Boulet v. Bangor Securities Inc.

• Court: U.S. District Court — District of Maine
• Writing for the Court: Hornby
• Citation: Boulet v. Bangor Securities Inc., 324 F.Supp.2d 120 (D. Me. 2004)
• Decision Date: 26 May 2004
• Docket Number: No. CIV.04-09-P-H.,CIV.04-09-P-H.
• Parties: Richard H. BOULET, et al., Plaintiffs, v. BANGOR SECURITIES INCORPORATED, et al., Defendants.

324 F.Supp.2d 120

Richard H. BOULET, et al., Plaintiffs, v. BANGOR SECURITIES INCORPORATED, et al., Defendants.

No. CIV.04-09-P-H.

United States District Court, D. Maine.

May 26, 2004.

COPYRIGHT MATERIAL OMITTED

Daniel G. Lilley, Christian C. Foster, Daniel G. Lilley Law Offices, P.A., Portland, ME, for Plaintiffs.

Daniel J. Mitchell, Bernstein, Shur, Sawyer, & Nelson, Portland, ME, for Defendants.

MEMORANDUM DECISION AND ORDER ON DEFENDANT BANGOR SECURITIES INCORPORATED'S MOTION TO DISMISS OR TO STAY AND COMPEL ARBITRATION

HORNBY, District Judge.

The issue in this lawsuit is whether a Client's Margin Agreement obligates brokerage customers to arbitrate disputes with the brokerage firm. Arbitrability hinges on the scope of the term "broker" as used in the Agreement: Does it mean only an individual stock broker or does it include the brokerage firm for which he works? I conclude that the term has broad meaning and that the customers agreed to arbitrate disputes with the brokerage firm. Accordingly, the defendant's motion to dismiss is GRANTED.

BACKGROUND

The plaintiffs, Richard H. Boulet and Celene Brooke Boulet ("the Boulets"), invested money through broker-dealer Bangor Securities, formerly Livada Securities. The Boulets' individual broker was Gary Hobbs, an employee of Bangor Securities. Bangor Securities used Wexford Clearing Services Corporation ("Wexford") as a so-called "clearing firm." Bangor Securities placed orders to buy and sell securities through Wexford, and Wexford performed centralized accounting and trade execution for accounts held by Bangor Securities.

On December 23, 1998, the Boulets executed a "Client's Margin Agreement." The Margin Agreement was provided to Bangor Securities by Wexford and Bangor Securities provided the agreement to the Boulets. The Margin Agreement contains an arbitration provision as follows:

The undersigned [customer] agrees, and by carrying an account for the undersigned you [Wexford] agree, 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.

The Margin Agreement also provides that the Boulets'"broker is a third-party beneficiary of this Agreement and that the terms and conditions hereof, including the arbitration provision, shall be applicable to all matters between or among myself and either my broker and/or Wexford Clearing Services Corporation."

On January 13, 2004, the Boulets filed a lawsuit against Bangor Securities and Hobbs. The Boulets allege that Hobbs and Bangor Securities mismanaged their investments and engaged in fraud, in violation of the Securities Exchange Act of 1934, the Electronic Funds Transfer Act, the Maine Securities Act, and the Maine Unfair Trade Practices Act. The Boulets also advance several common law claims, including negligence, negligent misrepresentation, breach of fiduciary duty, fraud, vicarious liability and loss of consortium. The Boulets allege that, as a result of the defendants' misconduct, their investments are worthless. To date, the Boulets have been unable to serve process on Hobbs and are seeking service by publication. Relying on the arbitration clause in the Client's Margin Agreement, Bangor Securities filed this motion to dismiss the complaint or, alternatively, to stay the proceedings and compel arbitration.

ANALYSIS

"[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." InterGen N.V. v. Grina, 344 F.3d 134, 142 (1st Cir.2003). When deciding whether parties agreed to arbitrate, "courts generally should apply ordinary state-law principles that govern the formation of contracts." First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995). In this case, the arbitration agreement provides that New York law governs.¹ Under New York law, "agreements are construed in accord with the parties' intent." Greenfield v. Philles Records, 98 N.Y.2d 562, 750 N.Y.S.2d 565, 780 N.E.2d 166, 170-71 (2002). "[A] written agreement that is complete, clear, and unambiguous on its face must be enforced according to the plain meaning of its terms." Id. Extrinsic evidence of the parties' intent may only be considered if the court determines that the agreement is ambiguous. Id.

(A) Standard of Review

In their opposition motion, the Boulets suggest that Fed.R.Civ.P. 12(b) governs the standard of review for this motion to dismiss or compel arbitration. Although the First Circuit has not addressed the question, other courts have held that motions to compel arbitration are subject to the same standard of review as motions for summary judgment. E.g. Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., Ltd., 636 F.2d 51, 54 & n. 9 (3d Cir.1980) ("[A]lthough styled as a motion to dismiss, in a motion to stay proceedings and/or compel arbitration, the appropriate standard of review for the district court is the same standard used in resolving summary judgment motions."); Brown v. Dorsey & Whitney, 267 F.Supp.2d 61, 67 (D.D.C.2003). When ruling on a motion to compel arbitration, the court should "consider facts in the light most favorable to the Plaintiff ... and exercise its `wide discretion' to look beyond the complaint at pleadings and documents submitted by either party." Anderson v. Delta Funding Corp., 316 F.Supp.2d 554, 558-59 (N.D.Ohio 2004).

Indeed, under Rule 12(b), if "matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56." But when a motion to dismiss is converted into a summary judgment motion, the parties must be offered a "`reasonable opportunity' to present pertinent summary judgment materials." Rubert-Torres v. Hospital San Pablo, 205 F.3d 472, 475 (1st Cir.2000).

The First Circuit has held that "[n]otice of conversion need not be explicit.... [T]he notice requirement can be satisfied when a party receives constructive notice that the court has been afforded the option of conversion — a phenomenon that occurs when, for example, the movant attaches to his motion, and relies on, materials dehors the pleadings." Collier v. City of Chicopee, 158 F.3d 601, 603 (1st Cir.1998). In this case, Bangor Securities attached the Client's Margin Agreement and an affidavit to its motion. Its legal memorandum relied on the arbitration provision in the Client's Margin Agreement to argue that the Boulets are bound to arbitrate their claims. Even the Boulets cited and quoted the Client's Margin Agreement in their opposition motion. Opp'n Mot. at 8. The Boulets therefore had constructive notice that I would look beyond the pleadings when ruling on Bangor Securities' motion.²

(B) Third-party Beneficiary Status

Under New York law, a third-party beneficiary may enforce the terms of a contract where the contract expressly states that the parties intend to benefit the third party. E.g., Port Chester Elec. Constr. Corp. v. Atlas, 40 N.Y.2d 652, 389 N.Y.S.2d 327, 357 N.E.2d 983, 985-86 (1976). The Boulets signed a Client's Margin Agreement that contains a broad arbitration clause. It explicitly provides that the Boulets'"broker" is a third-party beneficiary of both the Agreement generally and the arbitration clause specifically. Bangor Securities therefore argues that it fits the term "broker" and can compel arbitration. The Boulets contend that the term "broker" in the Margin Agreement refers only to their individual broker, Hobbs, not Bangor Securities.

The threshold question is whether the term "broker" is ambiguous. I conclude that it is not. "Broker" is defined as "[o]ne that acts as an agent for others, as in negotiating contracts, purchases, or sales in return for a fee or commission." The American Heritage Dictionary of the English Language (4th ed.2000). The parties' use of the word "broker" indicates that they are conveying third-party beneficiary status upon the person or entity acting as their agent. Both Hobbs and Bangor Securities acted as the Boulets' agents with regard to their investments. Moreover, the Margin Agreement applies to all of the Boulets'"accounts" and the accounts were held by Bangor Securities, not Hobbs individually. If, as the Boulets contend, "broker" refers only to Hobbs, then disputes between the Boulets and Hobbs and/or Wexler would be resolved in arbitration but the same dispute between the Boulets and Bangor Securities would be litigated. The parties could not possibly have intended such a result. By conveying third-party beneficiary status upon the "broker," the parties intended that all disputes relating to the Boulets' accounts and involving transactions in which Wexford played a role be resolved in arbitration. According to the agreement's plain language, "broker" means both Hobbs and Bangor Securities.³

The Boulets contend that, even if Bangor Securities is a third-party beneficiary of their Client Margin Agreement, the arbitration provision applies only if they have a dispute with Wexford. They rely on Stone v. Doerge, 328 F.3d 343 (7th Cir.2003), where a broker-dealer tried to enforce an arbitration clause in an agreement between a customer and a clearing firm. In that case, the agreement committed the parties to arbitrate "any controversies arising between [the customer] and [the clearing firm] or any broker for which [the clearing firm] acts as a clearing agent." A separate clause in the agreement made the broker-dealer a third party beneficiary. Id. at 344. The broker-dealer sought to invoke the arbitration provision, even though none of the disputed trades were cleared through the clearing firm. The Seventh Circuit held that, in order for the broker-dealer to compel arbitration, the clearing firm must have acted as a clearing agent in the...