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Securities Law Commentary
Magnolia Capital Advisors v. Bear Sterns Teaches How to Make A Colorable Denial of An Agreement to Arbitrate
Magnolia Capital Advisors, Inc. v. Bear Sterns & Co. and Bear Stearns Securities Corp.
Posted: 05/14/2008
By: Joel B. Ginsberg, Esq.
Companies Mentioned: Bear Stearns & Co., Bear Stearns Securities Corp., Magnolia Capital Advisors, Inc.
Introduction
In the case Magnolia Capital Advisors Inc. v. Bear Stearns, the 11th Circuit Court reversed a decision of the Northern District of Florida to order the parties to arbitration pursuant to their purported agreement. The 11th Circuit found that Magnolia had met the requirements set forth by court precedent and 9 USC § 4 to challenge the enforcement of the arbitration agreement, thus compelling the district court to hold a trial on the issue of the agreement’s enforceability before compelling arbitration. Because the district court failed to hold such a trial, the 11th Circuit reversed the district court’s decision and remanded the case for that trial. The requirements to challenge the enforcement of an arbitration agreement and compel a trial under 9 USC § 4 are not new. However, there have not been that many reported cases where a plaintiff has actually succeeded in meeting those requirements. The Magnolia case is instructive, therefore, in demonstrating the type of evidence a plaintiff can submit to make a “colorable denial” of the arbitration agreement.
Detailed Commentary
Background
Magnolia Capital Advisors was an investment advisory firm; Don Reinhard was the firm’s principal. Magnolia made recommendations and transactions for its clients with clearing agent Bear Stearns through Paragon Financial Group, an introducing broker dealer. Under this arrangement, Bear Stearns was supposed to provide daily status reports on Magnolia’s client accounts. Magnolia claimed that Bear Stearns failed to do so, causing Magnolia and its clients to suffer significant losses. Magnolia sued Bear Stearns under several tort theories.
Bear Stearns filed a motion to dismiss Magnolia’s complaint or compel arbitration of the claims. In support of the latter, Bear Stearns filed with the court a letter-agreement apparently directed to one of Magnolia’s account clients, but bearing the signature of Don Reinhard and the names of both Magnolia and its client in the place reserved for the name of the contracting party, followed by Magnolia’s address only. That letter-agreement contained a clear arbitration agreement, which Bear Stearns now sought to enforce against Magnolia.
Magnolia unequivocally denied that it was a consenting party to the arbitration agreement or to the letter-agreement in evidence. Magnolia submitted an affidavit from Reinhard, setting forth this denial and explaining that he signed the document only in the capacity of an interested party for his clients only, not as an actual party to the contract. In addition, Magnolia submitted three faxes from Paragon and/or AmSouth (the client in question) to Bear Stearns supporting the claim that Magnolia was only a “registered representative” or “interested party” and not an actual party to the letter-agreement.
The district court found that the face of the letter-agreement was sufficient to prove that Magnolia had agreed to the arbitration provision and granted Bear Stearns’ motion, ordering the parties to arbitration. Magnolia moved for a new trial pursuant to 9 USC § 4, and the district court denied that motion. Magnolia appealed to the 11th Circuit.
Commentary
The standard for trying the enforceability of an arbitration agreement under 9 USC § 4, at least in the 11th Circuit, is well-established and often-cited:
1) A district court, not an arbitration panel, must decide whether an arbitration agreement is actually enforceable against the parties in question.Chastain v. Robinson-Humphrey Co., 957 F.2d 851, 854 (11th Cir. 1992);
2) The party seeking to avoid arbitration must at all times “unequivocally deny” that it consented to an agreement to arbitrate. Id.
3) The party seeking to avoid arbitration must substantiate its denial of the agreement with “enough evidence to make the denial colorable.” Wheat, First Secs., Inc. v. Green, 993 F.2d 814, 819 (11th Cir. 1993).
While many plaintiffs have had no problem “unequivocally denying” the arbitration agreement, few – at least in reported cases – have been able to produce the evidence required to establish a “colorable” denial. See, e.g., Dale et al v. Comcast, 453 F. Supp. 2d 1367 (N.D. Ga. 2006) (overruled on other grounds) (finding that the plaintiffs did not offer sufficient evidence to substantiate their denial of the arbitration agreement); Dassero v. Edwards, 190 F. Supp. 2d 544 (WDNY 2002) (holding that it is not enough for the plaintiffs to merely opine or aver, in conclusory fashion, that no agreement exists between the parties); Gipson v. Cross Country Bank, 294 F. Supp. 2d 1251 (M.D. Ala. 2003) (holding that plaintiff’s argument that no one called her attention to the arbitration agreement was insufficient to set forth a colorable denial).
The Magnolia case, therefore, is a shining example of how a successful plaintiff can present a colorable denial, compared to the vast sea of failed plaintiffs. Plaintiffs seeking to avoid arbitration agreements in the future should look to Magnolia for guidance as to the type and amount of evidence required to present a colorable denial of an arbitration agreement sufficient to trigger the trial requirement of 9 USC § 4.
The author, Joel B. Ginsberg, Esq., is an associate in the transactional department of Zuber & Taillieu LLP, focusing on corporate law, and securities and finance law.
Securities Law Summary
Read the related Securities Law summary: Circuit Court Remands Bear Stearns Fraud Case for Trial
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