Arrants v. F.N. Wolf & Co. ( 1997 )


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  • PUBLISHED
    UNITED STATES COURT OF APPEALS
    FOR THE FOURTH CIRCUIT
    FRANKIE A. ARRANTS; DANETTE F.
    ARRANTS,
    Plaintiffs-Appellees,
    v.
    ELLSWORTH ALLEN BUCK, JR.;
    GEORGE E. HUBBARD,                                  No. 93-1651
    Defendants-Appellants,
    and
    F. N. WOLF & COMPANY,
    INCORPORATED,
    Defendant.
    ERNEST T. COLTRAIN; BETTY P.
    COLTRAIN,
    Plaintiffs-Appellees,
    v.
    ELLSWORTH ALLEN BUCK, JR.;
    GEORGE E. HUBBARD,                                  No. 93-1658
    Defendants-Appellants,
    and
    F. N. WOLF & COMPANY,
    INCORPORATED,
    Defendant.
    Appeals from the United States District Court
    for the Eastern District of Virginia, at Norfolk.
    J. Calvitt Clarke, Jr., District Judge.
    (CA-93-45, CA-93-127-2)
    Argued: April 12, 1994
    Decided: December 4, 1997
    Before WILLIAMS and MICHAEL, Circuit Judges, and
    WARD, Senior United States District Judge for the
    Middle District of North Carolina, sitting by designation.
    _________________________________________________________________
    Affirmed and remanded by published opinion. Judge Michael wrote
    the opinion, in which Judge Williams and Senior Judge Ward joined.
    _________________________________________________________________
    COUNSEL
    ARGUED: James Christopher Cosby, MALONEY, YEATTS &
    BARR, Richmond, Virginia, for Appellants. William Edgar Spivey,
    KAUFMAN & CANOLES, Norfolk, Virginia, for Appellees. ON
    BRIEF: John S. Barr, Daniel A. Gecker, Steven S. Biss, MALONEY,
    YEATTS & BARR, Richmond, Virginia, for Appellants. Jonathan L.
    Thorton, KAUFMAN & CANOLES, Norfolk, Virginia, for Appel-
    lees.
    _________________________________________________________________
    OPINION
    MICHAEL, Circuit Judge:
    This appeal involves the subject of arbitration. The matter began
    when the brokerage firm of F. N. Wolf & Co., Inc. (F. N. Wolf or
    Wolf) and two of its employees, Ellsworth A. Buck, Jr. and George
    E. Hubbard, were sued in two cases by four customers for securities
    fraud. There were immediate motions to compel arbitration. Wolf, the
    introducing broker, and its employees sought to invoke the arbitration
    clause in an agreement to which Wolf was not a party, that is, the
    agreement between the customers and the clearing broker. The district
    court denied arbitration, and Wolf and its employees appealed. We
    now join the many federal courts which (aside from two limited
    2
    exceptions not relevant here) do not allow an introducing broker to
    invoke the clearing broker's arbitration clause. F. N. Wolf is no lon-
    ger a party in this case, so we affirm the district court's denial of arbi-
    tration to its employees, Buck and Hubbard.
    I.
    After their broker, F. N. Wolf, placed them in allegedly risky
    stocks that lost value, Frankie and Danette Arrants and Ernest and
    Betty Coltrain (in separate cases) sued F. N. Wolf; Buck, their
    account executive; and Hubbard, Buck's supervisor. 1 The main counts
    of the complaints assert violations of federal securities law.
    The Arrantses are high school graduates who are self-employed in
    the logging and trucking business. Mr. Coltrain works in the mainte-
    nance department of a lumber company. Neither the Arrantses nor the
    Coltrains had any prior experience in stock market investment.
    According to the complaints, Buck's "high-pressure telephone calls"
    convinced the Arrantses in 1989 and the Coltrains in 1992 to open
    securities accounts with F. N. Wolf. The customers claim that Buck
    and F. N. Wolf convinced them to buy high risk, speculative stocks
    that rapidly declined in price and were unsuitable to their investment
    needs. The Arrantses claim to have lost about $52,000 and the
    Coltrains about $29,000. They allege, among other things, misrepre-
    sentations and omissions in violation of section 10(b) of the Securities
    Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 
    17 C.F.R. § 240
    .10b-5.
    After the complaints were filed, F. N. Wolf, Buck, and Hubbard
    moved in each case to compel arbitration under the Federal Arbitra-
    tion Act, 
    9 U.S.C. §§ 1
     et seq. The movants sought to take advantage
    of an arbitration clause contained in the account agreements between
    the customers and the clearing broker, Prudential Securities Incorpo-
    rated (Prudential).
    The facts governing the arbitration issue are undisputed, and we
    begin our discussion by explaining why Prudential is in the picture.
    _________________________________________________________________
    1 We sometimes refer to the Arrantses and the Coltrains as "the custom-
    ers."
    3
    F. N. Wolf engaged Prudential to provide certain clearing functions
    for the accounts of Wolf's customers. In industry jargon F. N. Wolf
    is the "introducing broker" and Prudential is the "clearing broker."
    The clearing agreement between F. N. Wolf and Prudential is not
    in the record, but the basic division of their responsibilities for cus-
    tomer accounts is clear. F. N. Wolf, as is universally the case with
    introducing brokers, "retain[ed] all functions that relate to direct per-
    sonal customer contacts, such as soliciting customer accounts, . . .
    making investment recommendations to customers, and accepting
    their orders for the purchase or sale of securities." Henry F. Min-
    nerop, The Role and Regulation of Clearing Brokers, 48 Bus. Law.
    841, 843 (1993). Prudential performed "cashiering and processing
    functions" for the accounts introduced by F. N. Wolf. Among other
    things, Prudential kept books and records reflecting transactions in the
    accounts, maintained funds and securities, and prepared (and mailed
    to the customers) confirmations and monthly statements.
    After the Arrantses and the Coltrains agreed to open accounts with
    F. N. Wolf, each couple received a letter from that firm asking that
    they sign and return certain documents "need[ed] to support" their
    accounts with Wolf. One of the documents was a joint account agree-
    ment (Prudential Agreement) bearing Prudential's name in large bold
    print at the top.2 The name F. N. Wolf did not appear anywhere in the
    agreements. There were some boxes filled in near the top of both doc-
    uments. On both, "EWP" was written under "Branch" and "B5" was
    written under the letters "FA." The "Account Number" was filled in
    on both agreements, "015541" for the Arrantses and "024931" for the
    Coltrains. It was later revealed that "EWP" was the F. N. Wolf branch
    office, "B5" was the F. N. Wolf account executive (Buck) for each
    account, and the numbers were the customers' account numbers at
    F. N. Wolf. It is apparent from the record that the Arrantses and the
    Coltrains did not know the meaning of these codes and numbers when
    they signed the agreements.
    _________________________________________________________________
    2 The agreement received by the Arrantses bore the name "Prudential-
    Bache Securities," and the one received by the Coltrains said "Prudential
    Securities."
    4
    When the Coltrains received the letter from F. N. Wolf enclosing
    the agreement with Prudential's name at the top, Mr. Coltrain tele-
    phoned Buck, his account executive. Buck "explained to [him] that
    [Prudential] was a clearinghouse broker performing certain paper-
    work functions for [F. N. Wolf] and that the ``Joint Account Agree-
    ment' was something Prudential required be signed in order for
    Prudential to perform such services." The Coltrains then signed the
    Prudential Agreement and returned it to F. N. Wolf. The Arrantses
    also signed and returned the agreement.
    Sometime after executing the Prudential Agreements, the Arrantses
    and Coltrains received from Prudential a Correspondent Allocation of
    Responsibility Letter. The letter began with the greeting, "Dear Cli-
    ent," and summarized its message in the first substantive paragraph
    as follows: "[Prudential] is not your Broker.[Prudential] is your Bro-
    ker's clearing firm. As such, [Prudential] handles the back office, or
    clearing functions for your Broker and, for this purpose only, [Pru-
    dential] has opened an account in your name."
    The Prudential Agreements executed by the Arrantses and the
    Coltrains contain the same key sentence in the arbitration provision:
    The undersigned [customer] agrees, and by carrying an
    account for the undersigned you agree,3 all controversies
    which may arise between us concerning any transaction or
    the construction, performance or breach of this or any other
    agreement between us, whether entered into prior, on or
    subsequent to the date hereof, shall be determined by arbi-
    tration.
    It is this clause that F. N. Wolf and its employees sought to invoke
    in their motions to compel arbitration.
    After considering the undisputed facts and the case law bearing on
    the arbitration issue, the district court denied the motions to arbitrate,
    concluding that "Wolf is not identified with reasonable certainty in
    _________________________________________________________________
    3 A Prudential vice president acknowledged in her affidavit that Pru-
    dential, as clearing broker, "carr[ies] accounts . . . for the customers" of
    the introducing broker.
    5
    the agreement the [customers] signed containing the arbitration provi-
    sion." Coltrain v. F. N. Wolf & Co., 
    818 F. Supp. 163
    , 164 (E.D. Va.
    1993); Arrants v. F. N. Wolf & Co., Civ. A. No. 2:93cv45 (E.D. Va.
    Apr. 9, 1993).4 F. N. Wolf, Buck, and Hubbard appealed from this
    determination in each case, and the cases were consolidated.
    Shortly after we heard oral argument, F. N. Wolf filed a petition
    under Chapter 11 of the Bankruptcy Code. We then stayed further
    proceedings in this appeal pending action in the bankruptcy case. The
    bankruptcy court ultimately entered a confirmation order that results
    in the discharge of the claims asserted here against F. N. Wolf. As a
    result, we have entered an order dismissing F. N. Wolf as a party to
    this appeal. We are now free to decide the appeal insofar as it is
    pressed by the two remaining parties, Buck and Hubbard, who were
    denied arbitration.
    II.
    An arbitration clause in a "contract evidencing a transaction involv-
    ing commerce . . . shall be valid, irrevocable, and enforceable, save
    upon such grounds as exist at law or in equity for the revocation of
    any contract." 
    9 U.S.C. § 2
    . This provision in the Federal Arbitration
    Act "manifest[s] Congress's ``liberal federal policy favoring arbitra-
    tion agreements.'" Glass v. Kidder Peabody & Co., 
    114 F.3d 446
    , 451
    (4th Cir. 1997) (quoting Moses H. Cone Mem'l Hosp. v. Mercury
    Constr. Corp., 
    460 U.S. 1
    , 24-27 (1983)). In keeping with this policy,
    we have said that arbitration "``should not be denied unless it may be
    said with positive assurance that the arbitration[agreement] is not
    susceptible of an interpretation that covers the asserted dispute.'"
    Peoples Sec. Life Ins. Co. v. Monumental Life Ins. Co., 
    867 F.2d 809
    ,
    812 (4th Cir. 1989) (quoting United Steelworkers of Am. v. Warrior
    & Gulf Navigation Co., 
    363 U.S. 574
    , 582-83 (1960)).
    Even though arbitration has a favored place, there still must be an
    underlying agreement between the parties to arbitrate. See Adamovic
    v. Metme Corp., 
    961 F.2d 652
    , 654 (7th Cir. 1992) (stating that "the
    federal policy favoring arbitration does not give[courts] license to
    _________________________________________________________________
    4 Because the orders denying arbitration are substantially identical, we
    hereafter cite only the published Coltrain order.
    6
    compel arbitration absent an agreement to do so." (citing Mitsubishi
    Motors Corp. v. Soler Chrysler-Plymouth, Inc., 
    473 U.S. 614
    , 626
    (1985))). Courts decide whether there is an agreement to arbitrate
    according to common law principles of contract law. See Whiteside
    v. Teltech Corp., 
    940 F.2d 99
    , 101 (4th Cir. 1991).
    In the case before us, there is no question that the arbitration clause
    would be valid and enforceable as between the customers and Pruden-
    tial, the clearing broker. Indeed, Prudential's reason for requiring an
    arbitration provision is obvious: clearing brokers are also vulnerable
    to suit. Thus, Prudential followed the common industry practice of
    requiring the customers to sign a client agreement directly with it. See
    Henry F. Minnerop, The Role and Regulation of Clearing Brokers, 48
    Bus. Law. 841, 864 (1993).
    Of course, Prudential has not been sued here, so it does not seek
    arbitration. Instead, it is the introducing broker, F. N. Wolf, and its
    employees, Buck and Hubbard, who have argued that the customers
    were bound to arbitrate with them under the Prudential Agreement.
    As noted, F. N. Wolf is no longer a party, and only Buck and Hubbard
    remain as defendants and appellants. Wolf's absence does not affect
    our inquiry, however. The allegations against Buck and Hubbard
    arose out of their actions concerning the customers' accounts at F. N.
    Wolf. Thus, if F. N. Wolf had the right to compel arbitration under
    the Prudential Agreement, Buck and Hubbard can enforce the same
    right as employees and disclosed agents of F. N. Wolf. See Scher v.
    Bear Stearns & Co., 
    723 F. Supp. 211
    , 216 (S.D.N.Y. 1989); Lenhart
    v. Westfield Fin. Corp., 
    909 F. Supp. 744
    , 749 n.9 (D. Haw. 1995).
    We will therefore analyze Buck and Hubbard's situation by determin-
    ing whether F. N. Wolf would be entitled to enforce the arbitration
    clause, with the understanding that our determination applies to Buck
    and Hubbard.
    III.
    A.
    For the most part federal courts have rejected attempts by introduc-
    ing brokers to invoke arbitration clauses in agreements between their
    customers and clearing brokers. See, e.g., McPheeters v. McGinn,
    7
    Smith & Co., 
    953 F.2d 771
     (2d Cir. 1992); Mowbray v. Moseley,
    Hallgarten, Estabrook & Weeden, Inc., 
    795 F.2d 1111
     (1st Cir. 1986);
    Taylor v. Investors Assocs., 
    29 F.3d 211
     (5th Cir. 1994); O'Connor
    v. R.F. Lafferty & Co., 
    965 F.2d 893
     (10th Cir. 1992).
    An introducing broker has been permitted to invoke the arbitration
    provision in a customer-clearing broker agreement only in two situa-
    tions that rarely occur: when the introducing broker is the agent of the
    clearing broker or when the introducing broker is a third-party benefi-
    ciary to the agreement. In this appeal F. N. Wolf has not advanced
    either of these theories, but we discuss them briefly to illustrate how
    difficult it is for introducing brokers to take advantage of arbitration
    clauses in customer-clearing broker agreements.
    Courts have concluded that the standard arrangement between an
    introducing and clearing broker, such as the one between F. N. Wolf
    and Prudential here, does not support a claim that the introducing bro-
    ker is the agent of the clearing broker. See, e.g., Taylor, 
    29 F.3d at 214-15
    ; Lenhart v. Westfield Fin. Corp., 
    909 F. Supp. 744
    , 749-50 (D.
    Haw. 1995); Shaffer v. Stratton Oakmont, Inc. , 
    756 F. Supp. 365
    , 369
    (N.D. Ill. 1991); Kyung Sup Ahn, M.C., P.C. v. Rooney, Pace Inc.,
    
    624 F. Supp. 368
    , 370-71 (S.D.N.Y. 1985). Only in very limited cir-
    cumstances have introducing brokers been recognized as agents of
    clearing brokers. See, e.g., Nesslage v. York Sec., Inc., 
    823 F.2d 231
    ,
    233 (8th Cir. 1987) (holding that introducing broker, who was dis-
    closed agent of clearing broker, could take advantage of arbitration
    clause in client-clearing broker agreement); Okcuoglu v. Hess, Grant
    & Co., 
    580 F. Supp. 749
    , 751-52 (E.D. Pa. 1984) (finding that intro-
    ducing broker acted as agent for clearing broker in approving custom-
    ers for options trading). Although it does not appear that F. N. Wolf
    made an agency argument in district court, the court nevertheless con-
    cluded that "Wolf is not Prudential Securities's agent." Coltrain, 818
    F. Supp. at 163.
    The second instance in which an introducing broker has been
    allowed to take advantage of the arbitration clause in a customer-
    clearing broker agreement is when the introducing broker is made the
    third-party beneficiary of the agreement. However,"where an agree-
    ment between a customer and a clearing broker does not express a
    clear intent to benefit the introducing broker, the introducing firm will
    8
    not be held to be a third-party beneficiary." Monisoff v. American
    Eagle Inv., Inc., 
    927 F. Supp. 137
    , 138 (S.D.N.Y.) (citations omitted),
    aff'd 
    104 F.3d 356
     (2d Cir. 1996). Courts usually find that the requi-
    site intent to benefit is lacking and do not permit introducing brokers
    to compel arbitration as third-party beneficiaries. See, e.g., Taylor, 
    29 F.3d at 215
    ; Conway v. Icahn & Co., 
    16 F.3d 504
    , 509 (2d Cir. 1994);
    O'Connor, 
    965 F.2d at 901-02
    ; Monisoff, 
    927 F. Supp. at 138
    ;
    Lenhart, 
    909 F. Supp. at 750-51
    ; Wilson v. D.H. Blair & Co., 
    731 F. Supp. 1359
    , 1362 (N.D. Ind. 1990). Courts have found that the
    introducing broker has third-party beneficiary status only where a
    specific provision in the customer-clearing broker agreement makes
    the arbitration clause applicable to the introducing broker. See, e.g.,
    Whisler v. H.J. Meyers & Co., 
    948 F. Supp. 798
    , 801 (N.D. Ill. 1996)
    (contract with clearing broker explicitly included introducing broker
    in arbitration clause); Ziegler v. Whale Sec. Co., 
    786 F. Supp. 739
    ,
    743 (N.D. Ind. 1992) (same). It also appears that F. N. Wolf did not
    claim third-party beneficiary status in district court. In any event, the
    district court found nothing in the circumstances or in the Prudential
    Agreement to establish an intent to benefit Wolf. It therefore deter-
    mined that "there is no evidence that Wolf was intended to be a bene-
    ficiary of the agreement." Coltrain, 818 F. Supp. at 163.
    B.
    Perhaps recognizing the futility of asserting an agency or third-
    party beneficiary theory to invoke the clearing broker's arbitration
    clause, F. N. Wolf makes a different argument. 5 It claims to be an
    actual party to the Prudential Agreement based on three allegations:
    (1) F. N. Wolf is expressly referred to in the agreement, (2) the agree-
    ment's language and the circumstances of its execution entitle F. N.
    Wolf to compel arbitration, and (3) the course of dealing between the
    customers and F. N. Wolf make Wolf a party to the agreement. We
    will now evaluate each of Wolf's arguments.
    _________________________________________________________________
    5 Although for convenience we refer to the argument as Wolf's, it is
    now Buck and Hubbard who press it.
    9
    1.
    F. N. Wolf first argues that it is referred to expressly in the Pruden-
    tial Agreement. In an effort to prove this, F. N. Wolf points to letters
    and numbers written in boxes under the Prudential letterhead: "EWP"
    and "B5," which turned out to be the codes for Wolf's Virginia Beach
    branch office and the account executive, Buck; and"015541" and
    "024931," which happened to be the customers' account numbers at
    Wolf. The issue, of course, is whether these references are clear
    enough to make F. N. Wolf a party to the agreement.
    "While the parties [to an agreement] need not be named formally,
    there can be no enforceable agreement unless [they] . . . can be identi-
    fied with reasonable certainty." Conway v. Ichan & Co., 
    787 F. Supp. 340
    , 344 (S.D.N.Y. 1990) (internal quotations omitted), aff'd 
    16 F.3d 504
     (2d Cir. 1994). The district court found that the Prudential Agree-
    ment "lacked any meaningful identification of Wolf" because the cus-
    tomers "had no reference from which to equate[the letter and number
    codes] to Wolf." Coltrain, 818 F. Supp. at 163-64. The court thus
    concluded "that Wolf [was] not identified with reasonable certainty in
    the agreement." Id. This ruling is consistent with that of other courts
    in similar circumstances. See, e.g., O'Connor v. R.F. Lafferty & Co.,
    
    965 F.2d 893
    , 902 (10th Cir. 1992) (account agreement on clearing
    broker's letterhead with name of introducing broker stamped at top
    insufficient to bind customer to arbitration with introducing broker);
    Wilson v. D.H. Blair & Co., 
    731 F. Supp. 1359
    , 1360 & n.1 (N.D. Ind.
    1990) (refusing to allow introducing broker to arbitrate with customer
    despite assumption that account number on customer-clearing broker
    agreement reflected customer's account with introducing broker).
    There is nothing to suggest that the customers in this case knew or
    should have known that the codes and numbers identified F. N. Wolf
    and made Wolf a party to the agreement. It thus cannot be said that
    F. N. Wolf is expressly referred to in the Prudential Agreement.
    2.
    F. N. Wolf next argues that certain language in the Prudential
    Agreement and the circumstances surrounding the establishment of
    the customers' accounts with F. N. Wolf establish Wolf as a party to
    the agreement.
    10
    First, F. N. Wolf notes that the Prudential Agreement refers to a
    "joint trading account," and Wolf points out that the customers had
    a trading account with it, not Prudential. Wolf also asserts that the
    agreement refers to certain retail functions, such as placing orders,
    and that these functions were performed for the customers by Wolf.
    Thus, according to Wolf, the agreement was meant to cover it as well
    as Prudential. The Prudential Agreement was certainly broad enough
    to cover the activities of a broker equipped to take all steps necessary
    to execute and clear a securities transaction. The agreement was spe-
    cific enough, however, to cover the precise function Prudential per-
    formed for these accounts. This is confirmed by the arbitration clause
    itself: "The undersigned [customer] agrees, and by carrying an
    account for the undersigned you agree, all controversies . . . shall be
    determined by arbitration." (Emphasis added.) In the securities indus-
    try, clearing brokers "carry" introduced accounts, and these brokers
    are sometimes called "carrying brokers." See Minnerop, supra, at 841
    n.1. Although the customers did not have trading accounts with Pru-
    dential, Prudential was the carrying or clearing broker, and Prudential
    opened accounts in their names to perform the clearing functions.
    Moreover, right before the Coltrains signed the agreement, Buck told
    Mr. Coltrain that Prudential "was a clearinghouse broker performing
    certain paperwork functions for [F. N. Wolf] and that the ``Joint
    Account Agreement' was something Prudential required be signed in
    order for Prudential to perform such services."
    Second, F. N. Wolf argues that language in its letter forwarding the
    Prudential Agreement to the customers for signature, coupled with
    language at the bottom of the agreement, suggests that F. N. Wolf was
    a party to the agreement. According to the Wolf letter, the firm
    needed the document signed "to support your account with F. N.
    Wolf." The enclosed Prudential Agreement said at the bottom, "We
    require two signed copies." In the circumstances, the statement in the
    transmittal letter is consistent with F. N. Wolf's need to satisfy Pru-
    dential's requirement for a signed customer agreement before it
    would "carry" an account as clearing broker. The transmittal letter
    does not indicate that Wolf was a party to the Prudential Agreement.
    Finally, the "we" in "we require" at the bottom of Prudential's boiler-
    plate agreement does not include or refer to Wolf. Read in context,
    it is simply a corporate "we" that refers only to Prudential.
    11
    Third, F. N. Wolf argues that the word "you" in the body of the
    Prudential Agreement refers to or includes Wolf. That is not apparent,
    for example, from a reading of the agreement's arbitration clause,
    which we repeat: "The undersigned [customer] agrees, and by carry-
    ing an account for the undersigned you agree, all controversies which
    may arise between us . . . shall be determined by arbitration."
    (Emphasis added.) The "you" in this provision refers to the firm "car-
    rying" the account, and that was Prudential. This reading is consistent
    with that of the court in Conway v. Icahn & Co. , 
    787 F. Supp. 340
    (S.D.N.Y. 1990), aff'd 
    16 F.3d 504
     (2d Cir. 1994), where the intro-
    ducing broker also claimed that it was covered by the pronoun "you"
    in a client-clearing broker agreement containing language similar to
    that in the Prudential Agreement here. The court rejected the intro-
    ducing broker's attempt to invoke the arbitration clause, concluding
    that "it appears from a contextual reading of the Agreement that the
    term ``you' refers to [the clearing broker]." Id. at 344; accord Finkel
    v. D. H. Blair & Co., 
    581 N.Y.S.2d 126
     (N.Y. Sup. Ct. 1992) (inter-
    preting Bache client-clearing broker agreement). It is therefore clear
    that neither the language of the Prudential Agreement nor any circum-
    stances surrounding its execution indicate that F. N. Wolf was meant
    to be a party.
    3.
    F. N. Wolf argues finally that the established course of dealing
    between it and the customers illustrates that Wolf is a party to the
    Prudential Agreement. This argument is based on the fact that the cus-
    tomers bought and sold the securities in their accounts solely through
    F. N. Wolf. Wolf says that the customers "communicated exclusively
    with F. N. Wolf and had no direct dealings with Prudential Securi-
    ties." Appellants' Brief at 28. F. N. Wolf therefore claims that it and
    the customers actually operated under the Prudential Agreement and
    that Wolf is therefore entitled to arbitration under it. We disagree.
    The customers here received a lengthy letter, addressed "Dear Cli-
    ent," from Prudential. In this letter, Prudential explained that it was
    F. N. Wolf's clearing firm, handling back office or clearing functions,
    and that it had opened an account for the customers for the purpose
    of performing those functions. The letter also set forth a full list of
    Prudential's responsibilities. Because of Prudential's role, the reason
    12
    for a separate agreement between Prudential and the customers would
    have been obvious to the customers. As a result, we would be assum-
    ing too much if we said that simply as a result of their dealings with
    F. N. Wolf the customers had agreed to cover Wolf in the Prudential
    Agreement.
    One other circuit court has specifically rejected the course of deal-
    ing argument when an introducing broker tried to invoke the arbitra-
    tion clause in the clearing broker-customer agreement. In Mowbray v.
    Moseley, Hallgarten, Eastabrook & Weeden, Inc., 
    795 F.2d 1111
    ,
    1117 (1st Cir. 1986), the court recognized that the agreement between
    the investor and the clearing broker was signed in conjunction with
    the opening of the investors' account with the introducing broker. The
    introducing broker exercised full supervisory powers over the account
    and "stood in a ``central position' between the[investors] and the
    clearing house." 
    Id.
     Nevertheless, the court rejected the argument that
    the investors intended to include the introducing broker within the
    coverage of their agreement with the clearing broker. "[I]t does not
    follow from the introducing broker's de facto control over a client's
    account that the client originally or subsequently intended that the
    introducing broker be able to invoke [the clearing broker's] power to
    compel arbitration." 
    Id.
     (emphasis in original); see also Shaffer v.
    Stratton Oakmont, Inc., 
    756 F. Supp. 365
    , 369 (N.D. Ill. 1991) (intro-
    ducing broker's supervisory power over account and investor's lack
    of communication with clearing broker do not establish that investor
    empowered introducing broker to invoke arbitration clause in inves-
    tor's agreement with clearing broker); Finkel v. D. H. Blair & Co.,
    
    581 N.Y.S.2d 126
    , 128 (N.Y. Sup. Ct. 1992) (absence of actual intent
    to include introducing broker in clearing broker's arbitration clause
    precluded inference of constructive consent based on conduct). We
    agree with this reasoning. The fact that the customers here dealt and
    communicated only with F. N. Wolf does not mean that they intended
    for Wolf to be a party to the Prudential Agreement.
    ***
    If F. N. Wolf had wanted the customers to be bound to arbitrate
    with it, it could have written its own agreement and gotten the cus-
    tomers' signatures. F. N. Wolf was simply not a party to, and was not
    13
    covered by, the Prudential Agreement. As a result, there was no
    agreement to arbitrate between the customers and F. N. Wolf.
    IV.
    The orders and judgments of the district court are affirmed insofar
    as they deny the motions of F. N. Wolf's employees, Ellsworth A.
    Buck, Jr. and George E. Hubbard, to compel arbitration. The cases are
    remanded for further proceedings.
    AFFIRMED AND REMANDED
    14
    

Document Info

Docket Number: 93-1651

Filed Date: 12/4/1997

Precedential Status: Precedential

Modified Date: 9/22/2015

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