Morgan Keegan & Company, Inc. v. Drzayich et al

Filing 33

MEMORANDUM ORDER granting 2 Motion for Preliminary Injunction. Defendants are enjoined from pursuing claims against Morgan Keegan in the FINRA arbitration proceeding Defendants instituted on December 30, 2010, FINRA Case No. 11-00027.. Signed by Judge Edward J. Lodge. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by dks)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO

MORGAN KEEGAN & COMPANY,
INC.,
Plaintiff,

Case No. 1:11-CV-00126-EJL
MEMORANDUM ORDER

v.
PEGGY A. DRZAYICK, ANTHONY
and CAROLYN VAN
CATTENBURCH, ROGER and
MARTHA CONNOR, DAN TENNENT,
THE BRIDGE INC., and PATRICIA
THOMAS
Defendants.

Pending before the Court in the above-entitled matter is Plaintiff Morgan Keegan
& Company, Inc.’s (“Morgan Keegan”) Motion for Preliminary Injunction, Dkt. 2.
Having fully reviewed the record, the Court finds that the facts and legal arguments are
adequately presented in the briefs and record. Accordingly, in the interest of avoiding
further delay, and because the Court conclusively finds that the decisional process would
not be significantly aided by oral argument, this matter shall be decided on the record
before this Court without oral argument.

MEMORANDUM ORDER - 1

FACTUAL BACKGROUND
On Mach 28, 2011, Morgan Keegan filed a Complaint for Declaratory Judgment
and Injunctive Relief against Defendants Peggy A. Drzayich, Anthony and Carolyn Van
Cattenburch, Roger and Martha Connor, Dan Tennent, The Bridge Inc. and Patricia
Thomas (collectively referred to as “Defendants”), Dkt. 1. Morgan Keegan seeks
declaratory and injunctive relief to preclude Defendants from pursuing an arbitration
proceeding they have filed against Morgan Keegan before the Financial Industry
Regulatory Authority ("FINRA”). Morgan Keegan argues it does not have an agreement
with Defendants to arbitrate and that Defendants are not customers of Morgan Keegan as
required by FINRA rules.
Morgan Keegan is a regional broker-dealer incorporated under the laws of the state
of Tennessee, with its principal place of business in Memphis, Tennessee. Defendants are
believed to be residents of state of Idaho, except for The Bridge Inc., which is a nonprofit corporation incorporated and doing business in New Jersey. On December 10,
2010, Defendants initiated an arbitration proceeding against Morgan Keegan before the
FINRA (FINRA Case No. 11-00027). Defendants requested and the FINRA selected the
arbitration should be held in Boise, Idaho. Defendants assert the following claims against
Morgan Keegan in the arbitration: common law fraud; violation of the Idaho securities
laws; violation of § 10(b)of the Securities Exchange Act of 1934; violation of S.E.C. Rule
10b-5; violation of §§ 11, 12(a)(2), and 15 of the Securities Act of 1933; violation of the
Tennessee Consumer Protection Act, and violation of FINRA Rule 2210. Morgan
MEMORANDUM ORDER - 2

Keegan denies it has liability relating to Defendants’ claims.
Defendants’ arbitration claims are related to their alleged purchases of shares in
two closed-end, high yield funds: the RMK High Income Fund and the RMK MultiSector High Income Fund (collectively the “Funds”). It is undisputed that Defendants did
not purchase the Funds from Morgan Keegan. Rather, Defendants purchased the shares
in the Funds from an unrelated, third party broker-dealer, LPL Financial Inc. It is
undisputed that Defendants have never entered into any written agreements (including an
agreement to arbitrate claims) with Morgan Keegan nor have Defendants opened and
maintained accounts with Morgan Keegan. Morgan Keegan was an underwriter for the
initial public offering of the Funds, but Defendants did not purchase either fund in its
initial public offering.
Morgan Keegan maintains Defendants are not “customers” of Morgan Keegan, so
they are not subject to arbitration under FINRA. Defendants argue that because Morgan
Keegan received .15% of the total assets held by the Funds as compensation for services
and Defendants and/or their brokers relied on information obtained from Morgan Keegan
regarding the Funds, “customer” should be broadly defined and should include
Defendants.

MEMORANDUM ORDER - 3

ANALYSIS
1. Question of Arbitrability is Court Matter
This Court finds that the question of arbitrability is for the court to decide. Bridge
Fund Capital Corp. v. Fastbucks Franchise Corp., 622 F.3d 996, 998 (9th Cir. 2010).
“[A]rbitration is a matter of contract and a party cannot be required to submit to
arbitration any dispute which he has not agreed so to submit.” United Steelworkers of
America v. Warrior and Gulf Navigation Co., 363 U.S. 574, 582 (1960). Whether a party
has consented to arbitration has long been recognized to be a question of law, to be
decided by the court, not the arbitrator, “[u]nless the parties clearly and unmistakably
provide otherwise.” AT & T Techs., Inc. v. Communications Workers, 475 U.S. 643, 649
(1986). In determining whether the parties have agreed to arbitrate, “courts generally . . .
should apply ordinary state-law principles that govern the formation of contracts.” First
Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995).
Morgan Keegan, as a FINRA member firm, is required to arbitrate disputes only
where they contractually agreed to arbitrate with the claimant or the claimant is a
customer of Morgan Keegan. Defendants concede that they did not have arbitration
agreements with Morgan Keegan. Therefore, the threshold question of whether
Defendants are “customers” of Morgan Keegan a legal matter that should be resolved by
the court, instead of the arbitrator or the Director of FINRA.1
1

The Court finds the Director of FINRA’s denial of Morgan Keegan’s motions to declare nearly
identical claims non-artibable is not binding precedent on this Court and such decision need not be given
deference by this Court. Auer v. Robbins, 519 U.S. 452 (1997).
MEMORANDUM ORDER - 4

2. Standard of Review for Preliminary Injunction
Preliminary injunctions are designed to preserve the status quo pending the
ultimate outcome of litigation. While courts are given considerable discretion in deciding
whether injunctive relief should be issued, injunctive relief is not obtained as a matter of
right and it is considered to be an extraordinary remedy that should not be granted unless
the movant, by a clear showing, carries the burden of persuasion. See: Sampson v.
Murray, 415 U.S. 61 (1974); Brotherhood of Locomotive Engineers v. Missouri-KansasTexas R. Co., 363 U.S. 528 (1960); and Stanley v. Univ. of Southern California, 13 F.3d
1313 (9th Cir. 1994).
In each case, the district court “must balance the competing claims of injury and
must consider the effect on each party of the granting or withholding of the requested
relief.” Amoco Production Co. v. Gambell, 480 U.S. 531, 542 (1987). The test for a
temporary restraining order or a preliminary injunction are basically the same. In Winter
v. Natural Resource Defense Council, Inc., 555 U.S. 7 (2008), the United States Supreme
Court held that, in order to be entitled to a preliminary injunction, the moving party must
demonstrate (1) likelihood of success on the merits; (2) that he or she is likely to suffer
irreparable harm in the absence of preliminary relief; (3) that the balance of equities tips
in his or her favor; and (4) that an injunction is in the public interest. 555 U.S. at 20; see
also, Stormans, Inc. v. Selecky, 586 F.3d 1109, 1127 (9th Cir. 2009).
Prior to the Supreme Court’s ruling in Winter, the Ninth Circuit applied alternative
tests in determining whether a preliminary injunction should be granted: “[a] preliminary
MEMORANDUM ORDER - 5

injunction is appropriate when a plaintiff demonstrates either: (1) a likelihood of success
on the merits and the possibility of irreparable injury; or (2) that serious questions going
to the merits were raised and the balance of hardships tips sharply in [the plaintiff’s]
favor.” Lands Council v. McNair, 537 F.3d 981, 987 (9th Cir. 2008). The Ninth Circuit
reasoned that “[t]hese two options represent extremes on a single continuum: the less
certain the district court is of the likelihood of success on the merits, the more plaintiffs
must convince the district court that the public interest and balance of hardships tip in
their favor.” Id. In Winter, the Supreme Court expressly disapproved the “possibility of
harm standard,” stating that “the Ninth Circuit’s ‘possibility’ standard is too lenient . . .
[and the proper] standard requires plaintiffs seeking preliminary relief to demonstrate that
irreparable injury is likely in the absence of an injunction.” 555 U.S. at 22 (emphasis in
original). This left open the question, however, of whether the remaining aspects of the
Ninth Circuit’s sliding scale test for preliminary injunctions remained good law.2

2

Justice Ginsburg addressed the sliding scale approach in her dissent in Winter. Justice
Ginsburg stated that “[c]onsistent with equity’s character, courts do not insist that litigants uniformly
show a particular, predetermined quantum of probable success or injury before awarding equitable relief.
Instead, courts have evaluated claims for equitable relief on a ‘sliding scale,’ sometimes awarding relief
based on a lower likelihood of harm when the likelihood of success is very high. . . . This Court has
never rejected that formulation, and I do not believe it does so today.” 555 U.S. at 51 (Ginsburg, J.
Dissenting)
MEMORANDUM ORDER - 6

The Ninth Circuit clarified the issue earlier this year in Alliance for the Wild
Rockies v. Cottrell, 632 F.3d 1127 (9th Cir. 2011). In that case, the Court of Appeals held
that although Winter had raised the bar on what must be shown on the irreparable harm
prong to justify a preliminary injunction, it did not alter the district court’s authority to
balance the elements of the preliminary injunction test, so long as a certain threshold
showing is made on each factor. 632 F.3d at 1134-35. The court in Wild Rockies stated
that “the ‘serious questions’ approach survives Winter when applied as part of the fourelement Winter test.” Id. at 1135. In other words, “‘serious questions going to the merits’
and a hardship balance that tips sharply toward the plaintiff can support issuance of an
injunction, assuming the other two elements of the Winter test are also met.” Id.
Speculative injury does not constitute irreparable injury sufficient to warrant
granting a preliminary injunction. Goldie's Bookstore Inc. v. Superior Court, 739 F.2d
466, 472 (9th Cir. 1984).
3. Likelihood of Success on the Merits
FINRA Rule 12200 provides FINRA members, like Morgan Keegan, must
arbitrate a dispute under the Code if it is required by a written agreement or requested by
the customer. However, FINRA does not define the term “customer” for purposes of
Rule 12200. The Ninth Circuit has not defined the term “customer” in this context, so the
Court must look to case law from other jurisdictions which have addressed this issue.

MEMORANDUM ORDER - 7

The Eighth Circuit has held that the term “customer” under Rule 12200 of FIRNA
“refers to one involved in a business relationship with [a FIRNA] member that is related
directly to investment or brokerage related services.” Fleet Boston Robertson Stephens,
Inc. v. Innovex, Inc., 264 F.3d 770 (8th Cir. 2001). Investors are not customers of a
broker-dealer if they have not “opened, maintained, controlled or traded in an account at
[the broker-dealer] or entered into an account or customer agreement with [the brokerdealer]. Interactive Brokers, LLC v. Duran, No. 08-CV-6813, 2009 WL 393827 (N..
Illinois, Feb. 17, 2009). There are no facts indicating that Morgan Keegan was in any
way directly involved in the purchases by Defendants. To find a brokerage or investment
relationship under the facts of this case would have the effect of making every purchasers
of shares in the Funds a customer of Morgan Keegan and that is too broad and an
unrealistic application of the term “customer.” Because it does not appear Defendants
can establish that some brokerage or investment relationship existed with Morgan
Keegan, it does not appear Defendants are customers that can seek FINRA arbitration
against Morgan Keegan.
Defendants urge the Court to find the Defendants were customers based upon the
fact that their broker and Defendants collectively relied on information obtained from
Morgan Keegan’s website and information given to the Defendants’s broker by a Morgan
Keegan representative. However, merely reviewing public disclosures and website

MEMORANDUM ORDER - 8

information does not create a customer relationship. See Brookstreet Sec. Corp. v. Bristol
Air, Inc., No. CV 02-0863, 2002 U.S. Dist. LEXIS 16784 (N.D. Cal. Aug. 5, 2002).
Moreover, while Morgan Keegan may have provided information on the Funds for
the initial public offerings, the Defendants did not purchase their shares in the Funds
during the initial public offerings, so it would be unfair to create a customer relationship
based on this initial public offering information that was available online.
The Court finds that Morgan Keegan is likely to succeed on the merits of its legal
claims. There was no agreement between the parties to arbitrate, there was no customer
relationship between Morgan Keegan and the Defendants are not “customers” of Morgan
Keegan. This finding is consistent with other courts that have examined similar factual
scenarios. See e.g., Zarecor v. Morgan Keegan & Company, Inc., Civ. Action No.
4:10CV01643-SWW, entered July 29, 2011 in the Eastern District of Arkansas, Western
Division; Charles Schwab & Co., Inc. v. Reaves, No. CV-2590, 2010 WL 447370 (D.
Ariz. Feb. 4, 2010); Herbert J. Sims & Co., Inc. v. Roven, 548 F. Supp. 2d 759, 766 (N.D.
Cal. 2008); Proshares Trust v. Schnall, 695 F. Supp 2d 76, 80 (S.D.N.Y. 2010).
4. Adequate Remedy and Irreparable Harm.
Many courts have held that “forcing a party to arbitrate a dispute that it did not
agree to arbitrate constitutes per se irreparable harm.” See Chicago School Reform Board
of Trustees v. Diversified Pharm. Servs., Inc., 40 F.Supp.2d 987, 996 (N.D.Ill.1999); see
also McLaughlin Gormley King Co. v. Terminix Int'l Co., 105 F.3d 1192, 1194 (8th
Cir.1997); PaineWebber Inc. v. Hartmann, 921 F.2d 507, 515 (3d Cir.1990); Mount
MEMORANDUM ORDER - 9

Ararat Cemetery v. Cemetery Workers and Greens Attendants Union, Local 365, 975
F.Supp. 445, 447 (S.D.N.Y.1997). This Court agrees with the reasoning of those courts.
In certain circumstances, the Supreme Court has made it clear that arbitration is a
favored form of dispute resolution, but it also has made it clear that a party cannot be
forced to arbitrate issues that it did not agree to arbitrate. See, e.g., AT & T Techs., Inc. v.
Communications Workers, 475 U.S. 643, 649 (1986). Forcing a party to arbitrate a matter
that the party never agreed to arbitrate, unalterably deprives the party of its right to select
the forum in which it wishes to resolve disputes. See Sokol Holdings Inc. v. BMB Munai,
Inc., 542 F.3d 354, 358 (2d cir. 2008). Thus, the Court finds that Morgan Keegan has
demonstrated that it will suffer irreparable harm if an injunction is not entered and it is
forced to proceed with arbitration.
5. Balancing of Harms
The harm that Defendants would suffer if the Court issues an erroneous
preliminary injunction would be a delay in the arbitration proceedings while this Court
determines whether Morgan Keegan can be forced to arbitrate. If the Court ultimately
rules in favor of Defendants, Defendants could proceed with their arbitration at that time.
On the other hand, and in light of Morgan Keegan’s likelihood of success on the merits,
the harm that Morgan Keegan would suffer if the injunction were erroneously denied
would be irreparable, as Morgan Keegan would have been compelled to arbitrate a
dispute that it did not agree to arbitrate. Given that a preliminary injunction simply will
delay the arbitration in its early stages until this Court conclusively decides the
MEMORANDUM ORDER - 10

underlying issues, the balance of hardships tips in Morgan Keegan’s favor.
6. Public Interest
The Court acknowledges that the public interest “generally favors arbitration, this
policy is based on the presumption that the subject of the arbitration is one that the parties
actually agree to arbitrate.” Chicago School Reform Board of Trustees., 40 F.Supp.2d at
996–97. See also, Volt Information Sciences v. Board of Trustees, 489 U.S. 468, 475
(1989). In the case at bar, there is no agreement to arbitrate and the Court finds the public
interest will be served because a preliminary injunction will minimize the risk that the
parties will suffer the inconvenience, cost, and delay associated with arbitration only to
have any resulting award vacated for lack of jurisdiction.
7. Conclusion
For all the above reasons, the Court finds Plaintiff Morgan Keegan is entitled to a
preliminary injunction to be entered in this case.
ORDER
IT IS ORDERED that Morgan Keegan’s Motion for Preliminary Injunction (Dkt.
2) is GRANTED and Defendants are enjoined from pursuing claims against Morgan
Keegan in the FINRA arbitration proceeding Defendants instituted on December 30,
2010, FINRA Case No. 11-00027.

MEMORANDUM ORDER - 11

SO ORDERED.
DATED: November 8, 2011

Honorable Edward J. Lodge
U. S. District Judge

MEMORANDUM ORDER - 12