OPINION OF THE COURT
HUTCHINSON, Circuit Judge.
Appellants Manuel Kaplan, Carol Kaplan ("Kaplans"), and M.K. Investments, Inc. ("MKI"), appeal an order of the United States District Court for the Eastern District of Pennsylvania. It confirmed an arbitration award arbitrators appointed under the rules of the Philadelphia Stock Exchange ("the Exchange") had entered in favor of appellee First Options of Chicago, Inc. ("First Options").
The Kaplans argue that the arbitration panel lacked jurisdiction over them. First Options says that the Kaplans have waived any jurisdictional objections. Because they raised their objection to arbitral jurisdiction several times during the arbitration proceedings, we hold that the Kaplans have not waived it. We also reject First Options' alternate argument that an agreement MKI signed as part of a "workout," meant to settle a dispute arising out of Mr. Kaplan's activities as a principal of MKI and a former member of the Exchange, evidences the Kaplans' consent to arbitrate and the Kaplans' individual liability for performance of the workout. There was no arbitration clause in the workout document the Kaplans signed.
First Options' argument that Mr. Kaplan's position as an officer of MKI compelled him to arbitrate his obligations under the workout as an "associated person" of a member, MKI, is also rejected. The record does not contain any U-4 Form or other document evidencing Mr. Kaplan's agreement to arbitrate, and the terms of the workout plainly show that he did not agree to submit his personal responsibility for MKI's obligations to arbitration.
In addition, we reject First Options' argument that Mr. Kaplan's former membership in the Exchange subjected him to arbitration under its rules relating to members. The only dispute that arose while Mr. Kaplan was a member was the dispute that led to the workout, not the dispute over the workout's performance that the arbitrators heard.
Finally, we reject First Options' argument that Mr. Kaplan is the alter ego of MKI. The evidence of failure to observe corporate formalities in some distributions MKI made to him is insufficient to show that MKI was a sham that Mr. Kaplan manipulated in fraud of creditors.
We will therefore reverse the district court's order confirming the arbitration award against the Kaplans and remand the case to it with instructions to enter an order granting the Kaplans' request to vacate the arbitrators' award against them as individuals.
I. Factual & Procedural History
First Options is a "clearing firm" or "clearinghouse" and member of the Exchange. MKI, a Pennsylvania corporation, was an "options market maker"
On October 19, 1987, corporate equities suffered an unprecedented drop in value. Stocks traded on the New York Stock Exchange, and those traded on regional exchanges, crashed. The Philadelphia Stock Exchange was no exception. Five days before the crash, MKI's trading account had a balance or net equity of approximately $10.5 million. On October 19, 1987, MKI lost over $12 million and its account had a deficit of $2.1 million by the end of the trading day.
As the clearing firm for MKI, First Options guaranteed to the Exchange and the persons with whom MKI traded that all positions in MKI's accounts would be covered. After trading closed on October 19, 1987, First Options was at risk on the $2.1 million deficit in MKI's accounts.
First Options' agreement with MKI gave it the right to liquidate MKI's positions "whenever in [First Options'] discretion [First Options] deem[ed] it necessary." App. at 72. Therefore, First Options took control of MKI's trading accounts and proceeded to liquidate any remaining positions which, in its opinion, posed significant unacceptable risks. First Options' liquidation of MKI's positions increased MKI's deficit to $5.1 million.
MKI and First Options had, in the meantime, entered into settlement negotiations about MKI's continued operation. First Options pressed Mr. Kaplan to assume personal liability for MKI's obligations. Mr. Kaplan refused. Instead, he and MKI disputed the size of MKI's deficit and claimed that First Options' mishandling of the liquidation was only increasing the deficit. During these negotiations, Mr. Kaplan and his counsel told First Options that neither MKI nor Mr. Kaplan had any liquid assets to contribute to any settlement or workout beyond MKI's interest in a joint trading account, certain exchange memberships and the 1987 federal income tax refund the Kaplans were anticipating.
Negotiations continued during November and December and there is evidence that the parties reached a "handshake" deal in December. On December 8, 1987, Mr. Kaplan relinquished his membership on the Exchange and negotiations continued. On March 24, 1988, the Kaplans, MKI, and First Options separately executed four documents evidencing an overall method of settling the dispute that had resulted from MKI's October 19, 1987, deficit. They were: (1) a Letter Agreement executed by First Options, MKI, Mr. Kaplan, Mrs. Kaplan, and certain other entities and individuals; (2) a Guaranty executed only by MKI; (3) a Subordinated Loan Agreement executed by First Options, MKI, and a separate entity; and (4) a Subordinated Promissory Note executed by MKI. Only one of these four documents, the Subordinated Loan Agreement, contained an arbitration clause, and only First Options, MKI and the other entity, whose agreement to
Under the terms of the Workout:
First Options agreed to release MKI from any claims First Options might have against it for the disputed debt upon MKI's performance of all its obligations under the workout. First Options also agreed to release Mr. Kaplan, individually, from any claims First Options might have against him beyond those he had undertaken in the workout.
MKI resumed trading in April of 1988. On January 16, 1989, before the parties had carried out all the terms of the March 1988 workout, MKI's account suffered another loss of over $1.5 million as a result of a takeover bid for one of the companies in whose stock MKI had a position.
On January 17, 1989, First Options again took over MKI's accounts and began to liquidate all its positions. First Options also barred MKI and Mr. Kaplan from conducting business on the Exchange and ordered all MKI traders off the trading floor. This second liquidation took about four months. It added $65,000 to the deficit that had been outstanding when the workout began.
After taking control of MKI, First Options demanded an opportunity to inspect MKI's corporate books and the Kaplans' tax returns. It also demanded payment of the $300,000 tax refund the Kaplans had agreed to turn over and contended Mr. Kaplan, along with MKI, was liable for all sums still due from MKI because they were alter egos of each other. The Kaplans refused First Options' demands, asserting that it was again compounding the problem by its ongoing liquidation of MKI's accounts. First Options then declared all sums still due under the workout accelerated and demanded immediate payment of the accelerated debt.
Ultimately, First Options submitted the dispute over the workout to the Exchange. It sought: (1) $6,292,421.60 from MKI for breach of contract; (2) $300,000, the amount of the Kaplans' 1987 tax refund, from the Kaplans individually; (3) $6,292,421.60 from Mr. Kaplan on the theory he was individually liable as MKI's controlling person; (4) $6,292,421.60 from Mr. Kaplan as MKI's alter-ego; plus (5) interest, costs, and attorneys' fees against MKI and the Kaplans.
On July 24, 1989, the Kaplans and MKI filed responses denying liability, and Mr. Kaplan and MKI filed counterclaims against First Options, each seeking $10,000,000 from First Options for breach of contract, interference with prospective business opportunities and libel and slander. The Kaplans also submitted written objections to the arbitrators' jurisdiction under the Exchange's arbitration rules. In them, the Kaplans stated, "The Philadelphia Stock Exchange ... and the Arbitration Committee ... lack jurisdiction over this matter and the purported claim should be dismissed." App. at 311-12.
On February 26, 1990, not quite two years later, there was a pre-hearing discovery conference. The Kaplans' former counsel participated in it without renewing the objections to the arbitrators' jurisdiction. The Kaplans contend his limited participation in the discovery conference did not waive their objections to jurisdiction. Neither the Kaplans nor First Options submitted any documents to the Exchange that confirmed the Kaplans' withdrawal of their objections to the arbitrators' jurisdiction at the discovery conference or thereafter, and the arbitration panel's February 26, 1990, discovery order did not mention jurisdiction.
For the next twenty-two months, no discovery took place and no motions were filed; nor did the arbitration panel conduct any proceedings or issue any rulings before January 10, 1992. In December 1991, the Kaplans retained new counsel. On January 6, 1992, they filed a motion to dismiss for lack of jurisdiction. They also complained about the arbitrators' failure to rule on the objections they had filed two years earlier and said they were "reiterat[ing] and renew[ing] their objections to the Committee's jurisdiction." App. at 194.
In response to the Kaplans' motion to dismiss for lack of jurisdiction, First Options argued in the alternative that Mr. Kaplan was bound to arbitrate under Exchange rules because he was a member of the Exchange at the time of the October 19, 1987 crash, because he is an associated person of a member, or because he was MKI's alter ego. The Exchange denied the Kaplans' motion to dismiss for lack of jurisdiction without comment.
Sometime in May 1992, the matter finally proceeded to arbitration and, after eight days of hearings, the seven-member arbitration panel voted five to two to pierce the corporate veil and, on June 5, 1992, entered an award for $5,662,188.00 plus interest in favor of First Options and against Mr. Kaplan and MKI jointly and severally. The panel also ordered the Kaplans, jointly and severally, to remit their 1987 tax refund, $346,342.00, plus interest. Finally, it found for First Options on Mr. Kaplan's and MKI's counterclaims.
The Kaplans and MKI filed a petition to vacate the award in the district court and First Options filed a cross-petition for its confirmation. In an order accompanied by a memorandum opinion dated September 25, 1992, the district court confirmed the award. It held that Mr. and Mrs. Kaplan had consented to Exchange arbitration under the arbitration clause in the Subordinated Loan Agreement even though neither had ever signed that particular document. Alternately, the court held that the Kaplans' former counsel's participation in the 1990 discovery conference had waived their jurisdictional objections.
The district court then went on to affirm the arbitrators' decision to pierce the corporate veil on the merits. It also held, without explanation, Mr. Kaplan's release from individual liability was conditioned upon performance of the workout and that the release was ineffective because the workout had not been fully performed,
II. Jurisdiction & Standard of Review
The district court had subject matter jurisdiction over this action to confirm or vacate the arbitration award under 28 U.S.C.A. § 1332 (West 1993) and 9 U.S.C.A. §§ 9, 10 (West 1970 & Supp.1993). We have appellate jurisdiction over MKI's and the Kaplans' appeal from the final judgment of the district court confirming the award under 28 U.S.C.A. § 1291 (West 1993).
We review a district court's denial of a motion to vacate a commercial arbitration award de novo. Colonial Penn Ins. Co. v. Omaha Indem. Co., 943 F.2d 327, 331 (3d Cir.1991); Mutual Fire, Marine & Inland Ins. Co. v. Norad Reinsurance Co., 868 F.2d 52, 56 (3d Cir.1989) ("In reviewing the district court's denial of appellants [sic] motion to vacate the arbitration award, this Court will stand in the shoes of the district court and determine whether appellants were entitled to vacate the arbitration award pursuant to 9 U.S.C. § 10(d)."); see also R.M. Perez & Assocs. v. Welch, 960 F.2d 534, 540 (5th Cir.1992); Moseley, Hallgarten, Estabrook & Weeden v. Ellis, 849 F.2d 264, 267 (7th Cir. 1988).
First Options asks us to reconsider these holdings and adopt instead the standard the United States Court of Appeals for the Eleventh Circuit uses. That court reviews decisions denying petitions to vacate arbitration awards for abuse of discretion. See Robbins v. Day, 954 F.2d 679, 681-82 (11th Cir.), cert. denied, ___ U.S. ___, 113 S.Ct. 201, 121 L.Ed.2d 143 (1992). We reject First Options' invitation. Even if this panel were to look favorably on the new standard it suggests, we could not adopt it. See Third Circuit Internal Operating Procedure 9.1 (1993) ("[N]o subsequent panel overrules the holding in a published opinion of a previous panel."). Only the Court in banc has power to change our present standard of review. See Third Circuit Internal Operating Procedures 9.1 (1993).
This Court has also held the district courts should independently decide whether an arbitration panel has jurisdiction over the merits of any particular dispute. In International Brotherhood of Teamsters, Local 249 v. Western Pennsylvania Motor Carriers Association, 574 F.2d 783 (3d Cir.), cert. denied, 439 U.S. 828, 99 S.Ct. 102, 58 L.Ed.2d 122 (1978), we stated:
[W]hether the arbitrator has jurisdiction over a particular dispute—i.e. whether the controversy is arbitrable—is a question for the court to decide. A jurisdictional decision by an arbitrator that he has authority to decide a dispute is subject to a much broader and more rigorous judicial review. Bieski v. Eastern Automotive Forwarding Co., [396 F.2d 32 (3d Cir.1968)]. As we said in Bieski:
Id. at 787 (quoting Bieski, 396 F.2d at 38) (citations omitted).
We will exercise plenary review over the district court's determination that the arbitration panel had jurisdiction over the Kaplans insofar as it turns on questions of law. See Mellon Bank v. Farino, 960 F.2d 1217, 1221 (3d Cir.1992). To the extent that the district court's determination of arbitral jurisdiction turns on findings of fact, however, our scope of review will be limited to whether those findings are clearly erroneous.
III. The Parties' Contentions
The Kaplans argue that the Exchange's Arbitration Panel lacked jurisdiction over
First Options also argues that this record establishes the Kaplans' consent to arbitration even if they did not waive their objection to jurisdiction. In support, it advances three alternate theories. Only the first applies to Mrs. Kaplan. They are: (1) the arbitration clause in the Subordinated Loan Agreement, one of the four documents embodying the workout, subjects the Kaplans to arbitration even though they did not sign it because the four documents refer to each other and must be read together as one agreement under general principles of contract law; (2) because Mr. Kaplan was a "member" of the Exchange at the time some of the underlying incidents occurred that led to the dispute which was the subject of the workout he consented to arbitral jurisdiction under the bylaws and rules of the Exchange requiring its "members" to arbitrate; and (3) Mr. Kaplan, as President of MKI, impliedly consented to arbitral jurisdiction under the bylaws and rules of the Exchange requiring an "associated person" of a member to arbitrate. Finally, First Options contends that Mr. Kaplan was an alter ego of MKI and therefore MKI's consent to arbitrate binds him. We will discuss each of these arguments in turn, beginning with waiver.
IV. Waiver of Objection to Arbitral Jurisdiction
As one alternate basis for its conclusion that the arbitrators had jurisdiction over the Kaplans, the district court held their former counsel's participation in the 1990 discovery conference waived their objection to the arbitrators' jurisdiction.
A party does not have to try to enjoin or stay an arbitration proceeding in order to preserve its objection to jurisdiction. See Pennsylvania Power Co. v. Local Union No. 272 of Int'l Bhd. of Elec. Workers, 886 F.2d 46, 50 (3d Cir.1989); Local 719, Am. Bakery and Confectionery Workers v. National Biscuit Co., 378 F.2d 918, 921-22 (3d Cir.1967); see also Avis Rent A Car Sys., Inc. v. Garage Employees Union, Local 272, 791 F.2d 22, 26 (2d Cir.1986) (citing National Biscuit for proposition that party does not have to seek stay of arbitration to preserve jurisdictional objection). Federal courts encourage participation in arbitration. Requiring parties to refuse to participate in order to challenge arbitral jurisdiction would not advance this goal.
A jurisdictional objection, once stated, remains preserved for judicial review absent a clear and unequivocal waiver. See Pennsylvania Power Co., 886 F.2d at 50 (only where party has "clearly indicate[d] his willingness to forego judicial review" will court find waiver of jurisdictional objection) (quoting National Biscuit, 378 F.2d at 921-22). Therefore, where a party objects to arbitrability but nevertheless voluntarily participates in the arbitration proceedings, waiver of the challenge to arbitral jurisdiction will not be inferred. Id. In Pennsylvania Power Co., Penn Power had objected to the arbitrability of an issue in its answer to a grievance before the arbitrator, the district court and the court of appeals. Id. In International Brotherhood of Teamsters, in contrast, both the Union and the Association signed a submission form specifying the issues that could be submitted to arbitration. This Court nevertheless held "the fact that the Union disputed [the arbitrators'] jurisdiction and argued the merits before [the arbitrators] does not constitute a waiver of its jurisdictional objections." International Brotherhood of Teamsters, 574 F.2d at 786 n. 2 (citing National Biscuit, 378 F.2d at 921).
The Kaplans refused to sign any submission form. They asserted their objection
In January 1992, the arbitration panel denied the Kaplans' motion to dismiss for lack of jurisdiction without stating why. When the Kaplans spoke with the Exchange's Director of Arbitration about the motion, she said only that the denial was consistent with the Exchange Arbitration Panel's interpretation of jurisdiction. She did not mention waiver.
The district court initially thought the Kaplans' intentions concerning their objection to the arbitrators' jurisdiction were "at least somewhat ambiguous" when they chose to proceed with the 1990 discovery conference. App. at 627. It ultimately decided, however, that they had "clearly indicated their willingness to submit to the authority of the arbitration panel and forego any jurisdictional objections."
Yorkaire is materially different from this case, and the district court's reliance on it is misplaced.
This conclusion is supported by International Brotherhood of Teamsters. There, the parties had actually signed submission forms yet we held they had not waived their objections to the arbitrators' jurisdiction. International Brotherhood of Teamsters, 574 F.2d at 786 n. 2, 788. Here, the Kaplans reasserted their jurisdictional objection before commencement of the arbitration proceedings and again, two years later, before the panel heard any evidence, as soon as activity in the case had resumed. The Kaplans did not waive their objections. They reasserted
Likewise, Mr. Kaplan's filing of a counterclaim against First Options in the arbitration does not waive his objection to the arbitrators' jurisdiction. We believe filing a counterclaim does not waive an objection to jurisdiction. Bayou Steel Corp. v. M/V Amstelvoorn, 809 F.2d 1147, 1149 (5th Cir.1987); In re Arthur Treacher's Franchisee Litig., 92 F.R.D. 398, 413 (E.D.Pa.1981); cf. Neifeld v. Steinberg, 438 F.2d 423, 431 n. 17 (3d Cir.1971) (dicta). We think Mr. Kaplan had a right, without waiving his objection to the arbitrators' jurisdiction, to file a counterclaim to protect himself against the possibility that the arbitrators could rule against him on the merits of First Options' claims. The counterclaim is not a clear or manifest expression of his "willingness to forego judicial review." Pennsylvania Power Co., 886 F.2d at 50.
The district court erred in holding that the Kaplans had waived their jurisdictional objection. Therefore, we turn to First Options' other arguments in support of the Exchange Arbitration Panel's jurisdiction over the Kaplans.
Arbitration is fundamentally a creature of contract. See, e.g., United Steelworkers v. Warrior and Gulf Navigation Co., 363 U.S. 574, 582, 80 S.Ct. 1347, 1352, 4 L.Ed.2d 1409 (1960). The Supreme Court has stated: "arbitrators derive their authority to resolve disputes only because the parties have agreed in advance to submit such grievances to arbitration." AT & T Techs., Inc. v. Communications Workers, 475 U.S. 643, 648-49, 106 S.Ct. 1415, 1418, 89 L.Ed.2d 648 (1986) (citation omitted). The Federal Arbitration Act makes written agreements to arbitrate "valid, irrevocable, and enforceable" on the same terms as other contracts. 9 U.S.C.A. § 2 (West 1970). There must be evidence sufficient to establish the parties' consent to arbitration. "As a matter of contract, no party can be forced to arbitrate unless that party has entered into an agreement to do so." PaineWebber Inc. v. Hartmann, 921 F.2d 507, 511 (3d Cir.1990). That agreement must be "express" and "unequivocal." ParKnit Mills, Inc. v. Stockbridge Fabrics Co., 636 F.2d 51, 54 (3d Cir.1980). On the other hand, doubts about the intended scope of an agreement to arbitrate are resolved in favor of arbitration. See, e.g., Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983).
An arbitrator's decision on the merits will be affirmed as long as it "draws its essence" from the contract. Pennsylvania Power Co., 886 F.2d at 48; see also ParKnit, 636 F.2d at 54. An arbitrator's decision to assert jurisdiction over objection is, however, subject "to a much broader and more rigorous judicial review" than an arbitral decision on the merits. Because it is "a question for the court to decide," it is subject to de novo judicial review. International Brotherhood of Teamsters, 574 F.2d at 787.
The district court considered only the first of the three, but in the end all three fail to come to grips with one significant set of material facts about which there is no genuine dispute. The record shows that from October 19, 1987 on, Mr. Kaplan persistently refused to take individual responsibility for MKI's obligations to First Options. There were negotiations from then until March 1988. During them, he offered to make some limited contributions to help eliminate the deficit MKI had incurred in the October 19, 1987 crash. That offer was accepted by First Options in March 1988 and its acceptance was formally embodied in the workout documents. These documents limited the Kaplans' obligations to the contribution of certain fixed sums and contained no promise to arbitrate. Thus, though we will separately consider all three of First Options' variations on the theme of consent, the common denominator which applies to all is the absence of any agreement to arbitrate in the only workout document the Kaplans signed as individuals.
A. The Arbitration Clause in the Subordinated Loan Agreement As Evidence of Consent
We begin with the argument in support of arbitration on a contract theory that the district court did consider. Did the arbitration clause in the Subordinated Loan Agreement MKI signed bind the Kaplans though they did not sign it? The district court said yes.
The workout had four documents. Only one, the Subordinated Loan Agreement, has an arbitration clause. MKI, not the Kaplans, signed the Subordinated Loan Agreement. First Options argues, however, that the arbitration clause in the Subordinated Loan Agreement nevertheless applies to the Kaplans. It says the four workout documents must be read together because they are all inextricably tied together as part of one transaction. It relies on the case of Hagerman v. Schulte, 349 Ill. 11, 181 N.E. 677 (1932). In Hagerman, the court stated:
Id. 181 N.E. at 680. The four documents embodying the workout were all executed on March 24, 1988, for the same overall purpose. Therefore we agree with First Options that they should be construed together in accord with the unobjectionable general principle stated in Hagerman. On the other hand, we do not think Hagerman supports the proposition that an arbitration clause in a document signed by one party who has generally guaranteed performance of all the obligations other persons have individually undertaken
The circumstances of this case plainly negate the Kaplans' consent to arbitrate their individual responsibility for MKI's obligations. In the document they signed, they undertook only limited and precisely defined obligations. They eschewed any general responsibility for MKI's obligations. They did not sign any documents that stated they would arbitrate their individual liability under the workout. They have always contended they had no individual responsibility for any obligations MKI might have to First Options. Only MKI undertook overall responsibility. It did so in the Subordinated Loan Agreement signed only by it. The limited obligations the Kaplans did undertake in the workout document they signed indicates at least their belief that they are not individually and personally responsible for all the obligations of the workout. Unless both parties are in accord, there is no meeting of the minds from which an agreement could be found.
We think people intend to perform the obligations that are embodied in the words of the formal agreements they sign: no more, no less. The workout, read as a whole, does not evidence that the Kaplans consent to arbitrate their individual liability for all the obligations MKI assumed in the Subordinated Loan Agreement it signed.
There is no ambiguity about the absence of any consent to arbitrate in the documents the Kaplans signed individually. The Letter Agreement does no more than obligate them to contribute their individual 1987 tax refunds to the workout. Their failure to do so by March 31, 1989, may be a breach of the Letter Agreement and so constitute an "Event of Acceleration" under the Subordinated Loan Agreement MKI signed, but it does not impose on the Kaplans any obligation to arbitrate or any of the other obligations MKI agreed to. Thus, Hagerman does not help First Options.
The other cases First Options and the district court rely on are also inapposite. In reaching its decision that "[t]he Letter Agreement and the Subordinated Loan Agreement were executed in tandem, are inextricably intertwined and mutually dependent and must be read as a whole, particularly given the underlying circumstances and the relationships of the parties[,]" Mem.Op. at 11, the district court relied upon Com-Tech Associates v. Computer Associates International, Inc., 753 F.Supp. 1078 (E.D.N.Y. 1990), aff'd, 938 F.2d 1574 (2d Cir.1991).
Com-Tech is distinguishable on much the same basis as Hagerman. Com-Tech and Computer Associates had signed a partnership agreement containing an arbitration provision. Computer Associates sought to compel Com-Tech to arbitrate a dispute arising out of a marketing agreement Com-Tech and it had signed along with the partnership agreement. Though the marketing agreement did not have an arbitration clause, activities under the marketing agreement were one of the things the partnership was formed to engage in. Accordingly, the court held the arbitration clause in the partnership agreement Com-Tech had signed covered disputes about transactions under the marketing agreement that were undertaken on the partnership's behalf. Id. at 1084.
In the recent case of Eli Pritzker v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 7 F.3d 1110 (3d Cir.1993), this Court held on agency principles that a party who did not sign the agreement out of which a dispute arose was nevertheless subject to arbitration under its arbitration clause. In Pritzker, the question was whether persons who acted wrongfully on behalf of their principal or without its authority could be compelled to arbitrate under an arbitration agreement the principal had signed. If First Options were still disputing Mr. Kaplan's responsibility for MKI's losses on October 19, 1987, Pritzker could be material. That is not the issue before us. Rather, it is the extent of Mr. Kaplan's obligations under the workout. Mr. and Mrs. Kaplan only contributed some of
Our statement "[b]ecause a principal is bound under the terms of a valid arbitration clause, its agents, employees, and representatives are also covered under the terms of such agreements" does not apply here. Pritzker, 7 F.3d at 1121 (citing Arnold v. Arnold Corp.-Printed Communications for Business, 920 F.2d 1269, 1281-82 (6th Cir. 1990); Letizia v. Prudential Bache Secs., 802 F.2d 1185, 1187-88 (9th Cir.1986)). Arnold and Letizia were also decided on agency principles. See Arnold, 920 F.2d at 1281-82; Letizia, 802 F.2d at 1187-88. There, individual brokers were entitled to invoke their brokerage firms' right to arbitration in an action against the firm and its agents for fraud and violation of the federal securities laws. Here, the Kaplans' obligation to arbitrate depends on contract, not on agency or their participation with MKI in a wrongful act or statutory tort.
Moreover, in Pritzker, the non-signatories and the signatory's interests were co-extensive. That community of interest was material to our decision there. See Pritzker, 7 F.3d at 1122. Likewise, in Isidor Paiewonsky Assocs., Inc. v. Sharp Properties, Inc., 998 F.2d 145 (3d Cir.1993), agents who had not themselves signed the arbitration agreement had interests largely co-extensive with those of their principals. Sharp Properties, 998 F.2d at 155. Here, only MKI assumed responsibility for all the obligations of the settlement. The Kaplans have always contended they were not individually liable for MKI's obligations and in the workout that contention was accepted. Thus, the Kaplans' breach could trigger MKI's obligations, but we do not think it could make their individual obligations coextensive with MKI's. The absence of an arbitration clause, or a cross-reference to it in the Subordinated Loan Agreement, in the document the Kaplans signed unambiguously shows their limited contractual obligation to provide funds to MKI was separate from and independent of MKI's obligations, including its express obligation to arbitrate.
The district court erred in holding the arbitration provision in the Subordinated Loan Agreement, a document the Kaplans did not sign, evidenced the Kaplans' consent to arbitrate their individual liability.
B. The Exchange's Bylaws As Evidence of Consent
First Options contended before the arbitration panel and the district court that Mr. Kaplan was subject to the arbitrators' jurisdiction under the Exchange's bylaws and rules either as a "member" of the Exchange or as an "associated person" of a member. When the arbitration panel denied the Kaplans' motion to dismiss for lack of jurisdiction and went on to consider the dispute over performance of the workout on its merits, it did not give any rationale for its decision to assume jurisdiction.
After the district court held that the Kaplans had waived their jurisdictional objection and, alternately, that the arbitration panel had jurisdiction over the Kaplans by virtue of the arbitration clause in the Subordinated Loan Agreement, it had no occasion to address First Options' contention that Mr. Kaplan's individual membership in the Exchange before the workout was signed or his continuing service as an officer of MKI thereafter showed his consent to arbitration. First Options, however, continues to press its contentions that these facts evidence consent in this Court and we must consider them.
The Supreme Court has stated the Securities and Exchange Commission has "expansive power to ensure the adequacy of the arbitration procedures employed by [a self-regulating organization]." Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 233, 107 S.Ct. 2332, 2341, 96 L.Ed.2d 185 (1987). The National Association of Securities Dealers ("NASD") and other regional exchanges, including the Philadelphia Stock Exchange, are self-regulatory organizations within the meaning of section 28(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78bb(b) (West 1981 & Supp.1993). Its members and their employees can unquestionably agree to arbitrate all disputes arising out of their use of the Exchange's trading facilities. Creative Sec. Corp. v. Bear Stearns & Co., 671 F.Supp. 961, 966 n. 7 (S.D.N.Y.1987), aff'd, 847 F.2d 834 (2d Cir.1988); Goldberg v. Donaldson, Lufkin & Jenrette Sec. Corp., 650 F.Supp. 222, 225-26 (N.D.Ga.1986).
Nevertheless, "`federal policy alone cannot be enough to extend the application of an arbitration clause far beyond its intended scope.'" Haviland v. Goldman, Sachs & Co., 947 F.2d 601, 605 (2d Cir.1991) (quoting McDonnell Douglas Fin. Corp. v. Pennsylvania Power & Light Co., 858 F.2d 825, 831 (2d Cir.1988)), cert. denied, ___ U.S. ___, 112 S.Ct. 1995, 118 L.Ed.2d 591 (1992). In order to compel arbitration, we think there should be some evidence of agreement or consent to abide by the Exchange's rules before a member or associated person can be compelled to arbitrate. See Tullis v. Kohlmeyer & Co., 551 F.2d 632, 635-37 (5th Cir.1977); Coenen v. R.W. Pressprich & Co., 453 F.2d 1209, 1211 (2d Cir.), cert. denied, 406 U.S. 949, 92 S.Ct. 2045, 32 L.Ed.2d 337 (1972); Cullen v. Paine, Webber, Jackson & Curtis, Inc., 587 F.Supp. 1520, 1522 (N.D.Ga.1984); cf. Gateway Coal Co. v. United Mine Workers, 414 U.S. 368, 374, 94 S.Ct. 629, 635, 38 L.Ed.2d 583 (1974) ("No obligation to arbitrate ... arises solely by operation of law. The law compels a party to submit his grievance to arbitration only if he has contracted to do so.").
1. Associated Person
The Philadelphia Exchange's bylaws and rules do not define "associated person."
First Options is correct in asserting that Mr. Kaplan is an associated person within the meaning of the Act and the Exchange's rules, including its rules concerning arbitration. The Philadelphia Exchange bylaws and rules were adopted pursuant to the Securities and Exchange Act. Therefore, Mr. Kaplan is without doubt an "associated person" of MKI. Mr. Kaplan continued to be an associated person of MKI as one of its directors, its president, and its sole shareholder after the workout was signed.
First Options argues the Exchange's adoption of a rule including an arbitration provision is all that is needed to require an associated person to arbitrate. If First Options is right, no separate agreement or other evidence of Mr. Kaplan's consent to arbitrate is necessary.
We do not think Exchange Rule 950 § 6(a)(2) requires Mr. Kaplan to arbitrate the dispute with First Options over the workout absent other evidence that he has individually agreed to submit to arbitration this particular dispute over his continuing individual responsibility for MKI's obligations. The workout documents themselves not only fail to furnish that evidence, they negate his consent to arbitration.
Most of the cases that have considered whether persons associated with members of an exchange must arbitrate a dispute involving the exchange or the use of its facilities have required evidence other than the rule itself to show the associated person's consent to arbitrate. The courts deciding these cases have relied on the associated person's execution of a Uniform Application for Securities and Commodities Industry Representative and/or Agent ("U-4 Form") or a provision in an exchange membership application to show consent. In the standard U-4 Form, an employee expressly agrees to abide by all the exchange rules and submit disputes involving it or a member to arbitration.
Where, as here, the arbitration involves an obligation the officer has undertaken separately and independently of his acts as an agent of the member that employs him, we believe some evidence of an associated person's consent to arbitrate beyond his or her employment as an agent or executive of a member must appear.
First Options' reliance on Goldberg v. Donaldson, Lufkin & Jenrette Sec. Corp., 650 F.Supp. 222 (N.D.Ga.1986), in support of its argument that Mr. Kaplan is subject to arbitration because he is an associated person of MKI, is misplaced. There was no dispute about Goldberg's consent to arbitrate. It was shown by his signature on a U-4 Form.
The record before us does not have any independent evidence of Mr. Kaplan's agreement to arbitrate the question of his responsibility for MKI's obligations. No U-4 Form nor any other document signed by Mr. Kaplan shows he had agreed to arbitrate this particular dispute once he relinquished his own membership on the Exchange in December 1987.
Mr. Kaplan's status as an associated person of MKI did not evidence his individual agreement to assume the broad obligation to arbitrate that MKI expressly undertook when it signed the Subordinated Loan Agreement. Under the circumstances of this
First Options argues alternately that Mr. Kaplan's individual membership in the Exchange at the time of the crash that precipitated MKI's problem provides the necessary consent to arbitrate. There was a provision in Mr. Kaplan's membership agreement consenting to the Exchange rules, including its rules on arbitration; but Mr. Kaplan's Exchange membership ended in December 1987, several months before execution of the workout documents. See Tullis, 551 F.2d at 636-37; Coenen, 453 F.2d at 1211 (membership application requiring signatory to abide by exchange rules shows consent to arbitrate).
First Options says the December 1987 termination of Mr. Kaplan's Exchange membership does not matter. It argues he is still subject to arbitral jurisdiction under Exchange Rule 950 because the circumstance that caused this dispute, the October 1987 stock market crash, happened when he was a member. First Options relies on a commentary to the applicable version of Rule 950, which was in effect until June 20, 1991. It stated: "For purposes of this Rule, the terms member, member organization and associated person of a member, shall be deemed to encompass those persons who were Exchange members at the time the circumstances occurred which gave rise to the controversy." PHLX Rule 950, Commentary .01. This commentary is consistent with case law holding that the membership which is material is membership at the time the events giving rise to the controversy occur. Cf. Muh v. Newburger, Loeb & Co., 540 F.2d 970, 973 (9th Cir.1976).
It is a dispute over Mr. Kaplan's performance under the workout that is now before us, or perhaps more specifically a dispute over whether the only obligations which survive the workout are those each of the parties undertook in the separate documents they signed to formalize the workout, rather than the earlier dispute over the deficit in MKI's account which arose as a result of the October 19, 1987 stock market crash. We think the workout documents independently define and limit the obligations Mr. Kaplan and MKI independently assumed. Under them MKI retained all the obligations it had as a result of the October 19, 1987 events. Therefore, the workout document the Kaplans signed negates any intent on their part to arbitrate their individual responsibility for MKI's obligations.
First Options did not seek arbitration of the original dispute while Mr. Kaplan was still a member of the Exchange. Instead, it agreed to the terms in the workout documents. They did not contain any agreement by Mr. Kaplan to arbitrate the question of his individual liability for MKI's obligations.
Here again, First Options' reliance on Goldberg, 650 F.Supp. at 225-26, is misplaced. That case concerned Goldberg's obligation to arbitrate a dispute about events that occurred while he was still a member or an associated person of an exchange member. Id. at 226 (citing O'Neel v. National Assoc. of Sec. Dealers, Inc., 667 F.2d 804, 807 (9th Cir.1982); Isaacson v. Hayden, Stone Inc., 319 F.Supp. 929 (S.D.N.Y.1970)). The Goldberg court did not have to consider the effect of an intervening agreement that defined Goldberg's individual obligations without providing for arbitration. The dispute about Goldberg's activities while he was an active member of the Exchange was uninterrupted. Mr. Kaplan terminated his membership before the workout documents were executed. They contained no agreement to arbitrate. The dispute before us concerns an alleged breach of the workout, not the events that led to it.
VI. Mr. Kaplan as an Alter Ego of MKI
Finally, we consider First Options' argument that Mr. Kaplan was subject to binding arbitration as MKI's alter ego. The arbitrators accepted this contention after it was conceded that they had jurisdiction over MKI. They then resolved the alter ego issue against Mr. Kaplan on its merits. If they did so correctly, they would have jurisdiction to subject Mr. Kaplan to all the obligations MKI assumed in the Subordinated Loan Agreement, including its obligation to arbitrate. See Interocean Shipping Co. v. National Shipping & Trading Corp., 523 F.2d 527, 539 (2d Cir.1975) ("In an appropriate situation, the corporate veil may be pierced and a party may be held bound to arbitrate as the signatory's alter ego.") (citing Fisser v. International Bank, 282 F.2d 231, 233-34 (2d Cir.1960)), cert. denied, 423 U.S. 1054, 96 S.Ct. 785, 46 L.Ed.2d 643 (1976); see also Dighello v. Busconi, 673 F.Supp. 85, 89 (D.Conn.1987), aff'd mem., 849 F.2d 1467 (2d Cir.1988). But neither this Court nor the district court is bound by the arbitrators' determination that Mr. Kaplan was the alter ego of MKI. He is entitled to an independent judicial determination of that issue. Laborers' Int'l Union v. Foster Wheeler Corp., 868 F.2d 573, 575-77 (3d Cir.1989) (per curiam) (right to independent judicial determination of arbitrator's jurisdiction based on alter ego status); Sheet Metal Workers Intern. Assoc., Local No. 359 v. Arizona Mechanical & Stainless, Inc., 863 F.2d 647, 653 (9th Cir.1988); see also International Brotherhood, 574 F.2d at 787.
The district court concluded "[e]ven if [First Options had unconditionally released Mr. Kaplan from any liability for the debt in the Workout Agreement], it would not release MKI from liability for the debt and, on the record adduced, would not preclude a piercing of the corporate veil." Mem.Op. at 27. The district court felt "[i]t cannot be said the arbitration panel's decision to pierce the corporate veil was a decision made in manifest disregard of the law." Id. We think the district court erred when it used manifest disregard of the law as the standard for judging the arbitrators' alter ego conclusion.
We begin with the proposition that generally a shareholder is not personally
The alter ego concept is a "tool of equity [that] is appropriately utilized `when the court must prevent fraud, illegality or injustice, or when recognition of the corporate entity would defeat public policy or shield someone from public liability for a crime.'" Carpenters Health & Welfare Fund, 727 F.2d at 284 (quoting Publicker Indus., Inc. v. Roman Ceramics Corp., 603 F.2d 1065, 1069 (3d Cir.1979)) (internal quotation omitted). Events that permit the corporate veil to be pierced include:
United States v. Pisani, 646 F.2d 83, 88 (3d Cir.1981) (quoting DeWitt Truck Brokers v. W. Ray Flemming Fruit Co., 540 F.2d 681, 686-87 (4th Cir.1976)). In addition, courts sometimes consider undercapitalization. Id.
Not every disregard of corporate formalities or failure to maintain corporate records justifies piercing the corporate veil. That remedy is available only if it is also shown that a corporation's affairs and personnel were manipulated to such an extent that it became nothing more than a sham used to disguise the alter ego's use of its assets for his own benefit in fraud of its creditors. In short, the evidence must show that the corporation's owners abused the legal separation of a corporation from its owners and used the corporation for illegitimate purposes. See Zubik, 384 F.2d at 267.
The testimony the arbitrators heard about Mr. Kaplan's personal use of MKI's corporate funds dealt largely with acts that took place in 1986 and 1987, before execution of the workout.
See Mem.Op. at 25-26.
Mr. Kaplan argues that withdrawal of some corporate funds for personal use before
Neither are Chicago Florsheim Shoe Store Co. v. Cluett, Peabody & Co., 826 F.2d 725, 727-28 (7th Cir.1987), and Connors v. Peles, 724 F.Supp. 1538, 1559-61 (W.D.Pa.1989), the cases on which First Options primarily relies to support the alter ego theory. They stand only for the general proposition that alter ego status is determined by conduct of the parties that is material to the dispute at hand. They are not controlling on whether Mr. Kaplan's failure to observe some corporate formalities before the present dispute over performance of the workout arose is material to its resolution.
On this record, however, we think Mr. Kaplan's disregard of corporate formalities in distributions he made to himself before execution of the workout may have some relevance to his responsibility for the obligations MKI assumed in the workout including its obligation to arbitrate.
First Options also pointed to some evidence of withdrawals after the workout documents were signed. Thus, it says Mr. Kaplan used a deceptive financing scheme to raise the $500,000 MKI agreed to and did contribute to the workout and that he falsely represented the source of that money. It points to other evidence that it says showed commingling after MKI resumed trading under the terms of the workout. First Options' witness, Mr. Murphy, testified that $100,000 was drawn out of MKI's trading account on December 21, 1988 and deposited into one of Mr. Kaplan's checking accounts that same day. Mr. Murphy went on to say Mr. Kaplan then transferred $100,000 from this checking account into another personal account on December 30, 1988. Then, on January 2, 1989, five checks were drawn on the latter personal account. They totaled just under $100,000 and were payable to a real estate joint venture in which Mr. Kaplan was interested.
All this must be balanced against the lack of any evidence from which we might infer Mr. Kaplan's general non-compliance with corporate formalities. Testimony before the arbitrators indicated MKI was validly incorporated, it elected officers and directors, it held regular board meetings and prepared minutes, enacted by-laws, issued share certificates, entered into contracts in its own name, filed tax returns in its own name, maintained corporate books and records and had its own corporate checking account.
We have said MKI's argument that pre-workout events are immaterial to this dispute may lose some force on the alter ego theory. We think this is so because of the element of fraud that lies at its core. Fraud is often a basis for setting aside or refusing to enforce an agreement. Thus, if Mr. Kaplan's corporation, MKI, were a sham that he fraudulently manipulated to First Options' detriment, it would deprive him of the limitation of his own obligations that he sought to accomplish through the workout. But if First Options is to rely on a fraud theory, it must swallow the bitter with the sweet. Because alter ego is akin to and has elements of fraud, we think it too must be shown by clear and convincing evidence. That kind of evidence is not present here. See Carpenters Health & Welfare Fund, 727 F.2d at 283. The record does not show Mr. Kaplan had a practice of culling profits from a failing company while creditors' attempts to seek payment were being rebuffed. Before the 1987 crash, MKI was a profitable entity from which Mr. Kaplan, as sole shareholder, had a right to draw profits. Moreover, this record does not show that corporate formalities were generally ignored. Alter ego status cannot be inferred whenever a shareholder withdraws some monies from a corporation without formally declaring a dividend or executing a note even if one of the withdrawals is made while the corporation is insolvent.
This record does not show that MKI was a "sham" either pre- or post-workout. Instead, it shows that Mr. Kaplan had run a successful business venture until the crash. From it, before and after the crash, he had sometimes withdrawn funds for personal use without observing corporate formalities. With the exception noted, none of these withdrawals appear to have affected MKI's solvency or to have been made when it was insolvent. This record does not clearly and convincingly show that MKI was a sham Mr. Kaplan manipulated in fraud of its creditors.
The district court's finding that MKI was Mr. Kaplan's alter ego does not withstand review when the correct standard of independent judicial review of an arbitration panel's decision on its own jurisdiction is substituted for the incorrect standard of manifest disregard for the evidence that the district court used. Applying the proper standard, we conclude the Exchange did not have jurisdiction over the dispute between Mr. Kaplan and First Options concerning his individual liability to perform all of MKI's obligations, under the workout or otherwise, on a theory that they were alter egos.
The evidence in this record is insufficient to allow First Options to pierce MKI's corporate veil.
The order of the district court confirming the arbitration award against the Kaplans will be reversed. The record will be remanded to the district court with instructions to enter in its place an order vacating the arbitrators' award against the Kaplans. The order confirming the award as to MKI will be affirmed.
Each party shall bear its own costs.
App. at 108-09.
App. at 86 (emphasis added). MKI's release reads as follows:
Id. at 85-86. Those differences may add some support to the Kaplans' argument that the arbitration clause in the workout document MKI signed does not bind them individually, but they are inconclusive. Accordingly, we do not rely on them.
Whether the release is conditional is not material on the arbitrators' jurisdiction over the Kaplans. The fact that is material on the arbitrators' jurisdiction is the absence of any arbitration clause in the agreements the Kaplans signed as opposed to its presence in the Subordinated Loan Agreement only MKI signed. On the merits the question whether the parties intended to release Mr. Kaplan from any liability on the losses MKI suffered October 19, 1987, in return for the contributions he and Mrs. Kaplan made to the workout or instead intended to preserve whatever rights First Options might have against him for his management of MKI if the workout failed could become material.
Tays v. Covenant Life Ins. Co., 964 F.2d 501, 502 (5th Cir.1992) (quoting NASD By-Laws, Art. I(m)).
Pearce, 828 F.2d at 828 (emphasis omitted). It appears customary to have a prospective employee sign and submit a standard U-4 Form to the Exchange in order to obtain such employment. See id.