Dispute With Dallas Broker Must Be Arbitrated Under FINRA Rules Despite Letter Agreement Designating AAA Arbitration

Originally published by Beth Graham.

Texas’ Fifth District Court of Appeals has ruled that a dispute between a licensed securities broker and an investment company must be arbitrated before FINRA rather than the AAA. In Morford v. Esposito Securities, LLC, No. 05-14-01223-CV (Tex. App – Dallas, September 18, 2015), a securities broker and Financial Industry National Regulatory Authority (“FINRA”) member, Esposito, provided a group of customers, Nemaha Water Services, with assistance in locating investors. In exchange for his help, Nemaha agreed to pay Esposito five percent of any funds the company received as a result. As part of the transaction, the parties signed a letter agreement which stated any future disputes would be resolved through arbitration before the American Arbitration Association (“AAA”).

Later, Esposito filed a lawsuit against Nemaha and asked the court to compel arbitration before the AAA. Nemaha countered by filing a motion to compel arbitral proceedings under FINRA Rule 12200. As part of his FINRA membership, Esposito agreed to settle all disputes with his customers through arbitration using FINRA rules. According to Nemaha, the company was the broker’s customer and any arbitration was required to be held before FINRA. The 44th Judicial District Court in Dallas County held that Nemaha was not a customer as intended under the terms of the broker’s FINRA membership agreement. As a result, the court denied the company’s motion and granted Esposito’s request to compel arbitral proceedings before the AAA. After that, Nemaha filed an appeal with Texas’ Fifth District Court of Appeals in Dallas.

On appeal, the court first considered whether it had jurisdiction to consider the appeal. According to the appellate court, it lacked jurisdiction to review the lower court’s order compelling AAA arbitration but stated it was within its power to treat the appeal as a petition seeking a writ of mandamus. The court said:

Following Austin Commercial, we conclude we do not have appellate jurisdiction over that portion of the order granting Esposito’s motion to compel arbitration. Accordingly, we dismiss that portion of this appeal, but grant Nemaha’s request that we treat its appeal as a mandamus petition as to the order granting the motion to compel. If Nemaha is a customer, it has a contractual right as a third party beneficiary to request arbitration under FINRA rules under Esposito’s member agreement with FINRA. If that right is erroneously denied by ordering Nemaha to arbitrate before the AAA, Nemaha will lack an adequate remedy by appeal. Thus, we conclude we have mandamus jurisdiction to consider whether the trial court abused its discretion by granting Esposito’s motion to compel arbitration before the AAA.

Next, the Fifth District determined Nemaha was a customer of Esposito for purposes of FINRA because the company agreed to purchase services from the licensed securities broker in exchange for a fee. The Dallas Court of Appeals then held that the trial court abused its discretion when it granted Esposito’s motion to compel arbitration before the AAA. Consequently, the appeals court reversed the trial court’s order denying Nemaha’s motion to compel arbitration under FINRA Rule 12200 and conditionally granted the company’s petition for writ of mandamus with regard to the lower court’s order compelling the parties to engage in arbitration before the AAA.

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