Court Opinion

ID: 4393440
Source: CourtListenerOpinion
Date Created: 2019-05-02 18:00:32.02896+00
Date Added: 2024-06-11T14:51:47.242722
License: Public Domain

FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

BOKF, NA,                          No. 18-15369
 Plaintiff-Counter-Defendant-
                   Appellant,        D.C. No.
                                  3:17-cv-00694-
             v.                     LRH-WGC

ROBERT ESTES; KAREN NILES;
JERRY CARPENTER; SHIRLEY            OPINION
CARVEY; JAMES CARPENTER,
as Co-Trustee of the
Carpenter Family Rev Trust
UAD 1/19/14; BECKY LYNN
CARPENTER, as Co-Trustee of
the Carpenter Family Rev
Trust UAD 1/19/14,
         Defendants-Counter-
         Claimants-Appellees.

      Appeal from the United States District Court
               for the District of Nevada
       Larry R. Hicks, District Judge, Presiding

       Argued and Submitted September 5, 2018
              San Francisco, California

                   Filed May 2, 2019
2                      BOKF, NA V. ESTES

  Before: Marsha S. Berzon and Michelle T. Friedland,
Circuit Judges, and Daniel R. Dominguez, * District Judge.

                    Opinion by Judge Berzon

                          SUMMARY **

            Arbitration / Preliminary Injunction

    The panel reversed the district court’s denial of plaintiff
BOKF’s motion for a preliminary injunction against
arbitration by the Financial Industry Regulatory Authority
and remanded for further proceedings.

   BOKF was a federally chartered bank. Its Institutional
Investment Department was registered as a municipal
securities dealer with the Municipal Securities Rulemaking
Board (“MSRB”), but its Corporate Trust Department
(“CTD”) was not.

    The panel held that BOKF was likely to succeed on the
question of whether BOKF or its CTD was a municipal
securities dealer and thus subject to compelled arbitration
before FINRA pursuant to MSRB Rule G-35. Applying the
definition of a dealer in the Securities Exchange Act of 1934,
the panel concluded that neither the CTD nor BOKF was a
municipal securities dealer. The panel therefore reversed the

    *
      The Honorable Daniel R. Dominguez, United States District Judge
for the District of Puerto Rico, sitting by designation.
    **
       This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
                   BOKF, NA V. ESTES                      3

district court’s denial of a preliminary injunction and
remanded for consideration of the remaining factors—
irreparable harm, the public interest, and balance of the
equities.

                       COUNSEL

Frederic Dorwart (argued), Jared M. Burden, Paul DeMuro,
and Frederic Dorwart, Lawyers PLLC, Tulsa, Oklahoma;
Spencer H. Gunnerson, Kemp Jones & Coulthard LLP, Las
Vegas, Nevada; Benjamin W. Snyder and Gregory G. Garre,
Latham & Watkins LLP, Washington, D.C.; for Plaintiff-
Appellant.

Thomas C. Bradley (argued), Sinai Schroeder Mooney
Boetsch Bradley & Pace, Reno, Nevada, for Defendants-
Appellees.

Jonathan K. Youngwood, Simpson Thacher & Bartlett LLP,
New York, New York; Michael D. Kibler, Simpson Thacher
& Bartlett LLP, Los Angeles, California; for Amicus Curiae
American Bankers Association.

                        OPINION

BERZON, Circuit Judge:

   Our question is whether every entity that engages in
“municipal securities dealer activities” is a “municipal
securities dealer” for purposes of determining whether it is
subject to compelled arbitration before the Financial
Industry Regulatory Authority (“FINRA”). We think not, so
4                       BOKF, NA V. ESTES

we reverse the district court’s denial of a motion for a
preliminary injunction.

                                    I.

    BOKF (Bank of Oklahoma, National Association) is a
federally chartered bank. BOKF’s Institutional Investment
Department (“IID”) is registered as a municipal securities 1
dealer with the Municipal Securities Rulemaking Board
(“MSRB”). 2 Its Corporate Trust Department (“CTD”) is
not. The CTD “[s]erved as the Indenture Trustee for certain
conduit municipal bonds” issued by cities “in Arizona,
Georgia, Alabama, and other states,” to finance “the
purchase and renovation of senior living facilities” by
private entities as third-party borrowers. 3

    1
       A municipal security is “a bond, note, warrant, certificate of
participation or other obligation issued by a state or local government or
their agencies or authorities (such as cities, towns, villages, counties or
special districts or authorities).” Municipal Securities, Municipal
Securities Rulemaking Board, Glossary of Municipal Securities Terms,
http://www.msrb.org/Glossary/Definition/MUNICIPAL-SECURITIES.
aspx (last visited Apr. 8, 2019).

    2
      The MSRB is a private self-regulatory organization created by
Congress in 1975 and subject to supervision by the Securities and
Exchange Commission. The MSRB regulates municipal securities
brokers and dealers. See The Role and Jurisdiction of the MSRB,
Municipal Securities Rulemaking Board (2018) http://www.msrb.org/m
srb1/pdfs/Role-and-Jurisdiction-of-MSRB.pdf; see also 15 U.S.C.
§ 78o-4(b).

    3
       An indenture is “[a] contract between the issuer of municipal
securities and a trustee for the benefit of the bondholders.” Indenture,
Municipal Securities Rulemaking Board, Glossary of Municipal
Securities Terms, http://www.msrb.org/Glossary/Definition/INDENTU
RE.aspx (last visited Apr. 8, 2019). An indenture trustee is typically
                       BOKF, NA V. ESTES                               5

    The third-party borrowers on the conduit municipal
bonds used to fund the senior living facilities were
Christopher Brogdon and Dwayne Edwards. Brogdon
served as an officer for various companies “in the nursing
home, assisted living, and retirement community business,”
and Edwards “owned or administered assisted living and
skilled nursing facilities.” Lawson Financial Corporation
underwrote the bonds at issue—that is, as a municipal
securities dealer, it purchased the bonds from the issuer cities
and sold them to members of the public. See The
Underwriting Process, Municipal Securities Rulemaking
Board, https://www.msrb.org/EducationCenter/Municipal-
Market/Lifecycle/Primary/Underwriting-Process.aspx (last
visited April 8, 2019).

    In addition to serving as indenture trustee for these
bonds, the record suggests that that BOKF was also a
dissemination agent for a number of the conduit municipal
bonds. BOKF’s role as a dissemination agent was governed
by a continuing disclosure agreement, which required BOKF
to assist underwriter Lawson Financial Corporation in
complying with its obligations under the Securities
Exchange Act of 1934, 15 U.S.C. § 78a et seq. (“the 1934
Act”), including to provide various continuing disclosures
for the life of the bonds. See 17 C.F.R. § 240.15c2-12. As
the dissemination agent, BOKF was required to disclose the
issuer’s annual financial statements and other information on

charged with “administer[ing] the funds or property specified in the
indenture in a fiduciary capacity on behalf of the bondholders.” Id. A
conduit municipal bond is used “to finance a project to be used primarily
by a third party.” Conduit Financing, Municipal Securities Rulemaking
Board, Glossary of Municipal Securities Terms, http://www.msrb.org/
Glossary/Definition/CONDUIT-FINANCING.aspx (last visited Apr. 8,
2019).
6                      BOKF, NA V. ESTES

the MSRB’s system, as well as to provide notice to the
bondholders if the issuer did not provide this information in
a timely fashion.

     In 2015, the Securities and Exchange Commission
(“SEC”) initiated action against BOKF, BOKF’s former
senior vice president Marrien Neilson, Brogdon, Edwards,
and Lawson Financial Corporation for fraud, in violation of
securities laws, in relation to the conduit municipal bonds.
BOKF entered into a consent decree with the SEC, in which
it did not “admit[] or deny[] the SEC’s findings [but] agreed
to disgorge” fees and interests and to pay a penalty.

    The consent decree resolved only the SEC’s complaint.
A group of bondholders, who were third-party beneficiaries
of the indentures, initiated on their own behalf arbitration
before FINRA, asserting claims of breach of fiduciary duty,
fraud, fraudulent concealment, breach of contract, and
negligence. 4 FINRA, like the MSRB, is a non-governmental
“self-regulatory organization . . . that enforces MSRB rules
applicable to the municipal securities activities of its
member broker-dealers” and “handles arbitration
proceedings relating to municipal securities for its member
broker-dealers and for bank dealers,” among other activities.
FINRA, Municipal Securities Rulemaking Board, Glossary
of Municipal Securities Terms, http://www.msrb.org/Gloss
ary/Definition/FINANCIAL-INDUSTRY-REGULATORY
-AUTHORITY-_FINRA_.aspx (last visited Apr. 16, 2019).
FINRA Rule 12200 provides that “[p]arties must arbitrate”

    4
      The bondholders first brought an identical action against BOK
Financial Securities, Inc. (“BOKFS”), a sister company of BOKF.
Although BOKFS is a member of FINRA (which would have supported
FINRA’s jurisdiction), it is not involved in the actions at issue here.
After BOKFS objected to that action, the bondholders withdrew it.
                    BOKF, NA V. ESTES                      7

before FINRA if (1) the arbitration is “required by a written
agreement” or “requested by the customer,” (2) “[t]he
dispute is between a customer and a member or associated
person of a member,” and (3) “[t]he dispute arises in
connection with the business activities of the member.”

    BOKF is not a registered member of FINRA and the
underlying indenture contracts do not include any agreement
to arbitrate disputes arising from the bonds in question, so
Rule 12200 does not compel arbitration. The bondholders
resorted instead to MSRB Rule G-35, which provides that,

       [E]very bank dealer (as defined in rule D-8)
       shall be subject to the Code of Arbitration
       Procedure of the National Association of
       Securities Dealers, Inc. (“NASD”) for every
       claim, dispute, or controversy arising out of
       or in connection with the municipal securities
       activities of the bank dealer acting in its
       capacity as such.

Based on Rule G-35, the bondholders argued that the CTD
had engaged in certain activities of a municipal securities
dealer and was therefore a “bank dealer” subject to
compulsory arbitration before FINRA. This argument
persuaded FINRA, and the arbitration was set to proceed on
an expedited schedule.

    BOKF then moved for a preliminary injunction in the
United States District Court for the District of Nevada,
seeking to enjoin the arbitration. BOKF’s argument was that
neither the bank as a whole nor the CTD was subject to
FINRA arbitration. Denying the motion, the district court
reasoned that BOKF was unlikely to prevail on the merits for
two reasons. First, the district court concluded that the
bondholders were “customers” of BOKF with standing to
8                    BOKF, NA V. ESTES

initiate the FINRA arbitration. Second, the district court
reasoned that the CTD was a “municipal securities dealer”
subject to the MSRB’s arbitration requirement. In the
district court’s view, BOKF had not shown that it was likely
to prevail on the merits and was unable to show that a
preliminary injunction was otherwise justified.

    BOKF sought an injunction pending this timely appeal,
which the district court denied. This court’s motions panel,
however, granted an injunction preventing arbitration
pending our decision. Before us is BOKF’s appeal of the
district court’s denial of a preliminary injunction.

                              II.

    “We review the district court’s decision to grant or deny
a preliminary injunction for abuse of discretion.” Sw. Voter
Registration Educ. Project v. Shelley, 344 F.3d 914, 918 (9th
Cir. 2003) (en banc). To obtain a preliminary injunction, a
plaintiff “must establish (1) that he is likely to succeed on
the merits, (2) that he is likely to suffer irreparable harm in
the absence of preliminary relief, (3) that the balance of
equities tips in his favor, and (4) that an injunction is in the
public interest.” Toyo Tire Holdings of Am. v. Cont’l Tire
N. Am., Inc., 609 F.3d 975, 982 (9th Cir. 2010) (citing Winter
v. Nat’l Res. Def. Council, Inc., 555 U.S. 7, 20 (2008)). We
employ a “sliding scale test,” under which a “plaintiff can
support issuance of a preliminary injunction” if he raises
“serious questions going to the merits”; shows that the
“balance of hardships tips sharply” in his favor; establishes
that a likelihood of irreparable harm exists; and, finally,
demonstrates “that the injunction is in the public interest.”
All. for the Wild Rockies v. Cottrell, 632 F.3d 1127, 1134–
35 (9th Cir. 2011) (internal quotation marks and citations
omitted).
                    BOKF, NA V. ESTES                        9

                              A.

    The district court correctly identified the two questions
on which BOKF’s effort to avoid arbitration is likely to turn:
Is BOKF or its CTD a municipal securities dealer subject to
the MSRB’s requirement of arbitration before FINRA, and
are the bondholders customers of BOKF? Because we
believe the answer to the first question is no, we conclude
BOKF is likely to succeed on that first question and do not
address the second.

    MSRB Rule D-1 provides that “[u]nless the context
otherwise specifically requires, the terms used in the rules of
the [MSRB] shall have the respective meanings set forth in
the” 1934 Act. The 1934 Act defines a “dealer” as “any
person engaged in the business of buying and selling
securities . . . for such person’s own account through a
broker or otherwise.” 15 U.S.C. § 78c(a)(5)(A) (emphasis
added). More specifically, a “municipal securities dealer” is
“any person (including a separately identifiable department
or division of a bank) engaged in the business of buying and
selling municipal securities for his own account.” Id.
§ 78c(a)(30) (emphasis added).

    BOKF’s IID is registered as a municipal securities
dealer. But there is no evidence that any other department
or division of BOKF, including the CTD, was registered as
a municipal securities dealer or traded municipal securities
for its own account. As to the transactions giving rise to this
case, the CTD acted as an indenture trustee and administrator
for bonds underwritten and sold by Lawson Financial
Corporation; it did not buy or sell the bonds for its own
account or on behalf of any other division of the bank.
Accordingly, the CTD is not a municipal securities dealer
within the meaning of that term in the statute. Nor is BOKF
as a whole a municipal securities dealer on the basis that one
10                  BOKF, NA V. ESTES

of its component parts, the IID, is such a dealer. In such
circumstances, only “the department or division and not the
bank itself [is] the municipal securities dealer.”
Id.§ 78c(a)(30)(B).

      The bondholders vigorously dispute this straight-
forward statutory interpretation, relying on a combination of
MSRB Rules to maintain that BOKF is a municipal
securities dealer for purposes of the obligation to participate
in FINRA arbitration even though it does not come within
the statutory definition of that term. The bondholders note,
first, that MSRB Rule G-35 provides that “every bank dealer
. . . shall be subject to the code of Arbitration Procedure of”
FINRA, which includes FINRA Rule 12200. MSRB Rule
D-8 in turn explains, “[t]he term ‘Bank Dealer’ shall mean a
municipal securities dealer which is a bank or a separately
identifiable department or division of a bank as defined in
rule G-1 of the Board” (emphasis added). Rule G-1 provides
in pertinent part:

       Separately Identifiable       Department      or
       Division of a Bank

       (a) Municipal Securities Dealer Activities.

           (i) A separately identifiable department
               or division of a bank, as such term is
               used in section 3(a)(30) of the Act, is
               that unit of the bank which conducts
               all of the activities of the bank
               relating to the conduct of business as
               a municipal securities dealer
               (“municipal       securities    dealer
               activities”), as such activities are
               hereinafter defined . . .
          BOKF, NA V. ESTES                      11

(ii) For purposes of this rule, the activities
     of the bank which shall constitute
     municipal securities dealer activities
     are as follows:

    (A)     underwriting, trading and
            sales of municipal securities;

    (B)     financial    advisory      and
            consultant services for issuers
            in connection with the
            issuance     of     municipal
            securities;

    (C)     processing and clearance
            activities with respect to
            municipal securities;

    (D)     research and investment
            advice with respect to
            municipal securities;

    (E)     any activities other than those
            specifically       enumerated
            above       which       involve
            communication, directly or
            indirectly,     with     public
            investors     in     municipal
            securities; and

    (F)     maintenance     of   records
            pertaining to the activities
            described in paragraphs (A)
            through (E) above;
12                   BOKF, NA V. ESTES

               provided, however, that the activities
               enumerated in paragraphs (D) and (E)
               above shall be limited to such
               activities as they relate to the
               activities enumerated in paragraphs
               (A) and (B) above.

    The bondholders urge that “as defined in rule G-1 of the
Board” modifies “a municipal securities dealer” in Rule D-8.
And the Rule D-8 definition of “municipal securities dealer,”
they contend, therefore refers to the list of “activities of [a]
bank which shall constitute municipal securities dealer
activities” in Rule G-1. According to the bondholders,
because the district court found the CTD engaged in
activities enumerated in Rule G-1—albeit not “underwriting,
trading and sales of municipal securities”—the CTD is a
municipal securities dealer, whether or not it traded
securities for its own account. On this view, the definition
of “bank dealer” for purposes of the MSRB Rules becomes
severed from the statutory “dealer” sine qua non—trading
securities for one’s “own account.” See 15 U.S.C.
§ 78c(a)(5)(A).

    For support, the bondholders point to the phrase in Rule
D-8 that follows “municipal securities dealer”—“which is a
bank or a separately identifiable department or division of a
bank as defined in rule G-1 of the Board.” But “as defined
in rule G-1 of the Board” does not modify “municipal
securities dealer” (or “bank”); it modifies “a separately
identifiable department or division of a bank.” We know
that is so for four reasons.

    First, as a matter of grammar, an established canon of
interpretation instructs that, absent other indicia of meaning,
“a limiting clause or phrase . . . should ordinarily be read as
                        BOKF, NA V. ESTES                           13

modifying only the noun or phrase that it immediately
follows.” Barnhart v. Thomas, 540 U.S. 20, 26 (2003); see
also Antonin Scalia & Bryan A. Garner, Reading Law: The
Interpretation of Legal Texts 144–46 (2012). So the phrase
“as defined in rule G-1 of the Board” most naturally modifies
the phrase immediately before it, “a separately identifiable
department or division of a bank.”

     Second, Rule G-1 itself confirms that the cross-reference
in Rule D-8 refers to the description of “separately
identifiable department of division of a bank.” Rule G-1 is
titled “Separately Identifiable Department or Division of a
Bank,” announcing exactly what it defines, and in Rule
G-1(a)(i) explains what counts as such a department or
division.

    Third, the MSRB’s authority is specifically spelled out
in 15 U.S.C. § 78o-4(b), and, not surprisingly, it does not
include overriding the statutory definition of “municipal
securities dealer.” Rather, § 78o-4(b) provides that “the
Board shall propose and adopt rules to effect the purposes of
this chapter with respect to transactions in municipal
securities effected by brokers, dealers, and municipal
securities dealers.” Id. § 78o-4(b)(2). That same section
gives the MSRB authority to define “separately identifiable
department or division,” which is not defined by statute, and
in doing so refers again to the “buying and selling [of]
municipal securities.” Id. § 78o-4(b)(2)(H). 5 Nowhere does
   5
       Section 78o-4(b)(2)(H) provides that the MSRB Rules shall:

         [D]efine the term ‘separately identifiable department
         or division’, as that term is used in section 78c(a)(30)
         of this title, in accordance with specified and
         appropriate standards to assure that a bank is not
         deemed to be engaged in the business of buying and
14                    BOKF, NA V. ESTES

that statute authorize the MSRB to give the “municipal
securities dealer” term a different definition than the statute
does.

    The relevant MSRB Rules reflect the bounds of the
Board’s statutory authority. Rule D-8, again, provides that
“[t]he term ‘Bank Dealer’ shall mean a municipal securities
dealer which is a bank or a separately identifiable
department or division of a bank as defined in rule G-1 of
the Board.” And MSRB Rule D-1 states that “[u]nless the
context otherwise specifically requires, the terms used in the
rules of the [MSRB] shall have the respective meanings set
forth in the [1934] Act.” As “municipal securities dealer” is
defined by statute, 15 U.S.C. § 78c(a)(30), MSRB Rule D-8,
far from redefining “municipal securities dealer”—which,
again, the MSRB has no authority to do—incorporates the
statutory term and so, according to Rule D-1, the statutory
meaning.

    Fourth, the bondholders wrongly assume, as did the
district court, that because Rule G-1(ii) lists “the activities of
the bank which shall constitute municipal securities dealer
activities,” a bank or a division of a bank which performs
any activity on the list is a “municipal securities dealer.” But
again, Rule G-1 announces itself to be a definition of

        selling municipal securities through a separately
        identifiable department or division unless such
        department or division is organized and administered
        so as to permit independent examination and
        enforcement of applicable provisions of this chapter,
        the rules and regulations thereunder, and the rules of
        the Board. A separately identifiable department or
        division of a bank may be engaged in activities other
        than those relating to municipal securities.
                    BOKF, NA V. ESTES                       15

“Separately Identifiable Department or Division of a Bank,”
not a definition of “municipal securities dealer.”

    Moreover, Rule G-1(i) explains that to come within that
rubric, the department or division must be “that unit of the
bank which conducts all of the activities of the bank related
to the conduct of business as a municipal securities dealer
(‘municipal securities dealer activities’), as such activities
are hereinafter defined” (emphasis added). So the language
of Rule G-1(i) confirms the list does not specify that a bank
department or division that engages in any municipal
securities dealer activities is a municipal securities dealer.
Rather, as Rule G-1(i) explains, the list applies only to units
that do “conduct . . . business as a municipal securities
dealer.” And such a unit can be considered as a “separately
identifiable department or division of a bank” for regulatory
purposes only if it conducts all (not any) of the bank’s listed
“municipal securities dealer activities”—including Rule
G-1(a)(ii)(A), “underwriting, trading and sales of municipal
securities.” The difference between “all” and “any” in this
context is stark. Eating dinner is a food critic activity, but
that does not mean we are a panel of food critics because we
eat dinner.

    In sum, the CTD is not a “municipal securities dealer,”
as it does not trade in securities on its own account, as the
statutory definition requires. Nothing in the MSRB
provides—or could permissibly provide—otherwise. The
CTD therefore cannot be a “Bank Dealer” for purposes of
Rule D-8, and Rule G-35 therefore does not subject it to
FINRA’s arbitration rules.

                              B.

    A likelihood of success on the merits is not, on its own,
sufficient basis for the grant of a preliminary injunction.
16                   BOKF, NA V. ESTES

BOKF must also show that it is likely to suffer irreparable
harm in the absence of preliminary relief, that the balance of
equities tips in its favor, and that an injunction is in the public
interest. See Toyo Tire Holdings of Am., 609 F.3d at 982.
The district court concluded that BOKF had “not met the
remaining . . . factors of irreparable harm, public interest,
and the balance of equities sufficient to overcome the court’s
findings on the [lack of] likelihood of success on the merits
of its claim.” Our determination that the CTD is not a
municipal securities dealer and therefore BOKF is likely to
succeed on the merits fundamentally changes the district
court’s calculus. Because the irreparable harm, public
interest, and balance of equities factors are, at least in part,
fact-dependent, we remand rather than “undertak[e] a
searching review . . . to make the required factual findings in
the first instance.” Flexible Lifeline Sys, Inc. v. Precision
Lift, Inc., 654 F.3d 989, 1000 (9th Cir. 2011) (remanding “to
allow the district court to make the requisite factual
determinations regarding irreparable harm and [to] apply
those factual findings to” the test for injunctive relief); see
also eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 394
(2006) (requiring case-by-case assessment of preliminary
injunction factors rather than reliance on per se rules).

                               III.

    For the foregoing reasons, we REVERSE the district
court’s denial of BOKF’s motion for a preliminary
injunction and REMAND for further proceedings consistent
with this decision.