Intl Fcstone Fin., Inc. v. Jacobson
| Decision Date | 04 June 2019 |
| Docket Number | Case No. 19 C 1438 |
| Parties | INTL FCSTONE FINANCIAL, INC., Plaintiff, v. DAVE and LINDA JACOBSON, et al., Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
OPINION AND ORDER
INTL FCStone Financial Inc. has sued several defendants to enjoin them from further pursuing their pending arbitration at the Financial Industry Regulatory Authority (FINRA), which FCStone claims is the wrong arbitral forum. FCStone also asks the court to compel defendants to arbitrate their claims before the National Futures Association (NFA). Defendants have moved to dismiss the complaint and for sanctions against FCStone for pursuing its claim for injunctive relief.
Construing the parties' arbitration agreements and FINRA's rules, the court concludes that the parties agreed to arbitrate their disputes before the NFA, not FINRA, and enters declaratory judgment to that effect, as detailed below.1 The court therefore (1) grants FCStone's motion to compel arbitration (dkt. 33); (2) denies FCStone's motion for preliminary injunction(dkt. 7) without prejudice; (3) denies defendants' motion to dismiss (dkt. 38); and (4) denies defendants' motion for sanctions (dkt. 50).2
FCStone is a global financial services firm. Among its services is a futures commission merchant division that helps execute and clear exchange-traded futures, commodities, and options transactions. Separate from that division, FCStone also engages in securities-related business and is therefore a member of FINRA, a self-regulatory organization for the securities and investment banking industry. FINRA members agree to arbitrate before FINRA any disputes with their "customers" that "arise[] in connection with the business activities of the member" on the customer's request. FINRA Rule 12200, available at http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=4106 (last visited May 31, 2019).
(Dkt. 32-2.)
The defendants experienced significant losses in their accounts in November 2018 based on volatility in the natural gas market—so significant that defendants owed balances to FCStone. On December 3, 2018, defendants to the original complaint—the Jacobsons, Musial, the Slanecs, the Schweigers, the Holcombs, the Rogerses, the Greaveses, and Pradko (and their related trusts) ("Original Defendants")—initiated arbitration against FCStone before FINRA, alleging among other things that FCStone violated § 13(a) of the Commodity Exchange Act, 7 U.S.C. § 13c(a).
Taking this as notice of a dispute under the arbitration agreements, FCStone emailed defense counsel on December 13, 2018 offering arbitration at any of three forums: (1) the NFA; (2) the Chicago Mercantile Exchange; or (3) the American Arbitration Association (AAA). (Dkt. 32-7 at 1.) Defense counsel responded that the arbitration agreement was unenforceable because it did not comply with 17 C.F.R. § 166.5—the Commodity Futures Trading Commission's (CFTC) regulation governing arbitration agreements between Commission registrants like FCStone and their customers—and insisted on arbitration before FINRA. (Id.) In February 2019, more than forty-five days after offering its slate of arbitral options, FCStone initiated arbitration before the NFA to collect the original defendants' balances due.
Late in the briefing on the motions in this case, the parties apprised the court that some of the defendants also filed notices of claim before the AAA. FCStone offered AAA arbitration in its December 13, 2018 email to defense counsel, attaching the AAA's commercial arbitration rules. Eight customers who are not parties to this case or the related case FCStone v. Farmer, No. 19-cv-1629 (N.D. Ill.), demanded arbitration before the AAA in December 2018 under the AAA's consumer rather than commercial arbitration rules. (See dkt. 49-2 (FCStone's objectionto eight nonparties' AAA arbitration).) FCStone objected, insisting that it had no agreement with its customers to arbitrate before the AAA, but did not advise the AAA that it had included the AAA as one of its three options in the December 13 email. (Id.) The AAA found it lacked jurisdiction over the nonparty customers' disputes. (Dkt. 65-2.)
On January 29, 2019, more than forty-five days after FCStone's December 13 email, defense counsel notified FCStone that all his clients—including most of the defendants here3—elected to arbitrate before the AAA. (Dkt. 65-1 at 2 (providing notice); id. at 3 (notice postmarked Jan. 29, 2019).) In February 2019, the AAA found that FCStone had not agreed to arbitrate defendants' disputes before the AAA. (Dkt. 65-2.)
In February 2019, FCStone filed this action for injunctive and declaratory relief, arguing that FINRA lacks jurisdiction over the underlying disputes. After failing to secure arbitration before the AAA, many customers filed statements of claim before FINRA in March 2019. In April, FCStone amended its complaint to add these customers as new defendants, along with a new count under § 4 of the Federal Arbitration Act, 9 U.S.C. § 4, to compel defendants (except the Motleys) to arbitrate their disputes before the NFA. These motions for preliminary injunction (dkt. 7) and to compel arbitration (dkt. 33) followed. Defendants have also moved to dismiss the complaint under Rules 12(b)(1) and 12(b)(6) (dkt. 38) and for Rule 11 sanctions (dkt. 50).
FCStone is a Florida corporation with its principal place of business in New York. The defendants named in the amended complaint are citizens of two foreign countries and seventeenstates; none is from Florida or New York. But while the individual defendants are completely diverse from FCStone, some of the individuals are named "individually and on behalf of" an LLC, a limited partnership, or a trust, and FCStone does not plead the citizenship of those entities. Diversity jurisdiction might exist, but not as FCStone pleads the amended complaint.
The court instead has subject matter jurisdiction under 28 U.S.C. § 1331, which requires FCStone to show that the complaint "arises under" federal law. In its amended complaint, FCStone pleads one count under § 4 of the Federal Arbitration Act. Section 4 does not itself confer jurisdiction; instead, it provides that "[a] party aggrieved by the alleged failure . . . to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under title 28 . . . ." 9 U.S.C. § 4. To determine whether the court would have had jurisdiction save for the arbitration agreement, a "federal court may 'look through' a Section 4 petition to determine whether it is predicated on an action that 'arises under' federal law . . . ." Vaden v. Discover Bank, 556 U.S. 49, 62, 129 S. Ct. 1262 (2009). Because all underlying disputes include claims under § 13(a) of the Commodity Exchange Act, 7 U.S.C. § 13c(a), the disputes present federal questions and this court has jurisdiction. To the extent FCStone's remaining claims arise under state law, the court has supplemental jurisdiction over those claims under 28 U.S.C. § 1367.4
In their motion to dismiss, defendants argue that the court lacks jurisdiction to decide procedural issues before the arbitrator. (Dkt. 38 at 4 (citing Howsam v. Dean Witter Reynolds,Inc., 537 U.S. 79, 84, 123 S. Ct. 588 (2002)).) Defendants conflate jurisdiction to hear a case with the propriety of relief. If the controversy could be in federal court but for the arbitration agreement, as this one could, the court has subject-matter jurisdiction. Vaden, 556 U.S. at 62. Whether the court can or should grant certain relief once it has jurisdiction is a separate question, to which the court now turns.
FCStone has moved to compel defendants (other than the Motleys) to arbitrate their disputes before the NFA. Under § 4 of the Federal Arbitration Act, "[a] party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement may petition any United States district court . . . for an order directing that such arbitration proceed in the manner provided for in such agreement." 9 U.S.C. § 4. Federal courts "will compel arbitration under the Federal Arbitration Act 'if three elements are present: (1) an enforceable written agreement to arbitrate, (2) a dispute within the scope of the arbitration agreement, and (3) a refusal to arbitrate.'" A.D. v. Credit One Bank, N.A., ...
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