Opinion
04 Civ. 3993 (RWS).
October 20, 2004
GERSTEN, SAVAGE, KAPLOWITZ, WOLF MARCUS, MARC R. ROSEN, ESQ., New York, NY, Attorneys for Plaintiff.
GREENBERG TRAURIG, ADAM COLE, ESQ., MARK PARMELEE, ESQ., New York, NY, Attorneys for Defendant.
OPINION
Plaintiff Brian Frank ("Frank") moved by order to show cause for a temporary restraining order and preliminary injunction to prohibit defendant National Securities Corporation ("NSC"), a broker/dealer with its principal place of business in Seattle, Washington, from liquidating or otherwise restraining his accounts at NSC and to require NSC to make the accounts accessible to Frank. For the reasons set forth below, the motion is granted in part and denied in part.
I. Prior Proceedings
Frank filed his complaint against NSC on May 26, 2004. In the complaint, Frank alleged he had been employed by NSC as a registered representative pursuant to an independent contractor's agreement (the "Agreement") executed July 10, 2000. Frank further alleged that he maintains investment and cash management accounts with NSC. These accounts, according to the complaint, hold an amount of approximately $360,447.62.
According to the complaint, on April 24, 2004, NSC notified Frank that it had settled a claim against it asserted by Greg and Regan Brown (the "Browns"), former clients of Frank, for $45,000 and had incurred $1,106.50 in attorneys' fees. Thereafter, Frank denied NSC's asserted right to indemnity, and NSC restrained certain of Frank's accounts in the amount of $360,447.62.
The complaint sought a declaratory judgment and injunction to bar any restraint, damages for breach of contract, conversion, breach of fiduciary duty, and unjust enrichment.
The order to show cause seeking a temporary restraint and a preliminary injunction was heard on May 27, 2004. NSC undertook not to liquidate the accounts at issue and the motion for preliminary injunctive relief was set down for June 5, at which time it was marked submitted.
II. Facts
For the purposes of this motion, the Court makes the following preliminary findings of fact, which are based on the affidavits submitted by the partes.
1. During the relevant time period, Frank served as a registered representative working on behalf of NSC pursuant to an NSC independent contractors agreement ("the Agreement"), which was executed on July 10, 2000. (Bresner Aff. Ex. A at 6.)
2. Article VIII of the Agreement provides, inter alia, that "Contractor also grants a security interest to the Company in any brokerage or other account held by the Company in the name of, the joint name of, or for the benefit of Contractor, to secure any indebtedness of the Contractor to the Company." Id. at 2.
3. Article XII of the Agreement provides that "The [Company [Operations and Compliance Manual], as published, and as modified and amended from time to time, is incorporated into this contract by reference as though fully set out." Id. at 4. Article XII further provides that "[f]ailure to comply with the provisions of [the Manual] constitutes a material breach of the Agreement."Id.
4. It is uncontested that the Registered Representatives Manual ("the RR Manual") is a component of or functionally equivalent to the Company Operations and Compliance Manual ("the Company Manual").
5. Section 2.21 of the RR Manual states:
As an Independent Contractor of National Securities Corporation ("NSC") you agree to pay, on behalf of NSC and its administrators or assigns, and agree to hold NSC forever harmless with respect to, any amount which NSC is or becomes legally obligated to pay because of any claim or claims made against NSC because of any act or omission or neglect or breach of duty, including but not limited to any actual or alleged error or misstatement or misleading statement, which you commit or suffer while acting in your capacity as a Registered Representative ("RR") or agent of NSC. The payments which you will be obligated to make hereunder shall include, inter alia, damages, judgements, settlements and costs, cost of investigation and costs of defense of legal actions (including reasonable attorney's fees), claims or proceedings and appeals therefrom, and costs of attachment or similar bonds, provided, however, that you shall not be obligated to pay fines or other obligations or fees, imposed by law or otherwise, which you are prohibited by applicable law or regulation from paying as indemnity.
As an Independent Contractor of NSC, you shall reimburse the Company for all losses and/or charges incurred due to the actions of your clients, including but not limited to, sell-outs, buy-ins, reneges, late charges and extensions. You specifically authorize the Company to withhold from Commissions amounts reasonably estimated by the Company to be sufficient or necessary to indemnify the Company hereunder or to secure any indebtedness of the Contractor to the Company. You also grant a security interest to the Company in any brokerage or other account held by the company in the name of, the joint name of, or for your behalf to secure any indebtedness of the Contractor to the Company.
(Bresner Aff. Ex. B at 11.)
6. Frank admits that the Browns were his former clients at NSC. (Id. at ¶ 7.)
7. On or about August 22, 2003, the Browns, by letter from their attorney, stated an intention to assert a claim for breach of fiduciary duty against NSC arising out of Frank's course of conduct as the Registered Representative responsible for the Browns' accounts. (Bresner Aff. Ex. C at 1.) This letter characterized Frank's conduct as "churning." Id. at 2.
8. Frank does not dispute NSC's allegation that in or about August, 2003, Frank was indicted in the Eastern District of New York on two counts of federal securities fraud and one count of conspiracy to commit securities fraud. (Def. Mem. in Opp'n to Pl.'s Mot. at 2.)
It should be noted that the only evidence submitted by NSC in support of its allegation that Frank was indicted is an unsigned indictment. Since this document is unsigned, it is not conclusive on the question of whether such an indictment was, in fact, entered.
9. On December 12, 2003, NSC settled for $45,000 the Browns' claim that Frank had engaged in unauthorized trading in their NSC accounts. (Bresner Aff. Ex. G at 1.) The Browns alleged that between January and late August of 2002, Frank engaged in $8,000,000 of trade activity in an account holding an average of $400,000 of assets. (Bresner Aff. Ex. C at 1.) In an eleven week period spanning from June to August 2002, Frank is alleged to have made 231 trades in the Browns' accounts. (Id. at 2.) By churning the account in this way, Frank is alleged to have generated $76,709.33 in improper commissions. (Id.)
10. On April 27, 2004, NSC's counsel informed Frank of its settlement with the Browns and demanded indemnification in the amount of $46,106.50 — an amount equivalent to the value of NSC's settlement with the Browns plus and additional $1,106.50 in attorneys' fees. (Frank Aff. Ex. B).
11. On May 4, 2004, Frank's counsel represented to NSC that Frank would not voluntarily provide the demanded indemnification. (Id. at Ex. C.)
12. On May 14, 2004, NSC's counsel informed Frank that if he failed to pay NSC the $46,106.50 of indemnification by May 28, 2004, it would foreclose on its security interest by liquidating cash and securities from two accounts held by Frank at NSC (i.e., accounts numbered 8363-7865 and 3077-2784). (Id. at Ex. E.)
13. On May 20, 2004, Frank's counsel indicated to NSC's counsel that the freezing of the Frank accounts was "grossly improper and actionable."
14. Frank admits to having six separate investment and cash management accounts with NSC: (1) the "Brian David Frank IRA" account ($348,880.47 in assets), (2) the "Brian Frank Sherryl Frank JT Ten" account ($722.35 in assets), (3) the "Brian D. Frank" account ($10,844.80 in assets), (4) the "Brian Frank C/F Alexandra Frank, UND NY Unif. Trans. to Min. Act" account ($75,147.49), (5) the "Sherryl Frank" account ($5,922.52 in assets), (6) "The BS Frank Trust Stace Frank" account ($50,336.03 in assets). (Frank Aff. ¶ 5.)
15. Frank alleges, and NSC does not dispute, the following accounts were restrained: (1) the "IRA Account" ($348,880.47 in assets), (2) the "Frank Account" ($10,844.80 in assets), and (3) and "the Frank Joint Account" ($722.35 in assets).
III. Discussion
A preliminary injunction is "an extraordinary remedy that should not be granted as a routine matter." JSG Trading Corp. v. Tray-Wrap, Inc., 917 F.2d 75 (2d Cir. 1990) (citing Patton v. Dole, 806 F.2d 24, 28 (2d Cir. 1986); Medical Society v. Toia, 560 F.2d 535, 538 (2d Cir. 1977). A party seeking a preliminary injunction under Fed.R.Civ.P. 65 must show "(a) irreparable harm and (b) either (1) likelihood of success on the merits or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief." Blum v. Schlegel, 18 F.3d 1005, 1010 (2d Cir. 1994) (quoting Jackson Dairy, Inc. v. H.P. Hood Sons, Inc., 596 F.2d 70, 72 (2d Cir. 1979)); see also Fun-Damental Too, Ltd. v. Gemmy Indus. Corp., 111 F. 3d 993, 998-99 (2d Cir. 1997).
Pursuant to Fed.R.Civ.P. 52(a), in granting or refusing a preliminary injunction, the court shall set forth "the findings of fact and conclusions of law" which constitute the grounds of its action. The Second Circuit has stated that "[t]hese findings are not conclusive, and may be altered after a trial on the merits." Visual Sciences, Inc. v. Integrated Communications Inc., 660 F.2d 56, 58 (citing Hamilton Watch Co. v. Benrus Watch Co., 206 F.2d 738, 740 (2d Cir. 1953).
A. Frank has Failed to Demonstrate Probable Success on the Merits
1. Contractual Indemnification
For the purposes of this motion, the Court has determined that the RR Manual was incorporated into the Agreement by reference. As described above, Section 2.21 of the RR Manual imposed on Frank a duty to indemnify NSC for any "any amount which NSC is or becomes legally obligated to pay because of any claim or claims made against NSC because of any act or omission or neglect or breach of duty" by Frank. By its terms, Section 2.21 gives NSC a right to indemnification for settlements and attorneys' fees paid out by NSC as a result of a registered representative's acts or omissions. Therefore, the $45,000 settlement, which NSC was legally obligated to pay pursuant to the December 12, 2003 Settlement and Release Agreement and which NSC paid to settle claims arising from Frank's alleged breach of his fiduciary duty to the Browns, gave NSC an apparently meritorious contractual indemnification claim that included attorneys' fees. Pursuant to Article VIII of the Agreement, this $46,106.50 claim, an indebtedness owed by Frank to NSC, was subject to NSC's valid security interest in accounts held by Frank at NSC.
The Agreement provides that this security interest exists as to "any brokerage or other account held by the Company in the name of, the joint name of, or for the benefit of Contractor. . . ."
In his reply papers, Frank makes four arguments in opposition to NSC's asserted right of contractual indemnification. First, Frank argues that he never signed the RR Agreement and never received a copy — and, therefore, cannot be bound by its terms. This argument fails because Article XII of the Agreement incorporates the RR Manual by reference, and no additional signature or separate review was necessary to give the RR Manual force as part of the Agreement. Frank's apparent ignorance to the RR Manual's content is no defense to its proper application.
Second, Frank argues that Section 2.21 of the RR Manual is in conflict with Article VIII of the Agreement, and that Article VIII controls under the circumstances. No such conflict exists between the identified terms. Article VIII provides NSC with the following: (1) a right of indemnification against its contractors for losses to NSC caused by a contractor's clients, (2) the right to withhold a contractor's commissions to the extent necessary to satisfy indemnification claims and/or other debts owed to NSC by a contractor, and (3) a security interest in any NSC accounts held by an NSC contractor to secure any indebtedness owed by such contractor to NSC. In contrast, Section 2.21 of the RR Manual addresses the entirely separate question of NSC's rights of indemnification for NSC payment obligations arising as a result of a registered representative's acts or omissions. The two provisions are complimentary: Section 2.21 grants NSC a right of indemnification and Article VIII provides a means by which that right can be exercised.
Third, Frank argues that Section 2.21 of the RR Manual gives rise to no right of indemnification unless the elements of the claim against the registered representative are proven. This proof requirement is not to be found anywhere in the actual language of the provision. Moreover, Frank's interpretation flies in the face of the Section 2.21's text, which provides that rights of indemnification arise even if NSC settles claims against it prior to adjudication on the merits.
Fourth, Frank argues that NSC had a duty to notify Frank of its contemplated settlement with the Browns. However, Frank has failed to demonstrate where in the text of the Agreement or the RR Manual this notice requirement is to be found.
In short, Frank has failed to demonstrate any meaningful probability for the success of his opposition to NSC's contractual indemnification claim.
2. Equitable Indemnification
Under Washington law, implied indemnity is an equitable theory based on a party paying more than its fair share; it is distinct from any underlying contract. Toaster v. Durham Bates Agencies, Inc., 116 Wash. App. 516, 522, 67 P.3d 506, 509-10 (2003). This equitable indemnity arises when one party incurs a liability that the other should discharge by virtue of the nature of the relationship between the parties. Donald B. Murphy Contractors v. King Co., 112 Wash. App. 192, 198, 49 P.3d 912, 915 (2002). Implied indemnity can be established by showing: "(i) injury to a third party and that party's right to assert a cause of action against the defendant; and (ii) settlement of the third party's claim by plaintiff, who itself was legally obligated to pay the claim." Id.; see also United Boatbuilders, Inc. v. Tempo Prods. Co., 1 Wash. App. 177, 180-81, 459 P.2d 958, 960 (1969) (stating that to establish such a right to equitable indemnification in the context of a settlement, a party must prove that it was liable to a third party, that the settlement was reasonable, and that the facts give rise to a duty to indemnify.)
Based on consideration of the facts alleged by Frank and also the arguments advanced in his reply papers, the Court determines that Frank has failed to meet his burden of demonstrating that he would probably defeat NSC's equitable indemnification claim. First, NSC has come forward with credible evidence to suggest that NSC was liable to the Browns as a result of the fact that Frank, in violation of his fiduciary duties, was churning the Browns' accounts for the purpose of generating commissions. In addition, Frank has failed to come forward with any evidence or any legal argument to refute NSC's contention that it was legally obligated to pay the Brown's claim. Finally, Frank has not, and presumably cannot, demonstrate that the settlement, which provided the Browns with 60 percent of their claimed damages, was unreasonable.
Based on the foregoing, it is reasonable to conclude that NSC is entitled to equitable indemnity from Frank, including the $45,000 settlement payment and attorneys' fees incurred in connection with the settlement and NSC's collection efforts from Frank, including this action.
B. Irreparable Harm
Since Frank has failed to demonstrate a probability of success on the merits, it is unnecessary to consider whether denial of Frank's prayer for injunctive relief will cause him to suffer irreparable harm.
IV. Conclusion
Frank's motion for injunctive relief releasing his NSC accounts is granted to the extent that NSC has restrained funds in amounts exceeding the total value of its indemnification claim against Frank. Frank's motion is denied to the extent that funds in the NSC accounts are held as security for NSC's indemnification claim against him.
It is so ordered.