O.N. Equity Sales Co. v. Rahner

• Decision Date: 30 November 2007
• Docket Number: Civil Action No. 07-cv-01323-MSK-MJW.
• Parties: The O.N. EQUITY SALES COMPANY, Plaintiff, v. Mark R. RAHNER and Leslie L. Rahner, individually and as Trustees of the Mark R. and Leslie L. Rahner Trust and the Mark R. Rahner OD PC Profit Sharing Plan, Defendants.
• Court: U.S. District Court — District of Colorado

526 F.Supp.2d 1195

The O.N. EQUITY SALES COMPANY, Plaintiff, v. Mark R. RAHNER and Leslie L. Rahner, individually and as Trustees of the Mark R. and Leslie L. Rahner Trust and the Mark R. Rahner OD PC Profit Sharing Plan, Defendants.

Civil Action No. 07-cv-01323-MSK-MJW.

United States District Court, D. Colorado.

November 30, 2007.

Dennis J. Bartlett, Kristin Anderson, Kerr, Brosseau, Bartlett, O'Brien, LLC, Denver, CO, Marion H. Little, Jr., Michael R. Reed, Zeiger, Tigges & Little, LLP, Columbus, OH, for Plaintiff.

Joel A. Goodman, Goodman & Nekvasil, P.A., Clearwater, FL, for Defendants.

MEMORANDUM OPINION AND ORDER COMPELLING ARBITRATION

MARCIA S. KRIEGER, District Judge.

THIS MATTER comes before the Court on the Defendants' Motion to Compel Arbitration (# 12), which seeks a determination as to whether the Defendants are entitled to compel arbitration under NASD Code of Arbitration Rule 10301. The parties filed several documents addressing this issue (# 7, # 13, # 14, # 24, # 30, # 32, # 33 # 39, # 43, # 45).¹ Also before the Court is the Plaintiffs appeal (# 40) from the Magistrate Judge's Order (# 38) which denied the Plaintiff's motion (# 10) to allow the parties to engage in discovery on the issue of whether the Defendants could compel arbitration. The parties filed several documents in conjunction with this issue (# 10, # 11, # 15, # 26, # 40, # 41, # 46, # 48). In addition, the Plaintiff filed a motion (# 28) under Fed.R.Civ.P. 56(f) asking the Court not to rule on the Motion to Compel Arbitration until after it has been given an opportunity to conduct discovery This motion is also fully briefed (# 29, # 42, # 44, # 49). Having consid"ered the same, the Court

FINDS and CONCLUDES that:

I. Jurisdiction

For purposes of determining the instant motions and appeal, the Court exercises subject matter jurisdiction pursuant to 28 U.S.C. § 1332.

II. Background

The Plaintiff, O.N. Equity Sales Company (ONESCO), commenced this action against Mark R. Rahner and Leslie L. Rahner, individually and in their role as trustees of two trusts (collectively, "the Rahners"). The sole relief sought in the Complaint is a determination that ONESCO is not required to participate in an arbitration proceeding in which the Rahners are claimants. ONESCO contends that the Rahners cannot compel arbitration under the NASD Code of Arbitration, Rule 10301. The Rahners now move to compel arbitration of their claims against ONESCO.

ONESCO filed a motion for leave to conduct discovery on the "issue of arbitrability," which was referred to the Magistrate Judge for a determination. ONESCO contended that it should be allowed to conduct discovery to determine certain facts pertaining to the Rahners' claims. The Rahners opposed the motion, contending that all pertinent documents demonstrate that they are entitled to compel arbitration of their claims.

The Magistrate Judge denied the motion for discovery. He determined that no discovery was needed in order to determine whether the Rahners can compel arbitration. ONESCO has appealed from that ruling.

III. Issues Presented

The first issue presented is whether ONESCO should be allowed to conduct discovery before this Court rules on the Defendants' Motion to Compel Arbitration. If no discovery is necessary, then the second issue presented is whether the Rahners can compel arbitration of their claims.²

The Court addresses both issues simultaneously. Whether discovery is necessary is inextricably dependent upon the analytical framework which governs whether the Rahners can compel arbitration. This is because it is the analytical framework which defines what facts are material. If there is a dispute as to a material fact, then discovery should be permitted. Conversely, if the dispute is as to an immaterial fact, then no discovery is required.

IV. Analysis

The Federal Arbitration Act applies when there is a written contract to arbitrate involving commerce. See Cummings v. FedEx Ground Package System, Inc., 404 F.3d 1258 (10th Cir.2005). The Tenth Circuit has repeatedly stated that "[t]he FAA manifests a liberal federal policy favoring arbitration." See, e.g., 1mage Software Inc. v. Reynolds and Reynolds Co., 459 F.3d 1044, 1055 (10th Cir.2006) (internal quotes and cite omitted). An agreement to submit claims to arbitration "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2.

If there is an agreement to submit claims to arbitration, then a court turns to its interpretation. If there are ambiguities as to the scope of an arbitration clause, they should be resolved in favor of arbitration. See Volt Information Sciences, Inc. v. Board of Trustees of the Leland Stanford Junior Univ., 489 U.S. 468, 475-76, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989); see also image Software, Inc., 459 F.3d at 1055 (the, parties' intentions are controlling but generously construed with regard to the scope of issues which must be arbitrated).³

Rule 10301 in the NASD Code of Arbitration acts as a written arbitration contract for purposes of the FAA. ONESCO, as an NASD member, is a party to such contract.⁴ See MONY Securities Corp. v. Bornstein, 390 F.3d 1340, 1342 (11th Cir. 2004) (citing Washington Square Sec. Inc., 385 F.3d at 435).

Rule 10301 provides that: "Any dispute, claim, or controversy eligible for submission under the Rule 10100 Series between a customer and a member and/or an 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." A related rule—Rule 10101—describes matters which are eligible for arbitration and provides that the NASD Code of Arbitration "is prescribed and adopted ... for the arbitration of any dispute, claim, or controversy arising out of or in connection with the business of any member of the [NASD] ....: (c) between or among members or associated persons, and public customers, or others[.]"

Although there does not appear to be Tenth Circuit authority addressing the application of Rule 10301, the other circuit courts that have addressed its application uniformly apply a two-part test to determine whether arbitration of a dispute is required.⁵ To be subject to arbitration under Rule 10301, the dispute must (1) be between a customer and either an NASD member or "associated person" of an NASD member, and (2) arise in connection with the NASD member's business, or in connection with the activities of an associated person. The parties to this case both agree that this framework applies, but they disagree as to whether either element is satisfied,

Material Undisputed Facts

The material facts are not in dispute.⁶

ONESCO is an NASD Member. Gary Lancaster was a registered representative with ONESCO from March 23, 2004 until January 3, 2005.

Mr. Lancaster was the trustee of the Lancorp Financial Fund Business Trust ("the Lancorp Trust"). The Rahners signed subscription agreements for a private placement offered by the Lancorp Trust in December 2003, pursuant to which they agreed to purchase shares in the Lancorp Trust. At that time, they tendered checks totaling $230,000 to the Lancorp Trust to be held in escrow until used to purchase shares in the Lancorp Trust. Each of these subscription agreements identifies Bob Reese as the person who referred the Rahners to the Lancorp Trust. In February 2004, Mr. Lancaster accepted the Rahners' subscriptions by signing the subscription agreements.

Acting on behalf of the Mark R. Rahner and Leslie L. Rahner Trust, Mr. Rahner signed a new subscription agreement on April 30, 2004, and tendered another check in the amount of $25,000 to be held in escrow by the Lancorp Trust under the same conditions as the prior checks.⁷ As previously, Bob Reese was listed as the person who referred the Rahners to the Lancorp Trust. In April 2004, Mr. Lancaster accepted this subscription.

The Lancorp Trust retained the authority to cancel all subscription agreements. Its private placement memorandum states: "this offering is made subject to withdrawal, cancellation, or modification by the trust without notice."

Between May 4 and November 10, 2004, Mr. Lancaster completed six sales of Lancorp Trust securities to Mark and/or Leslie Rahner in an amount totaling $385,000.

Several claimants, including the Rahners, now pursue claims against ONESCO in NASD Arbitration Case No. 07-00965. They claim that UNESCO failed to supervise Mr. Lancaster, because it did not inspect his office, failed to review his correspondence and sales literature, failed to verify that he was not selling unapproved securities, did not investigate him after it was alerted by the Pennsylvania Securities Commission that it was investigating Mr. Lancaster's business, did not investigate his lack of production of commission revenue for ONE SCO, allowed him to "park" his securities license, and reported inaccurate information about Mr. Lancaster in a Form U-5 submitted to the NASD. They seek to hold ONESCO liable for Mr. Lancaster's conduct, including alleged misrepresentations and omissions about the Lancorp Trust, and allege the violation of several federal and state securities laws and state common law.

"Between a customer and an associated person"

The first part of the two-part test requires that the Rahners be "customers," either of ONESCO or of an "associated person" of ONESCO. Here, the Rahners contend that they were customers of an "associated person," Gary Lancaster, and that the sales of the Lancorp Trust securities occurred while Mr. Lancaster worked for ONESCO.

ONESCO argues that the. Rahners were not customers of an associated person for several reasons. First, ONESCO contends that Mr. Lancaster was not associated with ONESCO at the time when he allegedly made any...