ALEX BROWN, Plaintiff-Appellee, v. ANTHONY D. DELFRE and WEALTH CAPITAL MANAGEMENT GROUP, LLC, Defendants-Appellants (The Players Group, LLC, Defendant).
No. 2-11-1086
Appellate Court of Illinois, Second District
March 29, 2012
2012 IL App (2d) 111086
Appellate Court
Brown v. Delfre, 2012 IL App (2d) 111086
Rule 23 Order filed January 26, 2012
Rule 23 Order withdrawn March 29, 2012
Opinion filed March 29, 2012
Held (Note: This syllabus constitutes no part of the opinion of the court but has been prepared by the Reporter of Decisions for the convenience of the reader.) In an action alleging malfeasance in connection with investments plaintiff made with defendants, the trial court‘s denial of defendants’ motion to compel arbitration was reversed, notwithstanding plaintiff‘s contention that the arbitration provision of the parties’ wealth management services agreement was not enforceable due to the fact that the agreement provided that arbitration would be conducted under the rules of the National Association of Securities Dealers, but NASD would not conduct the arbitration because neither party was a member of NASD, since the agreement required only that NASD rules be used and non-NASD arbitrators could be used; therefore, the cause was remanded with directions to allow arbitration, and if the parties are unable to agree on an arbitral entity, the trial court shall, upon application by any party, designate an arbitrator.
Judgment Reversed and remanded with directions.
Counsel on Appeal Edward M. Kay, Brian J. Riordan, Christopher M. Kahler, and Mark J. Sobczak, all of Clausen Miller P.C., of Chicago, for appellants.
Laurence M. Landsman, of Block & Landsman, and Nicholas P. Iavarone, of Iavarone Law Firm, P.C., both of Chicago, for appellee.
Panel PRESIDING JUSTICE JORGENSEN delivered the judgment of the court, with opinion. Justices Bowman and Hutchinson concurred in the judgment and opinion.
OPINION
¶ 1 Plaintiff, Alex Brown, filed a complaint against defendants, Anthony D. Delfre, Wealth Capital Management Group, LLC (WCMG), and The Players Group, alleging malfeasance relating to investments plaintiff made with defendants. Defendants moved the trial court to dismiss the complaint and compel arbitration or, alternatively, to stay the proceedings and compel arbitration. On October 20, 2011, the trial court denied defendants’ motion. Defendants Delfre and WCMG appeal.1 For the following reasons, we reverse and remand the cause.
I. BACKGROUND
¶ 2 ¶ 3 According to the complaint, plaintiff lived in Lake County and played professional football for the Chicago Bears. Delfre is a registered securities broker who owns WCMG, an Ohio company that provides investment advice. Delfre also owns Players Group, a Utah company with its principal office in Ohio. Plaintiff‘s trusted financial advisor, Jason Jernigan, had a professional relationship with Delfre and, via that relationship, Delfre acquired detailed information regarding plaintiff‘s investment and financial background.
¶ 4 On June 9, 2011, defendants moved pursuant to
“This agreement will be governed by and construed in accordance with the laws of the State of Ohio without giving effect to any of its conflict or choice of law provisions ***. WCMG is not a broker/dealer or member of the National Association of Securities Dealers, Inc. (NASD) and is not subject to the jurisdiction of the NASD or other self-regulatory organization.
Notwithstanding the forgoing, any dispute or controversy between Client and WCMG or any of WCMG‘s officers, directors, agents, or employees, arising out of or relating to this Agreement or the relationship created hereby, shall be submitted to binding arbitration conducted by and according to the securities arbitration rules then in effect of the NASD in arbitration proceedings to be conducted in Cleveland, Ohio. Client is aware of and by signing this Agreement acknowledges that: (1) arbitration is final and binding on the parties; (2) Client and WCMG are waiving their right to seek remedies in court, including the right to a jury trial, except to the extent such a waiver would violate applicable law; (3) pre-arbitration discovery is generally more limited than and different in form and scope from discovery typically available in court proceedings; (4) the arbitrators’ award is not required to include factual findings or legal reasoning and a party‘s right to seek modification or appeal from arbitrators’ rulings is strictly limited; and (5) the panel of arbitrators may include arbitrators who were or are affiliated with the securities industry. In any arbitrations conducted hereunder, the arbitrators shall award the prevailing party, in addition to any other relief that may be awarded, its or their reasonable attorneys’ fees, costs, and expenses (including, but not limited to, fees charged by any expert witness).” (Emphases added.)
¶ 5 After defendants filed their motion, plaintiff wrote to the Financial Industry Regulatory
¶ 6 On October 20, 2011, the trial court entered its written order, determining that the arbitration provision required that any disputes between the parties to the agreement be “conducted by and according to” the rules of NASD/FINRA. Accordingly, the court determined, the agreement required the arbitration to be “conducted by” NASD/FINRA and, therefore, the designation of NASD/FINRA as arbitrator was an integral part of the provision. The court noted that FINRA has specialized knowledge regarding investments and securities and that it had refused to arbitrate the instant dispute. Therefore, the court found that the arbitration clause was unenforceable, and it denied defendants’ motion to dismiss the complaint and to compel arbitration or, alternatively, to stay the proceedings and compel arbitration. The court further found that defendants did not waive their right to invoke the arbitration provision. Defendants Delfre and WCMG appeal.
II. ANALYSIS
A. Standard of Review
¶ 7 ¶ 8 ¶ 9 We address first the proper standard of review. An order denying a motion to compel arbitration is injunctive and is appealable pursuant to Illinois Supreme Court Rule 307(a)(1) (eff. July 6, 2000). See Illinois Concrete-I.C.I., Inc. v. Storefitters, Inc., 397 Ill. App. 3d 798, 800 (2010). As plaintiff notes, it has been said that, on a Rule 307(a)(1) interlocutory appeal, the “sole issue” the appellate court considers is whether there was a “sufficient showing” to sustain the trial court‘s order denying the motion to compel. Id.
¶ 10 Nevertheless, the standard applied to an interlocutory appeal of a denial of a motion to compel arbitration is ultimately dictated by the nature of the issue decided. Peach v. CIM Insurance Corp., 352 Ill. App. 3d 691, 694 (2004) (appellate court would consider for an abuse of discretion whether there was a sufficient showing in the record to support the trial court‘s finding that the parties, in fact, enjoyed the relationship required by the arbitration agreement, but would consider de novo whether the agreement required such a relationship); Caligiuri v. First Colony Life Insurance Co., 318 Ill. App. 3d 793, 800 (2000) (where party argued waiver and that, as an agent of a signatory to the agreement, it could compel arbitration thereunder, appellate court noted that questions of waiver and agency were factual and subject to deference, whereas interpretation of the arbitration agreement itself was a legal question subject to de novo review).
¶ 11 ¶ 12 Here, we are asked to determine whether the trial court properly concluded that the arbitration provision is unenforceable because: (1) it named NASD/FINRA as arbitrator and (2) the designation was integral to the agreement. As these questions involve interpretation of the agreement, they are legal and will be reviewed de novo.
B. Applicable Law Favors Arbitration
¶ 13 ¶ 14 When considering the issues on appeal we remain mindful that “[i]t is well established that agreements to submit to arbitration, as an alternative method of dispute resolution, are favored at both the state and federal levels.” QuickClick Loans, LLC v. Russell, 407 Ill. App. 3d 46, 52 (2011). “[T]he decision whether to compel arbitration is not discretionary. Where there is a valid arbitration agreement and the parties’ dispute falls within the scope of that agreement, arbitration is mandatory and the trial court [unless the agreement is invalid] must compel it.” (Internal quotation marks omitted.) LRN Holding, 409 Ill. App. 3d at 1027 (quoting Travis v. American Manufacturers Mutual Insurance Co., 335 Ill. App. 3d 1171, 1175 (2002)).
¶ 15 The Federal Arbitration Act applies to both state and federal courts (QuickClick Loans, 407 Ill. App. 3d at 52), and it was enacted “to reverse long-standing judicial hostility to arbitration agreements and to place arbitration agreements on the same footing as other contracts.” Carr, 241 Ill. 2d at 21. The Act reflects a liberal policy in favor of arbitration agreements, providing, in section 2 (
¶ 16 Moreover,
“If in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed; but if no method be provided therein, or if a method be provided and any party thereto shall fail to avail himself of such method, or if for any reason there shall be a lapse in the naming of an arbitrator or arbitrators or umpire, or in filling a vacancy, then upon the application of either party to the controversy the court shall designate and appoint an arbitrator or
arbitrators or umpire, as the case may require, who shall act under the said agreement with the same force and effect as if he or they had been specifically named therein ***.” (Emphasis added.)
Accordingly, if the parties have chosen an arbitrator or arbitral forum and that selection becomes unavailable, section 5 of the Act permits the trial court to name a substitute or replacement arbitral forum. Carr, 241 Ill. 2d at 26. An exception to application of section 5, however, exists where the parties’ designated arbitral forum is “integral” to the parties’ agreement to arbitrate. Id. To determine whether the chosen forum is integral, a court looks to the essence of the agreement to assess whether the agreement to arbitrate is the essential term or whether the failed term (i.e., the chosen arbitral forum) was as important a consideration as the agreement to arbitrate itself. Id. at 22-23. In other words, if the agreement to arbitrate and the chosen forum are of equal importance, the chosen forum is integral and a new forum may not be substituted. In contrast, “[w]here the designation of an arbitral forum is only an ancillary, logistical concern and the primary consideration is the intent to arbitrate disputes, allowing a court to appoint a substitute arbitrator fulfills the parties’ agreement to arbitrate.” Id. at 26-27.3
C. Arbitration Provision Did Not Name NASD/FINRA as Arbitrator
¶ 17 ¶ 18 Here, the questions on appeal are whether the arbitration provision designates NASD/FINRA as the arbitral forum and, if it does, whether that designation is so integral to the agreement that FINRA‘s refusal to conduct the arbitration renders the entire arbitration provision unenforceable. The trial court answered both questions in the affirmative. We disagree.
¶ 19 Unambiguous contract terms must be afforded their plain and ordinary meaning. Barth v. State Farm Fire & Casualty Co., 228 Ill. 2d 163, 174 (2008). Our de novo review of the parties’ agreement leads us to conclude that the parties chose only the rules that would be applied to any arbitration between them, not the forum that would administer the arbitration. Again, the arbitration agreement here provides that any dispute between the parties “shall be submitted to binding arbitration conducted by and according to the securities arbitration rules then in effect of the NASD.” (Emphasis added.) Plaintiff argued, and the trial court agreed, that the agreement specifies the arbitral forum because it provides that arbitration will be “conducted by *** NASD.” As defendants point out, this construction ignores that the terms “conducted by and according to” relate to the immediately following object, i.e., NASD‘s “rules.” NASD is not specified in any manner except to specify which rules should be applied, i.e., NASD‘s rules that are in effect at the time of the arbitration. Plaintiff argues that this interpretation renders meaningless the phrase “conducted by.” We disagree. Broken
¶ 20 We further note that contract terms should not be read in isolation. Reading the arbitration provision as a whole supports our plain language interpretation. First, if the parties contemplated that NASD/FINRA would be the exclusive arbitral forum, there would be no need to specify that the arbitration must be conducted by NASD/FINRA‘s rules. See, e.g., Carr, 241 Ill. 2d at 29 (discussing the rationale used by the court in Adler v. Dell Inc., No. 08-cv-13170, 2009 U.S. Dist. LEXIS 112204 (E.D. Mich. Dec. 3, 2009), that requiring that a specific forum‘s rules be used would appear to be surplusage unless another arbitral forum could be used). Second, the agreement explicitly states that WCMG is not a member of NASD and is not subject to NASD‘s jurisdiction. As defendants note, it is absurd to interpret the contract as limiting arbitration to a forum unable to administer it. Hot Light Brands, L.L.C. v. Harris Realty, Inc., 392 Ill. App. 3d 493, 499 (2009) (contract should not be interpreted in a manner so as to render one clause meaningless).
¶ 21 Plaintiff asserts that the chosen rules require application in a FINRA forum and that, therefore, the agreement, by selecting the rules, also selected the forum. We reject this argument. First, although plaintiff includes, in a separate appendix on appeal, copies of what appear to be FINRA rules, those rules were not included in the record before the trial court. Keener v. City of Herrin, 235 Ill. 2d 338, 346 (2009) (party may not rely on matters outside of the record to support his or her position). Second, the agreement specifies that the rules to be applied are those that are in effect at the time of the arbitration, and, therefore, we do not know whether the version presented in plaintiff‘s appellate brief is, in fact, the version that will ultimately be applied to this dispute. Third, we read the rules in plaintiff‘s appendix (which permit arbitration under FINRA‘s code of rules for “any dispute between a customer and a member or associate person of a member that is submitted to arbitration under Rule 12200 or 12201“) not as prohibiting use of the rules outside of a FINRA forum but as providing only that, where parties that are FINRA members agree to submit their dispute to arbitration under the FINRA code, FINRA‘s rules may be applied. Cf. Carr, 241 Ill. 2d at 31 (citing a National Arbitration Forum (NAF) provision that the NAF code “shall be administered only by the [NAF]” (emphasis added and internal quotation marks omitted)).
¶ 22 Accordingly, we conclude that the arbitration provision selected only the rules to be applied in the event of an arbitration, not the arbitral forum that would conduct the arbitration. Because we conclude that the arbitration provision did not select an arbitration forum, the trial court erred in finding that, because FINRA declined to arbitrate, the arbitration provision is unenforceable. While our inquiry could end there, we note that, even if the agreement did select NASD/FINRA as arbitrator, that designation was not integral to the agreement and, therefore, the overarching agreement to arbitrate remains enforceable.
¶ 23 Even where parties explicitly specify in their arbitration agreement both an arbitral service to handle arbitration and the rules to be applied, that fact does not, standing alone, make the forum designation integral to the agreement. Id. at 30. If that were the case, the Carr court noted, then section 5 of the Act (permitting appointment of a substitute arbitrator when the selected one becomes unavailable) would not apply in any case where the specified arbitrator becomes unwilling or unable to handle the arbitration. Id. Thus, “the mere
¶ 24 In Carr, the provision at issue provided that any dispute “will be resolved exclusively and finally by arbitration administered by the National Arbitration Forum (NAF) and conducted under its rules.” (Internal quotation marks omitted.) Id. at 20. Further, the agreement provided, “[s]hould either party bring a dispute in a forum other than NAF, the arbitrator may award the other party its reasonable costs and expenses, including attorneys’ fees, incurred in staying or dismissing such other proceedings or in otherwise enforcing compliance with this dispute resolution provision.” (Internal quotation marks omitted.) Id. The supreme court looked to the agreement as a whole and determined that, because it provided that NAF would be the “exclusive” administrator of the arbitration and included a penalty provision for bringing a dispute in a forum other than NAF, the chosen arbitral forum was integral to the agreement. Id. at 33. Accordingly, where NAF had declined to arbitrate and it was integral to the agreement, the trial court could not substitute an arbitrator under section 5 of the Act. Id. Thus, the arbitration provision was unenforceable.
¶ 25 Similarly, in QuickClick Loans, the arbitration agreement contained a specific provision entitled “Choosing the Administrator,” which provided that “the party requiring arbitration must choose one of the following arbitration organizations as the Administrator: American Arbitration Association (AAA)*** or National Arbitration Forum (NAF)***.*** If for any reason the chosen organization is unable or unwilling or ceases to serve as the Administrator, the party requiring arbitration will have 20 days to choose a different Administrator consistent with the requirements of this Arbitration Agreement.” (Internal quotation marks omitted.) QuickClick Loans, 407 Ill. App. 3d at 48. Ultimately, both AAA and NAF became unavailable forums. The court determined that the plain language of the agreement provided that, if the chosen forum was unavailable, a new one could be selected only in a manner consistent with the agreement‘s requirements, and, because the agreement exclusively designated AAA and NAF as the only administrators that could be chosen, the selection of the arbitral forum was integral to the agreement. Id. at 53-54. Thus, section 5 could not be used to appoint an alternative forum, and the provision was rendered unenforceable. Id.
¶ 26 In contrast, in a case discussed by our supreme court in Carr, the Ninth Circuit Court of Appeals, in Reddam v. KPMG LLP, 457 F.3d 1054 (9th Cir. 2006), considered an arbitration agreement similar to that presented here. Specifically, the agreement at issue provided that all controversies between the parties would be determined by arbitration and that “[a]ny arbitration under this agreement shall be determined pursuant to the rules then in effect of the [NASD], as the undersigned you may elect. If the undersigned fails to make such election, then you may make such election.” Id. at 1057. Ultimately, NASD refused jurisdiction over the arbitration because no party was an NASD member, and the district court refused to appoint a substitute arbitrator under section 5 of the Act. Id. The appellate court disagreed, concluding first that the agreement did not reflect a choice of
¶ 27 We find this case more like Reddam than Carr or QuickClick Loans. Nothing in this agreement evidences that the choice of NASD/FINRA was so integral to the agreement that the agreement to arbitrate would be void if FINRA declined jurisdiction. Again, the agreement here did not provide for both a choice of law and a choice of arbitrator, or that NASD/FINRA would be the “exclusive” arbitrator, or that there would be a penalty if a party sought arbitration before a non-FINRA entity. Like in Reddam, the agreement did not even expressly state that FINRA would be the arbitrator. The provision, read as a whole, evidences that the parties’ primary intent was to arbitrate their disputes. Indeed, the provision lists with detail the differences between arbitration and court proceedings, the rights to recover costs and fees, and the location where the arbitration would take place. Therefore, because the agreement does not reflect that FINRA was named as arbitrator or, if it was, that the designation was integral to the agreement, we cannot conclude that FINRA‘s unavailability renders the agreement unenforceable.
¶ 28 We further note that we disagree with plaintiff‘s assertion that the designation of FINRA rules reflects that the parties contemplated that any arbitration would require specialized financial or investment expertise and that, therefore, designating FINRA as arbitrator was integral to the agreement. First, the agreement does not designate FINRA, only its rules. Second, plaintiff has not established on appeal that FINRA‘s rules cannot be followed by another neutral arbitrator.4 Again, FINRA‘s rules are not in the record before us, but even if there are technicalities (such as, as plaintiff notes, various computer databases) that are available to FINRA but are not available to other arbitration administrators, we cannot say
¶ 29 In sum, the trial court erred in finding the arbitration agreement unenforceable and in denying defendants’ motion to compel arbitration and to dismiss the complaint or, alternatively, stay the proceedings. We note that, when a motion to compel is granted, the case is not automatically transferred to an arbitrator; rather, the matter is simply stayed in the trial court, and if the party who lost on the motion to compel still wishes to pursue his or her claim, it is responsible to file for arbitration. See
III. CONCLUSION
¶ 30 ¶ 31 For the foregoing reasons, the judgment of the circuit court of Lake County is reversed and the cause is remanded with directions.
¶ 32 Reversed and remanded with directions.