Ryan, Beck & Co., LLC. v. Fakih

• Decision Date: 20 June 2003
• Docket Number: No. 02-CV-4052 (RLM).,02-CV-4052 (RLM).
• Citation: 268 F.Supp.2d 210
• Parties: RYAN, BECK & CO., LLC, Plaintiff, v. Youssef FAKIH, et al., Defendants.
• Court: U.S. District Court — Eastern District of New York

268 F.Supp.2d 210

RYAN, BECK & CO., LLC, Plaintiff, v.Youssef FAKIH, et al., Defendants.

No. 02-CV-4052 (RLM).

United States District Court, E.D. New York.

June 20, 2003.

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Christopher J. Bebel, Shepherd, Smith & Bebel, P.C., Houston, TX, Ariel Berschadsky, Shepherd, Smith & Bebel, P.C., New York City, Edward H. Glenn, Jr., Zamanasky & Associates, New York City, Stuart D. Meissner, Stuart D. Meissner LLC, New York City, for Defendant.

Joel E. Davidson, New York City, for Plaintiff.

MEMORANDUM AND ORDER

MANN, United States Magistrate Judge.

PlaintiffRyan, Beck & Co., LLC("plaintiff or "Ryan Beck") filed this action against defendantsPerry S. Reich("Reich"), Franka Jones, as trustee of the Franka Jones Trust ("Jones"), and Youssef and Ali Fakih("the Fakihs")(collectively referred to herein as "the investors" or "defendants"), seeking the following relief: a declaratory judgment that Ryan Beck has no obligation to arbitrate certain disputes with the investors; a stay of three pending arbitrations brought by the investors against Ryan Beck; and a declaratory judgment absolving Ryan Beck of liability for the acts that are the subject of those arbitrations.See generallyComplaint ("Compl.")at ¶¶ 8, 10-20 and ad damnum clause.

Currently before this Court, following the parties' consent to have a magistrate judge handle the case for all purposes (see28 U.S.C. § 636(c)(1)), are various dispositive motions and cross-motions filed by Ryan Beck, Jones and the Fakihs.¹Specifically, Ryan Beck has moved for summary judgment on its second claim for declaratory relief (i.e., adjudging the parties' disputes non-arbitrable) and demands a permanent stay of each of the arbitrations pending against it.All three groups of investors² have filed papers opposing Ryan Beck's motions,³ and Jones and the Fakihs have cross-moved to compel arbitration.⁴

For the reasons that follow, the Court denies Ryan Beck's motions in all respects and grants in part the cross-motions of the Fakihs and Jones, directing Ryan Beck to arbitrate the issue of arbitrability with respect to those investors.Reich's arbitration proceeding is hereby stayed pending the outcome of this lawsuit.

FACTUAL BACKGROUND⁵

Several years ago, each of the investors opened an account with Gruntal & Co., L.L.C.("Gruntal"),⁶ which was then registered with the Securities and Exchange Commission as a broker-dealer and was a member of the New York Stock Exchange ("NYSE") and the National Association of Securities Dealers("NASD").Upon becoming a client of Gruntal, each investor entered into a form contract entitled "Client Agreement & Margin Agreement"(hereinafter "Client Agreement").See, e.g.,Court Exhibit ("CX") 2; CX 3;9/5/02Tr. at 5-6.⁷Each such Client Agreement included a broadly worded arbitration provision, see, e.g.,CX 2and 3 at ¶ 16,⁸ and provided that the Client Agreement would "inure to the benefit of and be binding upon"the parties to the Client Agreement and, among others, their respective successors and assigns.Seeid.at ¶ 17; PX 2A (# 90 [Ex. A]), Client Agreement at HI.⁹

In March 2001, Reich notified Gruntal, in writing, that he had "made arrangements to move [his] accounts to another brokerage firm," and he directed Gruntal "not to make any further transactions with respect to this account."Letter from Perry S. Reich to Joseph Burgos, dated March 16, 2001, included in PX 2A and PX 4 (# 90 [Ex.A]).The next day, in a follow-up letter to a Gruntal supervisor, Reich complained that his account manager had not "follow[ed his] directions," and he accused the account manager of seeking "to increase his personal commissions at [Reich's] continued expense."Letter from Perry S. Reich to Mark Serby, dated March 17, 2001, included in PX 4 (# 90 [Ex.A]).Reich transferred all of the assets in his Gruntal accounts to Quick & Reilly on or about April 9, 2001.SeeReich Dep. (# 90 [Ex.A])at 31-32.The accounts of the other defendants remained open in and after the end of April 2002.See9/5/02 Tr.at 11;1/21/03Tr. at 21;see alsoid. at 48.

In June 2001, Reich initiated an arbitration proceeding before the NASD against Gruntal and its agent, Joseph Burgos, charging that his account had been mishandled.In April 2002, the Fakihs and Jones commenced similar arbitration proceedings against Gruntal and its agents: the Fakihs brought their claims before the NASD and Jones brought hers before the NYSE.

Later that month, on or about April 20, 2002, Ryan Beck, a broker-dealer headquartered in Livingston, New Jersey, entered into a series of interrelated agreements, including an amended asset acquisition agreement ("Acquisition Agreement"), with Gruntal, its parent company Gruntal Financial, L.L.C., and Gruntal Facilities Management, L.L.C.¹⁰Pursuant to the Acquisition Agreement, Ryan Beck agreed to purchase most of the assets of Gruntal, including customer accounts and related books and records.The nature and effect of the transaction—that is, whether it constituted a de facto merger or rendered Ryan Beck a successor-in-interest to Gruntal's liabilities—are the subject of much controversy among the parties, as is the adequacy of the purchase price paid by Ryan Beck.Part of the debate centers on a provision in the Acquisition Agreement, pursuant to which the parties to that contract agreed that, with certain exceptions not relevant here, Ryan Beck would not assume any of Gruntal's liabilities or obligations other than those arising as of the closing date, April 26, 2002("the Closing Date").SeeAcquisition Agreement§ 1(B)(2)(stating, inter alia, that Ryan Beck"will not assume ... liabilities for litigation, arbitrations or other claims relating to operations prior to the Closing Date [April 26, 2002], whether instituted before or after the Closing Date....").

On the Closing Date, the defendants and other investors were sent form letters on Gruntal letterhead, signed by the chairmen and chief executive officers of Gruntal and Ryan Beck, respectively.Following the salutation "Dear Valued Client," each letter advised that Ryan Beck had acquired certain assets and liabilities of Gruntal; that the investor's account would be transferred to Ryan Beck, effective April 29, 2002, unless the investor immediately notified his or her account executive otherwise and made arrangements for the account and/or securities to be transferred elsewhere; and that the account would be serviced at Ryan Beck by the same account executive as at Gruntal.¹¹It is undisputed that none of the defendants signed a new client agreement with Ryan Beck.See, e.g.,9/5/02 Tr.at 15.However, plaintiff acknowledges that the Gruntal Client Agreements with Jones and the Fakihs became the operative contracts with those customers.See9/5/02 Tr.at 15-16, 25, 71-73;10/11/02Tr. at 19, 44-45;1/21/03Tr. at 21-23, 33, 48.

Within several months of Ryan Beck's acquisition of Gruntal's accounts and other assets, each of the investor-defendants amended his or her statement of claim in arbitration to add Ryan Beck as a respondent.¹²On June 25, 2002, Ryan Beck filed its answer to the Fakihs' arbitration claims, requesting their dismissal.The underlying arbitration proceedings have continued, subject to a stipulation by the defendants that they"will not assert or argue that further participation of Ryan, Beck & Co., L.L.C. in the [respective] arbitration proceeding[s] ... constitutes a waiver by Ryan, Beck & Co., L.L.C. of any rights it may have to contest the propriety of its inclusion in such arbitration proceeding[s]."Stipulation & Agreement of the Defendants, dated September 18, 2002(# 51);see9/5/02 Tr.at 100-05.¹³

On July 17, 2002, Ryan Beck commenced this federal action with the filing of its complaint for declaratory and injunctive relief.On July 25, 2002, Ryan Beck sought a temporary restraining order, which was denied by the Honorable Edward R. Korman, who referred plaintiffsmotion for a preliminary injunction to this magistrate judge.¹⁴After the motion was fully briefed and argued, and after the case was, with the parties' consent, reassigned to a magistrate judge for all purposes, this Court issued a Memorandum and Order on September 20, 2002, denying the motion for a preliminary injunction.See Memorandum & Order, dated September 20, 2002("9/20/02 M & O").¹⁵On October 11, 2002, the Court denied from the bench a cross-motion filed by the Fakihs to dismiss the action on the ground that Ryan Beck had waived its objection to arbitrability.See10/11/02 Tr.at 4-7.The Court then ordered discovery limited to the issue of Reich's status as a customer of Ryan Beck(seeid. at 54-57, 60-61) and established a briefing schedule on the cross-motions for summary judgment.

Gruntal filed for bankruptcy protection on October 30, 2002, in In re GCO Services LLC,No. 02-15360(S.D.N.Y.Bankr.).SeeBerson Aff. (# 55)at ¶ 2.

DISCUSSION

I.The Parties' Positions

The investors advance a series of arguments as to why Ryan Beck is obligated to arbitrate the disputes at issue.Looking first to traditional principles of contract and agency, the investors assert that, as plaintiffs customers, their relationships with Ryan Beck were governed by the Gruntal Client Agreements, each of which included an arbitration provision; therefore, they argue, Ryan Beck assumed the obligation to arbitrate the parties' disputes and, having derived the benefits of that contractual relationship, plaintiff is estopped from denying its duty to arbitrate.SeeDef. Joint Mem. (# 99)at 4-8.Secondly, the investors contend that, apart from the aforesaid contractual right to arbitration, NASD rules compel member firms to arbitrate disputes with their customers.Seeid. at 8-13.Moreover, they claim, the scope of the arbitration clause in the Client Agreement is a matter for the arbitrators to decide.Seeid. at 13-14.

Plaintiff resists arbitration...