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DASSERO v. EDWARDS

February 12, 2002

RAYMOND G. DASSERO, ET AL., PLAINTIFFS,
V.
CHARLES E. EDWARDS, ET AL., DEFENDANTS.



The opinion of the court was delivered by: David G. Larimer, Chief United States District Judge.

  DECISION AND ORDER

INTRODUCTION

This is an action under the federal securities fraud laws, commenced on May 29, 2001 by eight individual plaintiffs against defendant Charles E. Edwards and four other defendants. Plaintiffs' claims arise out of the sale by ETS Payphones, Inc. (a Georgia corporation, now in bankruptcy, of which Edwards was the President and Chief Executive Officer ("CEO")) to plaintiffs of customer-owned coin-operated telephones ("COCOTs"). In general, plaintiffs paid $7000 for each COCOT unit, and ETS agreed to lease the telephone back for a fixed fee, and to maintain and operate the COCOT. The COCOTs, including the site leases, lease-back and other agreements, are alleged to have constituted investment contracts, and therefore "securities" within the meaning of § 2(1) of the Securities Act of 1933, 15 U.S.C. § 77b(1), and § 3(a)(10) of the Securities Exchange Act of 1934, 15 U.S.C. § 78c(a)(10). Plaintiffs allege that because ETS's revenues from payphone operations were never enough to cover its operating expenses, ETS had to attract an ever-growing number of new investors in order to meet its obligations to existing investors. In short, ETS's "investment" offer was allegedly nothing more than a Ponzi scheme.

On September 26, 2001, pursuant to stipulation, plaintiffs' claims against two of the defendants were dismissed. On October 19, 2001, plaintiffs filed an amended complaint asserting claims against Edwards only, thus leaving Edwards as the only defendant in this action.

On October 18, 2001, Edwards filed a motion to compel arbitration and to stay these proceedings pending arbitration ("the arbitration motion"), pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. § 3 and 4.*fn1

Defendant's motion is based on an arbitration clause contained in the "Telephone Equipment Lease Agreement" ("the Agreement") between ETS and each plaintiff concerning the sale and leasing of COCOTs. Paragraph 22(a)*fn2 of the Agreement states:

DISPUTE. Any dispute, controversy, or claim of whatever nature (except an interlocutory hearing for an action for a temporary restraining order, preliminary injunction, or similar equitable relief) asserted by any party against another party arising out of, or relating to, this Agreement or the breach hereof, shall be settled by arbitration, if requested, by any party pursuant to this Section 21.*fn3 The arbitration shall be conducted by one (1) arbitrator, who shall be appointed pursuant to the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). The arbitration shall be held in Atlanta, Georgia, and shall be conducted in accordance with the Commercial Arbitration Rules of the AAA, except that the rules set forth in this Section 21 shall govern such arbitration to the extent that they conflict with the rules of the AAA.

Arbitration Motion, Ex. 1. An almost identically worded provision is located at § 7(a) of the Option to Sell Agreement attached to, and incorporated by reference in, the Agreement, governing plaintiffs' rights to require ETS to purchase the COCOT equipment prior to or upon termination of the Agreement.

DISCUSSION

I. Edwards's Status as a Nonparty to the Agreement

In opposition to the arbitration motion, plaintiffs contend that Edwards cannot seek to enforce the arbitration clause because he is not a party to the Agreement containing the clause. The Agreement states that it is "by and between ETS Payphones, Inc." and each plaintiff. Although Edwards did sign each Agreement, he did so on behalf of ETS. Plaintiffs contend that because the Agreement provides for arbitration of any claim "asserted by any party against another party . . . if requested, by any party," Edwards, a nonparty to the Agreement, cannot demand arbitration of the instant dispute.

Plaintiffs contend that as a general rule, a non-signatory to an agreement cannot enforce the agreement's arbitration clause. A review of the case law in this area, however, reveals that there are a number of different situations in which a non-signatory can both enforce, and be bound by, an arbitration agreement.

In fact, the Second Circuit has "repeatedly found that non-signatories to an arbitration agreement may nevertheless be bound according to `ordinary principles of contract and agency.'" Smith/Enron Cogeneration Ltd. Partnership, Inc. v. Smith Cogeneration Int'l, Inc., 198 F.3d 88, 97 (2d Cir. 1999) (citing McAllister Bros., Inc. v. A&S Transp. Co., 621 F.2d 519, 524 (2d Cir. 1980)), cert. denied, 531 U.S. 815 (2000); Deloitte Noraudit A/S v. Deloitte Haskins & Sells, U.S., 9 F.3d 1060, 1064 (2d Cir. 1993)), cert. denied, 531 U.S. 813 (2000). "These principles include `(1) incorporation by reference; (2) assumption; (3) agency; (4) veil-piercing/alter ego; and (5) estoppel.'" Smith/Enron, 198 F.3d at 97 (quoting Thomson-CSF, S.A. v. American Arbitration Ass'n, 64 F.3d 773, 776 (2d Cir. 1995)). "[S]uch determinations are often `fact specific' and differ with `the circumstances of each case.'" Id. (quoting Thomson-CSF, 64 F.3d at 777-78).

In the case at bar, I find that Edwards can seek to enforce the arbitration agreement against plaintiffs under both agency and veil-piercing/alter ego theories. There is no dispute that at the time the Agreements were signed, Edwards was an agent of ETS. Though plaintiffs assert that an agency theory has no application here because their claims against Edwards are based solely on his alleged status as a "control person" (rather than as an agent) with respect to ETS, "this is a distinction without a legal difference." Roby v. Corporation of Lloyd's, 996 F.2d 1353, 1360 (2d Cir.), cert. denied, 510 U.S. 945 (1993). In Roby, the Second Circuit held that individual chairs of the governing bodies of Lloyd's insurance syndicates were entitled to rely on arbitration provisions incorporated into their employers' agreements in a securities action brought by investors in the syndicates, notwithstanding that the chairs were not signatories to any agreement with the investors.

In reaching that holding, the Second Circuit stated that "[c]ourts in this and other circuits consistently have held that employees or disclosed agents of an entity that is a party to an arbitration agreement are protected by that agreement." Id. (citing Nesslage v. York Securities, Inc., 823 F.2d 231, 233-34 (8th Cir. 1987); Scher v. Bear Stearns & Co., 723 F. Supp. 211, 216-17 (S.D.N Y 1989); Brener v. Becker Paribas, Inc., 628 F. Supp. 442, 451 (S.D.N.Y. 1985)). The plaintiffs in Roby had argued that this principle did not apply to their claims against the individual chairs because the chairs had been sued only as "controlling persons" under the securities laws. Rejecting that argument, the court stated:

We believe that this is a distinction without a legal difference. The complaints against the individual Chairs are completely dependent on the complaints against the Agents.*fn4 Whether the individual Chairs are disclosed agents or controlling persons, their liability arises out of the same misconduct charged against the Agents. If the scope of the Agents' agreements includes the Agents' misconduct, it necessarily includes the Chairs' derivative misconduct. Moreover, we believe that the parties fully intended to protect the individual Chairs to the extent they are charged with misconduct within the scope of the ...

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