the basis of equitable estoppel. This is so, they claim, = for two=20 reasons. First, the Alanizes=92 claims refer = to or=20 presume the existence of the Merrill Lynch CMA agreement containing the=20 arbitration clause. Second, the Alanizes=92 = claims raise=20 allegations of substantially interdependent and concerted misconduct by = ML=20 Trust, ML Life, and Medina. See Grigson, 210 F.3d at 527 (=93First, equitable = estoppel=20 applies when the signatory to a written agreement containing an = arbitration=20 clause must rely on the terms of the written agreement in asserting its = claims=20 against the nonsignatory. . . . Second, = application of=20 equitable estoppel is warranted when the signatory to the contract = containing an=20 arbitration clause raises allegations of substantially interdependent = and=20 concerted misconduct by both the nonsignatory and one=20 or more of the signatories to the contract. Otherwise the arbitration=20 proceedings between the two signatories would be rendered meaningless = and the=20 federal policy in favor of arbitration effectively thwarted.=94 (emphasis omitted)).

&nbs= p;=20 We have previously noted that when the FAA applies there is some = question as to=20 whether federal law or state law applies to the issue of whether a party = to a=20 lawsuit may be compelled to arbitrate its claims. In re=20 Kellogg Brown & Root, Inc., 166 S.W.3d 732, 738-39 (Tex. = 2005). We=20 cited Washington Mutual Finance Group, LLC v. Bailey, 364 F.3d = 260,=20 267-68 (5th Cir. 2004), in acknowledging the Fifth Circuit=92s position = that=20 federal law generally applies. In re Kellogg Brown & Root, = 166 S.W.3d=20 at 738-39. The Fifth Circuit explained that =93because the determination = of=20 whether a non-signatory is bound by an arbitration provision =91presents = no state=20 law question of contract formation or validity,=92 a court should = =91look to the=20 federal substantive law of arbitrability to = resolve=20 this question.=92=94 Bailey, 364 F.3d at 268 n.6 (quoting = Int=92l Paper Co.=20 v. Schwabedissen Maschinen=20 & Anlagen GMBH, 206 F.3d 411, 417 n.4 (4th Cir. 2000)). = Nevertheless, we=20 concluded that state law may also play a role in the decision, and we = applied=20 =93state law . . . informed by persuasive and well-reasoned federal = precedent.=94=20 In re Kellogg Brown & Root, 166 S.W.3d at 739. Subsequently, = we noted=20 the importance of maintaining uniformity of state and federal law on = this issue,=20 stating that =93[w]e remain mindful of the importance of keeping federal = and state=20 law uniform so that arbitrability does not = depend on=20 where one seeks to compel it.=94 In re Vesta, 192 S.W.3d at 763.

&nbs= p;=20 Equitable estoppel cannot force parties such as the Alanizes to arbitrate if they have not agreed to = do so in=20 the first instance. See Bridas S.A.P.I.C. = v. Gov=92t of Turkm., = 345 F.3d 347,=20 360-61 (5th Cir. 2003) (noting that equitable estoppel could not be used = to=20 compel a nonsignatory to arbitrate and = distinguishing=20 Grigson by noting that in Grigson the court =93estopped=20 a signatory plaintiff from relying upon the defendants=92 = status as=20 a nonsignatory to prevent the defendants = from=20 compelling arbitration under the agreement. We justified applying = equitable=20 estoppel in Grigson in part because = to do=20 otherwise would permit the signatory plaintiff to =91have it both = ways.=92=94). Thus,=20 equitable estoppel does not, by itself, create an agreement to = arbitrate. But=20 here, the Alanizes agreed to arbitrate=97the = question is=20 with whom and what.

&nbs= p;=20 The Alanizes=92 claims do not fall under the = first Grigson equitable estoppel prong. The = claims do not=20 refer to or presume the existence of the CMA agreement containing the=20 arbitration clause. But I would hold that because we are dealing with = the FAA,=20 under Grigson=92s second prong the = Alanizes are equitably estopped=20 from asserting the lack of an agreement to arbitrate with ML Life and ML = Trust=20 as to those claims which depend on actions or omissions of Medina for = which the=20 Alanizes are also suing Medina. The Alanizes=92 agreement to arbitrate encompasses = those=20 disputes.

&nbs= p;=20 In determining whether an outside party may assert equitable estoppel as = a basis=20 for joining arbitration proceedings, the Fifth Circuit has held that = =93=91[t]he=20 lynchpin for equitable estoppel is equity=92 and the point of applying = it to=20 compel arbitration is to prevent a situation that =91would fly in the = face of=20 fairness.=92=94 Hill v. G E Power Sys., Inc., 282 F.3d 343, 349 = (5th Cir.=20 2002) (quoting Grigson, 210 F.3d at = 527).=20 Reviewing the various ways that proceedings could develop in this case, = it seems=20 that equity mandates allowing ML Trust and ML Life to participate in the = arbitration. Speculating about future developments in lawsuits and legal = theories parties might advance is generally not very productive. But at = the risk=20 of being nonproductive, one can envision how, if the claims against ML = Trust and=20 ML Life which are based on claims the Court holds the Alanizes must arbitrate with Medina are not = referred to=20 arbitration, then the possibility, if not probability, exists that = Medina is=20 going to be a significant part of the litigation whenever the Alanizes=92 suit against ML Trust and ML Life is = prosecuted.=20 One reason for this comes to mind immediately. If Medina prevails in the = arbitration, the Alanizes could press an = argument in=20 the lawsuit that even though the arbitration might preclude Medina=92s = personal=20 liability to the Alanizes, his actions are = imputable=20 to ML Trust and ML Life because he acted as their agent and they should = be held=20 responsible for his actions. If that or some similar (or dissimilar) = argument is=20 entertained by the trial court, Medina is sure to be deposed, = subpoenaed to=20 testify at trial, etc.

&nbs= p;=20 On the other hand, and again without trying to speculate as to all the = arguments=20 counsel might develop, one can envision how, if the Alanizes prevail on their claims against Medina in = arbitration, ML Trust and ML Life would argue that the arbitration = proceedings=20 do not bind them and that they remain entitled to fully litigate any = issue=20 involving Medina=92s allegedly improper actions or omissions before the = actions or=20 omissions can be imputed to them. The net result is that Medina ends up = deeply=20 enmeshed in the litigation process no matter what happens in = arbitration.

&nbs= p;=20 The above scenarios do not take into account various other problems = presented by=20 requiring the Alanizes to arbitrate only = against=20 Medina. For=20 example, what happens if, after Medina and the Alanizes arbitrate, ML Trust and ML Life attempt = to sue or=20 hold Medina as a party to the lawsuit to recover damages they must pay = the Alanizes resulting from Medina=92s actions as = their agent? If=20 they are for some reason barred or restricted from claiming against = Medina because = of=20 arbitration proceedings, ML Trust and ML Life will almost assuredly = claim that=20 their rights have been impaired by the arbitration in which they were = not=20 allowed to participate. But if the trial court allows Medina to be brought into and kept in the lawsuit = by ML=20 Trust and ML Life, Medina loses the benefit of having = arbitrated=20 his disputes with the Alanizes.

&nbs= p;=20 One solution to all of this is the second prong of Grigson=92s equitable estoppel construct. = Grigson, 210 F.3d at = 527.=20 The Alanizes should be equitably estopped from asserting they have no arbitration = agreement=20 with ML Trust and ML Life to the extent the Alanizes=20 claim ML Trust and ML Life are liable because of Medina=92s misconduct. Their claims = that=20 Medina wronged=20 them are disputes the Alanizes, under the = law, agreed=20 to arbitrate. The claims against ML Trust and ML Life that rely on = Medina=92s alleged misconduct depend on = =93substantially=20 interdependent and concerted misconduct=94 by Medina, ML Trust and ML Life because = they are=20 based on the same allegations of misconduct. See Brown v. Pac. Life = Ins.=20 Co., 462 F.3d 384, 398-99 (5th Cir. 2006); Grigson, 210 F.3d at 527. There is little, = if any,=20 inequity to the Alanizes if ML Trust and ML = Life are=20 included in the arbitration to the extent noted above. The facts and = claims in=20 arbitration would remain the same and would pose little, if any, = increased=20 burden on the Alanizes. The Alanizes are in control of their own fate: they = arbitrate=20 only facts and matters underlying the misconduct which they allege both = against=20 Medina and as a=20 basis for the companies=92 liability to them.

&nbs= p;=20 In Brown, the Fifth Circuit affirmed the trial court=92s = determination that=20 the Browns, signatories to an arbitration agreement, were equitably = estopped under Grigson=92s=20 second prong from asserting that lack of an arbitration agreement = precluded=20 their being required to arbitrate with a nonsignatory=20 to the agreement. Brown, 462 F.3d at = 398-99. In=20 doing so, the court did not question the validity of Grigson=92s second prong as a basis for = applying=20 equitable estoppel to require arbitration. To the contrary, the court = noted that=20 =93[t]his circuit does not stand alone in approving the use of equitable = estoppel=20 against a non-party to an arbitration agreement=94 and cited cases from = the=20 Fourth, Seventh, Eighth, and Eleventh federal circuits. Id. = at 398 n.9.

&nbs= p;=20 In Meyer v. WMCO-GP, LLC, 211 S.W.3d 302, 305 (Tex. 2006), a case = brought=20 under the Texas General Arbitration Act [1] as opposed to the FAA, the = trial court=20 refused to compel arbitration between a signatory and a nonsignatory. The court of appeals affirmed. In = holding that=20 the trial court abused its discretion in refusing to compel arbitration, = we=20 discussed the two Grigson prongs for = applying=20 equitable estoppel. Id. at=20 305-06. Our decision that the signatory, WMCO, was equitably = estopped from refusing to arbitrate its claims = against the=20 nonsignatories was bottomed on Grigson=92s first prong. Id. at=20 306. However, we also addressed, without questioning its = validity, the=20 second prong of Grigson in refuting = the court=20 of appeals=92 conclusion that WMCO=92s = claims against the=20 nonsignatories were not intertwined with its = claims=20 against the signatory:

&nbs= p;=20 Finally, the court [of appeals] concluded that WMCO=92s=20 claims against Meyer and Ford were not intertwined with claims against = Bullock.=20 This is simply wrong. WMCO=92s claims = against Meyer and=20 Ford are not only intertwined with its claims against Bullock, they have = the=20 same tap root: WMCO=92s assertion that Ford = lost its=20 right of first refusal.

Id. at=20 307. The one dissenting justice did not argue that the second = Grigson prong was not a valid basis under = the TAA for=20 equitably estopping a signatory from = refusing to=20 arbitrate with a nonsignatory, but disagreed = that=20 either prong was satisfied. Id. at 308=20 (O=92Neill, J., dissenting). Thus less than a year ago we at = least implied=20 both prongs of Grigson=92s equitable = estoppel=20 construct apply even in cases subject to the TAA. Just as the claims in=20 Meyer had =93the same tap root,=94 to the extent the Alanizes=92 claims against Medina, ML Trust, and ML Life in this case are = based on=20 Medina=92s alleged misconduct, they = have the same=20 root system: Medina=92s actions.

&nbs= p;=20 The two-pronged equitable estoppel framework set out in Grigson and referenced recently in = Brown is=20 the Fifth Circuit=92s position on equitable estoppel and arbitration = pursuant to=20 the FAA. I would conform our decisions to = that position=20 in FAA cases until either the Fifth Circuit or the United States Supreme = Court=20 rejects the construct.

&nbs= p;=20 We have held that =93[m]andamus is proper to = correct a=20 clear abuse of discretion when there is no adequate remedy by appeal, as = when a=20 party is erroneously denied its contracted-for arbitration rights under = the=20 FAA.=94 In re D. Wilson Constr.=20 Co., 196 S.W.3d 774, 780 (Tex. 2006). It is within the = trial=20 court=92s discretion whether to apply equitable estoppel in cases like = this.=20 See Brown, 462 F.3d at 398; Grigson, 210=20 F.3d at 528. But a trial court =93has no =91discretion=92 in determining = what the law=20 is or applying the law to the facts.=94 Meyer, 211 S.W.3d at 308 = (quoting=20 Walker v. Packer, 827 S.W.2d 833, 840 (Tex. 1992)). On this record I would = hold that=20 any discretion in compelling arbitration of the Alanizes=92 claims against ML Trust and ML Life is = foreclosed=20 as to claims based on Medina=92s actions. Those claims are = not just=20 arguably substantially interdependent and concerted. They are the same = claims=20 based on the same facts: Medina=92s actions. If those claims = are tried by=20 the Alanizes and the companies, as opposed = to being=20 arbitrated with Medina, Medina can = hardly avoid=20 being a key part of the trial. If he is, one aspect of the federal = policy=20 favoring arbitration of claims within the scope of a valid arbitration = agreement=20 will be frustrated: disputes based on Medina=92s actions will not be = quickly and=20 efficiently resolved. The claims in all probability will be arbitrated = and then=20 tried in the lawsuit to a significant degree.

&nbs= p;=20 I join parts I and II of the Court=92s opinion. I dissent from the = Court=92s refusal=20 to direct the trial court to order the Alanizes=92=20 claims against ML Trust and ML Life to arbitration to the extent the = claims=20 against the companies are based on Medina=92s alleged misconduct. As to = claims=20 against ML Trust and ML Life not based on Medina=92s actions, I agree that the = trial court=20 did not abuse its discretion in failing to order arbitration. If = mandamus relief=20 were granted to ML Trust and ML Life as well as to Medina, I = would not direct=20 the trial court to stay the remaining trial proceedings because claims = remaining=20 in the lawsuit would not involve disputes sent to arbitration. But given = the=20 Court=92s holding that the Alanizes are not = required to=20 arbitrate any claims with ML Trust and ML Life, I agree that the = litigation must=20 be stayed pending completion of the arbitration between the Alanizes and Medina because=20 both the arbitration and the litigation will encompass claims based on = Medina=92s = actions.=20 Accordingly, I also join the Court=92s opinion as to part IV.

&nbs= p; = ; = &= nbsp; &n= bsp; =20 ________________________________________

&nbs= p; = ; = &= nbsp; &n= bsp; =20 Phil Johnson

&nbs= p; = ; = &= nbsp; &n= bsp; =20 Justice

OPINION = DELIVERED: August=20 24, 2007

^[1]=20 See Tex. Civ. Prac. = & Rem. Code = =A7=A7=20 171.001-.098.