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A party cannot avoid arbitrating with a non-signatory third party by not naming the subsidiary second party signatory in its complaint, ruled a New Jersey appellate court. Additionally, an arbitration agreement requiring use of NASD rules during arbitration remains valid even if the NASD is unavailable to arbitrate the dispute.
In Alfano v. BDO Seidman, LLP, No. L-12369-04, 2007 WL 1712614 (N.J. Super. Ct. App. Div. June 15,2007), Alfano's accountants, BDO Seidman, solicited him to participate in a tax shelter strategy designed to shelter a $150 million capital gain Alfano realized when he sold his business. This offshore portfolio investment strategy (OPIS) required Alfano to realize a capital loss by borrowing funds from Deutsche Bank (DB) and then buying stocks and options in DB.
The IRS audited Alfano and found the tax shelter abusive. The IRS required Alfano to pay capital gains, interest, and penalties. Alfano later learned the OPIS tax shelter promoted by the defendants was an abusive tax shelter. Alfano filed various fraud and breach of fiduciary duty claims against the defendants.
DB moved to compel arbitration pursuant to an arbitration agreement contained in the Customer Account Agreement between DBSI, its subsidiary, and Alfano. The trial court denied the motion and DB appealed.
The Court held that Alfano's claims were subject to arbitration. Although DB was not a signatory to the arbitration agreement, an agency relationship existed between DB and DBSI. DBSI assumed the role of DB's agent because DB could only effectuate stock trades through DBSI. Moreover, none of Alfano's causes of action against DB would have arisen had Alfano not purchased the DBSI stock and options. Therefore, Alfano's choice not to name DBSI does not allow him to avoid arbitration with DB.
Additionally, the Court held that the arbitration agreement remained applicable despite the NASD's unavailability to arbitrate the dispute because the arbitration agreement applied to the dispute and was otherwise enforceable. Although the arbitration agreement required arbitration of disputes and prescribed NASD rules, the agreement did not limit arbitration to disputes covered by NASD rules. Moreover, the arbitration agreement did not require the NASD to accept jurisdiction in order to be effective.
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