An irreverent Wall Street Blog
by Bill Singer
by Bill Singer
JP Morgan Customers Get Two Tickets To Paradise
August 4, 2014
In July 2007, Jeffrey B. McDonald and his wife Shelli A. McDonald opened an investment account with J.P. Morgan Chase Bank (the "Bank") and its affiliate brokerage firm J.P. Morgan Securities ("JPMS"). Each account was subject to a separate contract governing various conduct, including how disputes would be resolved.
Bank Shot
Although the Bank managed the McDonalds' Bank investment account, the McDonalds directed the transactions in their JPMS brokerage account. With the onset of the Great Recession, by the end of 2008, the McDonalds lost approximately $1.5 million from the Bank investment account; in contradistinction, they had managed to turn a profit in their self managed JPMS brokerage account.
The Name That Shall Not Be Named
In August 2011, the McDonalds filed an arbitration with the Financial Industry Regulatory Authority ("FINRA") alleging breach of fiduciary duty, self-dealing, and other forms of misrepresentation and mismanagement. In their arbitration statement of claim, they only named JPMS and two employees of the Bank, who set up and oversaw the McDonalds' accounts.
SIDE BAR: Although JPMS is registered with FINRA and as a member firm subject to its arbitration jurisdiction, the Bank is not a FINRA member firm and is not subject to its jurisdiction. The McDonald's Bank investment account was subject to the terms of a contract that did not provide for arbitration.
The McDonalds claimed that the Bank employees had ignored their stated investment goals by improperly investing nearly all their money in an illiquid proprietary hedge fund. Moreover, the McDonalds complained that they could not withdraw their funds from that fund until months after the September 2008 market crash. The arbitration claim charged JPMS with vicarious liability for failing to supervise its agents; however, the Bank was not named at all.
I Do Declare!
After the McDonalds made their demand for arbitration, the Bank filed suit against them in United States District Court for the Northern District of Illinois. The Bank sought a declaration that it had not breached any duty to the McDonalds. JPMS and the Bank also sought an injunction prohibiting the McDonalds from pursuing their ongoing arbitration action against JPMS and the two Bank employees.
Not Getting Its Act Together
The district court granted a preliminary injunction blocking the arbitration but eventually dismissed the Bank's claim for declaratory relief based upon a lack of standing. The Court declined to halt an arbitration to which the Bank was not a party. The Court then dismissed the rest of the lawsuit on the ground that the Bank and JPMS had failed to join the two Bank employees, who the court held were both required and indispensable parties because it could not enjoin the arbitration in their absence.
A Higher Authority
Following appeal to the United States Court of Appeals for the Seventh Circuit, J.P. Morgan Chase Bank, N.A. and J.P. Morgan Securities, LLC, Plaintiffs-Appellants, v. Jeffrey B. McDonald And Shelli A. McDonald, Defendants-Appellees (7th Circuit, 13-2635, July 25, 2014), the Circuit Court offered this preliminary assessment of the dispute:
Businesses often seek to bind customers to arbitration agreements because they view arbitration as more efficient and predictable than going to court. In an unusual role reversal, this case features a large company trying its best to avoid arbitration with two of its former customers. That company, J.P. Morgan Chase Bank, has sued its former investment account holders, Jeffrey and Shelli McDonald, in federal district court to stop them from arbitrating a dispute against an affiliate of the Bank and two Bank employees, but not against the Bank.The district court dismissed the Bank's case, finding (a) that the Bank lacked standing to block the arbitration to which it was not a party and (b) that the two Bank employees named in the arbitration were indispensable parties to the federal lawsuit. (One of the employees could not be joined without defeating the court's diversity jurisdiction.) We reverse and remand. The Bank has standing to sue because the arbitration would violate a forum-selection clause in the relevant contract with the McDonalds. The McDonalds cannot avoid that forum-selection clause by the tactic of naming only an affiliate of the Bank and the two Bank employees as respondents in the arbitration. We also find that the two employees are not required parties to this federal lawsuit. Our decision should not be understood as touching the merits of the McDonalds' substantive claims. This appeal is limited to forum selection.
Opinion at Pages 1 -2
Two Tickets To Paradise
In the words of famed jurist Eddie Money, the Circuit Court reiterated that the McDonalds had, in effect, "two tickets to paradise":
In short, there is no reason the individual employees need to be named parties to this lawsuit between their employer and its customers. The McDonalds remain free to pursue claims concerning the losses to their investment account with the Bank, but they will have to do so in a state or federal court in Cook County. They can also seek arbitration of any claims they have arising from their brokerage account with JPMS. But under the terms of the separate contracts they signed with the separate companies-the Bank and JPMS-the McDonalds cannot confuse the two. The district court's decisions dismissing the Bank for lack of standing and dismissing the rest of the action for failure to join required and indispensable parties are REVERSED and the case is REMANDED for further proceedings consistent with this opinion, including possible reinstatement of injunctive relief against the arbitration demanded by the McDonalds.
Opinion at Page 13