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HD BROUS & CO. INC. v. MRZGLOCKI

February 25, 2004.

HD Brous & Co., Inc. Petitioner -against- Roman M. Mrzyglocki, Respondent


The opinion of the court was delivered by: BARBARA JONES, District Judge

MEMORANDUM OPINION, ORDER, AND ORDER TO SHOW CAUSE

This is a petition to enjoin an arbitration currently pending before the New York Stock Exchange ("NYSE"). For reasons set forth below the petition is denied. The arbitration sought by Respondent will proceed according to a schedule set by the arbitrators. Denial of the petition intimates no view of the Court on Petitioner's proposed statute of limitations defense, which may be presented to the arbitrators at Petitioner's discretion. In addition to denying the petition, the Court will direct an order to show cause to Petitioner's counsel under Federal Rule of Civil Procedure 11(c)(1)(B).

I. BACKGROUND

  According to the memoranda and supporting papers filed with this Court by the parties in the above captioned action, Respondent, Roman Mrzyglocki, was a client of HD Brous & Co., Inc., Petitioner, from late 1996 until March of 1998. HD Brous is a financial services organization and a New York Corporation. Mrzyglocki is a resident of New Jersey. During the period of their business relationship, Respondent alleges that he lost over $180,000 as a result of Page 2 transactions and investments made by and through Petitioner that were at odds both with responsible business practices and with Respondent's expectations and instructions.

  As part of the business relationship entered into by Petitioner and Respondent, Mrzyglocki signed a Margin Account Agreement (the "Agreement"), which included an arbitration agreement. A copy of the Agreement has been provided to the Court as Exhibit C, attached to the sworn affidavit of Robert Brous, Chief Executive Officer of HD Brous. In his affidavit Brous testifies that the Agreement was completed and signed during the course of opening Respondent's account with HD Brous. Brous Affidavit at 2. Brous further relies upon Exhibit C, asserting that it, by a choice of law provision, binds the parties to apply Maryland law to their disputes. Id. at 3. These assertions are repeated in the petition filed by HD Brous in the State court.

  On June 26, 2003 Respondent filed a Statement of Claim, in accordance with the arbitration rules of the New York Stock Exchange ("NYSE"), demanding arbitration of claims against Petitioner arising from HD Brous's alleged mishandling of his account. In his Claim, Respondent alleges that Petitioner and its agent, Timothy Mann, breached their fiduciary duties to Respondent by engaging in a series of high-risk transactions that resulted in the above-mentioned losses. Respondent further alleges violations of National Association of Securities Dealers ("NASD") and NYSE rules and regulations, citing, inter alia, alleged failures to inform Respondent about critical investment transactions and failures to act on Respondent's directions.

  On July 18, 2003 the NYSE served Petitioner with Respondent's Statement of Claim. On October 3, 2003 HD Brous filed a petition before the Supreme Court of New York, New York County, seeking to enjoin the arbitration pursuant to Section 7502(b) of the New York Civil Practice Law and Rules, asserting that Respondent's claims were time-barred. On that date Page 3 Justice Emily Jane Goodman issued an Order to Show Cause wherein Respondent was directed to appear in New York Supreme Court on October 30, 2003. Justice Goodman declined to issue a Temporary Restraining Order as part of the Order to Show Cause.*fn1

  Respondent filed a Notice of Removal in this Court on October 23, 2003. The matter was subsequently referred to me by normal administrative procedures. With the Notice of Removal, Respondent filed his "Memorandum of Law in Opposition to Petitioner's Application to Stay Arbitration" (the "Response"). On November 20, 2003 Petitioner filed a timely Reply (the "Reply"). The events recounted above have put HD Brous's fully-briefed petition before this Court.

  In the course of reviewing papers submitted by the parties the Court became concerned with a series of shifts in Petitioner's positions on critical issues of law and fact. Foremost of these was Petitioner's reversal as to whether or not the arbitration agreement, presented to the Court by Robert Brous himself, formed part of a binding contract between the parties. To resolve this question, amongst others, the Court scheduled an oral argument on the petition by an Order dated January 13, 2004 (the "January 13, 2004 Order").

  That argument was commenced, as scheduled, on January 21, 2004. At the end of the hearing the Court invited the parties to provide the Court with written submissions detailing any additional cases or other sources of law the Court should consider. Petitioner obliged in the form of a letter dated January 28, 2004. Respondent, in conformance with the directions of the Court, responded with his own letter on February 2, 2004. The Court has given full consideration to the Page 4 arguments of the parties and the relevant law. For reasons set forth below it declines to issue the requested order enjoining arbitration. This Court makes no comment on the merits of either Petitioner's statute of limitations defense or Respondent's claims. In their present posture, these issues are rightfully the concern of the arbitrators, not this Court.

  II. DISCUSSION

  The weight of Petitioner's argument for a court imposed stay on the arbitration pending before the NYSE is borne by the assertion that Respondent's claims are time-barred. Petitioner points out that March 1998 marks the end of its business relationship with Respondent. Therefore, Petitioner argues, Respondent's claim for arbitration, filed in June of 2003, relies on events more than five years in the past. Petitioner further claims, in its original petition, that this five-year period exceeds the statutes of limitation on Respondent's claims under both federal law and Maryland law.*fn2

  Mrzyglocki responds, after having removed the petition to this Court, with a series of conditional arguments, beginning with an assertion that HD Brous can neither file a petition under N.Y. CPLR §§ 7502 and 7503 nor rely on New York case law because New York law does not govern the dispute. Respondent contends that New Jersey law should apply in this case and argues that his claim for arbitration is timely under the six-year statute of limitations that governs his claims under New Jersey common law. Next, Respondent argues that, "even if New Page 5 York law did apply, the issue of whether Mrzyglocki's claims are time-barred is a question for the arbitrators, rather than the courts, to decide" under the broad-form arbitration agreement signed by the parties. Response at 5. Finally, Respondent argues that, even if New York law applies and all issues relating to his claims were not destined for the arbitrators by way of the arbitration agreement, HD Brous was untimely in making its petition under N.Y. CPLR §§ 7502 and 7503.

  In reply, Petitioner again contends that it may move for an injunction in this Court pursuant to N.Y. CPLR § 7502. In support of this contention counsel point out that the only basis for this Court to assert jurisdiction over the subject-matter in this case is pursuant to 28 U.S.C. § 1332. Thus, counsel conclude, the Court is bound to receive and consider the petition pursuant to N.Y. CPLR § 7502 because, in diversity cases, "state substantive law must be applied." Reply at 1. In their Reply counsel for Petitioner also, for the first time and after having relied upon the Agreement in earlier submissions to the State court, claim that HD Brous is not a signatory to the Agreement and is, therefore, not bound by either the choice of law provisions in numbered paragraph 17, Reply at 11, of the Agreement or the broad-form arbitration agreement in numbered paragraph 19 of the Agreement, Reply at 7-8.

  The Court finds that the terms of the Margin Account Agreement are enforceable over Petitioner. Numbered paragraph 19 of the Agreement contains a broad-form arbitration clause in which "[i]t is agreed" that all disputes between Petitioner and Respondent will be resolved in arbitration. This Court is bound to respect this agreement. It will, therefore, decline to grant the petition. Without commenting on the merits of Respondent's claims or Petitioner's proposed defenses, the Court will leave the arbitrators to do their duties. Page 6

 A. Petitioner is Bound by the Terms of the Margin Agreement

  Petitioner, through the affidavit of Robert Brous and in its original petition, presents the Agreement as a document forming part of its business relationship with Respondent. In its petition, HD Brous relies upon numbered paragraph 17 of the Agreement to argue that Maryland and federal law should apply to Respondent's claims. In a radical change of position, counsel for Petitioner assert in their Reply that Petitioner is not bound by the terms of the Agreement because it is not a signatory. Counsel repeated this claim at the oral argument and do so again in the letter to their January 28 letter. Counsel's attempts to distance their client from the Agreement are misleading and fruitless. The Agreement serves as evidence that Petitioner agreed, along with Respondent, to arbitrate all controversies between them. Petitioner has also claimed benefits from the Agreement and is, on this basis, estopped from disclaiming the arbitration clause.

 1. The Margin Agreement Documents Terms Affecting Respondent's Business Relationship with Petitioner

  Petitioner is not a signatory to the Agreement. In their Reply, counsel for Petitioner represent that the Agreement is signed "by a Maryland clearing firm, Alex, Brown & Sons, Inc." Reply at 7. From these facts, counsel would have this Court conclude that the Agreement is a contract between Alex, Brown and Respondent in which Petitioner does not participate, from which Petitioner does not benefit, and by which Petitioner is not bound. Counsel are wrong on all scores.

  To start, counsel's claim that Alex, Brown signed the Agreement is not accurate. The agreement is, in fact, only signed by Respondent. Alex, Brown & Sons ("Alex, Brown") is Page 7 named in the agreement and its corporate name and address appear at the top of the document. There is, however, no signature line for Alex, Brown, its representative, or any parties other than prospective clients. Alex, Brown also does not appear in a first-person speaking role at any point in the Agreement.

  The document does not purport to speak for anyone other than Respondent. There are three parties contemplated in the Agreement: the signatory client (Respondent), Alex, Brown, and the client's "Financial Services Organization." At the oral argument, counsel for Petitioner admitted that HD Brous is the Financial Services Organization named in the Agreement. Pursuant to paragraph 1 of the Agreement, all uses of the first-person in the Agreement refer to Respondent. Most of the substantive paragraphs in the Agreement find Respondent acting or reporting in his own voice. By contrast, Alex, Brown and HD Brous are silent in the Agreement. At no point in the document do Alex, Brown or HD Brous speak or take action in the first-person.

  In the first unnumbered paragraphs of the document, Respondent acknowledges that he has been informed by HD Brous that Alex, Brown will provide certain services to HD Brous relating to Respondent's account. Respondent also agrees that he has been informed about and accepts certain features of and limitations on his business relationship with Alex, Brown and HD Brous. These features and limitations are documented in the remaining eighteen numbered paragraphs, all of which have Respondent acknowledging and agreeing to features and limitations on his margin accounts with HD Brous that are, as per HD Brous's arrangements with Alex, Brown, serviced by Alex, Brown.

  According to the affidavit of Robert Brous, Respondent signed the Agreement "in the course of opening his account." Brous Affidavit at 2. It became clear at the oral argument that, Page 8 consistent with the normal business practices of HD Brous, Petitioner presented the Agreement to Respondent along with a "new account form" and "account transfer documents." The "new account form," Exhibit B attached to the affidavit of Robert Brous, consists of one page and provides no details as to the features and limitations of the business relationship between Petitioner and Respondent. The "account transfer documents" perform the job suggested by their title, but provide no details whatever as to the business relationship between Petitioner and Respondent. The Agreement, presented to Respondent by Petitioner, is the only document of substance offered by either party relating to the business relationship formed between the parties when Respondent opened his account with Petitioner.

  The Agreement is not, as counsel for Petitioner want the Court to believe, an agreement solely between and affecting Respondent and Alex, Brown. The Agreement makes reference to Petitioner no fewer than twenty times. That is so, notwithstanding the fact that HD Brous's name does not appear in the Agreement. The Agreement's references are to the "Financial Services Organization," and to the "correspondent." It is not disputed that HD Brous is the subject of these references. As examples, in numbered paragraph 2 Respondent agrees to delegate authority to Petitioner; in numbered paragraphs 3, 11, and 13 Respondent describes how Petitioner will be involved in the financing and handling of his accounts; in numbered paragraph 4 Respondent agrees to make certain disclosures to Petitioner; in numbered paragraph 14 Respondent sets forth the procedure by which he can object to Petitioner's handling of his funds and accounts; in numbered paragraph 19 Respondent recites an agreement amongst the parties that any disputes between them will be sent to arbitration pursuant to the Federal Arbitration Act. Page 9

  These facts and the form of the Agreement itself make the absence of Petitioner's signature on the document irrelevant. In its form and content the Agreement demonstrates that Respondent has been informed of and agrees to certain features and requirements of his account with HD Brous. It documents Respondent's acceptance of terms on an offer of services extended by Petitioner and Alex, Brown. According to the Agreement, these terms and information relating to the respective duties of the parties were provided to Respondent by Petitioner. The Agreement itself was, according to Robert Brous, provided to Respondent by Petitioner. The terms documented in the Agreement are Petitioner's terms of service. The Agreement does no more or less than document that Respondent, at the time he opened his account with Petitioner, understood and accepted these terms. Pursuant to terms documented in the Agreement, Petitioner began to perform services for Respondent and to claim benefits from their business relationship. Petitioner is, therefore, bound to abide by the terms of the Agreement.

  The grammatical construction of the Agreement also provides strong evidence that it documents an agreement between the parties as opposed to creating one. Most paragraphs in the Agreement are animated by a first-person present tense declarative such as "I acknowledge," "I agree," and "I authorize." These paragraphs present a picture of duties, conditions, and limitations being proposed to Respondent with Respondent acting affirmatively to accept them. Consistent with the use of these first-person declarations, the duties, acknowledgments, and agreements found in these paragraphs are uniquely Respondent's.

  The contrasting choice of the phrase "It is agreed" at the beginning of paragraph 19 is, in this context, quite revealing. The use of the third-person singular present tense indicative in combination with the past participle clearly communicate the fact that the speaker, here Page 10 Respondent, is reporting rather than acting. Specifically, he is reciting, from an objective point of view, an agreement between Alex, Brown, HD Brous, and Respondent, "that all past, present, or future controversies between myself, any persons having an interest in my account, Alex, Brown, [HD Brous], or any of the employees or affiliates of either . . . shall be submitted to arbitration pursuant to the Federal Arbitration Act."

  If Petitioner did not, as its counsel now claims, intend or want to be bound by contract terms that it presented to Respondent for his acceptance, then it could have taken action to avoid any commitment. It could have disclaimed the contract terms set forth in Respondent's acceptance. Having done so, Petitioner could have altered the Agreement or negotiated a separate and superceding agreement. At the very least, a representative of HD Brous, one of whom was present when Respondent signed, could have manifested an unwillingness to be bound by the arbitration clause in numbered paragraph 19 before accepting the signed Agreement and commencing a business relationship with Respondent. Petitioner did none of these things.

  The title "Agreement" may be misleading to Petitioner, but the Court suspects not. Petitioner presented to Respondent the terms set forth in the Agreement. Petitioner was present when Respondent accepted these terms. The terms accepted by Respondent document details pertaining to the business relationship being formed between Petitioner and Respondent. Respondent specifically names Petitioner as a beneficiary of his acceptance of terms. Agreement at para. 2 ("I intend that my Financial Service Organization be a beneficiary of this Agreement"). Petitioner, through its officer Robert Brous, is also the first party to use the Agreement as evidence of contract terms between itself and Respondent. All of this suggests Page 11 that Petitioner knows that the Agreement accurately reports the terms of its business relationship with Respondent. Petitioner certainly relied upon this being the case in its petition.

  Petitioner made an offer of financial services to Respondent. Respondent accepted. Petitioner presented an Agreement to Respondent. According to Respondent's reports in the Agreement, Petitioner provided information and explanation pertinent to the contract terms described in the Agreement. Respondent signed the Agreement. Petitioner accepted it without alteration and without disclaiming Respondent's report, at paragraph 19 of the Agreement, that he, Petitioner, and Alex, Brown had agreed to arbitrate "all past, present, or future controversies" between them. Petitioner has not produced any other document of substance that purports to set additional or alternative terms for its contract relationship with Respondent. After the Agreement was signed, Petitioner accepted funds from Respondent and ...


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