Bensadoun v. Jobe-Riat

• Decision Date: 13 January 2003
• Docket Number: Docket No. 02-7053.
• Citation: 316 F.3d 171
• Parties: Jean BENSADOUN, Plaintiff-Appellant, v. Marie Therese JOBE-RIAT, Pierre Schmidt, Salvatore Rasino, Louisette Buchard, Gaston Buchard, Liliane Girardin, Patrick Gouiran and Catherine Peiretti, Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

316 F.3d 171

Jean BENSADOUN, Plaintiff-Appellant, v. Marie Therese JOBE-RIAT, Pierre Schmidt, Salvatore Rasino, Louisette Buchard, Gaston Buchard, Liliane Girardin, Patrick Gouiran and Catherine Peiretti, Defendants-Appellees.

Docket No. 02-7053.

United States Court of Appeals, Second Circuit.

Argued: October 16, 2002.

Decided: January 13, 2003.

Brian D. Graifman, Gusrae, Kaplan & Bruno, PLLC, New York, N.Y., for Plaintiff-Appellant.

Richard C. Fooshee, New York, N.Y, for Defendants-Appellees.

Before: MESKILL, NEWMAN, and POOLER, Circuit Judges.

JON O. NEWMAN, Circuit Judge.

This appeal concerns the issue of arbitrability in the context of the rules of the National Association of Securities Dealers ("NASD"). Plaintiff-Appellant Jean Bensadoun, a stockbroker registered with the NASD, appeals from the January 9, 2002, judgment of the District Court for the Southern District of New York (Jed S. Rakoff, District Judge) dismissing his suit for declaratory and injunctive relief to prevent the Defendants-Appellees, eight investors ("the Investors"),¹ from requiring him to arbitrate their claims against him. We conclude that the suit was prematurely dismissed, and therefore vacate and remand for further proceedings.

Background

Underlying allegations. In June 2001, the Investors filed a Statement of Claims ("SOC") for arbitration with the NASD. The SOC named as respondents Bensadoun, two brokerage firms for which he worked during the relevant time period, UBS Paine Webber, Inc. ("Paine Webber") and Salomon Smith Barney, and Man Financial, Inc. The SOC designated Michel Autard as an "unnamed co-conspirator/respondent." Autard is a resident of Switzerland and, during the relevant periods, was a principal and the managing director of Compagnie Financiere Metropolitaine SA ("CFM"), a Swiss company. Although not a party to this action or the underlying arbitration, Autard was allegedly a key participant in the alleged fraud and conspiracy that precipitated the present controversy.

The SOC alleges that Bensadoun and Autard conspired to defraud the Investors, resulting in a net loss of $1,136,274. According to the SOC, the Investors made a series of fund transfers to Paine Webber in 1998. Bensadoun, then employed by Paine Webber, was the account representative for the brokerage accounts into which the funds were initially transferred. These transfers were made on the Investors' understanding that Autard would "open accounts for them at PaineWebber and that he would invest the proceeds in a combination of stocks and bonds." Instead, Autard and Bensadoun deposited the Investors' funds in accounts held under CFM's name, which prevented the Investors from receiving copies of monthly statements and confirmations. The SOC implies that the pooling of funds in an account held in the name of CFM was done without Investors' knowledge or consent.

At some point after the first CFM account was opened, Pierre Schmidt, one of the Investors, alleges that he discovered that the account was not registered in his name and he called Bensadoun to complain about this fact. The SOC alleges that Bensadoun told Schmidt that "the funds were being held temporarily in the account of CFM in order to complete certain administrative tasks." Bensadoun allegedly told Schmidt that he would open an account in Schmidt's name. Bensadoun did open the account in Schmidt's name, but the address on the account was CFM's instead of Schmidt's. The SOC alleges that Autard and Bensadoun conspired to keep Schmidt uninformed about this second account.

In its Answer and Defenses to the SOC, filed with the NASD Arbitration Panel, Paine Webber asserts that, in opening this account, Schmidt executed a form granting trading authority on the account to Michel Autard. Paine Webber asserts that three accounts are at issue; two accounts opened under CFM's name and a separate account opened under Schmidt's name. The SOC implies, without directly stating, that the second CFM account referred to by Paine Webber and the Schmidt account were in fact the same.

When Bensadoun transferred his employment to Smith Barney, some portion of the Paine Webber accounts were allegedly transferred to Smith Barney as well. Also, Bensadoun opened an account in the name of Pierre Schmidt at Smith Barney.

The SOC alleges other direct contacts between Bensadoun and the Investors. The SOC alleges that after CFM went into bankruptcy, Bensadoun called Schmidt at his home and "told Schmidt that he had invested money in CFM, and that his father had invested about $80,000 with CFM as well." When Catherine Peiretti sought to withdraw money from her account, Bensadoun allegedly told her that the "money was not available in her account at that time, and that she would be paid from the CFM account instead"; a third-party check was apparently issued to Ms. Peiretti drawing on CFM funds. The SOC also alleges that Madame Jobe-Riat and her son-in-law Alban Peiretti faxed memoranda to Bensadoun making inquiries about her investments "in what she thought was her account." The SOC includes as exhibits two letters written by Alban Peiretti on behalf of Madame Jobe-Riat inquiring as to her accounts. The SOC states that following the events complained of, CFM went into bankruptcy and Autard was arrested for embezzlement.

Bensadoun's suit for declaratory relief. In December 2001, Bensadoun filed the suit from which this appeal arises, naming the Investors as defendants. Contrary to the usual alignment in stockbroker controversies in which an NASD broker demands arbitration, Bensadoun sought a declaration that the Investors have no right to arbitrate against him and an injunction preventing the Investors from pursuing arbitration.

Bensadoun submitted a proposed order to show cause why arbitration should not be preliminarily enjoined, supported by his affidavit and a memorandum of law. In this affidavit, Bensadoun declares that none of the Investors other than Schmidt was ever his customer, and that no misconduct is alleged in connection with Schmidt's personal account. He states that he never had any contact with the Investors, other than Schmidt, prior to the closing of the CFM accounts and that he never saw the letters, purportedly addressed to him, that the Investors attached to the SOC. He also says that the accounts that the complaint concerns were opened by CFM, through Autard, and that the accounts enjoyed profits while under Bensadoun's representation. Finally, he states that when the accounts were eventually closed at the direction of Autard, the funds in the accounts were transferred to CFM's account in Switzerland.

Proceedings before the District Court were apparently quite limited. The Court did not issue the proposed show cause order, and appears instead to have treated it as a "motion to stay arbitration." In response to the proposed order to show cause, the Defendants filed a memorandum opposing the "motion to stay arbitration" and an affidavit of Richard C. Fooshee, the attorney for the Defendants. This affidavit states that the Client Agreements of Paine Webber include an arbitration clause and that Schmidt had such an agreement with Paine Webber.

In January 2002, the District Court issued a brief Memorandum Order denying Bensadoun's "motion to stay arbitration." The Court ruled that "customer," as used in the NASD rules, is to be given a liberal construction. The Court further ruled that the SOC, "liberally construed in favor of the [Investors]," alleges that Bensadoun participated in a scheme to convince the Investors that they were engaged in an "customer-like relationship" with Bensadoun, and that this allegation was "sufficient, on the present sparse record, to support sending the matter to arbitration (without prejudice to any subsequent determination the arbitrators may make, on a fuller record, as to their jurisdiction)."

Because the action had "no other raison d'etre" besides the "motion to stay arbitration," the District Court ordered the complaint dismissed, and judgment was entered dismissing the action.

Discussion

I. The District Court's Deferral of the Arbitrability Issue

In the absence of a motion to dismiss or for summary judgment, and prior to any discovery, the District Court dismissed the complaint, acknowledging that the record thus far developed was "sparse." In doing so, the Court appears to have resolved against Bensadoun the factual issues he sought to present. The District Court declined to give close scrutiny to Bensadoun's contentions in the belief that the arbitrators would have an opportunity to evaluate their own jurisdiction on a "fuller record." The case law is clear, however, that "`[u]nless the parties clearly and unmistakably provide otherwise, the question of whether the parties agreed to arbitrate is to be decided by the court, not the arbitrator.'" John Hancock Life Ins. Co. v. Wilson, 254 F.3d 48, 53 (2d Cir.2001) (quoting AT & T Techs. v. Communications Workers of America, 475 U.S. 643, 649, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986)); see also Spear, Leeds & Kellogg v. Central Life Assurance Co., 85 F.3d 21, 25 (2d Cir.1996) ("Whether or not a matter is arbitrable is a matter for judicial determination.").

In John Hancock, we ruled that the NASD Code does not evidence a "clear and unmistakable" intent to submit the issue of arbitrability to arbitrators where only one party is a NASD member and the parties do not have a separate agreement to arbitrate. 254 F.3d at 55. The NASD member in John Hancock, like Bensadoun here, sought to prevent investors from pursuing arbitration and contended that the investors were not its customers. Id. In holding that arbitrability was a matter for the court to decide, we said: "Although John Hancock may be required to submit to arbitration ... we are bound ... to preserve John Hancock's right to ask a court to make that determination." Id. The District Court erred in deferring the issue of arbitrability to the...