Morgan Keegan v. Shorthouse et al

Filing 38

ORDER by Judge Benjamin H Settle granting 4 Motion for Preliminary Injunction.(TG)

1
2
3
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF WASHINGTON
AT TACOMA

4
5
6

MORGAN KEEGAN & COMPANY,
7 INC.,
Plaintiff,

8
v.

9

CASE NO. C11-5734BHS
ORDER GRANTING
PLAINTIFF’S MOTION FOR
PRELIMINARY INJUNCTION

10 JOSEPH SHORTHOUSE, et al.,
Defendants.

11
12
13
14
15
16

This matter comes before the Court on Plaintiff Morgan Keegan & Company,
Inc.’s (“Morgan Keegan”) motion for preliminary injunction (Dkt. 4). The Court has
considered the pleadings filed in support of and in opposition to the motion and the
remainder of the file and hereby grants the motion for the reasons stated herein.
I. PROCEDURAL HISTORY

17
18
19
20
21

On September 14, 2011, Morgan Keegan filed the complaint in this action against
Defendants Joseph Shorthouse, Denise Shorthouse and Joseph Shorthouse on behalf of
KS and MS (the “Shorthouses”). Dkt. 1. On the same day, Morgan Keegan filed a
motion for preliminary injunction. Dkt. 4.

22

ORDER - 1

1

II. FACTUAL BACKGROUND

2

This matter arises out of the Shorthouses’ attempt to arbitrate claims that they filed

3 against Morgan Keegan for fraud, violations of federal and state securities laws,
4 violations of the Tennessee Consumer Protection Act, and violations of the Financial
5 Industry Regulation Authority (“FINRA”) 1 Rules 2210, 2120, and 3010. See Dkt. 1-1
6 (the Shorthouses’ statement of claims against Morgan Keegan, “SOC”).
7

Morgan asserts that it is not subject to arbitration on the basis that it has no

8 agreement whatsoever with the Shorthouses. Dkt. 4. Morgan Keegan further asserts that
9 because the Shorthouses are not its customers, it cannot be forced to arbitrate under
10 FINRA. It is on these two bases that Morgan predicates its motion for preliminary
11 injunction. Id.
12

According to the SOC, Joseph Shorthouse “invested in [Morgan Keegan’s] RMK

13 High Income Fund (“High Income Fund” of the “Fund”) through TD Ameritrade, Inc. on
14 behalf of [the Shorthouses].” Dkt. 1-1 at 3. Prior to purchasing the funds, “Mr.
15 Shorthouse reviewed the RMK Funds’ prospectus, statement of additional information,
16 annual reports, semi-annual reports, quarterly reports and website marketing materials.”
17 Id. at 8. According to the Shorthouses, “Mr. Shorthouse relied on the information
18
1

FINRA, formerly the National Association of Securities Dealers, Inc. (“NASD”), is a
not-for-profit corporation registered with the Securities and Exchange Commission as a national
20 securities association created under the Maloney Act amendments to Section 15A of the
Securities Exchange Act of 1934. See 15 U.S.C. § 78o-3. The NASD Code of Arbitration was
the predecessor to the FINRA Code, and FINRA has stated that it intended no substantive change
21
when it replaced NASD Rule 10301 with FINRA Rule 12200. See Comparison Chart of Old and
New NASD Arbitration Codes for Customer Disputes, Rule 12200, www.fi
22 nra.org/web/groups/rules_regs/documents/rule_filing/p018366.pdf.

19

ORDER - 2

1 provided by Morgan Keegan regarding the RMK Funds.” Id. Absent from the SOC is
2 any claim by the Shorthouses that they have a contractual relationship by written
3 agreement with Morgan Keegan or that they are customers of Morgan Keegan. See
4 generally, Dkt. 1-1. Although the SOC states that “Mr. Shorthouse opened six accounts
5 with Morgan Keegan,” (id. at 8) his accounts were actually opened with TD Ameritrade,
6 Inc.. See id. at 7-8.
7

III. DISCUSSION

8 A.

Standard

9

The court may issue a preliminary injunction where a party establishes (1) a

10 likelihood of success on the merits, that (2) it is likely to suffer irreparable harm in the
11 absence of preliminary relief, that (3) the balance of hardships tips in its favor, and (4)
12 that the public interest favors an injunction. Winter v. Natural Resources Defense
13 Council, 555 U.S. 7, 20 (2008). A party can also satisfy the first and third elements of
14 the test by raising serious questions going to the merits of its case and a balance of
15 hardships that tips sharply in its favor. Alliance for the Wild Rockies v. Cotrell, 632 F.3d
16 1127, 1135, 632 F.3d at 1135 (9th Cir. 2011) (holding that the Ninth Circuit’s “sliding
17 scale” approach continues to be valid following the Winter decision).
18 B.

Morgan’s Motion for Preliminary Injunction

19

1.

20

Arbitrability is a question for the courts to decide. Bridge Fund Capital Corp. v.

Likely To Succeed on the Merits

21 Fastbucks Franchise Corp., 622 F.3d 996, 998 (9th Cir. 2010) (“The arbitrability of a
22 particular dispute is a threshold issue to be decided by the courts, unless that issue is

ORDER - 3

1 explicitly assigned to the arbitrator”). Morgan has the burden of establishing that it is
2 likely to succeed on the merits of its case. Winter, 129 S. Ct. at 374. The issue
3 underlying Morgan’s motion is whether FINRA lacks the authority to arbitrate the
4 Jindras’ claims against Morgan.
5

“[A]rbitration is a matter of contract and a party cannot be required to submit to

6 arbitration any dispute which he has not agreed so to submit.” United Steelworkers of
7 America v. Warrior & Gulf Navig. Co., 363 U.S. 574 (1960). However, when an
8 agreement to arbitrate exists, federal courts have long recognized and enforced a “liberal
9 federal policy favoring arbitration agreements.” Moses H. Cone Mem’l Hosp. v. Mercury
10 Constr. Corp., 460 U.S. 1 (1983). “Questions of arbitrability” – such as whether an
11 arbitration agreement exists and whether an arbitration clause covers the dispute in
12 question – are issues “for judicial determination unless the parties clearly and
13 unmistakably provide otherwise.” Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79,
14 83 (2002) (citing AT&T Techs., Inc. v. Commc’n Workers of America, 475 U.S. 643, 649
15 (1986)).
16

Here, because it appears that no arbitration agreement exists between the

17 Shorthouses and Morgan Keegan, the only available basis upon which the Shorthouses
18 can force Morgan Keegan to arbitrate their claims appears to be under FINRA. See Dkts.
19 1 & 1-1. While there is a public policy favoring arbitration, FINRA is a non20 governmental agency, and it has no specific grant of authority – from Congress or some
21 other form of governmental power – to conduct arbitration proceedings. As such, its
22 authority to compel arbitration must have some contractual basis – either a contract

ORDER - 4

1 between customer and FINRA member, or an agreement between the member and
2 FINRA. See John Hancock Life Ins. Co. v. Wilson, 254 F.3d 48 (2nd Cir. 2001) (finding
3 that NASD member, by virtue of its membership in NASD, had agreed to arbitrate all
4 disputes under Rule 10301 of the NASD Code of Arbitration). Although Morgan Keegan
5 does not dispute that it is a FINRA member, it claims that the Shorthouses are not its
6 customers.
7

It appears that the Shorthouses hinge their case on Rule 12200 of the FINRA

8 Code, which states that parties must arbitrate a dispute if:
9
10
11
12

[a]rbitration under the Code is either:
(1)
Required by a written agreement, or
(2)
Requested by the customer;
The dispute is between a customer and a member or associated person of a
member; and the dispute arises in connection with the business activities of
the member or the associated person, except disputes involving the
insurance business activities of a member that is also an insurance
company.

13
FINRA Proc. R. 12200. 2
14
Who, specifically, is a “customer” within the meaning of FINRA 12200 remains
15
unaddressed by the Ninth Circuit Court of Appeals. However, FINRA Rule 12100(i)
16
defines “customer” only in the negative, stating: “[t]he term ‘customer’ shall not include
17
a broker or dealer.” Thus, the Shorthouses argue, they are customers of Morgan Keegan
18
because they are not brokers or dealers.
19
20
21
2

Under FINRA, “associated persons” is defined as only natural persons, which Morgan

22 is not. Therefore, the Jindras could not be proceeding under this portion of FINRA.

ORDER - 5

1

In the past, courts generally have construed the term “customer” broadly, but not

2 so broadly as to include everyone who is not considered a broker or a dealer. See Fleet
3 Boston Robertson Stephens, Inc. v. Innovex, Inc., 264 F.3d 770, 772 (8th Cir. 2001); BMA
4 Financial Services, Inc. v. Guin, 164 F. Supp. 2d 813, 818-19 (W.D. La. 2001). Other
5 courts have recognized that the definition of “customer” must not be so broad that it
6 would upset the reasonable expectations of the FINRA members, as parties to the
7 “contract” created by the FINRA rules. See BMA Financial Services, Inc., 164 F. Supp.
8 2d at 819 (interpreting NASD, now FINRA). Instead, they looked at the nature of the
9 relationship between the investor and the FINRA member. See id. at 820.
10

Recently, three district courts have granted a motion for preliminary injunction in

11 cases involving Morgan Keegan as the plaintiff and defendants similarly situated to the
12 Jindras. See Morgan Keegan & Co. v. Ras, No. 5:11-CV-352-KKC 2011 WL _______
13 (E.D. Ken. Nov. 14, 2011); Morgan Keegan & Co. v. Drzayick, No. 1:11-CV-126-EJL,
14 2011 WL 5403031 (D. Idaho Nov. 8, 2011); Morgan Keegan & Co. v. Shadburn, No.
15 2:11-VB-624-WKW, 2011 WL 5244696 (M.D. Ala. Nov. 3, 2011). In each of those
16 cases, the court granted the motion for preliminary injunction finding that Morgan
17 Keegan was likely to succeed on the merits because the defendants were not customers
18 under FINRA 12200. See id. In Shadburn, the court found that under the defendant’s
19 “proposed definition . . . a FINRA member’s membership alone would require
20 arbitration. Such a result would ‘do significant injustice to the reasonable expectations of
21 [FINRA] members.’” 2011 WL 5244696 at *8 (quoting Wheat First Sec., Inc. v. Green,
22 993 F.3d 814, 820 (11th Cir. 1993)) (alteration in original). In addition, on facts

ORDER - 6

1 substantially similar to those present in the instant case, two courts have vacated FINRA
2 arbitration awards because the investors who purchased RMK Funds from third-party
3 brokers were not customers, thus, could not arbitrate against Morgan Keegan before
4 FINRA. See Morgan Keegan & Co. v. Garrett, __F. Supp. 2d __, No. 4:10-CV-4308,
5 2011 WL 4716060 at *1-2 (S.D. Tex. Sept. 30, 2011); Zarecor v. Morgan Keegan & Co.,
6 No. 4:10-CV-1643-SWW at *8-9 (E.D. Ark. July 29th 2011).
7

In Ras, under almost identical facts to those present in the instant case, the court

8 adopted the reasoning in Shadburn, finding that Morgan Keegan was likely to succeed on
9 the merits, and granted the motion for preliminary injunction. See 2011 WL _______.
10 Here, as in Ras and Shadburn, the Shorthouses are investors who interacted with a third11 party broker who had an account with Morgan; however, their third-party broker (TD
12 Ameritrade, Inc.) was not an employee, agent, or registered representative of Morgan.
13 See SOC. Like the defendant in Shadburn, the Shorthouses’ relationship with Morgan
14 Keegan is “void of any form of business qualities whatsoever.” 2011 WL 5244696 at *8.
15 The Shorthouses “did not purchase shares in the RMK Fund through Morgan Keegan.”
16 Id. They “did not pay for any investment, brokerage or other service through Morgan
17 Keegan.” Id. The Shorthouses “did not have a direct transactional relationship with
18 Morgan Keegan (or its associated person).” Id. (quotations marks and citation omitted).
19 Next, the Shorthouses did not have an account with Morgan Keegan, and “Morgan
20 Keegan has no record of any documents, accounts, or files related to anyone named
21 Joseph Shorthouse, Denise Shorthouse, KS or MS.” Dkt. 5 at 3. (Declaration of William
22 Schmitt) (names of minor children redacted. Finally, as the court held in Shadburn, Mr.

ORDER - 7

1 Shorthouses’s reliance on Morgan Keegan’s prospectus, reports, and website marketing
2 materials is insufficient to create a customer relationship with Morgan Keegan under
3 FINRA. See 2011 WL 5244696 at *9.
4

Five district courts in five different circuits “have all concluded that individual

5 investors who purchased the RMK Fund from third-party brokers were not customers of
6 Morgan Keegan and cannot force Morgan Keegan to participate in FINRA arbitration.”
7 Ras 2011 WL _______. Here, as in Ras, the Shorthouses offer “no case law that reaches
8 a contrary result on similar facts.” Id.
9

Accordingly, the Court adopts the reasoning in Shadburn and Ras in concluding

10 that the Shorthouses are not “customers” of Morgan Keegan under FINRA 12200.
11 Therefore, Morgan is likely to succeed in establishing that it is not subject to arbitration
12 with the Shorthouses under FINRA.
13

2.

14

Morgan cites several unpublished cases to the effect that a party suffers per se

Irreparable Harm

15 irreparable harm when it is forced to arbitrate claims that are not arbitrable. See Dkt. 4 at
16 13-15 (collecting cases). The Court also finds that case law supports finding that a party
17 suffers irreparable harm when it is “forced to expend time and resources arbitrating an
18 issue that is not arbitrable.” See, e.g., Merrill Lynch Inv. Managers v. Optibase, Ltd., 337
19 F.3d 125, 129 (2d Cir. 2003); Paine Webber, Inc. v. Hartman, 921 F.2d 507, 515 (3rd
20 Cir. 1990) (holding that Paine Webber would suffer per se irreparable harm if a
21 preliminary injunction was not entered prior to the court’s determination of whether the
22 customer's claims at issue were eligible for NASD, now FINRA, arbitration).

ORDER - 8

1

Therefore, for purposes of this motion, the Court finds that Morgan Keegan will

2 suffer irreparable harm if it is forced to arbitrate what appears to be claims that are not
3 arbitrable.
4

3.

5

To determine whether the balance of hardships favors the moving party, courts

Balance of Hardships

6 must “balance the interests of all parties and weigh the damage to each.” Stormans, Inc.
7 v. Selecky, 571 F.3d 960, 988 (9th Cir. 2009).
8

Here, as explained above, it appears that the Jindras have no right to force Morgan

9 Keegan to arbitrate this action. If the Court denied the preliminary injunction, Morgan
10 Keegan would be forced to spend substantial time and resources defending the
11 Shorthouses’ claims before FINRA. Allowing the Shorthouses to proceed with
12 arbitration would benefit them in no way because the arbitration award would ultimately
13 have to be set aside by the Court.
14

Thus, the balance of equities favors granting the injunction to prevent arbitration.

15

4.

16

It is not in the public interest to force a party into arbitration on issues that are not

Public Interest

17 arbitrable. Because it appears that the Shorthouses have no basis upon which to force
18 Morgan Keegan into arbitration, it would be against the public interest to deny the
19 preliminary injunction.
20

5.

21

Pursuant to Rule 65(c) of the Federal Rule of Civil Procedure 65(c), the Court may

Bond

22 require the party seeking a preliminary injunction to post a security bond “in an amount

ORDER - 9

1 that the court considers proper to pay the costs and damages sustained by any party found
2 to have been wrongfully enjoined or restrained.”
3

It does not appear that a bond is necessary in this matter. Therefore, no bond will

4 be required.
5 C.

Conclusion

6

A preliminary injunction enjoining the Shorthouses from proceeding in arbitration

7 against Morgan Keegan is warranted in this instance.
8

IV. ORDER

9

Therefore, it is hereby ORDERED that:

10

1.

Morgan’s motion for preliminary injunction is GRANTED as discussed

2.

Unless and until the Court orders otherwise, the Shorthouses are enjoined

11 herein.
12

13 from proceeding in the arbitration proceeding before FINRA, styled Joseph Shorthouse,
14 Denise Shorthouse, and Joseph Shorthouse on behalf of KS and MS v. Morgan Keegan &
15 Company, Inc., FINRA Case No. 11-02889.
16

Dated this 22nd day of November, 2011.

A

17
18

BENJAMIN H. SETTLE
United States District Judge

19
20
21
22

ORDER - 10