State Of West Va. Ex Rel. Td Ameritrade Inc v. Kaufman

• Decision Date: 05 March 2010
• Docket Number: No. 35125.,35125.
• Parties: STATE of West Virginia ex rel. TD AMERITRADE, INC., Petitioner,v.Honorable Tod J. KAUFMAN, Judge of the Circuit Court of Kanawha County, Respondent,andBruce P. Conrad and Dan Salamie, Respondents.
• Court: West Virginia Supreme Court

225 W.Va. 250

692 S.E.2d 293

West Virginia.

STATE of West Virginia ex rel. TD AMERITRADE, INC., Petitioner,v.Honorable Tod J. KAUFMAN, Judge of the Circuit Court of Kanawha County, Respondent,andBruce P. Conrad and Dan Salamie, Respondents.

No. 35125.

Supreme Court of Appeals of

Submitted Jan. 26, 2010.

Decided March 5, 2010.

Syllabus by the Court

1. “In determining whether to entertain and issue the writ of prohibition for cases not involving an absence of jurisdiction but only where it is claimed that the lower tribunal exceeded its legitimate powers, this Court will examine five factors: (1) whether the party seeking the writ has no other adequate means, such as direct appeal, to obtain the desired relief; (2) whether the petitioner will be damaged or prejudiced in a way that is not correctable on appeal; (3) whether the lower tribunal's order is clearly erroneous as a matter of law; (4) whether the lower tribunal's order is an oft repeated error or manifests persistent disregard for either procedural or substantive law; and (5) whether the lower tribunal's order raises new and important problems or issues of law of first impression. These factors are general guidelines that serve as a useful starting point for determining whether a discretionary writ of prohibition should issue. Although all five factors need not be satisfied, it is clear that the third factor, the existence of clear error as a matter of law, should be given substantial weight.” Syl. Pt. 4 State ex rel. Hoover v. Berger, 199 W.Va. 12, 483 S.E.2d 12 (1996).

2. When a trial court is required to rule upon a motion to compel arbitration pursuant to the Federal Arbitration Act, 9 U.S.C. §§ 1-307 (2006), the authority of the trial court is limited to determining the threshold issues of (1) whether a valid arbitration agreement exists between the parties; and (2) whether the claims averred by the plaintiff fall within the substantive scope of that arbitration agreement.

Ramonda C. Lyons, Mychal S. Schulz, Dinsmore & Shohl, Charleston, WV, for the Petitioner, TD Ameritrade, Inc.

William V. DePaulo, Law Office of William V. DePaulo, Charleston, WV, for Respondent, Bruce Conrad.

Richard F. Neely, Neely & Callaghan, Charleston, WV, for Respondent, Dan Salamie.

McHUGH, Justice:

Petitioner TD Ameritrade, Inc. (“Ameritrade”) seeks a writ of prohibition to prevent the Circuit Court of Kanawha County from enforcing a portion of its ruling of May 28, 2009, through which the trial court referred the subject dispute to arbitration and further ordered the arbitrator to adopt its findings of fact and conclusions of law. As support for its request for extraordinary relief, Ameritrade contends that the trial court exceeded its powers by ruling on the merits of the underlying dispute in its referral order. Having carefully reviewed the arguments presented on this issue in conjunction with controlling law, we determine that the trial court committed error by addressing issues clearly subject to arbitration when issuing its referral order. Based on Petitioner's demonstration of the grounds necessary for the relief it seeks, we issue the requested writ of prohibition.

I. Factual and Procedural Background

On November 14, 2008, Mr. Salamie filed a civil action against Bruce Conrad, an independent financial advisor and Ameritrade, a New York discount brokerage firm. Through the complaint, Mr. Salamie avers that he sustained financial loss due to Mr. Conrad's disregard of specific instructions regarding various investment holdings in four Ameritrade accounts.¹ Mr. Salamie alleged that Ameritrade was responsible under a theory of vicarious liability for Mr. Conrad's actions with regard to his account on the theory that Mr. Conrad was an account officer or registered representative of Ameritrade.

Mr. Salamie served his first set of discovery requests upon Petitioner concurrent with effecting service of process on Ameritrade. Seeking relief from its obligation to comply with the discovery requests, Ameritrade filed a motion for protective order and informed the trial court that it intended to file a motion to compel arbitration. Ameritrade subsequently filed such a motion, citing the inclusion of language in account documents executed by Mr. Salamie with regard to each of his Ameritrade investment accounts that requires arbitration of controversies.² As part of its motion to compel arbitration, Ameritrade requested that the trial court dismiss the litigation filed by Mr. Salamie or, alternatively, stay the litigation during the pendency of the arbitration.

Before the trial court addressed either the motion for protective order ³ or the motion to compel arbitration, the parties conferred in an attempt to eliminate the need for protracted litigation over preliminary matters. During this exchange, Mr. Salamie indicated that he would only agree to participate in arbitration if Ameritrade would stipulate that Mr. Conrad was subject to its “control” under federal securities law for purposes of establishing that Ameritrade was vicariously liable for Mr. Conrad's actions. Viewing the applicable arbitration agreements as both valid and controlling, Ameritrade refused to stipulate that it had control of Mr. Conrad or to admit that it was vicariously liable for his actions.

After the parties reached an impasse on the issue of arbitration, Mr. Salamie filed a combined response to Ameritrade's motion to compel and a motion for partial summary judgment. While unopposed to arbitration, Mr. Salamie requested a ruling from the trial court as part of the referral on whether Mr. Conrad was a “controlled person” under federal law ⁴ for purposes of establishing vicarious liability against Ameritrade.

By order entered on May 28, 2009, the trial court granted Ameritrade's motion to compel arbitration but also granted Mr. Salamie's motion for partial summary judgment. The trial court made the following conclusions of law as part of its order referring the underlying matter to arbitration:

4. By asserting the 1999 contracts as grounds for compelling arbitration, TD Ameritrade judicially admits that it has a responsibility to supervise with regard to:

(1) “[o]pening, approving and monitoring [Plaintiff's] account, including obtaining and verifying account information;

(2) “the supervision of Account Officers (registered representatives) in accordance with TD Waterhouse policies and applicable federal, state and industry regulations;”

(3) “[g]eneral supervision of [the] account, including compliance with New York Stock Exchange Rules 342 and 405 and Rule 3010 of the National Association of Securities Dealers.”

(emphasis in original) 5. The contract upon which Defendant TD Ameritrade relies squarely places Defendant Bruce P. Conrad within the purview of 15 U.S.C. § 78t as a “controlled person.”

In the judgment portion of its referral ruling, the trial court expressly ordered the arbitrator to “follow the directives of this Court.” Those directives included its decree “that Bruce P. Conrad is a ‘controlled person’ within the purview of 15 U.S.C. § 78t, Rule 3010 of the NASD, and/or related regulatory statutes and rules designed to protect customers of brokerage houses” and that “by demanding that this Court compel arbitration, [Ameritrade] judicially admits the viability of all clauses contained in the original contracts.” In response to the trial court's issuance of a combined ruling on the motion to compel and on the motion for summary judgment, Ameritrade filed a rule to show cause to prohibit the enforcement of the lower court's rulings that address the merits of matters that were referred to arbitration for resolution.

II. Standard of Review

In syllabus point four of State ex rel. Hoover v. Berger, 199 W.Va. 12, 483 S.E.2d 12 (1996), we announced the standard by which we determine whether a trial court has exceeded its jurisdiction:

In determining whether to entertain and issue the writ of prohibition for cases not involving an absence of jurisdiction but only where it is claimed that the lower tribunal exceeded its legitimate powers, this Court will examine five factors: (1) whether the party seeking the writ has no other adequate means, such as direct appeal, to obtain the desired relief; (2) whether the petitioner will be damaged or prejudiced in a way that is not correctable on appeal; (3) whether the lower tribunal's order is clearly erroneous as a matter of law; (4) whether the lower tribunal's order is an oft repeated error or manifests persistent disregard for either procedural or substantive law; and (5) whether the lower tribunal's order raises new and important problems or issues of law of first impression. These factors are general guidelines that serve as a useful starting point for determining whether a discretionary writ of prohibition should issue. Although all five factors need not be satisfied, it is clear that the third factor, the existence of clear error as a matter of law, should be given substantial weight.

With these factors in mind, we proceed to determine whether Ameritrade has established the necessary grounds for a writ of prohibition.

III. Discussion

The argument advanced by Ameritrade in support of its entitlement to a writ of prohibition is straightforward. In syllogistic fashion, Ameritrade contends that a court is not permitted to address the merits of the underlying controversy when it decides whether a matter is subject to arbitration. By ruling that Mr. Conrad was a “controlled person” as that term is used in the Securities Exchange Act,⁵ the trial court ruled upon the merits of the underlying case. In making rulings that exceeded the scope of the limited issue before it-whether arbitration was required under the account agreements executed by Mr. Salamie-the trial court exceeded the scope of its legitimate powers.

The law is well-settled “that, in deciding whether the parties have agreed to submit a particular grievance to arbitration, a court is not to rule on the...