Glazer v. Lehman Bros Inc , 394 F.3d 444 ( 2005 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 05a0016p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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No. 03-4312
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SAMUEL GLAZER,
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Plaintiff-Appellee,
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Nos. 03-4312/4415
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v.
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LEHMAN BROTHERS, INC.,
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Defendant,
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SG COWEN SECURITIES CORPORATION; SOCIETE
GENERALE, -
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Defendants-Appellants. >
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No. 03-4415
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SAMUEL GLAZER,
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Plaintiff-Appellee,
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v. -
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LEHMAN BROTHERS, INC.; LEHMAN BROTHERS
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HOLDINGS, INC.,
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Defendants-Appellants,
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SG COWEN SECURITIES CORPORATION,
Defendant. -
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Appeal from the United States District Court
for the Northern District of Ohio at Cleveland.
No. 02-00370—John M. Manos, District Judge.
Argued: October 26, 2004
Decided and Filed: January 12, 2005
Before: DAUGHTREY and SUTTON, Circuit Judges; FORESTER, Chief District Judge.*
*
The Honorable Karl S. Forester, Chief United States District Judge for the Eastern District of Kentucky, sitting by
designation.
1
Nos. 03-4312/4415 Glazer v. Lehman Brothers, Inc., et al. Page 2
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COUNSEL
ARGUED: P. Benjamin Duke, COVINGTON & BURLING, New York, New York, H. Nicholas
Berberian, NEAL, GERBER & EISENBERG, Chicago, Illinois, for Appellants. Robert P. Duvin,
DUVIN, CAHN & HUTTON, Cleveland, Ohio, for Appellee. ON BRIEF: P. Benjamin Duke,
Laurence A. Silverman, Aaron R. Marcu, COVINGTON & BURLING, New York, New York, H.
Nicholas Berberian, NEAL, GERBER & EISENBERG, Chicago, Illinois, Douglas V. Bartman,
KAHN KLEINMAN, Cleveland, Ohio, Mark O’Neill, WESTON, HURD, FALLON, PAISLEY &
HOWLEY, Cleveland, Ohio, for Appellants. Robert P. Duvin, Kenneth D. Schwartz, DUVIN,
CAHN & HUTTON, Cleveland, Ohio, for Appellee.
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OPINION
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KARL FORESTER, Chief District Judge. The Defendants-Appellants appeal the District
Court’s denial of their motion to compel arbitration. The District Court held that the arbitration
provisions contained in five agreements between the Plaintiff-Appellee and the Defendants-
Appellants were not enforceable because four of those provisions were fraudulently induced, based
on oral representations made by a broker who worked for Appellants, and because a fifth agreement
was superseded by subsequent criminal conduct and the other four agreements. We AFFIRM, in
part, REVERSE, in part, and REMAND for further proceedings consistent with this opinion.
OVERVIEW
This appeal asks this Court to again review the Supreme Court’s decision in Prima Paint
Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 402-04 (1967), and to construe the breadth of the
Supreme Court’s holding therein. Specifically, this appeal requires the Court to examine two areas
of law, the “severability” of arbitration provisions under Prima Paint and the application of the parol
evidence rule under Ohio law, as applied to the former. Although the primary issue presented by
the parties concerns the application of the parol evidence rule under Ohio law, the severability issue
must first be addressed.
JURISDICTION
We have jurisdiction over this interlocutory appeal pursuant to 28 U.S.C. §§ 1331, 1332 and
1367(a). Further, because the District Court denied the Appellants’ motion to stay this action
pending arbitration pursuant to section 3 of the Federal Arbitration Act (“FAA”), 9 U.S.C. § 3, we
also have jurisdiction under 9 U.S.C. § 16(a)(1)(A).
While a “claim of fraud in the inducement of the entire contract” is a matter to be resolved
by an arbitrator, “a claim of fraud in the inducement of the arbitration clause itself . . . the federal
court” has jurisdiction to adjudicate it. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S.
at 402-04 (emphasis added). See C.B.S. Employees Fed. Credit Union v. Donaldson, Lufkin &
Jenrette Sec. Corp., 912 F.2d 1563, 1567 (6th Cir.1990) (stating that if a fraud claim relates to the
making of the arbitration provision, the court must first adjudicate the fraud claim). Because the
instant appeal involves allegations that the arbitration provisions at issue were fraudulently induced,
the Court has jurisdiction over this appeal.
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BACKGROUND
The Appellee, Samuel Glazer (“Glazer” or “Appellee”), brought this action against
Appellants Lehman Brothers, Inc. and affiliated investment companies (the “Lehman Brothers”
companies) and Appellants SG Cowen Securities Corp. and Societe Generale (the “SG Cowen”
companies) (collectively, the “Appellants”)1 based on the alleged theft of Frank Gruttadauria
(“Gruttadauria”), a former employee and broker with2 the Appellants. Glazer had several investment
accounts with the Appellants through Gruttadauria. Gruttadauria engaged in a complex system of
fraud and theft as an investment broker during his approximately fifteen years working for the
Appellants and has previously pled guilty to criminal charges relating to this wrongdoing.
In 1998, Glazer established investment accounts with the Appellants through Gruttadauria.
In doing so, Glazer signed four contracts with SG Cowen: an account agreement, a margin
agreement, an option contract, and an account agreement in connection with a prior, 1996 Option
Agreement (collectively, the “Account Agreements”). Prior to the creation of those accounts with
Gruttadauria, Glazer signed an Option Agreement with SG Cowen through broker David Tissue in
1996 (the “Tissue Account” or the 3“1996 Option Agreement”). Each of these five agreements
contain broad arbitration provisions that are now at issue.
Glazer filed this action in 2002, seeking damages from the Appellants for Gruttadauria’s
misconduct and theft. Specifically, Glazer brings claims under the Securities and Exchange Act,
15 U.S.C. § 78j(b), other federal securities laws and Ohio state law. The Appellants claim that
Glazer’s claims should be submitted to arbitration pursuant to arbitration clauses contained in the
five agreements.
This is the second time Glazer’s claims have been presented to this Court. Previously, his
claims were heard with six similar actions in a consolidated appeal, Fazio v. Lehman Brothers, Inc.,
340 F.3d 386 (6th Cir.2003), after the District Court denied the appellants’ motions to stay pending
arbitration in those cases. The facts underlying this and other stockbroker fraud cases involving the
Appellants and Gruttadauria were set forth in Fazio. Id. at 391-92.
In the prior appeal, a panel of this Court reversed the District Court’s refusal to enforce the
various arbitration agreements contained in the investment contracts with the Appellants. Id. at 395.
The only question presented in that interlocutory appeal was whether similarly worded arbitration
clauses in the various plaintiffs’ brokerage account agreements mandated arbitration of their claims.
Id. at 391. Because the panel could not reach the “fact-intensive issues” regarding whether the
arbitration clauses were enforceable, it remanded each action for a case-by-case “determination of
whether the arbitration clauses, analyzed independently from the account agreements, are valid.”
Id. at 397-98. Thus, this Court specifically remanded with instructions to consider the particular
1
Lehman Brothers purchased the assets and accounts of SG Cowen’s Cleveland, Ohio office, including those owned
by Glazer, in October 2000.
2
Under Ohio law, “a fiduciary relationship is ‘a relationship in which ... [one reposes] special confidence and trust
... in the integrity and fidelity of another,’ thereby creating ‘a position of superiority or influence, acquired by virtue of
this special trust.’” Andersons, Inc. v. Consol, Inc., 348 F.3d 496, 509 (6th Cir.2003) (citing Federated Management,
Co. v. Coopers & Lybrand, 738 N.E.2d 842, 854 (Ohio 2000)). In their briefs before this Court, the parties have not
disputed that the Defendants, through Gruttadauria, had a fiduciary duty of trust and confidence to the Plaintiff.
Accordingly, the Court therefore assumes that the Appellants, through Gruttadauria, owed the Appellee Glazer a
fiduciary duty.
3
The broad arbitration clauses in the Account Agreements provide that “[a]ny controversy arising out of or relating
to [Appellee Glazer’s] accounts . . shall be settled by arbitration.” [J.A. at 811-18] The 1996 Option Agreement contains
similar language. [J.A. at 809]
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claims of the plaintiffs regarding the validity of the arbitration clauses standing apart from the
account agreements as a whole. Id. at 392.
Turning to the instant action, upon remand and following a period of discovery, the District
Court held an evidentiary hearing on September 3, 2003, pursuant to 9 U.S.C. § 4. Subsequent to
the hearing, on October 3, 2003, the District Court issued an Order and Memorandum Opinion that
again denied the Appellants’ motions to stay pending arbitration. Specifically, the District Court
held that: (1) the parol evidence rule did not bar consideration of Gruttadauria’s alleged oral promise
to Glazer that SG Cowen would not enforce the arbitration provisions; (2) Glazer proved the
elements of fraud in the inducement by clear and convincing evidence; and (3) the 1996 account
agreement was superseded by Gruttaduaria’s subsequent fraud and, therefore, the arbitration
provision therein was not binding upon Glazer. [J.A. at 244-261]
In reaching its decision, the District Court held that “the arbitration provisions must be
treated as contracts separate and distinct from the broader account agreements.” [J.A. at 254] Yet,
in reaching this conclusion, the District Court merely adopted Glazer’s position without explaining
how or why it reached this conclusion; nor did the District Court cite any authority for this legal
proposition. Notably, the District Court framed the issue as:
if an issue arises as to whether the parties intended to be bound by an alleged written
contract, parol evidence is admissible to show that despite the writing, the parties did
not enter any agreement. . . . [H]owever, if the parties generally intended to be bound
by a written agreement, parol evidence is inadmissible to directly contradict one of
its terms. The parties essentially dispute which situation is present in the current
case.
[J.A. at 254] We find that the District Court properly identified the main issue, but, as discussed
infra, engaged in an improper application of the appropriate rules.
Relying on Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, the District Court
held that the “severability doctrine” dictates that the “arbitration provisions must be treated as
contracts separate and distinct from the broader account agreements.” [J.A. at 254] Thus, the
District Court held that parol evidence was admissible to prove that the parties lacked intent to be
bound by the “separate” arbitration clause notwithstanding the signed Account Agreements. [J.A.
at 254] Based on these legal conclusions, the District Court then found that Glazer proved each
element of fraudulent inducement by clear and convincing evidence. [J.A. at 256-260] In addition,
the District Court also held that the 1996 Option Agreement did not require arbitration because it
was superseded by Gruttadauria’s conduct and by the closing of the Tissue account. [J.A. at 260]
Appellants SG Cowen filed a timely Notice of Appeal on October 6, 2003, and Appellants
Lehman Brothers timely filed their Notice of Appeal on October 21, 2003.
LEGAL STANDARD
We review de novo the district court’s conclusions of law and determination on whether to
compel arbitration pursuant to the FAA. Burden v. Check into Cash of Kentucky, LLC, 267 F.3d
483, 487 (6th Cir.2001). A district court’s findings of fact are reviewed for clear error. Great Earth
v. Simons, 288 F.3d 878, 888 (6th Cir.2002). However, it is well-established that any doubts
regarding arbitrability must be resolved in favor of arbitration, Fazio v. Lehman Bros., Inc., 340 F.3d
at 392, because there is a strong presumption in favor of arbitration under the FAA. O.J. Distrib.,
Inc. v. Hornell Brewing Co., 340 F.3d 345, 355 (6th Cir.2003). Additionally, because of the strong
presumption in favor of arbitration, waiver of the right to arbitration is not to be lightly inferred. Id.
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Before this Court can send a case to arbitration, we must first determine whether a valid
agreement to arbitrate exists. 9 U.S.C. § 2; Fazio v. Lehman Bros., Inc. 340 F.3d at 393. An
arbitration agreement may be voided for the same reasons for which any contract may be
invalidated, including forgery, unconscionability, and lack of consideration. Id. In making this
determination, “ordinary state-law principles that govern the formation of contracts” will apply to
this analysis. Id. at 394 (citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995)).
Accordingly, the substantive law of Ohio regarding contract formation, interpretation and defenses
thereto will be examined.
In this appeal, the Court is called upon, yet again, to examine Prima Paint and its application
to the validity of arbitration clauses when claims of fraudulent inducement are raised concerning the
making of those clauses, as opposed to the entire agreement. “[T]here is a general presumption of
arbitrability, and any doubts are to be resolved in favor of arbitration ‘unless it may be said with
positive assurance that the arbitration clause is not susceptible of an interpretation that covers the
asserted dispute.’” Highlands Wellmont Health Network, Inc. v. John Deere Health Plan, Inc., 350
F.3d 568, 576-77 (6th Cir.2003) (quoting AT & T Techs., Inc. v. Communications Workers of Am.,
475 U.S. 643, 650 (1986)). Further, where, as in the instant action, the arbitration clause is broad,
“only an express provision excluding a specific dispute, or ‘the most forceful evidence of a purpose
to exclude the claim from arbitration,’ will remove the dispute from consideration by the
arbitrators.” Highlands Wellmont, 350 F.3d at 577 (quoting AT & T Techs., 475 U.S. at 650). Of
course, “[w]hile ambiguities in the language of the agreement should be resolved in favor of
arbitration, we do not override the clear intent of the parties, or reach a result inconsistent with the
plain text of the contract, simply because the policy favoring arbitration is implicated.” EEOC v.
Waffle House, Inc., 534 U.S. 279, 294 (2002) (internal citations omitted). See Masco Corp. v.
Zurich American Ins. Co., 382 F.3d 624, 627 (6th Cir.2004).
ANALYSIS
A. Overview Of The Federal Arbitration Act.
The Federal Arbitration Act (“FAA”) provides that arbitration clauses in commercial
contracts “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in
equity for the revocation of any contract.” 9 U.S.C. § 2. If a plaintiff’s cause of action is covered
by an arbitration clause, the court must stay the proceedings until the arbitration process is complete.
9 U.S.C. § 3. In order to compel arbitration, a court must conduct a hearing, and:
upon being satisfied that the making of the agreement for arbitration or the failure
to comply therewith is not in issue, the court shall make an order directing the parties
to proceed to arbitration in accordance with the terms of the agreement. . . . If the
making of the arbitration agreement or the failure, neglect, or refusal to perform the
same be in issue, the court shall proceed summarily to the trial thereof.
9 U.S.C. § 4. Under this statutory scheme, the district court must make a number of threshold
determinations before compelling arbitration:
[w]hen considering a motion to stay proceedings and compel arbitration under the
Act, a court has four tasks: first, it must determine whether the parties agreed to
arbitrate; second, it must determine the scope of that agreement; third, if federal
statutory claims are asserted, it must consider whether Congress intended those
claims to be nonarbitrable; and fourth, if the court concludes that some, but not all,
of the claims in the action are subject to arbitration, it must determine whether to stay
the remainder of the proceedings pending arbitration.
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Stout v. J.D. Byrider, 228 F.3d 709, 714 (6th Cir.2000). See also Fazio v. Lehman Brothers, 340
F.3d at 392-94.
It is well-established that any doubts regarding arbitrability should be resolved in favor of
arbitration. Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983). In
addition, the Supreme Court has held that the FAA preempts state law regarding arbitration.
Southland Corp. v. Keating, 465 U.S. 1, 10-11 (1984). State contract law, however, governs in
determining whether the arbitration clause itself was validly obtained, provided the contract law
applied is general and not specific to arbitration clauses. Doctor’s Assoc., Inc. v. Casarotto, 517
U.S. 681, 686-87 (1996); Great Earth Cos. v. Simons, 288 F.3d at 889.
In this case, the crux of the District Court’s decision was its legal conclusion that the
arbitration provisions of the Account Agreements “must be viewed as distinct contracts subject to
invalidity independent of the broader account agreements.” [J.A. at 254] Based on that finding, the
District Court then decided that parol evidence, therefore, was admissible to show fraudulent
inducement to be bound by the arbitration provisions. [J.A. at 254-55] Then, relying on Glazer’s
oral testimony, the court found, by clear and convincing evidence, that Glazer proved his fraudulent
inducement claim and the arbitration provisions could not be enforced. This appeal followed.4
Accordingly, the first issue presented is whether an arbitration clause itself constitutes an
independent contract isolated from the agreement in which it is contained or whether such clause
should be considered a “separate” contract. No panel of this Court has yet addressed this narrow
question directly and, thus, the issue is one of first impression.
B. The District Court Erred By Concluding That The Arbitration Clauses
Contained In The Account Agreements Are “Separate And Independent
Contracts.”
Section 2 of the FAA, 9 U.S.C. § 2, provides that an arbitration clause “shall be valid,
irrevocable, and enforceable save upon such grounds as exist at law or in equity for the revocation
of any contract.” Id. (emphasis added). The question presented in this appeal is whether this
mandate, that an arbitration provision can be invalidated on the same grounds as the revocation of
a contract, means that the arbitration provision is actually a “separate contract” or is merely to be
examined “separate” from the overall contract at issue for the limited purpose of determining
arbitrability.
The leading Supreme Court decision on this issue is Prima Paint Corp. v. Flood & Conklin
Mfg. Co., 388 U.S. 395. Therein, the Supreme Court held that a “claim of fraud in the inducement
of the entire contract” is a matter to be resolved by the arbitrators, not the federal courts. Id. at 402-
04. However, if there is an alleged fraud that “goes to the ‘making’ of the agreement to arbitrate,”
as in the instant case, a federal court may adjudicate that issue. Id. at 403- 04. In reaching that
decision, the Supreme Court relied on the explicit statutory language of Section 4 of the Federal
Arbitration Act:
Under [section] 4, with respect to a matter within the jurisdiction of the federal
courts save for the existence of an arbitration clause, the federal court is instructed
to order arbitration to proceed once it is satisfied that “the making of the agreement
for arbitration or the failure to comply (with the arbitration agreement) is not in
4
Unfortunately, this case is indicative of the exact problem that Congress intended to eliminate by passing the FAA.
Specifically, Congress intended that arbitration “be speedy and not subject to delay and obstruction in the courts.” Prima
Paint, 388 U.S. at 404. The instant action has been in litigation for over two and a half years and the parties are still
disputing whether to submit this matter to arbitration rather than resolving the merits of Glazer’s claims.
Nos. 03-4312/4415 Glazer v. Lehman Brothers, Inc., et al. Page 7
issue.” Accordingly, if the claim is fraud in the inducement of the arbitration clause
itself--an issue which goes to the “making” of the agreement to arbitrate--the federal
court may proceed to adjudicate it.... We hold, therefore, that in passing upon a
[section] 3 application for a stay while the parties arbitrate, a federal court may
consider only issues relating to the making and performance of the agreement to
arbitrate.
Id. (footnotes omitted) (emphasis added).
In other words, a district court is instructed to order arbitration to proceed once it is satisfied
that “the making of the agreement for arbitration or the failure to comply (with the arbitration
agreement) is not in issue.” Id. at 403. Thus, even if there was fraudulent inducement to sign the
contract as a whole, by the terms of Sections 3 and 4 of the FAA, the arbitration clause is severable
and will only be voided for some error in its making. Fazio v. Lehman Bros., Inc., 340 F.3d at 393.
See also Ferro Corp. v. Garrison Indus., 142 F.3d 926, 933 (6th Cir.1998).
This Circuit has interpreted Prima Paint to mean that arbitration clauses are “separable” from
the contracts in which they are included when examining whether those provisions were fraudulently
induced. See, e.g., Burden v. Check into Cash, 267 F.3d at 488. Yet, contrary to the District court’s
conclusion and Glazer’s arguments, the Supreme Court in Prima Paint did not hold that arbitration
provisions in contracts are “severable” to such an extent that they should be considered separate and
distinct contracts. Rather, the Supreme Court held merely that arbitration clauses should be
reviewed to determine whether the dispute should be referred to arbitration (primarily because
Section 4 of the FAA explicitly directs the courts to order arbitration once the arbitration clause is
no longer at issue). Id. at 403. In other words, arbitration provisions are “severable” because the
FAA does not permit the courts to examine the enforceability of contracts containing arbitration
provisions. Id. at 404. Thus, nothing in Prima Paint actually states or provides that arbitration
provisions are to be considered separate, distinct and independent contracts, as the District Court
concluded.
For the reasons discussed herein, arbitration provisions, although severable insofar as they
are considered in determining whether a contractual dispute should be submitted to arbitration, are
not “separate, independent and distinct contracts.” Although Prima Paint clearly requires courts to
separately examine arbitration clauses, those clauses should not be considered as “separate
contracts” outside of the underlying agreement.
To begin, various courts have routinely discussed why arbitration provisions are not subject
to scrutiny as independent contracts in other contexts. For example, in Wilson Electrical
Contractors, Inc. v. Minnotte Contracting Corp., 878 F.2d 167 (6th Cir.1989), the only decision
from this Circuit touching on the issue, the plaintiff argued that Prima Paint should “be interpreted
as implying that an arbitration clause is an independent contract that is separable from the main
contract in which it is found and therefore must have all essential elements of a contract, including
consideration.” Id. at 169. Yet, the panel rejected this position and stated that “[s]uch an
interpretation of Prima Paint would, however, clearly be inappropriate given the Supreme Court’s
recent decision in several arbitration cases.” Id. In fact, the Court noted in footnote 2 of its decision
that “the Supreme Court’s characterization of arbitration clauses as independent, separable contracts
in Prima Paint, which was decided in 1967, may be regarded less than persuasive in light of the
holdings of the Court in its more recent [FAA] cases.” Id. at 169, n. 2. The Wilson Electrical Court
then pointed out that recent decisions of the Supreme Court following Prima Paint have consistently
emphasized that the FAA is grounded on a strong federal policy favoring arbitration. Id. at 169.
Based on this analysis, the Court then rejected the claim that an arbitration clause requires separate
“consideration” to be enforceable, thereby implying that such provisions are not independent
contracts either. Id.
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Similarly, other circuits have held that “mutuality” is not a requirement of a valid arbitration
clause. See, e.g., Harris v. Green Tree Financial Corp., 183 F.3d 173, 180 (3rd Cir.1999). In
Doctor’s Associates, Inc. v. Distajo, 66 F.3d 438 (2nd Cir.1995), the Court examined Prima Paint
and its reliance on a prior Second Circuit case and held that “one might argue, [Prima Paint]
indicates that an arbitration clause must be treated as a contract supported by independent
consideration. For the following reasons, however, we reject this characterization.” Id. at 452. In
reaching its decision in Distajo, the Court clarified that Prima Paint merely
indicated only that arbitration clauses are ‘separable’ from void or voidable
provisions of a contract – not that they are independent contracts. Although we
consider an arbitration clause separately for the limited purpose of evaluating a claim
of fraudulent inducement, we do not do so for all purposes.
Id. (emphasis added). Thus, the Court ultimately decided that mutuality of obligation was not
required to enforce an arbitration agreement if the underlying contract is supported by consideration.
Id. at 451-53.
Similar decisions implying that arbitration provisions are not separate, independent contracts
were reached in Barker v. Golf U.S.A., Inc., 154 F.3d 788, 792 (8th Cir.1998) (concluding “that,
under Oklahoma law, mutuality of obligation is not required for arbitration clauses so long as the
contract as a whole is supported by consideration”); Dorsey v. H.C.P. Sales, Inc., 46 F. Supp. 2d 804,
806-07 (N.D.Ill.1999) (holding that an arbitration clause is not unenforceable for lack of identical
obligations); Randolph v. Green Tree Fin. Corp., 991 F. Supp. 1410, 1421-22 (M.D.Ala.1997)
(rejecting claim that arbitration clause that required one party to arbitrate all claims, while giving
the second party the option not to arbitrate anything, was invalid); Pate v. Melvin Williams
Manufactured Homes, Inc., 198 B.R. 841, 844 (Bankr.S.D.Ga.1996) (rejecting argument that
arbitration agreement lacked mutuality because defendant company could sue over certain issues,
while consumer had to arbitrate all claims). Cf., Great Earth Co., Inc. v. Simon, 2000 WL 310354
(S.D.N.Y. March 24, 2000), opinion withdrawn in part on reconsideration, 2000 WL 640829
(S.D.N.Y. May 18, 2000) (withdrawing part of opinion wherein the district court initially found that
it would have found no “meeting of the minds” existed as to the arbitration clause or arbitration
forum clause). Accordingly, other courts addressing related issues have rejected similar legal
arguments made by Glazer and adopted by the District court in this case, and these decisions thus
give additional persuasive authority against the position that arbitration clauses should be construed
as separate, independent contracts.
If arbitration clauses cannot be considered “independent contracts” when examining
contractual formation issues, like mutuality or consideration, how much more so should such
provisions not be considered “separate contracts” when examining other enforceability issues, such
as when examining whether an arbitration clause was fraudulently induced. In other words, based
on the foregoing, it is clear to us that arbitration clauses should not be considered “separate
contracts” at all. Rather, in accordance with Prima Paint, arbitration agreements contained in larger
contracts should be considered “separate” from the contract only insofar as a federal court (as
opposed to the arbitrator) can examine whether the arbitration clause was fraudulently induced or
is otherwise unenforceable.
C. The District Court Erred In Deciding That The Parol Evidence Rule Did Not
Bar Glazer’s Testimony.
During the evidentiary hearing before the District Court, Glazer testified that Gruttadauria
promised or represented to him that the arbitration provisions contained in the Account Agreements
would not be enforced against him, as the Account Agreements were mere formalities to the creation
of the accounts with the Appellants. Based on this extrinsic evidence, Glazer now asserts that the
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arbitration provisions in the Account Agreements are not enforceable because they were fraudulently
induced.
Conversely, the Appellants argue that allegations of fraudulent inducement of a specific
provision in an agreement, such as those made by Glazer herein, cannot be used to contradict the
terms and provisions of a signed, written contract. They further argue that the parol evidence rule
bars Glazer’s evidence of fraudulent inducement as a matter of law. Specifically, they contend that
testimony and extrinsic evidence regarding Gruttadauria’s alleged oral assurances that SG Cowen
would not enforce the arbitration clauses, which directly contradicts the written terms of the
executed account agreements, are not admissible to prove any agreement that contradicts the written
terms of the Account Agreements.
Generally,
[w]hen two parties have made a contract and have expressed it in a writing to which
they have both assented as the complete and accurate integration of that contract,
evidence, whether parol or otherwise, of antecedent understandings and negotiations
will not be admitted for the purpose of varying or contradicting the writing.
3A Corbin, Contracts § 573 at 357 (1960). The parol evidence rule, as construed by Ohio courts,
states “absent fraud, mistake or other invalidating cause, the parties’ final written integration of their
agreement may not be varied, contradicted or supplemented by evidence of prior or
contemporaneous oral agreements, or prior written agreements.” Galmish v. Cicchini, 734 N.E.2d
782, 788 (Ohio 2000) (citing 11 Williston on Contracts 569-70, § 33.4 (4 Ed.1999)). Thus, absent
fraud, mistake or some other invalidating cause, prior or contemporaneous oral agreements may not
be used to alter, contradict, contest, or vary an integrated written agreement. Galmish, at 788.
Contrary to its name, this rule is one of substantive contractual, not evidentiary, law. Id.
In Galmish, the most recent Ohio opinion discussing the parol evidence rule at length, the
Ohio Supreme Court considered whether the plaintiff’s claims were barred by that rule.
Specifically, the issue in Galmish was whether parol evidence was admissible to prove a breach of
contract claim when the written contract at issue imposed no affirmative duties to engage in certain
performance. The court ultimately found that the parol evidence rule did not bar evidence of the
breach of contract claim because the extrinsic evidence went to the making of the contract, not to
a provision of that contract. Explaining the nature, history and application of this rule, the court
stated:
The parol evidence rule, as is now universally recognized, is not a rule of evidence
but is one of substantive law. It does not exclude evidence for any of the reasons
ordinarily requiring exclusion, based on the probative value of such evidence or the
policy of its admission. The rule as applied to contracts is simply that as a matter of
substantive law, a certain act, the act of embodying the complete terms of an
agreement in a writing (the ‘integration’), becomes the contract of the parties. The
point then is, not how the agreement is to be proved, because as a matter of law the
writing is the agreement. Extrinsic evidence is excluded because it cannot serve to
prove what the agreement was, this being determined as a matter of law to be the
writing itself. The rule comes into operation when there is a single and final
memorial of the understanding of the parties. When that takes place, prior and
contemporaneous negotiations, oral or written, are excluded; or, as it is sometimes
said, the written memorial supersedes these prior or contemporaneous negotiations.
Id. at 788-89 (citation omitted); accord Watkins & Son Pet Supplies v. Iams Co., 254 F.3d 607, 612
(6th Cir.2001) (citing Galmish and stating “the parol evidence rule does not operate to prohibit proof
Nos. 03-4312/4415 Glazer v. Lehman Brothers, Inc., et al. Page 10
of terms of the agreement; instead, it provides that parol terms are not terms of the agreement at
all”). The principle policy behind the rule is to protect the integrity and purpose of written
agreements. Galmish, at 789 (citation omitted).
However, under Ohio law, “the parol evidence rule does not prohibit a party from
introducing parol or extrinsic evidence for the purpose of proving fraudulent inducement.” Id. But
cf. Coal Resources, Inc. v. Gulf & Western Indus., Inc., 756 F.2d 443, 447 n. 2 (6th Cir.1985)
(indicating that defendant’s alleged promise was one of future performance rather than a
representation of past or present material fact, and because “the purpose of an integration clause is
to preclude reliance upon promises of future performance that have not been included in the
contract,” that case did not involve a claim of fraud in the inducement). Yet,
[t]he principle which prohibits the application of the parol-evidence rule in cases of
fraud inducing the execution of a written contract* * * has been regarded as being
as important and as resting on as sound a policy as the parol-evidence rule itself. It
has been said that if the courts were to hold, in an action on a written contract, that
parol evidence should not be received as to false representations of fact made by the
plaintiff, which induced the defendant to execute the contract, they would in effect
hold that the maxim that fraud vitiates every transaction is no longer the rule; and
such a principle would in a short time break down every barrier which the law has
erected against fraudulent dealing.
Fraud cannot be merged; hence the doctrine, which is merely only another form of
expression of the parol-evidence rule, that prior negotiations and conversations
leading up to the formation of a written contract are merged therein, is not applicable
to preclude the admission of parol or extrinsic evidence to prove that a written
contract was induced by fraud.
Id. at 789 (citation omitted) (emphasis added). In other words:
It was never intended that the parol evidence rule could be used as a shield to prevent
the proof of fraud, or that a person could arrange to have an agreement which was
obtained by him through fraud exercised upon the other contracting party reduced
to writing and formally executed, and thereby deprive the courts of the power to
prevent him from reaping the benefits of his deception or chicanery.
Id. (citation omitted). See also F.W. Dodge Corp. v. Fultz, 175 N.E.2d 543, 546 (Ohio App.1961)
(“it is nevertheless clear that the parol evidence rule does not preclude a party from s[h]owing that
a writing which apparently constitutes a contract, was not intended or understood by either party to
be binding upon them”).
Yet, notwithstanding the foregoing principles, this rule may not be side-stepped by
a fraudulent inducement claim which alleges that the inducement to sign the writing
was a promise, the terms of which are directly contradicted by the signed writing.
Accordingly, an oral agreement cannot be enforced in preference to a signed writing
which pertains to exactly the same subject matter, yet has different terms.
Galmish, at 790 (citation omitted) (emphasis added). Stated differently, under Ohio law,
[t]he Parol Evidence Rule will not exclude evidence of fraud which induced the
written contract. But, a fraudulent inducement case is not made out simply by
alleging that a statement or agreement made prior to the contract is different from
that which now appears in the written contract. Quite to the contrary, attempts to
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prove such contradictory assertions is exactly what the Parol Evidence Rule was
designed to prohibit.
Id. (citation omitted). Accordingly, “the parol evidence rule does apply ‘to such promissory fraud
if the evidence in question is offered to show a promise which contradicts an integrated written
agreement. Unless the false promise is either independent of or consistent with the written
instrument, evidence thereof is inadmissible.’” Id. at 790-91 (citation omitted)(emphasis added).
See Watkins & Son Pet Supplies v. Iams Co., 254 F.3d 607, 613 (6th Cir.2001) (citing Galmish, 734
N.E.2d at 791) (stating “‘fraud in the inducement,’ in the sense intended in Coal Resources and
Galmish, is a fraudulent misstatement of fact [as opposed to promissory fraud] that induces a party
to enter a contract, not a fraudulent promise of future performance that is within the scope of the
subject matter of the written contract but that was not included in it.”)
As in Watkins, Glazer’s claim is not one alleging a fraudulent misstatement of fact, but one
alleging “a fraudulent promise of future performance that is within the scope of the subject matter
of the written contract but that was not included in it.” Watkins, 254 F.3d at 613. The fraudulent
promise that Glazer is alleging is not only within the scope of the subject matter of the written
contract and5 not included therein, but directly contradictory to the terms of the signed written
agreements.
In Watkins, this Court examined a promissory fraud claim in which the plaintiff alleged that
it was fraudulently induced into signing an agreement based on a promise of future performance by
the defendant which was not included in the contract and which the defendant failed to fulfill. Id.
Relying on Galmish, the Court held that parol evidence was not admissible to show “a promise
which contradicts an integrated written agreement.” Id. (quoting Galmish, 734 N.E.2d at 791). The
court held that the promise was neither “independent of [n]or consistent with the written
instrument,” and as such parol evidence was inadmissible. Id. (quoting Galmish, 734 N.E.2d at
791). See also National City Bank, Akron v. Donaldson, 642 N.E.2d 58, 60 (Ohio App. 1994).
Similarly, in Coal Resources, 756 F.2d 443, this Court held that parol evidence was
admissible to show that the promisor had no intention of performing the promises that were included
in the agreement, but was not admissible to show that the promisor had no intention of performing
the promise that was not included in the agreement. Id. at 446-47. Finally, the parol evidence
admitted in Galmish, 734 N.E.2d at 791, itself did not “seek to contradict or vary the terms of the
written agreement.” Id. Instead, the fraud alleged was that the promisor, at the time of entering into
the agreement, had no intention of performing a condition precedent to the promisee’s ability to
benefit from the contract as written. Id.
In reaching its decision in this case, the District Court relied on F.W. Dodge Corp. v. Fultz,
175 N.E.2d 543, and National City Bank, Akron v. Donaldson, 642 N.E.2d 58. However, these cases
are distinguishable and were erroneously relied upon. In Fultz, the court held that the parol evidence
rule did not prohibit a party from proving that a written agreement (as opposed to a provision in that
agreement) was not intended or understood by either party to be binding upon them. Fultz, at 546.
In fact, the court permitted the defendant Fultz to introduce testimony as to certain oral
conversations and oral promises that the plaintiff’s corporate representative and sales person had
5
For a discussion of the distinction between fraud in the factum and promissory fraud in the inducement under Ohio
law see Williams v. Edwards, 717 N.E.2d 368, 374 (Ohio App. 1 Dist. 1998) (“Furthermore, fraud is generally predicated
on a misrepresentation relating to a past or existing fact, and not on promises or representations relating to future
actions or conduct. An exception to this rule exists, however, where an individual makes a promise concerning a future
action, occurrence, or conduct and, at the time he makes it, has no intention of keeping the promise. In such a case, the
individual possesses actual fraudulent intent and a claim for fraud may be asserted against him.”) (emphasis added). See
also Burden v. Check Into Cash of Kentucky, LLC, 267 F.3d 483, 488-89.
Nos. 03-4312/4415 Glazer v. Lehman Brothers, Inc., et al. Page 12
made that the company would not enforce the one-year subscription agreement at issue. Thus,
unlike the instant action, which involves the enforceability of a provision in the account agreements,
the issue in Fultz was whether the parties intended the contract as a whole to be binding upon them.
Id. at 546. Accordingly, the application of the parol evidence rule in Fultz is inapplicable in this
case because the arbitration provisions at issue in the Account Agreements are not independent
contracts.
Similarly, in Donaldson, 642 N.E.2d 58, in deciding whether the parol evidence rule was
applicable, the court asked whether the parties intended the signed document, the alleged contract,
to be a complete and accurate integration of the agreement between the parties. The appellate court
permitted evidence that Donaldson and the bank, through a sales person, did not intend the written
and signed document (again, as opposed to a provision or term of that agreement) to be an
enforceable contract. Thus, Donaldson is also inapposite and distinguishable from the instant action.
In this case, Glazer seeks to introduce evidence of a promise that directly contradicts a term
of the integrated written agreement. Here, the parties have not6disputed, and we therefore assume,
that the Account Agreements at issue are integrated contracts. Further, Glazer is not asking us to
invalidate the contract on the ground that SG Cowen had no intention of performing it. Instead, he
is asking us to admit evidence to show that Gruttaduaria made an oral promise not to enforce the
arbitration clause - a promise directly contradicted by the language of the agreement. See Galmish,
734 N.E.2d at 790 (assertion that there was “a statement or agreement made prior to the contract
[that] is different from that which now appears in the written contract” are exactly the type which
the “Parol Evidence Rule was designed to prohibit”). Glazer does not claim that the parties never
intended for the Account Agreements signed and executed by him to be unenforceable or not
binding upon them; in fact, he relies upon those account agreements as the basis for his claims
against the Appellants. Rather, he argues that the parties never intended for the arbitration
provisions at issue, as opposed to the Account Agreements, to be binding.
Thus, the distinction regarding whether an arbitration provision is a separate, distinct contract
or whether it is merely “severable” in determining whether to send a dispute to arbitration, as
discussed supra, becomes critical. In this case, it is undisputed that Glazer freely signed the
Account Agreements that contained arbitration clauses allowing the Appellants to elect to arbitrate
any controversy or claim arising out of or relating to the contracts or the breaches thereof. [J.A. at
811-18] Further, the Account Agreements also each contain a clause providing that these
“Agreement[s] [are] not subject to any oral modification and it may only be amended or modified
in a writing signed by [SG Cowen].” [J.A. at 811-18]
It is clear that, under Ohio law, the parol evidence rule prohibits a party from challenging
the terms of a written contract through the use of extrinsic evidence, such as that proffered by Glazer
in this case. Accordingly, based upon Ohio law and the facts of this case, Glazer cannot challenge
the enforceability of the arbitration provisions within the Account Agreements through the use of
parol evidence. See Galmish, at 791. As a result, the District Court erred as a matter of law when
it held that parol evidence was admissible to prove that Glazer was fraudulently induced to agree
to the Account Agreements containing the arbitration clauses at issue. Thus, it was also error when
it considered Glazer’s testimony regarding Gruttadauria’s oral promises that the arbitration
provisions would not be enforced.
6
The parties have not raised any issue regarding whether the agreements are integrated, written contracts. While
a prerequisite to the parol evidence rule is that the contract must be a complete and accurate integration of the parties’
agreement, a document that appears, on its face, to be a complete and accurate integration will sufficiently meet this
requirement. See, e.g., National City Bank, Akron, v. Donaldson, 642 N.E.2d at 60.
Nos. 03-4312/4415 Glazer v. Lehman Brothers, Inc., et al. Page 13
D. The District Court Erred In Finding That Glazer Was Fraudulently Induced To
Sign The Account Agreements Containing Arbitration Clauses.
As a result of the District Court’s reliance upon Glazer’s oral testimony, it concluded that
Glazer had sufficiently proven that he was fraudulently induced to sign the arbitration provisions
at issue. [J.A. at 250-61] In reaching its decision, the District Court relied wholly upon that oral
testimony. [J.A. at 246, 248-49, 250-51, 255, 256-61] As stated above, Glazer’s oral testimony,
being parol evidence, was inadmissible and should not have been relied upon in examining the
Appellants’ motion to stay pending arbitration. Absent this inadmissible parol evidence, there is
insufficient evidence in the record for any factual finding of fraudulent inducement7 in the making
of the arbitration provision. In fact, this parol evidence appears to be the only evidence relied upon
by the District Court in reaching its decision. As a result, the elements of fraudulent inducement
cannot be satisfied. The Court thus finds that the District Court’s factual findings as to the
fraudulent inducement claim were clearly erroneous. See, e.g., Great Earth v. Simons, 288 F.3d at
888.
Accordingly, there being no admissible evidence to support the fraudulent inducement claim,
a valid agreement to arbitrate exists pursuant to the arbitration clauses contained in the four Account
Agreements. As a result, Glazer’s claims against the Defendants-Appellants are covered by
enforceable arbitration clauses, and the District Court should have stayed this matter until the
arbitration process was complete. See 9 U.S.C. § 3. Its decision was not in accord with the FAA’s
mandate and innumerable decisions from this Circuit favoring arbitration agreements and resolving
doubts about arbitrable issues in favor of arbitration and, therefore, cannot be sustained. See, e.g.,
Masco Corp. v. Zurich North American Ins. Co., 382 F.3d 624 (6th Cir.2004).
E. The District Court Did Not Err In Holding That The Arbitration Clause
Contained In The 1996 Option Agreement Was Rendered Unenforceable
Because It Was Modified And/Or Superceded By Subsequent Events And/Or
Conduct.
The Appellants also contend that the District Court erred in holding that the 1996 Option
Agreement and the arbitration provision contained therein was not applicable to this case. [J.A. at
260] The District Court found that “[w]hatever obligations [the 1996 Options Agreement] may have
imposed initially, this agreement was superseded by Gruttadauria’s conduct in 1998. In 1998, the
Tissue account was effectively closed and all the assets were transferred to the new Gruttadauria
account.” As a result, the court held that the Options Agreement for the defunct Tissue Account
cannot be used to side step Gruttadauria’s later representations. [J.A. at 260.]
It is undisputed that the 1998 Account Agreements effectively closed the Tissue Account and
transferred the Tissue Account assets into new accounts with the Appellants under Gruttadauria’s
management. It is a fundamental precept of contract law that parties may agree to discharge or
terminate a contract in favor of creating a second agreement to replace the former, and, when that
occurs, the initial agreement is superceded and is no longer enforceable as to any party thereto. See
3A Corbin on Contracts § 574 (1960); Restatement (Second) of Contracts §279 (1979); 17A
Am.Jur.2d Contracts § 539 (2004). Thus, as noted in the Restatement, parties may substitute one
7
Under Ohio law, a Plaintiff must prove six elements in order to prove fraudulent inducement. He must prove by
clear and convincing evidence that: (1) a representation, or where there is a duty to disclose, a concealment of fact; (2)
which is material in nature; (3) was made falsely with knowledge of its falsity or with utter disregard or recklessness as
to whether it is true or false that knowledge may be inferred; (4) with the intent of misleading another to rely upon said
misrepresentation or concealment; (5) which results in justifiable reliance upon that representation or concealment; and
(6) proximately causing some injury. Davis v. Sun Refining and Marketing Co., 671 N.E.2d 1049, 1058 (Ohio App.
1996).
Nos. 03-4312/4415 Glazer v. Lehman Brothers, Inc., et al. Page 14
contract for another, thereby discharging the pre-existing duty of the one party and extinguishing
the other’s right to enforce the original duty. Restatement (Second) of Contracts § 279.
In the case sub judice, when the parties agreed to close the Tissue Account and terminate the
1996 Option Agreement, the parties substituted one of the 1998 Account Agreements for the 1996
Option Agreement. The arbitration clause contained in the 1996 Option Agreement was legally
substituted, and therefore superseded, by the subsequent Account Agreements. Thus, any arbitration
provision in the 1996 Option Agreement is no longer enforceable and is inapplicable to this action.
As a result, the Court need not address whether Gruttadauria’s subsequent criminal conduct
superceded the 1996 Option Agreement because the substitution of the four Account Agreements
supercedes the 1996 arbitration provision.
Therefore, the District Court’s decision on this issue must be sustained.
CONCLUSION
Accordingly, for the reasons discussed supra, we will AFFIRM, in part, REVERSE, in part,
and REMAND this case for proceedings not inconsistent with this opinion.