"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
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
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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