Arrants v. Buck
| Decision Date | 04 December 1997 |
| Docket Number | 93-1658,Nos. 93-1651,s. 93-1651 |
| Citation | 130 F.3d 636 |
| Parties | Frankie A. ARRANTS; Danette F. Arrants, Plaintiffs-Appellees, v. Ellsworth Allen BUCK, JR.; George E. Hubbard, Defendants-Appellants, and F.N. Wolf & Company, Incorporated, Defendant. Ernest T. COLTRAIN; Betty P. Coltrain, Plaintiffs-Appellees, v. Ellsworth Allen BUCK, Jr.; George E. Hubbard, Defendants-Appellants, and F.N. Wolf & Company, Incorporated, Defendant. |
| Court | U.S. Court of Appeals — Fourth Circuit |
ARGUED: James Christopher Cosby, Maloney, Yeatts & Barr, Richmond, Virginia, for
Appellants. William Edgar Spivey, Kaufman & Canoles, Norfolk, Virginia, for Appellees. ON BRIEF: John S. Barr, Daniel A. Gecker, Steven S. Biss, Maloney, Yeatts & Barr, Richmond, Virginia, for Appellants. Jonathan L. Thorton, Kaufman & Canoles, Norfolk, Virginia, for Appellees.
Before WILLIAMS and MICHAEL, Circuit Judges, and WARD, Senior United States District Judge for the Middle District of North Carolina, sitting by designation.
Affirmed and remanded by published opinion. Judge MICHAEL wrote the opinion, in which Judge WILLIAMS and Senior Judge WARD joined.
This appeal involves the subject of arbitration. The matter began when the brokerage firm of F.N. Wolf & Co., Inc. (F.N. Wolf or Wolf) and two of its employees, Ellsworth A. Buck, Jr. and George E. Hubbard, were sued in two cases by four customers for securities fraud. There were immediate motions to compel arbitration. Wolf, the introducing broker, and its employees sought to invoke the arbitration clause in an agreement to which Wolf was not a party, that is, the agreement between the customers and the clearing broker. The district court denied arbitration, and Wolf and its employees appealed. We now join the many federal courts which (aside from two limited exceptions not relevant here) do not allow an introducing broker to invoke the clearing broker's arbitration clause. F.N. Wolf is no longer a party in this case, so we affirm the district court's denial of arbitration to its employees, Buck and Hubbard.
After their broker, F.N. Wolf, placed them in allegedly risky stocks that lost value, Frankie and Danette Arrants and Ernest and Betty Coltrain (in separate cases) sued F.N. Wolf; Buck, their account executive; and Hubbard, Buck's supervisor. 1 The main counts of the complaints assert violations of federal securities law.
The Arrantses are high school graduates who are self-employed in the logging and trucking business. Mr. Coltrain works in the maintenance department of a lumber company. Neither the Arrantses nor the Coltrains had any prior experience in stock market investment. According to the complaints, Buck's "high-pressure telephone calls" convinced the Arrantses in 1989 and the Coltrains in 1992 to open securities accounts with F.N. Wolf. The customers claim that Buck and F.N. Wolf convinced them to buy high risk, speculative stocks that rapidly declined in price and were unsuitable to their investment needs. The Arrantses claim to have lost about $52,000 and the Coltrains about $29,000. They allege, among other things, misrepresentations and omissions in violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5.
After the complaints were filed, F.N. Wolf, Buck, and Hubbard moved in each case to compel arbitration under the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq. The movants sought to take advantage of an arbitration clause contained in the account agreements between the customers and the clearing broker, Prudential Securities Incorporated (Prudential).
The facts governing the arbitration issue are undisputed, and we begin our discussion by explaining why Prudential is in the picture. F.N. Wolf engaged Prudential to provide certain clearing functions for the accounts of Wolf's customers. In industry jargon F.N. Wolf is the "introducing broker" and Prudential is the "clearing broker."
The clearing agreement between F.N. Wolf and Prudential is not in the record, but the basic division of their responsibilities for customer accounts is clear. F.N. Wolf, as is universally the case with introducing brokers, "retain[ed] all functions that relate to direct personal customer contacts, such as soliciting customer accounts, ... making investment recommendations to customers, and accepting their orders for the purchase or sale of securities." Henry F. Minnerop, The Role and Regulation of Clearing Brokers, 48 Bus. Law. 841, 843 (1993). Prudential performed "cashiering and processing functions" for the accounts introduced by F.N. Wolf. Among other things, Prudential kept books and records reflecting transactions in the accounts, maintained funds and securities, and prepared (and mailed to the customers) confirmations and monthly statements.
After the Arrantses and the Coltrains agreed to open accounts with F.N. Wolf, each couple received a letter from that firm asking that they sign and return certain documents "need[ed] to support" their accounts with Wolf. One of the documents was a joint account agreement (Prudential Agreement) bearing Prudential's name in large bold print at the top. 2 The name F.N. Wolf did not appear anywhere in the agreements. There were some boxes filled in near the top of both documents. On both, "EWP" was written under "Branch" and "B5" was written under the letters "FA." The "Account Number" was filled in on both agreements, "015541" for the Arrantses and "024931" for the Coltrains. It was later revealed that "EWP" was the F.N. Wolf branch office, "B5" was the F.N. Wolf account executive (Buck) for each account, and the numbers were the customers' account numbers at F.N. Wolf. It is apparent from the record that the Arrantses and the Coltrains did not know the meaning of these codes and numbers when they signed the agreements.
When the Coltrains received the letter from F.N. Wolf enclosing the agreement with Prudential's name at the top, Mr. Coltrain telephoned Buck, his account executive. Buck "explained to [him] that [Prudential] was a clearinghouse broker performing certain paperwork functions for [F.N. Wolf] and that the 'Joint Account Agreement' was something Prudential required be signed in order for Prudential to perform such services." The Coltrains then signed the Prudential Agreement and returned it to F.N. Wolf. The Arrantses also signed and returned the agreement.
Sometime after executing the Prudential Agreements, the Arrantses and Coltrains received from Prudential a Correspondent Allocation of Responsibility Letter. The letter began with the greeting, "Dear Client," and summarized its message in the first substantive paragraph as follows:
The Prudential Agreements executed by the Arrantses and the Coltrains contain the same key sentence in the arbitration provision:
The undersigned [customer] agrees, and by carrying an account for the undersigned you agree, 3 all controversies which may arise between us concerning 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.
It is this clause that F.N. Wolf and its employees sought to invoke in their motions to compel arbitration.
After considering the undisputed facts and the case law bearing on the arbitration issue, the district court denied the motions to arbitrate, concluding that "Wolf is not identified with reasonable certainty in the agreement the [customers] signed containing the arbitration provision." Coltrain v. F.N. Wolf & Co., 818 F.Supp. 163, 164 (E.D.Va.1993); Arrants v. F.N. Wolf & Co., Civ. A. No. 2:93cv45 (E.D.Va. Apr. 9, 1993). 4 F.N. Wolf, Buck, and Hubbard appealed from this determination in each case, and the cases were consolidated.
Shortly after we heard oral argument, F.N. Wolf filed a petition under Chapter 11 of the Bankruptcy Code. We then stayed further proceedings in this appeal pending action in the bankruptcy case. The bankruptcy court ultimately entered a confirmation order that results in the discharge of the claims asserted here against F.N. Wolf. As a result, we have entered an order dismissing F.N. Wolf as a party to this appeal. We are now free to decide the appeal insofar as it is pressed by the two remaining parties, Buck and Hubbard, who were denied arbitration.
An arbitration clause in a "contract evidencing a transaction involving commerce ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. This provision in the Federal Arbitration Act "manifest[s] Congress's 'liberal federal policy favoring arbitration agreements.' " Glass v. Kidder Peabody & Co., 114 F.3d 446, 451 (4th Cir.1997) (quoting Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-27, 103 S.Ct. 927, 941-42, 74 L.Ed.2d 765 (1983)). In keeping with this policy, we have said that arbitration " 'should not be denied unless it may be said with positive assurance that the arbitration[agreement] is not susceptible of an interpretation that covers the asserted dispute.' " Peoples Sec. Life Ins. Co. v. Monumental Life Ins. Co., 867 F.2d 809, 812 (4th Cir.1989) (quoting United Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582-83, 80 S.Ct. 1347, 1352-53, 4 L.Ed.2d 1409 (1960)).
Even though arbitration has a favored place, there still must be an underlying agreement between the parties to arbitrate. See Adamovic v. METME Corp., 961 F.2d 652, 654 (7th Cir.1992) (...
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