Arbitration – Fraud-in-the-Factum – Enforcement Against Non-Signatories – Estoppel


Equity Trust Company v. Morris, et al.; ETC Brokerage v. Fry, et al., [Ms. 1200551; 1200552, Aug. 19, 2022] __ So. 3d __ (Ala. 2022). The Court (Wise, J.; Parker, C.J., and Bolin, J., concur; Sellers and Stewart, JJ., concur in the result) reverses the Houston Circuit Court’s order denying Equity Trust Company’s (“Equity Trust”) and ETC Brokerage Services, LLC’s (“ETC”), motions to compel arbitration of tort claims asserted by several Plaintiffs.

Gary Morgan, who signed an Equity Trust IRA application that referenced an Equity Trust custodial agreement and its arbitration agreement, argues that he was not bound to arbitrate his claims related to his IRA due to fraud. Ms. *23. Fraud-in-the-factum claims test the very existence of the contract and are not subject to arbitration. Ms. *23. The Court reiterates, however, that “‘Alabama caselaw, like the Restatement, recognizes that to constitute fraud in the factum, and thereby to prevent the formation of a contract, the misrepresentation must go to the essential nature or existence of the contract itself, for example, a misrepresentation that an instrument is a promissory note when in fact it is a mortgage ....’” Ms. *26, quoting Harold Allen’s Mobile Home Factory Outlet, Inc. v. Early, 776 So. 2d 777, 783 n. 6 (Ala. 2000).

The Court holds that Morgan’s claims constituted fraud-in-the-inducement claims subject to arbitration because Morgan does not allege that when “he signed the Equity Trust IRA application, he did not have knowledge of the true nature or contents of that document … or that he did not understand that he was signing a document that included by reference to the Equity Trust custodial agreement an arbitration agreement.” Ms. *26. In short, Morgan’s fraud claims are directed to the custodial agreement as a whole and not solely to the arbitration agreement contained in it does not provide a basis to avoid arbitration. Ms. *28.

The Court also orders arbitration of the tort claims asserted by the nonsignatory plaintiffs. While recognizing that nonsignatories are not bound by arbitration provisions, the Court holds the “nonsignatory plaintiffs are estopped from avoiding the arbitration agreements included in the Equity Trust custodial agreement, the 2020 Equity Trust custodial agreement, and the ETC customer agreement.” Ms. *49. The Court explains

[W]e do not see how the plaintiffs may prove their claims, including any duties owed to them by Equity Trust or ETC, without reference to their account documents, including the Equity Trust IRA applications and the ETC brokerage-account applications, the Equity Trust custodial agreement, the 2020 Equity Trust custodial agreement, and the ETC customer agreement. Accordingly, the nonsignatory plaintiffs’ claims against Equity Trust and/or ETC depend upon the existence of the agreements containing the arbitration agreements. Therefore, the nonsignatory plaintiffs cannot simultaneously base their claims on their accounts that were created by those agreements and, at the same time, seek to avoid the arbitration agreements contained therein.

Ms. **48-49, citing Olshan Found. Repair Co. of Mobile, LP v. Schultz, 64 So. 3d 598 (Ala. 2010).

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