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June 20, 2003


The opinion of the court was delivered by: Roanne Mann, Magistrate Judge.


Plaintiff Ryan, Beck & Co., LLC ("plaintiff" or "Ryan Beck") filed this action against defendants Perry S. Reich ("Reich"), Franka Jones, as trustee of the Franka Jones Trust ("Jones"), and Youssef and Ali Fakih ("the Fakihs") (collectively referred to herein as "the investors" or "defendants"), seeking the following relief: a declaratory judgment that Ryan Beck has no obligation to arbitrate certain disputes with the investors; a stay of three pending arbitrations brought by the investors against Ryan Beck; and a declaratory judgment absolving Ryan Beck of liability for the acts that are the subject of those arbitrations. See generally Complaint ("Compl.") at ¶¶ 8, 10-20 and ad damnum clause.

Currently before this Court, following the parties' consent to have a magistrate judge handle the case for all purposes (see 28 U.S.C. § 636(c)(1)), are various dispositive motions and cross-motions filed by Ryan Beck, Jones and the Fakihs.*fn1 Specifically, Ryan Beck has moved for summary judgment on its second claim for declaratory relief (i.e., adjudging the parties' disputes non-arbitrable) and demands a permanent stay of each of the arbitrations pending against it. All three groups of investors*fn2 have filed papers opposing Ryan Beck's motions,*fn3 and Jones and the Fakihs have cross-moved to compel arbitration.*fn4

For the reasons that follow, the Court denies Ryan Beck's motions in all respects and grants in part the cross-motions of the Fakihs and Jones, directing Ryan Beck to arbitrate the issue of arbitrability with respect to those investors. Reich's arbitration proceeding is hereby stayed pending the outcome of this lawsuit.


Several years ago, each of the investors opened an account with Gruntal & Co., L.L.C. ("Gruntal"),*fn6 which was then registered with the Securities and Exchange Commission as a broker-dealer and was a member of the New York Stock Exchange ("NYSE") and the National Association of Securities Dealers ("NASD"). Upon becoming a client of Gruntal, each investor entered into a form contract entitled "Client Agreement & Margin Agreement" (hereinafter "Client Agreement"). See, e.g., Court Exhibit ("CX") 2; CX 3; 9/5/02 Tr. at 5-6.*fn7 Each such Client Agreement included a broadly worded arbitration provision, see, e.g., CX 2 and 3 at ¶ 16,*fn8 and provided that the Client Agreement would "inure to the benefit of and be binding upon" the parties to the Client Agreement and, among others, their respective successors and assigns. See id. at ¶ 17; PX 2A (#90 [Ex.A]), Client Agreement at ¶ 1.*fn9

In June 2001, Reich initiated an arbitration proceeding before the NASD against Gruntal and its agent. Joseph Burgos, charging that his account had been mishandled. In April 2002, the Fakihs and Jones commenced similar arbitration proceedings against Gruntal and its agents: the Fakihs brought their claims before the NASD and Jones brought hers before the NYSE.

Later that month, on or about April 20, 2002, Ryan Beck, a broker-dealer headquartered in Livingston, New Jersey, entered into a series of interrelated agreements, including an amended asset acquisition agreement ("Acquisition Agreement"), with Gruntal, its parent company Gruntal Financial, L.L.C., and Gruntal Facilities Management, L.L.C.*fn10 Pursuant to the Acquisition Agreement, Ryan Beck agreed to purchase most of the assets of Gruntal, including customer accounts and related books and records. The nature and effect of the transaction — that is, whether it constituted a de facto merger or rendered Ryan Beck a successor-in-interest to Gruntal's liabilities — are the subject of much controversy among the parties, as is the adequacy of the purchase price paid by Ryan Beck. Part of the debate centers on a provision in the Acquisition Agreement, pursuant to which the parties to that contract agreed that, with certain exceptions not relevant here, Ryan Beck would not assume any of Gruntal's liabilities or obligations other than those arising as of the closing date, April 26, 2002 ("the Closing Date"). See Acquisition Agreement § 1(B)(2) (stating, inter alia, that Ryan Beck "will not assume . . . liabilities for litigation, arbitrations or other claims relating to operations prior to the Closing Date [April 26, 2002], whether instituted before or after the Closing Date. . . .").

On the Closing Date, the defendants and other investors were sent form letters on Gruntal letterhead, signed by the chairmen and chief executive officers of Gruntal and Ryan Beck, respectively. Following the salutation "Dear Valued Client," each letter advised that Ryan Beck had acquired certain assets and liabilities of Gruntal; that the investor's account would be transferred to Ryan Beck, effective April 29, 2002, unless the investor immediately notified his or her account executive otherwise and made arrangements for the account and/or securities to be transferred elsewhere; and that the account would be serviced at Ryan Beck by the same account executive as at Gruntal.*fn11 It is undisputed that none of the defendants signed a new client agreement with Ryan Beck. See, e.g., 9/5/02 Tr. at 15. However, plaintiff acknowledges that the Gruntal Client Agreements with Jones and the Fakihs became the operative contracts with those customers. See 9/5/02 Tr. at 15-16, 25, 71-73; 10/11/02 Tr. at 19, 44-45; 1/21/03 Tr. at 21-23, 33, 48.

Within several months of Ryan Beck's acquisition of Gruntal's accounts and other assets, each of the investor-defendants amended his or her statement of claim in arbitration to add Ryan Beck as a respondent.*fn12 On June 25, 2002, Ryan Beck filed its answer to the Fakihs' arbitration claims, requesting their dismissal. The underlying arbitration proceedings have continued, subject to a stipulation by the defendants that they "will not assert or argue that further participation of Ryan, Beck & Co., L.L.C. in the [respective] arbitration proceeding[s] . . . constitutes a waiver by Ryan, Beck & Co., L.L.C. of any rights it may have to contest the propriety of its inclusion in such arbitration proceeding[s]." Stipulation & Agreement of the Defendants, dated September 18, 2002(#51); see 9/5/02 Tr. at 100-05.*fn13

On July 17, 2002, Ryan Beck commenced this federal action with the filing of its complaint for declaratory and injunctive relief. On July 25, 2002, Ryan Beck sought a temporary restraining order, which was denied by the Honorable Edward R. Korman, who referred plaintiff's motion for a preliminary injunction to this magistrate judge.*fn14 After the motion was fully briefed and argued, and after the case was, with the parties' consent, reassigned to a magistrate judge for all purposes, this Court issued a Memorandum and Order on September 20, 2002, denying the motion for a preliminary injunction. See Memorandum & Order, dated September 20, 2002 ("9/20/02 M & O").*fn15 On October 11, 2002, the Court denied from the bench a cross-motion filed by the Fakihs to dismiss the action on the ground that Ryan Beck had waived its objection to arbitrability. See 10/11/02 Tr. at 4-7. The Court then ordered discovery limited to the issue of Reich's status as a customer of Ryan Beck (see id. at 54-57, 60-61) and established a briefing schedule on the cross-motions for summary judgment.

Gruntal filed for bankruptcy protection on October 30, 2002, in In re GCO Services LLC, No. 02-15360 (S.D.N.Y.Bankr.). See Berson Aff. (#55) at ¶ 2.


I. The Parties' Positions

The investors advance a series of arguments as to why Ryan Beck is obligated to arbitrate the disputes at issue. Looking first to traditional principles of contract and agency, the investors assert that, as plaintiff's customers, their relationships with Ryan Beck were governed by the Gruntal Client Agreements, each of which included an arbitration provision; therefore, they argue, Ryan Beck assumed the obligation to arbitrate the parties' disputes and, having derived the benefits of that contractual relationship, plaintiff is estopped from denying its duty to arbitrate. See Def. Joint Mem. (#99) at 4-8. Secondly, the investors contend that, apart from the aforesaid contractual right to arbitration, NASD rules compel member firms to arbitrate disputes with their customers. See id. at 8-13. Moreover, they claim, the scope of the arbitration clause in the Client Agreement is a matter for the arbitrators to decide. See id. at 13-14.

Plaintiff resists arbitration on a number of grounds. Relying principally on the disclaimer of liability contained in the Acquisition Agreement, Ryan Beck maintains that it did not agree to arbitrate "antecedent Gruntal disputes"*fn16 or "disputes relating to successor liability."*fn17 According to plaintiff, its arbitration agreement with former Gruntal customers did not encompass "the subject matter of the [pending] arbitrations." Pl. Mem. (#87) at 3. Plaintiff also disputes the investors' claim that the arbitrators should decide the scope of the arbitration provision; in plaintiff's view, the "plain meaning" of the Acquisition Agreement "reflects [plaintiff's] intent not to arbitrate. . . ." Pl. Reply (#103) at 3.

Concerning the duty to arbitrate imposed by the NASD Code, plaintiff takes the position that "customer" status must be determined as of the time of the alleged wrongdoing; in this case, the investors were Gruntal customers when their claims arose. See Pl. Mem. (#87) at 4-6; Pl. Reply (#103) at 8.

As to Reich, plaintiff alleges that he never became a customer of Ryan Beck, as he closed his Gruntal accounts and transferred his assets one year prior to the acquisition, see generally Pl. Supp. Br. (#90); consequently, Reich "totally failed to prove that he has any agreement to arbitrate" with Ryan Beck. Id. at 11.

Finally, Reich maintains that he "must be deemed to have been a `customer' of Ryan, Beck," because he received a "Dear Client Letter" advising him of the acquisition. See Memorandum of Law Regarding Perry Reich's Status as a Ryan, Beck Customer ("Reich Mem." [#105]) at 1. He also invokes a series of theories for binding plaintiff, as a successor-in-interest, to his Gruntal Client Agreement. See id. at 6.

II. Arbitration: General Legal Principles

As a preliminary matter, while counsels' submissions are silent on this issue, it appears that the parties' disputes are governed by the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq., inasmuch as (1) there are a series of written arbitration agreements (albeit ones whose applicability and scope are contested); (2) diversity provides an independent basis for federal jurisdiction; and (3) the arbitration provisions are contained in contracts affecting interstate commerce. See Shaw Group Inc. v. Triplefine Int'l Corp., 322 F.3d 115, 120 (2d Cir. 2003); ACEquip Ltd. v. Am. Eng'g Corp., 315 F.3d 151, 154 (2d Cir. 2003). Pursuant to section 4 of the FAA, the role of the Court is "limited to determining two issues: i) whether a valid agreement or obligation to arbitrate exists, and ii) whether one party to the agreement has failed, ...

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