315 F.3d 619 (6th Cir. 2003), 02-3352, Javitch v. First Union Securities, Inc.
| Citation | 315 F.3d 619 |
| Party Name | Victor M. JAVITCH, Receiver, Plaintiff-Appellee, v. FIRST UNION SECURITIES, INC.; Michael D'Angelo; Charles Schwab & Company, Inc.; Charles Harris; Morgan Stanley Dean Witter & Company; Marcel Pope; Fifth Third/Maxus Securities, Inc., Defendants-Appellants. |
| Case Date | January 10, 2003 |
| Court | United States Courts of Appeals, U.S. Court of Appeals — Sixth Circuit |
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Argued: Dec. 3, 2002.
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Matthew P. Moriarty (argued and briefed), Arter & Hadden, LLP, Robert E. Cahill (briefed), Roger A. Hipp (briefed), Brzytwa, Quick & McCrystal, Cleveland, OH, for Plaintiff-Appellee.
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Michael N. Ungar (argued and briefed), Joseph S. Simms, Suzanne E. Duddy (briefed), Timothy J. Downing (briefed), Ulmer & Berne, Cleveland, OH, for Defendants-Appellants.
Ida W. Draim (argued and briefed), Frank C. Razzano (briefed), Dickstein, Shapiro, Morin & Oshinsky, Washington, DC, for Amicus Curiae.
Before GUY and BOGGS, Circuit Judges; EDMUNDS, District Judge.[*]
OPINION
RALPH B. GUY, JR., Circuit Judge.
The brokerage firms and individual brokers named as defendants in four related actions have brought interlocutory appeals from the district court's denial of their motions to compel arbitration of claims asserted by plaintiff, Victor M. Javitch, as the receiver for Viatical Escrow Services, LLC (VES), and Capital Fund Leasing, LLC (CFL).1 The district court found that Javitch, the receiver, could not be compelled to arbitrate any of the claims against the defendants because (1) Javitch did not personally sign the agreements containing the mandatory arbitration clauses, (2) the complaints challenged the validity of the agreements, and (3) he could not be bound to the arbitration agreements under ordinary contract and agency principles. Defendants argue that the receiver is bound either because he "stands in the shoes" of VES and CFL, or because he should be estopped from refusing to arbitrate claims that arise from the broker-customer relationship. After review of the record and the arguments presented on appeal, we VACATE the district court's orders denying the motions to compel arbitration and REMAND for further proceedings consistent with this opinion.2
I.
Javitch was appointed as receiver for VES and CFL in the case of Liberte Capital Group, LLC v. James A. Capwill, CA. No. 99-CV-00818 (N.D.Ohio Jul. 15, 1999) (order appointing receiver). In that case, Liberte Capital and Alpha Capital claimed that James A. Capwill and entities he controlled (including VES and CFL) participated in a scheme to defraud viatical funding companies and viatical investors.3 The receiver was appointed "to oversee and to administer the business and assets of VES and CFL," with the objective to "preserve and increase the estate for the benefit of all the creditors, investors, owners and parties to this case." Among the powers enumerated in the order, the receiver was authorized,
upon application and approval by the Court, to institute, prosecute, defend, intervene in, become party to, compromise or settle all such cases and proceedings as are in the Receiver's opinion necessary or proper to preserve or protect the Receivership property or to carry out the terms of this Order, whether such cases and proceedings are now pending or hereafter brought by or against the Receiver in his capacity as Receiver of VES and/or CFL, against
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VES, or against CFL in state or federal courts or administrative agencies or other forums[.]
Under this authority, Javitch commenced these actions against the following defendants: First Union Securities, Inc. (f/k/a Everen Securities), and one of its brokers, Michael D'Angelo (First Union); Charles Schwab & Co., and one of its brokers, Charles Harris (Schwab); Morgan Stanley Dean Witter & Co., and one of its brokers, Marcel Pope (MSDW); and Fifth Third/Maxus Securities, Inc. (Maxus).
Each of the complaints aver that Capwill provided services to viatical funding companies and investors through VES and Capwill & Company (C & C), Capwill's accounting firm. CFL was used by Capwill to invest funds belonging to VES, the funding companies, and the investors.4 In his capacity as accountant and escrow agent, Capwill had control of how funds were to be distributed from bank accounts belonging to several viatical funding companies, including Liberte and Alpha, as well as the accounts of VES and CFL. Capwill diverted funds, some of which were held in trust, to the various brokerage accounts, after which the funds were misspent, misappropriated, and placed in unsuitable investments. The complaints state the same claims in each case: negligence, negligent supervision, breach of fiduciary duty, fraud, conspiracy to defraud, RICO Act violations, aiding and abetting violations of securities laws, conversion, and for money had and received.5
The claims of negligence and negligent supervision (counts 1 and 2) rest on duties defendants owed to Capwill, VES, CFL, and C & C to act as reasonable securities brokers would under similar circumstances. Javitch alleges that defendants breached those duties by failing to know their customers, recommending or permitting unsuitable investments, allowing the improper designation of accounts, and permitting inappropriate fund transfers. As with each count of each complaint, Javitch claims that as proximate cause of the defendants' wrongful conduct, Capwill, VES, CFL, C & C, and others (including funding companies and investors) suffered financial losses.
The fraud, conspiracy to defraud, and securities fraud claims (counts 4, 5, and 7) rest on allegations that the defendants knew or should have known the nature of the business that Capwill, VES, CFL, and C & C were involved in; that these entities had no significant earnings, capital, or assets of their own; that the funds they controlled were to be held in actual or constructive trust for others; and that Capwill had no meaningful experience in financial investing. Despite this knowledge, defendants opened brokerage accounts in the names of people or entities who had no right, title, or interest in the funds or securities in those accounts; accepted moneys into those accounts; allowed unsuitable investments of escrow funds; failed to restrain Capwill's improper withdrawals and transfers of funds from those accounts; issued statements with known misrepresentations of account ownership; and allowed Capwill to withdraw and transfer funds after the accounts had been "restricted" by court order in April 1999.
Javitch claims that the defendants' wrongful activities in connection with these
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accounts constitute a pattern of racketeering activity; specifically, mail fraud, wire fraud, fraud in the conduct of financial transactions, and failure to prevent money laundering (count 6). Plaintiff further alleges that the various claims of negligence, fraud, and racketeering also involved breaches of fiduciary duties that defendants owed to Mr. Capwill, VES, CFL, and C & C (count 3). Lastly, plaintiff alleges that defendants are liable in conversion, or on a claim for money had and received, as a consequence of Capwill's diversion of funds rightfully belonging to viatical funding companies (such as Liberte and Alpha); the original investors; and/or VES, CFL, and C & C (counts 8 and 9).
Defendants promptly moved for an order compelling arbitration and for a stay of the proceedings, relying on customer agreements containing broad provisions for mandatory arbitration of disputes. Javitch alleges that Capwill and CFL caused multiple brokerage accounts to be opened in various names at all four brokerage firms.
At First Union, Capwill opened an account in the name of CFL and signed a client agreement containing the following mandatory arbitration clause:
I agree that all claims or controversies, whether such claims or controversies arose prior to, on or subsequent to the date hereof, between me and EVEREN and/or any of its present or former officers, directors, or employees concerning or arising from (I) any account maintained by me with EVEREN individually or jointly with others in any capacity; (II) any transaction involving EVEREN or any predecessor firms by merger, acquisition or other business combination and me, whether or not such transaction occurred in such account or accounts; or (III) the construction, performance or breach of this or any other agreement between us or any duty arising from the business of EVEREN or otherwise, shall be submitted to arbitration. . . .
Capwill was also alleged to have opened accounts at First Union in his own name and in the names of a girlfriend, a business associate, and an ex-employee.
At Morgan Stanley Dean Witter (MSDW), Capwill opened accounts in the names of VES, CFL, another girlfriend, a business associate, and the business associate's wife. The MSDW Client Account Agreement, signed by Capwill on behalf of CFL, included the following arbitration provision:
You agree that all controversies between you or your principals or agents and Dean Witter Reynolds or its agents (including affiliated corporations) arising out of or concerning any of your accounts, orders or transactions, or the construction, performance, or breach of this or any other agreement between us, whether entered into before or after the date an account is opened, shall be determined by arbitration. . . .
At Maxus, Capwill opened accounts in the names of VES, Capwill, and other of Capwill's family members. Maxus relies on the following arbitration clause, which states in part that: "IT IS AGREED THAT ANY CONTROVERSY BETWEEN U.S. ARISING OUT OF YOUR BUSINESS OR THIS AGREEMENT SHALL BE SUBMITTED TO ARBITRATION. . . ." Although Maxus maintains that this provision was part of agreements signed by Capwill on behalf of VES and himself, Javitch disputes whether this provision was in fact part of the agreements entered into when...
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