Kreger v. McCance

Decision Date06 May 2021
Docket NumberCivil Action No. 3:21-cv-424 (CSH)
Citation537 F.Supp.3d 234
Parties Richard H. KREGER, Bruce C. Ryan, and RHK Capital, LLC, Plaintiffs, v. William H. MCCANCE, Susan M. Lemoine, Advisory Group Equity Services, Ltd., Tag Group, Inc., and Trust Advisory Group, Ltd. (f/k/a Trust Advisory Services, Ltd.), Defendants.
CourtU.S. District Court — District of Connecticut

Richard Slavin, Stuart M. Katz, Cohen & Wolf, P.C., Bridgeport, CT, for Plaintiffs.

Kirsten Patzer, Freeman Mathis & Gary LLP, Boston, MA, Michael P. Kenney, Freeman Mathis & Gary LLP, Hartford, CT, for Defendants.

RULING ON PLAINTIFFSMOTION FOR TEMPORARY RESTRAINING ORDER

HAIGHT, Senior District Judge:

Plaintiffs in this action move, pursuant to Federal Rule of Civil Procedure 65(b), for a temporary restraining order. See Doc. 4. The Court has duly conducted an expedited hearing, with counsel for the Parties having briefed the issues. This Ruling resolves Plaintiffs’ motion.

I. BACKGROUND

This diversity action involves the world of securities markets, peopled by investors who buy securities from or sell them to other investors, assisted in those pursuits by investment advisers, brokers, broker-dealers, clearing brokers, and registered representatives (who call investors "clients"). The securities industry is strictly regulated, principally by the Securities and Exchange Commission and the Financial Industry Regulatory Authority ("FINRA").

A broker-dealer company transacts in stocks, bonds, and mutual funds on behalf of its clients, and generates income from commissions on those transactions. An individual registered representative affiliated with a broker-dealer company trades on behalf of clients and also is compensated for these services by receiving commissions on the trades.

At the time of filing the Verified Complaint, Doc. 1, and the First Amended Verified Complaint, Doc. 19 ("Am. V. Compl."), the two individual PlaintiffsRichard H. Kreger and Bruce C. Ryan—were and remain registered broker-dealer agents of Noble Capital Markets, Inc., a registered broker-dealer, and investment adviser representatives of Noble Capital Management, Inc., a registered investment adviser (collectively, the "Noble Capital entities"). Am. V. Compl. at 3 ¶¶ 12–13. Kreger and Ryan are also members of the third Plaintiff, RHK Capital, LLC ("RHK"), a limited liability company. Id. at 2 ¶ 3. Defendant Advisory Group Equity Services, Ltd. ("AGES") is a registered broker-dealer. Id. at 3 ¶ 17. Defendant Trust Advisory Group, Inc. ("TAG") is a registered investment advisor. Id. at 3 ¶ 18. Defendant Tag Group, Inc. ("TGI") is the owner of AGES and TAG. Id. at 4 ¶ 19. The individual Defendant William McCance is a principal and the chief executive officer and president of AGES, TGI, and TAG. Id. at 3 ¶ 15. The individual Defendant Susan Lemoine is the chief operating officer and a principal of AGES and TGI. Id. at 3 ¶ 16.

According to the Verified Amended Complaint, the events giving rise to this action took place before Kreger and Ryan became affiliated with the Noble Capital entities.

On November 30, 2016, a Business Transfer Agreement ("BTA") was executed, whereby Defendants AGES and TAG acquired the "business" of Source Capital Group, Inc. ("Source"). Id. at 4 ¶ 20. This "business" was defined as including, inter alia , all Source registered representatives, all Source customer account agreements, and all Source investment advisory service and management agreements. Id. at 4 ¶ 21; see also Doc. 18 ("Def.’s Mem.") Ex. A.

Plaintiffs allege that, in consideration for the transfer of Source's "business," AGES and TAG agreed to enter into a separate series of contracts establishing a "Super OSJ"1 owned and managed by Kreger and Ryan, as well as a third individual named David Harris,2 and guaranteed to them certain monthly cash payments. Id. at 3 ¶¶ 12–13; 4–5 ¶¶ 22, 24. Plaintiffs refer to these contracts as the "OSJ Manager Agreements." Id. The OSJ Manager Agreements form the basis for Plaintiffs’ claims against Defendants.

Although disputed by the Parties, see Def.’s Mem. at 2, 4–8, the BTA and its accompanying OSJ Manager Agreements may have become operative in early 2017. The Parties subsequently lived together in apparent harmony until, on November 30, 2020, McCance—on behalf of AGES and TAG—gave a 60-day written notice to Kreger and Ryan that he was terminating the OSJ Manager Agreements, effective February 1, 2021. Am. V. Compl. at 6–7 ¶¶ 29–30.

Plaintiffs claim that they "were induced to enter into the OSJ Manager Agreements by Paragraphs 8 and 9 of those agreements." Id. at 5 ¶ 25. Plaintiffs’ theory of the case is that, collectively, "[t]he provisions in paragraphs 8 and 9 ... allowed [Plaintiffs] to terminate or suffer termination of the agreement without the worry that their agents, clients, and customers would [not] be free to move to a new broker-dealer and investment advisor without interference from the Defendants and, in fact, with affirmative aid from the Defendants." Id. at 6 ¶ 28.

More specifically, Paragraph 8 provides, in part: "AGES or TAG clients introduced to those entities by the OSJ Manager may, at the client's option, become a client of the OSJ Manager upon closure of the OSJ ... however, if any client so chooses and is bound by a then current contract of any kind with [AGES and TAG], all fees, costs and expense reimbursements described in the contract shall be allocated ... as if the client, the OSJ Manager, and the [AGES/TAG]/OSJ relationships remained unchanged." Id. at 6 ¶ 26; see also Doc. 1-2 at 6. Plaintiffs maintain that, under the terms of Paragraph 8, Kreger and Ryan are to continue receiving portions of income generated by the operation of accounts previously existing with Source, or from new accounts recruited by OSJ Managers that remain with AGES and TAG. See Doc. 3 (Ryan Decl.) at 2 ¶ 8; Am. V. Compl. at 8 ¶ 34(h).

Paragraph 9 of the OSJ Manager Agreements, meanwhile, provides in part that AGES and TAG "will not place any impediment in the way of and shall not in any way oppose the OSJ Manager or interfere with the further transfer or reassignment" of OSJ representatives and their Source accounts "to any broker dealer or investment adviser designated by the OSJ Manager," and "AGES and TAG shall also proactively assist with such transfer in a reasonable and helpful manner complying with all rules and regulations." Am. V. Compl. at 6 ¶ 27; see also Doc. 1-2 at 6. Plaintiffs claim that Paragraph 9 "allowed the OSJ to affiliate with a new broker-dealer or investment advisor without any restriction on the transfer of accounts of the former Source customers and clients ... It also creates an affirmative duty for AGES and TAG to refrain from hindering the transfer of accounts in any way and to assist in the transfer." Doc. 4-1 ("Pl.’s Mem.") at 5.

Plaintiffs do not question Defendants’ right of termination. Kreger and Ryan allege that they "immediately identified a broker-dealer with which they wanted to affiliate"—i.e., the Noble Capital entities—and that they promptly notified Defendants of the new affiliation. Am. V. Compl. at 7 ¶ 31. However, Plaintiffs claim that, subsequent to Kreger's and Ryan's reaffiliation with the Noble Capital entities, Defendants have breached the surviving terms of the OSJ Manager Agreements in two respects: (1) by failing to make payments purportedly owed to Plaintiffs based on OSJ representatives’ business originated under the OSJ Manager Agreements, in violation of Paragraph 8; and (2) by impeding or failing to proactively assist the transfer of relationships and client accounts to the Noble Capital entities, in violation of Paragraph 9. Id. at 7–8 ¶¶ 34–39.

Plaintiffs move for a Temporary Restraining Order ("TRO") and pray for the correction and alteration of Defendants’ conduct in these regards.

II. DISCUSSION
A. Temporary Restraining Orders in FINRA Matters

The Parties dispute important aspects of their relationship. Defendants do not agree that they ever contracted with Plaintiffs in the manner alleged in the Amended Verified Complaint, or, in the alternative, that they have breached that contract. See generally Def.’s Mem. at 4–10. There is no dispute, however, that these issues presently are subject to arbitration before a FINRA panel of arbitrators, who will decide the merits of Plaintiffs’ underlying claims and Defendants’ defenses to them.

Why, then, is the case before this Court, on a motion by Plaintiffs for a TRO? The answer lies in Rule 13804 of the FINRA Code of Arbitration Procedure for Industry Disputes. Under that Rule, an arbitration claimant may seek interim injunctive relief from a court of competent jurisdiction while a FINRA arbitration hearing is pending. See FINRA Arb. Proc. R. 13804(a)(1).3 Plaintiffs invoke Rule 13804 in their motion to this Court for a TRO.

Rule 13804 further provides for an expedited arbitration hearing, to be scheduled within fifteen days of the Court's issuance of interim relief. FINRA Arb. Proc. R. 13804(b)(1). If the Court declines to grant a TRO, however, the arbitration of the Parties’ underlying disputes will proceed before FINRA arbitrators in the ordinary, non-expedited manner. Doc. 22 ("Hr'g Tr.") at 17:8–17:12. Counsel for Plaintiffs acknowledged at this Court's hearing on Plaintiffs’ motion that if Plaintiffs succeed on the merits of their claims in the FINRA proceeding, the arbitrators at that time will have the power to grant Plaintiffs all the forms of relief Plaintiffs seek now in the TRO. Id. at 17:12–17:14, 24:22–24:24, 45:3–45:10. Plaintiffs nonetheless invoke Rule 13804 to seek a TRO from this Court for the purpose of obtaining an expedited arbitration hearing. Id. at 15:15–15:19.

Whether to issue or deny interim injunctive relief, by temporary restraining order or preliminary injunction, is a much-litigated question. The standard of review in this Circuit is established by decisions of the Supreme Court and the Second Circuit. See infra Part II.B. Courts in this...

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