Washington Square Securitites Inc. v. Aune, 3:02 CV 308-V.

• Decision Date: 07 March 2003
• Docket Number: No. 3:02 CV 308-V.,No. 3:02 CV 309-V.,3:02 CV 308-V.,3:02 CV 309-V.
• Citation: 253 F.Supp.2d 839
• Court: U.S. District Court — Western District of North Carolina
• Parties: WASHINGTON SQUARE SECURITIES, INC., Plaintiff, v. James K. AUNE, Howard W. Norman and his wife Virginia M. Norman, Individually and as Trustees of the Howard and Virginia Norman Charitable Trust, and Patricia J. Walker, Defendants. Washington Square Securities, Inc., Plaintiff, v. Fred W. Miltz, Jr., Defendant.

253 F.Supp.2d 839

WASHINGTON SQUARE SECURITIES, INC., Plaintiff, v. James K. AUNE, Howard W. Norman and his wife Virginia M. Norman, Individually and as Trustees of the Howard and Virginia Norman Charitable Trust, and Patricia J. Walker, Defendants.

Washington Square Securities, Inc., Plaintiff, v. Fred W. Miltz, Jr., Defendant.

No. 3:02 CV 308-V.

No. 3:02 CV 309-V.

United States District Court, W.D. North Carolina, Charlotte Division.

March 7, 2003.

Stephen D. Allred, Amy R. Langdon, Helms, Mulliss & Wicker, PLLC, Charlotte, Burton w Wiand, Fowler, White Boggs & Banker, Elaine M Rice, Fowler, White, Boggs & Banker, Tampa, FL, for Washington Square, Washington Square Securities, Inc., plaintiff.

Stephen Krosschell, Goodman & Nekvasil, P.A., Joel Goodman, Goodman & Nekvasil, Clearwater, FL, for James K. Aune, Howard W. Norman, Virginia M. Norman, Patricia J. Walker, defendants.

ORDER

RICHARD L. VOORHEES, District Judge.

THIS MATTER is before the Court on Defendant's Motion for Reconsideration of the Court's October 8, 2002 Order granting Plaintiffs Motion for Expedited Discovery. (Document # 24) Also pending before the Court is Plaintiffs Motion for Preliminary Injunction, filed on July 26, 2002 (Documents #1, #4), and Defendants' Motion to Compel Arbitration, filed October 28 2002. (Documents #30, #31) Upon receipt of the parties' Consent Motion For Continuance Of Preliminary Injunction Hearing, the undersigned postponed the hearing originally scheduled for October 31, 2002. (Documents # 32, # 33)

I. Factual and Procedural Background

This civil action was precipitated by Defendants' initiation of arbitration proceedings against Plaintiff Washington Square Securities, Inc. ("Washington Square") pursuant to Plaintiffs membership agreement with the National Association of Securities Dealers ("NASD"). (Arbitration Case Nos. 01-05680 & 02-0150) Pursuant to Section 10101 and 10301(a) of the NASD Code of Arbitration Procedure, members of the NASD, such as Plaintiff, agree to arbitrate those disputes, claims or controversies that arise out of or in connection with its business between members or associated persons and "customers." Id. See NASD Code of Arbitration Procedure, Sections 10101 and 10301(a).

Defendants invested in ETS Payphones, Inc. ("ETS") and Worldwide Growth Partners, Inc. Series B / Evergreen Security Ltd. ("Evergreen") at various times from late 1997 through 1998. It's undisputed that Richard D. White, a "representative" of Plaintiff Washington Square, was the investment broker for each of these transactions. Defendants allege that as a result of these investments, they collectively sustained losses in excess of $1,000,000. According to Plaintiff Washington Square, White had an independent contractor agreement with Washington Square, which terminated on December 4, 1998. The agreement "allowed [White] to sell only certain, approved products," not including Evergreen or ETS.

Plaintiff Washington Square brings the instant action seeking a Declaratory Judgment that Defendants are not "customers" of Plaintiff.¹ In addition to claiming that Defendants are not its "customers," Plaintiff contends that the transactions at issue did not arise out of Plaintiffs business or association with any associated persons, such as Mr. White. Thus, Plaintiff contends that no valid arbitration agreement between Plaintiff and Defendants exists that would require Plaintiff to submit to arbitration. The arbitration proceedings have been voluntarily stayed pending this Court's resolution of Plaintiffs Motion for Preliminary Injunction.

II. Discussion of the Law

The issue raised by the parties is whether Plaintiff Washington Square, by virtue of its membership in the NASD, has executed a valid agreement to arbitrate that is enforceable by Defendants. Sydnor v. Conseco Financial Servicing, Corp., 252 F.3d 302, 305 (4th Cir.2001)("initial inquiry is whether the parties agreed to arbitrate their dispute"). However, for purposes of resolving Defendant's motion for reconsideration, the Court must also decide whether the presumption in favor of arbitration applies when considering this threshold question, and whether discovery is necessary in making this determination. For the reasons stated herein, the Court finds that the presumption does not apply and discovery is not, in fact, necessary. Upon reconsideration, the Court vacates its earlier Order granting Plaintiffs motion for expedited discovery.

Contrary to Defendants' contention that the presumption in favor of arbitrability is relevant to the Court's present inquiry, the presumption that a dispute is subject to arbitration cannot apply if there is no agreement to arbitrate.² The rationale is explained as follows: "[I]f the general presumption in favor of arbitration were applied to the question of arbitrability, it `might too often force unwilling parties to arbitrate a matter they reasonably would have thought a judge, not an arbitrator, would decide.'" John Hancock, 254 F.3d at 55 (citing First Options of Chicago v. Kaplan, 514 U.S. 938, 945, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995)); AT&T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 648^9, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986)("arbitration is a matter of contract and a party cannot be required to submit to arbitration [in] any dispute which he has not agreed to submit.") In other words, despite federal policy favoring arbitration, "Congress did not intend for the FAA to force parties who had not agreed to arbitrate into a non-judicial forum, and therefore, federal courts must first decide whether the parties entered into an agreement to arbitrate their disputes." Sydnor, 252 F.3d at 302; Hornor, Townsend & Kent, Inc. v. Hamilton, 218 F.Supp.2d 1369 (N.D.Ga.2002)(because parties never actually signed a formal agreement to arbitrate, presumption did not apply). However, Defendants need not rely on the presumption and policies favoring arbitration.

In determining whether the parties agreed to arbitrate, the Court turns to North Carolina contract law.³ Sydnor, 252 F.3d at 305. Under North Carolina law, Defendants can be considered thirdparty beneficiaries of Plaintiffs NASD membership agreement. LSB Financial Services, Inc. v. Harrison, 144 N.C.App. 542, 548 S.E.2d 574 (2001).⁴ To establish a claim based on the third-party beneficiary contract doctrine, Defendants must demonstrate "1) the existence of a contract between two other persons; 2) that the contract was valid and enforceable; and 3) that the contract was entered into for plaintiffs direct, and not incidental, benefit." Id. at 548, 548 S.E.2d 574 n. 1 (citing United Leasing Corp. v. Miller, 45 N.C.App. 400, 405-6, 263 S.E.2d 313, 317 (1980)). At a minimum, by virtue of its NASD membership, Plaintiff agreed to arbitrate disputes with its "customers" so a contract contemplating arbitration certainly exists. Likewise, Plaintiff does not question the validity of the NASD arbitration provision—only whether it extends to "customers" of its "associated persons." Thus, the Court need only determine whether the NASD arbitration provisions are required, and thereby entered into for the direct benefit of investors such as the Defendants. A person is a direct beneficiary of a contract if the contracting parties intended to confer a legally enforceable benefit on that person. Wood v. Guilford County, 143 N.C.App. 507, 513, 546 S.E.2d 641 (2001), rev'd in part on other grounds, 355 N.C. 161, 558 S.E.2d 490 (2002). In determining the intent of the contracting parties as to whether plaintiff was a third-party beneficiary, the court should consider the circumstances surrounding the transaction as well as the actual language of the contract. Holshouser v. Shaner Hotel Group Properties One Ltd. Partnership, 134 N.C.App. 391, 398, 518 S.E.2d 17 (1999), affd, 351 N.C. 330, 524 S.E.2d 568 (2000).

Both the circumstances surrounding the transaction and the actual language of the NASD provisions favor the interpretation of Section 10301(a) suggested by Defendants. While there is no evidence of a "traditional" customer relationship between Plaintiff and Defendants, there certainly is evidence that a "traditional" customer relationship existed between White and the Defendants. Defendants' failure to open accounts with Plaintiff is irrelevant. Washington Square Securities v. Sowers, 218 F.Supp.2d 1108 (D.Minn.2002)(citing Vestax, 117 F.Supp.2d at 657.) In addition, Plaintiffs obligation here stems from its decision to join the NASD and abide by the NASD Code of Arbitration Procedure. Notably, Plaintiff doesn't dispute that the goal of the NASD is to "promote and enforce just and equitable principles of trade and business, to maintain high standards of commercial honor and integrity among members of the NASD, to prevent fraudulent and manipulative acts and practices, [and] ... to protect investors and the public interest." (Art. XI, NASD By-Laws / Defendants' Exhibit 9) Thus, accepting Plaintiffs argument and proposed narrow definition of the term "customer" would be wholly inconsistent with these goals.

The NASD's intent is also evidenced by White's U-4 Application for Securities Industry Registration, which imposes an arbitration obligation upon both White and Plaintiff Washington Square.⁵ (White Form U-4, 1115, 9 / Defendants' Exhibit 4:4) The transactions at issue herein occurred subsequent to White's registration with the NASD as an agent and general securities representative of Plaintiff Washington Square in North Carolina as well as other states. As explained in LSB Financial Services, a firm that reaps the benefits of a broker's registration with the NASD via Form U^ should not be able to avoid its burdens. LSB Financial Services, Inc., 144 N.C.App. at 548, 548 S.E.2d 574. Here, Plaintiff asserts that it did not reap any benefit by way of commissions as a result of Defendants' investments. Even so, the regulatory scheme from which Form U-4 arose, and the...