Michael Morford D/B/A Nemaha Water Services v. Esposito Securities, LLC ( 2015 )

ACCEPTED
05-14-01223-CV
FIFTH COURT OF APPEALS
DALLAS, TEXAS
2/19/2015 11:44:54 PM
LISA MATZ
CLERK
No. 05-14-01223-CV
________________________________________________________
FILED IN
5th COURT OF APPEALS
IN THE COURT OF APPEALS DALLAS, TEXAS
2/19/2015 11:44:54 PM
FIFTH DISTRICT OF TEXAS AT DALLAS
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,
APPELLEES,
v.
ESPOSITO SECURITIES, LLC,
APPELLEE.
________________________________________________________
APPEAL FROM 44TH DISTRICT COURT
DALLAS COUNTY, TEXAS
________________________________________________________
APPELLEE’S FIRST AMENDED BRIEF ON THE MERITS
________________________________________________________
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 2101 Cedar Springs Road,
rkelso@modjarrad.com 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: 972-789-1965
COUNSEL FOR APPELLEE
ORAL ARGUMENT CONDITIONALLY REQUESTED
STATEMENT REGARDING ORAL ARGUMENT
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
TABLE OF CONTENTS
STATEMENT REGARDING ORAL ARGUMENT ................................... i
TABLE OF CONTENTS ........................................................................... II
INDEX OF AUTHORITIES...................................................................... V
I. RESTATEMENT OF FACTS .......................................................... 1
A. THE PARTIES’ PRE-DISPUTE ARBITRATION AGREEMENT. ....... 1
B. THE DISPUTED TRANSACTIONS. .............................................. 2
C. APPELLANTS’ POST-DISPUTE ATTEMPT TO SQUIRM OUT OF
THEIR PRE-DISPUTE ARBITRATION AGREEMENT. ................... 4
II. STANDARD OF REVIEW ............................................................... 7
A. SETTLED TEXAS LAW ESTABLISHES THIS COURT’S REVIEW OF
THE TRIAL COURT’S ORDER IS GOVERNED BY THE NO-
EVIDENCE STANDARD OF REVIEW. .......................................... 7
B. APPELLANTS’ ARGUED-FOR APPLICATION OF THE DE NOVO
STANDARD OF REVIEW IS CONTRARY TO TEXAS LAW. ............. 9
III. SUMMARY OF ARGUMENT ....................................................... 11
IV. ARGUMENT .................................................................................. 12
A. THE TRIAL COURT PROPERLY REFUSED TO GRANT
APPELLANTS’ FACTUALLY DEFICIENT AND LEGALLY
UNSUPPORTED MOTION TO COMPEL ARBITRATION .............. 12
1. Appellants’ Motion to Compel Arbitration Is
Completely Devoid of Evidentiary Support and Thus
Fails On Its Face. ....................................................... 12
2. Appellants’ Motion to Compel Grossly Misconstrues
FINRA Rules. ............................................................. 15
3. 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. ............................................... 18
B. RECENT (AUGUST 21, 2014) SECOND CIRCUIT
DECISIONS HOLD FORUM SELECTION CLAUSES
SUPERSEDE ANY ARBITRATION AGREEMENT
CREATED BY FINRA RULE 12200.................................... 22
ii
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. ...................................................................... 23
2. Status as a “customer” for purposes of FINRA Rule
12200 has never been determined by merely
examining “the face of the Agreement..” .................... 30
3. Federal Appellate Courts Have Rejected Appellants’
Contention that there is a presumption favoring
FINRA Arbitration. .................................................... 31
C. GENERAL RULES OF CONTRACT INTERPRETATION FAVOR
ARBITRATION BEFORE THE AMERICAN ARBITRATION
ASSOCIATION (AAA). ............................................................. 34
1. Precedent does not exist requiring construing facts in
favor of finding a party is a “customer” for purposes of
FINRA Rule 12200. .................................................... 38
D. APPELLANTS DO NOT PRESENT A VIABLE
ARGUMENT THAT APPELLANTS ARE
CUSTOMERS FOR PURPOSES OF FINRA RULE
12200 AND APPLICABLE CASE PRECEDENTS. . 39
2. Cases cited by Appellants involve Financial
Agreements for the issuance and underwriting of
Auction Rate Securities (ARS) ................................... 44
3. Other cases cited by Appellants present factual
circumstances wholly distinguishable from the case at
bar. .............................................................................. 49
4. APPELLANTS CITE IRRELEVANT FINRA RULES
AND IRRELEVANT FACTS THAT FAIL TO SAVE
APPELLANTS ARGUMENT THAT THEY ARE
“CUSTOMERS” FOR PURPOSES OF FINRA RULE
12200 ........................................................................... 53
5. Appellants attempt to analogize legal contingency fee
agreement. ................................................................... 56
iii
iv
INDEX OF AUTHORITIES
Page(s)
CASES
Applied Energetics, Inc. v. NewOak Capital Mkts., LLC,
645 F.3d 522 (2d Cir. 2011) .................................................. 24, 25
Bensadoun v. Jobe-Riat,
316 F.3d 171 (2d Cir. 2003) ........................................................ 28
Charles Schwab & Co. v. Fin. Indus. Regulatory Auth. Inc.,
861 F. Supp. 2d at (N.D. Cal. 2012) ............................................ 54
Citigroup Global Mkts. Inc. v. Abbar,
761 F.3d 268 (2d Cir. 2014) ...................................... 28, 29, 48, 49
Citigroup Global Mkts. Inc. v. Abbar,
943 F. Supp. 2d 404 (S.D.N.Y. 2013) .......................................... 17
Citigroup Global Mkts., Inc. v. VCG Special Opportunities
Master Fund Ltd.,
598 F.3d 30 (2d Cir. 2010) .......................................................... 28
Credit Suisse Sec. (USA) LLC v. Sims,
Civ. Action No. H-13-1260, 2013 U.S. Dist. LEXIS
143712 (S.D. Tex. Oct. 4, 2013) ............................................ 17, 35
In re Crosstex CCNG Processing Ltd,
No. 05-08-01091-CV, 2008 Tex. App. LEXIS 8391
(Tex. App.—Dallas Nov. 7, 2008, no pet.) (mem. op.).......... 32, 33
EEOC v. Waffle House, Inc.,
534 U.S. 279 (U.S. 2002) ............................................................. 25
First Options of Chicago, Inc. v. Kaplan,
514 U.S. 938 (1995) ..................................................................... 31
v
Goldman, Sachs & Co. v. Golden Empire Schs. Fin. Auth.,
764 F.3d 210, 2014 U.S. App. LEXIS 16155 (2d Cir.
2014) ................................................................................ 21, 22, 24
J.P. Morgan Secs. Inc. v. La Citizens Prop. Ins. Corp.,
712 F. Supp. 2d 70 (S.D.N.Y 2010) ........................... 21, 34, 41, 42
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) .................................................................................. 11
Mitsubishi Motors Corp. v. Soler Chrysler–Plymouth, Inc.,
473 U.S. 614 (1985) ..................................................................... 31
Morgan Keegan & Co., Inc. v. Garrett,
816 F. Supp. 2d 439 (S.D. Tex. 2011) ................................ 43, 44, 45
Morgan Keegan & Co. v. Silverman,
706 F.3d 562 (4th Cir. 2013) ................................................. passim
In re Nat’l Health Ins. Co.,
109 S.W.3d 552 (2002) ................................................................ 32
Patten Secs. Corp. v. Diamond Greyhound & Genetics, Inc.,
819 F.2d 400 (3d Cir. 1987) ............................................ 21, 40, 42
Phillips v. ACS Mun. Brokers, Inc.,
888 S.W.2d 872 (Tex. App.—Dallas 1994, no writ) ............ 7, 8, 13
Raymond James Fin. Servs. v. Cary,
709 F.3d 382 (4th Cir. Va. 2013) ................................................. 17
Tex. Capital Bank, N.A. v. Automaker, Inc.,
No. 14-94-0069-CV, 1995 WL 472346 (Tex. App.—
Houston [14th Dist.] Aug. 10, 1995, no writ) (not
designated for publication) .......................................................... 12
vi
Tradestation Secs., Inc. v. Capone,
2014 U.S. Dist. LEXIS 51876 (W.D.N.C. Apr. 10,
2014) ............................................................................................ 17
In re Trammell,
246 S.W.3d 815 (Tex. App.—Dallas 2008, no pet.)............. 7, 8, 16
UBS Fin. Servs., Inc. v. Carilion Clinic,
706 F.3d 319 (4th Cir. 2013) ....................................................... 35
UBS Fin. Servs., Inc. v. W. Va. Univ. Hosps., Inc.,
660 F.3d 643 (2d Cir. 2011) ...................................... 21, 22, 41, 43
Wachovia Bank, Nat. Ass’n v. VCG Special Opportunities
Master Fund, Ltd.,
661 F.3d 164 (2d Cir. 2011) .................................................. 28, 34
Zarecor v. Morgan Keegan & Co., Inc.,
No. 4:10-cv-01643 (SWW), 2011 WL 5592861 (E.D.
Ark. July 29, 2011) ................................................................. 45, 46
STATUTES
9 U.S.C. § 2 ................................................................................. 23, 30
16 C.F.R. § 240.15C3-3(a)(1) ........................................................... 54
Dodd-Frank Wall Street Reform and Consumer
Protection Act .............................................................................. 51
Securities Exchange Act of 1934 ....................................................... 54
TEX. CIV. PRAC. & REM. CODE § 171.001(a) ...................................... 30
TEX. CIV. PRAC. & REM. CODE ANN. § 171.021(a)(1)-(2) ........... 31, 32
OTHER AUTHORITIES
FINRA Rule 2268 ................................................................. 52, 53, 55
vii
FINRA Rule 4000 ............................................................................. 47
FINRA Rule 4530 ............................................................................. 47
FINRA Rule 12000 ..................................................................... 47, 52
FINRA Rule 12200 ..................................................................... passim
FINRA Rule 12200’s .................................................................... ix, 16
SECONDARY AUTHORITIES
Teresa J. Verges, Opening the Floodgates of Small Customer
Claims in FINRA Arbitration: FINRA v. Charles Schwab &
Co., Inc., 15 CARDOZO J. CONFLICT RESOL. 623
(2014)........................................................................................... 19
viii
ABBREVIATIONS AND RECORD REFERENCES
Abbreviations
“Appellants” The terms “Appellants,” “Defendants,” and
“Appellants-Defendants” are used interchangeably
herein to refer collectively to 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.
“Appellee” The terms “Appellee,” “Plaintiff,” and “Appellee-
Plaintiff” are used interchangeably herein to refer to
ESPOSITO SECURITIES, LLC.
“Agreement” The term “Agreement” r e f e r s h e r e i n t o the
May 1, 2013 engagement letter between Nemaha
Water Services and Esposito Securities, LLC.
“Arbitration The term “Arbitration Order” refers to the trial
Order” court’s “Order Granting Plaintiff’s Motion to Compel
Arbitration,” dated August 28, 2014.
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 #]
ix
RESTATEMENT OF THE CASE
Nature of the Appellee-Plaintiff initiated the underlying action—
Case: styled, 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 The trial court held two hearings before deciding the
Prior issues presented in the parties’ competing motions to
Proceedings: compel. See generally RR Vols. 1-3. Thereafter, the
court conducted another hearing to consider 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 The trial court granted Appellee-Plaintiff’s Motion to
Court’s Compel Arbitration before the AAA, 1 CR at 292-94,
Disposition: and impliedly denied Appellants-Defendants’ motion
to reconsider that order, 1 CR at 362.
x
RESTATEMENT OF ISSUE PRESENTED
Appellants-Defendants admit below, in their FINRA Statement
of Claim, 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; and, (3)
in this case, the lone claim they seek to compel Appellee-Defendant
to arbitrate before FINRA pertains to a transaction Appellants
conducted entirely independent of, and without in any way relying
on, any FINRA-regulated goods or services from Appellee.
On this state of the appellate record, did Appellants satisfy
their burden 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?
xi
I.
RESTATEMENT OF FACTS
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
1
(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 by binding
arbitration in accordance with the Commercial Arbitration Rules of
the American Arbitration Association[.]” 1 CR at 35, ¶ K.
B. The Disputed Transactions.
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”).1 1 CR at
1 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.
2
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, 2 the Transaction entitled Appellee-Plaintiff to “a
Transaction fee [] equal to five percent (5%) of the [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,
2 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.
3
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
4
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.”).
In alleged support of the foregoing filings, Appellants-
Defendants generally cite FINRA Rule 12200 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;
5
(2) they signed the Agreement containing the pre-dispute
arbitration clause without objection, 2 RR at 11:23-25;
(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
6
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.
II.
STANDARD OF REVIEW
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)
7
(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 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).
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.
8
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.
According to Appellants-Defendants, the de novo standard is
appropriate in this case because they indisputably (allegedly) proved
themselves to be “customers” of a FINRA member within the
contemplation FINRA Code of Arbitration Procedure; thus, contend
Appellants-Defendants, “the only disputed question before this
[C]ourt is purely legal in nature.” Appellants’ Brief at 9.
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 ignore their counsel’s express acknowledgment 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 to initiate a FINRA arbitration against Appellants-Defendants
specifically disavows they were in any way involved with the
Transaction they want the FINRA arbitrator to resolve, 1 CR at 241-
56.
10
III.
SUMMARY OF ARGUMENT
Appellants-Defendants attack the trial court’s Arbitration
Order on the limited ground that “the trial court erred in finding
Appellants were not ‘customers’ of Appellee under the Rules of the
Financial Industry National Regulatory Authority (FINRA), and
[thus] 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’ failed to prove their alleged FINRA-
customer status, it establishes 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.
11
IV.
ARGUMENT
A. The Trial Court Properly Refused To Grant Appellants’
Factually Deficient And Legally Unsupported Motion To
Compel Arbitration
On August 19, 2014, Appellants-Defendants filed two separate
documents, respectively titled, Defendants’ Response to Plaintiffs’
Motion to Compel and Defendants’ Motion to Compel Arbitration
and Stay. 1 CR at 131-35, 136-41. Notwithstanding their different
titles, both documents requested the same relief, to-wit: an order
refusing to enforce the parties’ pre-dispute arbitration clause. 1 CR
at 131-35, 136-41
1. 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).
12
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 Secs. Inc. v. Banales, 860 S.W.2d
594, 597 (Tex. App.—Corpus Christi 1993, orig. proceeding)).
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.
13
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.
14
2. 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 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.
a) 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
15
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 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
16
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).
Besides constituting little more than Appellants-Defendants’
ipse dixit, the foregoing analysis completely disregards the applicable
standard of review.
b) 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
17
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.
3. 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
18
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. Morgan Keegan & Co. v.
Silverman, 706 F.3d 562, 565 (4th Cir. 2013).
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. 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).
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
19
the customer, as a matter of contract, the option to select FINRA as
an arbitral forum regardless of whatever might be provided in the
agreement.” See Appellant’s Brief at 11, ¶ 2.
Third, Appellants actually go on to claim, “[t]his matter of law
was not contested below.” Appellant’s Brief at 11, ¶ 2. 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
20
business activities of the FINRA member or a member's
associated person.’”
1 CR at __ (quoting Morgan Keegan & Co., 706 F.3d at 563).
In this cause, Appellants have stipulated on the record that
they signed and entered into the May 1, 2013 contractual
Agreement. See generally RR Vol. 2. Said Agreement, and the
arbitration agreement therein, constitute a separate arbitration
agreement. See Exhibit B, para.K 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. Teresa J.
Verges, Opening the Floodgates of Small Customer Claims in FINRA
Arbitration: 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,
21
http://disciplinaryactions.finra.org/viewdocument.aspx?DocNB=29
288).
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, see Ex. B, para. K,
and as per the ruling of the Fourth Circuit Court of Appeals,
Nemaha Defendants cannot compel FINRA Member Esposito to
FINRA Arbitration. Morgan Keegan & Co., 706 F.3d at 563.
B. 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
22
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. 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”).
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
23
millions of dollars in Auction Rate Securities (“ARS”), the parties
were indeed deemed Rule 12200 “customers.” Issuance and
underwriting of ARS has long been held to establish a member-
customer relationship for purposes of 12200. 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).
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…” Golden Empire Schs. Fin. Auth., 764 F.3d 210, at 212 (2d Cir.
2014).
24
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.” Id., at 214, citing, 9 U.S.C. § 2; see, UBS Fin. Servs., 660 F.3d
at 648-49.
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
25
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.” Id., at 1745.
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 or in 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
26
grounds for revocation of the contractual agreement to arbitrate
created by FINRA Rule 12200
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.”
Id., at 215, citing Applied Energetics, 645 F.3d at 525 (2d Cir. 2011).
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.” Id., at 216, citing
Applied Energetics, 645 F.3d at 525-526 (2d Cir. 2011)
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
27
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.” Id., at 217.
The forum selection clause between Appellants and
Appellee uses the terms “any claim or 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.” EEOC v. Waffle House, Inc., 534 U.S. 279, at 282-3 (U.S.
2002).
28
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.”
See Appellants Brief, Tab 2, the Agreement, Paragraph 2.
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 to
arbitrate before FINRA cannot be waived or abrogated by contract,”
is patently false. See Appellant Brief, page 7, no. 4 (see also
Morgan Keegan).
29
2. 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. See Appellant Brief, page 12.
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).
30
3. 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). 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).
First, Appellee notes the multiple cases rejecting this
contention. 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"). In the case cited by Appellants to rely on the presumption
31
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. 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.").
In Abbar, 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
32
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.
33
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. Id. As to
Abbar and Energetics, see also Agreement
C. 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.” TEX. CIV. PRAC. & REM.
CODE ANN. § 171.001(a).
Similarly, the Federal Arbitration Act provides that a written
arbitration provision is valid, irrevocable, and enforceable. 9 U.S.C.
§ 2 (2006).
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
34
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.’” 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 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.”).
Proceedings to compel arbitration must be conducted in
accordance with the procedure outlined in § 171.021 of the Texas
35
Civil Practice and Remedies Code. TEX. CIV. PRAC. & REM. CODE
ANN. § 171.021(a)(1)-(2).
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. Id. 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. 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).
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. See In re Crosstex CCNG Processing Ltd,
2008 Tex. App. LEXIS 8391, *6 (Tex. App.—Dallas 2008) (mem.
36
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”).
Appellee would point to a 2008 ruling by this Honorable
Court, wherein the Court of Appeals, Fifth District, Dallas, stated
“[a]rbitration agreements are 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.” Id.
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.” Id.
37
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.
1. 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, JP Morgan Sec. v. La. Citizens
Prop. Ins. Corp., 712 F. Supp. 2d 70 (S.D.N.Y. 2010), see Appellant
Brief, page 12 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.” Id. at 77. The LA Citizens
decision came out of the United States 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
38
“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. 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).
2. 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. 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.
39
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 business.” 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).
The plain meaning of the word “purchase,” is to “to buy
(property, goods, etc.)” or “to get (something) by paying money for
it.” Morgan Keegan & Co., 706 F.3d at 565-66.
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.
40
Appellants have never held an account with or purchased
commodities or services from FINRA Member Esposito (Appellee).
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.
a) 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 Rule
12200 “customers.” See Appellants’ Brief, page 12. 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
41
FINRA member at all, must be doing one or the other. See
Appellants’ Brief, page 12
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.
b) 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.” See Appellants’ Brief, page 12.
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,
42
was the basis for finding that the party was a Rule 12200
“customer.” Accordingly, Appellee will not address this matter
further.
c) 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 FINRA
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
43
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,” see Appellant Brief, page 14, is a blatantly
unsupported misstatement of the law, and yet another attempt to
mislead this Honorable Court.
3. 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”). See Appellant Brief, page 14, citing.
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
44
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 corporation’s shares and warrants. Patten
Securities Corp. v. Diamond Greyhound & Genetics, Inc., 819 F.2d 400, 402
(3d Cir. 1987).
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
45
purchase the securities and damages arising from same. Id., at 402-
403.
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.” Id., at 402-403.
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.
See Appellant Brief Tab B, the Agreement, Paragraph K, see
46
also Appellants’ Brief, page 5, citing CR 245. 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).
Next, Appellants cite West Virginia University Hospitals58 and
Louisiana Citizens, J.P. Morgan Securities Inc. v. Louisiana Citizens
Property Insurance Corp., 712 F. Supp. 2d 70 (S.D.N.Y 2010) 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. Id.
Citizens then sought to arbitrate the dispute before FINRA.
The Southern District of New York cited the Third District’s decision
47
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.” 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))
The court concluded that issuers are Rule 12200 “customers”
of underwriters and could demand arbitration before FINRA of their
disputes. Id., at 74-79. Appellants were never issuers for Appellee
Esposito, and Appellee Esposito never provided underwriting
services for Appellants. See Appellants’ Brief, Tab B, the Agreement.
Appellants do not dispute the validity of these facts. The
circumstances surrounding the parties’ relationship in LA Citizens
are 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
48
fact that WVUH had paid for UBS to perform broker-dealer services.
See, 660 F.3d 643 at 648 (2d Cir. 2011).
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
4. 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.” See Appellant Brief, page 14.
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. Id.
49
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.” Morgan
Keegan & Co., Inc. v. Garrett, 816 F. Supp. 2d 439, 441 (S.D. Tex. 2011).
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. 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…).
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
50
secondary market” and that these two claimants “never gave money
to Morgan Keegan,” the Court found that these two Claimants were
not Rule 12200 “customers” and “could not compel Morgan
Keegan to arbitrate.” Garrett, 816 F. Supp. 2d 439, at 441 (S.D. Tex.
2011)
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.”
51
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.” See Appellant Brief, page 14
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. Id., footnote citation no. 34
Appellee has examined this case in detail and does not find a
single reference to an underlying financial services agreement.
Further, Appellee does 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
52
this Honorable Court by virtue of Appellants’ appeal. Accordingly,
Appellee will not address this case further.
5. APPELLANTS CITE IRRELEVANT FINRA RULES AND
IRRELEVANT FACTS THAT FAIL TO SAVE APPELLANTS
ARGUMENT THAT THEY ARE “CUSTOMERS” FOR
PURPOSES OF FINRA RULE 12200
a) 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. See FINRA Rule 4000, et al.
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 FINRA By-Laws. Second, the case at bar does not
53
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.
b) 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
54
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.
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].”
Abbar, 761 F.3d at 275
“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.” Id., at 276.
“The only relevant inquiry in assessing the existence of a
customer relationship is whether an account was opened or a
55
purchase made; parties and courts need not wonder whether myriad
facts will ‘coalesce into a functional concept of the customer
relationship.’" Id., at 276, citing, CGMI v. Abbar, 943 F. Supp. 2d at
407.
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 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.
6. Appellants attempt to analogize legal contingency fee agreement.
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
56
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 it further.
a) Appellants raise direct privet by contract; note
that under Appellee’s scenario, FINRA member
could not bring action before FINRA.
Appellants find it worth noting that direct privet of contract
upholds Appellants as a customer (Appellants have yet to establish
Appellants are “customers” for purposes of FINRA Rule 12200)
despite fraudulent inducement or non-performance under a contract.
Appellants then suggest that if direct privet 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
57
a member could never bring a FINRA claim against a client for
failure to pay.” See Appellants’ Brief, page 20
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.” 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.
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
58
statements to the matters pending before this Honorable Court,
Appellee will not address this further.
b) 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.). See FINRA Rule 2268 and FINRA Rule 12000, et al.
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 it.
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
59
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’ in a pre-dispute
arbitration agreement that ‘limits or contradicts the rules of any self-
regulatory organization.’” See Appellants’ Brief page 22, citing
FINRA Rule 2268(d)(1).
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
60
could have to the pre-dispute arbitration agreement between the
parties at bar.
c) 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, the SEC defines “customer
account” as accounts held by retail and institutional customers. SEC
Rule, 16 C.F.R. § 240.15C3-3(a)(1) (emphasis added) This SEC
definition can be found on FINRA’s official website at:
http://www.finra.org/Industry/Compliance/MarketTransparency/IN
SITE/FAQ/P005933.
FINRA has regulatory power, delegated from Congress through
the SEC in the Securities Exchange Act of 1934 ("Exchange Act"),
over broker-dealer firms registered pursuant to Section 15 of the
Exchange Act and their registered associated persons. SEC Rule, 16
C.F.R. § 240.15C3-3(a)(1) (emphasis added).
61
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. Charles Schwab & Co., 861 F.
Supp. 2d at 1065.
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 retail or as
an institutional customer.
d) 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 a
“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
62
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.
V.
CONCLUSION AND PRAYER
For the foregoing reasons, Appellee respectfully requests the
Court to overrule the sole issue Appellants-Defendants present on
appeal and affirm the trial court’s judgment. Appellee-Plaintiff
further requests all other relief to which it is entitled.
63
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, Ste
1050
Dallas, Texas 75201
(214) 238-4800 (direct dial)
(214) 238-4801 (direct fax)
—and—
M|A|S 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
Counsel for Appellee-Plaintiff
64
CERTIFICATE OF SERVICE
I, the undersigned counsel , certify on February 19, 2015,
Appellee’s First Amended Brief on the Merits was served on the
following counsel of record through the undersigned counsel’s
electronic filing service provider:
Mazin Sbaiti
mazin@stecklerlaw.com
Sean R. Cox
sean@stecklerlaw.com
STECKLER, LLP
12720 Hillcrest Road, Ste. 1045
Dallas, TX 75230
Richard A. Lewins
rlewins@lewinslaw.com
LEWINS LAW
7920 Belt Line Road, Ste. 650
Dallas, Texas 75248
/s/ David J. Mizgala
David Jefrie Mizgala
65
CERTIFICATE OF COMPLIANCE
In accordance with the Texas Rules of Appellate Procedure, I
certify that APPELLEE’S FIRST AMENDED BRIEF ON THE
MERITS contains 10,155 words, exclusive of the caption, identity of
parties and counsel, statement regarding oral argument, table of
contents, index of authorities, statement of the case, statement of
issues presented, statement of jurisdiction, statement of procedural
history, signature, proof of service, certification, certificate of
compliance, and appendix.
/s/ David J. Mizgala
David Jefrie Mizgala
66