Stern v. Boothe

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NEW YORK
------------------------------------------------------x
In re:
CONTINENTAL BROKER-DEALER 	Case No.: 04-85318-JBR
CORP., 	Chapter 7
Debtor.
------------------------------------------------------x
RICHARD L. STERN, as Chapter 7 Trustee
of CONTINENTAL BROKER-DEALER 	Adv. Pro. No.: 806-08370-JBR
CORP.,
Plaintiff,
-against-
M. CARLETON BOOTHE ,
Defendant.
------------------------------------------------------x
APPEARANCES:
ZEICHNER ELLMAN & KRAUSE , LLP
BY: NATHAN SCHWED, ESQ.
Attorney for Plaintiff, Richard L. Stern as Chapter 7
Trustee of the estate of Continental Broker-Dealer Corp.
575 Lexington Avenue
New York, New York 10022
WILSON ELSER MOSKOWITZ EDELMAN & DICKER, LLP
BY: JEFFREY L WILSON, ESQ.
Attorney for Defendant, M. Carleton Boothe
150 East 42nd Street
New York, New York 10017
MEMORANDUM DECISION AND ORDER ON MOTION OF PLAINTIFF FOR
Case 8-06-08370-dte Doc 28 Filed 05/09/07 Entered 05/09/07 15:05:41

1The NASD is a self-regulating organization of securities dealers created under the
authority of the U.S. Securities and Exchange Commission. Prior to the instant summary
judgment motions, Defendant had sought arbitration before the NASD of these issues.
2
SUMMARY JUDGMENT [#9-11] AND CROSS MOTION OF DEFENDANT
SEEKING: (I) DENIAL OF SUMMARY JUDGMENT; (II) DISMISSAL OF ALL
CLAIMS AGAINST DEFENDANT; AND (III) COMPELLING ARBITRATION
OF ANY REMAINING ISSUES IF ANY (#15-18)
HON. JOEL B. ROSENTHAL, United States Bankruptcy Judge:
This matter came before the Court for hearing (the “Hearing”), on the Motion of
Plaintiff, Richard L. Stern as Chapter 7 Trustee of the estate of Continental Broker-Dealer Corp.
(“Plaintiff” or the “Trustee”) for Summary Judgment [#9] to which the Defendant M. Carleton
Boothe (“Defendant” or “Boothe”) objected [# 15-18], and on the Motion of Defendant (the
“Motion”) seeking: (i) denial of summary judgment; (ii) dismissal of all claims against Defendant;
and (iii) compelling arbitration of any remaining issues if any [#15- 18] to which the Plaintiff
objected [#19-23]. Various other responses and oppositions to the respective motions are reflected
on the Court’s docket.
At the conclusion of the Hearing the Court denied the Trustee’s motion for Summary
Judgment and that portion of Defendant’s Motion seeking dismissal of the adversary proceeding.
The Court took under submission Defendant’s request to compel arbitration. As set forth more fully
below, the Court will compel arbitration before the National Association of Securities Dealers 1
(“NASD”) to determine the issues raised in the adversary proceeding and to fix the amount of
damages, if any.
BACKGROUND
Case 8-06-08370-dte Doc 28 Filed 05/09/07 Entered 05/09/07 15:05:41

2The NASD defines an associated person as “any person engaged in the investment
banking or securities business who is directly or indirectly controlled by an NASD member,
whether or not they are registered or exempt from registration with NASD. An associated person
includes, but is not limited to, every sole proprietor, partner, officer, director, or branch manager
of any NASD member.” 	NASD Glossary of Arbitration Terms.
3The parties disagree as to whether the Agreement calls for the entire $300,000 or only
10% of that amount to be repaid. Their disagreement is irrelevant to the issue presently before
the Court.
3
Defendant began employment with the Debtor, a member of the NASD, in 1992 and
became an “associated person of a member” of the NASD2. Sometime during 2000 the Debtor and
Boothe discussed Boothe’s relocating to Boca Raton, Florida to work at the Debtor’s office there.
Defendant and the Debtor then entered into a “Sales Representative Association Agreement” (the
“Agreement”). 	Pursuant to the Agreement the Debtor transferred $300,000 to Defendant: a
payment of $150,000 on September 11, 2000 and an additional payment of $150,000 on October 4,
2000. 	Pursuant to paragraph 3 of the Agreement Defendant was to repay some or all of the
$300,000 3 if his employment terminated within 5 years for any reason other than his death or
disability.
The Defendant completed approximately 3½ years of employment under the
Agreement and resigned in January 2004. In June 2004, following an investigation by the NASD
and the U.S. Securities and Exchange Commission, the Debtor was expelled from the securities
industry. The parties substantially differ on the circumstances precipitating the Defendant’s
resignation prior to the expiration of the 5 year period and dispute each others’ obligations under
the Agreement. Also Defendant contends that subsequent to the execution of the Agreement, for
separate and additional consideration, he was released by the Debtor from any further obligations
Case 8-06-08370-dte Doc 28 Filed 05/09/07 Entered 05/09/07 15:05:41

4The Complaint also included a claim for indemnification, which the Trustee is not
pursuing
5The Trustee is the legal representative of the bankruptcy estate. As such he steps into
the shoes of the Debtor. Thus, if the Debtor could be compelled to arbitrate, so too can the
Trustee be compelled. See 11 U.S.C. § 323. See also In re Mercurio, 402 F.3d 62 (1st Cir.
2005) (holding that a Chapter 11 Trustee stood in debtor's shoes and could no more avoid
arbitration in a contractually agreed forum, based simply on showing of inconvenience, than
could debtor.)
4
under the Agreement4.
DISCUSSION
Under the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1 et seq., a federal court is
required to enforce arbitration agreements and to stay litigation that contravenes them. See 9 U.S.C.
§§ 2 & 3. The FAA affords no latitude for discretion. See Dean Witter Reynolds, Inc. v. Byrd, 470
U.S. 213, 218, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985). Although “the FAA does not require parties
to arbitrate when they have not agreed to do so,” Volt Info. Sciences, Inc. v. Board of Trustees, 489
U.S. 468, 478, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989), arbitration is indicated unless it can be said
“with positive assurance” that an arbitration clause is not susceptible to an interpretation that covers
the asserted dispute. Thomas James Assocs., Inc. v. Jameson, 102 F.3d 60, 65 (2d Cir.1996).
The threshold inquiries under the FAA are whether under recognized principles of
contract law the arbitration agreement is valid, and if so, are the parties bound by the agreement.
First Plaintiff5 alleges that paragraph 5 of the Agreement which addresses remedies including
arbitration specifically excludes claims under paragraph 3 (compensation) and 4 (customer records)
from those claims that must be arbitrated before the NASD. 	Plaintiff’s interpretation belies a
fundamental misunderstanding of the relationship between the various parties and their independent
obligations to arbitrate certain disputes, such as the one here, under the NASD's Code of Arbitration
Case 8-06-08370-dte Doc 28 Filed 05/09/07 Entered 05/09/07 15:05:41

6 As noted by the Beard Court,
Numerous courts have indicated that an individual is bound by the
arbitration provision contained in the NASD regulations if they
join the NASD, even though they have no direct agreement to
arbitrate with a covered third party. See e.g., First Liberty Group v.
Nicholsberg, 145 F.3d 647, 653 (3d Cir.1998) (stating that each
member of NASD is contractually bound by its
regulations-including all of its arbitration provisions); Paul Revere
Variable Annuity Ins. Co. v. Zang, 81 F. Supp.2d 227, 234
(D.Mass.2000), affd. by 226 F.3d 15 (1st Cir.2000).
Beard , 2001 WL 1231003, 3.
5
Procedure (the “NASD Code”).
By becoming a member of the NASD the Debtor agreed with the NASD to be bound
by the rules and regulations of the association, including the NASD Code. Similarly, the Defendant
upon accepting employment with an NASD member became as an associated person of a member
and agreed with the NASD to be bound by the regulations of the association, including the NASD
Code 6 . It is important to understand this distinction; these agreements were not between the Debtor
and the Boothe, rather these were separate agreements that each party entered into directly with the
NASD long before the Agreement herein was undertaken. See Gilmer v. Interstate/Johnson Lane
Corp., 500 U.S. 20, 25 n. 2, 111 S.Ct. 1647, 1651 n. 2, 114 L.Ed.2d 26. (1985) (explaining that the
NASD’s Form U-4 agreement, signed by employees in the securities industry, is more correctly
understood as an agreement between the signatory and the NASD). Even if the parties intended to
waive these requirement, they did not have the right to waive it as such a waiver violates public
policy. See Thomas James Associates, Inc. v. Jameson, 102 F.3d 60 (2d Cir. 1996)(citing to the
NASD Code in holding that when a self-regulatory association of securities firms, such as the
NASD, under direct federal supervision by the Securities and Exchange Commission, ordains that
Case 8-06-08370-dte Doc 28 Filed 05/09/07 Entered 05/09/07 15:05:41

7Rules 10101 and 10201 of the NASD's Code of Arbitration Procedure make employment
disputes between a member firm and an “associated person,” such as the Defendant, subject to
arbitration by the NASD at the behest of an NASD member. Rule 10201(a), Code, which sets
forth the claims that are required to be arbitrated, states in pertinent part that:
...a dispute, claim or controversy eligible for submission under the
Rule 10100 Series between or among members and/or associated
persons . . . or arising out of the employment or termination of
employment of such associated person(s) with such member, shall
be arbitrated under this Code, at the instance of: (1) a member
against another member; (2) a member against a person associated
with a member or a person associated with a member against a
member; and (3) a person associated with a member against a
person associated with a member.
National Association of Securities Dealers, Code of Arbitration Procedure, Rule 10201(a).
6
its members may not require their employees to waive arbitration rights, it is inappropriate for a
court to enforce such a waiver). See also Qadri v. PointDirex, L.L.C., 823 So.2d 861, 863-864
(Fla.App. 5 Dist. 2002) (holding that the NASD Manual Code of Arbitration Procedure which makes
it improper for NASD members to require their employees to waive their rights to arbitration.)
Accordingly, the Court rejects the argument by Plaintiff that this that provision of the Agreement
constitutes a waiver of the parties right to arbitrate before the NASD.
Plaintiff argues that regardless of any agreement this dispute is still not subject to
NASD arbitration since the Debtor is a former member no longer subject to the NASD Code7 which
he claims only applies to current members. 	Defendant contends that the Court must allow the
NASD arbitration to proceed as the NASD’s Code is applicable because membership status for
purposes of determining application of the NASD Code must be determined at the time of the events
giving rise to the dispute occurred. Defendant cites to an Eleventh Circuit decision in support of this
result, Riccard v. Prudential Ins. Co. 307 F.3d 1277 (11th Cir. 2002). This Court agrees with the
Case 8-06-08370-dte Doc 28 Filed 05/09/07 Entered 05/09/07 15:05:41

7
holding of the Eleventh Circuit that Debtor’s status as an NASD member, for the purpose of
determining the applicability of the NASD’s Code, should be determined at the time of the events
leading to the dispute or claim or when the dispute or claim arose. As stated by the Eleventh Circuit,
[w]e think the key is that the rule explicitly includes among the
claims, disputes, and controversies subject to mandatory arbitration
those between a member and associated person “arising out of the ...
termination of employment of such associated person(s) with such
member.” That indicates to us that the status of association with a
member must be determined at the time of the events giving rise to
the dispute or claim. If not, a termination of employment could never
be arbitrated, because from the time the termination occurred the
employee (no longer controlled by his employer) would no longer be
a person associated with a member. This would defeat the rule's clear
intent that termination of employment claims be subject to mandatory
arbitration after an employee is terminated. Of course, the question
here is when [the former members] membership status is to be
judged, but we do not see why the NASD rule would make associated
person status count to enable insistence on arbitration if that status
existed at time of the events (such as a termination of employment)
giving rise to the dispute or claim, but not make membership count
if membership existed at that same time.
Id. at 1288. The Riccard decision was recently cited with approval by the New York Southern
District Court in Beer v. Nutt, 2007 WL 13100 (S.D.N.Y. Jan. 3, 2007)(No. 06 Civ. 9424).
The United States District Court for the Western District of Missouri also addressed
and rejected the argument that NASD status is determined at the time suit was filed, writing
if the Court were to evaluate Beard's status under NASD regulations
at the time the lawsuit was initiated, it would allow plaintiffs like
Beard to avoid the mandatory arbitration provision of the NASD
regulations simply by canceling their membership with NASD prior
to filing suit for their grievances. Such action would thwart the
mandatory arbitration provision of the NASD regulations.
Furthermore, the language of the Code of Arbitration Procedure
suggests that the Code contemplates suits by former associated
members. Rule 10216(f) provides in relevant part that “[i]f a member
or a current or former associated person of a member files in court a
Case 8-06-08370-dte Doc 28 Filed 05/09/07 Entered 05/09/07 15:05:41

8
claim against a member or a current or former associated person of
a member that includes matters that are subject to mandatory
arbitration, either by the rules of the association or by private
agreement, the defending party may move to compel arbitration of
the claims that are subject to mandatory arbitration” (emphasis
added). Also, Rule 10101 and Rule 10201 of the NASD Code of
Arbitration Procedures both refer to arbitration being available or
mandatory in disputes “... arising out of the employment or
termination of employment of associated person[s] with any member
....” Once an associated person is terminated, he would no longer be
an associated person. Yet, the regulations suggest that arbitration is
still available and under Rule 10201 mandatory.
Beard v. American Exp. Financial Advisors, Inc., 2001 WL 1231003, 4-5, (W.D.Mo. July 19,
2001)(No. 01-4030-CV-C-5). 	This Court rejects Plaintiff’s argument that under a literal reading
of the NASD Code former members are not subject to the arbitration requirements of the NASD
Code. This was the holding of the New York Western District Court in an unreported case, Gaghich
v. Prudential Ins. Co. of America, 1997 WL 128269 (W.D.N.Y. 1997) cited by the Plaintiff. Given
the language of the NASD Code of Arbitration Procedures, the Court finds that Rule 10201
mandates that the Debtor as a former member and Boothe as an associated person of a member must
arbitrate their dispute before the NASD.
Finally, the Court rejects Plaintiff’s argument that Boothe waived the right to
arbitrate by submitting an Answer in the adversary proceeding and participating in discovery
without asserting a right to arbitration. Boothe points out that he did not seek arbitration at the
outset because the Complaint made no reference to the Agreement. 	While it is undisputed that
Boothe did not initially seek arbitration, it is the Court’s view that this proceeding has not so
substantially proceeded as to prejudice any party were the Court to order that the parties arbitrate.
See Carcich v. Rederi A/B Nordie 	389 F.2d 692, 696 (2d Cir. 1968) (holding that there is an
overriding federal policy favoring arbitration, and waiver of the right thereto is not to be lightly
Case 8-06-08370-dte Doc 28 Filed 05/09/07 Entered 05/09/07 15:05:41

9
inferred, and mere delay in seeking a stay of litigation without resultant prejudice to a party cannot
be deemed a waiver). See also American Exp. Financial Advisors, Inc. v. Zito, 45 F. Supp.2d 230,
234 (E.D.N.Y. 1999) (because federal policy favors arbitration, a waiver of arbitration is not to be
lightly inferred). 	Accordingly, Boothe has not waived his right to arbitrate by his limited
participation in this adversary proceeding to date.
CONCLUSION
The parities to this adversary proceeding are both subject to the NASD Code which
under the FFA requires that this dispute must be arbitrated before the NASD. 	Based on these
findings and the applicable statutory and case law, the Motion is GRANTED IN PART and the
Court hereby directs the parties to proceed with the arbitration before the NASD previously
requested by the Defendant. Upon a final decision of the NASD arbiters the parties are directed to
notify this Court in writing of same. Any party seeking to enforce an arbitration order shall seek
appropriate relief in this Court.
So Ordered.
Dated: Central Islip, New York
May 9, 2007 	s/Joel B. Rosenthal
Joel B. Rosenthal
U.S. Bankruptcy Judge
Case 8-06-08370-dte Doc 28 Filed 05/09/07 Entered 05/09/07 15:05:41