In Rocky XXIV, we come across a fighter who transitioned his fee-for-advice business to a new FINRA member firm after obtaining assurances that the firm would expeditiously arrange to handle his model. The firm paid a huge purse in the form of a six-figure promissory note. The fight didn't go the distance. Rocky refused to answer the bell for the third round claiming that his opponent was trying to bite off his ear -- or, in somewhat more mundane terms -- that the new firm wasn't timely delivering on its promises to provide support services. The promoter wants his purse back. Rocky calls for Adrian, calls for Creed, calls for Rambo (he was confusing movies), and then refuses to return the purse. Angered, the firm marches into a Texas state court. Rocky, still recovering from his shortened fight, climbs back into the ring and demands that any new bout be held before a FINRA arbitration panel. The bell rings for Round One . . .
Petition for Note Balance
On March 7, 2018, FINRA member firm Plaintiff Hilltop Securities, Inc., Plaintiff filed a Petition in the Texas State District Court alleging the Defendant Rocky V. Emery had executed a Promissory Note for $350,000 around June 17, 2015, and owed the firm a balance of $294,955.66 plus interest as of the date on which his employment was terminated. Hilltop Securities, Inc., Plaintiff, v. Rocky V. Emery, Defendant (Petition, 93rd Judicial District Court Dallas County, Texas, Trial Court Cause No. DC-18-03103 / March 7, 2018) https://courtsportal.dallascounty.org/DALLASPROD/DocumentViewer/ Embedded/7RLo-Ycp5V1VgIv5e0PCLExNOw0uFzJ7cnL0DRnB3oxTFCzXfzxf3u _0dhiAdW6pPJycNZThI_WOMhwG7FHg0w2?p=0
Emery's Motion and Answer
In response to Hilltop's Petition, Emery moved to compel the claims into a FINRA arbitration. Hilltop Securities, Inc., Plaintiff, v. Rocky V. Emery, Defendant (Defendant's Motion to Compel Arbitration and Answer, 93rd Judicial District Court Dallas County, Texas, Trial Court Cause No. DC-18-03103 / April 1, 2018) https://courtsportal.dallascounty.org/DALLASPROD/DocumentViewer/ Embedded/_jt9auJY59K3-wq4B-ncncA2znz59vjAmsO8XTtgNQEa9Y8E37Fa8c5QXA7 aa42EawJieqFooGy3GnBE-6GAsg2?p=0 In his Motion to Compel/Answer, Emery argued that as a FINRA member firm, Hilltop was subject to FINRA Rule 13200, which provides, in part that:
[A] dispute must be arbitrated
under the Code if the dispute arises out of the business activities of a member or an associated
person and is between or among: Members; Members and Associated Persons; or Associated
Fee for Advice -- A Lack of Support
In furtherance of his defenses against repayment of the Promissory Note, Defendant Emery offered, in part, this narrative [Ed: footnotes omitted]:
6. As part of the business activities of Defendant, in 2016, while searching for a broker-dealer that could support his ultra-high net worth client base as a registered investment adviser
and provide his clients services on a "fee for advice" basis, a recruiter introduced Defendant to
Earle Hoppe ("Hoppe"), the branch manager of Plaintiff's Houston, Texas office.
7. Defendant had an initial lunch meeting with Hoppe and another representative of Plaintiff
and explained his needs for a broker-dealer platform like Plaintiff had. The meeting was
followed by a WebEx presentation Defendant then made to the president of one of Plaintiff's
"independent networks" and its head of compliance, who obviously received the presentation as
part of Plaintiff's business activities. Such presentation made clear that Defendant desired to
utilize a "fee for advice" model as opposed to a transaction model for charging clients. Following that presentation, Defendant provided Plaintiff with a sample "fee for advice" client
agreement he had previously used.
8. On or around May 2016, Plaintiff advised that the defendant that he believed the industry
was going in a "fee for advice" direction, that the plaintiff could support the defendant's
business, and that it would take a couple of months for the plaintiff to be able to implement
Emery's "fee for advice" model. As part of its attempt to induce the defendant, plaintiff
presented Emery with the very promissory note in the amount of $350,000 (the "Note"), which is
the subject of this lawsuit. As a result, in or around June 2016, Emery accepted Plaintiff's
employment offer. A copy of such agreement is annexed hereto as Exhibit A.
9. After Defendant joined Plaintiff, Plaintiff made no progress in terms of being able to
support Defendant's business and the "fee for advice" model, which ultimately led to Defendant
being forced to leave the employment of Plaintiff. That, in turn, led to Plaintiff's improper filing
of the instant action instead of commencing arbitration as required by FINRA rules to which
Plaintiff is bound.
FINRA Arbitration: Long May She Un-Waive
In anticipation of Hilltop's objection to remand to arbitration, Emery offers, in part, this argument:
12. Should Plaintiff attempt to argue that language in the subject promissory note states that
all disputes involving the note shall be tried in a Dallas County court and that such language
should somehow trump mandatory FINRA arbitration and strong public policy in favor of
arbitration, such argument should be rejected. Such argument has been soundly rejected by other
courts and efforts to undermine FINRA's rules in such manner have resulted in disciplinary
action against brokerage firms who attempt to deprive employees of the rights established by
13. When confronted with this specious argument, a New York appellate court recognized
that FINRA's arbitration clause is non-waivable and that "an employment-related compensation
arrangement which purports to bypass arbitration is without significance." Merrill Lynch Intl.
Fin., Inc. v. Donaldson, 27 Misc. 3d 391, 395 (Supreme Court, N.Y. County, February 5, 2010).
As a result of its efforts to circumvent FINRA's arbitration requirement in the foregoing case,
Merrill Lynch entered into an Acceptance, Waiver and Consent Agreement with FINRA in
which it agreed to pay a $1 million fine for engaging in the very same conduct Plaintiff now
hopes will escape this Court's scrutiny. A copy of the Acceptance, Waiver and Consent
Agreement is annexed . . .
Trial Court Denies Motion to Remand
Without providing any discernible rationale, the Trial Court denied Defendant Emery's Motion to Compel Arbitration. Additionally, the Court enjoined Emery from filing a FINRA Arbitration against Hilltop. Hilltop Securities, Inc., Plaintiff, v. Rocky V. Emery, Defendant(Order, 93rd Judicial District Court Dallas County, Texas, Trial Court Cause No. DC-18-03103 / May 21, 2018).
Emery appealed the Trial Court's Order to the Texas Court of Appeals. On appeal, he argued that the trial court erred by refusing to compel arbitration and by granting
Hilltop's application for temporary injunction. Rocky V. Emery, Appellant, v. Hilltop Securities, Appellee (Opinion, Court of Appeals for the Fifth District of Texas, 05-18-00697-CV, Trial Ct. Cause No. DC-18-03103) http://brokeandbroker.com/PDF/EmeryTXCtApp.pdf
In its Opinion, the Court of Appeals highlights this portion of the Promissory Note at issue:
This Note shall be governed by and construed in accordance with the laws of the
State of Texas and the applicable laws of the United States of America. This Note
is performable in Dallas County, Texas. Any action or proceeding under or in
connection with this Note against Employee or any other party ever liable for
payment of any sums of money payable on this Note may be brought in any state
or federal court in Dallas County, Texas. Employee and each such other party
hereby irrevocably (i) submits to the nonexclusive jurisdiction of such courts, and
(ii) waives any objection he may now or hereafter have as to the venue of any such
action or proceeding brought in such court or that such court is an inconvenient
At Page 2 of the Court of Appeals Opinion
The Court of Appeals noted that Emery's Employment Agreement with Hilltop does not contain an arbitration clause; and, further, the Court noted the following [Ed: footnotes omitted]:
[T]he agreement does
not contain an arbitration clause. It provides only that "[t]he validity, interpretation, and
performance of this Agreement shall be controlled by and construed under the laws of the State of
Texas." Emery did not include a copy of Rule 13200 or any evidence supporting his argument that
the rule bound Hilltop to arbitrate its claim on the promissory note.
Hilltop opposed Emery's motion, responding that "[w]hatever issues Defendant raises as
to his employment with Plaintiff clearly are outside the terms of the Promissory Note." Hilltop
concluded, "[i]t is [Hilltop's] assertion that the claims in the FINRA arbitration are trumped by the
prior pending case in this Court in Dallas, Texas."
After a hearing, the trial court denied Emery's motion by written order dated May 21, 2018.
There is no reporter's record of this hearing or any indication that any witness testified or that any
documents were offered or admitted into evidence. Consequently, there is nothing in the record
to show that Emery proffered to the trial court the FINRA rule under which he contended Hilltop
was required to arbitrate. The trial court had before it only the note-the sole basis for Hilltop's
claim-that did not contain an arbitration provision.
At Page 3 of the Court of Appeals Opinion
In deciding to reverse the Trial Court's Order granting Hilltop's temporary injunction against resort to a FINRA arbitration, the Court of Appeals also remanded the case back to the lower court with instruction to order the parties to arbitrate their claims before FINRA. In part, the Court of Appeals offered this rationale:
The Note provides that it "shall be governed by and construed in accordance with the laws
of the State of Texas and the applicable laws of the United States of America." The Employment
Agreement between Hilltop and Emery also provides that "[t]he validity, interpretation, and
performance of this Agreement shall be controlled by and construed under the laws of the State of
Texas." But Emery argues on appeal that arbitration is required under a "U4 Uniform Application
for Securities Industry Registration or Transfer" that he submitted to Hilltop at the commencement of his employment. We have concluded that a Form U4 "is a separate contract involving the sale
of securities, and its arbitration clause is enforceable under the FAA," In re Merrill Lynch, Pierce,
Fenner & Smith, Inc., 195 S.W.3d 807, 813 (Tex. App.-Dallas 2006, orig. proceeding), as have
several of our sister courts. . .
At Pages 6 - 7 of the Court of Appeals Opinion
By its ruling that Emery's claims in the arbitration were compulsory counterclaims under
rule [sic] 97, the trial court necessarily found that Emery's claims "[arose] out of the transaction or
occurrence that is the subject matter of the opposing party's claim." TEX. R. CIV. P. 97. Given the
evidence establishing that FINRA Rule 13200 required arbitration of disputes "aris[ing] out of the
business activities of a member or an associated person and is between or among" members or members and associated persons, and the evidence that Hilltop and Emery were subject to
FINRA's rules, the parties are required to arbitrate their dispute. Consequently, Hilltop failed to
establish that it was entitled to the injunctive relief it sought, to stay the arbitration pending the
resolution of Hilltop's suit on the promissory note. See Topletz, 2017 WL 1281393, at *2. The trial
court should have denied Hilltop's application for injunction. We sustain Emery's second issue
At Pages 10 - 11 of the Court of Appeals Opinion
Bill Singer's Comment
An interesting procedural preliminary for this dispute.
Notwithstanding the District Court's terse Decision that is wholly lacking in content, context, or rationale, the Court of Appeals saved the day with a perfectly drafted Opinion. Having come to the fork-in-the-road presenting both court and FINRA arbitration routes, the parties are now directed down the arbitration road. All of which is mere prelude to the actual determination of the merits of the lawsuit.
As thing set up, Emery will assert that Hilltop had explicitly promised to support his fee-for-advice business within a couple of months and paid him a $350,000 "bonus" (in the form of the underlying Promissory Note) as an inducement to transition his business. Accordingly, Emery will probably attempt to repudiate any obligation to repay the Note by arguing that Hilltop breached its agreement to onboard his business in an expeditious manner and/or fraudulently induced him into the business relationship. Hilltop's likely responses will be that it had engaged in good faith and timely efforts to accommodate Emery, and he left for reasons that do not justify any waiver of the repayment of the Note balance at tissue.