Court Opinion

ID: 9489192
Source: CourtListenerOpinion
Date Created: 2023-08-05 13:08:27.926403+00
Date Added: 2024-06-11T17:53:23.126045
License: Public Domain

MILTON POLLACK, Senior District Judge,
dissenting:
I respectfully dissent.
The defendants herein, insurance companies, were enjoined from seeking arbitration before the New York Stock Exchange of *31their claims against SLK, the appellee. The majority lifts that injunction.
Marvin Goodman was a floor broker on the Commodity Exchange and was a member of the NYSE. He solicited individuals to trade gold and silver commodity futures contracts. He traded those customers’ accounts through sub-account arrangements with SLK who handled the mechanics and cleared the transactions in those “Goodman” accounts.1
Some of his customers gave money to Goodman to finance their trades. To save his clients from loss from his advice and trading, Goodman purchased and himself paid for insurance on his life through the appellants, naming his clients in an insurance trust as beneficiaries of the life insurance. Goodman died and the Goodman clients collected the life insurance.
The insurance companies then filed arbitration claims with the New York Stock Exchange against SLK the clearing broker seeking a recovery from the clearing broker of the life insurance which they had paid to Goodman’s customers. The insurance companies charged that Goodman was guilty of fraud on his personal customers and that SLK had furnished incomplete or doctored statements of account to those customers and had thereby assisted Goodman in his fraud on his customers. Goodman’s customers are making no claim.
SLK sued to enjoin the attempted arbitration on the ground that it was not obligated to arbitrate any claims of the insurance companies and the district court entered an injunction against the attempted arbitration proceedings. The insurance companies appealed.
The NYSE arbitration rules are applicable in respect of any dispute between a member brokerage firm and any third party “arising out of’ or “in connection with” the firm’s “business”. It is undisputed that the insurance companies had no business or eonnection or communication whatsoever with the clearing brokers and were not furnished by SLK any statements of account applicable to Goodman’s clients and did not request any information whatsoever from SLK. In short, the insurance companies did no due diligence so far as concerns SLK or in any way inform it that they were selling life insurance to Goodman for the protection of his personal customers.
To obtain the arbitration which the District Court enjoined, the Insurers claim that SLK acted wrongfully in the handling of Goodman’s sub-accounts with his customers’ accounts. They assert that even if SLK did not deal directly with the Insurers, and had no part in the procurement and payment by Goodman for insurance on his life for the benefit of his customers, that by mishandling of Goodman’s accounts, SLK was a proximate cause of the Insurers’ “losses” and that SLK thus collaborated with Goodman in “defrauding” the Insurers. The insurance companies obtained life insurance premiums from Goodman on the life insurance and paid the beneficiaries designated for those premiums.
The majority reaches its conclusion that the insurance companies are entitled to demand arbitration with SLK by the NYSE on the reasoning that the payment of the death benefits under the life insurance policies “aris[es] out of the business,” NYSE Const., art XI, § 1, or “aris[es] in connection with [its] business.” NYSE Arbitration R 600(a). The majority rests this result on the notion that the Insurers were or are intended third party beneficiaries of the settlement of the life insurance payments on Goodman’s death to the designated beneficiaries of the life insurance that Goodman purchased.
It seems appropriate to recite what the record shows which makes clear beyond peradventure of doubt that the life insurance companies are in no way third party beneficiaries of any claim against SLK and that *32neither the sale of the insurance to Goodman nor payment of the death benefits to the trust for the named beneficiaries constituted the Insurers third party beneficiaries of any claim thereon against SLK.
The controversy at issue does not even remotely arise out of SLK’s exchange-related business; it concerns insurance policies which Goodman purchased and personally paid for to benefit his customers in the event of his death, by providing for protection from delays of probate in the event of his death. The trustees of the insurance trust created by Goodman were to pay the proceeds first to the persons who had given Goodman money for him to trade (since the account was in Goodman’s name, these individuals would otherwise not be paid until Goodman’s estate was probated), and to hold the remainder in continuing trust for Goodman’s heirs.
Plainly, the Insurers are not presenting an exchange-related dispute in which either Goodman or his customers make claim or are parties. The life insurers are not third party beneficiaries to the contract between SLK and the NYSE rule governing arbitration which provides that “any controversy ... between a member ... and any other person arising out of the business of such member” shall be submitted to arbitration. Neither SLK nor the NYSE could ever have intended to benefit with Exchange arbitration, unrelated life Insurers which sold estate planning and the insurance benefits to Goodman, a customer of SLK, the brokerage firm, without any participation or input whatsoever of SLK, on the notion that the Insurers had thus achieved a third party status under the arbitration agreement between the Exchange and its members.
Moreover, any attempt to place the life Insurers “in the shoes of’ Goodman must fail. Equitable subrogation or the equivalent, third party beneficiary status, does not exist for life insurance. Nor are the life Insurers able to invoke a third party beneficiary status based on the mere fact that there was a tort committed against them by Goodman, because third party beneficiary doctrine is applicable to contract, not tort, law.
In describing who are intended and incidental third party beneficiaries, the Restatement (Second) of Contracts § 302 teaches that:
“... a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either (a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or (b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.”
It is undeniable that SLK did not “intend” or in fact or in law confer an arbitrable right on the Insurers of Goodman’s life or intend to reimburse life insurance proceeds paid by the Insurers in accordance with the policy which it wrote. The life insurance was obtained and paid for by Goodman without the knowledge or participation of SLK, to facilitate payment of death benefits promptly without waiting on the administration of Goodman’s estate; it bore no relation at all to SLK.
To summarize for the sake of any needed further clarification:
We are asked to compel a member of the NYSE to arbitrate a possible tort claim asserted by life Insurers which wrote life insurance on the life of one, Goodman, a customer of SLK, as part of his estate planning, for the benefit of Goodman’s customers, payable to a trust for their benefit. The Insurers had no contact or business of any kind with SLK and made no inquiries of SLK. The Insurers wrote the life policies for, and dealt with Goodman, but never transacted any business with SLK. By virtue of joining the NYSE, SLK agreed to arbitrate only the business claims of any person who asserted a claim against SLK in connection with some business conducted by or with SLK by that person.
SLK never came in contact with the Insurers/appellants, never made any representations to the latter, never sent any documents or communications whatsoever to appellants, had no knowledge of the dealings of Goodman resulting in the life insurance and did not provide appellants with *33any ground on which they could reasonably believe that appellants were obtaining or could assert an arbitrable right against SLK for the sum paid out on the life insurance written for the benefit of Goodman’s customers. The Insurers never contacted SLK regarding Goodman’s insurance applications, his SLK account statements or anything else. To compel SLK to arbitrate with the Goodman Insurers would violate the basic principle that a party cannot be compelled to arbitrate with one with whom there is no business connection, or any contract to do so directly or by inference. The life insurance on Goodman’s life did not arise in connection with any business between the life insurance companies and SLK.
Again, there was no transaction between the member and non-members, who were strangers to one another. As the Eleventh Circuit recently held in an analogous NASD context, the fact that the non-member and member “had absolutely no relationship” to each other “at the time of the alleged events that the [non-member] seek[s] to arbitrate”, affords a “compelling basis” for the conclusion that the member could not be deemed to have agreed to arbitrate with a non-member stranger. Wheat, First Securities, Inc. v. Green, 993 F.2d 814, 818 (11th Cir.1993).
“[Arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute outside the scope of the business conducted or involving the estate planning undertaken by life insurers with another he has never agreed so to submit”. United Steelworkers of America v. Warrior and Gulf Navigation Co. 363 U.S. 574, 582, 80 S.Ct. 1347, 1353, 4 L.Ed.2d 1409 (1960). See also, Thomson-CSF, S.A. v. American Arbitration Assoc., 64 F.3d 773, 779 (2d Cir.1995). Congress, in enacting the Federal Arbitration Act, preserved this principle. See Volt Information Sciences, Inc. v. Board of Trustees of the Leland Stanford Junior Univ., 489 U.S. 468, 478, 109 S.Ct. 1248, 1255, 103 L.Ed.2d 488 (1989) (“The FAA does not require parties to arbitrate when they have not agreed to do so”.) While we have held that the NYSE arbitration provisions may require a party to submit to arbitration in the absence of a written agreement, see, e.g., Paine, Webber, Jackson & Curtis v. Chase Manhattan, 728 F.2d 577, 580 (2d Cir.1984), we have never extended this principle to require the member to submit to arbitration of claims outside the member’s chain of commerce. Here it is clear that SLK did not “intend”, in fact or law, to reimburse life insurance payments made by the Insurers to customers of the deceased on policies of insurance with which SLK had no connection, which were obtained by Goodman for prompt administration of his estate and bore no relationship to SLK at all. Goodman’s customers are not claimants against SLK.
The majority’s reliance on Kidder, Peabody & Co. v. Zinsmeyer Trusts Partnership, 41 F.3d 861 (2d Cir.1994) and Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991) is inapposite. Kidder, Peabody involved direct business contact between a broker and its customer and a written contract between those parties which specifically incorporated the NASD provisions and rules into it. In Gilmer the Supreme Court suggested that a third party, Interstate, could compel its ex-employee to arbitrate as a third party beneficiary of the business agreement between the ex-employee and the Exchange, but the agreement relied upon, Gilmer’s securities registration application, specifically designated any of Gilmer’s employees as beneficiaries to the agreement. Goodman’s life insurance trust did not name SLK, his employer, as a beneficiary of the insurance trust. Nor does the NYSE’s investigation into Goodman’s activities or the procedural shortcomings of SLK for which they were fined, establish Goodman’s life insurers as third-party beneficiaries entitled to admission into Exchange arbitration for recovery of the insurance payment to the intended and named legatees.
Finally the Insurers’ payment on Goodman’s policy does not entitle them to the arbitrable right formerly held by Goodman himself. There is no right of equitable subrogation under life-insurance. (16 Couch, Cyclopedia of Insurance § 61:8 2d rev. ed.1983).
*34The record (A-197-98) contains an application on behalf of Goodman (unknown to SLK) to one of the insurers, explaining Goodman’s motivation for purchasing life insurance, as follows:
For trading purposes, all accounts are in Marvin Goodman’s name. As you know, Marvel wishes to have all account balances (all of which are traded under his name) liquid when he dies and not held up in probate which may take two years during which his clients wtll not have their money. Life insurance in some multiple amount of his capital base is very important to Marv for business as well as psychological reasons. He cannot take in new money without the assurance of ample protection since the account growth tends to diminish insurance rather quickly. As a result he always wants to be insured ahead of his anticipated needs (approximately 2x account balances).
Once Marv’s account balance meets his insurance total, he must stop growing which is counter productive. Marv’s fee is based only on profits. We would like Mass Mutual Life to issue an additional $10 million of insurance. The insurance would be owned by an irrevocable Trust to immediately liquidate all the client balances. The fact that this trust discharges an obligation (debt) of the estate creates a secondary need for funding the estate tax (1st death) that is attributed to the estate relative to the debt paid (see enclosure). This, of course, reduces the ultimate amount available to his family after probate.
The District Court Judge soundly observed that:
“It is undisputed that Plaintiff [SLK] never had any direct contact or business transaction with Defendants [Insurers].” Goodman obtained the life insurance policies independently of Plaintiff and without Plaintiffs knowledge. Defendants do not claim there was any contractual relationship with Plaintiff. In fact, Defendants do not allege any contact with Plaintiff at all. Rather, Defendants claim that their reliance on falsified documents, whether by the fraudulent conduct of Goodman or that of Plaintiff, makes Plaintiff accountable to Defendants....(A-927-28) ‘[A]ny rule extending the arbitration provisions to controversies not arising out of exchange-related business would do significant injustice to the reasonable expectations of exchange members ... ’ Paine, Webber, 728 F.2d at 581. (A-927).
I would affirm.2

. SLK received commissions on every trade and would split the interest in Goodman’s account on a monthly basis. SLK created approximately 69 accounts under a primary account number in Goodman’s name labelled "7260 MG MOO” ("primary account”). At least three other accounts were also in Goodman's name and were labelled with names such as "Goodman Arbitrage.” The remaining accounts were set up as "sub-accounts” under the 7260 account number, i.e., 7260-7283, and were listed under the hyphenated name of Goodman and a Goodman customer.

. The NYSE has refused to act as arbitrators in controversies remote from the business purposes and scope of arbitrable “exchange related” business controversies. Cf. In re Salomon, Inc., 68 F.3d 554 (2d Cir.1995)
Essential fairness to both parties is better served by leaving the administration of the unusual issues herein to judicial standards in the Courts rather than by straining to bring life insurance for estate planning within the scope of “exchange related” business for third parties to exchange agreements.
No matter how the semantics are arranged, the instant claims to recover life insurance payments made to Goodman's customers at his death do not and cannot represent claims arising in connection with the business of Goodman’s stockbrokers. The semantic allusions in the majority opinion to the "errors” in the minority opinion did not originate with the minority opinion, but a response would only further delay focussing on the merits of the life insurers' unsupportable third party concoction to gain an unmerited arbitration (even if it is safe for the majority to assume that the Stock Exchange would consider the convoluted claim for arbitration).
The notion of “arising out of exchange-related business” must be limited in some manner, lest any third party could compel an exchange member to arbitrate any claim, so long as some tenuous link to the member's “business” be alleged. This limitation should take the form of either a direct contract between the parties, or a relationship between the parties, such that they stand in the "chain of commerce," one with the other— situations which were present in all prior decisions invoking the third party beneficiary rule. See Kidder, Peabody & Co. v. Zinsmeyer Trusts Partnership, 41 F.3d 861 (2d Cir.1994); Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991). The claims at issue here simply fail such a test. A tort claim based on reliance on an accounting statement not forwarded by the accountant to the injured party, will not state a claim at law. While this analysis goes to the merits of the insurers' trader-*35lying claim and not the question of arbitrability, a line must be drawn whereby claims that have such an invisible foundation in law will not be allowed to force an exchange member to arbitrate with a party with whom it had no contact or business.