Rowland v. Sandy Morris Financial & Estate Planning Services, LLC., No. 20-1187 (4th Cir. 2021) [click for opinion]
Barry and Donna Rowland (“Rowland”) first enlisted Sandy Morris and her Florida-based firm, Sandy Morris Financial LLC (“SMF”), for financial planning advice in 2014. After the couple moved to North Carolina, they continued to use SMF for financial services and, in 2017, hired Morris and SMF to manage their investment accounts. Pursuant to this expanded scope of work, SMF provided Rowland with several documents for signature, including the firm’s Asset Management Agreement (“AMA”), in a fifty-four-page PDF. After Mr. Rowland signed and returned this document through Docusign, it was signed by SMF’s Chief Compliance Officer.
The relationship between the parties soured, following missed investment performance expectations, and the Rowlands filed suit in the Western District of North Carolina for state law contract and fraud claims. Upon SMF’s filing of a motion to compel arbitration, each party submitted markedly different versions of the firm’s AMA, with the most significant differences being in the account numbers to be managed and the investment objectives and risk preferences. The district court denied SMF’s motion on the basis that the parties had not actually formed an agreement to arbitrate.
On appeal, the circuit court began its analysis by framing the issues before it under three key frameworks and accompanying legal doctrines. First, it noted that it would review the decision to deny a motion to compel arbitration de novo. Second, it stated that the question of whether the parties had formed an agreement to arbitrate is a matter of “ordinary state-law principles that govern the formation of contracts,” which are also reviewed de novo. Third, the court explained that all allegations that “relate to the ‘underlying dispute between the parties'” are accepted as true in review of the denial of a motion to compel arbitration.
The court then discussed the policy and legal principles favoring arbitration, notably the Federal Arbitration Act (the “FAA“), but cautioned that it is still the court’s role to determine whether an agreement to arbitrate was ever formed in the first place when this is in dispute. Accordingly, the court noted that this question is a “threshold issue of contract formation,” citing the Supreme Court’s 2010 decision in Rent-A-Center, West, Inc. v. Jackson for the proposition that arbitration is ultimately “a matter of contract” and parties must actually agree to arbitration. Further, the court observed that the FAA, in Section 4, explicitly gives the court the authority to determine issues of contract formation.
Accordingly, the court spent much of its analysis discussing the rules for contract formation in North Carolina and whether a contract, including an agreement to arbitrate any disputes, had been formed here. After referencing several state cases for holdings on what the court described as “nothing more than the standard black-letter law taught in every first year Contracts course,” the court held that clearly no contract had been formed in this case.
The court primarily relied on the fact that the two parties had submitted “material[ly]” different versions of the same AMA as unequivocal support for its conclusion that there was no meeting of the minds and thus no contract formed. Specifically, the court noted that the agreements contained two different account numbers and differing parameters for managing the accounts, either of which on its own would have defeated the formation of a contract. In dicta, the court also noted the vastly different levels of sophistication between the two parties.
As the AMA versions presented to the court did not constitute a fully formed and executed contract, the court held that the arbitration agreements contained therein were not enforceable and thus upheld the district court’s denial of SMF’s motion to compel arbitration.