141 F.3d 1007 (11th Cir. 1998), 96-9106, Scott v. Prudential Securities, Inc.

Docket Nº:96-9106.
Citation:141 F.3d 1007
Party Name:William Sumner SCOTT, Plaintiff-Appellant, v. PRUDENTIAL SECURITIES, INC., Defendant-Appellee.
Case Date:May 18, 1998
Court:United States Courts of Appeals, Court of Appeals for the Eleventh Circuit

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141 F.3d 1007 (11th Cir. 1998)

William Sumner SCOTT, Plaintiff-Appellant,



No. 96-9106.

United States Court of Appeals, Eleventh Circuit

May 18, 1998

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[Copyrighted Material Omitted]

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William Sumner Scott, Hollywood, FL, pro se.

Kutak Rock, Michael K. Wolensky, Robert G. Brunton, Atlanta, GA, Gregg J. Breitbart, Kirkpatrick & Lockhart, LLP, Miami, FL, for Defendant-Appellee.

Appeal from the United States District Court for the Northern District of Georgia.

Before BIRCH, Circuit Judge, FAY, Senior Circuit Judge, and COHILL [*], Senior District Judge.

BIRCH, Circuit Judge:

In this appeal, we decide whether the Member Arbitration Rules of the National Futures Trading Association ("NFA") permit NFA arbitrators to decide whether a dispute is arbitrable. We must also address whether an individual consents to arbitrate disputes with other members of the NFA by becoming an associate member of the NFA. In addition, the petitioner-appellant asks us to vacate the arbitration award entered below pursuant to section 10 of the Federal Arbitration Act, 9 U.S.C. § 10, and on the non-statutory ground that the award was arbitrary and capricious. 1 The district court held that the arbitrators did have the authority to determine issues of arbitrability but, upon conducting an independent review, the court made an alternative holding that the dispute was indeed subject to NFA arbitration. The district court also rejected Scott's attacks on the arbitrators' award and refused to vacate the award. Finally, the district court granted the respondent-appellee's motion to confirm the award. Although we hold that the district court erred when it found that the arbitrators had the authority to decide issues of arbitrability, we agree with the district court's alternative holding and its decision to confirm the arbitration award. We AFFIRM.

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William S. Scott ("Scott"), the petitioner-appellant, formed a Delaware corporation, Creative Strategies, Inc. ("CSI"), that acted as the general partner of a Pennsylvania limited partnership, the Creative Strategy Fund I, (the "Fund"). Scott was the sole shareholder of CSI and the sole limited partner of the Fund. The Fund subsequently opened a number of accounts with the respondent-appellee, Prudential Securities, Inc. ("PSI"), for the purpose of engaging in futures trading. Scott executed all the documents required to open these accounts but structured the transactions with the intent of avoiding personal liability for any deficits in the accounts. 2 He specifically refused PSI's request that he execute a personal guarantee on the accounts.

These accounts lost a significant amount of money due to what Scott alleges were PSI's mistakes in trading the accounts on a margin. Scott further alleges that instead of correcting the mistakes, PSI forged documents to support the transactions and demanded payment for the deficit in the accounts. PSI then issued a demand for arbitration before the NFA against Scott, the Fund, and CSI. In October, 1992, the Fund filed a complaint with the Commodity Futures Trading Commission ("CFTC"), alleging that PSI had committed a number of transgressions in connection with the accounts and claiming damages. PSI responded by filing a counterclaim in the CFTC proceeding that demanded payment of the debit balances from Scott, the Fund, and CSI. The CFTC, however, refused to consider PSI's claims against Scott individually, and the NFA granted a stay of PSI's arbitration proceedings pending the outcome of the CFTC hearing.

In 1994, an administrative law judge (the "ALJ") for the CFTC decided that the allegations regarding PSI's conduct were without merit and entered an award of $101,087.53 plus interest in PSI's favor. In 1995, the CFTC heard an appeal of the ALJ's decision and affirmed it in all material respects. 3 At PSI's request, the NFA then lifted the stay in the arbitration proceedings that PSI had initiated against Scott in his personal capacity and notified both parties that arbitration would commence on October 31, 1995.

On October 18, 1995, Scott petitioned the NFA to delay the arbitration pending the outcome of a motion the Fund had filed in the United States District Court for the Southern District of Florida seeking a temporary restraining order ("TRO") to enjoin the NFA proceedings. Scott also petitioned the NFA staff for the option of participating in the arbitration by telephone. On October 25, 1995, the NFA denied Scott's request for a stay, and, on October 27, 1995, the arbitrators' denied Scott's request to participate by telephone. On October 30, 1995, the district court in Florida denied the Fund's request for a TRO to enjoin the NFA arbitration. The arbitrators subsequently commenced their hearing on October 31, 1995, in Scott's absence. That morning, the arbitrators also refused an attempted phone call from Scott, who sought either a delay in the hearing or the option of participating by telephone. The arbitrators did, however, accept and consider a fifty-six page affidavit detailing Scott's position on the dispute.

On November 20, 1995, a three-person NFA arbitration panel found that the Fund and CSI were Scott's "alter-egos" and pierced the corporate veil to hold Scott liable for the debts of those entities. The arbitrators awarded PSI $106,087.54 plus interest against Scott personally. Scott brought a motion to vacate the arbitration award in the United States District Court for the Northern District of Georgia; PSI brought a motion to confirm the arbitration award. After

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a resolving a number of procedural disputes, 4 the district court granted PSI's motion to confirm the award and denied Scott's motion to vacate.


On appeal, Scott argues that the district court erroneously decided that the NFA's Member Arbitration Rules gave the NFA arbitrators the authority to resolve disputes about arbitrability (i.e., whether a particular dispute is subject to arbitration). Scott also appeals the district court's alternative holding that, even if the NFA arbitrators did not have the power to decide issues of arbitrability, the alter-ego liability dispute between PSI and Scott was nonetheless subject to arbitration. Finally, Scott attacks the arbitrators' award on a number of different grounds and asks us to vacate the award pursuant to section 10 of the FAA, because the award was arbitrary or capricious, and because the NFA's filing fees violated his rights under the Florida Constitution. PSI defends the district court's opinion and the NFA arbitrators' award on all grounds and asks us to affirm the district court's confirmation of the award.

I. Arbitrability of the Dispute

Scott argues that the NFA arbitrators did not have the authority to enter a judgment in his dispute with PSI. It is well established that arbitration is a creature of contract and no party can be compelled to submit a dispute to arbitration without having given prior contractual consent to do so. See AT & T Tech., Inc. v. Communications Workers, 475 U.S. 643, 649, 106 S.Ct. 1415, 1418, 89 L.Ed.2d 648 (1986). Although the United States Supreme Court has made it clear that, the courts, not arbitrators, ordinarily will decide whether or not a particular dispute is arbitrable, the parties may choose to have arbitrators resolve even the question of arbitrability. Id. at 649, 106 S.Ct. at 1418 (unless the parties "clearly and unmistakably" provide otherwise "the question of arbitrability-whether ... [an arbitration] agreement creates a duty for the parties to arbitrate the particular grievance-is undeniably an issue for judicial determination."). The arbitrators in this case, by entering an award against Scott on the merits, implicitly decided that they had the power to decide questions of arbitrability and decided that the dispute was arbitrable. As we must defer to the arbitrators' conclusion that the dispute was arbitrable only if we agree that the parties clearly and unmistakably consented to have them decide issues of arbitrability, see First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943, 115 S.Ct. 1920, 1923, 131 L.Ed.2d 985 (1995), we will address that question first.

A. Competence de la Competence

In this case, section 2 of NFA Member Arbitration Rules, which requires all members and associates to arbitrate disputes, provides the only possible justification for the arbitrator's implicit conclusion that they had the authority to resolve questions of arbitrability. 5 Scott, however, argues that the language in the NFA rules is not broad enough to permit the arbitrators to decide the issue of arbitrability.

The Supreme Court has explained that courts should not assume that parties have agreed to arbitrate arbitrability unless there is clear and unmistakable evidence to that effect. See First Options, 514 U.S. at 944, 115 S.Ct. at 1924 (quoting AT & T Tech., 475 U.S. at 649, 106 S.Ct. at 1418-19). To determine whether the parties agreed to submit the question of arbitrability to the arbitrators, we must refer to "ordinary state-law principles that govern the formation of contracts." First Options, 514 U.S. at 944, 115 S.Ct. at 1924.

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Regrettably, neither the parties nor the district court have dwelt on the question of which state's principles of contract law govern this question. Scott apparently executed a Form 8-R, the document that registered him with the NFA, in Florida and sent it to the NFA in Illinois. Given that none of the relevant documents appears to contain a choice of law provision, it would appear that either Florida or Illinois law applies. 6 We, however, need not resolve this choice of law problem because the relevant law in both states is essentially in harmony. Both Florida and Illinois require courts to interpret a contract so as to give effect to the intent of the...

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