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Morgan Keegan & Company, Inc v. Peggy A. Drzayick

November 8, 2011


The opinion of the court was delivered by: U. S. District Judge Honorable Edward J. Lodge


Pending before the Court in the above-entitled matter is Plaintiff Morgan Keegan & Company, Inc.'s ("Morgan Keegan") Motion for Preliminary Injunction, Dkt. 2. Having fully reviewed the record, the Court finds that the facts and legal arguments are adequately presented in the briefs and record. Accordingly, in the interest of avoiding further delay, and because the Court conclusively finds that the decisional process would not be significantly aided by oral argument, this matter shall be decided on the record before this Court without oral argument.


On Mach 28, 2011, Morgan Keegan filed a Complaint for Declaratory Judgment and Injunctive Relief against Defendants Peggy A. Drzayich, Anthony and Carolyn Van Cattenburch, Roger and Martha Connor, Dan Tennent, The Bridge Inc. and Patricia Thomas (collectively referred to as "Defendants"), Dkt. 1. Morgan Keegan seeks declaratory and injunctive relief to preclude Defendants from pursuing an arbitration proceeding they have filed against Morgan Keegan before the Financial Industry Regulatory Authority ("FINRA"). Morgan Keegan argues it does not have an agreement with Defendants to arbitrate and that Defendants are not customers of Morgan Keegan as required by FINRA rules.

Morgan Keegan is a regional broker-dealer incorporated under the laws of the state of Tennessee, with its principal place of business in Memphis, Tennessee. Defendants are believed to be residents of state of Idaho, except for The Bridge Inc., which is a nonprofit corporation incorporated and doing business in New Jersey. On December 10, 2010, Defendants initiated an arbitration proceeding against Morgan Keegan before the FINRA (FINRA Case No. 11-00027). Defendants requested and the FINRA selected the arbitration should be held in Boise, Idaho. Defendants assert the following claims against Morgan Keegan in the arbitration: common law fraud; violation of the Idaho securities laws; violation of § 10(b)of the Securities Exchange Act of 1934; violation of S.E.C. Rule 10b-5; violation of §§ 11, 12(a)(2), and 15 of the Securities Act of 1933; violation of the Tennessee Consumer Protection Act, and violation of FINRA Rule 2210. Morgan Keegan denies it has liability relating to Defendants' claims.

Defendants' arbitration claims are related to their alleged purchases of shares in two closed-end, high yield funds: the RMK High Income Fund and the RMK Multi-Sector High Income Fund (collectively the "Funds"). It is undisputed that Defendants did not purchase the Funds from Morgan Keegan. Rather, Defendants purchased the shares in the Funds from an unrelated, third party broker-dealer, LPL Financial Inc. It is undisputed that Defendants have never entered into any written agreements (including an agreement to arbitrate claims) with Morgan Keegan nor have Defendants opened and maintained accounts with Morgan Keegan. Morgan Keegan was an underwriter for the initial public offering of the Funds, but Defendants did not purchase either fund in its initial public offering.

Morgan Keegan maintains Defendants are not "customers" of Morgan Keegan, so they are not subject to arbitration under FINRA. Defendants argue that because Morgan Keegan received .15% of the total assets held by the Funds as compensation for services and Defendants and/or their brokers relied on information obtained from Morgan Keegan regarding the Funds, "customer" should be broadly defined and should include Defendants.


1. Question of Arbitrability is Court Matter

This Court finds that the question of arbitrability is for the court to decide. Bridge Fund Capital Corp. v. Fastbucks Franchise Corp., 622 F.3d 996, 998 (9th Cir. 2010). "[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." United Steelworkers of America v. Warrior and Gulf Navigation Co., 363 U.S. 574, 582 (1960). Whether a party has consented to arbitration has long been recognized to be a question of law, to be decided by the court, not the arbitrator, "[u]nless the parties clearly and unmistakably provide otherwise." AT & T Techs., Inc. v. Communications Workers, 475 U.S. 643, 649 (1986). In determining whether the parties have agreed to arbitrate, "courts generally . . . should apply ordinary state-law principles that govern the formation of contracts." First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995).

Morgan Keegan, as a FINRA member firm, is required to arbitrate disputes only where they contractually agreed to arbitrate with the claimant or the claimant is a customer of Morgan Keegan. Defendants concede that they did not have arbitration agreements with Morgan Keegan. Therefore, the threshold question of whether Defendants are "customers" of Morgan Keegan a legal matter that should be resolved by the court, instead of the arbitrator or the Director of FINRA.*fn1

2. Standard of Review for Preliminary Injunction

Preliminary injunctions are designed to preserve the status quo pending the ultimate outcome of litigation. While courts are given considerable discretion in deciding whether injunctive relief should be issued, injunctive relief is not obtained as a matter of right and it is considered to be an extraordinary remedy that should not be granted unless the movant, by a clear showing, carries the burden of persuasion. See: Sampson v. Murray, 415 U.S. 61 (1974); Brotherhood of Locomotive Engineers v. Missouri-Kansas-Texas R. Co., 363 U.S. 528 (1960); and Stanley v. Univ. of Southern California, 13 F.3d 1313 (9th Cir. 1994).

In each case, the district court "must balance the competing claims of injury and must consider the effect on each party of the granting or withholding of the requested relief." Amoco Production Co. v. Gambell, 480 U.S. 531, 542 (1987). The test for a temporary restraining order or a preliminary injunction are basically the same. In Winter v. Natural Resource Defense Council, Inc., 555 U.S. 7 (2008), the United States Supreme Court held that, in order to be entitled to a preliminary injunction, the moving party must demonstrate (1) likelihood of success on the merits; (2) that he or she is likely to suffer irreparable harm in the absence of preliminary relief; (3) that the balance of ...

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