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WITH BROKER-DEALERS TO
ARBITRATE BEFORE SEEKING
INTERPLEADER
Rushelle Bailey*
I.
INTRODUCTION
Broker-dealers, who are members of the Financial Industry
Regulatory Authority (“FINRA”), ordinarily have a pre-dispute
arbitration clause in their customer agreements and are subject to
FINRA’s arbitration rules.1 When a dispute arises between a customer and his or her broker-dealer,2 the question of whether to
arbitrate is relatively simple to answer—broker-dealers are required to arbitrate the dispute.3 However, it is not readily apparent whether interpleader4 relief is available as a method of dispute
resolution, notwithstanding the pre-dispute arbitration clause. A
broker-dealer might seek interpleader relief after receiving a restraining notice from her customer’s judgment creditor.5 There is a
grey area in this scenario as to whether arbitration is mandatory.6
* Senior Articles Editor, Cardozo Journal of Conflict Resolution; B.A. 2013, McGill University; J.D. Candidate, 2017, Benjamin N. Cardozo School of Law. The author would like to thank
her family and friends for their love, support, and encouragement. The author also thanks Professor David Gray Carlson for his insight and guidance.
1 The FINRA Code of Arbitration Procedure for Customer Disputes Rule 12200 pertains to
arbitration under an arbitration agreement or the rules of FINRA. See FINRA RULE 12200,
http://finra.complinet.com/en/display/display_main.html?rbid=2403& element_id=4106 (last visited Sept. 30, 2015).
2
For the definition of broker-dealer, see infra Part II.B.1.
3
FINRA RULE 12200, supra note 1.
R
4
Interpleader can be defined as “[a] suit to determine a right to property held by a [usually]
disinterested third party (called a stakeholder) who is in doubt about ownership and who therefore deposits the property with the court to permit interested parties to litigate ownership. Typically, a stakeholder initiates an interpleader both to determine who should receive the property
and to avoid multiple liability.” Interpleader, BLACK’S LAW DICTIONARY 943 (10th ed. 2014).
5 The case in which this dispute arises is Caro v. Fid. Brokerage Servs., No. 3:12-CV-01066
CSH, 2014 WL 3907920 (D. Conn. Aug. 11, 2014). This case will be discussed in Part II.A and
Part III.A.1.
6
See infra Part III.A.
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When broker-dealers receive restraining notices on their customers’ account, this can cause controversy with their customers.7
The controversy occurs because the customer does not want a restraint placed on his or her account, and he or she wants the broker-dealer to continue activity on the account.8 Broker-dealers,
who react by interpleading the customer and the judgment creditor
and depositing funds in the court’s registry, raise a red flag as to
why they did not seek arbitration. When the broker-dealer refuses
to arbitrate with the customer, one wonders whether the recalcitrant broker-dealer is choosing the best method for resolving the
dispute. Broker-dealers are subject to FINRA’s rules and arbitration procedures;9 it is imperative to understand whether other
methods of dispute resolution are available for this particular dispute. Additionally, it is important for broker-dealers to find out
whether the controversy arising from restraining a customer’s account is a dispute that falls within the scope of the arbitration
clause, thereby making the interpleader inappropriate.
This Note assesses whether it is appropriate10 for a brokerdealer to commence an interpleader action in response to receiving
a restraining notice on the customer’s account, despite the existence of a pre-dispute arbitration clause. If not, what are the consequences, and what are the appropriate dispute resolution
methods for resolving any dispute that might arise regarding the
restraining notice on the customer’s account? Part II of this Note
presents the issue that arises when a restraining notice is served on
a customer’s account under the control of a broker-dealer. A
description is given of the regulation of broker-dealers and their
membership with FINRA. This section also discusses the use of
arbitration by broker-dealers in customer disputes. Finally, an
overview is given of the nature of restraining notices and the use of
interpleader.
Part III analyzes cases that address the issue of whether interpleader is appropriate. This Note argues that when considering the
consequences of doing nothing on the customer’s account, the broker-dealers’ fear of multiple and vexatious litigation is speculative
and unreasonable; therefore, interpleader is inappropriate. This
7
Id.
Caro, 2014 WL 3907920, at *1.
9 See FINRA RULE 0140, http://finra.complinet.com/en/display/display_main.html?rbid=24
03&element_id=5453 (last visited Jan. 20, 2016).
10 The term “appropriate” is used here to mean both (a) what is the right method of dispute
resolution, and (b) the determination of whether interpleader relief is proper in the first stage of
interpleader action and whether. See infra Part III.
8
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section also considers the analysis used to determine when to compel arbitration on an interpleader action. This Note argues that
restraining notice disputes are arbitrable and, therefore, courts
should compel arbitration of these disputes on interpleader actions.
Part IV of this Note proposes that the best way to get recalcitrant broker-dealers to submit to arbitration is to add new language to the pre-dispute arbitration clause. Customers should
negotiate with broker-dealers for a pre-dispute arbitration clause
that includes another mandatory arbitration provision requiring
parties to arbitrate before they can seek interpleader relief.
II.
BACKGROUND
A broker-dealer receiving a restraining notice on a customer’s
account can give rise to controversy. Whether the appropriate
method for resolving that dispute is through interpleader or arbitration is dependent on defining broker-dealers and the self-regulatory organization that subjects them to arbitration.
A.
Restraining Notice on a Customer’s Account
Giving Rise to Controversy
The following scenario is based on the facts of Caro v. Fid.
Brokerage Servs.11 A broker-dealer receives a restraining notice
for the accounts of a customer. Upon investigation, the brokerdealer finds that the restraining notice does not cover all of the
customer’s accounts within the firm’s possession. The brokerdealer advises both the customer and the judgment creditor that
the firm will not restrain the account it believes the restraining notice does not cover. The judgment creditor threatens contempt
proceedings and demands that the broker-dealer restrain all of the
customer’s accounts within the firm’s possession. However, the
customer insists that the broker-dealer open access to his or her
account, arguing that it is outside the bounds of the restraining notice. So, the broker-dealer starts an interpleader action for the
court to resolve whom amongst the customer and the judgment
creditor has the right to the funds in the account. The customer
11
Caro, 2014 WL 3907920, at *1.
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argues that interpleader is inappropriate and seeks to compel
arbitration.
B.
Broker-Dealers and Self-Regulatory Organizations
1.
Who are Broker-Dealers?
It is important to define who qualifies as a broker-dealer, because the role of broker-dealers in the economy puts them in a
position where they can cause injury to investors.12 The Securities
Exchange Act of 1934 (the “Exchange Act”) defines a brokerdealer, imposes a regulatory scheme on broker-dealers, and requires them to register with the Securities Exchange Commission
(“SEC”) and join a self-regulatory organization.13 A “broker” is
defined in the Exchange Act § 3(a)(4)(A) as “any person engaged
in the business of effecting transactions in securities for the account
of others.”14 A “dealer” is defined in the Exchange Act
§ 3(a)(5)(A) as “any person engaged in the business of buying and
selling securities . . . for such person’s own account through a broker or otherwise.”15
2.
FINRA, a Self-Regulatory Organization
As previously mentioned, broker-dealers are required under
the Exchange Act to join a self-regulatory organization.16 Brokerdealers can register to become members17 of FINRA. FINRA was
created, pursuant to the Exchange Act, as a self-regulatory organi12 David A. Lipton, A Primer on Broker-Dealer Registration, 36 CATH. L. REV. 899, 899–908
(1987).
13 See Guide to Broker-Dealer Registration, U.S. SECURITIES & EXCHANGE COMM’N, http://
www.sec.gov/divisions/marketreg/bdguide.htm (last visited Sept. 30, 2015) (describing to investors who is a broker-dealer). For more details on broker-dealer registration, see also Lipton,
supra note 12, at 899–908. For details on registering with FINRA, see Brokers, FINRA, http://
www.finra.org/investors/brokers (last visited Jan. 20. 2016); Lowenstein Sandler, BD Registration
101: A Primer on FINRA Broker-Dealer Registration, LOWENSTEIN SANDLER LLP, https://www
.lowenstein.com/files/upload/FINRA%20BD%20Registration%20Primer%20Spring%202015
.pdf (last visited Jan. 20. 2016).
14 15 U.S.C. § 78(c) (2012).
15 Id.
16 See Guide to Broker-Dealer Registration, supra note 13.
17 The term “member” is defined in FINRA’s Rules as “any individual, partnership, corporation or other legal entity admitted to membership in FINRA under the provisions of Articles III
and IV of the FINRA By-Laws.” FINRA RULE 0160 § 10, http://finra.complinet.com/en/display/
display_main.html?rbid=2403&element_id=5456 (last visited Jan. 20, 2016).
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zation subject to the oversight of the SEC.18 Firms and brokers
that sell securities have to be licensed and registered by FINRA.19
Furthermore, one of the core missions of FINRA is investor protection.20 To achieve this, FINRA has its own rules and also enforces federal securities laws and rules.21 Moreover, FINRA
provides oversight for broker-dealers and protection for
investors.22
C.
The Use of Arbitration in Broker-Dealer Disputes
with their Customers
1.
Overview of Arbitration
FINRA has the largest securities arbitration forum in the
United States.23 Arbitration is the dispute resolution method used
for most disputes between customers24 and their broker-dealers.25
Arbitration is an alternative method for resolving disputes outside
the court system.26 FINRA explains arbitration as “similar to go18 For a description of the nature of self-regulation in the securities industry, see Jonathan
Macey & Caroline Novogrod, Enforcing Self-Regulatory Organization’s Penalties and the Nature
of Self-Regulation, 40 HOFSTRA L. REV. 963, 964–70 (2012).
19 See Macey & Novogrod, supra note 18, at 964. See also Member Regulation, FINRA,
http://www.finra.org/industry/member-regulation (last visited Jan. 20, 2016).
20 See FINRA Marks 75th Anniversary of Protecting Investors, FINRA, http://www.finra.org/
newsroom/2014/finra-marks-75th-anniversary-protecting-investors (last visited Jan. 20, 2016).
21 See Oversight, FINRA, http://www.finra.org/industry/oversight (last visited Sept. 30, 2015).
22 Id.
23 For more information on arbitration at FINRA, see Arbitration and Mediation, FINRA,
http://www.finra.org/arbitration-and-mediation (last visited Sept. 30, 2015).
24 Defining the term customer is a contested issue because there is no precise definition in
FINRA’s rules. FINRA’s definition of customer is “a customer shall not include a broker or
dealer.” FINRA RULE 12100 (i), http://finra.complinet.com/en/display/display_main.html?rbid=
2403&element_id=4099 (last visited Jan. 20, 2016). For more examples on cases defining a “customer,” see UBS Fin. Servs., Inc. v. Carilion Clinic, 706 F.3d 319, 327 (4th Cir. 2013) (“[O]ne, not
a broker or a dealer, who purchases commodities or services from a FINRA member in the
course of the member’s business activities insofar as those activities are regulated by FINRA—
namely investment banking and securities business activities.”); Raymond James Fin. Servs., Inc.
v. Cary, 709 F.3d 382, 386 (4th Cir. 2013) (“[A]n entity that is ‘not a broker or dealer, who
purchases commodities or services from a FINRA member in the course of the member’s business activities,’ namely, ‘the activities of investment banking and the securities business.’ ”)
(quoting Morgan Keegan, 706 F.3d 562, 566 (4th Cir. 2013)). See also, Jason W. Burge & Lara
K. Richards, Defining “Customer”: A Survey of Who Can Demand FINRA Arbitration, 74 LA. L.
REV. 173, 175–76 (2013).
25 See Arbitration and Mediation, supra note 23.
26 Arbitration can be defined as “[a] dispute-resolution process in which the disputing parties
choose one or more neutral third parties to make a final and binding decision resolving the
dispute. The parties to the dispute may choose a third party directly by mutual agreement, or
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ing to court, but is usually faster, cheaper and less complex than
litigation. It is a formal alternative to litigation in which two or
more parties select a neutral third party, called an arbitrator, to
resolve a dispute. The arbitrator’s decision, called an award, is final and binding.”27
2.
Enforcement of Arbitration Agreements under the FAA
A binding agreement to arbitrate is frequently enforced in
court.28 The Federal Arbitration Act of 1925 (the “FAA”) “provides for the enforcement of pre-dispute agreements in commercial
or maritime transactions,”29 hence securities transactions fall under
the FAA because they involve interstate commerce.30 The effect of
the FAA on the dispute resolution process is to validate pre-dispute arbitration agreements; “[o]nce it is determined to have been
validly entered into, the court cannot act further and must order
the matter submitted to arbitration, including compelling the recalcitrant party to submit to such arbitration.”31 The federal policy
favoring arbitration created by the FAA will impact interpretation
of arbitration clauses and agreements because, “it not only ‘declared a national policy favoring arbitration,’ but actually ‘withdrew the power of the states to require a judicial forum for the
indirectly, such as by agreeing to have an arbitration organization select the third party.” Arbitration, BLACK’S LAW DICTIONARY 125 (10th ed. 2014).
27 See Arbitration and Mediation, supra note 23. FINRA’s Investor’s Guide to arbitrating
securities disputes provides a general overview of what investors can expect from the arbitration
process, see Jill Gross, Edward Pekarek & Alice Oshins, Investor’s Guide to Securities Industry
Disputes: How to Prevent and Resolve Disputes with your Broker, FINRA, http://www.finra.org/
sites/default/files/Investors%20Guide%20to%20Securities%20Industry%20Disputes.pdf (last
visited Jan. 20, 2016).
28 Pre-dispute arbitration clauses are now being enforced, whereas historically they were not
as easily enforceable. In Wilko v. Swan, the Supreme Court held that for claims under the
Federal Securities Act of 1933 § 12(a)(2), arbitration could not be compelled based on an arbitration agreement with a broker. Wilko v. Swan, 346 U.S. 427, 435–38 (1953). In the Supreme
Court case Shearson/American Express, Inc. v. McMahon, the court questioned the premise in
Wilko—that pre-dispute arbitration agreements between brokers and customers do not safeguard the interest of the customer—because commercial arbitration became a frequent occurrence and the procedures were viewed favorably. Shearson/American Express, Inc. v.
McMahon, 482 U.S. 220, 107 S. Ct. 2332 (1987). After these Supreme Court decisions, predispute arbitration clauses in broker contracts became enforceable in court. See Margo E.K.
Reder, Securities Law and Arbitration: The Enforceability of Predispute Arbitration Clauses in
Broker-Customer Agreements, 1990 COLUM. BUS. L. REV. 91, 104–06, 107–10 (1990).
29 9 U.S.C. § 1 (2012). See also J. KIRKLAND GRANT, SECURITIES ARBITRATION FOR BROKERS, ATTORNEYS, AND INVESTORS 19 (1994).
30 GRANT, supra note 29, at 18–19.
31 Id. at 19.
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resolution of claims which the contracting parties agreed to resolve
by arbitration.’”32
3.
Pre-Dispute Arbitration Clauses
FINRA’s arbitration rules for customer-member33 disputes are
contained in its Code of Arbitration Procedure for Customer Disputes (“Code of Arbitration”).34 Under FINRA Rule 12200,
FINRA members and their customers must arbitrate a dispute in
connection with the members’ business activities:
[p]arties must arbitrate a dispute under the Code if: Arbitration
under the Code is either: (1) [r]equired by a written agreement,
or (2) [r]equested by the customer; [t]he dispute is between a
customer and a member or associated person of a member; and
[t]he dispute arises in connection with the business activities of
the member or the associated person, except disputes involving
the insurance business activities of a member that is also an insurance company.35
Moreover, any customer of a member firm or any associated persons of the member firm can use FINRA’s arbitration forum for
any claim that arises from the member firm’s business activities.36
Customers can arbitrate either by written agreement or upon demand.37 As members of FINRA, broker-dealers agree to adhere to
FINRA’s rules and regulations, including its Code of Arbitration.38
Broker-dealers include in their agreements with customers a
pre-dispute arbitration clause,39 and it is standard practice to arbitrate using FINRA’s forum.40 The following is an example of a
standard pre-dispute arbitration clause, taken from Fidelity Brokerage Services, LLC’s Customer Agreement:
This agreement contains a pre-dispute arbitration clause. Under
this clause, which you agree to when you sign your account application, you and Fidelity agree as follows: A. All parties to this
agreement are giving up the right to sue each other in court,
32 See Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 56 (1995) (quoting
Southland Corp. v. Keating, 465 U.S. 1, 10 (1984)).
33 The controversy that arises due to a broker-dealer receiving a restraining notice falls in the
category of customer claims against broker-dealers and associated persons. This note will refer
to this category as customer-member disputes.
34 See FINRA RULE 12200, supra note 1.
35 Id.
36 Id.
37 Id.
38 See FINRA RULE 0140, supra note 9.
39 See FINRA, supra note 23.
40 Id.
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including the right to a trial by jury, except as provided by the
rules of the arbitration forum in which a claim is filed . . . . All
controversies that may arise between you and us concerning any
subject matter, issue or circumstance whatsoever (including, but
not limited to, controversies concerning any account, order or
transaction, or the continuation, performance, interpretation or
breach of this or any other agreement between you and us,
whether entered into or arising before, on or after the date this
account is opened) shall be determined by arbitration through
the Financial Industry Regulatory Authority (FINRA) or any
United States securities self-regulatory organization or United
States securities exchange of which the person, entity or entities
against whom the claim is made is a member, as you may designate . . . .41
In this standard pre-dispute arbitration clause, the customer is first
advised that the agreement contains a pre-dispute arbitration
clause. This warning is followed by a list of what the parties agree
to, such as giving up the right to sue each other in court. The
clause then specifies how the customer and the brokerage firm will
resolve disputes. Here, the chosen method is arbitration through
FINRA or any other self-regulatory organization of which the firm
is a member. This Note uses the language in this pre-dispute arbitration clause as an example for its analysis.
4.
Negotiating the Pre-Dispute Arbitration Clause
Negotiation42 can be integral to the dispute resolution process. Bargaining is usually informal and self-regulated; that is,
there are no procedural rules similar to those in arbitration.44 Ef43
41 FIDELITY ACCT.: CUSTOMER AGREEMENT & ADDITIONAL INFO., https://www.fidelity.com/
bin-public/060_www_fidelity_com/documents/customer-agreement-cash-management-and-additional-information.pdf (last visited Nov. 29, 2015).
42 Negotiation can be defined as a “consensual bargaining process in which the parties attempt to reach agreement on a disputed or potentially disputed matter.” Negotiation, BLACK’S
LAW DICTIONARY 1200 (10th ed. 2014). From a functionalist perspective of negotiation, “1)
bargaining is: indispensable to the functioning of society, 2) the fundamental purpose of bargaining is to achieve a valid agreement, 3) practices that threaten the validity of an agreement violate
the fundamental purpose of the process, 4) bargaining is an adversarial market process in which
willing opponents use partisan strategic dealings (bargaining techniques) to arrive at accurate
information and to obtain fair treatment . . . . These assumptions underlie the use of the internal
resources of the process to achieve truthfulness and fairness in bargaining. The result is a minimal but functional ethic.” Eleanor Holmes Norton, Bargaining and the Ethic of Process, 64
N.Y.U. L. REV. 493, 535 (1989).
43 Norton, supra note 42, at 495.
44 See Norton, supra note 42, at 526 (“Bargaining is a self-regulated process in which parties
with different goals engage in strategic dealings until they agree upon an outcome, or until one
or more of them decides that agreement cannot be reached. However, this process has n[o]
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fectively, adversarial/positional bargaining advances the interest of
the parties.45 However, customers usually do not negotiate arbitration agreements in the securities industry.46 Pre-dispute arbitration
clauses in Customer Agreements are often offered on a “take it or
leave it”47 condition.48 Often, the customer does not receive the
opportunity to bargain for the terms in the arbitration clause.49
prescribed form or rules. It is what the parties agree it is and may be conducted in any way that
they decide. Bargaining, a self-directed market process, assumes that the parties will monitor
the truthfulness and fairness of that process.”).
45 See Norton, supra note 42, at 529–30 (“Like its market features, the adversarial posture in
negotiation is a structural characteristic. An adversarial posture is necessary in bargaining to
protect and advance the parties’ interests, including their interests in ethical treatment. However, the viability of an adversarial setting depends on its ability to enforce ethical standards
such as truthfulness and fairness.”). An alternative approach to positional bargaining is “principled negotiation or negotiation on the merits.” See ROGER FISHER, WILLIAM L. URY, AND
BRUCE PATTON, GETTING TO YES: NEGOTIATING AGREEMENT WITHOUT GIVING IN 9–13
(1991). This approach recommends that parties “1) separate the people from the problem, 2)
focus on interests, not positions, 3) invent multiple options looking for mutual gain before deciding what to do, and 4) insist that the result be based on some objective standard.” Id.
46 See Macey & Novogrod, supra note 18, at 964–970.
47 For an analysis on negotiating mandatory arbitration clauses in employment contracts, see
Miriam A. Cherry, A Negotiation Analysis of Mandatory Arbitration Contracts Rosenberg v.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 170 F.3d 1 (1st Cir. 1999), 4 HARV. NEGOT. L. REV.
269, 277 (1999).
48 The absence of negotiation over the terms of the arbitration clause does not mean that all
Customer Agreements are contracts of adhesion. See Trott v. Paciolla, 748 F. Supp. 305, 309
(E.D. Pa. 1990) (citing Brokers Title Co. v. St. Paul Fire & Marine Ins. Co., 610 F.2d 1174, 1180
(3d Cir.1979) (“In the typical contract of adhesion, economic necessity compels a weaker party
to accept an unfavorable contractual term, and ‘[t]he dominant party knows that the other would
not accept the term, and thus employs the practices of minute print, unintelligible legalese, or
high pressure sales technique’ ”); Brokers Title Co., 610 F.2d at 1179 (“An adhesion contract has
been described as ‘one which is dictated by a predominant party to cover transactions with many
people rather than with an individual, and which resembles an ultimatum or law rather than a
mutually negotiated contract.’ ”). See also Todd D. Rakoff, Contracts of Adhesion: An Essay in
Reconstruction, 96 HARV. L. REV. 1173, 1177 (1983) (defining a model of “contract of adhesion”
as: “(1) The document whose legal validity is at issue is a printed form that contains many terms
and clearly purports to be a contract. (2) The form has been drafted by, or on behalf of, one
party to the transaction. (3) The drafting party participates in numerous transactions of the type
represented by the form and enters into these transactions as a matter of routine. (4) The form
is presented to the adhering party with the representation that, except perhaps for a few identified items (such as the price term), the drafting party will enter into the transaction only on the
terms contained in the document. This representation may be explicit or may be implicit in the
situation, but it is understood by the adherent. (5) After the parties have dickered over
whatever terms are open to bargaining, the document is signed by the adherent. (6) The adhering party enters into few transactions of the type represented by the form—few, at least, in
comparison with the drafting party. (7) The principal obligation of the adhering party in the
transaction considered as a whole is the payment of money.”).
49 See Cherry, supra note 47, at 278.
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D. Broker-Dealer’s Use of Interpleader Instead of Arbitration
1.
A Restraining Notice on the Customer’s Account
A broker-dealer might seek interpleader relief in response to a
restraining notice on the customer’s account, even though there is a
pre-dispute arbitration clause in the customer agreement. The nature of the restraining notice is such that the broker-dealer is not
required to take action with the property in the brokerage firm’s
possession; it is simply a proscriptive, not prescriptive document.50
When the broker-dealer takes an action contrary to the notice,
then she opens herself up to liability.51
A judgment creditor can obtain a restraining notice any time
after a money judgment.52 A restraining notice can be defined as
“a court order commanding its recipient to pay no debt to or transfer no property of a judgment debtor that might be levied pursuant
to an execution.”53 The clerk of the court or “the attorney for the
judgment creditor as officer of the court” can issue a restraining
notice.54
The N.Y. C.P.L.R. (“C.P.L.R.”) invokes a specific example of
how restraining notices function. In New York, a judgment debtor
served with a restraining notice is “forbidden to make or suffer any
sale, assignment, transfer or interference with any property in
which he or she has an interest, except as set forth in subdivisions
(h) and (i) of this section, and except upon direction of the sheriff
or pursuant to an order of the court.”55 A restraining notice served
against a third person is effective when the brokerage firm has the
property in its possession:
A restraining notice served upon a person other than the judgment debtor . . . is effective only if, at the time of service, he or
she owes a debt to the judgment debtor . . . or he or she is in the
possession or custody of property in which he or she knows or
has reason to believe the judgment debtor or obligor has an interest, or if the judgment creditor or support collection unit has
stated in the notice that a specified debt is owed by the person
served to the judgment debtor or obligor.56
50 See N.Y. C.P.L.R. § 5222(b) (McKinney 2014); see also David Gray Carlson, Critique of
Money Judgment Part Three: Restraining Notices, 77(4) ALB. L. REV. 1490, 1499 (2014).
51 Id.
52 See Carlson, supra note 50, at 1497–98.
53 Id.
54 N.Y. C.P.L.R. 5222(a) (McKinney 2014).
55 N.Y. C.P.L.R. 5222(b) (McKinney 2014).
56 Id.
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The duration of the restraining notice is one year, so the brokerdealer is forbidden from transferring the funds in the customer’s
account for one year:
Such a person is forbidden to make or suffer any sale, assignment or transfer of, or any interference with, any such property,
or pay over or otherwise dispose of any such debt, to any person
other than the sheriff or the support collection unit, except as
set forth in subdivisions (h) and (i) of this section, and except
upon direction of the sheriff or pursuant to an order of the
court, until the expiration of one year after the notice is served
upon him or her, or until the judgment or order is satisfied or
vacated, whichever event first occurs.57
Any noncompliance with a restraining notice is punishable by contempt of court.58
The restraining notice anticipates a levy by writ of execution
under C.P.L.R. 5232(a).59 A judgment creditor could use C.P.L.R.
5232(a) to obtain a levy and execution against the judgment
debtor’s “property not capable of delivery.”60 This levy occurs
when the sheriff serves a copy of the execution on the garnishee,
here, the brokerage firm.61 The brokerage firm, when served with
the execution, is required to transfer the levied property to the
sheriff.62 The sheriff takes no further action against the firm after
the execution is served.63 The broker-dealer and the brokerage
firm “[are] forbidden to make or suffer any sale, assignment or
transfer of, or any interference with, any such property, or pay over
or otherwise dispose of any such debt, to any person other than the
sheriff . . . .”64 The levy expires ninety days after execution and
becomes void unless the judgment creditor brings a turnover
proceeding:
57
Id.
58
N.Y. C.P.L.R. 5222(a) (McKinney 2014); N.Y. C.P.L.R. 5251 (McKinney 2014).
See Carlson, supra note 50, at 1497–500; see also David Gray Carlson, Critique of Money
Judgment (Part Two: Liens on New York Personal Property), 83 ST. JOHN’S L. REV. 43, 87 (2009)
(“[T]he levy is the equivalent of a restraining notice under CPLR 5222(b). The injunctive effect,
however, lapses ninety days after the levy. The injunctive effect can be further extended by
motion beyond ninety days.”).
60 N.Y. C.P.L.R. 5232(a) (McKinney 2014). The customer’s account in the broker-dealer’s
possession is considered to be property not capable of delivery. See Carlson, supra note 59, at
120.
61 N.Y. C.P.L.R. 5232(a) (McKinney 2014).
62 Id.
63 See Carlson, supra note 50, at 1500–01.
64 N.Y. C.P.L.R. 5232(a) (McKinney 2014).
59
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At the expiration of ninety days after a levy is made by service
of the execution, or of such further time as the court, upon motion of the judgment creditor or support collection unit has provided, the levy shall be void except as to property or debts which
have been transferred or paid to the sheriff or to the support
collection unit or as to which a proceeding under sections 5225
or 5227 has been brought.65
Once the levy has expired, the broker-dealer is no longer forbidden
from transferring the customer’s property in the brokerage firm’s
possession.66
If the broker-dealer does nothing67 on the account though, the
judgment creditor can commence a turnover proceeding under
C.P.L.R. 5225(a) and (b), and C.P.L.R. 5227.68 The broker-dealer,
as garnishee, is in possession of the funds subject to the judgment;
accordingly, the judgment creditor could use C.P.L.R. 5225(b) to
bring a turnover proceeding.69 The court permits the judgment
debtor, here the customer, and any adverse claimant to intervene
in the turnover proceeding.70 At this point, the customer will be
able to present evidence to determine the rights in the property or
debt.71 The turnover order is different from the restraining notice
because, “it forces the recipient to do something, whereas the restraining notice admonishes the recipient to do nothing.”72 If the
judgment creditor is successful, the broker-dealer will be required
to release the funds to satisfy the judgment to the judgment
creditor.73
2.
Interpleader Relief
A broker-dealer might seek interpleader relief in response to a
restraining notice on his or her customer’s account, on the belief
that there will be multiple claims to or double vexation over the
funds in the account.74 However, an interpleader action is problematic because the broker-dealer and the customer agreed in the
65
N.Y. C.P.L.R. 5232(a) (McKinney 2014).
See Carlson, supra note 50, at 1500–01.
67 See Carlson, supra note 50, at 1499–1500.
68 N.Y. C.P.L.R. 5225(a), (b) (McKinney 2014); N.Y. C.P.L.R. 5227 (McKinney 2014).
69 N.Y. C.P.L.R. 5225(b) (McKinney 2014).
70 Id.
71 Id.; N.Y. C.P.L.R. 5239 (McKinney 2014).
72 See Carlson, supra note 50, at 1499–500.
73 N.Y. C.P.L.R. 5225(b) (McKinney 2014).
74 Caro, 2014 WL 3907920, at *1; Fid. Brokerage Servs., LLC v. Bank of China, 192 F. Supp.
2d 173, 174–75 (S.D.N.Y. 2002).
66
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pre-dispute arbitration clause to arbitrate any dispute between
them.
Interpleader is a form of litigation, and not an alternative dispute resolution process like arbitration.75 Interpleader relief is intended to protect stakeholders from multiple claims, liability, and
double vexation.76 Interpleader actions can be brought as a “statutory interpleader” under 28 U.S.C. § 1335 or as a “rule interpleader” under Rule 22 of the Federal Rules of Civil Procedure.77
An interpleader action is conducted in two stages. In the first
stage, the court considers whether interpleader is appropriate; and
if the stakeholder is entitled to bring the action, then the stakeholder deposits the funds with the clerk and could be discharged
from the action.78 During this first stage, the court will not consider the merits of each claim to the funds in the stakeholder’s possession.79 If interpleader is improper, the proceedings will
discontinue and the court will not get to the second stage.80 In the
second stage, the court considers the merits of who is entitled to
the funds.81 This Note is concerned with the first phase of the interpleader proceeding that focuses on the stakeholder’s right to interplead the claimants.
The primary test for determining the appropriateness of an interpleader action is whether the stakeholder fears that the fund in
his or her possession will bring about the vexation of litigating
more than once and paying twice.82 Interpleader is inappropriate
when the claims that will cause vexation to the stakeholder are
speculative.83 Nevertheless, the stakeholder’s vexatious claims or
75
For general information on Interpleader, see Geoffrey C. Hazard Jr. and Myron Moskovitz, An Historical and Critical Analysis of Interpleader, 52 CAL. L. REV. 706 (1964).
76 Fid. Brokerage Servs., 192 F. Supp. 2d at 174–75 (“Whether statutory or under Rule 22,
interpleader is designed to protect stakeholders from undue harassment in the face of multiple
claims against the same fund, and to relieve the stakeholder from assessing which claim among
many has merit.”) (citing Washington Elec. Coop. v. Paterson, Walke & Pratt, P.C., 985 F.2d 677,
679 (2d Cir. 1993)).
77 28 U.S.C. § 1335 (2012); Fed. R. Civ. P. 22.
78 Fid. Brokerage Servs., 192 F. Supp. 2d at 178, 183.
79 Id. at 178.
80 Id.
81 Id.
82 Id.
83 See, e.g., E. Cascade Women’s Grp., P.C. v. Tutthill, 216 F. Supp. 2d 1159, 1163 (D. Or.
2002) (“A theoretical concern is an insufficient basis for the use of interpleader.”) (citing New
York Life Ins. Co. v. Lee, 232 F.2d 811, 813–814 (9th Cir. 1956)); Pine Run Properties, Inc. v.
Pine Run Ltd., No. 90 CIV. 6289 (PKL), 1991 WL 280719, at *10 (S.D.N.Y. Dec. 26, 1991)
(finding that plaintiffs gave only barest speculation and did not meet the threshold level of substantiality that the property in their possession is subject to adverse claims).
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threat of claims must be real, and the stakeholder must have a reasonable fear of liability to such claims.84
III.
DISCUSSION
Whether it is appropriate for a broker-dealer to commence an
interpleader action in response to a restraining notice on the customer’s account can be determined by analyzing, first, the arguments that interpleader relief is appropriate, and second, the
arguments for compelling arbitration on an interpleader motion.
A.
1.
Broker-Dealers in favor of Interpleader Relief
Interpleader is Appropriate when the Dispute does not Arise
“Between You and Us”
In Caro v. Fid. Brokerage Servs., the broker-dealer started an
interpleader action despite the existence of a pre-dispute arbitration agreement.85 In Caro, the customer/petitioner had his own account with Fidelity Brokerage Services (“Fidelity”), and his
corporation had a separate account.86 Prior to the opening of his
account with Fidelity, a creditor had a money judgment entered
against the customer, but not against the customer’s corporation.87
Subsequently, Fidelity received a restraining notice from the judgment creditor on both the accounts of the customer and of the corporation.88 Fidelity made inaccessible the customer’s personal
account and the corporation’s account.89 Fidelity then informed
the judgment creditor that it would lift the restraint on the corporation’s account, as the corporation was not a judgment debtor, unless it received a court order.90 In response, the creditor
threatened contempt proceedings if Fidelity did not put a restraint
on the corporation’s account.91 But still, the customer wanted Fidelity to lift the restraint.92 Fidelity then commenced an inter84
85
86
87
88
89
90
91
92
See Pine Run Properties, Inc., 1991 WL 280719, at *10.
See Caro, 2014 WL 3907920.
Id. at *1.
Id.
Id.
Id.
Id.
See Caro, 2014 WL 3907920, at *2.
Id.
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pleader action.93 Interpleader relief was granted; however, shortly
thereafter, the customer personally paid the debt owed to the judgment creditor.94 Consequently, the customer sought arbitration
for, inter alia, Fidelity’s breach of the arbitration agreement.95 An
award was entered in favor of Fidelity—this district court decision
was made on cross-motions to vacate and confirm the arbitration
award.96 Note, as it is difficult to vacate an arbitration award,97 the
procedural posture of this case should be considered as impacting
the outcome.
The customer argued, inter alia, that Fidelity breached the arbitration agreement when it brought an interpleader action in district court.98 Fidelity argued that the dispute at hand was not
between petitioners and Fidelity, but between petitioners and another party outside the arbitration agreement.99 The district court
denied the motion to vacate the arbitration award, holding that this
dispute was outside the scope of the arbitration provision because
the contract on its face does not reference disputes involving third
parties.100
The court relied on the following contractual language of the
agreement: “[a]ll controversies that may arise between you and us
concerning any subject matter, issue or circumstance whatsoever
. . . shall be determined by arbitration through [FINRA].”101 The
court only considered the four corners of Fidelity’s Customer
Agreement and found nothing to suggest that the arbitration provision extended to disputes arising outside of Fidelity and its customers.102 The court found the dispute over the funds was in fact
between the judgment creditor and the customer and did not involve Fidelity. Moreover, the arbitration agreement only applied
to disputes between Fidelity and its customers.103
93
94
95
96
97
98
99
100
101
102
103
Id.
Id.
Id. at *3.
Caro, 2014 WL 3907920, at *1.
GRANT, supra note 29, at 53.
Caro, 2014 WL 3907920, at *6.
Id.
Id.
Id.
Id.
Caro, 2014 WL 3907920 at *7.
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i.
The Insufficiency of Insurance Interpleader Case Law
Caro relied on Title v. Enron Corp., an insurance interpleader
case.104 In Title, the insurers were subject to an arbitration agreement; nevertheless, they sought interpleader relief from the court
to distribute the policy proceeds.105 The Fifth Circuit affirmed the
district court’s denial of the motion to compel arbitration and to
stay the action pending arbitration; holding, the scope of the arbitration clause was limited in nature, and only applicable to disputes
between the insurer and one or more insured.106 The court found
that the dispute was amongst the insured themselves, and did not
involve the insurers.107 The Fifth Circuit considered that when the
insurers tendered the policy proceeds to the district court, they
were no longer involved in the dispute, and remained neutral as to
how the funds should be distributed.108 The remaining dispute was
amongst the insured over how to distribute the policy proceeds,
which the court concluded, is a dispute that is outside the scope of
the arbitration clause.109
Insurance interpleader case law is insufficient when used to
analyze broker-dealer pre-dispute arbitration clauses on interpleader actions because broker-dealers are subject to FINRA’s
Code of Arbitration.110 The standard pre-dispute arbitration
clause states that disputes “shall be determined by arbitration
through. . . (FINRA),”111 and, therefore, are subject to the
FINRA’s Code of Arbitration. Moreover, insurance interpleader
case law does not consider: the language that must be included in
pre-dispute arbitration clauses, the procedure by which arbitration
must be enforced, and the requirement for broker-dealers to abide
by these rules and procedures. FINRA broadly grants customers
the right to arbitrate any dispute with a broker-dealer regarding
the broker-dealer’s activities, with which the broker-dealer must
comply.112 Because of this, the customer can arbitrate pursuant to
104
Id.; Title v. Enron Corp., 463 F.3d 410 (5th Cir. 2006).
105
Title, 463 F.3d at 410, 414.
106
Id. at 410
107
Id. at 423.
108
Id. at 423.
109
Id.
110
See FINRA RULE 0140, http://finra.complinet.com/en/display/display_main.html?rbid=24
03&element_id=5453, (last visited Mar. 8, 2016).
111
FIDELITY ACCT., supra note 41.
R
112
See FINRA RULE 12200, supra note 1.
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an arbitration agreement or the customer can demand
arbitration.113
Based on the analysis in Title, the court in Caro found that the
customer had no claims or disputes against Fidelity only the judgment creditor, so the interpleader action was not in violation of the
agreement to arbitrate.114 The customer’s argument in Caro was
weak because it did not explicitly locate the controversy regarding
the restraining notice within a customer-member dispute. Nevertheless, the pre-dispute arbitration clause in Caro should be read
broadly, based on FINRA’s rules, to encompass restraining notice
disputes. The customer could have compelled arbitration by showing that there was a disagreement between the customer and Fidelity regarding Fidelity’s actions on its account. However, the
dispute over whether or not Fidelity should continue or cease activity on the account is a dispute that directly relates to the business
activities of Fidelity. Therefore, insurance disputes should not
weigh too heavily in the decision to compel arbitration; rather
more consideration should have been given to FINRA’s rules.
2.
Interpleader is Appropriate when the Stakeholder Fears
Vexation from Multiple Claims
Some broker-dealers who use interpleader relief argue that interpleader is appropriate if there is a reasonable fear of vexation
from multiple claims. For instance, in Citigroup Glob. Markets,
Inc. v. KLCC Investments, LLC, the court stated that the stakeholder’s reasonable fear of multiple liability to the same fund,
rather than actual multiple liability, is enough to sustain an interpleader action.115 In Prudential Inv. Mgmt. Servs. LLC v. Forde,
the court agreed with the stakeholder that the focus of the interpleader action is whether or not there are potential competing
claims, and not on whether the competing claimants can actually
recover the assets in dispute.116
In Fid. Brokerage Servs., LLC v. Bank of China, Fidelity Brokerage Services (“Fidelity”) brought an interpleader action for the
court to resolve adverse claims to the funds in brokerage accounts
that were restrained pursuant to an Order of Attachment (“Or113
Id.
Caro, 2014 WL 390792, at *7.
115 Citigroup Glob. Markets, Inc. v. KLCC Investments, LLC, No. 06 CIV. 5466 (LBS), 2007
WL 102128, at *6 (S.D.N.Y. Jan. 11, 2007).
116 Prudential Inv. Mgmt. Servs. LLC v. Forde, No. 12 CIV. 5168 LAP, 2013 WL 3199098, at
*2 (S.D.N.Y. June 25, 2013).
114
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der”).117 Defendants, customers of Fidelity, brought counterclaims, alleging bad faith and wrongful attachment.118 Fidelity
moved for dismissal of the counterclaims and to be discharged
from the action.119 The court converted the motion to dismiss into
a motion for summary judgment, and granted Fidelity’s motion.120
The district court found that Fidelity “faced a ‘real and reasonable
fear of double liability or vexatious, conflicting claims’ arising out
of its restraint of assets pursuant to the Order.”121 The court found
no evidence of bad faith conduct.122 The court did not construe
adherence to the Order and commencement of the interpleader action as acting in bad faith.123 The allegation of acting in bad faith in
enforcing the Order failed as a matter of law because “[a] bank
served with a restraining notice . . . has no discretion in deciding
whether to honor the notice and may be held liable for damages to
a judgment creditor . . . for not complying with the notice.”124 Fidelity was “legally required to comply with the Order and had no
discretion in “determining to dishonor the objections of . . . defendants and in determining to honor” this Court’s mandate.”125 The
court did not find evidence that Fidelity acted in bad faith by attaching assets beyond the scope of the Order. Fidelity’s belief that
the assets were subject to the Order “was reasonable, even if mistaken as a matter of law.”126
B.
The Fear of Vexation from Multiple Claims is Unreasonable
The fear of these broker-dealers is unreasonable; after the
broker-dealers receive the restraining notice, the consequence of
doing nothing127 on the customer’s account will not be multiple liability and vexatious litigation. Under the C.P.L.R., the restraining
117
Fid. Brokerage Servs., LLC v. Bank of China, 192 F. Supp. 2d 173, 174–75 (S.D.N.Y.
2002).
118
Id.
Id.
120 Id.
121 Id. at 178.
122 Fid. Brokerage Servs., LLC, 192 F. Supp. at 179.
123 Id. at 180.
124 Id.
125 Id. at 181.
126 Id.
127 This Note uses the phrase “doing nothing” to mean that the broker-dealer ceases all activity on the customer’s account and does not transfer the funds. See Carlson, supra note 50, at
1499–500.
119
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notice simply requires that the broker-dealer do nothing; that is,
the broker-dealer should not “make or suffer any sale, assignment
or transfer of, or any interference” with the funds in the customer’s
account.128 Therefore, bringing an interpleader action is
unjustified.
1.
The Consequences of Doing Nothing in Caro
Even without assessing the merits of the customer’s claim and
the judgment creditor’s claim, the nature of restraining notices is
such that Fidelity faced speculative exposure to liability. The restraining notice required Fidelity to do nothing.129 The consequence of doing nothing is that when the restraining notice expires
after one year, the judgment creditor might levy the account.130
The sheriff would then serve a writ of execution on Fidelity to
transfer the funds in the account to the sheriff.131 After the account is levied, if Fidelity still does nothing for ninety days, there
will be a turnover proceeding brought by the judgment creditor.132
The customer would then intervene to stop the judgment creditor,
and argue that the corporate veil should not be pierced.133 A restraining notice being extended due to a turnover proceeding is
speculative; therefore, Fidelity faced minor liability if it had done
nothing. The restraining notice only required Fidelity not to take
any action.134 The purpose of this is to keep the status quo.135
However, Fidelity did not maintain the status quo. Therefore, Fidelity seeking an interpleader was inappropriate because it was
filed under speculation136 that the restraining notice would have
led to multiple litigations.
2.
The Consequences of Doing Nothing in Bank of China
The same analysis for a restraining notice applies to an Order
of Attachment under N.Y. C.P.L.R. 6214(b) since “[t]he levy under
an order of attachment is, basically, nothing but a combined turnover order and a restraining order.”137 The levy by service of an
128
129
130
131
132
133
134
135
136
137
N.Y. C.P.L.R. 5222(b) (McKinney 2014).
See supra Part II.D.1.
See supra Part II.D.1.
See supra Part II.D.1.
N.Y. C.P.L.R. 5232(a) (McKinney 2014).
N.Y. C.P.L.R. 5225(b) (McKinney 2014).
See Carlson, supra note 50, at 1499–500.
Id.
See Pine Run Properties, Inc., 1991 WL 280719, at *10.
See Carlson, supra note 50, at 1501.
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Order of Attachment expires after ninety days, and beyond the
ninety days, the judgment creditor must bring turnover proceedings against Fidelity.138 The customers could have intervened to
present evidence why the Order should not be extended.139 Moreover, the consequence of doing nothing is a turnover proceeding, in
which case, the customers and not Fidelity are defending against
extending the Order.140 Therefore, Fidelity’s fear of multiple
claims and vexatious litigation is speculative and therefore
unreasonable.
C.
Compelling Arbitration on an Interpleader Action
1.
The Inquiry on a Motion to Compel
The customer can bring a motion to compel arbitration if he or
she believes that the dispute is subject to arbitration.141 On a motion to compel arbitration, courts use a two-step inquiry to determine whether the parties agreed to arbitrate the dispute.142 The
first consideration is whether a valid agreement to arbitrate exists
and whether the dispute falls within the scope of that arbitration
agreement.143 The second consideration is whether the claims are
arbitrable because of a federal statute or policy.144 The contested
issue, for purposes of this Note, is whether the dispute falls within
the scope of the arbitration agreement. Furthermore, courts apply
state-law contract principles when granting a motion to compel arbitration.145 The federal policy favoring arbitration is given due re138
N.Y. C.P.L.R. 5232(a) (McKinney 2014).
N.Y. C.P.L.R. 5225(b) (McKinney 2014).
140 N.Y. C.P.L.R. 6214(b) (McKinney 2014).
141 Under § 4 of the F.A.A., a party may petition any United States district court “for an
order directing that such arbitration proceed in the manner provided for in such agreement.” 9
U.S.C. § 4 (2012). See also Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 217 (1985) (“[T]he
Arbitration Act requires district courts to compel arbitration of pendent arbitrable claims when
one of the parties files a motion to compel, even where the result would be the possibly inefficient maintenance of separate proceedings in different forums.”).
142 See Webb v. Investacorp, Inc., 89 F.3d 252, 258 (5th Cir. 1996) (citing Mitsubishi Motors
Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626, 105 S. Ct. 3346, 3353–54 (1985)). See
also JPMorgan Chase Bank, N.A. v. Oklahoma Oncology & Hematology, P.C., No. CIV.A.H 06
0645, 2007 WL 646372, at *3 (S.D. Tex. Feb. 26, 2007).
143 Id.
144 Id.
145 See Webb, 89 F.3d at 258 (citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938,
944, 115 S. Ct. 1920, 1924 (1995)); see also Perry v. Thomas, 482 U.S. 483, 492–93, 107 S. Ct. 2520,
2526–28 (1987).
139
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gard when applying state law, and ambiguities in the scope of
arbitration should be resolved in favor of arbitration.146 Moreover,
if the dispute is within the scope of the arbitration agreement, then
interpleader is inappropriate, and the court will compel arbitration
of that claim.
i.
Reading the Pre-Dispute Arbitration Clause broadly to
determine the Scope of the Arbitration Agreement
In JPMorgan Chase Bank v. Oklahoma Oncology & Hematology, P.C., JPMorgan Chase Bank (“JPMorgan”) brought an interpleader action to resolve competing claims to the funds in an
account within its possession.147 The defendants had an arbitration
agreement amongst themselves, and when a contractual dispute
arose, they sought arbitration.148 Despite the ongoing arbitration,
one of the defendants continued to access funds in the JPMorgan
account, so another defendant responded by contacting JPMorgan
to challenge the access to the funds in the account.149 JPMorgan
placed a hold on withdrawals on the account and continued access
for depositing funds.150 When JPMorgan’s hold on the account was
challenged, it sought interpleader relief and deposited the funds in
the court.151 The defendants brought a motion to compel arbitration.152 On the defendant’s motion to compel arbitration, the court
analyzed whether the parties agreed to arbitrate the dispute and
whether the dispute fell within the scope of the agreement.153 The
court found the arbitration clause to be a valid agreement to arbitrate.154 In order to determine whether the dispute fell within the
scope of the agreement to arbitrate, the court sought to characterize the arbitration clause as broad or narrow:
Broad arbitration clauses . . . embrace all disputes between the
parties having a significant relationship to the contract, regardless of the label attached to the dispute . . . . Narrow arbitration
clauses require arbitration only of disputes “arising out of” the
146 See Webb, 89 F.3d at 258 (citing Volt Info. Sciences, Inc. v. Board of Trustees of Leland
Stanford Jr. Univ., 489 U.S. 468, 475–76, 109 S. Ct. 1248, 1253–54 (1989)).
147 JPMorgan Chase Bank, 2007 WL 646372, at *1–2.
148 Id. at *1.
149 Id. at *2.
150 Id.
151 Id.
152 Id. at *1.
153 JPMorgan Chase Bank, 2007 WL 646372, at *1.
154 Id. at *4.
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contract, while broad clauses are those that cover all disputes
that “relate to” or “are connected with” the contract.155
The court concluded that the scope of the arbitration clause contained in the defendants’ Management Services Agreement is
broad, because it read, “any controversy, dispute, or disagreement
arising out of or relating to this [MSA] or the breach of this
[MSA].”156 The parties were in dispute over conduct that was covered under the broad language of “arose out of and related to;”
therefore, the court compelled arbitration.157
Under JPMorgan Chase Bank, if there is a valid arbitration
agreement and the dispute is within the scope of the arbitration
clause, arbitration should be compelled and interpleader is inappropriate. The emphasis of the court’s analysis is that the parties
were in dispute over an issue subject to an arbitration agreement.
Similar to JPMorgan Chase Bank, the standard pre-dispute arbitration clause should be categorized as broad, because it does not
limit disputes to those arising out of the contract, but covers all
disputes between the broker-dealer and the customer in connection with the contract. The standard pre-dispute arbitration clause
reads in part “[a]ll controversies that may arise between you and us
concerning any subject matter, issue or circumstance whatsoever.”158 Therefore, the contractual language should be read
broadly to cover all customer-member disputes relating to business
activities of the broker-dealer.159
D. The Recalcitrant Broker-Dealer should be
Compelled to Arbitrate
Disputes concerning restraining notices on a customer’s account are improperly framed as occurring between the customer
and a third-party.160 By framing the dispute in such a manner, broker-dealers subvert the arbitration process. The analysis for compelling arbitration is also deficient because it does not take into
155 JPMorgan Chase Bank, 2007 WL 646372, at *5 (quoting Pennzoil Exploration & Production Co. v. Ramco Energy Ltd., 139 F.3d 1061, 1067 (5th Cir. 1998)). See also Prima Paint Corp.
v. Flood & Conklin Mfg. Co., 388 U.S. 395, 398 (1967) (stating that “any controversy or claim
arising out of or relating to this Agreement” is a broad arbitration clause).
156 JPMorgan Chase Bank, 2007 WL 646372, at *5.
157 Id. at *7.
158 FIDELITY ACCT., supra note 41.
159 See FINRA RULE 12200, supra note 1.
160 See supra Part III.A.1.
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account FINRA’s Code of Arbitration.161 The recalcitrant brokerdealer should be compelled to arbitrate an interpleader action
when there is a pre-dispute arbitration clause or when the customer demands arbitration.
The arbitrability162 of restraining notice disputes should be
recognized because: (a) the pre-dispute arbitration clause is a valid
arbitration agreement; (b) any customer dispute regarding the broker-dealer’s actions on his account is a dispute within the scope of
the arbitration clause; and (c) the customer has the right to demand arbitration. On recognizing restraining notice disputes as arbitrable,163 courts should compel arbitration on interpleader
actions brought by recalcitrant broker-dealers.
1.
The Arbitration Agreement is Valid
The first prong of a court’s analysis is to determine whether
there is a valid arbitration agreement.164 When there is a valid predispute arbitration clause, the parties are bound to arbitrate the
dispute between them.165 FINRA’s requirement for language that
should precede the pre-dispute arbitration clause lends credence to
the argument that it is a valid agreement.166 Under FINRA Rule
2268(a), the following language is required to precede a pre-dispute arbitration clause:
This agreement contains a predispute arbitration clause. By
signing an arbitration agreement the parties agree as follows: (1)
All parties to this agreement are giving up the right to sue each
other in court, including the right to a trial by jury, except as
provided by the rules of the arbitration forum in which a claim is
filed.167
As discussed previously in Part II, a pre-dispute arbitration clause
is ordinarily enforceable.168 Moreover, if there is a valid agreement
161
See supra Part III.A.1.i.
Arbitrability can be defined as “the status, under applicable law, of a dispute’s being or
not being resolvable by arbitrators because of the subject matter.” Arbitrability, BLACK’S LAW
DICTIONARY 124 (10th ed. 2014).
163 A claim is arbitrable if it is “subject to or suitable for arbitration.” Arbitrable, BLACK’S
LAW DICTIONARY 124 (10th ed. 2014).
164 See JPMorgan Chase Bank, 2007 WL 646372.
165 See supra Part II.C.
166 FINRA RULE 2268, http://finra.complinet.com/en/display/display.html?rbid=2403&ele
ment_id=9955 (last visited Sept. 30, 2015).
167 Id.
168 See supra Part II.C.
162
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in place, the broker-dealer is bound to follow it, and arbitration
should be compelled.
2.
The Dispute falls within the Scope of the Agreement
The second prong of the court’s analysis on a motion to compel arbitration is whether the dispute falls within the scope of the
valid arbitration agreement.169 The pre-dispute arbitration clause
should be interpreted broadly under FINRA’s rules and Code of
Arbitration, instead of being interpreted under insurance interpleader case analysis. Customer-member disputes are different
from disputes in the insurance industry. In the former, all arbitration agreements with FINRA member firms are subject to
FINRA’s Code of Arbitration. The language of the standard predispute arbitration clause states that “[a]ll controversies that may
arise between you and us concerning any subject matter . . . shall
be determined by arbitration through . . . (FINRA).”170 Furthermore, any controversy regarding restraining the customer’s account is a customer-member dispute relating to the business
activities of the members. The restraining notice dispute over
whether or not the broker-dealer should continue or cease activity
on the account directly relates to his or her business activities.
Therefore, arbitration should be compelled to resolve these
disputes.
3.
Customer Requests Arbitration
Customers have the authority to request arbitration without a
written agreement.171 Under FINRA Rule § 12200, parties must
arbitrate if the customer requests arbitration.172 Moreover, the
FINRA Code of Arbitration requires broker-dealers to submit
claims to arbitration even if they have not signed a formal arbitration agreement.173 Additionally, under FINRA Rule 2268(e), a
member can compel arbitration of the customer’s claims that are
subject to arbitration:
[i]f a customer files a complaint in court against a member that
contains claims that are subject to arbitration pursuant to a
predispute arbitration agreement between the member and the
customer, the member may seek to compel arbitration of the
169
170
171
172
173
JPMorgan Chase Bank, 2007 WL 646372.
THE FIDELITY ACCOUNT, supra note 41.
See FINRA RULE 12200, supra note 1.
Id.
Id.
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claims that are subject to arbitration. If the member seeks to
compel arbitration of such claims, the member must agree to
arbitrate all of the claims contained in the complaint if the customer so requests.174
It follows that a customer can compel arbitration for customermember disputes arising in connection with the business activities
of the member, and the member must agree to arbitrate all the
claims. As a member of FINRA, broker-dealers are aware that
they must comply when a customer demands arbitration of a dispute that arises in connection with their business activities.175
IV.
A.
PROPOSAL
Mandatory Arbitration of Customer-Member
Restraining Notice Disputes
There should no longer be a grey area where broker-dealers
may or may not seek interpleader relief despite the existence of a
pre-dispute arbitration clause. Broker-dealers must be required to
use arbitration to resolve restraining notice disputes with their customers. The best way to get recalcitrant broker-dealers to submit
to arbitration is to add new language to the pre-dispute arbitration
clause. Therefore, customers should negotiate the language in the
pre-dispute arbitration clause to require mandatory176 arbitration
for disputes, such as restraining notice disputes, before interpleader relief can be obtained.
1.
The Grey Area of Standard Pre-Dispute Arbitration Clauses
The parties agreed in the pre-dispute arbitration clause to arbitrate specific disputes.177 The current practice of recalcitrant broker-dealers is to bypass the pre-dispute arbitration clause and to
seek interpleader relief.178 Additionally, broker-dealers might not
comply with their customers’ demand to arbitrate the restraining
174
Id.
Id. See also FINRA RULE 0140, supra note 38.
176 Mandatory arbitration is “arbitration required by law or a contractual agreement. [Also],
arbitration required by a predispute arbitration clause included in a contract of adhesion.”
Mandatory Arbitration, BLACK’S LAW DICTIONARY 126 (10th ed. 2014).
177 See supra Part II.C.3.
178 See supra Part III.A.
175
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notice disputes.179 These behaviors by broker-dealers occupy a
grey area where arguments could be made for and against
mandatory arbitration.180 Customers who do not wish to be joined
in an interpleader action and prefer arbitration will have to specify
this interest in the pre-dispute arbitration clause.
2.
Customers Should Assume a New Role to Create Certainty
Negotiation can be integral to the arbitration process.181 Customers and broker-dealers are able to structure their arbitration
agreement, within the confines of FINRA’s Code of arbitration,
“as they see fit.”182 The language of the arbitration agreement
should be negotiated during the contract formation process.183
When the parties are negotiating the terms of the overall Customer
Agreement, the customer should bargain for mandatory arbitration
over interpleader relief. Moreover, customers should assume a
new role in the contract formation process; that is, they should actively negotiate their pre-dispute arbitration clause as they would
other provisions in the Customer Agreement.
3.
Customers Negotiating the Terms of the Pre-Dispute
Arbitration Clause
i.
Negotiating during Contract Formation
There are different negotiating styles and tactics,184 and the
focus of this Note is not on using one specific approach. Instead,
the emphasis is on the use of negotiation during contract formation, and using negotiation to aid the arbitration process that will
follow. Moreover, the strategy the customer chooses should open
the broker-dealer to negotiating before the contract is formed.
179
See supra Part III.A.1
See supra Part III.A.
181 See supra Part III.C.
182 The FAA allows parties to structure their arbitration agreement. See Volt Info. Scis., Inc.
v. Bd. of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 479 (1989) (“But it does not
follow that the FAA prevents the enforcement of agreements to arbitrate under different rules
than those set forth in the Act itself. Indeed, such a result would be quite inimical to the FAA’s
primary purpose of ensuring that private agreements to arbitrate are enforced according to their
terms. Arbitration under the Act is a matter of consent, not coercion, and parties are generally
free to structure their arbitration agreements as they see fit. Just as they may limit by contract
the issues which they will arbitrate . . . so too may they specify by contract the rules under which
that arbitration will be conducted.”).
183 Id.
184 See Norton, supra note 45. See also FISHER, supra note 45.
180
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As previously mentioned, investors who open an account with
a broker-dealer or brokerage firm will typically receive a Customer
Agreement containing a standard or boilerplate pre-dispute arbitration clause.185 The moment for negotiation can occur either
when negotiating the terms of the entire Customer Agreement,
before signing a standard agreement, or when revising the old Customer Agreement. There are no rules or procedures for negotiation,186 so customers could initiate the bargaining process when it is
most optimal.
The principled negotiation approach is useful because it focuses on finding options for mutual gain.187 In order to achieve
mutual gains, customers have to identify shared interests with their
broker-dealers.188 One shared interest is avoiding risk during restraining notice disputes.189 For instance, neither the broker-dealer
nor the customer wants to improperly restrain the customer’s account.190 Customers should stress this shared interest when negotiating.191 On the other hand, even though broker-dealers and
customers have differing interests, customers can exploit this for a
bargain advantageous to both sides.192 One advantageous bargain
that arises from exploiting differing interests is to make arbitration
mandatory and only allow interpleader if the arbitrator deems it
necessary. Therefore, the principled negotiation approach demonstrates that broker-dealers and their customers could brainstorm
language that benefits both sides.193
ii.
The Language of the Agreement
Customers should negotiate a clause that states that brokerdealers cannot bring interpleader actions until the arbitrator or
panel of arbitrators first resolves the dispute.194 The specific lan185
See Macey & Novogrod, supra note 18, at 964–70.
See supra Part II.C.4.
187 See FISHER, supra note 45, at 70–80.
188 Id.
189 See FISHER, supra note 45, at 71–73.
190 See supra Part III.A.1.
191 Id.
192 See FISHER, supra note 45, at 74–75.
193 See FISHER, supra note 45, at 60–70.
194 This language is fashioned from “Scott v. Avery clauses” in English Law. Scott v. Avery
[1856] 5 HL Cas 811 (Eng.), [1843–1860] All E.R. Rep. 1 HL (Eng.). The Scott v. Avery Clause
allows for mandatory arbitration, but is distinguished because it makes arbitrating the dispute a
condition precedent to the right of action that the parties arbitrated the dispute. See Andrew
Tweeddale and Keren Tweeddale, Scott v Avery Clauses: O’er Judges’ Fingers, Who Straight
Dream on Fees, SWEET & MAXWELL, http://corbett.co.uk/wpcontent/uploads/Arbitration-article-
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186
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guage that customers should use in the pre-dispute arbitration
clause should be negotiated. Most broker-dealers are arbitrating in
FINRA’s arbitration forum;195 consequently the specific language
should follow FINRA’s requirements for pre-dispute arbitration
clauses.196 Nevertheless, the substance and tone of the terms used
should indicate that arbitration is mandatory.
If this is implemented, parties will first be required to seek
arbitration for resolution of the issues. When resolving the issues
between the customer and the broker-dealer, the arbitrator(s) will
then decide whether court proceedings outside of the arbitration
forum are necessary. Moreover, as a result of this sequential structural arrangement, the arbitrator(s) hear(s) the restraining notice
dispute and issue(s) an award197 that includes a decision on
whether or not interpleader relief is necessary. Interpleader relief,
which falls within the grey area, would then be made subject to
mandatory arbitration.
For internal consistency, the mandatory language that excludes interpleader until an arbitration award is sought will apply
only to those disputes within the scope of the arbitration agreement. The added language is only a replacement of the implied
requirement for arbitration in existing pre-dispute arbitration
clauses. The customer and the broker-dealer did not agree to arbitrate every kind of dispute; similarly, the exclusion of interpleader
should only be for those disputes covered by the entire clause. An
example of an arbitrable dispute is a claim between the customer
and member arising in connection with the business activities of
the member.198 As argued previously, restraining notice disputes
are arbitrable disputes.199 Moreover, the language added is an express requirement that arbitrable disputes, such as restraining notice disputes, be subject to mandatory arbitration before
interpleader relief is sought.
Scott-v-Avery.pdf (last visited Mar. 9, 2016). The clause is used by in the commodities contracts
of the Grain and Feed Trade Association (GAFTA) and the Federation of Oilseeds and Fats
Associations (FOSFA). Id. However, this Note does not advocate adding broad or general
condition precedents to arbitration clauses as doing so might prevent the parties from seeking
interim relief that could aid the arbitral process.
195 See supra Part II.C.
196 See e.g., FINRA RULE 12200, supra note 1; FINRA RULE 0140, supra note 9; and FINRA
RULE 2268, supra note 166.
197 An arbitration award is “a final decision by an arbitrator or panel of arbitrators.” Arbitration Award, BLACK’S LAW DICTIONARY 126 (10th ed. 2014).
198 See FINRA RULE 12200, supra note 1. See also supra Part III.D.
199 See supra Part III.D.
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The Benefits of Negotiating for Express Terms
Both customers and broker-dealers benefit from negotiating
express terms. The language proposed is fair to broker-dealers because their liability is diminished with a binding award and their
right to interpleader is not completely eliminated. Additionally,
customers benefit from this language because they have the opportunity to resolve restraining notice disputes before their funds are
deposited in the court registry. Finally, this sequence of arbitrating
first fixes the haphazard structure of commencing an interpleader
action, fighting in court to compel arbitration, and—whether or not
interpleader is granted—arbitrating over the restraining notice
dispute.200
If broker-dealers are still recalcitrant, an express term will also
influence the analysis of the courts,201 because courts use contract
law to analyze arbitration agreements.202 When a customer moves
to compel arbitration, he or she will need to show that the dispute
is arbitrable.203 Adding an express term in the pre-dispute arbitration clause is a strong indicator that the dispute falls within the
scope of the arbitration agreement.204 On the other hand, when
interpleader is not expressly mentioned, courts might deem interpleader appropriate.205 Therefore, the benefit of adding new language in the pre-dispute arbitration clause is that it will be a strong
indicator of arbitrability.
C.
The Benefits of Negotiating for Mandatory Arbitration
Arbitration should be mandatory because it is the appropriate
forum to resolve the interests of both customers and broker-dealers. The parties’ interests, inferred from the cases previously discussed in Part II, are fully addressed through arbitration. Even the
broker-dealer’s unreasonable fear can be mitigated through
arbitration.
200
See supra Part III.A.1.
See supra Part III.A.1.
202 Arbitration agreements are considered equal to all other contracts. Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 219, 105 S. Ct. 1238, 1242, 84 L. Ed. 2d 158 (1985) (“The House
Report accompanying the [FAA] makes clear that its purpose was to place an arbitration agreement ‘upon the same footing as other contracts, where it belongs . . .’ ”).
203 See supra Part III.C.
204 See supra Part III.D.
205 See supra Part III.A.1.
201
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1.
The Customer’s Interest
Customers do not want their broker-dealers to improperly restrain the wrong accounts.206 The customer who challenges the
judgment creditor’s claim to his or her account might not want to
risk having the funds in their account be given to someone else.207
Customers might not want mandatory arbitration. Mandatory
arbitration is often attacked because “the modern paradigm of
mandatory securities arbitration creates a paramount need for fairness.”208 Although customers might be apprehensive that
mandatory arbitration is unfair,209 they ultimately do not want their
accounts liquidated and deposited with the court registry.210
2.
The Broker-dealer’s Interests
Broker-dealers might start an interpleader action because of
their fear of vexation from multiple claims to the funds in the customer’s account.211 Liability and costs are most likely to be the
main concerns for broker-dealers.212 In contrast to their customers, broker-dealers draft the pre-dispute arbitration clauses, and
accept mandatory arbitration as the method the securities industry
uses to resolve disputes.213 Finally, broker-dealers are interested in
preserving the relationship with their customers.214 The brokerdealers’ concern could be that a bad relationship with a customer
will affect their business and reputation with other investors.
3.
Arbitration Mutually Benefits both Parties
The interest of the broker-dealer and the customer can be accommodated through requiring mandatory arbitration before broker-dealers can seek interpleader relief. First, mandatory securities
arbitration is often regarded as unfair to customers, because they
have arbitration agreements imposed on them when they open
206
See supra Part III.A.1.
See supra Part III.A.1.
208 See Jill I. Gross, Mcmahon Turns Twenty: The Regulation of Fairness in Securities Arbitration, 76 U. CIN. L. REV. 493, 499 (2008). See also Jill I. Gross & Barbara Black, When Perception
Changes Reality: An Empirical Study of Investors’ Views of the Fairness of Securities Arbitration,
2008 J. DISP. RESOL. 349, 350 (2008).
209 See Michael S. Barr, Mandatory Arbitration in Consumer Finance and Investor Contracts,
11 N.Y.U. J. L. & BUS. 793, 805–06 (2015).
210 See supra Part III.A.1.
211 See supra Part III.B.
212 See supra Part III.B.
213 See supra Part II.C.3.
214 GRANT, supra note 29, at 13.
207
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their accounts.215 However, this Note now highlights how customers could use mandatory arbitration to their own advantage and to
protect themselves against the detriment of having the funds in
their account liquidated and interpleaded. Customers will have the
opportunity to resolve issues, such as what accounts are subject to
the restraining notice and how the broker-dealer should comply
with the restraining notice. Arbitration will also allow the customer to keep the broker-dealer accountable for the cessation or
continuance of activities on his or her account.
Simultaneously, arbitration can further alleviate the brokerdealer’s fear of liability. In that arbitration awards are final and
binding, an award will remove the broker-dealer from further liability to the customer.216 In contrast, on an interpleader action, the
broker-dealer might still be subject to the counterclaims of the customer for negligence, tortious interference with contract, breach of
contract, conversion, etc.217
Finally, a provision for mandatory arbitration before parties
could seek interpleader will most likely preserve the relationship
between the customer and the broker-dealer. The situation is less
hostile because the customer is not forced to join in a court proceeding. Additionally, negotiation of the terms of the pre-dispute
arbitration agreement reduces the conflict at this stage, because the
customers retained control over how the dispute would be
resolved.
V.
CONCLUSION
Customers, who are usually apprehensive about arbitration
because of a perceived bias of procedural unfairness,218 will prefer
resolving their disputes through arbitration rather than through an
interpleader action. The integrity of the arbitration process is damaged when broker-dealers do not adhere to the request of their
customers to arbitrate. For the arbitration process to be perceived
as fair to customers, broker-dealers should not be allowed to opt-in
and opt-out of arbitration when it is solely beneficial to them.
215
See Goss, supra note 208. See also Gross & Black, supra note 208.
See GRANT, supra note 29, at 53.
217 See, e.g., Citigroup Glob. Markets, Inc. v. KLCC Investments, LLC, No. 06 CIV. 5466
(LBS), 2007 WL 102128, at *8 (S.D.N.Y. Jan. 11, 2007) (finding interpleader appropriate, but not
dismissing the stakeholder from the action).
218 See Barr, supra note 209.
216
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An express provision for mandatory arbitration of disputes to
seek interpleader relief will be a mutual win for both customers
and broker-dealers. Therefore, customers should negotiate with
their broker-dealers as to the terms of the arbitration clause for
their mutual benefit and advantage. Customers are rarely seen in a
position of control during the formation of the arbitration clause;
however, through mandatory arbitration, they should assume this
role.