Court Opinion

ID: 4233494
Source: CourtListenerOpinion
Date Created: 2017-12-29 20:24:34.114552+00
Date Added: 2024-06-11T14:42:36.969347
License: Public Domain

J-A23023-17

NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37

    DAVID L. FITZGERALD,                       :   IN THE SUPERIOR COURT OF
                                               :        PENNSYLVANIA
                       Appellant               :
                                               :
                                               :
                v.                             :
                                               :
                                               :
    MARK COMYNS AND THE WHARTON                :   No. 3859 EDA 2016
    ADVISORY GROUP, LLC                        :

               Appeal from the Order Entered November 15, 2016
               In the Court of Common Pleas of Delaware County
                    Civil Division at No(s): No. 2015-006627

BEFORE:      PANELLA, J., DUBOW, J., and FITZGERALD, J.*

MEMORANDUM BY DUBOW, J.:                             FILED DECEMBER 29, 2017

       Appellant, David L. Fitzgerald, appeals from the November 15, 2015

Order, entered in the Delaware County Court of Common Pleas, sustaining the

Preliminary Objections that Appellees, Mark Comyns (“Comyns”) and the

Wharton Advisory Group, LLC (“Wharton”) filed, and dismissing Appellant’s

Complaint. After careful review, we reverse.

       In 2000, Appellant and Comyns formed Wharton, a Pennsylvania limited

liability company and investment advisory firm.1         Wharton is a Registered

Investment Advisor (“RIA”) whose activities are regulated by the Securities
____________________________________________

1
  Appellant and Comyns co-founded Wharton with a third person, Daniel P.
Quinn, each of whom had a one-third ownership interest in Wharton at the
time of founding. In 2002, Quinn terminated his involvement in Wharton and
transferred his one-third ownership interest to Appellant and Comyns in equal
shares. Currently, Appellant and Comyns each own a one-half interest in
Wharton.

____________________________________
*    Former Justice specially assigned to the Superior Court.
J-A23023-17

and    Exchange   Commission     and   the   Commonwealth     of   Pennsylvania

Department of Securities (collectively referred to as “SEC”). Because Wharton

is a RIA, Wharton is permitted only to provide fee-based, and not-commission

based, advisory services to its clients.

       In August 2010, Wharton, Comyns and Fitzgerald entered into three

agreements so that clients of Wharton would have access to commission-

based advisory services.     The three agreements make clear distinctions

between the parties’ rights and obligations when providing fee-based advisory

services provided through Wharton and commission-based services provided

through a separate entity—LPL Financial.

   Master Services Agreement Between Wharton and LPL Financial

       On August 10, 2010, Wharton entered into a Master Services Agreement

(“MSA”) with LPL Financial, which is a member of FINRA (“Financial Industry

Regulatory Authority”) and, thus, is regulated by FINRA.       As a result, LPL

Financial is authorized to provide commission-based advisory services to its

clients, a service Wharton is not authorized to provide.
       In the MSA, Wharton and LPL Financial clarify that they are separate

entities, not affiliated with each other, and neither party has the authority to

bind the other party. MSA, 8/10/10, at § 1(B), § 4(B), § 12(D)

       LPL Financial agreed to provide numerous services to clients of Wharton,

such as custodial services, account statements and reports, execute orders,

access to LPL Financial’s technology, and research support. Id. at §§ 2(A)-

(G).   The MSA, however, differentiates between customers for which LPL

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Financial provides commission-based advisory services and those for which

Wharton provides fee-based advisory services. Id. at §§ 3(A), (B).

        The MSA further acknowledged the individuals, including Appellant and

Comyns, who provide commission-based advisory services to clients (known

as “Investment Advisor Representatives”) and provide commission-based

advisory services (known as “LPL Registered Representatives”). Pursuant to

the terms of the MSA, when those individuals provide fee-based advisory

services for clients they act through Wharton, and when they provid

commission-based services, they act through LPL Financial. Id. at §§ 3(A)(2).

3(B). The parties further acknowledged that if an individual who is associated

with Wharton (known as “Associated Persons”) provides commission-based

advisory services, FINRA regulates those individuals. Id. at § 4(O)(7).

   Branch Office Manager Agreement Between Fitzgerald and LPL
                            Financial

        As part of the arrangement to provide Wharton customers with

commission-based advisory services, on August 19, 2010, Fitzgerald and LPL

Financial entered into a Branch Office Manager Agreement. This agreement

provided that LPL Financial appointed Fitzgerald to be the Branch Office

Manager for LPL Financial. Branch Office Manager Agreement, 8/19/10, at §

1(a).   The agreement required Fitzgerald to set up a branch office for LPL

Financial, called an Office of Supervisory Jurisdiction, as required by FINRA.

Fitzgerald agreed to supervise representatives selling commission-based

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advisory services and conduct its business in accordance with various

regulatory bodies, including FINRA. Id. at § 2(b).

         Hybrid Representative Agreement Between Comyns and LPL
                               Financial

       The final agreement the parties entered into in August 2010 was

between Comyns and LPL Financial.                In that agreement, LPL Financial

designated Comyns to be a Registered Representative of LPL Financial, and

authorized Comyns to sell LPL Financial commission-based advisory services.

Hybrid Representation Agreement, 8/10/10, at § 1(B). The agreement further

recognized that Comyns had a hybrid role: he would sell commission-based

advisory services through LPL Financial and fee-based advisory services

though Wharton. Id. at Preamble.

       In sum, these agreements demonstrate a clear delineation between the

fee-based advisory services provided through Wharton and the commission-

based advisory services provided through LPL Financial.

       On July 28, 2016, Appellant filed a one-count Complaint seeking

Wharton’s dissolution in accordance with 15 Pa.C.S. § 8971, et seq.2 In his

Complaint, Appellant alleged that since the parties did not have an operating

agreement governing Wharton’s dissolution, Appellant requested that the

court exercise its statutory and equitable authority to dissolve the company.

____________________________________________

2
  Effective February 21, 2017, the legislature replaced 15 Pa.C.S. § 8971, et
seq. with 15 Pa.C.S. § 8871, et seq. The cause of action herein arose prior to
the repeal of Section 8971, and, to the extent there are any differences
between the prior and current versions of this statute, they are immaterial to
our disposition.

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J-A23023-17

Complaint, 7/28/15 at ¶ 17, 45. Similarly, the parties did not have agreement

compelling arbitration to resolve their disputes.

       On August 24, 2015, Comyns filed Preliminary Objections, arguing that

the parties were required to arbitrate any dispute between them before a

FINRA arbitration panel. Specifically, Comyns alleged that because Appellant

and Comyns are FINRA-registered advisors, and LPL Financial is a FINRA

member, only FINRA has jurisdiction to resolve the disputes regarding

Wharton’s business activities. Preliminary Objections, 8/24/15, at ¶¶ 3-5.3

       On November 15, 2016, the trial court sustained Comyns’ Preliminary

Objections and dismissed Appellant’s Complaint finding that the dissolution of

Wharton is within the jurisdiction of FINRA, even though the SEC, and not

FINRA, regulates Wharton’s business activities.          This appeal followed.

Appellant and the trial court have complied with Pa.R.A.P. 1925.

       Appellant raises the following two issues on appeal:

       1. Whether the trial court committed an error of law when it
          sustained Preliminary Objections and dismissed the Complaint
          when it found that there was an applicable agreement to
          arbitrate before the Financial Industry Regulatory Authority
          and that agreement required the arbitration of a claim for
          dissolution of Wharton Advisory Group, LLC, an SEC-regulated
          Pennsylvania Limited Liability Company?

       2. After reviewing the whole record, did the trial court err when it
          made improper findings that were both legal and factual?

____________________________________________

3
  On February 4, 2016, the court entered an Order approving the parties’
Stipulation to dismiss Wharton as a defendant.

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Appellant’s Brief at 3.

      Our standard of review in determining whether a trial court erred in

ruling on preliminary objections is well established:

      [O]ur standard of review of an order of the trial court overruling
      or granting preliminary objections is to determine whether the
      trial court committed an error of law. When considering the
      appropriateness of a ruling on preliminary objections, the
      appellate court must apply the same standard as the trial court.
      When considering preliminary objections, all material facts set
      forth in the challenged pleadings are admitted as true, as well as
      all inferences reasonably deducible therefrom.          Preliminary
      objections which seek the dismissal of a cause of action should be
      sustained only in cases in which it is clear and free from doubt
      that the pleader will be unable to prove facts legally sufficient to
      establish the right to relief.

O’Donnell v. Hovnanian Enters., Inc., 29 A.3d 1183, 1186 (Pa. Super.

2011) (citations, quotation marks, and paragraph breaks omitted); see also

Midomo Co., Inc. v Presbyterian Hous. Dev. Co., 739 A.2d 180, 186 (Pa.

Super. 1999) (stating that where preliminary objections are lodged claiming

the existence of a previous agreement to arbitrate, an appellate court’s review

“is limited to determining whether the trial court’s findings are supported by

substantial evidence and whether the trial court abused its discretion in

denying the petition.”).

         No Agreement to Arbitrate the Dissolution of Wharton

      Generally, in order to assess whether an enforceable agreement to

arbitrate exists, a court must determine whether the parties entered into a

valid agreement to arbitration and, if so, whether the dispute between the

parties falls within the scope of the agreement. Messa v. State Farm Ins.

                                     -6-
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Co., 641 A.2d 1167, 1168 (Pa. Super. 1994). The merits of the underlying

controversy are irrelevant when deciding an application to proceed with

arbitration. See 42 Pa.C.S. §7304(e). However, in the instant matter, the

parties do not dispute that they do not have an agreement to arbitrate

Wharton’s dissolution.    Rather, Comyns argues that FINRA arbitration is

appropriate    because   Wharton’s    dissolution   concerns   FINRA-regulated

business activities.

 FINRA Does Not Require Arbitration of the Dissolution of Wharton,
            An Entity that FINRA does not Regulate.

      FINRA's Code of Arbitration Procedure ("Code") provides that "[e]xcept

as otherwise provided in the Code, a dispute must be arbitrated under the

Code if the dispute arises out of the business activities of a member or

an associated person and is between or among" members, members and

associated persons, or associated persons. Code § 13200 (emphasis added).

      In dismissing the Complaint and ordering this matter to FINRA

arbitration, the trial court focused not on Wharton itself, but rather on whether

Wharton’s members engage in FINRA-regulated business.             Trial Ct. Op,

4/6/17, at 14. Thus, the court concluded that, “[t]his matter involving the

financial services industry is ripe for arbitration by the self-regulatory

organization specifically established to manage this profession and to exercise

comprehensive oversight over all securities firms that do business with the

public.” Id.

                                      -7-
J-A23023-17

      Our review of the record indicates that, contrary to the trial court’s

conclusion, this dispute arises solely out of the business activities of Wharton,

which FINRA does not regulate. Therefore, Wharton, itself, is not a “member

or an associated person” of FINRA.

      The fact that the Wharton’s members engage in FINRA-related activities

through another entity is irrelevant to this analysis. Appellant’s and Comyns’

role as members of the LLC is to manage and hold an ownership interest in

Wharton. When Appellant and Comyns engage in FINRA-related activities,

they do so through an entity other than Wharton. Thus, the trial court erred

in imputing onto Wharton attributes of its owners who do not engage in FINRA-

regulated activities through Wharton.

      Similarly, the business activities of LPL Financial are equally irrelevant

when analyzing whether the parties must arbitrate the dissolution of Wharton

through FINRA. The three agreements discussed above clearly delineate that

when the parties engaged in FINRA-regulated activities, they did so through

LPL Financial and not through Wharton.            The agreements specifically

distinguish between the parties’ rights and obligations when engaged in

FINRA-regulated activities and SEC-regulated activities. Thus, the trial court

also erred when it imputed the business activities of LPL Financial onto

Wharton.

      Since the trial court erred in not respecting the corporate structure of

Wharton and imputing onto Wharton business activities of Wharton’s LLC

                                      -8-
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members as well as FINRA-regulated activities engaged in by an entity

separate and distinct from Wharton, the trial court erred in sustaining the

Appellant’s Preliminary Objections and finding that FINRA has jurisdiction over

the dissolution of Wharton.

      Order reversed. Complaint reinstated. Jurisdiction relinquished.

Judgment Entered.

Joseph D. Seletyn, Esq.
Prothonotary

Date: 12/29/2017

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