Court Opinion

ID: 61592
Source: CourtListenerOpinion
Date Created: 2010-04-26 04:08:20+00
Date Added: 2024-06-11T17:19:59.295193
License: Public Domain

[DO NOT PUBLISH]

             IN THE UNITED STATES COURT OF APPEALS
                                                                 FILED
                     FOR THE ELEVENTH CIRCUIT U.S. COURT OF APPEALS
                       ________________________ ELEVENTH CIRCUIT
                                                             April 3, 2008
                        Nos. 07-10320 & 07-11222           THOMAS K. KAHN
                       ________________________                CLERK

                D. C. Docket No. 06-00350-CV-4-SPM-WCS
                 D.C. Docket No. 06-00350-CV-4-SPMAK

MAGNOLIA CAPITAL ADVISORS INC,

                                                            Plaintiff-Appellant,

                                   versus

BEAR STEARNS & CO.,
BEAR STEARNS SECURITIES CORP.,

                                                        Defendants-Appellees.

                       ________________________

                Appeals from the United States District Court
                    for the Northern District of Florida
                      _________________________

                              (April 3, 2008)

Before BIRCH, CARNES and COX, Circuit Judges.

PER CURIAM:
       Plaintiff-appellant Magnolia Capital Advisors, Inc. (“Magnolia”) appeals the

order of the district court compelling arbitration as to its claims against defendants-

appellees Bear Stearns & Co. and Bear Stearns Securities Corp. (collectively “Bear

Stearns”).1 Magnolia argues that the court ordered arbitration and dismissed its

claims without affording it the trial required by 9 U.S.C. § 4, even though

Magnolia had unequivocally denied having agreed to arbitrate and produced

evidence to substantiate that denial. We REVERSE and REMAND.

                                      I. BACKGROUND

       Magnolia was a registered investment advisory firm whose primary

activities involved recommending and directing securities transactions to its

clients.2 Don Reinhard, as Magnolia’s principal, made the recommendations and

transactions with clearing agent Bear Stearns through Paragon Financial Group, an

introducing broker dealer. Bear Stearns was to provide daily status reports

containing accurate and up-to-date information on Magnolia’s client accounts. In

its suit against Bear Stearns, Magnolia has alleged that Bear Stearns, for various

reasons, failed to provide the daily reports, causing Magnolia clients substantial

       1
        Magnolia also appeals the court’s denial of its motion to vacate its judgment pursuant to
Federal Rule of Civil Procedure 60(b) and also argues that the arbitration agreement is subject to
a condition precedent before it might otherwise become obligatory to a signatory in the first
place. Because we remand based on our finding that the district court was required to hold a
bench trial in the first instance, we do not reach either of these issues.
       2
           Magnolia was voluntarily dissolved in May 2004.

                                                2
losses when margin calls were unexpectedly issued, forcing liquidation of those

accounts. Accordingly, Magnolia brought claims for negligent misrepresentation,

negligence, fraudulent misrepresentation, and tortious interference with existing

business relationships.

      Bear Stearns filed a motion to dismiss or compel arbitration of these claims,

citing certain provisions contained in an “Options Information Form and

Agreement” (“Options Form”) as proof that Magnolia had agreed to resolve all

disputes by arbitration. This agreement, for account number 174-00602-9-6, dated

5 April 2000, is styled as a letter addressed to a Bear Stearns client. There are

name and address blanks prior to the salutation on the first page, and a space for a

customer signature at the end of the second page. There are also signature blanks

at the end of the first page for “R.B.,” “BOM/ROP,” and “Registered Options

Principal.” R1-4 at 10. The second page of the agreement contains an arbitration

clause which explains the procedures for and consequences of arbitration,

including waiver of the right to seek redress in court, the final and binding nature

of arbitration decisions, and the limited right to appeal. The agreement to arbitrate

is set out as follows:

      You agree, and by maintaining an account for you Bear Stearns
      Securities agrees, that controversies arising between you and Bear
      Stearns, its control persons, predecessors, subsidiaries and affiliates
      and all respective successors, assigns and employees, whether arising

                                           3
       prior to, or subsequent to the date hereof, shall be determined by
       arbitration.

Id.

       Written in the name blank of the agreement in this case is “AmSouth

Bank/Magnolia Capital Advisors.” Id. This is followed by Magnolia’s mailing

address. Don Reinhard has signed at the end of the document in the space for a

customer signature. Magnolia argues that it is not a party to the agreement and is

only listed on the agreement in the capacity of an interested party for the purpose

of receiving account statements, confirmation of trades, and other information

important to management of the account. Magnolia also explains that Reinhard

signed the agreement only in his capacity as the registered representative with

Paragon. Paragon is not mentioned by name on the form, although R. William

Lee, president of Paragon, did sign the form in three places at the bottom of the

first page as “BOM/ROP,” “Registered Options Principal,” and “R.B.” Id.

       Reinhard has explained that he signed the Options Form when Paragon sent

it to him “as registered representative of Paragon who would service the many

customers and investors who would trade in the account.”3 R1-7-2 at 4. In other

words, he was signing in his capacity as Paragon’s registered representative in

       3
         Reinhard also explained that Paragon sent him the form when he informed Paragon that
some of the account’s investors had decided “to engage in covered call option writing
transactions.” R1-7-2 at 4.

                                              4
place of the account holders – the AmSouth investors. According to Reinhard, it

was Paragon, not he, who put Magnolia’s name along with that of AmSouth Bank,

and Magnolia’s address in the blanks at the top of the agreement. He suggests that

Paragon did so to make clear that Magnolia should “be coded to receive confirms

and statements.” Id. He emphasizes that statements, confirmation of trades, and

other account information needed to go to Magnolia as well as to AmSouth

because Magnolia was the investment advisor for the AmSouth investors. Id. at 5.

Attached to his affidavit were: (1) a November 1999 fax from Paragon to Bear

Stearns requesting the opening of a new account, numbered “174-00602-9-6. RR

285: Magnolia Capital Advisors; Amsouth Bank.” R1-7-2 at 7. According to

Reinhard, his registered representative ID number with Paragon was 285. The

second page of the fax contains “AmSouth Bank Delivery Instructions” for the

account, listing various AmSouth Departments as well as several departments of

the Bank of New York. R1-7-2 at 10. After the printed delivery instructions,

Magnolia’s name and address are hand-written in with the explanation: “Interested

Party (to receive hard confirms and statements).” R1-7-2 at 8. An October 2002

fax from Paragon to Bear Stearns seeks to ensure, as to several accounts -

including 174-00602-9-6, that “Magnolia Capital [is coded] as an interested party

to receive confirms and statements.” R1-7-2 at 9.

                                         5
       In response, Bear Stearns moved for leave to file a reply and then filed a

reply brief to which it attached further documents.4 These include: a July 2003

Paragon account statement for an account numbered 174-00602-285 which is

addressed to Magnolia and AmSouth Bank at Magnolia’s mailing address, R1-10-2

at 5, and a lengthy letter of understanding outlining Reinhard’s role as a registered

representative with Paragon. Reinhard’s agreement with Paragon makes him an

independent contractor rather than an agent of Paragon. The agreement explicitly

states that Reinhard has no authority to bind Paragon, to enter into a contract, or act

in any manner on its behalf. R1-10-3 at 2. The agreement also provides that

Reinhard will “conduct all of [his] securities business as a registered General

Securities Representative of [Paragon], and will place all brokerage orders for the

account of others with [Paragon].” Id. at 3.

       Referring only to the Options Form, the district court granted Bear Stearns’s

motion. Magnolia moved for a new trial pursuant to Federal Rule of Civil

Procedure 59(a) and 9 U.S.C. § 4. The district court denied the motion, ultimately

finding that “the face of the agreement alone was sufficient to show that Magnolia

       4
          The record does not indicate that the district court ever ruled on the motion for leave to
file a reply. We can only assume the motion was granted since a reply brief and supporting
documents were in fact filed.

                                                  6
bound itself to the terms of the agreement through the signature of its principal,

Don Reinhard.” R1-34 at 2. The court explained:

       Reinhard’s affidavit to the contrary does not change the fact that
       Reinhard signed the agreement’s “Customer” signature blank, that the
       address listed on the form is that of Magnolia Capital Advisors, Inc.,
       and that Reinhard’s independent contractor status with Paragon
       Financial Group explicitly barred him from binding Paragon or
       entering into any type of agreement on Paragon’s behalf.

Id. Magnolia timely appealed, case no. 07-10320-EE.5

                                      II. DISCUSSION

A. Making of the Agreement

       Because it is well established that “parties cannot be forced to submit to

arbitration if they have not agreed to do so,” a district court, rather than a panel of

arbitrators, must decide whether a challenged agreement to arbitrate is enforceable

       5
          On 6 February 2007, Dirk Zeiters et al. filed a case against Magnolia in Leon County,
Florida, in connection with the same transactions at issue in Magnolia’s claims against Bear
Stearns. Pursuant to that case, Magnolia noticed and took the deposition of Carrie Bell, formerly
Vice President for Paragon. Bear Stearns had no notice of this deposition, and therefore, was not
present. After taking this deposition, Magnolia filed a motion pursuant to Federal Rule of Civil
Procedure 60(b), requesting that the district court’s judgment in favor of Bear Stearns be vacated
in light of newly discovered evidence regarding the agreement to arbitrate. Magnolia explained
that Bell’s testimony had not been available prior to the district court’s ruling on the motion to
compel arbitration because it was only available via subpoena, and discovery in Magnolia’s case
against Bear Stearns had been stayed pending the court’s order on the arbitration issue. The
district court denied Magnolia’s motion on the ground that “the appeal process is far more
appropriate to deal with errors of law or fact beyond mere clerical mistakes.” R2-47 at 2
(internal quotation and citation omitted). Magnolia timely appealed this order as well. Case No.
07-11222-E. Because we reverse and remand based on the court’s underlying order to compel
arbitration, we do not reach the issues of the admissibility of this deposition testimony or
whether it would satisfy the requirements of Rule 60.

                                                7
against the parties in question. Chastain v. Robinson-Humphrey Co., 957 F.2d

851, 854 (11th Cir. 1992). We have said that a party seeking to avoid arbitration

must unequivocally deny that an agreement to arbitrate was reached and must offer

some evidence to substantiate the denial. Id. More specifically, we require a party

resisting arbitration to “substantiate[] the denial of the contract with enough

evidence to make the denial colorable.” Wheat, First Secs., Inc. v. Green, 993 F.2d

814, 819 (11th Cir. 1993) (quotation and citation omitted). Once an agreement to

arbitrate is thus put “in issue,” the Federal Arbitration Act (FAA) requires the

district court to “proceed summarily to the trial thereof” and if the objecting party

has not requested a jury trial, “the court shall hear and determine such issue.” 9

U.S.C. § 4.

      Observing that a district court’s order to arbitrate a contested agreement

without benefit of trial is “in effect a summary disposition of the issue of whether

or not there ha[s] been a meeting of the minds on the agreement to arbitrate,” the

Third Circuit has applied the summary judgment standard in deciding what is

sufficient evidence to require a trial on the issue of whether there was an agreement

to arbitrate. Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., 636 F.2d 51, 54 n.9

(3d Cir. 1980). Adopting that reasoning, we agree that “[o]nly when there is no

genuine issue of fact concerning the formation of the agreement should the court

                                           8
decide as a matter of law that the parties did or did not enter into such an

agreement.” Id. at 54. Further, as in the case of any other summary judgment, a

district court considering the making of an agreement to arbitrate, “should give to

the [party denying the agreement] the benefit of all reasonable doubts and

inferences that may arise.” Id.

       Magnolia has met the first requirement for a § 4 trial by unequivocally

denying that Reinhard signed the Options Form as an agent of Magnolia.

Magnolia also produced the following evidence in connection with its first set of

pleadings on the issue: (1) the affidavit of Reinhard in which he swears not to have

signed the agreement as an agent of Magnolia and explains that he signed it as a

registered representative of Paragon on behalf of the AmSouth investors who

owned the account numbered 172-00602-9-6; (2) a fax from Paragon to Bear

Stearns requesting the opening of that account by Paragon for the benefit of

AmSouth investors, and listing Magnolia as an “interested party (to receive hard

confirms and statements),” R1-7-2 at 8; and (3) a further fax from Paragon to Bear

Stearns seeking to ensure that “Magnolia Capital” is listed as an “interested party

to receive confirms and statements” on several accounts including the account at

issue, id. at 9.

                                           9
       Although Bear Stearns filed a reply brief, none of the evidence

accompanying that brief resolves the genuine issue of material fact raised by

Magnolia’s reponse. First, the Paragon account statement bearing Magnolia’s

name and address in addition to the name AmSouth, lists a different account

number than that appearing on the Options Form. Second, the letter of

understanding outlining Reinhard’s relationship with Paragon is not inconsistent

with his explanation regarding the capacity in which he signed the Options Form:

although it states that he could not sign on behalf of Paragon, it directs that he

conduct all securities business as a registered representative of Paragon on behalf

of his investment advisee clients. Thus, it is not illogical for him to have signed

the form, as requested by Paragon, as a registered representative of theirs, on

behalf of the AmSouth investors – his clients.6 Accordingly, we find that Magnolia

submitted sufficient evidence to make its denial colorable.

       6
         Bear Stearns also argues that Reinhard’s signature, even in a representative capacity,
binds him to the terms of the agreement. However, under New York law, which governs the
agreement, that is only the case when the principal’s name is not disclosed or the other
contracting party has no actual knowledge of the identity of the principal. See Orient Mid-East
Lines v. Albert E. Bowen, Inc., 458 F.2d 572, 575 (2d Cir. 1972); Nomura Secs. Int’l, Inc. v.
E*Trade Secs., Inc., 280 F. Supp. 2d 184, 195 (S.D.N.Y. 2003). In this case, the principal’s
name is clearly written on the Options Form in the name blank. Further, the Delivery
Instructions which accompanied Paragon’s request that Bear Stearns open the account clearly
establish that the account was for AmSouth Bank.

                                               10
                               III. CONCLUSION

      Magnolia appeals the district court’s order compelling arbitration as to its

claims against Bear Stearns. Because, in 9 U.S.C. §4, the FAA provides for a trial

when the making of an agreement to arbitrate is “in issue,” and we find that

Magnolia produced evidence sufficient to substantiate its unequivocal denial of

having made any such agreement, we REVERSE the district court’s order and

REMAND this case for a trial as to the making of an agreement to arbitrate.

                                         11