Klatte v. Buckman, Buckman & Reid, Inc.
| Decision Date | 08 July 2014 |
| Docket Number | Civil Action No. 14-0699 (FLW)(LHG) |
| Court | U.S. District Court — District of New Jersey |
| Parties | MICHAEL A. KLATTE, et al. Plaintiffs, v. BUCKMAN, BUCKMAN & REID, INC., Defendant. |
NOT FOR PUBLICATION
Before the Court is the Motion of Michael A. Klatte, et al. ("Plaintiffs"), to stay, under Section 3 of the Federal Arbitration Act (the "Act"), the proceedings now before the Court seeking to enforce against Buckman, Buckman & Reid, Inc. ("Defendant"), two Financial Industry Regulatory Authority ("FINRA") arbitration awards previously entered against Mercer Capital and others under a theory of Defendant's successor liability for the fraudulent conduct of Mercer Capital, Plaintiffs' former investment manager. Since filing their case, Plaintiffs have also brought arbitration actions against Defendant before a FINRA panel and now move, under Section 4 of the Act, for an order compelling Defendant to participate in those actions. In an Order dated June 13, 2014, this Court temporarily stayed the arbitration proceedings before FINRA, pending this Court's decision on whether the Court or the arbitration panel should determine the substantive arbitrability of the parties' dispute. For the reasons that follow, this Court finds that i) Plaintiffs have not waived their right to arbitrate the claims raised in their Complaint, ii) under the law ofthe Eighth Circuit, the determination of substantive arbitrability under the rules of FINRA remains with the courts at least until it has been determined whether an arbitration agreement exists between the parties, and iii) the question of whether an agreement exists is a mixed inquiry of law and fact requiring additional submissions from the parties. Accordingly, Plaintiffs' Motion to stay these proceedings and to compel arbitration is DENIED as premature.
I. BACKGROUND AND PROCEDURAL HISTORY
Plaintiffs are investors who deposited millions of dollars of their savings in accounts with Mercer Capital that were managed by Leonard C. Demers. At the time Plaintiffs made their investments, Mercer Capital was a registered broker-dealer in the State of Minnesota and participant in the self-regulatory regime of FINRA. Over a number of years, Mr. Demers mismanaged Plaintiffs' accounts and converted large sums of his clients' money for his own purposes. On November 27, 2008, apparently overcome by guilt or fearing discovery, Mr. Demers committed suicide after waiting for the exclusion period of his multimillion-dollar life insurance policies to lapse. Mr. Demers' will directed that some of the proceeds of his life insurance policies be used to reimburse his former clients for the funds he had stolen. However, the policies were insufficient to fully reimburse all of the money he had taken, leaving some of his former clients, including Plaintiffs, with residual claims against Mr. Demers' estate. In an effort to collect the remainder of the money Mr. Demers had taken from them, Plaintiffs joined a probate action in Minnesota state court as creditors against the Demers estate.
At the same time that the distributions from Mr. Demers' life insurance policy were being made and Plaintiffs were making their claims in probate court, Plaintiffs also brought two separatearbitration actions before a FINRA arbitration panel, first in April and then in May of 2009, bringing claims against both the estate of Demers and his former partnership, Mercer Capital. On December 1, 2010, the FINRA arbitration panel found Mercer Capital and several others1 jointly and severally liable to certain Plaintiffs for $789,287. On February 11, 2011, the FINRA arbitration panel entered judgment in favor of certain Plaintiffs in the amount of $688,126 against the estate of Mr. Demers and $98,303 against Mercer Capital and others.2 At an unspecified time shortly before, during, or after the arbitration proceedings, Mercer Capital ceased operations as an investment firm and brokerage and sold its remaining assets to Defendant. This sale included the transfer of the plurality of Mercer's client accounts to Defendant, including those of certain Plaintiffs, and resulted in three of Mercer's five surviving partners joining Defendant's firm. [Plaintiffs' Brief in Support, p. 4-6].3 Plaintiffs allege that the "sale" and transfer of assets were fraudulent and were orchestrated by Mercer and Defendant to avoid having to satisfy the FINRA arbitration awards against Mercer. While the parties were arbitrating their claims against Mr. Demers' estate and Mercer Capital before FINRA, the probate of Mr. Demers' estate continued in Minnesota state court. On December 13, 2012, the probate action concluded and Plaintiffs received all potential claims against Mercer Capital belonging to the Demers estate as compensation for Plaintiffs' unsatisfied claims for reimbursement of stolen funds.
Plaintiffs initiated the underlying action in this case by Complaint in the State of Minnesota, County of Washington, District Court for the Tenth Judicial District on October 11,2013, seeking to enforce against Defendant the arbitration awards previously secured before the FINRA arbitration panel against Mercer. Plaintiffs contend that Defendant operates as a mere continuation of Mercer Capital — that it is Mercer's successor in interest. Accordingly, Plaintiffs allege that, under Minnesota state law, the awards against Mercer are enforceable against Defendant. Specifically, in Count I of the Complaint, Plaintiffs allege that (i) Defendant, as the successor to Mercer, is liable to Plaintiffs for Mr. Demers' share of the proceeds of the allegedly fraudulent sale of all of Mercer's assets to Defendant and, alternatively, (ii) that the allegedly fraudulent transfer is void under Minnesota law, and that the assets of Mercer transferred to Defendant are available to satisfy the Plaitniffs' FINRA awards against Mercer. In Count II, Plaintiffs allege that Defendant is directly liable for the FINRA awards against Mercer under Minnesota law as Mercer's successor in interest. In Count III, Plaintiffs allege that Defendant, once again as Mercer's successor in interest, is liable for Mercer's breach of its agreement to abide by FINRA regulations in refusing to honor the FINRA arbitration awards.
On November 13, 2013, Defendant removed the underlying action in this case to the federal District Court for the District of Minnesota on the basis of the diversity of citizenship of the parties and an amount in controversy exceeding $75,000. Defendant then moved, on November 25, for a change of venue, based upon the convenience of the parties, pursuant to 28 U.S.C. § 1404(a). Defendant's motion was granted on February 3, 2014, and the underlying matter was transferred to this Court. Plaintiffs now move to stay this proceeding under Section 3 of the Arbitration Act, alleging (i) that their arbitration agreements with Mercer, governed by the rules of FINRA, are enforceable against Defendant as Mercer's successor in interest under Minnesota state law, and require the arbitration of all questions relevant to this dispute, including whether the dispute is arbitrable in the first instance; and, alternatively, (ii) that despite the absence of a written arbitrationagreement with Defendant, Defendant's mere membership in FINRA acts as an agreement with Plaintiffs as Defendant's customers and requires Defendant to arbitrate all questions relevant to this dispute, including whether the dispute is arbitrable in the first instance. Accordingly, Plaintiffs also ask this Court, under Section 4 of the Federal Arbitration Act, to compel the Defendant to submit to the arbitration of Plaintiffs' claims before a FINRA panel.
III. JURISDICTION
In this case, Defendant invokes the jurisdiction of this Court under 28 U.S.C. § 1332(a). To establish diversity jurisdiction under § 1332(a), the amount in controversy must exceed $75,000 and there must be complete diversity of citizenship among the adverse parties. It is undisputed that the parties are diverse and that Plaintiffs allege the requisite amount in controversy.4
IV. STANDARD OF REVIEW
The Federal Arbitration Act, 9 U.S.C. §§ 1 et seq. ("FAA"), directs federal courts to compel arbitration of claims "arising out of" a valid agreement to arbitrate. The FAA reflects "the national policy favoring arbitration agreements." 9 U.S.C. § 2; Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 443 (2006). Thus a motion to compel arbitration "should not be denied unless it maybe said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute." AT & T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 650 (1986); AT & T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1749, 179 L.Ed.2d 742 (2011) (); Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983) ().
The Federal Arbitration Act ("FAA") provides:
If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.
9 U.S.C. § 2. Under the FAA, "[a]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which [it] has not agreed so to submit." Steelworkets v. Warrior & Gulf...
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