Does the Merger Clause of a Broker’s Promissory Note Prohibit the Broker from Suing the Brokerage Firm in New York for Fraudulently Inducing Him to Join the Firm?

Does the Merger Clause of a Broker’s Promissory Note Prohibit the Broker from Suing the Brokerage Firm in New York for Fraudulently Inducing Him to Join the Firm?

"I could have been a contender." - Marlon Brando as Terry Molloy in On the Waterfront

When, in a promissory note arbitration brought before FINRA in New York, the respondent broker's promissory note contains a merger clause or integration clause, the question arises: Does the merger clause prohibit the broker from successfully maintaining a counterclaim against the claimant brokerage firm for fraudulently inducing him to accept employment with the claimant firm?  In general, the answer is "no."  That is, in general, the promissory note's integration clause does not preclude the broker from successfully counterclaiming in New York against the brokerage firm for fraudulent inducement.

See here for more information on promissory note disputes.  Such disputes are also known as up-front bonus, recruiting bonus, or forgivable loan cases.

Promissory Note Cases

Brokerage firms frequently bring, before The Financial Industry Regulatory Authority, Inc. ("FINRA"), arbitration proceedings against brokers, formerly employed by those firms, in which the brokerage firms seek to collect on amounts owed by the brokers under promissory notes.

Brokers' Counterclaims Of Fraudulent Inducement To Accept Employment

In these promissory note arbitrations, the respondent brokers often counterclaim, or consider counterclaiming, against the claimant brokerage firms for fraudulently inducing the broker to leave a prior employer and to come work at the claimant firm.  The respondent broker regretfully maintains that "I could have been a contender" - that is, that if the claimant brokerage firm hadn't, by making promises to the broker which it knew to be false, caused him to leave his prior employer and to join the claimant firm, and if the claimant firm hadn't then wrecked the broker's career by breaking those promises, the broker could have originated or held onto numerous clients and could have generated ample revenue for the claimant firm and the broker.

For example, the respondent broker may allege that, during the job interview process, supervisors at the claimant brokerage firm orally promised him that, if he left his then-employer and joined the claimant firm, the claimant firm (1) would make him part of a particular team of brokers or would allocate support staff to him, (2) would subscribe him to certain web-based services for the purchase of securities, or (3) would permit him to sell, to his clients, securities which the respondent broker had purchased in the market at favorable prices, rather than requiring him to sell, to his clients, higher-priced securities which the claimant firm held in its inventory.

Further, the respondent broker may assert that the claimant brokerage firm, through its managerial employees, made these oral promises to him with a preconceived and undisclosed intention of not performing them.  As a result of the claimant brokerage firm's breaches of these oral promises (the broker maintains), the broker was unable to bring in enough clients to the claimant firm, to retain enough clients upon joining the claimant firm, or to persuade his clients at the claimant firm to engage in enough fee-generating transactions.

Because of the broker's poor performance at the claimant brokerage firm - poor performance which, the broker asserts, was caused by the claimant firm's making to the broker, before he joined the firm, of oral promises which the firm knew that it did not intend to fulfill - (1) the firm fired the broker, or (2) the broker could not earn sufficient commissions at the firm to make a living, so the broker was compelled to obtain employment elsewhere.

Absent any contractual disclaimers, when a brokerage firm makes to a broker, at the outset of the employment relationship between them, oral representations which the firm, at the time it makes the promises, knows that it does not intend to fulfill, that broker may well have a meritorious claim against the firm for fraudulently inducing him to accept employment with the firm.  See, e.g., Stewart v. Nash, 976 F.2d 86 (2d Cir. 1992).

Effect Of Promissory Notes' Merger Clauses On Brokers' Counterclaims Of Fraudulent Inducement

However, a promissory note signed by a broker, or another employment-related agreement simultaneously signed by the broker, usually contains a merger clause, also known as an integration clause.  A merger clause is a provision in the promissory note or other employment-related agreement stating that the written terms of the note or agreement may not be varied by any  prior agreement or by any contemporaneous oral agreement, because all such agreements have been merged into the written document.

When, in a promissory note case arbitrated before FINRA in New York, the respondent broker's promissory note contains a merger clause or integration clause, the question arises: Does the integration clause prohibit the broker from successfully counterclaiming against the claimant brokerage firm for fraudulently inducing him to come work for the claimant firm?  In general, the answer is "no"; the integration clause does not preempt the broker from successfully counterclaiming in New York against the brokerage firm for fraudulent inducement.

In Gizzi v. Hall, 300 A.D.2d 879, 754 N.Y.S.2d 373 (3d Dep't 2002), New York's Third Department, reversing the Supreme Court's judgment dismissing the plaintiff purchasers' cause of action alleging that the defendant sellers fraudulently induced the purchasers the plaintiffs to purchase a home, held that "a general merger clause is insufficient to preclude the use of parol evidence to prove a claim of fraud."  Gizzi, 300 A.D.2d at 881.

So, too, in Caiola v. Citibank, N.A., 295 F.3d 312 (2d Cir. 2002), the U.S. Court of Appeals for the Second Circuit, reversing the federal district court's order dismissing the plaintiff investor's federal securities fraud complaint against the defendant bank, held that the plaintiff sufficiently pled that he reasonably relied on the bank's alleged oral misrepresentations about the securities which it bought and sold on the plaintiff's behalf, even though the master agreement and various trade confirmations between the parties stated that neither party was " 'relying on any advice, statements or recommendations (whether written or oral) of the other party regarding such Transaction, other than the written representations expressly made by that other party in [the master agreement or confirmations].' "   Caiola, 295 F.3d at 328.

The Caiola Court explained that these disclaimer provisions did not bar the plaintiff investor from relying on the defendant bank's oral statements, because " '[a] disclaimer is generally enforceable only if it "tracks the substance of the alleged misrepresentation,' "  and the disclaimer provisions contained in the trade confirmations "fall well short of tracking the particular misrepresentations made by [the plaintiff]."  Id. at 330 (further citation omitted).

So, too, because the general merger clause of a broker's promissory note or other employment-related agreement "fall[s] well short of tracking the particular misrepresentations" that the broker maintains the brokerage firm made to him, Caiola, 295 F.3d at 330, such a merger clause does not bar the broker, in a promissory note arbitration brought against him by the brokerage firm, from counterclaiming against the firm for fraudulently inducing him to accept employment.

If you are a securities industry professional residing in the New York City area, and the brokerage firm which formerly employed you demands that you repay monies due under a promissory note, call Attorney David S. Rich at (212) 209-3972.

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