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The Texas Supreme Court held that non-signatory third party affiliates could not be compelled to arbitrate their claims on the basis of an arbitration agreement signed by the main corporation. Instead, the Court stayed litigation of the overlapping claims against the main corporation and its affiliates pending the resolution of the claims subject to arbitration.
In In re Merrill Lynch Trust Co. FSB, No. 04-0865, 2007 WL 2404845 (Tex. Aug. 24, 2007), Juan Alaniz was severely injured and recovered more than two million dollars in a settlement. He hired Merrill Lynch to manage the recovery through its employee Henry Medina. For each account opened with Merrill Lynch, Alaniz agreed to arbitrate disputes.
Alaniz also created a life insurance trust with Merrill Lynch Trust Company (ML Trust), which in turn, purchased a life insurance policy from Merrill Lynch Life Insurance Company (ML Life).
Both companies, affiliates of Merrill Lynch, had contracts with Alaniz, but neither contract had an arbitration provision.
Alaniz sued ML Trust, ML Life and Medina, but not Merrill Lynch, asserting various claims relating to the insurance trust. The actions of each defendant were not differentiated, but asserted collectively.
The Defendants moved to compel arbitration, which was denied by the trial court. A petition for writ of mandamus was also denied, and the instant appeal followed.
Initially, this Court held that Alaniz’s claims were substantively against Merrill Lynch. Therefore, its employee, Medina, could not avoid arbitration of his claims through artful pleading.
Next, the Court held that ML Trust and ML Life could not compel arbitration, which would, in effect, “rewrite their contracts.” The purpose of separating a corporation into affiliates is to separate the various business activities, including contracts entered into, of each affiliate.
Though ML Trust and ML Life have a corporate relationship with Merrill Lynch, such a “relationship is not enough to bind a non-signatory to an arbitration agreement.” Zurich Am. Ins. Co. v. Watts Indus., Inc., 417 F.3d 682, 688 (7th Cir. 2005).
The only exception, that the main company is an alter-ego for the affiliate, was not applicable here.
Finally, the Court held that the overlapping issues between Merrill Lynch and its affiliates must be stayed in litigation until arbitration is concluded.
Under the FAA, arbitration must be given priority over litigation to the extent the same issues are involved. See AgGrow Oils, L.L.C. v. Nat’l Union Fire Ins. Co., 242 F.3d 777, 783 (8th Cir. 2001).
If this were not done, parties would have the opportunity to pursue litigation to potentially preclude claims appropriately subject to arbitration. See IDS Life Ins. Co., 103 F.3d 524, 530 (7th Cir. 1996).
Accordingly, the Court held that the trial court abused its discretion and conditionally granted the writ of mandamus, ordering the trial court to vacate its order.
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