California Court of Appeals, Fourth District, First Division
CERTIFIED FOR PARTIAL PUBLICATION[*]
APPEAL from an order of the Superior Court of San Diego County Super. Ct. No. 37-2011-00091226-CU-FR-CTL, Joan M. Lewis, Judge.
Fields, Fehn & Sherwin, H. Thomas Fehn, Gregory J. Sherwin and Orly Davidi for Defendants and Appellants.
Law Offices of Timothy C. Karen and Timothy C. Karen for Plaintiff and Respondent.
Robert R. Tweed (Tweed) and his investment firm, Tweed Financial Services, Inc. (TFI), appeal the order denying their petition to compel arbitration of claims for damages asserted against them by Ronay Family Limited Partnership (Ronay). The claims arose out of Tweed's provision of advice concerning Ronay's purchase of investments offered by CapWest Securities, Inc. (CapWest), for which Tweed and TFI acted as registered representatives or agents. The trial court ruled that the rights of Tweed and TFI, as entities acting on behalf of CapWest, to compel arbitration derived from and depended upon the corresponding right of CapWest. The court further ruled that because CapWest is now defunct, and therefore under the rules of the Financial Industry Regulatory Authority (FINRA) cannot compel arbitration, Tweed and TFI cannot compel arbitration either. We disagree, reverse the challenged order, and remand for further proceedings.
Tweed is a financial adviser and the president of TFI, a financial and estate planning firm. Neither Tweed nor TFI has ever been a member of FINRA. Tweed, however, has at all relevant times been registered with FINRA as an associated person of a securities broker-dealer.
Tweed opened an investment account for Ronay with CapWest, which at the time was a securities broker, investment adviser, and registered member of FINRA through which Tweed and TFI offered investments. To open the account, Ronay's general partner and Tweed, as CapWest's registered representative, filled out a new account form and signed an account agreement and disclosure statement. The agreement contained an arbitration clause, which states in part:
"I (we) agree that unless unenforceable due to federal or state law, any controversy arising out of or related to my (our) accounts, the transactions with [CapWest], its officers, directors, agents, registered representatives and/or employees for me (us), or related to this agreement or breach thereof, shall be settled by arbitration in accordance with the rules then in effect of the National Association of Securities Dealers, Inc. (NASD). Such arbitration shall follow the procedures as set forth by a national arbitration committee of the NASD."
Upon Tweed's recommendation, Ronay invested more than $4 million in several tenancy-in-common interests in real property offered by CapWest. Those investments failed.
Ronay sued Tweed, TFI, CapWest, and 13 other entities that participated in the investments in the tenancy-in-common interests. Ronay sought to recover damages and other relief on various theories, including breach of fiduciary duty, negligence, misrepresentation, and statutory unfair competition. The gist of Ronay's complaint is that Tweed and the other defendants misled Ronay about the risks of the tenancy-in-common investments and induced Ronay to make unacceptably risky investments, which ultimately failed.
Tweed and TFI filed a petition to compel arbitration in which they set forth the arbitration clause quoted above; alleged the existence of a controversy within the scope of the clause, and Ronay's refusal to submit the controversy to arbitration; and requested an order directing Ronay to arbitrate the controversy before FINRA. (See Code Civ. Proc., § 1281.2.) Tweed and TFI also moved for a stay of the action pending completion of arbitration. (See id., § 1281.4.)
Ronay opposed the petition and motion on the ground that the arbitration agreement was unenforceable because CapWest was defunct and FINRA had cancelled its membership. In support of this argument, Ronay relied on rule 12202 of FINRA's Code of Arbitration Procedure for Customer Disputes (FINRA Rule 12202),  which makes ineligible for arbitration claims by or against inactive members unless, after the claim arises, the customer agrees in writing to arbitrate. Ronay further argued that Tweed and TFI ...