### IN THE COURT OF APPEALS OF TENNESSEE AT NASHVILLE October 10, 2002 Se ssion J.C. BRADFORD & CO., LLC, ET AL 

### . v. DOUGLAS O.KITCHEN

Appeal from the Chancery Court for Davidson County No. 01-3446-III Ellen Hobbs Lyle, Chancellor

No. M2002-00576-COA-R3-CV - May 14, 2003

The principa

l issue in th

is case is whethe r the def endant, a member o

r partne r of J.C. Bradford, I

nc., waivedhis righ

t to the ar bitration of his cla imfor dama

ges ag ainst

the defendants allegedly

resulting from various machi nations inv olving f raud and deceit a nd the viol ation of F

ederal and State Securities Laws, by joi ning a plaintiff class in a n action f or damag es in

the U.S. District Court which was voluntarily dismissed after pending four months. The Chancellor he ld that the defendant filed the District C ourt act

ion with full knowled

ge of th e facts and th us made a

n electio n of reme dies, thereby waiving his right of arbitration. We disagree, and reverse the judgment g rant in g an injunction against arbitration. Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Reversed and Remanded
W ILLI AM B. C AIN , J., P ATRIC IA J. C OTT RELL , J., and J OHN A. T URNBU LL , S P
. J.
John A. Day and Todd Mc Kee, Brentwood, Tennessee and A. L ee Parks and David C. Ates, Atlanta, Georgia, for the appellant, Douglas Kitchen.
William L. Harbison and L. W ebb Campbell, II , Nashville, Tennessee and Robert J. Kriss and Bennet t E. Kapla

n, Chicag o, Ill

inois, atto rney s for app ellee, J. C. Bradf ord & Co. , LL

C.
Rob e rt J. Walker and John C. Hayworth, Nashville, Tennessee, a ttorneys for a

ppellee, Jeffrey

E. Powell.
James F. Sanders and

Thomas H. Dundon, N ashville, Tenness ee, atto rney s for app ellee, Jam

es C. Bradford, Jr.1 We have d eterm ined th at any e xplica tion of the co rpo rate na ture of J .C. B radfo rd Inc . and its o wners hip

stru cture, descr ibed a s “poi nts of i nter est s”, non- esse nti al t o a res olut ion of thi s l it igat

ion. The meth od of i ts acqui sit ion by the P aineW ebb er G roup , Inc., thou gh no t the acq uisition itself, is imm aterial. -2- OPINION

Background
This act io n wa s fi led by th e br oke rag e fi rm o f J .C . Br adf ord & Co ., LLC 1 [LL C] and tw o former members o f its executive

committee

seeking to enjoin a

n arbitra tion proc eeding

filed ag ainst the plaintiffs by the

defendant, a

former general partne

r and manager of the Futur es Department of the f irm, b efor e the Nati onal Futu res A ssoc iatio n [NFA ].
Mr. Kitchen managed the Futures De partment of the brokerage firm for eighteen years. He was a general partner a

nd one of seventeen m embe rs of the LL C, and owned sixteen “points of interest ” therein. He alleged that on September 10, 1999 Jeffre y E. Powell, a

management member of the L LC, iss ued a mem

orandum t

hat m anag ement had determined that the Futures Depar tment would be discontinued as of Octobe r 15, 1 999 and Mr. Kitchen’s employ ment would cease. The LLC retaine d his paid in capital a nd Mr. Kitc

hen reta ined his sixteen points o f intere st, the value of which had not then been determined.
On Janu ary 1, 200 0 the LLC cr eated a retir ed part ner pro gr am which provided that the Executive Committee could offer to any current or withdrawn membe r, whose capital account remained on deposit with the LLC, the option of pa rticipation in the program, wher e by a member who accept

ed the of fer toparticipate would receive one retire d partner point of interest for each four points of interest owned by the partner

before withdrawal. The progr am was described as a way f or retiring partner s to “leave their capital in the firm, get a g ood return, and possibly participate if the firmwere to go public or be sold at a premium.” This representation was made by the plaintiffs who, in writing , advised

Mr. Kitch

en that he “should not concl ude that J.C. Bradford & Co. is either going public or is selling out.”Mr. Kitch en acce pted the p rogra m, with the result that he forfeited twelve of his points of interest, which, as it developed, resulted in a loss to him of $2,100,000.00.
Mr. Kitchen a

llegesthat bef

ore the r etired p artner

progra m was cre ated, the plaintiff s had begunnegotiations to sell the firm, and that the decision to close the Futures Department was a pa rt of a plan to c

reate a reserv oir of una

llocated points of in

terest, s o that, when the firm was sold, the individual plaintiffs appropriated the unallocated twelve points thereby enriching thems elves, a

ll of which was unknown to Mr. Kitchen. Other acts of alleg ed self-dealing and fraudulent conduct by the principal managing partner s are alleged but need not be desc ribed here.
On April 26, 2001 a num ber of former members of J.C. Bradford, including Mr. Kitchen, filed suit in the United States District Court for the Middle District of Tennessee sty led Davenpo rt, et al v. J.C. Bradford & Co., LLC, et al , Civil Acti on No. 3:01 -0364 (th e “Dave nport” a ction). T his2 The Da ven por t litigation ha s since b een vo luntarily dismissed by all one hundred five (105) plaintif fs who elected to pa rticipate in a sep arately filed class ac tion suit in the Circu it Cou rt. -3- lawsuit concerned claims that the alleged se lf-dealing of

Powell and Graves ultimately diluted the amount of money that ea

ch member received for his or her points of in terest upon the sale of the LL C. The Davenpo rt

litigation did not include Mr. Kitchen’s claims concerning the c losing of the Futures Departm

ent to for ce him fr om employ

ment, nor did it include M

r. Kitche n’s claim that he was induced t

o accept the Retir

ed Partne r progr am and g ive up 75% of his ownershippoints so that Powell and Graves could secret l y increa se the amount of ownership points they e ach held. The clo sing of the Futures Department and the retire d partner program were not mentioned in the Davenpo rt

complain t or amen ded compl aint.
After the Davenpo rt

complaint

was filed, the parties engag ed in an initial case management conference. The result of the case manage ment conference was a sche duling order w here by the plaintiffs would amend their complaint. OnJuly 12, 2001 the Davenpo rt plaintiffs filed the

ir first amended compl ai nt. Thereafter, on July 30, 2001 the de fendants in the Davenpo rt action filed motions to dismiss the first amended Davenpo rt complai nt for failure to state a Federal c ause of action and failure to comply with the proc edural requirements of the Private Securities L itigation Reform Act of 1995. As a result, no discovery was ever even begun in the Davenpo rt litigation. The only actions which were taken in the Davenpo rt

litigati on were

the filing of a comp laint, an amended complain t, and a motion to dismi ss.
On August 16 , 2001 Mr. Kitchen f iled a sta tement of claim with

the NFA

to initiate arbitration proceedings, which alleged more grievances or claims than were asserted in the Davenpo rt

lawsuit. He voluntarily dismissed himself from the Davenpo rt action. 2

In an effo rt to avoid arbitration, the plaintiffs filed this action in Davidson Chancery seeking to enjoin the arbitration on the asserted grounds that Mr. Kitchen ha d effectively waived the right to arbitrate b ecause he joined in the Davenpo rt lawsuit. The Chancellor agreed and issued the requested injunction. For the r

easons f ollowing , we rev erse

and dissolve the injunction, and remand the case to the Chancery

Court for whatever purposes may be required. Analy sis
To the extent that the issue of waive r involve s question s of fac t, our revi ew is de novo with a presumpt

ion that the

judgmen t is correct . Rule 13(d) Tenn. R. Civ. P. We cannot reverse the f actual findings unless they a re contrary

to the preponderance of the evidence , Randolph v. Randolph , 937 S.W.2d 81 5 (Tenn. 1996), bu t legal conclu s ions are reviewed de novo with no presumption of correctness. Bell ex r el. Snyde r v. Icar

d , 986 S.W.2d 550 (Tenn. 1999).
The F ederal Arb itration Act [FAA], 9 USCA 2 et seq., controls, and Tennessee courts are required to ap pl y the FA A to contracts involving interstate commerce and whic h provide for arbitration. Tenn. River Pulp & Paper Co. v. Eichleay Corp. , 637 S.W.2d 853, 858 (Tenn. 1982).-4-

The contract in this case arises out of the registration of the individual plaintiffs and the defendant withthe NFA, whi ch authorizes its members to resolve disputes by ar bitration within the NFA. Alth ough federal law controls, the FAA doe s not pre empt state courts from determining whether arbitration should be staye d. Volt v. Infosciences, Inc. v. Brd. of Trustees , 459 U.S. 486 (1989).
The trial judg e conclu ded that t he essen tial quest ion in dete

rmi nin g the iss ue of wa

iver is “whether under all of the ci rcumstanc es the defaulting party had acted inconsistently with the arbitration right, ” citi ng Southern Systems Inc. v. Torrid Ltd, 105 F.Supp.2d 848 (W.D. Tenn. 2000). The Court in Southern Systems recognized that theparty alleging waiv er should

demonstr atethat it has been prejudiced, but that the absence of pre judice i s not fa tal to a determination that a waiver occurred.
We ho ld th at a d et er mi na ti on of wa iv er in ar bi tr at io n c as es co nt ro ll ed by federal l aw necessa rily implicates prejudic e to the pa rty opposing arbitra tion; other

wisethe issue

evolves into a simple, me chanistic

election of remedies inimicalto the entire process. The appellant arg ues that the record reveals no prejudice to the plaintiffs wha tsoever, and we agree . The appellees argue that the Sixth Circuit has adhered to the principle that a determination of waiver requiresa finding only that the defaulting party

has acted inconsi stently with the right to arbitra te, the issue of prejudice aside. See, Germany v. River Terminal Ry. Co. , 477 F.2d 546 (6 th Cir. 1973). But we think th e recent c ase of Genera l Star Ins. Co. v. Administratia Asigurarilor de Stat , 289 F.3d 434 (6 th Cir. 2002), decided after the trial court’s ruling herein, clarifies the issue.
General Star filed suit against a Romanian state-owned

insuranc e compan

y a sserting

claims for breach of contract and

unjust enrichment. The defendant did not respond to the complaint and a default judgment was entered. Nea rly one y ear later the defenda nt moved to

vacate the judg ment; the motion was denied. The defendant argued that its liability could be resolved only

through the arbitration processpursuant to the app licable

contracts. The Sixth Circuit, in an opin ion b y Judge Gilman, held:
But

“an agreement to arbitrate may be wa

ived by t h e actions of a party w hich are completely

inconsistent with any reliance thereon.” Germany v . River Terminal Ry. Co. , 477 F.2d 546 (6th Cir. 1973) (per curiam). Although a waiver of the rig ht to arbit ration is “not to be light ly inferred,” MicroStra tegy, In c. v. Laur icia , 268 F.3d 244, 249 (4th C ir. 2001) (internal quotation marks omitted), a party may waive the right by

delay ing its a ssertio n to such an extent that the opposi ng par ty incurs actual prejudice

. Doctor’s Assocs., Inc. v. Distajo , 107 F.3d 126, 131 (2d Cir. 1997) (recog nizing tha t a party waives the right to arbitrate where it delay s the invoca t ion of that right to the extent that the opposing party incurs“unnecessary delay or expense”) (internal quotation marks omitted).3 M ost of th e federal circu its requir e a showing of prejudice by the party o ppo sing arb itration. See, Creati ve Solut ions Grou p, supra ., Leadertex, Inc. v. Morgant on Dyeing and Fini shing Corp. , 67 F .3d 2 0 (2 nd C ir. 199 5), Wood
v. Prudential Ins. Co. of America , 207 F.3d 67 4 (3rd Cir. 200 0), Maxum Foundations I nc. v. Salus Corp. , 779 F.2d 924 (4th Cir. 19 85) , S ubw ay E quip . L easin g C orp . v. Fo rte , 169 F.3d 324 (5th C ir. 199 7), Ritz el Comm. I nc. v. MidAmerican Cell ular Telephone Co ., 989 F.2d 966 , 969 (8th C ir. 199 3), Chappell v. Laboratory Corp. Of Americ a , 232 F.3d 719 (9th Cir. 2000), Metz v. Merri ll Lynch Pi erce Fenner and Smith, I nc. , 39 F .3d 1 482 (10 th Cir. 1 994 ), Mo rewitz v. Wes t of

England , 62 F.3d 135 6 (11th Cir. 1995). -5- In the pres ent case , Astra di d not assert its purported right to arbitr ate until it filed its motion to vac ate the d efault judgment on March 16, 2000. General Star gave Astra a ctual notice of the lawsuit on October 16, 1998. Thus, for 17 months, Astra remaine d idle while General Star incurred the costsassocia

ted with th

is action. Astra, moreover, sought ar bi tr at io n o nl y after

the d istrict c ourt had e

ntered a default judgment aga inst it. Under these circumstances, we believe that Astra has wa ived its right to arbitrate. Menorah I ns. Co. v. I

NX Reinsurance Corp. , 72 F.3d 218, 222 (1st Cir. 1995) (concluding that the defenda

nt waived

its right to arbitr ate whe re it “chose no t to invoke arbitra

tion from July 19 92 until October 1993 and [the plaintiff] bore the costs of proceeding to try to obtain the sum s it thought owed”) ; Stone v. E

.F. Hutt on & Co

. , 898 F.2d 1542, 1543 (11th Cir. 1990) (per curiam) (holding that the defe ndant waived it s right to arbitrate where it delay ed its asserti on of that right for 20 months). (Emphasis added).
In the case at Bar, Mr. Kitchen, with one hundr ed five (105) other claimants-partners of the broker age firm filed an action for damages in the U.S. District Court from whic h he voluntari l y withdrew four months later after initiating arbitration procee dings before the NFA . The b rokera ge firmfiled no answer; no discovery procedure s were tak en; at a scheduling conferenc e before the Magistr atethe defendants gave oral notice of their intention to fi le a motio n to dismiss which generated the filing of an amended complaint. The plaintiffs herein understandably do not seriously argue that they were

prejudiced

by t h ese act ions. The

re is noth ing indic ative of

waiver in these actions ot he r than the mere joining as a plaintiff class member in the f iling of the complaint for damage s, which the Chancellor found amounted to a waiver, i.e. an election of re medies, since Mr. Kitchen made a conscious choice to join the federa l action.
In the absence of lega l constra ints a party clearly cannot be

compelle d to arbitr

ate bec ause the courts must be open to whomsoev er. But it is also c lear fr

om the re

ported c ases tha

t in determining whether a party has waived an arbitration right, a fore most principle for consideration is the strong federal policy favoring arbitration. Creative Solutions Group Inc. v. pPentzer Corp. , 252 F.3d 28 (1st Cir. 2001). 3 Appellees urge the correctness of the ruling that Mr. Kitchen’s filingof the lawsuit is , ipso facto , conclusive of the principle that his action was inconsisten t with his claimed rights of-6-

arbitration. Stated differently, tha tsuch action was an election of remedies and f oreclosed the issue. If the enquiry should end

with a finding that a lawsuit was filed, notwithstanding, for instance, that it was withdrawn before service wa s perfected, the principle urged

by a ppellee s would neverthel ess control. This is con

trary to the majo

rity rule in the

United Sta

tes. We hol d that the

party in op position to arbitra

tion is burd

ened with the resp onsibility

to show suc

h party was pre judiced i n somemateria

l way by t he judici al action . Here, no actua l p rejudice was shown, and no prejudice resulted.
Fi na ll y, the Chancellor d etermined that Mr. Kitchen’s claims are outside the scope of the NFA member A

rbitrati on Rules, th

us approv ing the a rgumen t of the a ppellee s that J.C. B radfor

d did notagree to arbitrate the lawf ulness of acts tha t occurred before it became a member of the NFA. We note that

J.C. Bradford & Co., I

nc., which was wholly owned by the LL C, was a member of the NFA for many

pertine nt y ears al though th e LL C assertsthat it

did not become a member of the NFA until November 16, 1999, after most of Mr. Kit chen’s c laims had o ccurred. It i s necess ary to co nsid er the “totality of the circ umstances”; the record speaks to a course of conduct which culminate d in the sale of the LL C to PaineWebber, and the LL C was a member of the NFA when Mr. Kitchen w as alleg edly induced t

o surrender much

of his ownership in

terests f or the Retire d Partner Progra m. While the closing of the Futures Department occ urred before the L

LC became a member o f the NF

A, many of the acts complained of oc curred subseque ntly to member ship in the NFA. This being so, an injunction issued on these grounds wa s not justified.
The judgment is reversed, the injunction is dissolved and the case is remanded. Costs of thi s appeal a re taxed to

the appe llees.

PER CURIAM