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Bank Wins Injunction Against Arbitration to Which It Is Not a Party: J.P. Morgan Chase Bank & J.P. Morgan Securities, LLC vs. McDonald
Posted on Categories Court Decisions, Securities ArbitrationTags ,

No. 13-2635 (7th Cir., 7/25/14). Arbitrability * FRCP (Rule 19(a) “Necessary Party”) * Jurisdiction Issues (“Standing”) * Forum Selection Clause * Remedies (Injunctive Relief) * Standing Issues (Case/Controversy) * Contribution & Indemnification * Contract Enforceability (Standing) * Jurisdiction Issues (Necessary Parties). A bank has standing to enjoin an arbitration against its affiliates in order to enforce a forum-selection clause in its customer agreement, even though the bank itself is not a party to the arbitration.

Defendants Jeffrey and Shelli McDonald opened a managed account with plaintiff J.P. Morgan Chase Bank, N.A. (the “Bank”) and a separate brokerage account with plaintiff J.P. Morgan Securities, LLC. (“JPMS”). After losing over $1 million in the managed account with the Bank, defendants filed an arbitration claim at FINRA against JPMS and two JPMS registered representatives, alleging a variety of claims relating to their losses in the managed account with the Bank. Defendants did not name the Bank as a party to the FINRA arbitration. The Bank and JPMS respond by filing a federal court action to enjoin the arbitration on the ground that defendants agreed in their account agreement with the Bank that the local courts would have “exclusive jurisdiction” to hear disputes “arising out of” the account agreement. The district court refused to grant the request for injunction.

On appeal, the Seventh Circuit reverses. Although not named as a party to the FINRA arbitration, the Bank nevertheless has standing to enjoin the arbitration from proceeding. Defendants’ claims against JPMS and its representatives clearly “arise out of” the account agreement. Thus, defendants are breaching their agreement with the Bank by trying to assert the claims in a venue other than the local courts. This breach constitutes injury to the Bank and gives it standing to file suit. Nor are the JPMS representatives necessary parties to the suit to enjoin the arbitration. The district court could have granted complete relief between the parties to the suit by enjoining defendants from proceeding with the arbitration. The fact that the JPMS representatives’ interests might be affected by the injunction does not make them necessary parties. Accordingly, the trial court committed reversible error by refusing to enjoin the FINRA arbitration.

(Ed: It was an interesting strategy call for the plaintiffs to sue to enjoin the FINRA arbitration claim – which the Court characterized as an “unusual role reversal.”) (SLC Ref. No. 2014-31-02)

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