1

United States Court of Appeals,

Fifth Circuit.

No. 93-5049.

Don TAYLOR, Plaintiff-Appellee,

v.

INVESTORS ASSOCIATES, INC. and Mitch Goldberg,

Defendants-Appellants.

Aug. 19, 1994.

Appeals from the United States District Court for the Eastern

District of Texas.

Before KING, JOLLY and DAVIS, Circuit Judges.

PER CURIAM:

Having studied the briefs filed in this appeal, having

considered the arguments of counsel, and having reviewed the

record, we are fully convinced that the district court correctly

decided the issues in this appeal in its well-reasoned opinion,

which we attach hereto and adopt as the opinion of this court. The

judgment of the district court is therefore

AFFIRMED.

APPENDIX

In the United States District Court

for the Eastern District of Texas

Paris Division

Don Taylor, Plaintiff,

v.

Investors Associates, Inc., Mitchell Goldberg, also known as

Mitch Goldberg, Defendants.

3:93 CV 20.
2

MEMORANDUM OPINION

Pending before the court for adjudication are the motions of

defendants Mitchell Goldberg ("Goldberg"), and Investors

Associates, Inc. ("IAI"), for an order to stay proceedings and

compel arbitration, or, alternatively, to dismiss the action.

I. Background

The facts in this case are undisputed. IAI is a securities

broker-dealer. Beginning in December 1991, Mitchell Goldberg, as

a representative of IAI, solicited plaintiff, Don Taylor, by

telephone, to buy and sell stock from IAI. On January, 6, 1992,

Taylor made his first trade with IAI, purchasing stock of United

Fashions at a total cost of $132,233.75. On January 7, 1992,

Taylor executed a Client's Agreement with Prudential-Bache

Securities, Inc. ("Prudential"). See Client's Agreement between

Prudential-Bache Securities, Inc. and Don Taylor, Exhibit B to

plaintiff's response to defendant Goldberg's motion to stay

proceedings and compel arbitration [hereinafter "Agreement"]. By

the terms of the Agreement, Prudential was designated as a clearing

broker, whose function it was to keep records relating to Taylor's

account.

Taylor filed a complaint in this court against IAI and

Goldberg alleging, inter alia, violations of § 10(b) of the

Securities and Exchange Act of 1934, as amended; Rule 10(b)(5)

promulgated thereunder, § 12(2) of the Securities Act of 1933, as

amended; and 18 U.S.C. § 1962(a), (b), and (c) ("RICO"), all

arising from the sale of stock by IAI in its capacity as a
3

securities broker-dealer for Taylor. In addition, Taylor alleges

common law fraud against defendants, under the provisions of

Article 581-33A(2) of the Texas Blue Sky Law; pursuant to Section

27.01 of the Texas Business and Commerce Code, for breach of a

fiduciary obligation; and under Section 17.41 of the Texas

Deceptive Trade Practices-Consumer Act, for negligence and

conspiracy. In response, defendant Goldberg filed a motion to stay

proceedings and compel arbitration. IAI filed a similar motion, as

well as a motion to dismiss the claims. The issue raised by these

motions is whether Goldberg, through IAI, is an agent or third

party beneficiary of the arbitration agreement between plaintiff

and Prudential. If so, then the defendants' motion to compel

arbitration must be granted; if not, it must be denied.

II. Analysis

A. The Arbitration Clause

 The arbitration clause at issue in this action is part of a

Client's Agreement, signed by Taylor, which was sent on

Prudential's letterhead. The clause, paragraph 14, providing for

compulsory arbitration does not mention defendants IAI or Goldberg

either by name or by function, and defendants did not sign the

document. Paragraph 14 says arbitration is binding on the

"parties." The only parties discussed in the Agreement are Taylor

("I" or "undersigned") and Prudential ("you"). Defendants'

argument that they are included in the term "you" is based upon the

fact that it was IAI which allegedly provided Taylor with the

Agreement. These circumstances are insufficient to support IAI's
 

1See, e.g., Ziegler v. Whale Securities Co., L.P., 786

F.Supp. 739 (N.D.Ind.1992); Shaffer v. Stratton Oakmont, Inc.,

756 F.Supp. 365 (N.D.Ill.1991); Conway v. Icahn Co., Inc., 787

F.Supp. 340 (S.D.N.Y.1990). 

 

2See Exhibit B, Prudential's Correspondent Allocation of

Responsibility Letter, attached to Goldberg's motion to stay

proceedings and compel arbitration. 

4

contention that it was a party to the agreement. Unlike the case

of Okcuoglu v. Hess, Grant & Co., 580 F.Supp. 749 (E.D.Pa.1984),

where the court held the arbitration clause providing protection

for the clearing broker's agents and corresponding firms to be

binding upon the introducing broker, the Agreement here does not

mention IAI, either implicitly or expressly. As such, the critical

question is whether defendants can enforce the arbitration

provision in the Agreement even though defendants are not parties

to the Agreement. Although the Fifth Circuit Court of Appeals has

not directly dealt with this issue, it appears that the case law

from other jurisdictions overwhelmingly rejects attempts by

introducing brokers to enforce arbitration agreements contained in

customer agreements between their clients and clearing brokers.1

The Agreement further states that "any controversy arising

out of or relating to my account shall be settled by arbitration."

On its face the provision is broad, but, if interpreted

contextually, the intent of the parties is manifest—to arbitrate

claims by or against the clearing house concerning its handling of

Taylor's account. This interpretation is reinforced by the

accompanying letter sent by Prudential defining Prudential's role

in Taylor's stock purchase transaction:2
5

Prudential Securities Incorporated ("PSI") is not your broker.

PSI is your Broker's clearing firm. As such, PSI handles the

back office, or clearing functions for your Broker and, for

this purpose only, PSI has opened an account in your name.

This language makes it perfectly clear that defendants are entities

independent from Prudential, a clearing house.

Defendants rely upon the agency principles upheld in Okcuoglu

to support their contention that IAI and Goldberg, although not

parties to the Agreement, are entitled to enforce the arbitration

clause contained in Prudential's Agreement with Taylor. The facts

of the case at hand are clearly distinguishable from those relied

upon by the court in Okcuoglu, in that Okcuoglu involved the

liquidation of stock from the customer's (plaintiff's) account to

meet a margin call. 580 F.Supp. at 752. The liquidation was

performed after consultation with the clearing broker, even though

the customer had disapproved the transaction. In that case, the

transaction directly involved the clearing broker, and the court

determined that so long as it was possible that the clearing broker

could be brought into the dispute as a necessary party, the dispute

as to the unauthorized options transaction should be submitted to

arbitration as set forth in the Customer Agreement. Id. at 751.

The court in Anderson v. Brock Investor Services, Inc., No. 4-92-

1032, slip op. (D.Minn., Jan. 14, 1993), found the factual

similarity to Okcuoglu dictated the conclusion that the introducing

broker could enforce the clearing broker's right to compel

arbitration. In Anderson, the transaction related to alleged

unauthorized trades; thus the possibility existed that the

clearing broker would yet be joined in the litigation. Also, the
 

3Lester v. Basner, 676 F.Supp. 481 (S.D.N.Y.1987); Ahn v.

Rooney, Pace Inc., 624 F.Supp. 368 (S.D.N.Y.1985). 

6

arbitration agreement in Anderson expressly applied to the clearing

broker and its employees and agents. Id. at 3, 5.

In contrast, Prudential is not a party to this action, and no

claims involved in this lawsuit pertain to Prudential or

plaintiff's accounts. The transactions sued upon in Okcuoglu and

Anderson relate to unauthorized or unexecuted trades, whereas

plaintiff Taylor's claim relates solely to misrepresentations made

by the defendants. In a factual situation mirroring the case at

hand, the court in Mowbray v. Moseley, Hallgarten, Estabrook and

Weeden, 795 F.2d 1111 (1st Cir.1986), expressly distinguished

Okcuoglu, because the disputed transaction in Okcuoglu involved the

liquidation of stock whereby the clearing house's services had been

employed. The Court of Appeals for the First Circuit concluded

that, because no claim had been asserted which intimated even a

"potential" involvement of the clearing broker, the activities of

the clearing broker were not a subject of dispute, and hence no

contingent right existed for the introducing broker to invoke the

arbitration agreement. Mowbray, 795 F.2d at 1116-1117.

B. No Agency Relationship Existed

Other courts have held that, even absent an express denial of

a principal and agent relationship in the agreement between client

and clearing broker, such a relationship does not exist between

them.3 Also, the Second Circuit refused to find an agency

relationship between an introducing broker and clearing broker,
7

even though the agreement executed by the customer and clearing

broker stated that the clearing broker was the introducing broker's

agent with respect to the customer's account. McPheeters v.

McGinn, Smith and Co., Inc., 953 F.2d 771, 773 (2nd Cir.1992).

Like the Agreement herein involved, the agreement in McPheeters

nowhere stated that the clearing broker acted as the introducing

broker's agent in entering into the contract generally, and the

Second Circuit refused to read such a provision into the document.

Id. Both Okcuoglu and Anderson, accordingly, can be distinguished

on the ground that, unlike those cases, the transaction in question

involves only a straight securities fraud claim; thus, in this

case, the clearing broker has no nexus with the transaction, and it

cannot be found to be an agent of the introducing broker.

Defendant IAI argues that it is an agent of Prudential, and

under the language of the arbitration agreement, all disputes with

Prudential must be submitted to arbitration. In this relation, IAI

relies on Nesslage v. York Securities, Inc., 823 F.2d 231, 233 (8th

Cir.1987), for the proposition that a customer must arbitrate

disputes with a introducing broker even where, as here, only the

clearing broker was a party to the arbitration agreement. Nesslage

is, however, distinguishable on its facts, specifically: (1) IAI

is not an agent of Prudential, because plaintiff was never advised

that IAI was acting in that capacity for Prudential; (2) there is

no evidence that plaintiff intended IAI to be a party to the

arbitration agreement, and, consequently, an agent or third party

beneficiary of such agreement; and (3) there is no evidence that
8

an agency relationship actually existed between Prudential and IAI.

C. Third Party Beneficiary Analysis Fails

Finally, IAI asserts that it is a third party beneficiary of

Prudential, and, as such, is entitled to enforcement of the

arbitration provision. The case relied upon by IAI is an

unpublished opinion from the United States District Court for the

Northern District of Texas, Donald R. Cathey v. Dallas Securities

Investment Corporation et al, No. 3-90-2686-T, slip op. (N.D.Tex.

July 9, 1991). In Cathey, the court upheld an arbitration

agreement under a third party beneficiary analysis in a case in

which the plaintiff asserted a claim against the clearing broker as

well as the introducing broker. Cathey, slip op. at 5.

Additionally, in Cathey, there was an agreement to settle disputes

between the clearing house and the introducing broker through

arbitration. Id., slip op. at 6. Here, there was no such

agreement.

In a New York District Court case, with facts similar to

these, the plaintiff signed a "Customer's Agreement" with the

clearing broker and the introducing broker was found not to be a

party to such an agreement. Lester v. Basner, 676 F.Supp. 481,

482-483 (S.D.N.Y.1987). There, the court said that the issue in

the third party beneficiary determination was whether the

introducing broker was an intended beneficiary or merely an

incidental beneficiary to the Customer's Agreement. The court

found that the introducing broker was an "incidental" beneficiary,

because the agreement was silent as to whether the terms of the
 

4See Leatherman v. Tarrant County Narcotics Intelligence and

Coordination Unit, --- U.S. ---- 113 S.Ct. 1160, 122 L.Ed.2d 517

(1993). 

9

contract applied to introducing brokers, and the defendants were

unable to show any intent to make the introducing broker a third

party beneficiary to the contract. Id. at 484-485. An intent to

benefit a third party must be apparent from the construction of the

contract in light of all surrounding circumstances to qualify that

party as a third party beneficiary. O'Connor v. R.F. Lafferty &

Co., Inc., 965 F.2d 893 (10th Cir.1992).

Furthermore, a literal interpretation of the language of this

Agreement suggests that the "omission of defendants from the clause

allowing arbitration and as signatories should be regarded as

purposeful." See Mowbray, 795 F.2d at 1116. Specifically, the

arbitration provision contained in the Agreement expressly states

that it is binding on the "undersigned, my heirs, executors,

administrators and assigns"; and shall "inure to the benefit of

your successors and assigns." It follows that, if the parties had

intended to benefit the broker, then the Agreement would have said

so. Expressio unius est exclusio alterius.4 Also, the Agreement

makes no reference to defendants by name or function, nor does it

refer to introductory brokers in general. In sum, no consent to

arbitration with Goldberg or IAI may be implied based solely on the

relationship between the introducing broker and the clearing house.

Id.

The introducing broker was not included in the arbitration

clause between Taylor and Prudential; because of that, it is
10

reasonable to draw the inference that the parties did not intend

for the defendants, the introductory firm (IAI) and its agent

(Goldberg), to be a beneficiary of the arbitration clause. The

plain meaning of the chosen language is clear. The defendants

cannot compel arbitration.

III. CONCLUSION

For the reasons set forth above, IAI and Goldberg's motion to

stay proceedings and compel arbitration, or, alternatively, to

dismiss, is denied. An order to that effect will issue

concurrently with this memorandum opinion.

SIGNED this 14th day of June, 1993.

 /s/ William Wayne Justice

 William Wayne Justice

 United States District Judge