Thursday, March 12, 2009
Supreme Court Denies Association’s Bid to Depublish Bank Fraud Ruling
By a MetNews Staff Writer
The California Supreme Court yesterday denied a request by the California Bankers Association to depublish an opinion of this district’s Court of Appeal, which held that the investment arm of Wells Fargo Bank may have taken fraudulent advantage of an elderly couple.
The justices, at their weekly conference in San Francisco, vote 5-0 to allow the opinion, by Justice Walter Croskey of this district’s Div. Five, to remain published in the official reports. Justices Marvin Baxter and Carol Corrigan were recused. a
The Court of Appeal panel held that a trial judge must determine whether a Wells Fargo manager took advantage of Ira and Ronnie Brown in order to get them to open a brokerage account with the bank. Ira Brown, now deceased, was a founder of the Sav-On drug chain.
Croskey agreed with Los Angeles Superior Court Judge John Shook that the parties had a fiduciary relationship. The case was sent back to the trial court so that the judge may “consider and rule upon the consequences of this conclusion.”
If the judge decides that there was fraud in the execution of the brokerage agreement, Croskey wrote, no part of that agreement, including the arbitration clause challenged by the plaintiff, can be enforced.
The lawsuit arises from a 2004 agreement that Ira Brown, then 93, and Ronnie Brown, then 81, signed with Wells Fargo. Ira Brown and a partner started Sav-On in San Bernardino in 1945, and by 2004 he had amassed more than 100,000 shares of the company’s stock, then valued at more than $1.8 million.
He was in failing health and legally blind at the time.
In late 2003 or early 2004, the bank—with which the Browns were already doing business—assigned the couple a “relationship manager,” Lisa Jill Tepper. Tepper began visiting the Browns every other week to help with their financial paperwork.
Tepper introduced the couple to an estate attorney and certified public accountant, and began advising them with respect to investments. She suggested to them that their then-current investments were inappropriate for persons their age, and urged them to open a brokerage account with Wells Fargo, introducing them to a stock broker who worked for the bank, Jack Harold Keleshian.
Following a meeting with Tepper and Keleshian, the Browns executed documents opening up several investment accounts with Wells Fargo. One of those accounts was for a new “Brown Family Trust,” and the supporting documents included an arbitration clause.
During the meeting, Tepper took possession of the Browns’ Sav-On stock certificates, later placing them in a Wells Fargo vault.
In May 2006, Ronnie Brown sued the bank, claiming that the previous September, while her husband was in hospice care and she was fatigued and mentally weary as a result of the burden of his care, she was pressured into selling nearly 75,000 shares of stock at $24.71 a share. Contrary to Keleshian’s advice that the stock’s value would drop to nothing if she did not sell immediately, the value subsequently rose, the complaint alleged.
Not only did she lose out on the subsequent increase in value, Brown alleged, she incurred significant capital gains taxes and thus suffered damages totaling more than $1 million, including Wells Fargo’s unjustified commission on the stock sale.
The bank moved to compel arbitration. Brown responded that the arbitration clause was unconscionable and that the bank breached its fiduciary duties.
Brown said she and her husband had become dependent on Tepper to handle their finances over a period of six months before the brokerage agreement was executed.
Following a hearing, Shook found that the arbitration agreement was “unfair and...procedurally unconscionable” but said the fraud issue was for a jury to decide. The bank, he said, should have done more to assist the couple in understanding the import of the documents they were signing.
But Croskey, writing for the Court of Appeal, said the arbitration agreement, a standard clause subjecting any dispute between the parties to resolution under the rules of the National Association of Securities Dealers, was not substantively unconscionable on its face.
“Without substantive unconscionability, procedural unconscionability is an insufficient basis on which to deny a motion to compel arbitration,” the justice added.
The trial judge, however, must decide the constructive fraud issue, Croskey went on to say, because it was raised by the petition to compel arbitration.
The case is Brown v. Wells Fargo Bank, NA, 168 Cal. App. 4th 938.
Copyright 2009, Metropolitan News Company