Wheat, First Securities, Inc. v. Green

• Decision Date: 21 June 1993
• Docket Number: No. 92-8557,92-8557
• Citation: 993 F.2d 814
• Parties: WHEAT, FIRST SECURITIES, INC., Plaintiff-Appellee, v. Ronald G. GREEN, Paul A. Duke, Jean F. Duke, Paul A. Duke, Jr., C. Hunter Tison, Laura D. Tison, Ruth Strickland, Herb Strickland, Paul A. Duke, Trustee for Terri L. Strickland, Defendants- Appellants.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 814

993 F.2d 814

62 USLW 2032

WHEAT, FIRST SECURITIES, INC., Plaintiff-Appellee, v. Ronald G. GREEN, Paul A. Duke, Jean F. Duke, Paul A. Duke Jr., C. Hunter Tison, Laura D. Tison, Ruth Strickland, Herb Strickland, Paul A Duke, Trustee for Terri L Strickland Defendants- Appellants.

No. 92-8557.

United States Court of Appeals, Eleventh Circuit.

June 21, 1993.

Sumner & Hewes, Stephen J. Anderson, William E. Sumner, David A. Webster, Atlanta, GA, for defendants-appellants.

Rogers & Hardin, Peter Wayne Schneider, Laura Hightower Robison, Atlanta, GA, for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of Georgia.

Before BLACK and CARNES, Circuit Judges, and RONEY, Senior Circuit Judge.

CARNES, Circuit Judge:

Before us in this appeal is the question of whether a district court or an arbitrator should decide the threshold issue of whether the parties agreed to arbitrate any disputes that arise between them. In the present case, the court properly concluded that this decision was within the province of a court, and not an arbitrator, and also correctly held that the securities fraud claims presented are not subject to arbitration.

Appellants Ronald G. Green, Paul A. Duke, Jean F. Duke, Paul A. Duke, Jr., C. Hunter Tison, Laura D. Tison, Ruth Strickland, Herb Strickland, and Paul A. Duke, the Trustee for Terri L. Strickland, ("Appellants") now appeal the district court's decision as reflected in its order granting Wheat, First Securities, Inc.'s motion for summary judgment on its declaratory judgment claim and denying Appellants' motion to dismiss or, alternatively, for summary judgment. Finding no error in the district court's disposition of the parties' cross-motions, we affirm.

I. FACTUAL BACKGROUND

There is virtually no dispute over the facts of this case. Wheat, First Securities, Inc. ("Wheat First") is a securities broker-dealer with membership in the National Association of Securities Dealers ("NASD"). Appellants are investors who held securities trading accounts with Marshall & Co. Securities, Inc. ("Marshall Securities"), another broker-dealer, from 1984 through 1989.

The present declaratory judgment action was spawned by January 1990 arbitration proceedings filed before the NASD by Appellants against Wheat First, Marshall Securities, Kentwood Brett Thackston (formerly an agent of Marshall Securities and subsequently an agent of Wheat First), and others. In those proceedings, Appellants alleged that Thackston, as agent for Marshall Securities, made certain material misrepresentations to them in connection with their purchases of shares of 21st Century Robotics, Inc., and its successor corporations TFC Teleservices Inc. and Central Corporation, Inc. (collectively, "Central stock"). Wheat First was not involved in any of the Appellants' purchases of Central stock.

Well after the allegedly fraudulent Central stock transactions occurred, Wheat First happened upon the scene by virtue of an Asset Purchase Agreement it signed with Marshall Securities and its holding company, Marshall & Company, Inc. ("Marshall"). Under this agreement, Wheat First purchased certain of Marshall Securities' assets and assumed certain of its contracts. However, Wheat First expressly did not "assume any liability, known or unknown, fixed or contingent, of [Marshall or Marshall Securities] except for [Marshall Securities'] liabilities and obligations under the Contracts" that were specified in an exhibit to the agreement. Appellants' customer agreements with Marshall Securities were not included among the identified "Contracts" specified in that exhibit to the Asset Purchase Agreement. ¹

Despite this seemingly unequivocal disclaimer in the Asset Purchase Agreement, Appellants maintain that Wheat First is liable for the acts of Marshall Securities as its successor in interest. More specifically, Appellants assert that, pursuant to the Asset Purchase Agreement, Marshall Securities transferred their trading accounts and certain customer agreements to Wheat First. Wheat First acknowledges that it now maintains accounts for some of the Appellants, but denies that the Asset Purchase Agreement covered either trading accounts or customer agreements. Wheat First argues that Marshall Securities, as a brokerage firm, did not own the Appellants' accounts and could not "sell" them. Rather, Wheat First asserts that Appellants, as customers, made a choice to transfer the securities in their accounts with Marshall Securities to accounts with Wheat First.

In response to Appellants' arbitration claims and their refusal to dismiss Wheat First from the arbitration proceedings, Wheat First filed the present action for declaratory judgment, seeking a declaration that it had no obligation to arbitrate the claims raised in the arbitration proceedings. After discovery, the parties filed their cross-motions for summary judgment. The district court disposed of the parties' motions in its Order of March 17, 1992. The court held that "the issue of whether parties have entered into a contract containing an arbitration clause is properly resolved by a court." The district court then declared that "Wheat First is not obligated to arbitrate any claims arising out of trading Defendants conducted through their Marshall Securities accounts." Finally, the court permitted the arbitration proceedings to proceed against Wheat First but only as to the allegations of one of the Appellants that arose out of trading in what was actually a Wheat First account. Wheat First does not contest that one aspect of the decision that went against it, so there is no cross-appeal.

II. DISCUSSION

Appellants argue that the district court "usurped" the role of the arbitrators in deciding the threshold question of whether Appellants' claims are arbitrable. Appellants further contend that Wheat First must submit to arbitration for two reasons. The first is the NASD Code theory under which Appellants contend that Wheat First, as a member of the NASD, is obligated to arbitrate "any dispute, claim, or controversy" arising "in connection with the business" of Wheat First with any of its public "customers." NASD Code of Arbitration Procedure, §§ 1, 12(a) (the "Code"). Second, Appellants argue that Wheat First acceded through the Asset Purchase Agreement to the Appellants' customer agreements with Marshall Securities which contained arbitration clauses, and that Wheat First is, therefore, bound as Marshall Securities' successor in interest. ² We will examine each of these contentions in turn.

A. WHO DECIDES THE ARBITRABILITY ISSUE

Contract interpretation is generally a question of law that is subject to plenary review. Zaklama v. Mount Sinai Medical Ctr., 906 F.2d 650, 652 (11th Cir.1990). "Determinations of arbitrability, like the interpretation of any contractual provision, are subject to de novo review." Republic of Nicaragua v. Standard Fruit Co., 937 F.2d 469, 474 (9th Cir.1991), cert. denied, --- U.S. ----, 112 S.Ct. 1294, 117 L.Ed.2d 516 (1992).

Appellants correctly note that in enacting § 2 of the Federal Arbitration Act ("FAA"), "Congress declared a national policy favoring arbitration." Southland Corp. v. Keating, 465 U.S. 1, 10, 104 S.Ct. 852, 858, 79 L.Ed.2d 1 (1984). However, the policy fostered by the FAA "does not require parties to arbitrate when they have not agreed to do so." Volt Info. Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 478, 109 S.Ct. 1248, 1255, 103 L.Ed.2d 488 (1989). Echoing this view, this Court has recently stated that "[s]imply put, parties cannot be forced to submit to arbitration if they have not agreed to do so." Chastain v. Robinson-Humphrey Co., 957 F.2d 851, 854 (11th Cir.1992); accord I.S. Joseph Co. v. Michigan Sugar Co., 803 F.2d 396, 399 (8th Cir.1986) (An arbitrator "has no independent source of jurisdiction apart from the consent of the parties."); George Day Constr. Co. v. United Brotherhood of Carpenters, Local 354, 722 F.2d 1471, 1474 (9th Cir.1984) ("[A]n arbitrator's jurisdiction is rooted in the agreement of the parties."); Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., 636 F.2d 51, 54 (3d Cir.1980) ("Before a party to a lawsuit can be ordered to arbitrate and thus be deprived of a day in court, there should be an express, unequivocal agreement to that effect.").

It is, therefore, rudimentary that "the first task of a court asked to compel arbitration of a dispute is to determine whether the parties agreed to arbitrate that dispute." Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626, 105 S.Ct. 3346, 3353, 87 L.Ed.2d 444 (1985). Section 4 of the FAA supports this conclusion. This section, which provides a federal remedy to a party seeking to compel compliance with an arbitration agreement, specifies that:

The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement.... If the making of the arbitration agreement or the failure, neglect, or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereof.

9 U.S.C. § 4 (emphasis added).

In Chastain v. Robinson-Humphrey Co., this Court applied the former Fifth Circuit's two-component test for determining whether the arbitrability question should first be litigated before the district court. The party seeking to avoid arbitration must unequivocally deny that an agreement to arbitrate was reached and must offer "some evidence" to substantiate the denial. Chastain, 957 F.2d at 854 (citing T & R Enters. v. Continental Grain Co., 613 F.2d 1272, 1278 (5th Cir.1980)). Wheat First has absolutely denied that it is bound to arbitrate the Appellants' Marshall Securities claims and, to the extent it is possible to prove a negative, has offered evidence to...