ORDER
I. Background..............................................................1014
II. Personal Jurisdiction......................................................1017
III. Arbitration...............................................................1018
A. Defendants Sly and Brian Sly & Company................................1019
1. Trustee Standing.................................................1019
2. PosL-Filing Buy-In to the Arbitration Clause........................1019
B. Arbitration by Estoppel................................................1020
1. MS Dealer, the Narrow Approach, and the Broad Approach............1020
2. MS Dealer and the Ninth Circuit...............■....................1021
3. Carlisle and the Return to State Law ...............................1021
4. Federal Law Based On “Traditional Principles of State Law”...........1023
a. “Traditional Principles” of Equitable Estoppel....................1023
b. MS Dealer’s Broad Approach Compared to “Traditional
Principles”.................................................1023
c. The Narrow Approach Compared to “Traditional Principles”.......1024
d. The Facts of this Case Compared to “Traditional Principles”.......1024
5. State Law.......................................................1025
C. Arbitration through Agency............................................1025
1. Arbitration and Agency Generally..................................1026
2. Defendant Huffs Agency Relationship ..............................1026
3. Defendant Bean’s Agency Relationship..............................1027
D. Unconseionability.....................................................1028
IV. Attorney Fees............................................................1028
V. Conclusion ...............................................................1028
Before the Court are (1) “Defendants Thomas Cunningham and Jane Doe Cunningham’s Motion to Dismiss or Alternatively, Motion to Compel Arbitration and Stay Litigation” (Doc. 22) and (2) “Defendants Brian Nelson Sly, Brian Sly and Company, Inc., Brian Sly and Company, Wilbur Anthony Huff, and Thomas J. Bean’s Motion to Compel Arbitration and Stay Litigation” (Doc. 23). The parties have since stipulated to dismiss Defendant Jane Doe Cunningham, thus resolving that part of the Cunninghams’ motion (see Docs. 47-48). The motions to compel arbitration will be granted as to Defendant Bean, but denied as against the other Defendants. The motion to dismiss Thomas Cunningham for lack of personal jurisdiction will be denied.
I. BACKGROUND
Plaintiff Kingsley Capital Management is an Arizona limited liability company con
According to Kingsley’s complaint, he met Defendant Brian Sly in 1994. A friendship resulted. In 2005, Sly began pitching certain investments to Kingsley. One such investment involved an air filter company. Kingsley did not invest, and the air filter company apparently failed.
Sly followed up with another investment opportunity, this one involving workers’ compensation insurance. This investment took the form of membership interests in certain limited liability companies. Sly did not personally own such, membership interests, but had invested through two trusts for which he is trustee. Many of these LLCs changed their names during the course of relevant events, but most of them had a name related to the words air or oxygen — perhaps a holdover from the defunct air filter business. Distinguishing between the various LLCs is not important for purposes of this order, and the Court will therefore generically refer to Sly’s workers’ compensation investment and the LLCs that effectuated it as “Oxygen.”
Supposedly, Sly and other Oxygen investors (who, like Sly, invested indirectly through trusts or business arrangements) had acquired a workers’ compensation carrier and hoped to expand its business. Expanding its business, however, required increased reserves. Sly therefore pitched to Kingsley the chance to invest in Oxygen. If Kingsley invested, Oxygen would add his investment to its insurance reserves, and Kingsley would receive investment returns based on insurance premiums collected. Sly told Kingsley that Sly’s Oxygen investment had been earning 20% returns.
Kingsley did not invest in Oxygen immediately. He was wary of Sly’s main business partner in the Oxygen investment, Defendant Wilbur Anthony Huff. Kingsley knew that Huff had once been convicted of mail fraud. 1 Sly explained that Huff had never really done anything wrong, but felt compelled to plead guilty in the face of prosecutorial threats that his father would also be charged in the same case. Kingsley nonetheless maintained his distance from Oxygen.
In January 2008, Sly invited Kingsley to attend an upcoming “investor reward trip” at the Phoenician Resort in Phoenix. This trip would bring Oxygen investors up-to-date on the progress of the investment and would also provide an opportunity for a more detailed pitch of the Oxygen investment to potential investors such as Kingsley.
Kingsley attended the investor reward trip at the Phoenician, which took place in March 2008. All of the Oxygen investors attended, as did one other potential investor whom the complaint does not name. As described by Kingsley, this investor meeting focused mostly on pitching Oxygen to the potential investors. Sly described Oxygen’s structure and also introduced various other investors and principal actors. These included Huff, described as “the man who makes it happen”; Defendant Thomas J. Bean, supposedly “in charge of operations”; Defendant Charles
Kingsley began to warm up to Oxygen following the March 2008 investor meeting. He began communicating frequently with Sly and Huff about the details of a proposed investment. He still had concerns, but Huff eventually won him over by a deal involving a put option agreement that would permit a quick refund of his full investment, with a letter of credit issued by Antonucci’s bank securing the put option agreement.
In July 2008, Kingsley invested $1.75 million in preferred units of Oxygen LLC membership. Kingsley therefore joined Oxygen and became subject to the arbitration clause in its operating agreement:
In the event of any dispute, controversy or claim by, among or between Members) and/or the Company arising out of or relating to this Agreement and/or the Offering, including as to its interpretation or as to the arbitrability of any issue arising hereunder, such dispute shall be submitted to binding arbitration in Louisville, Kentucky.... The presentation of evidence shall be governed by the Federal Rules of Evidence. Discovery in all respects shall be controlled by the arbitrator/panel.
(Doc. 1-4 at 48.) 2 In this clause, “Offering” refers to Oxygen’s “offering and sale of Preferred Units.” (Id. at 51.) The Oxygen operating agreement also states that it will be governed by Kentucky law. (Id. at 49.)
Not long after investing, Kingsley began to fear he would lose his investment. He learned, for instance, that Antonueci’s bank was not well-capitalized and that Huff would allegedly invest $5 million to shore it up. Antonueci later left the bank, which failed, and Antonueci has since pleaded guilty to bank fraud. 3 The bank’s failure doomed Kingsley’s letter of credit.
Kingsley also could not obtain audited Oxygen financials. Kingsley learned that Cunningham did not have an active CPA license, did not consider himself part of Oxygen’s management, and had not audited Oxygen’s financials before the March 2008 investor meeting. Kingsley also learned that Bean, supposedly in charge of “operations,” had no real control of Oxygen and instead spent most of his time managing a talk radio personality in Florida. Even more disturbingly, Kingsley learned of potential ongoing criminal activities by various persons associated with Oxygen.
Kingsley eventually exercised his put option agreement in May 2010, to no avail, and then filed this action on July 2010. Kingsley alleges various forms of securities fraud, consumer fraud, and common law fraud. He asserts no claim under the Oxygen operating agreement.
II. PERSONAL JURISDICTION
Cunningham, a resident of New Jersey, challenges this Court’s personal jurisdiction over him. When a defendant challenges personal jurisdiction, the plaintiff must make a prima facie showing of facts that, if true, would support personal jurisdiction.
Harris Rutsky & Co. Ins. Servs., Inc. v. Bell & Clements Ltd.,
Kingsley has alleged enough for a prima facie case of jurisdiction over Cunningham. Kingsley alleges that Sly introduced Cunningham at the March 2008 investor meeting as “the accountant” and “part of the management team.” (See Doc. 1-3 ¶¶ 51, 65.) Cunningham allegedly “did not object to” or “contradict anything said during Sly’s presentation. Specifically, Cunningham did not refute that he held a management role.” (Id. ¶ 66.) Cunningham then “presented financial data and information and answered questions about the financial status of the Oxygen entities” without disclosing that he had performed “no actual ‘accounting’ of the Oxygen entities.” (Id. ¶ 68.) Finally, Kingsley alleges that he “later learned that Cunningham did not hold a CPA license at the time of the March 2008 Investor Meeting or anytime thereafter, was not a practicing accountant, performed no actual accounting work for the Oxygen entities, and did not consider himself a member of the Oxygen entities’ management.” (Id. ¶ 72.)
Without admitting any of these accusations, Cunningham says they fall short of activities purposefully directed at Arizona. He attended a single meeting at which Kingsley was an invited guest, and that meeting happened to be in Arizona. But Cunningham views the personal jurisdiction test too narrowly. Kingsley claims that the Oxygen investment was a scam perpetrated by various persons acting together, including Cunningham. Kingsley infers that the March 2008 investor meeting in Arizona was used, at least in part, to convince Kingsley to invest in a scam. Kingsley reasonably draws this inference, considering his guest status at the March 2008 meeting, the investors’ familiarity with each other, their alleged misrepresentations, and their failure to correct each other’s misrepresentations. Kingsley has therefore stated a prima facie case for
Cunningham asks this Court to move beyond the prima facie stage to an evidentiary hearing. “If a plaintiff make[s] [a prima facie jurisdictional] showing ... it does not necessarily mean that he may then go to trial on the merits.... [T]he district court has the discretion to take evidence at a preliminary hearing in order to resolve the contested issues.”
Data Disc, Inc. v. Sys. Tech. Assocs., Inc.,
III. ARBITRATION
The Federal Arbitration Act provides:
If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.
9 U.S.C. § 3. Under the Act, “a district court must issue an order compelling arbitration if the following two-pronged test is satisfied: (1) a valid agreement to arbitrate exists; and (2) that agreement encompasses the dispute at issue.”
United Computer Sys. v. AT & T Info. Sys.,
As to the first question, Kingsley does not challenge the validity of the Oxygen operating agreement’s arbitration clause. Thus, a valid agreement to arbitrate exists. As to the second question, the arbitration clause at issue requires arbitration of “any dispute, controversy or claim by, among or between Member(s), the Manager and/or the Company arising out of or relating to this Agreement and/or the Offering.” Under this language, Kingsley’s allegations— without considering against whom they run — fall within the scope of the arbitration clause because they arise from the “Offering,” or in other words, his decision to buy Oxygen “preferred units.” In this sense, the “agreement encompasses the dispute at issue.”
United Computer Sys.,
However, the “dispute at issue” must be a “dispute between the parties [to the contract containing the arbitration clause].”
Simula, Inc. v. Autoliv, Inc.,
As explained below, Sly does not get the benefit of Oxygen’s arbitration clause through his recent purchase of Oxygen membership interests, nor is Kingsley es-
A. Defendants Sly and Brian Sly & Company 4
1. Trustee Standing
When Kingsley filed this action, Sly was not personally an Oxygen member. Rather, certain trusts for which he is “sole owner, grantor, trustee and beneficiary” (Doc. 23-1 ¶ 3) held the membership interests. Sly asserts that he should nonetheless be considered an Oxygen member because “[t]he interests of the Trusts and Mr. Sly are completely congruent. None of the Trusts[’] interests diverge in any manner from Mr. Sly’s interests.” (Doc. 33 at 2.)
Sly falls short of showing that he is an Oxygen member because his trusts are members, especially considering that his argument implies he had no trusts in the first place. See, e.g., Restatement (Third) of Trusts § 69 (2003) (“If the legal title to the trust property and the entire beneficial interest become united in one person, the trust terminates.”); Restatement (Second) of Trusts § 99 cmt. e (1959) (if “there is no separation of the legal and beneficial interests” then no trust exists because “there are no duties running from [the alleged trustee] to himself, and no rights against himself’); id. § 341(1) (“if the legal title to the trust property and the entire beneficial interest become united in one person who is not under an incapacity, the trust terminates”). Further, Sly has not cited any case law even remotely addressing whether a trustee in his personal capacity is considered a member of a limited liability company in which the trust has invested, for arbitration or any other purposes. Aecordingly, Sly does not make his case and cannot compel arbitration on this basis.
2. Post-Filing Buy-In to the Arbitration Clause
Sly also asserts that he and his eponymous company became Oxygen members after Kingsley filed suit by causing Sly’s trusts to transfer one unit of Oxygen membership to each of them. Kingsley hotly contests whether the transfer of membership interests was procedurally proper or permissible at all. That issue itself may be subject to arbitration, and in any event, it cannot be decided without an evidentiary hearing. But it need not be decided to rule on the pending motions.
No party has cited, and this Court did not locate, any authority on whether a party can buy into an arbitration agreement after being taken to court. However, a recent Second Circuit case suggests a reasonable approach. In
Sokol Holdings, Inc. v. BMB Munai, Inc.,
Sly’s new relationship to the Oxygen operating agreement differs from the Sokol defendants’ relationship to the contract at issue there, but the principle underlying Sokol applies equally well: the law should not expand arbitration through the bad faith conduct of the party seeking to compel arbitration. Sly’s transfer of a single Oxygen membership interest from each trust to him personally and to his company is bad faith conduct obviously intended to buy into the arbitration clause. Such conduct undermines the Federal Arbitration Act, which makes arbitration mandatory only by mutual express written consent or an equivalent. See Mundi, 555 F.3d at 1045. Sly’s theory, by contrast, leaves him free to claim arbitration or avoid it, as he wishes. If a dispute arises between Sly and Kingsley regarding Oxygen, Sly may wait until Kingsley actually files suit, then evaluate the claims, the forum, the assigned judge, and so forth, and decide if he would prefer litigation or arbitration. If he prefers arbitration, he causes his trusts to transfer Oxygen membership interests to him; if he prefers litigation, he does nothing. Conversely, if Kingsley demands arbitration against Sly, Sly could voluntarily submit, or he could argue against it because he did not sign the Oxygen operating agreement. However it plays out, Kingsley is at Sly’s whim whether the ease must go to arbitration.
Kingsley consented to arbitrate in some circumstances, but he did not consent to arbitrate at the election of others. Such one-sided control falls short of the mutual commitment to arbitration necessary for its enforceability.
Cf. Morrison v. Amway Corp.,
B. Arbitration by Estoppel 1. MS Dealer, the Narrow Approach, and the Broad Approach
None of the other Defendants claims Oxygen membership. But all of the remaining Defendants (Sly and his companies, Huff, Bean, and Cunningham) argue that Kingsley should be equitably estopped from avoiding arbitration with them. Defendants rely on federal case law from the last few decades that permits non-signatories to an arbitration agreement to equitably estop a signatory from refusing to arbitrate with them.
See
Christopher Driskill, Note,
A Dangerous Doctrine: The Case Against Using Concertedr-Misconduct Estoppel to Compel Arbitration,
60 Ala. L.Rev. 443, 447-64 (2009) (describing the development of arbitration-by-estoppel). A leading synthesis of modern arbitration-by-estoppel jurisprudence appears in
MS Dealer Service Corp. v. Franklin,
Existing case law demonstrates that equitable estoppel allows a nonsignatory to compel arbitration in two different circumstances. First, equitable estoppel applies when the signatory to a written agreement containing an arbitration clause must rely on the terms of the written agreement in asserting its claims against the nonsignatory. When each of a signatory’s claims against a nonsignatory makes reference to or presumes the existence of the written agreement, the signatory’s claims arise out of and relate directly to the written agreement, and arbitration is appropriate. Second, application of equitable estoppel is warranted when the signatory to the contract containing the arbitration clause raises allegations of substantially interdependent and concerted misconduct by both the nonsignatory and one or more of the signatories to the contract. Otherwise, the arbitration proceedings between the two signatories would be rendered meaningless and the federal policy in favor of arbitration effectively thwarted.
Id.
at 947 (internal quotation marks and citations omitted; alterations incorporated). Other circuits have adopted one or both of these tests.
See, e.g., Brantley v. Republic Mortg. Ins. Co.,
MS Dealer’s
two tests — “each of a signatory’s claims against a nonsignatory makes reference to or presumes the existence of the written agreement” and “substantially interdependent and concerted misconduct by both the nonsignatory and one or more of the signatories” — are sometimes referred to as the “narrow approach” and the “broad approach,” respectively.
See
Driskill, 60 Ala. L.Rev. at 460-64. As applied, the narrow approach will compel arbitration only when the plaintiffs claims “rely on the terms of the written agreement [containing the arbitration clause] in asserting its claims against the nonsignatory.”
Hawkins v. KPMG LLP,
2. MS Dealer and the Ninth Circuit
The Ninth Circuit has not expressly adopted either
MS Dealer
test.
See Jones v. Deutsche Bank AG,
No. C 04-05357 JW,
The Mundi case fell in the second category, as does this case. As to such signatory-sues-first cases, the Ninth Circuit noted that its precedent had never before permitted a non-signatory to compel arbitration, and “in light of the general principle that only those who have agreed to arbitrate are obliged to do so, we see no basis for extending the concept of equitable estoppel of third parties in an arbitration context beyond the very narrow confines delineated in [certain previous cases].” Id. Therefore, under Mundi, Kingsley is not estopped from maintaining this action.
3. Carlisle and the Return to State Law
A 2009 Supreme Court decision, however, indicates that arbitration-by-estoppel should no longer be decided under the federal case law, but rather under state
purports to alter background principles of state contract law regarding the scope of agreements (including the question of who is bound by them). Indeed § 2 explicitly retains an external body of law governing revocation (such grounds “as exist at law or in equity”). And we think § 3 adds no substantive restriction to § 2’s enforceability mandate. State law, therefore, is applicable to determine which contracts are binding under § 2 and enforceable under § 3 if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally. Because traditional principles of state law allow a contract to be enforced by or against nonparties to the contract through assumption, piercing the corporate veil, alter ego, incorporation by reference, third-party beneficiary theories, waiver and estoppel, the Sixth Circuit’s holding that nonparties to a contract are categorically barred from § 3 relief was error.
Id. at 1902 (emphasis added; internal quotation marks, citations, and footnotes omitted; alterations incorporated).
Recently, the Eleventh Circuit — author of the seminal
MS Dealer
decision — interpreted
Carlisle
as “clarifying] that state law governs [the arbitration-by-estoppel] question, and to the extent any of our earlier decisions indicate to the contrary [citing
MS Dealer,
among others], those indications are overruled or at least undermined to the point of abrogation.”
Lawson v. Life of the South Ins. Co.,
But this may not be the only interpretation of
Carlisle. Carlisle
invoked “traditional principles of state law” but its subsequent analysis did not cite the law of any particular state. Thus, one might read
This Court need not decide whether the source of law for resolving arbitration-byestoppel is federal law based on “traditional principles of state law” or the law of the state governing the contract. In this case, both paths lead to the same place, namely, Kingsley is not estopped to refuse arbitration.
4. Federal Law Based On “Traditional Principles of State Law”
If Carlisle requires rules that comport with “traditional principles” of state estoppel law — even if deemed to be a species of federal law — then much of federal case law regarding arbitration-by-estoppel is no longer valid. Further, “traditional principles” of equitable estoppel would not compel Kingsley to arbitrate.
a. “Traditional Principles” of Equitable Estoppel
Estoppel is generally defined as “[a] bar that prevents one from asserting a claim or right that contradicts what one has said or done before.” Black’s Law Dictionary 629 (9th ed. 2009). Equitable estoppel is, “[i]n its broadest sense,” essentially the same as estoppel generally: “a means of preventing a party from asserting a legal claim or defense which is contrary [to] or inconsistent with his prior action or conduct.” 28 Am.Jur.2d Estoppel and Waiver § 27 (2011) (hereafter, “Am. Jur. Estoppel ”). In other words, “it is generally held that a representation of past or existing fact made to a party who relies upon it reasonably may not thereafter be denied by the party making the representation if permitting the denial would result in injury or damage to the party who so relies.” 4 Richard A. Lord, Williston on Contracts § 8:3 (4th ed. 2001) (hereafter, “Williston ”).
A more definite statement of equitable estoppel’s elements is difficult because the claim “rests upon the facts and circumstances of the particular case in which it is urged[.] ... [Consequently, any attempted [statement of elements] usually amounts to no more than a declaration of an estoppel under those facts and circumstances.” Am.Jur. Estoppel § 27. One common element, however, is that the statement or conduct at issue must have been made with the intent that the other party rely on it. Id. § 39. Thus, equitable estoppel is often linked to “the prevention of actual or constructive fraud.” Id. § 28; see also Black’s Law Dictionary 630 (9th ed. 2009) (“This doctrine is founded on principles of fraud.”).
In contract law specifically, equitable estoppel generally arises to “preclude[ ] one who accepts the benefits from repudiating the accompanying or resulting obligation. Parties cannot accept benefits under a contract fairly made and at the same time question its validity.” Am.Jur. Estoppel § 60 (footnote omitted). Thus, for example,
[ejquitable estoppel bars assertion of the statute [of frauds] as a defense where the party setting up the statute as a defense has misrepresented some fact bearing upon the statute’s satisfaction, thereby inducing the plaintiffs detrimental reliance. The fact misrepresented may be that the statute is inapplicable or already satisfied....
4. Corbin on Contracts § 12.8, at 36 (rev. ed. 1993); see also 4 Williston § 27:16 (discussing a similar scenario).
b. MS Dealer’s Broad Approach Compared to “Traditional Principles”
MS Dealer’s
“broad approach” — “substantially interdependent and concerted
Turning the focus from the signatory’s actions to the non-signatories’ actions already turns equitable estoppel on its head. The explanation for it goes even further. Supposedly, if a non-signatory cannot compel a signatory to arbitrate where the signatory has alleged “substantially interdependent and concerted misconduct by both the nonsignatory and one or more of the signatories,” then “the arbitration proceedings between the two signatories would be rendered meaningless and the federal policy in favor of arbitration effectively thwarted.”
MS
Dealer;
c. The Narrow Approach Compared to “Traditional Principles”
The narrow approach to arbitration-by-estoppel comes much closer to traditional equitable estoppel. The narrow approach typically arises where: (1) the
signatory
seeks to compel arbitration with a non-signatory that has “knowingly exploited] the agreement containing the arbitration clause despite having never signed the agreement,”
Comer v. Micor, Inc.,
d. The Facts of this Case Compared to “Traditional Principles”
Defendants’ argument for arbitration resembles the narrow approach. They claim that but for entering into the Oxygen investment and signing the Oxygen’s operating agreement, Kingsley would have no claims against any of them. Thus, Defendants argue, Kingsley is seeking to “hold the non-signator[ies] liable pursuant to
Defendants’ “but for” premise is insufficient. This lawsuit does not affirm the operating agreement or seek any benefit under it. The mere fact that Kingsley entered into the operating agreement does not mean that Kingsley is attempting to hold Defendants liable for duties imposed by it. Kingsley’s claims against Defendants arise from their allegedly tortious conduct, not from the operating agreement. In essence, Kingsley claims that Defendants fraudulently induced him into the operating agreement — which would not be enough to get Kingsley out of arbitration
with the signatories. Prima Paint Corp. v. Flood & Conklin Mfg. Co.,
5. State Law
As discussed above, Carlisle does not state clearly whether “traditional principles of state law” refers to federal law incorporating “traditional principles of state law” or to the law of the state governing the contract. The previous subsection discussed the outcome under federal law that incorporates traditional state-law principles. But if Carlisle requires courts to apply the law of the state governing the contract (Kentucky), the result is the same. Kentucky law treats equitable estoppel even more restrictively than “traditional principles of state law,” and Kingsley is therefore not estopped.
“ ‘The doctrine of equitable estoppel is applied to transactions in which it would be unconscionable to permit a person to maintain a position which is inconsistent with one in which he has acquiesced.’ ”
Bruestle v. S & M Motors, Inc.,
None of these elements is satisfied. Of central importance, Kingsley has not led Defendants to believe they would have the benefits of the Oxygen operating agreement. Therefore, no basis exists under Kentucky law to equitably estop Kingsley from maintaining this action.
C. Arbitration through Agency
Defendants Bean and Huff both contend that they are agents of Oxygen and therefore deserve to compel arbitration as such. As explained below, Huffs legal inability to be an agent for Oxygen precludes him from claiming the benefits of agency.
1. Arbitration and Agency Generally
Agency and arbitrability cross paths in two situations: (i) where a principal facing an arbitration demand disavows an arbitration clause signed by its agent; or (ii) where an agent charged with arbitration seeks to shift that burden to its principal. See 1 Larry E. Edmonson, Domlce on Commercial Arbitration § 13:2 (3d ed. 2011). In these typical cases, either the principal or the agent wants to avoid arbitration. Defendants Bean and Huff, however, want the opposite. They see arbitration as a refuge.
Case law regarding Bean’s and Huffs situation is thin, perhaps because
MS
Dealer-inspired arbitration-by-estoppel authority is broad enough to cover most any situation in which agency might also play a role.
See, e.g., Kulpa v. OM Fin. Life Ins. Co.,
One area where Bean’s and Huffs argument sometimes arises is the broker-dealer’s relationship to investment clients. In these cases, an individual typically agrees to let a financial firm manage his or her investments, and the agreement between the client and the firm contains an arbitration clause. The client later sues the employees at the firm who made investment decisions. In these cases, the firm’s employees may invoke the arbitration clause on an agency theory because the firm can only carry out its executory investment advisory functions through such employees.
See, e.g., Pritzker v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
2. Defendant Huffs Agency Relationship
Defendant Huff argues that the complaint’s own words show he acted as an agent for Oxygen in soliciting Kingsley’s investment in “the Offering.” If true, this situation somewhat resembles the broker-dealer cases. However, Huffs argument is complicated by his status as a convicted felon. As Kingsley points out (and Huff does not dispute), Huff pleaded guilty to mail fraud — a crime involving dishonesty— and under federal law, it is also a crime if “[a]ny individual who has been convicted of any criminal felony involving dishonesty ... willfully engages in the business of insurance ... or participates in such business.” 18 U.S.C. § 1033(e)(1)(A). Oxygen was in the business of insurance, so Huff was not legally permitted to act as Oxygen’s agent.
No located authority (Kentucky or otherwise) addresses whether one can claim an agency relationship — for purposes of receiving the protections afforded to the principal (here, the arbitration clause)— when one cannot legally be an agent. The
Restatement (Second) of Agency
comes close when it declares, “The appointment of an agent to do an act is illegal if an agreement to do such an act or the doing of the act itself would be criminal, tortious, or otherwise opposed to public policy.”
Restatement (Second) of Agency
§ 19 (1958). However, the
Restatement (Third) of Agency
superseded its predecessor in
Capacity is not identical to legality, in that a person may have power to bind another although in exercising the power the person acts illegally. For example, a securities broker whose license has lapsed who buys securities on behalf of a customer affects the customer’s legal position by making the customer the owner of the securities.
Restatement (Third) of Agency § 3.05 cmt. b (2006). But this comment is directed at whether a third party can claim that one principal (in this example, the customer) is bound by the agent’s (broker’s) action. This has nothing to do with whether the agent can claim protections available to him only as an agent for the other principal, the employer.
Since 2006, Kentucky courts have cited both the Second and Third Restatements, but it appears that no Kentucky court has ever cited either of the sections just discussed. Falling back on “traditional principles of state law,” then, a longstanding tradition throughout American common law disciplines is good faith. One who cannot legally be an agent, and knows it, cannot act in good faith. As a matter of law, such a person cannot claim any benefit of agent status. Accordingly, Huff cannot compel Kingsley to arbitrate.
3. Defendant Bean’s Agency Relationship
Defendant Bean does not rely on the broker-dealer case law, but solely on Kentucky law governing limited liability companies. Specifically, at all times relevant to this lawsuit, Bean claims — and Kingsley does not dispute — that he managed an LLC known as River Falls Financial Services, and River Falls, in turn, was Oxygen’s “administrative member.” Kentucky LLC law states that all members of a member-managed LLC are “agent[s] of the limited liability company for the purpose ©f its business or affairs.” Ky.Rev. Stat. § 275.135(1). When Oxygen converted to a manager-managed LLC, River Falls became that manager and therefore retained its position as an agent of Oxygen. Id. § 275.135(2)(b) (“[e]very manager shall be an agent of the limited liability company for the purpose of its business or affairs”). In either case, Bean argues that he acted as a subagent for Oxygen, through its formal agent, River Falls. See Restatement (Third) of Agency § 3.15(1) & cmt. b (2006) (discussing agency and subagency relationships created when an agent is itself a business entity that can only act through other agents).
Bean further points to the Oxygen arbitration clause, which specifically requires arbitration “of any dispute, controversy or claim by, among or between Member(s), the Manager and/or the Company arising out of or relating to this Agreement, and/or the Offering.” Bean argues he is at least Oxygen’s manager, if not a stand-in for “the Company” itself. He therefore requests an order compelling arbitration on an agency theory.
Kingsley counters that Bean had no authority to act for Oxygen, despite Bean’s and others’ representations about Bean’s management role. Kingsley claims that he would not have invested had he known that Bean had no control of Oxygen. (Doc. 1-3 ¶¶ 60-64.) In other words, Kingsley claims that the fraud supposedly perpetrated on him comprised, in part, the false representations regarding Bean’s agency relationship with Oxygen.
It appears that no authority addresses whether arbitration should be compelled through an agency theory in these circumstances. Nonetheless, Kentucky law considers Bean an agent of Oxygen “for the purpose of its business or
D. Unconscionability
Kingsley argues, with very little elaboration, that arbitrating in Kentucky will be more expensive and therefore the arbitration agreement is substantively unconscionable. This issue is controlled by
Green Tree Financial Corp. v. Randolph,
Kingsley also argues that the arbitration provision is unconscionable because it would force Kentucky law upon him and defeat the protections of the Arizona Securities Act, such as the Act’s prohibition of fee-shifting in favor of defendants. This is really an argument of illegality rather than unconscionability, but in any event, it is not clear that the Oxygen operating agreement’s reference to Kentucky law is intended to preclude Kingsley’s securities fraud claims. If so, the operating agreement is invalid to that limited extent. Kingsley cannot be forced to give up his Arizona Securities Act claims, regardless of any choice-of-law or other stipulation. A.R.S. § 44-2000.
However, the Arizona Securities Act does not prohibit arbitration of claims brought under its provisions. And Defendants have conceded that fee-shifting under the Securities Act, if available at all, can only be in favor of Kingsley, despite arbitration rules that might allow otherwise. (See Doc. 33 at 11.)
IV. ATTORNEY FEES
Defendant Bean asks for attorney fees, claiming that enforcing an arbitration clause makes him a successful party in a “contested action arising out of a contract.” A.R.S. § 12-341.01. Some authority exists to support awarding attorney fees to parties that successfully compel arbitration.
See Canon Sch. Dist. No. 50 v. W.E.S. Constr. Co., Inc.,
V. CONCLUSION
The practical problem in this case, as in so many with arbitration agreements, is to
Parties to an arbitration agreement are entitled to the fair meaning of the text they endorse. But in many cases the arbitration clause — almost always a term of adhesion in a contract of adhesion — is written by one side summarily and without the clarity so easily available. Kingsley alleges an investment fraud with actors different from the signatories. Indeed, none of the signatories are defendants in this action, and there may be no reason of economic substance to have sued them. The actors who were masters of the documents could have drafted an arbitration clause that gave fair notice that promoters and others in the roles of Defendants would come within the arbitration. The investors could have then queried why such persons were not also signing, at least as to the arbitration obligation, thus making it mutual. In future transactions such clarity can be supplied through the drafting itself. It is not necessary for the courts to untether arbitration from the statute to have efficiency. Persons who want arbitration can have both efficiency and predictability in arbitration by saying clearly what they want others to sign off on.
In the meantime this case will have duplicative proceedings. That duplication will be modest. This Court processes its cases in as little or less time than most arbitrations. The Court will manage discovery in this case with economy and expedition. It will have an eye to parallel efficiency with the arbitration.
IT IS THEREFORE ORDERED that “Defendants Brian Nelson Sly, Brian Sly and Company, Inc., Brian Sly and Company, Wilbur Anthony Huff, and Thomas J. Bean’s Motion to Compel Arbitration and Stay Litigation” (Doc. 23) is DENIED, except it is GRANTED as to Defendant Bean.
IT IS FURTHER ORDERED that “Defendants Thomas Cunningham and Jane Doe Cunningham’s Motion to Dismiss or Alternatively, Motion to Compel Arbitration and Stay Litigation” (Doc. 22) is DENIED.
Notes
. United States v. Huff et al., No. 3:00-cr-123-H (W.D. Ky.).
. At the time Kingsley joined Oxygen, it was a member-managed company. In early 2010, Oxygen converted to a manager-managed company. The arbitration clause was then amended to cover disputes "among or between Member(s), the Manager and/or the Company arising out of or relating to this Agreement and/or the Offering." (Doc. 31-1 at 29.)
. United States v. Antonucci, No. 1:10-cr00922-NRB (S.D.N.Y.).
. The complaint names another Sly-related Defendant, Brian Sly & Company, Inc. Sly represents that, for purposes of this motion, there is no difference between Brian Sly & Company and Brian Sly & Company, Inc. (Doc. 23 at 5 n. 3, 6 n. 4.) The Court intends "Brian Sly & Company” to refer to both "& Company” Defendants.
. A line of district court cases quote
Carlisle’s
nod to state law, but then go on to apply only federal authority in their analyses — including cases such as
MS Dealer
— as if
Carlisle
changed nothing.
Homicek v. Card-works Servicing, LLC,
No. 10-3631,
.
See Erie Railroad Co. v. Tompkins,
. The Court makes this determination based on its understanding of the undisputed portions of the record before it, including Kingsley's surreply (Doc. 39). If Kingsley believes that the record nonetheless contains gaps that would affect this analysis, he may file a focused motion for reconsideration. If such a motion has merit, a hearing may be necessary under 9 U.S.C. § 4.