APPEAL FROM THE CIRCUIT COURT OF COOK COUNTY. No. 98 CH 6684 HONORABLE JULIA NOWICKI, JUDGE PRESIDING.
The opinion of the court was delivered by: Presiding Justice Campbell
Defendant Merrill Lynch Life Agency, Inc. (MLLA), an Illinois corporation, appeals an order of the circuit court of Cook County denying its motion to compel arbitration and stay the present action brought by plaintiff Heidi Caligiuri against MLLA and defendants First Colony Life Insurance Company (First Colony) and William A. Maniscalco. First Colony and Maniscalco are not parties to this interlocutory appeal.
The record on appeal discloses the following facts. MLLA is a wholly-owned subsidiary of Merrill Lynch, Pierce, Fenner & Smith, Inc. (MLPF&S), a broker-dealer registered under section 15 of the federal Securities Exchange Act of 1934 (see 15 U.S.C. § 15 (1998)) (Exchange Act), a member of the New York Stock Exchange, Inc. (NYSE) and the National Association of Securities Dealers, Inc. (NASD). In 1975, MLPF&S sought a "no action" letter from the Securities and Exchange Commission's Division of Market Regulation stating that it would not recommend action to the Securities and Exchange Commission (SEC) based on representations set forth in MLPF&S's request.
MLPF&S represented that it proposed to begin selling insurance products, some of which may be deemed securities under federal law. However, NYSE requirements prohibited the payment of insurance commissions to MLPF&S account executives. Moreover, according to MLPF&S, nearly all state insurance laws prohibited the payment of insurance commissions to entities not licensed as insurance agents. Furthermore, most state insurance laws did not permit a non-domestic corporation or a corporation not primarily engaged in insurance sales to be licensed as insurance agents.
MLPF&S proposed to form a series of wholly-owned subsidiaries to sell insurance products. Each subsidiary would be licensed as an insurance agency under its state law. The office manager and account executives of each MLPF&S branch would become licensed in the appropriate state as individual insurance agents. Each MLPF&S branch would also host at least one insurance specialist employed by the appropriate subsidiary, but subject to supervision by the MLPF&S office manager. The insurance specialists would only sell insurance, but would not sell or be compensated for the sale of variable contracts (which might be securities under federal law).
In addition, to comply with NYSE requirements, MLPF&S represented that all insurance premiums would be sent by customers directly to their respective insurance companies, or delivered to those companies by MLPF&S. The insurance companies would then pay commissions to the appropriate subsidiaries. The subsidiaries would not receive or accumulate customer funds. The subsidiaries and their personnel would all be deemed persons associated with a registered broker-dealer as defined by section 3(a)(18) of the Exchange Act (see 15 U.S.C. § 3(a)(18) (1998)). MLPF&S would maintain full responsibility for the training, supervision and control of the insurance specialists as it did for its registered representatives.
The Securities and Exchange Commission's Division of Market Regulation stated that it would not recommend any action be taken against the subsidiaries, based on the representations made by MLPF&S.
According to the affidavit of Richard Choma, Vice President and Treasurer of MLLA, MLLA was formed to provide MLPF&S customers and only those customers with opportunity to purchase life insurance and insurance planning. Neither MLPF&S nor MLLA issued life insurance policies or acted as an insurance company. Choma also stated that generally, MLPF&S account executives were not directly compensated by MLLA for life insurance sales, but by payments from MLLA through MLPF&S.
Defendant Maniscalco was a MLPF&S Senior Financial Consultant. According to Choma, Maniscalco was never a MLLA employee. When he was employed by MLPF&S, Maniscalco applied to register with various industry organizations, including the NASD. As part of the Form U-4 application, Maniscalco agreed to abide by the rules of these organizations and specifically to arbitrate any claims arbitrable under their rules.
In 1995, plaintiff Heidi Caligiuri and Mark Caligiuri, plaintiff's husband, established retail brokerage accounts with MLPF&S; Maniscalco was their financial consultant. In September 1995, MLPF&S prepared a "Financial Foundation Report" for the Caligiuris that comprehensively reviewed their finances, investments, retirement and estate planning goals. The report suggested that the Caligiuris consider purchasing life insurance to provide additional assets in the event of Mark's untimely death. An internal memorandum attached to Maniscalco's copy of the report urged him to consider the life insurance suggestion and instructed Maniscalco to "contact your Estate planner Specialist for competitive rates."
On December 26, 1996, Mark Caligiuri signed the first part of an application for a First Colony 20 year term life insurance policy in the amount of $500,000. Maniscalco signed the first part of the application as the broker on February 24, 1997.
In February 1997, the Caligiuris also opened a joint Cash Management Account (CMA) with MLPF&S. The CMA application form incorporated a CMA Agreement that provided in part that:
"I agree that all controversies which may arise between us, including but not limited to those involving any transaction or the construction, performance or breach of this or any other agreement between us, whether entered into prior, on or subsequent to the date hereof, shall be determined by arbitration."
On March 10, 1997, Mark completed the second part of the First Colony application, which included a medical history. The application noted that Mark had a splenectomy in 1975. Mark also noted that he had had hepatitis, bronchitis, kidney failure and other physical disorders.
In a deposition, Maniscalco testified that he forwarded the completed application to "our Northbrook office, which is where all insurance matters are handled." Plaintiff alleged that the medical history was delivered to First Colony through Maniscalco and MLLA. On March 27, 1997, First Colony issued the policy, listing plaintiff Heidi Caligiuri as the beneficiary. In April 1997, the policy was amended to a 10 year term at Mark's request.
Maniscalco collected premium checks from the Caligiuris. According to Maniscalco, these were later returned by First Colony because the checks were made payable to "Merrill Lynch." Maniscalco testified that this was his first knowledge that the checks should have been made payable to the insurance company.
On October 1, 1997, Mark passed away. Medical records show that Mark was admitted to Sherman Health systems on September 30, 1997. The medical record showed a past history of hospitalization during the winter with Pneumococcal meningitis. The medical "impression" was one of ...