The O.N. Equity Sales Co. v. Gibson

• Decision Date: 01 October 2007
• Docket Number: No. CIV.A.3:07-0362.,CIV.A.3:07-0362.
• Citation: 514 F.Supp.2d 857
• Court: U.S. District Court — Southern District of West Virginia
• Parties: The O.N. EQUITY SALES COMPANY, Plaintiff, v. Lonnie L. GIBSON, Defendant.

514 F.Supp.2d 857

The O.N. EQUITY SALES COMPANY, Plaintiff, v. Lonnie L. GIBSON, Defendant.

No. CIV.A.3:07-0362.

United States District Court, S.D. West Virginia, Huntington Division.

October 1, 2007.

Marion H. Little, Jr., Esq. and Michael R. Reed, Esq., Zeiger, Tigges & Little, LLP, Columbus, OH, for Petitioner O.N. Equity Sales Company.

Joel A. Goodman, Esq., Goodman & Nekvasil, P.A., Clearwater, FL, for Defendant Lonnie Gibson.

MEMORANDUM OPINION AND ORDER

Pending before this Court are numerous motions by the parties, revolving around the question of arbitrability, including, 1) Plaintiff's Motion for Preliminary Injunction (Doc. 16), 2) Plaintiff's Motion to Consolidate Preliminary Injunction Hearing with Trial on the Merits (Doe. 18), 3) Plaintiffs Motion for an Order Authorizing the Parties to Engage in Immediate Discovery on the Issue of Arbitrability (Doc. 20), 4) Defendant's Motion to Compel Arbitration (Doc. 24), and finally 5) Defendant's Motion for a Protective Order (Doc. 29). For the reasons explained more fully below, the Court GRANTS Defendant's motion to compel arbitration, DENIES Plaintiffs motion for preliminary injunction, and DENIES the parties' other motions as moot.

BACKGROUND

Plaintiff, O.N. Equity Sales Co. (ONESCO), is a full service securities broker dealer, registered in all 50 states and a member of the National Association of Securities Dealers (NASD). From March 23, 2004 until January 2, 2005, non-party Gary Lancaster, was employed as an independent contractor and registered representative of ONESCO. (Aff. of Jeffrey Bley, Attachment 2 to Doc. 16). During this time, Lancaster also served as Chairman, President, and CEO of Lancorp Financial Fund Business Trust (Lancorp). (See First Amended Statement of Claim, Pracht et al. v. O.N. Equity Sales Co, Case No. 7-948 before the Arbitration Tribunals of the NASD). Lancaster's actions and the failure of Lancorp served as a spark, igniting a firestorm of litigation which includes the motions pending before this Court.

Before he became associated with ONESCO, Lancaster solicited investors to Lancorp by circulating a private placement memorandum. (Pl. Mem. in Support of Motion for Prelim. Inj., Doc. 17). Interested individuals were required to review the Private Placement Memorandum and execute a subscription agreement. (See Private Placement Mem.) Pursuant to the Subscription Agreement, the amounts paid by investors were initially deposited in an escrow account and held until the closing date. Id. Under the terms of the agreement, investors could not "cancel, terminate or revoke." Id. Lancorp, however, could decide in its "sole discretion to terminate the offering ... at any time before the maximum number of 50,000 units" had been sold. Id.

The parties disagree about whether Lancaster fully disclosed his involvement with Lancorp to ONESCO. (Compare First Decl. of Gary Lancaster with Aff. of Jeffery Bley). In his own declaration, Lancaster reported that he informed ONESCO that he had an outside business, Lancorp, on February 14, 2004. (Decl. of Gary Lancaster). He also described a one page disclosure form, sent to him by ONESCO, on which he informed the defendant that he would be starting Lancorp on May 14, 2004. Id. He further stated that ONESCO never asked him about Lancorp, and that he assumed he had permission to sell and offer Lancorp to customers. Id. Jeffrey Bley, Vice President of ONESCO, asserted that Lancaster never provided written notice of his involvement with Lancorp, and never asked ONESCO's approval for his participation with Lancorp. (Aff. of Jeffery Bley). A document submitted by ONESCO, however, reveals that ONESCO was at least on notice that Lancaster was associated with Lancorp. (See Other Business Disclosure Reporting Page, Attachment 3 to Doc. 16)

After a number of initial investments had been made, Lancorp was forced to make a material alteration in its offering. Due to insurance industry changes, it could not obtain insurance and had to guarantee investments by way of a new bank or broker/dealer obligation. Lancaster circulated a letter to previous investors in April of 2004 asking them to either, 1) confirm their subscriptions and acknowledge the change, or 2) request withdrawal. (See Letter from Gary Lancaster, Attachment 3 to Doc. 24). Significantly, this material alteration occurred after Lancaster became associated with ONESCO.

Eventually, Lancorp attracted a sufficient number of investors. The offering became effective on May 14, 2004. (See Decl. of Gary Lancaster). Unfortunately, one of Lancorp's first major investments was in MegaFund, a Texas based Ponzi scheme. Because of this bad investment Lancorp failed and eventually went into receivership.

Based upon these facts numerous Lancorp investors filed arbitration actions with the NASD, asserting state and federal claims against ONESCO. ONESCO has responded by filing at least twenty separate actions in federal courts across the country seeking to avoid arbitrating claims with investors. The instant case involves one such dispute between a Lancorp investor and ONSESCO

Lonnie Gibson, a resident of Huntington, West Virginia, first became involved with Lancorp on June 2, 2003, when he executed a subscription agreement for 6 shares, worth $30,000 in response to the private placement memorandum. (See Subscription Agreement, Attachment 5 to Doc. 16). On April 12, 2004, despite the material change in the offering, Gibson confirmed this initial investment. (See Letter from Gary Lancaster, Attachment 3 to Doc. 24). A few months later, in September 2004, Gibson made an additional investment of $30,000 in Lancorp. (See Attachment 3 to Doc. 24).

ONESCO contends that all of the relevant actions in the dispute with Gibson occurred before Gary Lancaster became associated with ONESCO on March 23, 2004. Gibson on the other hand claims that the claims are properly submitted to arbitration because 1) the initial offering did not become final until May 14, 2004, 2) Gibson renewed the initial investment in response to a material change in the offering in April of 2004, 3) Gibson made a second investment in September of 2004, and 4) proper supervision of Lancaster on the part of ONESCO would have prevented Lancorp's failure.

ANALYSIS

At the outset it should be noted that at least three courts have already resolved related disputes between Lancorp investors and ONESCO.¹ See The O.N. Equity Sales Co. v. Steinke, 2007 WL 2421761 (C.D.Cal. August 27, 2007); The O.N. Equity Sales Co. v. Pals, 2007 WL 2506033 (N.D.Iowa Sept.6, 2007); The O.N. Equity Sales Co. v. Venrick, 2007 WL 2705859 (W.D.Wash. Sept. 17, 2007). In resolving these actions, each court has come to the same conclusion: The disputes between investors of Lancorp and ONESCO are properly submitted to arbitration. This Court sits in a different jurisdiction, which has not yet ruled on the matter, and though the resolution of the instant case is guided by different precedent, the reasoning as well as the conclusion contained in this opinion are consistent with that of the other courts that have resolved the issue. Despite the numerous motions and volume of documents submitted by the parties, the real dispute can be boiled down to a rather straightforward question — is each investor's dispute covered by the NASD Code of Arbitration Procedure? It seems that in the Southern District of West Virginia, as in the Central District of California, the Northern District of Iowa and the Western District of Washington, it is.

Before reaching the overarching question of arbitrability, however, it is necessary to first determine whether this court is the proper forum to address that issue, and also decide whether discovery on the issue is necessary.

I. This Court is the Proper Forum to Determine the Question of Arbitrability

The plaintiff in this case argues that the question of whether an agreement to arbitrate exists is for the court to decide. The defendant argues that because the issue of Lancaster's relationship with ONESCO deals with timing, an arbitrator rather than the court should resolve this matter.

"[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." AT & T Techs., Inc. v. Commc'n Workers of Am., 475 U.S. 643, 648, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986) (citations omitted). Indeed, courts have held that a party suffers a harm when forced to arbitrate without a contractual obligation to do so. See e.g. Merrill Lynch Inv. Managers v. Optibase, Ltd., 337 F.3d 125, 129 (2nd Cir.2003); MONY Sec. Corp. v. Vasquez, 238 F.Supp.2d 1304, 1308 (M.D.Fla.2002).

The question of whether this contractual agreement to arbitrate exists in a given situation (the question of arbitrability) is generally one for the courts to decide. Virginia Carolina Tools, Inc. v. Intl Tool Supply, Inc., 984 F.2d 113, 117 (4th Cir.1993) (citing AT & T Techs. Inc. at 649, 106 S.Ct. 1415). Parties can agree to arbitrate this question of arbitrability, but such an agreement is at odds with the normal practice, and therefore there exists no presumption to arbitrate this threshold question. Id. Consequently, in order for an arbitrator to have jurisdiction over the initial question of arbitrability, the parties must make a clear and unmistakable indication of this intent. Id.

In Howsam v. Dean Witter Reynolds Inc., the U.S. Supreme Court made clear that not all "potentially dispositive gateway question[s]" would be questions of arbitrability for a court to decide. 537 U.S. 79, 83, 123 S.Ct. 588, 154 L.Ed.2d 491 (2002). The Court noted that disputes about whether parties were bound by an arbitration clause, and disagreements about the applicability of an arbitration clause in a concededly binding contract were questions for the court, but that "procedural questions which grow out of the dispute and bear on its final disposition are presumptively not for...