Investors Capital Corp. v. Brown

• Decision Date: 21 May 2001
• Docket Number: No. 6:00CV598ORL31JGG.,No. 6:00CV595ORL31JGG.,6:00CV595ORL31JGG.,6:00CV598ORL31JGG.
• Citation: 145 F.Supp.2d 1302
• Parties: INVESTORS CAPITAL CORPORATION, Plaintiff, v. Gerald H. BROWN, Helen M. Brown, Defendants. Investors Capital Corporation, Plaintiff, Cecil T. Bragg, Elizabeth M. Bragg, Defendants.
• Court: U.S. District Court — Middle District of Florida

Page 1302

145 F.Supp.2d 1302

INVESTORS CAPITAL CORPORATION, Plaintiff, v. Gerald H. BROWN, Helen M. Brown, Defendants Investors Capital Corporation, Plaintiff Cecil T. Bragg, Elizabeth M. Bragg, Defendants.

No. 6:00CV595ORL31JGG.

No. 6:00CV598ORL31JGG.

United States District Court, M.D. Florida, Orlando Division.

May 21, 2001.

Burton Webb Wiand, Fowler White Gillen Boggs Villareal et al., Clearwater, FL, for Plaintiff.

Joel A. Goodman, Stephen Craig Krosschell, Goodman & Nekvasil PA, Clearwater, Fl, for Defendants.

MEMORANDUM OPINION

PRESNELL, District Judge.

This cause came on for consideration after an evidentiary hearing on the Defendants' motions to compel arbitration and stay these actions, the Report and Recommendation of the Magistrate Judge as to those motions, and the various objections to that report and recommendation.

Background

The Defendants in these consolidated cases — Gerald and Helen Brown in Case No. 6:00-cv-595-Orl-JGG ("the '595 case") and Cecil and Elizabeth Bragg in Case No. 6:00-cv-598-Orl-JGG ("the '598 case")— purchased securities known as First American Capital Trust Certificate of Commercial Notes ("FACT notes") through Virgil A. Smith and Angela Staub. In both cases, the Defendants made their initial FACT note purchases prior to the time that Smith and Staub became associated with the Plaintiff in these cases, Investors Capital Corporation ("ICC")¹; also in both cases, the Defendants repurchased² the FACT notes after Smith and Staub became associated with ICC. ICC is a member of the National Association of Securities Dealers ("NASD"). The FACT notes turned out to be a bad investment, and the Defendants now seek to recover damages from Smith, Staub, and ICC, among others. To that end, the Defendants filed arbitration claims with the NASD in March of 2000.

On May 12, 2000, ICC filed separate complaints in this Court against the Browns and the Braggs to enjoin the arbitration proceedings on the grounds that the Defendants were not "customers" — and therefore did not have a right to compel arbitration — under the NASD rules. The Browns and Braggs responded by filing a motion to compel arbitration. The cases were subsequently consolidated.

On October 27, 2000, after a hearing, Magistrate Judge Glazebrook entered a Report and Recommendation on the Defendants' motions to compel arbitration and stay these proceedings. In essence, Judge Glazebrook concluded that

1. The Court, not the arbitrator(s), should decide whether these disputes were subject to arbitration;

2. The NASD rules conferred an enforceable third-party beneficiary right on "customers" to compel arbitration; and

3. The Browns and the Braggs were "customers" under those rules and therefore could compel arbitration of these disputes.

Based on these conclusions, Judge Glazebrook recommended that this Court should compel arbitration of these disputes and should dismiss these cases without prejudice. ICC objected to the former recommendation, initially on the grounds that it had not been allowed to conduct discovery, and subsequently, on the grounds that the Defendants were not "customers" able to compel arbitration; the Defendants objected to Judge Glazebrook's recommendation to grant a dismissal rather than a stay. Legal Standards

Arbitrability disputes connected with a transaction involving interstate commerce are governed by the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq. (the "FAA"). See 9 U.S.C. § 2. No party disputes that the transactions at issue here involved interstate commerce.

"In enacting [the FAA], Congress declared a strong national policy favoring arbitration." Southland Corp. v. Keating, 465 U.S. 1, 10, 104 S.Ct. 852, 858, 79 L.Ed.2d 1 (1984). "The [FAA] establishes that, as a matter of [F]ederal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration" Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983). Notwithstanding this policy favoring arbitration, "the FAA does not require parties to arbitrate when they have not agreed to do so." Volt Information Sciences v. Board of Trustees of Leland Stanford Junior University, 489 U.S. 468, 478, 109 S.Ct. 1248, 1255, 103 L.Ed.2d 488 (1989). As the Supreme Court has stated: "[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration [in] any dispute which he has not agreed so to submit." AT & T Technologies v. Communications Workers of America, 475 U.S. 643, 648, 106 S.Ct. 1415, 1418, 89 L.Ed.2d 648 (1986).

Section 4 of the FAA provides a federal remedy to a party seeking to compel compliance with an arbitration agreement:

A party aggrieved by the alleged failure, neglect, or refusal of another 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, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement.... If the making of the arbitration agreement or the failure, neglect, or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereof.

In the instant cases, the parties did not reach any agreement between themselves as to arbitration. Instead, any such "arbitration agreement" results from ICC's membership in the NASD and its obligation to abide by the NASD Code of Arbitration Procedure. NASD Rule 10301(a) provides that [a]ny dispute, claim, or controversy eligible for submission under the Rule 10100 Series between a customer and a member and/or associated person arising in connection with the business of such member or in connection with the activities of such associated persons shall be arbitrated under this Code, as provided by any duly executed and enforceable written agreement or upon the demand of the customer. [Emphasis added.]

NASD rule 10101 provides that the following disputes are eligible for arbitration:

any dispute, claim, or controversy arising out of or in connection with the business of any member of the Association, or arising out of the employment or termination of employment of associated person(s) with any member ...

As Judge Glazebrook noted in the Report and Recommendation, "In the context of NASD arbitration, the issue of whether a would-be arbitration claimant is a `customer' entitled to invoke NASD Rule 10301 is a threshold question going to the existence of an agreement to arbitrate, and not to the agreement's scope." Report and Recommendation at 10 (citing Wheat, First Securities, Inc. v. Green, 993 F.2d 814, 820-21 (11th Cir.1993)). As such, it would be improper to apply the federal presumption in favor of arbitration when determining whether the Plaintiff agreed to arbitrate with these Defendants. The cases cited by the Defendants for a broader application of the presumption — for example, Armijo v. Prudential Ins. Co. of America, 72 F.3d 793 (10th Cir.1995)— address questions of whether a particular issue (such as the employment discrimination claims in Armijo) is arbitrable rather than the threshold issue of whether any agreement to arbitrate exists. The presumption arises after the court determines that the parties reached some agreement to arbitrate. See, e.g., Miller v. Flume, 139 F.3d 1130, 1136 (7th Cir.1998) ("[O]nce it is clear that the parties have a contract that provides for arbitration of some issues between them, any doubts concerning the scope of the arbitration clause are resolved in favor of arbitration.") and see Moses H. Cone, 460 U.S. at 24-25, 103 S.Ct. at 941, 74 L.Ed.2d 765 (1983) ("[A]ny doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration" [emphasis added]). Until it is determined that an agreement to arbitrate was reached, the court must keep its thumb off the scales.

Finally, the Court agrees with Judge Glazebrook's conclusion that the motion to compel arbitration should be addressed under a summary judgment standard, and that is the standard this Court will employ in addressing the "customer" issue. See, e.g., Oppenheimer & Co., Inc. v. Neidhardt, 56 F.3d 352, 357 (2d Cir.1995) (stating that "If the party seeking arbitration has substantiated the entitlement by a showing of evidentiary facts, the party opposing may not rest on a denial but must submit evidentiary facts showing that there is a dispute of fact to be tried" and referencing Fed.R.Civ.P. 56).

Analysis

In the instant case, no party has taken issue with the Magistrate Judge's conclusions that the court, rather than the arbitrators, was required to determine whether these disputes were arbitrable, and that NASD Rule 10301 confers an enforceable, third-party beneficiary right in an NASD member's customers to compel arbitration³. This Court agrees with the Report and Recommendation as to these points, leaving for determination only the issue of whether these defendants were "customers" as that term is used in NASD Rule 10301.

The NASD Code of Arbitration Procedure provides little guidance on the "customer" issue. The applicable definition, found in NASD Rule 0120(g), provides only that "[t]he term `customer' shall not include a broker or dealer." In construing the rule, courts have determined that the term is in some ways more broad, and in some ways more narrow, than the traditional, common-sense understanding of the term.

In Wheat, First Securities, Inc. v. Green, 993 F.2d 814 (11th Cir.1993), the Eleventh Circuit Court of Appeals determined that even parties who were doing business directly with an NASD member might not qualify as customers under the NASD rules. The Defendants in that case had been customers of a securities firm (Marshall Securities) whose assets were later purchased by NASD member Wheat, First. Id. at...