Miller v. Flume

• Decision Date: 24 March 1998
• Docket Number: No. 97-1127,97-1127
• Citation: 139 F.3d 1130
• Parties: Fed. Sec. L. Rep. P 90,173, 21 Employee Benefits Cas. 2803 Kevin MILLER, et al., Plaintiffs-Appellees, v. Dr. Charles W. FLUME, et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1130

139 F.3d 1130

Fed. Sec. L. Rep. P 90,173, 21 Employee Benefits Cas. 2803

Kevin MILLER, et al., Plaintiffs-Appellees, v. Dr. Charles W. FLUME, et al., Defendants-Appellants.

No. 97-1127.

United States Court of Appeals, Seventh Circuit.

Argued June 3, 1997.

Decided March 24, 1998.

Jonathan H. Margolies, Michael, Best & Friedrich, Milwaukee, WI, Judith A. Rogosheske (argued), Best & Flanagan, Minneapolis, MN, for Plaintiffs-Appellees.

Mark J. Briol, Minneapolis, MN, Thomas S. Sleik, Hale, Skemp, Hanson & Skemp, LaCrosse, WI, Gregory L. Wilmes (argues), Wilmes & Associates, Minneapolis, MN, for Defendants-Appellants.

Before CUMMINGS, WOOD, JR., and DIANE P. WOOD, Circuit Judges.

DIANE P. WOOD, Circuit Judge.

This is a somewhat unusual case raising questions about the court's authority to decide whether a particular dispute is arbitrable, as well as the merits of a district court decision refusing to stay proceedings for an arbitration. Its atypical character arises from the fact that the parties before us--Dr. Charles W. Flume and others associated with him, on the one hand, and securities brokers Kevin Miller, Wesley C. Hayne, and E. Chris Farni (to whom we refer as "the brokers"), on the other--have already arbitrated the Flumes' claim against the brokerage firm with which Miller and his colleagues were affiliated, the arbitral panel has rendered a final award, and the district court has confirmed the award. See Hayne, Miller & Farni, Inc. v. Flume, 888 F.Supp. 949 (E.D.Wis.1995) (Flume I). The Flumes commenced the arbitration that is the subject of the present appeal when the firm dissolved and, they claim, its officers fraudulently transferred the firm's assets to avoid paying the arbitral award in the Flumes' favor of some $178,034 plus interest. The brokers promptly repaired to federal court to enjoin the second arbitral proceeding, and in a proceeding held by consent before the magistrate judge, the court obliged them. The Flumes appealed from the injunction under 9 U.S.C. § 16(a)(2). As we explain below, the district court erred in enjoining the arbitration; we therefore reverse.

I

At this stage, the underlying dispute between the parties is of little relevance, although those who are interested may find a description of it in the district court's opinion confirming the first arbitral award. Flume I, 888 F.Supp. at 951. In brief, the appellants (to whom we refer collectively as the Flumes) are Dr. Charles W. Flume, his wife Nancy Flume, Dr. Flume's professional corporation, and the benefit plan it established under the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001 et seq. From May 1990 until approximately 1992 or 1993, the Flumes had an account with broker-dealer Hayne, Miller & Farni, Inc. (HMF), a member firm of the National Association of Securities Dealers (NASD). The broker-appellees, Hayne, Miller, and Farni, were officers and directors of HMF. In June 1993, the Flumes began an arbitration under the rules of the NASD against their HMF broker (James D. Peterson) and against HMF itself, in which they alleged violations of ERISA, state and federal securities fraud, common law fraud, breach of fiduciary duty, and negligence. On March 15, 1994, the NASD panel found HMF liable to the Flumes and awarded them $150,000 in damages and $28,034.40 in costs. (It awarded nothing against Peterson, who had filed for bankruptcy during the arbitration.) HMF then filed an action with the district court for the Eastern District of Wisconsin for vacatur of the award, and the Flumes responded with a counterclaim asking for confirmation of the award. On May 24, 1995, the district court denied HMF's motion and granted the Flumes' request for confirmation, entering a judgment for the total amount due of $178,034 plus interest. Flume I, 888 F.Supp at 955. The Flumes then learned that HMF had ceased operations while the motion for vacatur was pending in the district court. To this day, HMF has not paid any part of the judgment; instead, on December 31, 1994, it filed for withdrawal of its broker/dealer license with the NASD, which granted the request effective January 23, 1995.

The Flumes subsequently learned that while the arbitration and HMF's appeal were pending, the broker-appellees had transferred assets away from HMF. They claim that in 1993, HMF transferred investment securities with an approximate market value of $1,175,000 at the date of transfer to its parent company, HMF Holdings, Inc., and recorded the transaction as a reduction of additional paid-in capital. They also claim that HMF paid its parent another $450,000 in "management fees" over the same time period, which brought the total outflow up to about $1,625,000. Later, in November 1994 (again while HMF's vacatur action in the district court was pending), the Flumes claim that broker Miller transferred other valuable assets of HMF, including its customer accounts and retail brokerage force, to a new brokerage firm, Miller Financial Group, which Miller controlled. That firm continues to operate, they allege, and to reap the benefit of the assets transferred from HMF.

Frustrated that HMF had not satisfied the arbitral award against it, and with this new information in hand, the Flumes initiated a second NASD arbitration. This claim, filed in October 1995, alleged that Hayne, Miller, and Farni were "former principals and control persons" of HMF. It went on to claim that they had participated in the fraudulent acts that HMF had perpetrated on the public, and that they had failed to discharge their legal duty to supervise properly HMF's representatives, including broker Peterson. It also described the alleged fraudulent transfers about which they had learned, and claimed that the brokers had taken these actions to avoid paying the arbitral award in favor of the Flumes. All of these actions, they alleged, violated various rules of the NASD, and for that reason they claimed the right to bring the second arbitration under the NASD's rules.

When the Flumes began the second arbitration, they signed a "Uniform Submission Agreement," which is a form prescribed by the NASD. The brokers had each signed NASD Form U-4, which is a registration document that the NASD requires brokers to execute when they become registered NASD broker-dealers. Paragraph 5 of Form U-4 reads as follows:

5. I agree to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person, that is required to be arbitrated under the rules, constitutions, or by-laws of the organizations with which I register, as indicated in item 10 as may be amended from time to time.

The pertinent organization referred to in item 10 for these brokers is the NASD itself. Upon receiving the Flumes' second Statement of Claim, the NASD served it upon the brokers with a cover letter stating that "[t]he Statement of Claim is being sent to you because you also signed an agreement to arbitrate disputes involving yourself and claimant." Its letter indicated that the place of the arbitration would be Milwaukee, Wisconsin; the initial hearing was later scheduled for March 26 and 27, 1996.

The brokers did not welcome the prospect of a second arbitration. They turned instead to the federal court, filing the present lawsuit on January 8, 1996. Their complaint sought a declaration that the brokers were not required to arbitrate with the Flumes, and a preliminary and permanent injunction barring the Flumes from pursuing their new NASD arbitration. After a hearing by consent on October 4, 1996 before a magistrate judge, see 28 U.S.C. § 636(c)(1), the district court granted the brokers' motion for a preliminary injunction. Miller v. Flume, No. 96-C0029, memorandum and order at 11 (E.D.Wis. Dec. 26, 1996) (Flume II). Relying on this court's decision in Edward D. Jones & Co. v. Sorrells, 957 F.2d 509, 514 n. 6 (7th Cir.1992), the court first ruled that section 35 of the NASD Code of Arbitration Procedure, on which the Flumes relied, is not the kind of "clear and unmistakable expression of the parties' intent to have arbitrators, not the court," determine the threshold question of arbitrability. Flume II at 6. Looking at the complaint, the court then decided that it fell outside the scope of the NASD arbitration agreement, both because the Flumes were no longer "customers" within the meaning of section 12(a) of the NASD Code of Arbitration Procedure, and because a dispute over the collection of a judgment was not a claim "arising in connection with" transactions in the Flumes' accounts. Id. at 8.

II

The initial question we must answer is who should decide the question of the arbitrability of this second round dispute between the Flumes and the brokers: the court, or the NASD arbitrators? Our starting point is the Supreme Court's decision in First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995), in which the Court made clear that "[j]ust as the arbitrability of the merits of a dispute depends upon whether the parties agreed to arbitrate that dispute, ... so the question 'who has the primary power to decide arbitrability' turns upon what the parties agreed about that matter." Id. at 943, 115 S.Ct. at 1923 (emphasis in original). Because the preliminary question about the competent forum is so fundamental, however, the Court cautioned that lower courts "should not assume that the parties agreed to arbitrate arbitrability unless there is clear and unmistakable evidence that they did so." Id. at 944, 115 S.Ct. at 1924 (internal quotes and brackets omitted). We must therefore review the documents constituting the arbitration agreement between the Flumes and the brokers to see if such clear and unmistakable evidence is present here.

The Flumes urge us to find this kind of unambiguous entrustment of the arbitrability issue to the arbitrators in the NASD Manual's Code of Arbitration Procedures. They rely...