Bass, Berry & Sims attorney Chris Lazarini provided commentary on whether events that occurred after a contract is signed can render an arbitration agreement unconscionable, as revealed in the Harris vs. TD Ameritrade case. Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SLC, please visit the SLC website to sign up for the newsletter.
Harris vs. TD Ameritrade. Inc. No. 4:14-CV-0045 (E. D. Tenn., 1/5/15)
Determining whether an agreement is unconscionable requires an examination of the circumstances that existed at the time the parties entered into the contract; later events, including the possibility that the claims may ultimately fail in arbitration, do not render an otherwise valid arbitration agreement unconscionable.
In August 2005, Plaintiff purchased 48,000 shares of Bancorp International Group, Inc. ("BCIT"), in his TD Ameritrade ("TDA") account. In 2011, Plaintiff demanded that TDA transfer his BCIT shares into his name on the books of BCIT and deliver a stock certificate to him. TDA told Plaintiff that it could not comply with his demand because the Depository Trust and Clearing Corporation ("DTC") had placed a "global lock" on all BCIT shares, preventing them from being delivered, transferred or withdrawn. Plaintiff then instituted this court action, alleging fraud and violations of the Uniform Commercial Code. TDA moved to dismiss or, in the alternative, to compel arbitration under the FAA.
Citing the broad language of the PDAA in Plaintiff's TDA account agreement, the Court finds that the matter must be referred to arbitration under well-settled authority. The Court, however, goes on to discuss Plaintiffs arguments that the arbitration clause is unconscionable because no other BCIT shareholders had been successful in arbitrating similar claims. Examining Nebraska law pursuant to the choice of law provision in the account agreement, the Court holds that determining whether an agreement is unconscionable requires an examination of the circumstances that existed at the time the parties entered into the contract. However, Plaintiff has not pointed to any provision of the agreement that was unfair or inequitable at the time he signed the agreement. Finally, the Court rejects Plaintiff's argument that he should be excused from arbitration because of the lack of success of other shareholders who arbitrated similar claims. The Court labels this argument speculative and against the liberal policy favoring arbitration. Finding no reason to stay the matter, the Court dismisses the claims.
(The BCIT saga is not reflected in the opinion, but is an interesting story. In 2005, BCIT was the subject of an illegal takeover attempt and the victim of corporate identify fraud. The persons responsible for the illegal takeover attempt printed fraudulent share certificates and were able to sell them into the market where they were publicly traded for several months through the DTC. After the fraud was discovered, the SEC suspended all trading of BCIT shares, and the DTC issued a global lock on the shares, preventing them from being delivered, transferred or withdrawn. The global lock continues to be in place. Although Plaintiffs argument that all other similarly situated shareholders had been unsuccessful in arbitration may have been accurate at the time he filed his papers with the court, a review of 30 awards that came up on a search of "BCIT" on FINRA's Awards Database reveals three customers wins.)