United States Court of Appeals,
Fifth Circuit.
No. 93-5049.
Don TAYLOR, Plaintiff-Appellee,
v.
INVESTORS ASSOCIATES, INC. and Mitch Goldberg,
Defendants-Appellants.
Aug. 19, 1994.
Appeals from the United States District Court for the Eastern
District of Texas.
Before KING, JOLLY and DAVIS, Circuit Judges.
PER CURIAM:
Having studied the briefs filed in this appeal, having
considered the arguments of counsel, and having reviewed the
record, we are fully convinced that the district court correctly
decided the issues in this appeal in its well-reasoned opinion,
which we attach hereto and adopt as the opinion of this court. The
judgment of the district court is therefore
AFFIRMED.
APPENDIX
In the United States District Court
for the Eastern District of Texas
Paris Division
Don Taylor, Plaintiff,
v.
Investors Associates, Inc., Mitchell Goldberg, also known as
Mitch Goldberg, Defendants.
3:93 CV 20.
1
MEMORANDUM OPINION
Pending before the court for adjudication are the motions of
defendants Mitchell Goldberg ("Goldberg"), and Investors
Associates, Inc. ("IAI"), for an order to stay proceedings and
compel arbitration, or, alternatively, to dismiss the action.
I. Background
The facts in this case are undisputed. IAI is a securities
broker-dealer. Beginning in December 1991, Mitchell Goldberg, as
a representative of IAI, solicited plaintiff, Don Taylor, by
telephone, to buy and sell stock from IAI. On January, 6, 1992,
Taylor made his first trade with IAI, purchasing stock of United
Fashions at a total cost of $132,233.75. On January 7, 1992,
Taylor executed a Client's Agreement with Prudential-Bache
Securities, Inc. ("Prudential"). See Client's Agreement between
Prudential-Bache Securities, Inc. and Don Taylor, Exhibit B to
plaintiff's response to defendant Goldberg's motion to stay
proceedings and compel arbitration [hereinafter "Agreement"]. By
the terms of the Agreement, Prudential was designated as a clearing
broker, whose function it was to keep records relating to Taylor's
account.
Taylor filed a complaint in this court against IAI and
Goldberg alleging, inter alia, violations of § 10(b) of the
Securities and Exchange Act of 1934, as amended; Rule 10(b)(5)
promulgated thereunder, § 12(2) of the Securities Act of 1933, as
amended; and 18 U.S.C. § 1962(a), (b), and (c) ("RICO"), all
arising from the sale of stock by IAI in its capacity as a
2
securities broker-dealer for Taylor. In addition, Taylor alleges
common law fraud against defendants, under the provisions of
Article 581-33A(2) of the Texas Blue Sky Law; pursuant to Section
27.01 of the Texas Business and Commerce Code, for breach of a
fiduciary obligation; and under Section 17.41 of the Texas
Deceptive Trade Practices-Consumer Act, for negligence and
conspiracy. In response, defendant Goldberg filed a motion to stay
proceedings and compel arbitration. IAI filed a similar motion, as
well as a motion to dismiss the claims. The issue raised by these
motions is whether Goldberg, through IAI, is an agent or third
party beneficiary of the arbitration agreement between plaintiff
and Prudential. If so, then the defendants' motion to compel
arbitration must be granted; if not, it must be denied.
II. Analysis
A. The Arbitration Clause
The arbitration clause at issue in this action is part of a
Client's Agreement, signed by Taylor, which was sent on
Prudential's letterhead. The clause, paragraph 14, providing for
compulsory arbitration does not mention defendants IAI or Goldberg
either by name or by function, and defendants did not sign the
document. Paragraph 14 says arbitration is binding on the
"parties." The only parties discussed in the Agreement are Taylor
("I" or "undersigned") and Prudential ("you"). Defendants'
argument that they are included in the term "you" is based upon the
fact that it was IAI which allegedly provided Taylor with the
Agreement. These circumstances are insufficient to support IAI's
3
contention that it was a party to the agreement. Unlike the case
of Okcuoglu v. Hess, Grant & Co., 580 F.Supp. 749 (E.D.Pa.1984),
where the court held the arbitration clause providing protection
for the clearing broker's agents and corresponding firms to be
binding upon the introducing broker, the Agreement here does not
mention IAI, either implicitly or expressly. As such, the critical
question is whether defendants can enforce the arbitration
provision in the Agreement even though defendants are not parties
to the Agreement. Although the Fifth Circuit Court of Appeals has
not directly dealt with this issue, it appears that the case law
from other jurisdictions overwhelmingly rejects attempts by
introducing brokers to enforce arbitration agreements contained in
customer agreements between their clients and clearing brokers.1
The Agreement further states that "any controversy arising
out of or relating to my account shall be settled by arbitration."
On its face the provision is broad, but, if interpreted
contextually, the intent of the parties is manifest—to arbitrate
claims by or against the clearing house concerning its handling of
Taylor's account. This interpretation is reinforced by the
accompanying letter sent by Prudential defining Prudential's role
in Taylor's stock purchase transaction:2
1
See, e.g., Ziegler v. Whale Securities Co., L.P., 786
F.Supp. 739 (N.D.Ind.1992); Shaffer v. Stratton Oakmont, Inc.,
756 F.Supp. 365 (N.D.Ill.1991); Conway v. Icahn Co., Inc., 787
F.Supp. 340 (S.D.N.Y.1990).
2
See Exhibit B, Prudential's Correspondent Allocation of
Responsibility Letter, attached to Goldberg's motion to stay
proceedings and compel arbitration.
4
Prudential Securities Incorporated ("PSI") is not your broker.
PSI is your Broker's clearing firm. As such, PSI handles the
back office, or clearing functions for your Broker and, for
this purpose only, PSI has opened an account in your name.
This language makes it perfectly clear that defendants are entities
independent from Prudential, a clearing house.
Defendants rely upon the agency principles upheld in Okcuoglu
to support their contention that IAI and Goldberg, although not
parties to the Agreement, are entitled to enforce the arbitration
clause contained in Prudential's Agreement with Taylor. The facts
of the case at hand are clearly distinguishable from those relied
upon by the court in Okcuoglu, in that Okcuoglu involved the
liquidation of stock from the customer's (plaintiff's) account to
meet a margin call. 580 F.Supp. at 752. The liquidation was
performed after consultation with the clearing broker, even though
the customer had disapproved the transaction. In that case, the
transaction directly involved the clearing broker, and the court
determined that so long as it was possible that the clearing broker
could be brought into the dispute as a necessary party, the dispute
as to the unauthorized options transaction should be submitted to
arbitration as set forth in the Customer Agreement. Id. at 751.
The court in Anderson v. Brock Investor Services, Inc., No. 4-92-
1032, slip op. (D.Minn., Jan. 14, 1993), found the factual
similarity to Okcuoglu dictated the conclusion that the introducing
broker could enforce the clearing broker's right to compel
arbitration. In Anderson, the transaction related to alleged
unauthorized trades; thus the possibility existed that the
clearing broker would yet be joined in the litigation. Also, the
5
arbitration agreement in Anderson expressly applied to the clearing
broker and its employees and agents. Id. at 3, 5.
In contrast, Prudential is not a party to this action, and no
claims involved in this lawsuit pertain to Prudential or
plaintiff's accounts. The transactions sued upon in Okcuoglu and
Anderson relate to unauthorized or unexecuted trades, whereas
plaintiff Taylor's claim relates solely to misrepresentations made
by the defendants. In a factual situation mirroring the case at
hand, the court in Mowbray v. Moseley, Hallgarten, Estabrook and
Weeden, 795 F.2d 1111 (1st Cir.1986), expressly distinguished
Okcuoglu, because the disputed transaction in Okcuoglu involved the
liquidation of stock whereby the clearing house's services had been
employed. The Court of Appeals for the First Circuit concluded
that, because no claim had been asserted which intimated even a
"potential" involvement of the clearing broker, the activities of
the clearing broker were not a subject of dispute, and hence no
contingent right existed for the introducing broker to invoke the
arbitration agreement. Mowbray, 795 F.2d at 1116-1117.
B. No Agency Relationship Existed
Other courts have held that, even absent an express denial of
a principal and agent relationship in the agreement between client
and clearing broker, such a relationship does not exist between
them.3 Also, the Second Circuit refused to find an agency
relationship between an introducing broker and clearing broker,
3
Lester v. Basner, 676 F.Supp. 481 (S.D.N.Y.1987); Ahn v.
Rooney, Pace Inc., 624 F.Supp. 368 (S.D.N.Y.1985).
6
even though the agreement executed by the customer and clearing
broker stated that the clearing broker was the introducing broker's
agent with respect to the customer's account. McPheeters v.
McGinn, Smith and Co., Inc., 953 F.2d 771, 773 (2nd Cir.1992).
Like the Agreement herein involved, the agreement in McPheeters
nowhere stated that the clearing broker acted as the introducing
broker's agent in entering into the contract generally, and the
Second Circuit refused to read such a provision into the document.
Id. Both Okcuoglu and Anderson, accordingly, can be distinguished
on the ground that, unlike those cases, the transaction in question
involves only a straight securities fraud claim; thus, in this
case, the clearing broker has no nexus with the transaction, and it
cannot be found to be an agent of the introducing broker.
Defendant IAI argues that it is an agent of Prudential, and
under the language of the arbitration agreement, all disputes with
Prudential must be submitted to arbitration. In this relation, IAI
relies on Nesslage v. York Securities, Inc., 823 F.2d 231, 233 (8th
Cir.1987), for the proposition that a customer must arbitrate
disputes with a introducing broker even where, as here, only the
clearing broker was a party to the arbitration agreement. Nesslage
is, however, distinguishable on its facts, specifically: (1) IAI
is not an agent of Prudential, because plaintiff was never advised
that IAI was acting in that capacity for Prudential; (2) there is
no evidence that plaintiff intended IAI to be a party to the
arbitration agreement, and, consequently, an agent or third party
beneficiary of such agreement; and (3) there is no evidence that
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an agency relationship actually existed between Prudential and IAI.
C. Third Party Beneficiary Analysis Fails
Finally, IAI asserts that it is a third party beneficiary of
Prudential, and, as such, is entitled to enforcement of the
arbitration provision. The case relied upon by IAI is an
unpublished opinion from the United States District Court for the
Northern District of Texas, Donald R. Cathey v. Dallas Securities
Investment Corporation et al, No. 3-90-2686-T, slip op. (N.D.Tex.
July 9, 1991). In Cathey, the court upheld an arbitration
agreement under a third party beneficiary analysis in a case in
which the plaintiff asserted a claim against the clearing broker as
well as the introducing broker. Cathey, slip op. at 5.
Additionally, in Cathey, there was an agreement to settle disputes
between the clearing house and the introducing broker through
arbitration. Id., slip op. at 6. Here, there was no such
agreement.
In a New York District Court case, with facts similar to
these, the plaintiff signed a "Customer's Agreement" with the
clearing broker and the introducing broker was found not to be a
party to such an agreement. Lester v. Basner, 676 F.Supp. 481,
482-483 (S.D.N.Y.1987). There, the court said that the issue in
the third party beneficiary determination was whether the
introducing broker was an intended beneficiary or merely an
incidental beneficiary to the Customer's Agreement. The court
found that the introducing broker was an "incidental" beneficiary,
because the agreement was silent as to whether the terms of the
8
contract applied to introducing brokers, and the defendants were
unable to show any intent to make the introducing broker a third
party beneficiary to the contract. Id. at 484-485. An intent to
benefit a third party must be apparent from the construction of the
contract in light of all surrounding circumstances to qualify that
party as a third party beneficiary. O'Connor v. R.F. Lafferty &
Co., Inc., 965 F.2d 893 (10th Cir.1992).
Furthermore, a literal interpretation of the language of this
Agreement suggests that the "omission of defendants from the clause
allowing arbitration and as signatories should be regarded as
purposeful." See Mowbray, 795 F.2d at 1116. Specifically, the
arbitration provision contained in the Agreement expressly states
that it is binding on the "undersigned, my heirs, executors,
administrators and assigns"; and shall "inure to the benefit of
your successors and assigns." It follows that, if the parties had
intended to benefit the broker, then the Agreement would have said
so. Expressio unius est exclusio alterius.4 Also, the Agreement
makes no reference to defendants by name or function, nor does it
refer to introductory brokers in general. In sum, no consent to
arbitration with Goldberg or IAI may be implied based solely on the
relationship between the introducing broker and the clearing house.
Id.
The introducing broker was not included in the arbitration
clause between Taylor and Prudential; because of that, it is
4
See Leatherman v. Tarrant County Narcotics Intelligence and
Coordination Unit, --- U.S. ---- 113 S.Ct. 1160, 122 L.Ed.2d 517
(1993).
9
reasonable to draw the inference that the parties did not intend
for the defendants, the introductory firm (IAI) and its agent
(Goldberg), to be a beneficiary of the arbitration clause. The
plain meaning of the chosen language is clear. The defendants
cannot compel arbitration.
III. CONCLUSION
For the reasons set forth above, IAI and Goldberg's motion to
stay proceedings and compel arbitration, or, alternatively, to
dismiss, is denied. An order to that effect will issue
concurrently with this memorandum opinion.
SIGNED this 14th day of June, 1993.
/s/ William Wayne Justice
William Wayne Justice
United States District Judge
10