Trefny v. Bear Stearns Securities Corp.
| Citation | 243 BR 300 |
| Decision Date | 26 May 1999 |
| Docket Number | No. Civ.A. H-98-3836.,Civ.A. H-98-3836. |
| Parties | Michael T. TREFNY, Co-Trustee of MBM Investment Corporation, Plaintiff/Appellee, v. BEAR STEARNS SECURITIES CORP. and Bear Stearns & Co., Inc., Defendants/Appellants. |
| Court | United States District Courts. 5th Circuit. United States District Courts. 5th Circuit. Southern District of Texas |
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Bryan W. Scott, Attorney at Law, Houston, TX, for MBM Investment Corporation, debtor.
Gerard G. Pecht, Fulbright and Jaworski, Houston, TX, for Bear Stearns & Co, Bear Stearns Securities Corp., appellants.
Bryan W. Scott, Attorney at Law, Houston, TX, for Michael T. Trefny, co-trustee of MBM Investment Corp., appellee.
This case raises issues of the relationship between the Federal Arbitration Act (FAA) and the Securities Investor Protection Act (SIPA). Michael Trefny is a cotrustee appointed under the SIPA to preside over the liquidation of a brokerage firm, MBM Investment Corporation. Trefny sued Bear Stearns Securities Corp. and Bear Stearns & Co., Inc. (collectively "Bear Stearns") in an adversary proceeding in the bankruptcy court. Bear Stearns moved in the bankruptcy court to dismiss or stay the adversary proceeding in favor of written arbitration agreements. The arbitration agreements are contained in two types of contracts: a contract between Bear Stearns and MBM, under which Bear Stearns performed clearing services for MBM; and contracts between MBM customers and Bear Stearns, signed when the MBM customers opened accounts at Bear Stearns.
On October 9, 1998, the bankruptcy court denied Bear Stearns' motion to dismiss or stay pending arbitration. Bear Stearns appealed from that denial. Bear Stearns also appealed from the bankruptcy court's refusal to stay the adversary proceeding pending the resolution of this appeal.
On March 29, 1999, Bear Stearns filed an expedited motion to stay the bankruptcy proceeding pending appeal, triggered by the bankruptcy judge's order compelling Bear Stearns to produce documents in discovery. (Docket Entry No. 10). This court held an oral hearing on the expedited motion to stay pending appeal and on the merits of the appeal on April 5, 1999. Based on the motion and response, the arguments of counsel, the record, and the applicable law, this court GRANTED Bear Stearns' motion to stay pending the resolution of this appeal. In this opinion, this court sets out the reasons for its finding that Bear Stearns met the requirements for a stay.
On April 21, 1999, Trefny filed an expedited motion to abate this appeal and transfer it to another district judge in this division, the judge who had initially referred the SIPA trustee's claims against MBM to the bankruptcy court. Trefny filed this motion after that district judge denied Bear Stearns' motion to withdraw the reference. This court DENIES Trefny's motion to abate or transfer.
Finally, for the reasons set out in detail below, this court decides the merits of the appeal and GRANTS Bear Stearns' motion to stay in order to permit the resolution of the dispute in arbitration.
MBM was a brokerage firm located in Houston, Texas. Juan Carlos Martinez owned thirty-five percent of the stock and served as president. On November 9, 1992, MBM entered into an Agreement for Securities Clearance Services (the "Clearing Agreement") with Bear Stearns. Under the Clearing Agreement, Bear Stearns agreed to act as the clearing broker for MBM's customers. As clearing broker, Bear Stearns agreed to execute trades ordered by MBM on behalf of MBM's customers, clear the trades on national exchanges, and send trade confirmations and account statements to MBM and its customers.
The Clearing Agreement between MBM and Bear Stearns contained the following broad arbitration clause:
26(b). All disputes and controversies relating to or in any way arising out of this Agreement shall be settled by arbitration before and under the rules and auspices of the New York Stock Exchange, Inc., unless the transaction which gives rise to such dispute or controversy is effected in another United States market which provides arbitration facilities, in which case it shall be settled by arbitration under such facilities.
(No. H-98-3432, Docket Entry No. 7, Motion to Dismiss, ¶ 26).
In order to have Bear Stearns execute MBM's orders for MBM's customers, those customers opened accounts with Bear Stearns. Each of the MBM customers who opened a Bear Stearns account executed a written customer agreement containing, in bold type, the following broad arbitration clause:
(No. H-98-3234, Docket Entry No. 7, Motion to Dismiss, ¶ 21). The Customer Agreements stated that the customer agreed that the "arbitration provision . . . shall be applicable to all matters between or among any of you, your broker MBM and its employees, and Bear Stearns and its employees." Id.
The relationship between MBM, as an introducing broker, and Bear Stearns, as the clearing firm, is described in the Clearing Agreement and in the customer agreements. The relationship was fully disclosed: MBM, the introducing broker, disclosed its customers' names and addresses to Bear Stearns, the clearing firm, and those customers opened accounts with Bear Stearns to enable it, among other things, to execute trades and to prepare and furnish trade confirmations and monthly statements of account to the customer.
The customer agreements specifically stated that as clearing broker for the customer's broker, MBM, Bear Stearns would accept orders from MBM to purchase or sell securities or other property in the customers' accounts "without any inquiry or investigation." (No. H-98-3234, Docket Entry No. 7, Motion to Dismiss, Ex. 2, ¶ 8). The Clearing Agreement between Bear Stearns and MBM stated that (No. 98-3234, Docket Entry No. 7, Motion to Dismiss, Ex. 1, ¶ 21(a)).
In 1996, MBM became insolvent. A number of government agencies investigated numerous customer complaints, including complaints that MBM employees or officers had taken money from customers. One of MBM's officers is serving a jail sentence for his criminal involvement in the MBM customer accounts. .
On June 3, 1996, the Securities Investor Protection Corporation ("SIPC") sued MBM in the federal district court in the Southern District of Texas. (No. H-96-1765). Judge Gilmore appointed a trustee to oversee the liquidation of MBM and referred the liquidation to the bankruptcy court.
The SIPC advanced funds to the trustee to pay customer claims under the terms of the SIPA. Using these funds, the trustee paid $9.8 million to MBM customers whose claims the trustee had determined to be valid. (No. H-98-3234, Docket Entry No. 46, Second Amended Complaint, ¶ 6). These customers assigned their claims to the SIPA trustee up to the amount of the SIPC payments they received.
On March 12, 1998, the bankruptcy judge appointed Trefny as co-trustee. On April 29, 1998, Trefny filed an adversary proceeding against Bear Stearns in the bankruptcy court. In the adversary proceeding, Trefny alleged that Martinez, the president of MBM, had made unauthorized trades and transfers of money from his customers' accounts into financial accounts that Martinez owned or controlled. (No. H-98-3234, Docket Entry No. 46, Second Amended Complaint, ¶ 9). Trefny alleged that the improper transactions primarily involved $10 million worth of "Mannai Bonds," three-year notes issued by the Mannai Retail Group and by a Swiss brokerage house to finance shopping centers in Moscow. Trefny alleged that these bonds were worth far less than their face value and were unmarketable. Trefny alleged that MBM made unauthorized purchases of Mannai Bonds for its customers and that Bear Stearns executed the transactions, including selling securities in the customers' accounts in order to pay for the Mannai Bonds.
In the adversary proceeding, Trefny alleged that Bear Stearns is liable for the fraud committed by MBM and its employees and officers, as well as for Bear Stearns' own alleged misconduct. Trefny alleged different bases for Bear Stearns' liability. Trefny alleged "on information and belief" that Bear Stearns had paid for the Mannai Bonds purchased for MBM's account and therefore had an interest in placing the bonds "as quickly as possible, and pressure was put on employees of MBM to place them legally or not." (No. H-98-3234, Docket Entry No. 46, Second Amended Complaint, ¶ 10). Trefny alleged that MBM "and/or" Bear Stearns attempted to conceal the unauthorized trades and transfers by issuing false customer account statements or by sending the statements to wrong addresses. "Bear Stearns must have known that some of the customer statements were going to MBM and not to the customers." (Id., ¶ 12). Trefny asserted...
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In re Express One Intern., Inc., Bankruptcy No. 95-41189. Adversary No. 97-4057.
...... See also Brannon v. Gulf States Energy Corp., 562 S.W.2d 219 (1977) and the discussion in McCormick ......