ACCEPTED
05-14-01223-CV
FIFTH COURT OF APPEALS
DALLAS, TEXAS
1/20/2015 11:55:22 PM
LISA MATZ
CLERK
5th Court of Appeals
FILED: 01/21/2015
Lisa Matz, Clerk
NO. 05-14-01223-CV
13:28:53
RECEIVED IN
IN THE COURT OF APPEALS 5th COURT OF APPEALS
DALLAS, TEXAS
FOR THE FIFTH DISTRICT OF TEXAS AT DALLAS
1/20/2015 11:55:22 PM
LISA MATZ
Clerk
MICHAEL MORFORD D/B/A NEMAHA WATER SERVICES,
GEOFFREY ARNOLD MCFALLS D/B/A NEMAHA WATER
SERVICES, NEMAHA WATER SERVICES, L.P., NEMAHA
WATER SERVICES GP, LLC, NEMAHA WATER SERVICES
OK-1702, LLC, AND NEMAHA WATER SERVICES HOLDING
COMPANY, LLC,
APPELLANTS,
V.
ESPOSITO SECURITIES, LLC,
APPELLEES,
APPEAL FROM 44TH DISTRICT COURT
DALLAS COUNTY, TEXAS
APPELLEE’S BRIEF ON THE MERIT
Sean Modjarrad David Jefrie Mizgala
State Bar No. 24027398 State Bar No. 24031594
smodjarrad@modjarrad.com david@mizgalalaw.com
Rhiannon Kelso MIZGALA LAW PLLC
State Bar No: 24080636 Rosewood Court
rkelso@modjarrad.com 2101 Cedar Springs Road, Suite 1050
M|A|S LAW FIRM Dallas, Texas 75201
212 W. Spring Valley Road Tel: 214-238-4800
Richardson, Texas 75081 Fax: 214-238-4801
Tel: 972-789-1664
Fax: 972-789-1665
COUNSEL FOR APPELLEE-PLAINTIFF
ORAL ARGUMENT CONDITIONALLY REQUESTED
S TATEM ENT R EGARDING O RAL A RGUM ENT
Appellee does not believe oral argument will significantly aid the Court’s
decisional process. Besides being wholly unsupported by competent evidence or
controlling legal authority, Appellants’ Motion to Compel Arbitration and Stay
Proceedings is fatally undermined by the open-court admissions Appellants made
throughout the underlying proceedings.
However, to the extent the Court grants Appellants’ request for oral
argument, Appellee requests an opportunity to present argument also. TEX. R.
APP. P. 38.1(e), 39.7.
i
T ABLE OF C ONTENTS
A.
The
Parties’
Pre-‐Dispute
Arbitration
Agreement.
.......................................................................
1
(1)
For
an
initial
6-‐month
term,
and
thereafter
until
terminated
by
either
party
with
30
days
prior
written
notice;
........................................................................................................................................................
1
(2)
Appellee-‐Plaintiff
would,
if
requested
by
Appellants-‐Defendants,
provide
Appellants-‐
Defendants
certain
enumerated
services;
and
....................................................................................................
1
(3)
Appellants-‐Defendants
would
compensate
Appellee-‐Plaintiff
for
any
requested
services
in
accordance
with
the
Agreement’s
“Fees
and
Expenses”
provision.
............................................................
1
B.
The
Disputed
Transaction.
..................................................................................................................
2
C.
Appellants’
Post-‐Dispute
Attempt
to
Squirm
Out
of
Their
Pre-‐Dispute
Arbitration
Agreement.
........................................................................................................................................................
3
(1)
first,
filed
a
“Statement
of
Claim”
with
the
Financial
Industry
Regulatory
Authority
(“FINRA”),
a
self-‐
described
“forum
for
securities
dispute
resolution
…
involving
customers
of
brokerage
firms
and
disputes
between
brokerage
firms
and
their
employees[,]”
1
CR
at
230;
.................................................................................
3
(2)
then,
more
than
a
month
later,
moved
the
trial
court
to
compel
Appellee-‐Plaintiff
to
abandon
the
AAA
arbitration
in
favor
of
Appellants-‐Defendants’
later-‐filed
FINRA
action,
1
CR
at
131-‐35
(“Defendants’
Response
to
Plaintiff’s
Motion
to
Compel
Arbitration
and
Stay
Proceedings”),
at
136-‐41(“Defendants’
Motion
to
Compel
Arbitration
and
Stay
Proceedings”);
see
also
Appellant’s
Brief
at
5
(“In
response
to
[Appellee-‐
Plaintiff’s]
suit,”
[Appellants-‐Defendants]
“filed
a
declaratory
judgment
action
before
FINRA”
and
“moved
for
arbitration
before
[]
FINRA.”).
............................................................................................................................................
3
(1)
contracting
parties
may
effectively
agree
to
“opt
out”
of
Rule
12200’s
mandatory
FINRA
arbitration
provision,
2
RR
at
20:3-‐16;
...................................................................................................................
4
(2)
they
signed
the
Agreement
containing
the
pre-‐dispute
arbitration
clause
without
objection,
2
RR
at
11:23-‐25;
.........................................................................................................................................
4
(3)
to
invoke
Rule
12200’s
mandatory
arbitration
provision,
claimants
must
be
“customers”
complaining
of
a
dispute
arising
from
the
business
activities
the
named
FINRA
member(s),
4
RR
at
19:2
–
20:17;
..................................................................................................................................................................
5
(4)
persons
who
do
not
purchase
goods
or
services
from,
and
do
not
have
a
brokerage
account
with,
a
FINRA
member
does
not
qualify
as
that
member’s
“customers,”
as
that
term
is
contemplated
by
FINRA’s
Rules,
3
RR
at
21:18-‐23;
4
RR
at
24:14-‐16;
and
............................................
5
(5)
the
Statement
of
Claim
Appellants-‐Defendants
filed
with
FINRA
avows
the
disputed
Transaction
did
not
involve
the
purchase
of
any
goods
or
services
from
Appellee-‐Plaintiff
or
a
brokerage
account,
as
Appellants-‐Defendants
never
opened
such
an
account,
3
RR
20:22
-‐
21:
23;
4
RR
25:6
-‐
33:
18.
.....................................................................................................................................................
5
A.
Settled
Texas
Law
Establishes
This
Court’s
Review
of
the
Trial
Court’s
Order
Is
Governed
By
the
No-‐Evidence
Standard
of
Review.
............................................................................
6
B.
Appellants’
Argued-‐For
Application
of
the
De
Novo
Standard
of
Review
Is
Contrary
to
Texas
Law.
.........................................................................................................................................................
7
I.
The
Trial
Court
Properly
Refused
to
Grant
Appellants’
Factually
Deficient
and
Legally
Unsupported
Motion
to
Compel
Arbitration
.............................................................
10
A.
Appellants’
Motion
to
Compel
Arbitration
Is
Completely
Devoid
of
Evidentiary
Support
and
Thus
Fails
On
Its
Face.
........................................................................................................
10
B.
Appellants’
Motion
to
Compel
Grossly
Misconstrues
FINRA
Rules.
.....................................
11
1.
Appellants’
Argued-‐For
Interpretation
of
“Customer”
Belies
Their
Result-‐Oriented
Analysis.
...........................................................................................................................................................................
12
2.
More
than
a
scintilla
of
record
evidence
supports
the
trial
court’s
determination
Appellants
are
not
“customers,”
as
defined
by
FINRA’s
Rules.
................................................................
14
(1)
the
disputed
Transaction
that
is
the
subject
of
Appellants-‐Defendants’
FINRA
statement
of
claim
does
not
involve
the
purchase
of
any
goods
or
services
from
Appellee-‐Plaintiff,
4
RR
at
17:4-‐7;
and
.........................................................................................................................................................................
14
ii
(2)
Appellants-‐Defendants
do
not
know
of
a
single
case
in
which
a
person
was
determined
to
be
a
“customer”
without
actually
purchasing
goods
and
services
from
the
FINRA
member,
3
RR
at
20:9-‐17.
..........................................................................................................................................................................
14
C.
Appellee’s
Argument
before
the
trial
court:
A
Rule
12200
“customer”
of
a
FINRA
member
can
only
demand
arbitration
before
FINRA
absent
a
separate
arbitration
agreement.
......................................................................................................................................................
15
D.
RECENT
(AUGUST
21,
2014)
SECOND
CIRCUIT
DECISIONS
HOLD
FORUM
SELECTION
CLAUSES
SUPERSEDE
ANY
ARBITRATION
AGREEMENT
CREATED
BY
FINRA
RULE
12200.
18
1.
Goldman,
Sachs
&
Co.
v.
Golden
Empire
Schs.
Fin.
Auth.,
764
F.3d
210,
2014
U.S.
App.
LEXIS
16155
(2d
Cir.
2014):
An
Agreement
to
Arbitrate
Under
FINRA
may
be
declared
unenforceable
upon
such
grounds
as
exist
at
law
or
in
equity
for
the
revocation
of
any
contract.
............................................................................................................................................................................
18
2.
Goldman,
Sachs
&
Co.
v.
Golden
Empire
Schs.
Fin.
Auth.,
764
F.3d
210,
2014
U.S.
App.
LEXIS
16155
(2d
Cir.
2014):
An
“all
inclusive”
and
“mandatory”
superseding
arbitration
clause
is
grounds
for
revocation
of
the
contractual
agreement
to
arbitrate
created
by
FINRA
Rule
12200.
...............................................................................................................................................................................
20
E.
Status
as
a
“customer”
for
purposes
of
FINRA
Rule
12200
has
never
been
determined
by
merely
examining
“the
face
of
the
Agreement.”.
..........................................................................
23
F.
Federal
Appellate
Courts
Have
Rejected
Appellants’
Contention
that
there
is
a
presumption
favoring
FINRA
Arbitration.
............................................................................................
24
G.
General
Rules
of
Contract
Interpretation
Favor
Arbitration
Before
the
American
Arbitration
Association
(AAA)..
................................................................................................................
26
H.
Precedent
does
not
exist
requiring
construing
facts
in
favor
of
finding
a
party
is
a
“customer”
for
purposes
of
FINRA
Rule
12200
...................................................................................
28
I.
APPELLANTS
DO
NOT
PRESENT
A
VIABLE
ARGUMENT
THAT
APPELLANTS
ARE
CUSTOMERS
FOR
PURPOSES
OF
FINRA
RULE
12200
AND
APPLICABLE
CASE
PRECEDENTS
29
1.
The
unexplained
“disjunctive”
between
account
holders
and
purchases
of
goods
and
services
.............................................................................................................................................................................
30
2.
Appellants
state,
but
do
not
support,
the
contention
that
the
contingent
nature
of
the
parties
payment
agreement
is
irrelevant
for
purposes
of
determining
whether
Appellants
are
Rule
12200
“customers.”
..........................................................................................................................................
31
3.
There
is
no
case
law,
much
less
a
“superabundance
of
case
law”
holding
financial
agreements
similar
to
that
between
Appellants
and
Appellee
are
sufficient
to
create
a
customer-‐member
relationship
for
FINR
Arbitration
purposes
.............................................................
32
4.
Cases
cited
by
Appellants
involve
Financial
Agreements
for
the
issuance
and
underwriting
of
Auction
Rate
Securities
(ARS)
...........................................................................................................................
33
II.
Sun
Capital’s
Purposeful
Contacts
with
Texas
Gave
Rise
to
Appellees’
Asserted
Claims
and
Thus
Support
the
District
Court’s
Exercise
of
Specific
In
Personum
Jurisdiction
Over
Appellants.
.......................................................
Error!
Bookmark
not
defined.
iii
I NDEX OF A UTHORITIES
iv
A BBREVIATIONS AND R ECORD R EFERENCES
Abbreviations
“Appellants- “Appellants-Defendants” refers collectively to MICHAEL
Defendants” MORFORD d/b/a NEMAHA WATER SERVICES,
GEOFFREY ARNOLD MCFALLS d/b/a NEMAHA
WATER SERVICES, NEMAHA WATER SERVICES, L.P.,
NEMAHA WATER SERVICES GP, LLC, NEMAHA
WATER SERVICES OK-1702, LLC, and NEMAHA
WATER SERVICES HOLDING COMPANY, LLC
“Appellee- “Appellee=Plaintiff” refers to ESPOSITO SECURITIES,
Plaintiff” LLC.
“Agreement” “Agreement” refers to the May 1, 2013 engagement letter
between Nemaha Water Services and Esposito Securities,
LLC.
Record References
References to the reporter’s record in the form: [Vol] RR at [page #].
References to the clerk’s record are in the form: 1 CR at [page #]
v
R ESTATEMENT OF THE C ASE
Nature of the Case: Appellee-Plaintiff initiated the underlying action,
Esposito Securities, LLC v. Michael Morford d/b/a
Nemaha Water Services et al., Cause No. DC-14-
05795, In the 44th District Court, Dallas County,
Texas, to enforce a pre-dispute arbitration agreement.
1 CR at 27-108; 2 RR at 20:11-16; 3 R at 19:7-10.
Appellants-Defendants conceded the underlying
dispute must be arbitrated; however, they resisted the
contractually specified arbitration forum (the
American Arbitration Association). 2 RR at 7:10-19.
In response to Appellee-Plaintiff’s Motion to Compel
Arbitration before the AAA, Appellants-Defendants
filed a separate cross-motion to compel arbitration
before Financial Regulatory Authority (FINRA). 1 CR
at 136-41.
Course of Prior The trial court presided over three different open-court
Proceedings: hearings on the issues raised in the parties’ competing
motions to compel. See generally RR Vols. 1-3. The
court conducted a fourth hearing on Appellants-
Defendants’ Motion to Reconsider Order Grating
Plaintiff’s Motion to Compel Arbitration to AAA. 1
CR at 298-301; see also generally RR Vol. 4.
District Court’s The trial court granted Appellee-Plaintiff’s Motion to
Disposition Compel Arbitration before the AAA, 1 CR at 292-94,
and denied Appellants-Defendants’ motion to
reconsider that order, 1 CR at 362.
vi
R ESTATEM ENT OF I SSUES P RESENTED
Appellants-Defendants admit below and on appeal: (1) only a FINRA
member’s “customers” may invoke FINRA Rule 12200’s mandatory arbitration
procedures; (2) a FINRA member’s “customers” are “persons” who purchase
FINRA-regulated goods or services from a FINRA member; but in this case, (3)
the lone claim they seek to compel Appellee-Defendant to arbitrate before FINRA
does not concern goods or service purchased from a FINRA member.
On this state of the appellate record, did Appellants satisfy their burden on
appeal to prove there is no evidence to support the trial court’s determination
that Appellants-Defendants failed to prove the disputed transaction is subject
to FINRA’s mandatory arbitration procedures?
vii
R ESTATEM ENT OF F ACTS 1
This case is about Appellants’ discontent with the trial court’s order
enforcing their pre-dispute arbitration agreement to resolve “[a]ny claim or
controversy arising out of or relating to” their contract with Appellee-Plaintiff by
binding arbitration before the American Arbitration Association.
A. The Parties’ Pre-Dispute Arbitration Agreement.
Appellants-Defendants and Appellee-Plaintiff executed the letter agreement
(the “Agreement”) from which the underlying dispute arises on May 1, 2013. 1
CR at 32-38. Pursuant to that Agreement, Appellants-Defendants and Appellee-
Plaintiff provisionally agreed:
(1) For an initial 6-month term, and thereafter until terminated by either
party with 30 days prior written notice;
(2) Appellee-Plaintiff would, if requested by Appellants-Defendants,
provide Appellants-Defendants certain enumerated services; and
(3) Appellants-Defendants would compensate Appellee-Plaintiff for any
requested services in accordance with the Agreement’s “Fees and
Expenses” provision.
1 CR at 32-33, ¶¶ A-B, D.
The parties unconditionally agreed, however, that “any claim or controversy
arising out of or relating to th[e] Agreement, or the breach thereof, shall be settled
1
Because Appellants “Statement of Facts” fails to include pertinent facts
necessary to a full and fair consideration of the issue they present in Appellant’s Brief,
Appellees present the following Statement of Facts. See TEX. R. APP. P. 38.2(a)(1)(B).
1
by binding arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association[.]” 1 CR at 35, ¶ K.
B. The Disputed Transaction.
In mid-to-late February 2014, Appellants-Defendants revealed to Appellee-
Plaintiff, for the first time, that they (Appellants-Defendants) had secretly been
working with a third party to secure approximately $8,100,000.00 financing to
purchase a substantial portion of another company’s assets (the “Transaction”).2
1 CR at 100-01, ¶ 19 (Affidavit of Jared Behnke); 1 CR at 115, ¶¶ 4-6
(Defendants’ Original Counterclaim).
After learning about the Transaction, Appellee-Plaintiff notified Appellants-
Defendants that, because it occurred within the contract term,3 the Transaction
entitled Appellee-Plaintiff to “a Transaction fee [] equal to five percent (5%) of the
2
By the Agreement’s express terms, Appellants-Defendants agreed Appellee-Plaintiff would
“serve as the exclusive financial advisor of the Company with respect to a possible sale or recapitalization of
the Company that is accomplished in one or a series of transactions involving … “any exchange or tender
offer, merger, consolidation or other business combination involving the Company; or any recapitalization,
reorganization, restructuring or other similar transaction involving the Company.” 1 CR at 32.
3
Paragraph D of the Agreement provides, in relevant part:
[Appellee-Plaintiff] shall be entitled to the full amount of the Transaction Fee in the
event an agreement is entered into with respect to a Transaction at any time within one year
from the date of any such expiration or termination with any party (i) identified in writing by
[Appellee-Plaintiff] as a potential party to a Transaction during Esposito Securities' engagement
hereunder, (ii) with whom the [Appellants-Defendants] had any discussions regarding a
potential Transaction during [Appellee-Plaintiff’s] engagement hereunder regardless of
whether such discussions were initiated by [Appellee-Plaintiff], or (iii) who proposed or to
whom the Company proposed a Transaction during Esposito Securities' engagement
hereunder.
1 CR at 33, ¶ D.
2
[Transaction’s] total consideration[.]” 1 CR at 33, ¶¶ B, D; 1 CR at 100-01, ¶¶
19-22; see also Appellant’s Brief at 4 (“After learning of this deal, Esposito sent
Nemaha a demand for $405,000, claiming it was entitled to such fee under the
Agreement ….”).
C. Appellants’ Post-Dispute Attempt to Squirm Out of Their Pre-Dispute
Arbitration Agreement.
When Appellants-Defendants balked on their contractual payment
obligation, Appellee-Plaintiff initiated the underlying trial court proceedings to
enforce the Agreement’s pre-dispute arbitration clause. 1 CR at 6, ¶ 1 (“Plaintiff
submits this action for the purpose of compelling arbitration[.]”); 1 CR at 27-108
(“Motion to Compel Arbitration and Stay Proceedings”).
Appellants-Defendants refused to abide by their pre-dispute commitment to
resolve the disputed Transaction in binding arbitration before the AAA; instead,
they:
(1) first, filed a “Statement of Claim” with the Financial Industry Regulatory
Authority (“FINRA”), a self-described “forum for securities dispute
resolution … involving customers of brokerage firms and disputes between
brokerage firms and their employees[,]” 1 CR at 230;
(2) then, more than a month later, moved the trial court to compel Appellee-
Plaintiff to abandon the AAA arbitration in favor of Appellants-Defendants’
later-filed FINRA action, 1 CR at 131-35 (“Defendants’ Response to
Plaintiff’s Motion to Compel Arbitration and Stay Proceedings”), at 136-
41(“Defendants’ Motion to Compel Arbitration and Stay Proceedings”); see
also Appellant’s Brief at 5 (“In response to [Appellee-Plaintiff’s] suit,”
[Appellants-Defendants] “filed a declaratory judgment action before
FINRA” and “moved for arbitration before [] FINRA.”).
3
In alleged support of the foregoing filings, Appellants-Defendants generally
cite FINRA Rule 122004 as the source of their purported right: (1) unilaterally to
vitiate their pre-dispute commitment to arbitrate before the AAA; and (2) judicially
force Appellee-Plaintiff to: (a) abandon its earlier-filed AAA action, and (b) settle
the underlying dispute in an entirely different arbitral forum, governed by entirely
different rules, than the parties’ Agreement requires. 1 CR at 132-33, 137-39,
226, 243.
During the three hearings before the trial court, however, Appellees-
Defendants conceded:
(1) contracting parties may effectively agree to “opt out” of Rule 12200’s
mandatory FINRA arbitration provision, 2 RR at 20:3-16;
(2) they signed the Agreement containing the pre-dispute arbitration
clause without objection, 2 RR at 11:23-25;
4
In its entirety, Rule 12200 states:
12200. Arbitration Under an Arbitration Agreement or the Rules of FINRA
Parties must arbitrate a dispute under the Code if:
• Arbitration under the Code is either:
(1) Required by a written agreement, or
(2) Requested by the customer;
• The dispute is between a customer and a member or associated
person of a member; and
• The dispute arises in connection with the business activities of the
member or the associated person, except disputes involving the insurance business
activities of a member that is also an insurance company.
FINRA Rule 12200.
4
(3) to invoke Rule 12200’s mandatory arbitration provision, claimants
must be “customers” complaining of a dispute arising from the
business activities the named FINRA member(s), 4 RR at 19:2 –
20:17;
(4) persons who do not purchase goods or services from, and do not have
a brokerage account with, a FINRA member does not qualify as that
member’s “customers,” as that term is contemplated by FINRA’s
Rules, 3 RR at 21:18-23; 4 RR at 24:14-16; and
(5) the Statement of Claim Appellants-Defendants filed with FINRA
avows the disputed Transaction did not involve the purchase of any
goods or services from Appellee-Plaintiff or a brokerage account, as
Appellants-Defendants never opened such an account, 3 RR 20:22 -
21: 23; 4 RR 25:6 - 33: 18.
After considering the parties’ cross-motions, responses, pleadings on file,
and arguments of counsel, the trial court granted Appellee-Plaintiff’s Motion to
Compel Arbitration, and order the parties’ dispute to be determined by arbitration
before the AAA. 1 CR at 292-94. Appellants-Defendants did not request, and the
trial court did not make or enter Findings of Facts and Conclusions of Law in
support of its arbitration order. See generally 1 CR at 2-4 (Index of Clerk’s
Record).
This appeal/alternative mandamus action followed.
5
S TANDARD OF R EVIEW
A. Settled Texas Law Establishes This Court’s Review of the Trial Court’s
Order Is Governed By the No-Evidence Standard of Review.
This Court reviews trial-court orders denying motions to stay litigation and
compel arbitration under the “no evidence” standard. Phillips v. ACS Mun.
Brokers, Inc., 888 S.W.2d 872, 874 (Tex. App.—Dallas 1994, no writ) (citing
Hearthshire Braeswood Plaza Ltd. P’Ship v. Bill Kelly Co., 849 S.W.2d 380, 384
(Tex.App.—Houston [14th Dist.] 1993, writ denied)).
Under that standard, this Court must credit the favorable evidence if a
reasonable fact-finder could and disregard the contrary evidence unless a
reasonable fact-finder could not. In re Trammell, 246 S.W.3d 815, 820 (Tex.
App.—Dallas 2008, no pet.) (citing Kroger Tex. Ltd. v. Suberu, 216 S.W.3d 788,
793 (Tex. 2006) (legal sufficiency review of jury verdict); City of Keller v. Wilson,
168 S.W.3d 802, 807 (Tex. 2005) (legal sufficiency review of summary
judgment)).
Appellants-Defendants’ no-evidence point of error must be overruled unless
they demonstrate: (1) there is a complete absence in the record of evidence of a
vital fact; (2) the rules of law or of evidence bar the Court from giving weight to
the only evidence offered to prove a vital fact; (3) the evidence offered to prove a
vital fact is no more than a mere scintilla; or (4) the evidence conclusively
6
establishes the opposite of the vital fact. Id. (citing Marathon Corp. v. Pitzner,
106 S.W.3d 724, 727 (Tex. 2003); City of Keller v. Wilson, 168 S.W.3d at 809).5
When, as here, the record contains no findings of fact and conclusions of
law, the Court may affirm the trial court’s judgment on any legal theory the
evidence supports. Phillips v. ACS Mun. Brokers, Inc., 888 S.W.2d at 874 (citing
Lute Riley Motors, Inc. v. T.C. Crist, Inc., 767 S.W.2d439, 440 (Tex. App.—
Dallas 1988, writ denied); Hearthshire Braeswood, 849 S.W.2d at 384).
B. Appellants’ Argued-For Application of the De Novo Standard of Review
Is Contrary to Texas Law.
Appellants-Defendants expressly acknowledge the foregoing deferential
standard of review generally governs appellate courts’ review of trial-court orders
denying motions to compel arbitration. See Appellants’ Brief at 9 (citing
Schlumberger Technology Corp. v. Baker Hughes Inc., 355 S.W.3d 791, 800
(Tex. App.—Houston [1st Dist.] 2011,no pet.)). Nonetheless, they urge this
Court to review the trial court’s complained-of order de novo. Appellants’ Brief
at 9.
5
However, when the facts relevant to the arbitration issue are not disputed, an
appellate court is presented only with issues of law and reviews the trial court’s order de
novo. In re Trammell, 246 S.W.3d 815, 820 (Tex. App.—Dallas 2008, no pet.) (citing
Dewey v. Wegner, 138 S.W.3d 591, 597 (Tex. App.—Houston [14th Dist.] 2004, no
pet.)).
7
Appellants-Defendants ass the for argued-for application of the de novo
standard of review is that “facts surrounding the determination of whether” they
proved themselves to be “customers,” FINRA Rules—“are undisputed”; thus,
contend Appellants-Defendants, “the only disputed question before this [C]ourt is
purely legal in nature.” Appellants’ Brief at 9.
Tellingly, but problematically, Appellants-Defendants make no attempt to
support their bald proposition with record references or citations to legal authority.
See Appellants’ Brief at 9. What’s more, they conceal from the Court the fact that
their counsel’s expressly acknowledged in open court: (1) there is no “overriding
law of the land” for determining whether someone qualifies as a “customer,” 2 RR
at 35:11 – 36:7; (2) such determinations have been historically resolved on an ad
hoc, case-by-case basis, 2 RR at 36:5-78; (3) precedent exists which limits the
meaning of “customer” to instances in which the would-be customer actually
purchases FINRA-regulated goods or services from, or opens a brokerage account
with, a FINRA member, 3 RR at 10:18 – 11:6; and (4) the Statement of Claim
Appellants-Defendants filed with FINRA Appellants-Defendants’ Statement of
Claim wFINRA action contention that the disputed Transaction is
8
S UM M ARY OF THE A RGUM ENT
Appellants-Defendants attack the trial court’s August 24, 2014 Order
Granting Plaintiff’s Motion to Compel Arbitration (the “Arbitration Order”) on one
limited ground: “[T]he trial court erred in finding Appellants were not ‘customers’
of Appellee under the Rules of the Financial Industry National Regulatory
Authority (FINRA), and erred in denying Appellants’ motion to compel arbitration
on that basis[.]” Appellants’ Brief at xii; see also Appellant’s Brief at 9 (“The
dispositive question before this Court is whether the trial court erred in denying
Appellants’ motion to compel arbitration based on a finding that [they were] not []
‘customer[s].’”).
Not only does the record support the trial court’s conclusion about
Appellants-Defendants’ lack of competent evidence and controlling legal authority
to support their bald assurances about their FINRA “customer” status, it reveals the
trial court’s judgment is sustainable on numerous grounds Appellants-Defendants
do not challenge. Accordingly, as explained more fully below, Appellants-
Defendants’ appeal/alternative mandamus petition must fail.
9
A RGUM ENT
I.
THE TRIAL COURT PROPERLY REFUSED TO GRANT APPELLANTS’ FACTUALLY
DEFICIENT AND LEGALLY UNSUPPORTED MOTION TO COMPEL ARBITRATION
A. Appellants’ Motion to Compel Arbitration Is Completely Devoid of
Evidentiary Support and Thus Fails On Its Face.
Texas law is well settled: “To compel arbitration, a party must establish: (1)
the existence of a valid agreement to arbitrate and (2) the claims asserted [] are
within the scope of the arbitration agreement.” Merrill Lynch, Pierce, Fenner &
Smith, Inc. v. Williams, No. 05-97-01481-CV, 1998 WL 155454 (Tex. App.—
Dallas Apr. 6, 1998, no pet.) (not designated for publication).
In this case, Appellants-Defendants moved to compel arbitration with
FINRA in response to, and as an attempt to defeat, Appellee-Plaintiff’s Motion to
Compel Arbitration before the AAA. See Appellants’ Brief at 5 (“In response to
Esposito’s suit, Nemaha move for arbitration before [] FINRA.”). Thus, to prevail
in the trial court proceedings, Appellants-Defendants bore the burden to
“controvert the [Appellee-Plaintiff’s] claims by presenting affidavits or other such
evidence as would generally be admissible in a summary proceeding.” See Tex.
Capital Bank, N.A. v. Automaker, Inc., No. 14-94-0069-CV, 1995 WL 472346,
at *2 (Tex. App.—Houston [14th Dist.] Aug. 10, 1995, no writ) (not designated
for publication) (citing Prudential Securities Inc. v. Banales, 860 S.W.2d 594,
597 (Tex. App.—Corpus Christi 1993, orig. proceeding)).
10
Nowhere in Appellants-Defendants’ Motion to Compel do they cite or
otherwise attempt to incorporate any evidence of an agreement between the parties
to arbitrate any dispute with FINRA. 1 CR at 136-41. Instead, Appellants-
Defendants merely point to FINRA Rule 12200 and contend:
As Plaintiff is a members of FINRA and/or associated persons of a
member at the time of the issues that are the subject of this claim, the
Defendants are customers, the dispute is in connection with the
business activities of the member and associated persons that does not
involve insurance and the customer is requesting arbitration under the
Code, the parties must arbitrate under the Code.
1 CR at 137-38, ¶ 4 (emphasis in orig.).
This Court’s precedent makes plain, however, that Appellee-Plaintiff’s
obligation to arbitrate with a customer in accordance with FINRA Rule 12200 is
not a proxy for, and thus does not establish, the existence of an independent and
valid written agreement between Appellee-Plaintiff and Appellants-Defendants to
arbitrate before FINRA. See Phillips v. ACS Mun. Brokers, Inc., 888 S.W.2d
872, 875-76 (Tex. App.—Dallas 1994, no writ).
Because Appellants-Defendants fail to allege the existence of any other
agreement to arbitrate before FINRA, it is axiomatic that their motion to compel
fails on its face. See generally discussion supra.
B. Appellants’ Motion to Compel Grossly Misconstrues FINRA Rules.
But even supposing, for argument’s sake alone, FINRA Rule 12200 could
serve as a surrogate arbitration agreement, Appellants-Defendants readily admit
11
that Rule only applies to disputes: (1) between a FINRA member and its
customers; and (2) which arise “in connection with the business activities of the
member[.]” Appellants’ Brief at 10 (quoting FINRA Rule 12200). Accordingly,
insofar as FINRA Rule 12200 applies, Appellants-Defendants could not prevail on
their motion to compel without first establishing: (1) they are Appellee-Plaintiff’s
“customers”; and (2) the disputed Transaction “arises in connection with
[Appellee-Plaintiff’s] business activities.” See id. They failed conclusively to
establish either.
1. Appellants’ Argued-For Interpretation of “Customer” Belies Their
Result-Oriented Analysis.
Appellants-Defendants purportedly recognize that arbitration rules are
interpreted according to ordinary contract construction principles. Appellants’
Brief at 11. In seeking to ascertain whether they qualify as “customers” under
FINRA’s Rules, however, Appellants-Defendants do not begin their analysis by
examining FINRA’s Rules’ actual text. Appellants’ Brief at 12. Instead, they
begin with the wholly unsupported assumption that their “customer” status must be
ascertained from “the face of the Agreement.” Appellants’ Brief at 12 (citing
nothing).
With those parameters set, Appellants-Defendants next disavow the Rules’
text for being insufficiently explicit before finally settling on a recent Second
Circuit decision that “broadly define[s] ‘customer’ [a]s ‘one who, while not a
12
broker or dealer, either (1) purchases a good or service from a FINRA member, or
(2) has an account with a FINRA member.” Appellants’ Brief at 12 (emphasis by
Appellants) (quoting Citigroup Global Markets Inc. v. Abbar, 761 F.3d 268, 275
(2d Cir. 2014)).
Without further analysis or authority, Appellants declare that the
“disjunctive” word “or” is somehow “instructive and leaves no doubt that [they]
w[ere] [] customer[s] because, under the Agreement[, they were] purchasing a
service from [Appellee-Plaintiff], even though [they] did not have an investment or
trading account there.” Appellants’ Brief at 13 (citing nothing).
In an apparent attempt to prove to this Court they did, in fact, make
purchases under the Agreement, Appellants-Defendants recite the services they
could have, but did not, request Appellee-Plaintiff to perform. Compare
Appellant’s Brief at 13 (listing services), with 4 RR at 17:4-7 (responding to the
trial court’s question about services purchased from Appellee-Defendant relating to
the disputed Transaction, Appellants-Defendants stated: “Nothing.”).
Besides constituting little more than Appellants-Defendants’ ipse dixit, the
foregoing analysis completely disregards the applicable standard of review.
13
2. More than a scintilla of record evidence supports the trial court’s
determination Appellants are not “customers,” as defined by
FINRA’s Rules.
When, as here, the trial court conducted evidentiary hearings on a disputed
issue of fact, the question on appeal is whether—viewed in the light most favorable
to the judgment—there is more than a scintilla of evidence to support the trial
court’s judgment. In re Trammell, 246 S.W.3d 815, 820 (Tex. App.—Dallas
2008, no pet.) (citing Kroger Tex. Ltd. v. Suberu, 216 S.W.3d 788, 793 (Tex.
2006) (legal sufficiency review of jury verdict); City of Keller v. Wilson, 168
S.W.3d 802, 807 (Tex. 2005) (legal sufficiency review of summary judgment)).
In the proceedings below, in response to the trial court’s questioning,
Appellants-Defendants expressly admitted:
(1) the disputed Transaction that is the subject of Appellants-Defendants’
FINRA statement of claim does not involve the purchase of any goods
or services from Appellee-Plaintiff, 4 RR at 17:4-7; and
(2) Appellants-Defendants do not know of a single case in which a person
was determined to be a “customer” without actually purchasing goods
and services from the FINRA member, 3 RR at 20:9-17.
Because these admissions are some evidence that Appellants-Defendants do
not satisfy FINRA Rule 12200’s definition of customer, the trial court’s judgment
must be sustained.
14
C. Appellee’s Argument before the trial court: A Rule 12200 “customer” of
a FINRA member can only demand arbitration before FINRA absent a
separate arbitration agreement.
Essentially, The Code of Arbitration Procedure contained in
the FINRA Rules (the Code) provides in Rule 12200 that parties must arbitrate a
dispute if certain conditions are met. However, in addition, the United States
Courts of Appeals for the Second and Fourth Circuits further expanded said
conditions. In February of 2013, the Second Circuit held that a party can only
compel a FINRA member to FINRA arbitration under Rule 12200, absent a
separate arbitration agreement.6
First, Appellants’ brief conveniently leaves out the 4th Circuit’s opinion,
which was issued nearly two years ago, has no negative analysis, and has been
cited by Federal district courts and appellate courts across the country.7 Second,
Appellants make a patently false statement in their Brief that “it has been long
established that under FINRA Rule 12200, a dispute between a FINRA member
and a customer grants the customer, as a matter of contract, the option to select
6
Morgan Keegan & Co. v. Silverman, 706 F.3d 562, 565 (4th Cir. 2013).
7
See Raymond James Fin. Servs. v. Cary, 709 F.3d 382 (4th Cir. Va. 2013);
Credit Suisse Sec. (USA) LLC v. Sims, 2013 U.S. Dist. LEXIS 143712 (S.D. Tex. Oct. 4,
2013); Citigroup Global Mkts. Inc. v. Abbar , 943 F. Supp. 2d 404 (S.D.N.Y. 2013);
Tradestation Secs., Inc. v. Capone, 2014 U.S. Dist. LEXIS 51876 (W.D.N.C. Apr. 10,
2014)
15
FINRA as an arbitral forum regardless of whatever might be provided in the
agreement.”8
Third, Appellants actually go on to claim, “[t]his matter of law was not
contested below.”9 This matter of law was brought to Appellant’s attention at the
initial hearing on August 22, 2014 and at the Re-hearing on August 26, 2014.
In Appellee’s Brief in Support of Plaintiff’s Response to Defendant’s
Motion to Compel, Appellee submitted the following argument to the 44th District
Court on August 26, 2014 prior to the re-hearing, “[i]n Morgan Keegan & Co. v.
Silverman, the United States Court of Appeals for the Fourth Circuit, stated that:
‘in the absence of a separate arbitration agreement, a party can compel
a Financial Industry Regulatory Authority (FINRA) member to participate
in FINRA arbitration if: (1) the party is a “Customer” of the FINRA member;
and (2) there is a dispute between the “Customer” and the FINRA member, or
the member's associated person, arising in connection with the business activities
of the FINRA member or a member's associated person.’”10
In this cause, Appellants have stipulated on the record that they signed and
entered into the May 1, 2013 contractual Agreement.11 Said Agreement, and the
8
See Appellant Brief, Page 11, Par. 2
9
See Appellant Brief, Page 11, Par. 2
10
Morgan Keegan & Co., 706 F.3d at 563.
11
See generally RR Vol. 2.
16
arbitration agreement therein, constitutes a separate arbitration agreement.12 The
FINRA Office of Hearing Officers has expressly recognized that FINRA's
arbitration rules "themselves constitute an agreement to arbitrate that is covered by
the FAA, even separate from a customer-member agreement," essentially
recognizing that such an agreement can exist.13
The Court in Morgan Keegan, expressly recognized that a party, specifically
a party that qualifies as a “customer” under FINRA Rule 12200, may only compel
a FINRA Member to FINRA Arbitration, absent an arbitration agreement separate
from the arbitration agreement automatically created by FINRA’s arbitration rules.
Here, the parties are not absent a separate agreement,14 and as per the ruling of the
Fourth Circuit Court of Appeals, Nemaha Defendants cannot compel FINRA
Member Esposito to FINRA Arbitration.15
12
See Exhibit B, para.K.
13
Teresa J. Verges, Opening the Floodgates of Small Customer Claims in FINRA
Arbtiration: FINRA v. Charles Schwab & Co., Inc., 15 CARDOZO J. CONFLICT RESOL.
623 (2014) (citing Complaint and Request for expedited Hearing 12-14, FINRA Office of
Hearing Officers, Dep’t of Enforcement v. Charles Schwab & Co., Disciplinary
Proceeding No. 2011029760201 (Feb. 1, 2012), available at,
http://disciplinaryactions.finra.org/viewdocument.aspx?DocNB=29288).
14
See Exhibit B, para. K.
15
Morgan Keegan & Co., 706 F.3d at 563.
17
D. RECENT (AUGUST 21, 2014) SECOND CIRCUIT DECISIONS
HOLD FORUM SELECTION CLAUSES SUPERSEDE ANY
ARBITRATION AGREEMENT CREATED BY FINRA RULE 12200.
The initial hearing on the parties’ cross-Motions to Compel Arbitration was
held before the 44th District Court on August 22, 2014, the re-hearing was held on
August 26, 2014 and the Appellant-Defendant’s Motion to Reconsider the Order
Compelling the parties to Arbitration before the A.A.A., was held on September 9,
2014. The below cases were decided on August 21, 2014, prior to the initial
hearing, but the decision was not published until (waiting on lexis to advise date).
1. Goldman, Sachs & Co. v. Golden Empire Schs. Fin. Auth., 764 F.3d
210, 2014 U.S. App. LEXIS 16155 (2d Cir. 2014): An Agreement to
Arbitrate Under FINRA may be declared unenforceable upon such
grounds as exist at law or in equity for the revocation of any
contract.
The Second Circuit’s single opinion (disposing of two cases on August 21,
2014) on the issue of separate forum selection agreements in cases involving
FINRA arbitration demanded by Rule 12200 “customers,” held that FINRA
arbitration rules may be superseded by forum selection clauses.16 In both district
court cases, the status of the non-FINRA member party as a Rule 12200
“customer” was undisputed. Where the FINRA members had been retained to (and
in fact did) issue millions of dollars in Auction Rate Securities (“ARS”), the parties
were indeed deemed Rule 12200 “customers.” Issuance and underwriting of ARS
16
See, Goldman, Sachs & Co. v. Golden Empire Schs. Fin. Auth., 764 F.3d 210,
2014 U.S. App. LEXIS 16155 (2d Cir. 2014) (Hereafter “Golden Empire Schools”).
18
has long been held to establish a member-customer relationship for purposes of
12200.17
The Second Circuit examined both forum selection clauses in the two
separate contractual agreements existing between FINRA Member Goldman Sachs
and its undisputed Rule 12200 “customer,” Golden Empire, and FINRA Member
Citigroup Global Markets, Inc., and its undisputed Rule 12200 “customer,” North
Carolina Eastern.
Both forum selection clauses stated, “all actions and proceedings… shall be
brought in the United States District Court…”18 After Golden Empire and North
Carolina Eastern commenced separate actions before FINRA alleging their
respective FINRA members had fraudulently induced them to issue the ARS, the
FINRA members separately sought declaratory and injunctive relief against
FINRA arbitration in federal district court. Neither FINRA member disputed that
for purposes of general contract interpretation, FINRA Rule 12200 creates a
written agreement to arbitrate with their “customers” that is “enforceable, save
upon such grounds as exist at law or in equity for the revocation of any contract.”19
17
See, Patten Securities Corp. v. Diamond Greyhound & Genetics, Inc., 819 F.2d
400, 402 (3d Cir. 1987); UBS Fin. Servs., Inc. v. W. Va. Univ. Hosps., Inc., 660 F.3d 643,
652 (2d Cir. 2011); and, J.P. Morgan Securities Inc. v. Louisiana Citizens Property
Insurance Corp., 712 F. Supp. 2d 70 (S.D.N.Y 2010).
18
Golden Empire Schs. Fin. Auth., 764 F.3d 210, at 212 (2d Cir. 2014)
19
Id., at 214, citing, 9 U.S.C. § 2; see, UBS Fin. Servs., 660 F.3d at 648-49.
19
Indeed this is a long settled principle of contract interpretation and the
Supreme Court of the United States recently re-asserted the use of same, citing
“[t]he final phrase of 9 U.S.C.S. § 2 of the Federal Arbitration Act,” and holding:
“A written provision in… a contract evidencing a transaction involving
commerce to settle by arbitration a controversy thereafter arising out of such
contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon
such grounds as exist at law or in equity for the revocation of any contract.”20
The contract interpretation principal relied upon by the Second Circuit in
interpreting the enforceability and revocability of an agreement to arbitrate arising
out of FINRA Rule 12200, is thus applicable to the same matter when raised before
this Honorable Court in the state of Texas.
Challenges to the validity of arbitration agreements "upon such grounds
as exist at law orin equity for the revocation of any contract" can be divided
into two types. One type challenges specifically the validity of the agreement to
arbitrate. Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (U.S. 2006) –
Goldman, Sachs & Co. v. Golden Empire Schs. Fin. Auth., 764 F.3d 210, 2014
U.S. App. LEXIS 16155 (2d Cir. 2014): An “all inclusive” and “mandatory”
superseding arbitration clause is grounds for revocation of the contractual
agreement to arbitrate created by FINRA Rule 12200.
20
Id., at 1745.
20
An agreement to arbitrate is superseded by a later-executed agreement
containing a forum selection clause if the clause “specifically precludes”
arbitration. While there is no requirement that the later forum selection clause
mention the prior arbitration, the forum-selection clause must be “all-inclusive”
and “mandatory.”21 To be found “all-inclusive” and “mandatory,” later forum-
selection clauses “need only be sufficiently specific to impute to the contracting
parties the reasonable expectation that they would litigate any disputes in federal
court, thereby superseding the default obligation to arbitrate under FINRA Rule
12200.”22
Second, the Court, which had previously addressed this issue in Applied
Energetics, compared the forum-selection clause between the parties in that case,
versus the forum selection clause before it in the Golden Empire Schools cases,
thoroughly analyzed the use of the terms “all actions and proceedings.” The
Court specifically pointed out that although the terms used in Golden Empire
Schools, “all actions and proceedings” was narrower than the terms “any dispute”
used in Applied Energetics, it held that the “forum selection clause at issue is
plainly sufficient to supersede FINRA Rule 12200.”23 The forum selection
clause between Appellants and Appellee uses the terms “any claim or
21
Id., at 215, citing Applied Energetics, 645 F.3d at 525 (2d Cir. 2011).
22
Id., at 216, citing Applied Energetics, 645 F.3d at 525-526 (2d Cir. 2011).
23
Id., at 217.
21
controversy,” which under the broader standard in Applied Energetics and the
narrower standard in Golden Empire Schools, is plainly sufficient to supersede
FINRA Rule 12200.
Finally, in 2002, the Supreme Court of the United States described a
mandatory arbitration clause as one using the terms “any dispute or claim”
followed by “shall be settled by binding arbitration.”24 Thus by the Second
Circuit’s standard and the standard outlined by the United States Supreme Court,
the arbitration clause between the parties at bar qualifies as a ‘mandatory’
arbitration clause, and same reads, as follows:
“K. Arbitration of Disputes. Any claim or controversy arising out of or
relating to this Agreement, or the breach thereof, shall be settled by binding
arbitration in accordance with the Commercial Arbitration Rules of the American
Arbitration Association.”25
Thus, Appellants’ conclusion, after their gross mischaracterization of both
existing precedent and the record in this cause, that it is an “undisputable fact” that
“[a]s a matter of federal law and regulation, a FINRA customer’s Rule 12200 right
24
EEOC v. Waffle House, Inc., 534 U.S. 279, at 282-3 (U.S. 2002).
25
See Appellants Brief, Tab 2, the Agreement, Paragraph 2
22
to arbitrate before FINRA cannot be waived or abrogated by contract,” is patently
false.26
E. Status as a “customer” for purposes of FINRA Rule 12200 has never
been determined by merely examining “the face of the Agreement.”.
Appellants’ unsupported and conclusory statement that, “the only issue to be
determined is whether, on the face of the Agreement, Nemaha can be deemed a
“customer” of Esposito for FINRA purposes,” is incorrect.27 Appellants have not
cited a single provision or precedent (nor has Appellee found one for that matter)
wherein a court determined whether a party is a FINRA member’s “customer” for
purposes of Rule 12200 by examining “the face of the agreement,” as Appellant
has insinuated is the only proper path here.
Rather, as Appellee presents in detail to the Court below, federal appellate
courts examine the fact pattern in each case, with particular attention to the nature
of the relationship between the parties, which always includes either 1) an account,
or 2) a purchased good or service, and a sustained financial loss to the non-FINRA
member (see subsection X, page X of Appellee’s brief below).
26
See Appellant Brief, page 7, no. 4 (see also Morgan Keegan)
27
See Appellant Brief, page 12
23
F. Federal Appellate Courts Have Rejected Appellants’ Contention that
there is a presumption favoring FINRA Arbitration.
Appellants claim that interpretation of FINRA’s arbitration rules is similar to
contract interpretation and that in accordance with long-standing federal policy,
any doubts concerning the scope of arbitrable issues should be resolved in favor of
arbitration (Appellee can only assume Appellants mean in favor of FINRA
Arbitration as opposed to arbitration under the parties’ written agreement).28
First, Appellee notes the multiple cases rejecting this contention.29 In the
case cited by Appellants to rely on the presumption in favor of resolving the
present dispute in favor of FINRA arbitration, that very court explicitly rejected
that very contention. In Abbar, the Court found that where “the parties are
disputing the existence of an obligation to arbitrate, not the scope of the arbitration
clause, the general presumption in favor of arbitration does not apply.”30 In Abbar,
28
See Appellant Brief, Page 11, citing, Wachovia Bank, Nat. Ass’n v. VCG Special
Opportunities Master Fund, Ltd., 661 F.3d 164, 171 (2d Cir. 2011), also citing,
Bensadoun v. Jobe-Riat, 316 F.3d 171, 176 (2d Cir. 2003).
29
See Wachovia, 661 F.3d at 170-71; Citigroup Global Mkts., Inc. v. VCG Special
Opportunities Master Fund Ltd., 598 F.3d 30, 39 (2d Cir. 2010) cf. Bensadoun, 316 F.3d
at 176 (classifying John Hancock's suggestion that presumption in favor of arbitration
applies as "dicta").
30
Citigroup Global Mkts. v. Abbar, 761 F.3d 268, 273 (2d Cir. N.Y. 2014)
(affirmed district court decision that where Abbar held investments with foreign entity,
Abbar was not a “customer” of N.Y. based FINRA member and could not compel
FINRA arbitration), citing Applied Energetics, Inc. v. NewOak Capital Mkts., LLC, 645
F.3d 522, 526 (2d Cir. 2011) (("While doubts concerning the scope of an arbitration
clause should be resolved in favor of arbitration, the presumption does not apply to
disputes concerning whether an agreement to arbitrate has been made.")
24
at issue was whether Abbar was a Rule 12200 “customer” having the right to
request FINRA arbitration, and thus the ultimate issue of “the existence of an
agreement to arbitrate, not the scope of the arbitration clause.”31 Here, and at the
trial court level, Appellee has disputed Appellants’ claims that they are a
“customer” for purposes of FINRA Rule 12200. Appellee thus disputes whether an
obligation to arbitrate ever arose out of FINRA Rule 12200.
As per the Abbar and other decisions cited herein by Appellee, Appellants’
suggestion that the presumption in favor of arbitration results in a presumption in
favor of arbitration before FINRA is completely misapplied. Appellants have
failed to identify a single case where the existence of a “customer,” and thus
whether an agreement to arbitrate before FINRA existed at all, was in dispute,
wherein the Court cited the presumption in favor of arbitration as grounds for
requiring the parties to arbitrate before FINRA. In the present matter, there is no
presumption in favor of arbitration before FINRA, the presumption in favor of
arbitration does not apply to the questions of arbitrability that was presented to the
trial court and is before this Honorable Court now.
Finally, it would appear Appellants’ argument suggests this Court should
only apply principles of contract interpretation to FINRA’s arbitration rules but not
to the actual contractual agreement expressly entered into between the parties.
31
Id.
25
Given the rulings in Abbar and Applied Energetics, it would appear that not only is
that incorrect, but in fact the Second District has expressly stated that the
presumption in favor of arbitration applies to the scope of the arbitration clause in
the Agreement between the parties.32
G. General Rules of Contract Interpretation Favor Arbitration Before the
American Arbitration Association (AAA)..
The Texas Civil Practice & Remedies Code provides, “[a] written agreement
to arbitrate is valid and enforceable if the agreement is to arbitrate a controversy
that: . . . arises between the parties after the date of the agreement.”33 Similarly,
the Federal Arbitration Act provides that a written arbitration provision is valid,
irrevocable, and enforceable.34
Appellee would note that Supreme Court precedent holds that the question
of arbitrability is for a court to determine. In Howsam v. Dean Witter Reynolds,
Inc., the Supreme Court’s holding was unambiguous: “[t]he question of whether
the parties have submitted a particular dispute to arbitration, i.e., the ‘question of
arbitrability,’ is ‘an issue for judicial determination [u]nless the parties clearly and
unmistakably provide otherwise.’”35
32
Id. As to Abbar and Energetics, see also Agreement
33
TEX. CIV. PRAC. & REM. CODE ANN. § 171.001(a).
34
9 U.S.C. § 2 (2006).
35
Id. at 83 (quoting AT&T Technologies, Inc. v. Communications Workers, 475
U.S. 643, 649 (1986)); see also First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938,
943 (1995) (“If, on the other hand, the parties did not agree to submit the arbitrability
26
Proceedings to compel arbitration must be conducted in accordance with the
procedure outlined in § 171.021 of the Texas Civil Practice and Remedies Code.36
Under this provision, a court must order arbitration on application of a party
showing: (1) an agreement to arbitrate; and (2) the opposing party’s refusal to
arbitrate.37 The arbitration agreement provides the AAA with authority to
administer the arbitration. Importantly, once a court determines that a matter is
subject to arbitration, it has no discretion to modify the parties’ agreement.38
Indeed, it is an abuse of discretion to order parties to an arbitration not
administered by the AAA when they have agreed to arbitrate under the AAA
rules.39
Appellee would point to a 2008 ruling by this Honorable Court, wherein the
Court of Appeals, Fifth District, Dallas, stated “[a]rbitration agreements are
question itself to arbitration, then the court should decide that question just as it would
decide any other question that the parties did not submit to arbitration, namely,
independently.”); Mitsubishi Motors Corp. v. Soler Chrysler–Plymouth, Inc., 473 U.S.
614, 626 (1985) (“[T]he first task of a court asked to compel arbitration of a dispute is to
determine whether the parties agreed to arbitrate that dispute.”).
36
TEX. CIV. PRAC. & REM. CODE ANN. § 171.021(a)(1)-(2).
37
Id.
38
See In re Nat’l Health Ins. Co., 109 S.W.3d 552, 556 (2002) (holding that a
court cannot change an arbitration agreement because it or one of the parties comes to
dislike its provisions or thinks that something else is needed in it).
39
See In re Crosstex CCNG Processing Ltd, 2008 Tex. App. LEXIS 8391, *6
(Tex. App.—Dallas 2008) (mem. op.) (“[the] trial court failed to correctly analyze and
apply the law when it altered the agreement [calling for arbitration in accordance with the
Patent Arbitration Rules of the AAA] by ordering the parties to submit to an
arbitration not administered by the AAA. The trial court’s failure to analyze and
apply the law constitutes an abuse of discretion”).
27
interpreted by applying contract principles[,]” and “a court cannot change an
arbitration agreement because it or one of the parties comes to dislike the
provisions of the arbitration agreement or thinks that something else is needed.”40
The Court further stated that “the trial court failed to correctly analyze and apply
the law when it altered the agreement by ordering the parties to submit to an
arbitration not administered by the AAA[,]” and that “[t]he trial court’s failure to
analyze and apply the law constitutes an abuse of discretion.”41
Thus, the 44th District Court of Dallas County would have in fact abused its
discretion had that court changed the parties’ expressly entered into pre-dispute
arbitration agreement because Appellants came to dislike the provision or thought
something else was needed.
H. Precedent does not exist requiring construing facts in favor of finding a
party is a “customer” for purposes of FINRA Rule 12200
Citing a single case, LA Citizens,42 Appellants contend that “courts” (as in
plural) have advised that any question as to whether a party is a “customer” for
purposes of FINRA Rule 12200 should be construed in favor of finding that the
party is a “customer.”43 The LA Citizens decision came out of the United States
40
Id.
41
Id.
42
JP Morgan Sec. v. La. Citizens Prop. Ins. Corp., 712 F.Supp. 2d 70 (S.D.N.Y.
2010), see Appellant Brief, page 12
43
Id., at 77
28
District Court for the Southern District of New York in 2010. However, later, in
2011, the Second Circuit Court of Appeals held in VCG Special Opportunities that
“terms such as ‘customer’ should be construed in a manner consistent with the
‘reasonable expectations’ of FINRA members,” making no mention of a
presumption in favor of finding a party is a “customer” for purposes of FINRA
Rule 12200.44
I. APPELLANTS DO NOT PRESENT A VIABLE ARGUMENT THAT
APPELLANTS ARE CUSTOMERS FOR PURPOSES OF FINRA
RULE 12200 AND APPLICABLE CASE PRECEDENTS
Federal circuit courts across the nation, and even the United States District
Court for the Southern District of Texas, have rejected the argument that everyone
is a “customer” except a broker or a dealer.45 The term “customer” in FINRA Rule
12200 refers to “an entity that is not a broker or dealer, who purchases
commodities or services from a FINRA member in the course of the member's
business activities, namely, the activities of investment banking and the securities
44
Wachovia Bank, N.A. v. VCG Special Opportunities Master Fund, Ltd., 661 F.
3d 164, at 171 (2d Cir. 2011), citing, Wheat, First Securities, Inc. v. Green, 993 F.2d 814,
820 (11th Cir. 1993).
45
Credit Suisse Sec. (USA) LLC v. Sims, 2013 U.S. Dist. LEXIS 143712, *4 (S.D.
Tex. Oct. 4, 2013) (citing Berthel Fisher & Co. Fin. Servs., Inc., 695 F.3d at
752); Morgan Keegan & Co., 706 F.3d at 565-66.
29
business.”46 The plain meaning of the word “purchase,” is to “to buy (property,
goods, etc.)” or “to get (something) by paying money for it.”47
All relevant case law, found by Appellee to date, wherein the issue before a
district court of competent jurisdiction is whether a party wishing to compel a
FINRA Member to FINRA Arbitration qualifies as a “customer” for purposes of
Rule 12200, the party moving to compel arbitration has, at a minimum, held an
account with or purchased commodities or services from a FINRA member.
Appellants have never held an account with or purchased commodities or services
from FINRA Member Esposito (Appellee).48
Nevertheless, Appellants make several unsupported, uncited, and fairly
indecipherable claims as to why Appellants should be found to be “customers” for
purposes of FINRA Rule 12200, Appellee shall address these in turn.
1. The unexplained “disjunctive” between account holders and
purchases of goods and services
Citing Abbar, Appellants allege that because parties are found to be a
“customer” for purposes of FINRA Rule 12200, either because the party is an
account holder, or because the party has purchased goods and services, same
creates an “instructive” “disjunctive” that leaves “no doubt” that Appellants were
46
Morgan Keegan & Co., 706 F.3d at 565-66, see also, UBS Fin. Services, Inc. v.
Carilion Clinic, 706 F.3d 319, 328-29 (4th Cir. 2013).
47
Morgan Keegan & Co., 706 F.3d at 565-66
48
CITE ALL CASES USED IN TRIAL COURT ARGUMENTS
30
Rule 12200 “customers.”49 Appellants’ proffered rationale is seemingly that
Appellants must have been purchasing a service because they did not have an
investment or trading account there, and evidently, a party interacting with a
FINRA member at all, must be doing one or the other.50
First, and plainly, Appellee finds this reasoning difficult to follow as written.
Second, as Appellants have not cited a single case wherein the supposed
disjunctive between the only two bases for identifying a party as a Rule 12200
“customer” was in fact the reason for finding the party was a Rule 12200
“customer,” Appellee will not address this contention further.
2. Appellants state, but do not support, the contention that the
contingent nature of the parties payment agreement is irrelevant for
purposes of determining whether Appellants are Rule 12200
“customers.”
Appellants state that the “contingent nature of payment does not negate the
fact that Esposito obtained a 5% interest in exchange for the provision of
services.”51 However, Appellants do not cite a single case wherein, a party who
had a contingent payment agreement, or wherein a FINRA member’s obtained
interest in exchange for provision of services, was the basis for finding that the
49
See Appellants’ Brief, page 12
50
See Appellants’ Brief, page 12
51
See Appellants’ Brief, page 12
31
party was a Rule 12200 “customer.” Accordingly, Appellee will not address this
matter further
3. There is no case law, much less a “superabundance of case law”
holding financial agreements similar to that between Appellants and
Appellee are sufficient to create a customer-member relationship for
FINR Arbitration purposes
Appellants have cited federal appellate court decisions holding that a party
who purchased goods or services from a FINRA member, in a context beyond a
classic investor-broker relationship, were “customers” for purposes of FINRA Rule
12200. Appellee does not dispute the existence of these cases. Further, Appellee
does not dispute that in general, where a dispute arose over whether a party was a
“customer” for purposes of FINRA 12200, courts have found parties to be
customers and forced FINRA members to FINRA Arbitration.
However, Appellee would point out, that Appellants non-cited general
summary that “similar financial services agreements as involved here – be it for
raising money, identifying transactions such as mergers and acquisitions, or other
financial service[sic] that are clearly within the ‘business activities’ of a FINRA
member – are sufficient to create a customer-member relationship for FINRA
Arbitration purposes,”52 is a blatantly unsupported misstatement of the law, and yet
another attempt to mislead this Honorable Court.
52
See Appellant Brief, page 14
32
4. Cases cited by Appellants involve Financial Agreements for the
issuance and underwriting of Auction Rate Securities (ARS)
The “superabundance” of case law cited includes three cases wherein the
FINRA Member acted as an issuer of auction rate securities (“ARS”).53
Additionally, in each case, the party ultimately found to be a “customer,” alleged
an actual financial loss as a result of the FINRA Member’s business activities, and
thus was the party bringing the action, not the FINRA member. In the present
matter, the FINRA Member (Appellee Esposito) did not underwrite ARS for the
other party (Appellants Nemaha) and the other party has not alleged, nor is there a
record of, a financial loss at the hands of FINRA member Esposito. Finally,
FINRA Member Esposito initially brought this action against Nemaha, not vice
versa. The facts at bar are wholly distinguishable from the facts presented in the
three ARS cases cited by Appellants. Herein, Appellee addresses the three ARS
cases by Appellants in support of this similar financial service agreements
contention.
a. Patten Securities Corp. v. Diamond Greyhound & Genetics,
Inc., 819 F.2d 400 (3d Cir. 1987).
First, Appellants cite Patten Securities, a case wherein a corporation
contracted a FINRA member to serve as underwriter for the sale of the
53
See Appellant Brief, page 14, citing
33
corporation’s shares and warrants.54 When the proposed deal was not
consummated, the non-FINRA member corporation demanded arbitration before
FINRA, for damages it sustained as a result of the FINRA Member’s refusal to
purchase the securities and damages arising from same.55 The Third Circuit, held
the corporation was the FINRA member’s Rule 12200 “customer,” relying on an
interpretive statement from the NASD’s National Arbitration Committee that
stated, “an issuer of securities should be considered a public customer of a member
firm where a dispute arises over a proposed underwriting.”56 In the present matter,
Appellee Esposito was never contracted to serve as underwriter for Appellants’
shares and warrants and Appellants only brought an action before FINRA (seeking
declatory judgment that it was either not liable to Esposito under the Agreement, or
that the Agreement was fraudulently induced) until after Appellee FINRA Member
brought an action for damages before the A.A.A under the arbitration clause in the
parties’ agreement.57 Appellants do not dispute the validity of these facts.
b. UBS Fin. Servs., Inc. v. W. Va. Univ. Hosps., Inc., 660 F.3d
643, 652 (2d Cir. 2011) and J.P. Morgan Securities Inc. v.
Louisiana Citizens Property Insurance Corp., 712 F. Supp. 2d
70 (S.D.N.Y 2010).
54
Patten Securities Corp. v. Diamond Greyhound & Genetics, Inc., 819 F.2d 400,
402 (3d Cir. 1987).
55
Id., at 402-403.
56
Id. At 406.
57
See Appellant Brief Tab B, the Agreement, Paragraph K, see also Appellants’
Brief, page 5, citing CR 245
34
Next, Appellants cite West Virginia University Hospitals58 and Louisiana
Citizens,59 two cases which present largely identical facts. In both cases, the
FINRA Member had served as a broker-dealer to the other party at some point, and
the relevant dispute arose out of the issuance of ARS.
In Louisiana Citizens, the FINRA member served both as underwriter and
remarketer of the bonds, in said capacity, Citizens contended they suffered
economic loss as a result of J.P. Morgan’s (the FINRA member) manipulation of
the relevant market.60 Citizens then sought to arbitrate the dispute before FINRA.
The Southern District of New York cited the Third District’s decision in Patten,
noting, “although the relationship [in Patten] was not a broker/investor
relationship, [the issuer/underwriter relationship] still related directly to the
issuance of securities, rather than banking advice.”61 The court concluded that
issuers are Rule 12200 “customers” of underwriters and could demand arbitration
before FINRA of their disputes.62 Appellants were never issuers for Appellee
58
UBS Fin. Servs., Inc. v. W. Va. Univ. Hosps., Inc., 660 F.3d 643, 652 (2d Cir.
2011)
59
J.P. Morgan Securities Inc. v. Louisiana Citizens Property Insurance Corp., 712
F. Supp. 2d 70 (S.D.N.Y 2010).
60
Id., at 74-79
61
Id., (alteration in the original, emphasis added) (quoting Fleet Boston Robertson
Stephens, Inc. v. Innovex, Inc. 264 F.3d 770, 773 n.3 (8th Cir. 2001)).
62
Id., at 74-79
35
Esposito, and Appellee Esposito never provided underwriting services for
Appellants.63
Appellants do not dispute the validity of these facts. The circumstances
surrounding the parties’ relationship in LA Citizens is wholly distinguishable than
that between Appellants and Appellee here.
In West Virginia University Hospitals, the Second Circuit limited its finding
that WVUH was a “customer” under FINRA 12200 to the fact that WVUH had
paid for UBS to perform broker-dealer services.64 It is not contested, and indeed
Appellants have conceded the fact that Appellee Esposito was not performing
broker-dealer services for Appellants, nor had Appellants paid any monies to
Appellee Esposito. ** CITE RECORD
i. Other cases cited by Appellants present factual circumstances
wholly distinguishable from the case at bar.
a. Morgan Keegan & Co., Inc. v. Garrett, 816 F.Supp.2d 439
(S.D. Tex. 2011).
Appellants cite Garret as an alleged member of the “superabundance” of
case law establishing that the Agreement between the parties at bar establishes that
Appellants are Rule 12200 “customers.”65 Appellants do not include an in-text
63
See Appellants’ Brief, Tab B, the Agreement
64
See, 660 F.3d 643 at 648 (2d Cir. 2011).
65
See Appellant Brief, page 14
36
citation to the case, but merely list the case in a footnote with no parenthetical
explanation as to its analysis or holding.66 Appellee has examined this
approximately two page case in detail and can find no reference to a financial
services agreement. However the court does specifically point out that,
“[c]laimants and Morgan Keegan agreed to arbitrate before the National
Association of Securities Dealers, Inc., or the New York Stock Exchange, Inc. –
both follow Financial Industry Regulatory Authority rules.”67 As to those
claimants, they had an agreement to arbitrate using FINRA arbitration rules, and
therefore, as per the text of FINRA Rule 12200, their status as a Rule 12200
“customer” was irrelevant, their right to a FINRA arbitration arose out of their
written agreement to do so.68
Two Claimants did not have a written agreement to arbitrate with Morgan
Keegan, and when the Court found that these two claimants “bought shares in the
fund from third-party brokers on the secondary market” and that these two
claimants “never gave money to Morgan Keegan,” the Court found that these two
66
Id., footnote citation no. 34.
67
Morgan Keegan & Co., Inc. v. Garrett, 816 F.Supp.2d 439, 441 (S.D. Tex.
2011).
68
FINRA Rule 12200 (Parties must arbitrate a dispute under the Code if
arbitration under the Code is either required by a written agreement, or requested by
the customer…)
37
Claimants were not Rule 12200 “customers” and “could not compel Morgan
Keegan to arbitrate.”69
Appellants cited a case that fails on its face to support Appellants’ generally
cited summary regarding alleged financial service agreements underlying other
cases. Further, Appellants actually cited a case which furthers Appellee’s
argument that absent a written agreement to arbitrate with FINRA, one must be a
“customer,” to demand arbitration before FINRA, and one is a Rule 12200
“customer” if they hold an account and / or have “purchased goods or services
from the FINRA member relating to banking and securities activities.”
b. Zarecor v. Morgan Keegan & Co., Inc., No. 4:10-cv-01643
(SWW), 2011 WL 5592861 (E.D. Ark. July 29, 2011);
Appellants cite Zarecor as an alleged member of the “superabundance” of
case law establishing that the nature of the Agreement between the parties at bar
establishes that Appellants are Rule 12200 “customers.”70 Appellants do not
include an in-text citation to the case, but merely list the case in a footnote with no
parenthetical explanation as to its analysis or holding.71
Appellee has examined this case in detail and does not find a single
reference to an underlying financial services agreement. Further, Appellee does
69
. Garrett, 816 F.Supp.2d 439, at 441 (S.D. Tex. 2011)
70
See Appellant Brief, page 14
71
Id., footnote citation no. 34.
38
not find reference to any of the following terms; FINRA, customer, or arbitration.
It appears the suit in Zarecor, brought before federal district court in Tennessee,
involves a decision from a “Judicial Panel on Multidistrict Litigation” and is
wholly unrelated, incomparable, and irrelevant to matters raised to this Honorable
Court by virtue of Appellants’ appeal. Accordingly, Appellee will not address this
case further.
A. APPELLANTS CITE IRRELEVANT FINRA RULES AND
IRRELEVANT FACTS THAT FAIL TO SAVE APPELLANTS
ARGUMENT THAT THEY ARE “CUSTOMERS” FOR PURPOSES
OF FINRA RULE 12200
i. FINRA Rule 4530 – Not a Provision of the FINRA Code of
Arbitration Procedure for Customer Disputes (FINRA Rule
12000, et al).
Appellants have cited FINA Rule 4530,72 which is not a provision of the
FINRA Code of Arbitration Procedure for Customer Disputes (FINRA Rule
12000, et al). Specifically, Rule 4530 falls under FINRA Rule 4000, et al.,
regarding “Financial and Operational Rules” and relates to reporting requirements
and customer complaints involving investments.73 First, the predicate to Rule
12100’s definitions states, unless otherwise defined in the Code, terms used in the
Rule and interpretive material, if defined in the FINRA By-Laws, shall have the
meaning as defined in the FINRA By-Laws. FINRA Rule 4530 is not a part of the
72
See Appellants’ Brief, page 19
73
See FINRA Rule 4000, et al.
39
FINRA By-Laws. Second, the case at bar does not involve a reporting
requirement, nor a complaint involving an investment. The term “customer” is
defined in the Code.74 FINRA Rule 4530 is wholly inapplicable here and should
be disregarded by this Honorable Court.
ii. Appellant again misstates the contents of the Second Circuit’s
decision in Abbar, which held that a party who received services
from a FINRA member, but that had not paid any fees to said
FINRA member, had not purchased a good or service, and was
thus not a FINRA Rule 12200 “customer.”
Appellants have cited text from Abbar as follows:
“By agreeing to accept “[sic]a fee for its services” or by selling securities
to an entity, a FINRA member understands that it may be compelled to arbitrate if
a dispute arises with that entity. This may not be a “comprehensive definition of
the term,” but it captures virtually all customer relationships.[sic]
Appellants suggest same establishes that a mere agreement to accept
services, which the court recognizes as “captur[ing] virtually all customer
relationships,” makes a party who enters an agreement with a FINRA member a
“customer” for purposes of FINRA Rule 12200. Appellants have conveniently left
out the later text from the same case, which unequivocally establishes that the
party in that case that did not pay the FINRA member actual fees was found NOT
to be a “customer” for purposes of FINRA 12200.
74
FINRA Rule 12100(i).
40
In Abbar, the Second Circuit’s analysis is as follows:
“Citi NY employees certainly provided services to Abbar: they helped
structure and manage the option transactions. However, Abbar did not purchase
those services from Citi NY. His investment agreements were with Citi UK, and
the fee for all services rendered by Citigroup personnel and offices was paid
to Citi UK. While Abbar was certainly a "customer" of Citi UK, that relationship
does not allow Abbar to compel arbitration against its corporate affiliate [Citi
NY].”75
“In most cases, this definition of "customer" can be readily applied to
undisputed facts. That is so in this case: Abbar never held an account with the
FINRA member [Citi NY] and (notwithstanding his argument to the contrary)
never purchased any goods or services from it.”76
“The only relevant inquiry in assessing the existence of a customer
relationship is whether an account was opened or a purchase made; parties and
courts need not wonder whether myriad facts will ‘coalesce into a functional
concept of the customer relationship.’"77
Similar to the situation between the parties in the present matter, the FINRA
member in Abbar agreed to provide services, however, the FINRA was never paid
75
Abbar, 761 F.3d at 275
76
Id., at 276.
77
Id., at 276, citing, CGMI v. Abbar, 943 F. Supp. 2d at 407.
41
any fees. The Second Circuit held that Abbar was not a “customer” for purposes
of Rule 12200. For the same reasons, Appellants here are not “customers” for
purposes of Rule 12200.
iii. Appellants attempt to analogize legal contingency fee agreement.78
Appellants state that when a person employs an attorney on a contingent fee
basis the person becomes a client (for assumingly the purpose of having standing
to bring an action against the attorney, but Appellants do not elaborate).
Appellants then conclude that said analogy establishes that the Agreement between
the parties here makes Appellants a client of Esposito. Appellees would merely
point out that shall the issue before this Honorable Court come down to whether or
not Appellants are “customers” of Appellee for purposes of FINRA Rule 12200,
the only scenarios that should be considered are those involving FINRA members,
and the rules and legal precedent surrounding same. Given Appellants have not
provided any legal citations as to this analogous suggestion, Appellee will not
address same further.
iv. Appellants raise direct privity by contract, note that under
Appellee’s scenario, FINRA member could not bring action
before FINRA.
Appellants find it worth noting that direct privity of contract upholds
Appellants as a customer (Appellants have yet to establish Appellants are
78
See Appellants’ Brief, page 20
42
“customers” for purposes of FINRA Rule 12200) despite fraudulent inducement or
non-performance under a contract. Appellants then suggest that if direct privity of
contract does not accomplish same, “then it is difficult to imagine any breach of
contract or fraud claim that could be brought before FINRA because a member
could never bring a FINRA claim against a client for failure to pay.”79
Appellees would politely point out, that a FINRA member can never bring a
FINRA claim against a customer, client, or otherwise, ever, because Rule 12200
only allows a Rule 12200 “customer” to request FINRA arbitration under Rule
12200. “It is important to note that only the customer can compel arbitration under
12200, the option is unavailable to the member firm.”80
In consideration of the following: 1) privity of contract was not discussed
before the trial court, 2) privity of contract has no effect on a FINRA member’s
ability to bring a claim before FINRA because the member does not have, and has
never had that option, and 3) Appellants have utterly failed to explain the
relevancy of these statements to the matters pending before this Honorable Court,
Appellee will not address this further.
79
See Appellants’ Brief, page 20
80
See Catherine Moore, The Effect of the Dodd-Frank Act on Arbitration
Agreements: A Proposal for Consumer Choice, 12 PEPP. DISP. RESOL. L. J. 503, 511
(2012), note 5, at 508-509.
43
v. FINRA Rule 2268 Applies to Agreements with Account Holders
(ONLY) not the Relevant Dispute OR the Relevant Pre-Dispute
Arbitration Agreement
Appellants raise FINRA Rule 2268, which is not part of the FINRA Code of
Arbitration for Resolving Customer Disputes (Rule 12200, et al.).81 Appellee
would note that the title of FINRA Rule 2268 is as follows: “Requirements When
Using Predispute Arbitration Agreements for Customer Accounts.” Appellants
have admitted, and do not dispute, that they have never held a customer account, or
any account with Appellee. Appellee will nevertheless address the other glaring
problems with attempting to raise this rule in the manner in which Appellants have
raised same.
Appellants begin by citing subsection (d)(1), which they apparently have not
realized is part of the form language that is to be included in any pre-dispute
arbitration agreement with a holder of an account. Rule 2268 begins with
subsection (a), which says “[a]ny predispute arbitration clause shall be highlighted
and shall be immediately preceded by the following language in outline form.”
Rule 2268, regarding customer accounts, then goes on to provide seven hundred
and eighty three (783) words of text, including the eleven (11) words which
Appellants have completely taken out of context and cited in their Brief, to wit
“Rule 2268(d)(1) expressly prohibits member firms from placing ‘any condition’
81
See FINRA Rule 2268 and FINRA Rule 12000, et al.
44
in a pre-dispute arbitration agreement that ‘limits or contradicts the rules of any
self-regulatory organization.’”82
In addition, Appellant claims that Rule 2228 requires that any pre-dispute
arbitration clause be preceded by the highlighted text found therein. In Appellee’s
pleading to the trial court, to wit: Plaintiff’s Brief in Support of Plaintiff’s Reply to
Defendant’s Amended Response to Plaintiff’s Motion to Compel Arbitration,”
Appellee specifically eliminated any shred of applicability this Rule could have to
the pre-dispute arbitration agreement between the parties at bar.83
i. The definition of “Customer Account,” is provided by the SEC
which regulates FINRA Rules. Nemaha Appellants do not hold a
“Customer Account” with FINRA Member Esposito.
“Customer Account” is not given a definition in the FINRA Rules. As
Plaintiff previously stated, “customer account” is defined by the SEC as accounts
held by retail and institutional customers.84 This SEC definition can be found on
FINRA’s official website at:
http://www.finra.org/Industry/Compliance/MarketTransparency/INSITE/FA
Q/P005933.
FINRA has regulatory power, delegated from Congress through the SEC in
the Securities Exchange Act of 1934 ("Exchange Act"), over broker-dealer firms
82
See Appellants’ Brief page 22, citing FINRA Rule 2268(d)(1).
83
Cite to the CR and Pleading
84
SEC Rule, 16 C.F.R. § 240.15C3-3(a)(1) (emphasis added).
45
registered pursuant to Section 15 of the Exchange Act and their registered
associated persons.85 The Exchange Act gives FINRA the power to propose rules
for the conduct and governance of its regulatory functions, and the Exchange Act
also regulates those rules.86
As per the SEC definition of “customer account,” cited on FINRA’s official
web site, Nemaha Appellants do not currently, nor have they ever, related to the
contractual Agreement between the parties or otherwise, held any kind of an
account, be it as a retail or as an institutional customer.
ii. Appellee Esposito maintains a form for opening customer
accounts which complies with Rule 2268, this form was never
provided to Nemaha Appellants because they never opened an
“Customer Account.”
FINRA Rule 2268, went into effect on December 1, 2011. Since that time,
Esposito has maintained a document, which Esposito has used in the regular course
of business, entitled “New Account Form (instructions).” At the trial court level,
William D. Martin, Chief Compliance Officer of Esposito Securities, LLC
(Appellee) executed a Business Records Affidavit regarding this document,
verifying that Esposito is not only aware of Rule 2268, but fully complies with the
Rule when necessary.87
85
Charles Schwab & Co., 861 F. Supp. 2d at 1065.
86
Charles Schwab & Co., 861 F. Supp. 2d at 1065.
87
Cite to CR and pleading
46
CONCLUSION
For the foregoing reasons, Appellee respectfully request the court overrule
Appellants’ issue in its entirety and affirm the trial court’s judgment. Appellee
further requests all other relief to which it is entitled.88
Respectfully submitted,
Mizgala Law PLLC
/s/ David J. Mizgala
David Jefrie Mizgala
State Bar No. 24031594
david@mizgalalaw.com
Rosewood Court
2101 Cedar Springs Road, Suite 1050
Dallas, Texas 75201
(214) 238-4800 (direct dial)
(214) 238-4801 (direct fax)
—and—
MODJARRAD | ABUSAAD | SAID LAW
FIRM
RHIANNON KELSO
Texas Bar No. 24080636
rkelso@modjarrad.com
SEAN S. MODJARRAD
Texas Bar No. 24027398
smodjarrad@modjarrad.com
212 W. Spring Valley Road
Richardson, Texas 75081
Tel. (972) 789-1664
Fax. (972) 789-1665
88
Cite to CR and pleading
47
Counsel for Appellee-Plaintiff
CERTIFICATE OF SERVICE
In accordance with the Texas Rules of Appellate Procedure, I certify that a
true and correct copy of this APPELLEE’s BRIEF ON THE MERITS was served
upon the following counsel of record on January 16, 2015, by the undersigned
counsel’s e-filing provider and the Court’s e-filing system:
Mazin Sbaiti Richard A. Lewins
State Bar No. 24058096 State Bar No. 0079416
Sean R. Cox LEWINS LAW
State Bar No. 24031980 7920 Belt Line Road, Ste. 650
S TECKLER , LLP Dallas, Texas 75248
12720 Hillcrest Road, Ste. 1045 Telephone: (972) 934-1313
Dallas, TX 75230 Facsimile: (972) 231-3983
Telephone: (972) 387-4040 rlewins@lewinslaw.com
Fax: (972) 387-4041
mazin@stecklerlaw.com
sean@stecklerlaw.com
/s/ David J. Mizgala
David Jefrie Mizgala
48
Michael Morford D/B/A Nemaha Water Services v. Esposito Securities, LLC
Combined Opinion