Gupta v. Merrill Lynch
| Decision Date | 15 August 2014 |
| Docket Number | CIVIL ACTION NO: 12-1787 SECTION "H"(5) |
| Parties | SUMAN GUPTA, ET AL. v. MERRILL LYNCH, ET AL. |
| Court | U.S. District Court — Eastern District of Louisiana |
Before the Court are the following motions: (1) Motion to Compel Arbitration (R. Doc. 127) filed by Defendants Merrill Lynch, Pierce, Fenner and Smith, Inc., and Merrill Lynch & Co., Inc.; (2) Motion to Dismiss (R. Doc. 128) filed by Defendant Anil Chaturvedi; and (3) Motion for Review of the Magistrate Judge's Decision (R. Doc. 165) filed by Plaintiffs. For the following reasons, the Motion to Compel Arbitration is GRANTED IN PART. Plaintiffs Narinder Gupta and Suman Gupta shall ARBITRATE their claims against Merrill Lynch, Pierce, Fenner and Smith, Inc., and Anil Chaturvedi. The remaining claims are hereby STAYED pending arbitration. This matter is ADMINISTRATIVELY CLOSED but may be restored to the trial docket upon motion of a party oncearbitration has concluded. The Motion to Dismiss and the Motion for Review are DENIED WITHOUT PREJUDICE to be re-urged, if necessary, at a later date.
This case arises from the alleged mismanagement of a trust (the "Trust"). The Plaintiffs are Narinder Gupta ("N. Gupta"), Suman Gupta ("S. Gupta"), and their two sons, Neel Gupta and Jagan Gupta (collectively the "Gupta Sons"). The Defendants are Merrill Lynch, Pierce, Fenner and Smith, Inc. ("MLPFS"), Merrill Lynch & Co., Inc. ("ML & Co.") (collectively "Merrill Lynch"),2 Merrill Lynch Bank and Trust company (Cayman) Limited, Merrill Lynch Cayman Holdings Incorporated, Merrill Lynch International Holdings, Inc., and Anil Chaturvedi ("Chaturvedi").
Beginning in 1990, N. Gupta met with Chaturvedi—a security broker employer employed by Merrill Lynch—to discuss wealth management strategies that would ultimately benefit the Gupta Sons. Chaturvedi recommended creating a revocable trust, which could be terminated and liquidated at any time. Pushpa Bajaj ("Bajaj")—N. Gupta's aunt—settled the Trust on April 10, 2001. The ultimate beneficiaries are S. Gupta and the Gupta Sons; N. Gupta is the secondary beneficiary. Merrill Lynch (through Chaturvedi) managed the funds of the Trust at all times.
On or about May 23, 2002, N. Gupta informed Chaturvedi that Bajaj had passed away. Chaturvedi subsequently obtained a copy of Bajaj's death certificate and changed the date of death. After altering the death certificate, Chaturvedi forged Bajaj's signature on a document that purported to instruct Chaturvedi to transfer $300,000 from the Trust to another Merrill Lynch account. Chaturvedi forged a similar document on September 18, 2003.
On or about February 28, 2007, N. Gupta instructed Chaturvedi to liquidate the Trust. Chaturvedi disregarded this instruction. N. Gupta and S. Gupta made a similar request of Chaturvedi in 2009. Despite his previous representations to the contrary, Chaturvedi advised the Trust could not be liquidated.
Plaintiffs eventually filed suit. Although far from pellucid, the first amended complaint appears to assert causes of action against all Defendants for violations of (1) the Investment Company Act ("ICA"), 15 U.S.C. § 80a et seq., (2) the Security and Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78a et seq., and (3) the Racketeer Influenced and Corrupt Organization Act ("RICO"), 18 U.S.C. § 1961 et seq. Plaintiffs have voluntarily dismissed all Defendants except MLPFS, ML & Co., and Chaturvedi.
Defendants move to compel arbitration and dismiss this action for improper venue.3 The Fifth Circuit has repeatedly declined to address the proper procedural vehicle for bringing such motions.4 Because the Fifth Circuit has accepted Rule 12(b)(3) as a proper method for dismissal based on an arbitration clause,5 the Court analyzes Plaintiffs' motion under Rule 12(b)(3).6
On a Rule 12(b)(3) motion to dismiss for improper venue, the court must accept as true all allegations in the complaint and resolve all conflicts in favor of the plaintiff.7 In deciding such motions, the Court may examine all evidence in the record.8
When venue is challenged, district courts in the Fifth Circuit have been inconsistent in allocating the burden of proof.9 Most courts in this District, however, hold that a plaintiff bears the burden of proof.10 This Court follows their lead and holds that Plaintiffs bear the burden ofestablishing proper venue.11
The primary issue before the Court is whether Plaintiffs' claims are subject to arbitration. The inquiry is governed by the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq., which broadly applies to any written provision in "a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction."12 Section 2 of the FAA reflects a "liberal federal policy favoring arbitration agreements."13 To implement this policy, the FAA empowers federal district courts to compel arbitration when a party has refused to comply with an arbitration agreement.14
A two-step analysis governs whether parties should be compelled to arbitrate a dispute.15 The Court must first determine whether the parties agreed to arbitrate the dispute.16 This determination involves two separate inquiries: (1) whether there is a valid agreement to arbitrate between the parties, and, if so, (2) whether the dispute in question falls within the scope of thatagreement.17 Although both inquires are generally guided by ordinary principles of state contract law,18 the strong federal policy favoring arbitration does not apply to the initial determination of whether there is a valid agreement to arbitrate.19 If the Court finds the parties agreed to arbitrate, it must then proceed to the second step of the analysis and consider whether any federal statute or policy renders the claims non-arbitratable.20
Defendants move to compel arbitration on the basis of four separate arbitration agreements. Specifically, Defendants invoke a Cash Management Account Agreement (the "CMA"), an Option Agreement, a Custodial Agreement, and an IRA Account Agreement (the "IRA Agreement"). The Court addresses each agreement separately.
The Trust entered into the CMA with MLPFS on April 24, 2001. Fiduciary Services, Ltd signed the CMA on behalf of the Trust. The CMA contains an arbitration provision.21 The questionpresented is whether MLPFS, as a signatory to the CMA,22 can compel to arbitration the beneficiaries of the Trust, who did not sign the agreement. For the reasons explained more fully below, the Court answers this question in the negative.
Before addressing the merits, the Court must first determine whether federal law or state law governs the circumstances in which a non-signatory can be compelled to arbitration.23 The Fifth Circuit precedent is inconsistent.24
When confronted by inconsistent precedent, the Fifth Circuit applies the rule of orderliness.25 Under this rule, the earliest panel decision controls, "absent an intervening change in the law, such as by a statutory amendment, or the Supreme Court or by our en banc court."26
Fleetwood is the first panel to consider whether a non-signatory can be bound to arbitrate. Fleetwood applied state law. Thus, one could argue that Fleetwood requires courts in the Fifth Circuit to apply state law. As explained below, this argument fails to persuade.
As a preliminary matter, Fleetwood did not even acknowledge, much less address in depth, whether state law or federal law should apply. Instead, after noting that "ordinary contract principles determine who is bound [by an arbitration agreement]," the court elected to apply Texas law without any further analysis.27 Moreover, the Fifth Circuit has recognized that the circumstances in which a non-signatory is bound to arbitrate are the same under both federal law and Texas law.28 Thus, Fleetwood had no occasion to address the issue before the Court today. Accordingly, that the Fleetwood Court applied Texas law does not necessarily foreclose the application of federal law in this case.29
Bailey was the first panel to acknowledge the inconsistency in Fifth Circuit law and definitively pronounce on the issue. The court noted "that because the determination of whether a non-signatory is bound by an arbitration provision 'presents no state law question of contract formation or validity,' a court should 'look to the federal substantive law of arbitrability to resolvethis question.'"30 Bailey further noted that its decision to apply federal law is consistent with that of "all federal circuit courts" to address the issue.31 Accordingly, the Court finds that Bailey is controlling and therefore applies federal law to determine whether Plaintiffs are bound by the CMA.32
The Fifth Circuit recognizes six theories for binding a non-signatory to an arbitration agreement: (1) incorporation by reference; (2) assumption; (3) agency; (4) alter ego; (5) estoppel; and (6) third-party beneficiary.33 In applying these theories, the Court is mindful of the precept that "arbitration is a matter of consent, not coercion,"34 and that therefore "the strong federal policy favoring arbitration does not apply to the initial determination of whether there is a validagreement to arbitrate."35 Thus, it is no surprise that arbitration agreements will apply to nonsignatories "only in rare circumstances."36
A non-signatory may be compelled to arbitration when that party enters into a contractual relationship which incorporates an arbitration provision from a separate contract.37 There is no evidence in the record that Plaintiffs have entered into any contracts which incorporate the CMA. Accordingly, this theory is inapplicable.
A party may be bound by an arbitration agreement "if its subsequent conduct indicates that it is assuming the obligation to arbitrate."38 Plaintiffs never manifested through their...
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