ORDER AND REASONS

JANE TRICHE MILAZZO, District Judge.

Before the Court are the following motions: (1) Motion to Compel Arbitration (R. Doc. 127) filed by Defendants Merrill Lynch, Pierce, Fenner and Smith, Inc., and Merrill Lynch & Co., Inc.; (2) Motion to Dismiss (R. Doc. 128) filed by Defendant Anil Chaturvedi; and (3) Motion for Review of the Magistrate Judge's Decision (R. Doc. 165) filed by Plaintiffs. For the following reasons, the Motion to Compel Arbitration is GRANTED IN PART. Plaintiffs Narinder Gupta and Suman Gupta shall ARBITRATE their claims against Merrill Lynch, Pierce, Fenner and Smith, Inc., and Anil Chaturvedi. The remaining claims are hereby STAYED pending arbitration. This matter is ADMINISTRATIVELY CLOSED but may be restored to the trial docket upon motion of a party once arbitration has concluded. The Motion to Dismiss and the Motion for Review are DENIED WITHOUT PREJUDICE to be re-urged, if necessary, at a later date.

BACKGROUND1

This case arises from the alleged mismanagement of a trust (the "Trust"). The Plaintiffs are Narinder Gupta ("N. Gupta"), Suman Gupta ("S. Gupta"), and their two sons, Neel Gupta and Jagan Gupta (collectively the "Gupta Sons"). The Defendants are Merrill Lynch, Pierce, Fenner and Smith, Inc. ("MLPFS"), Merrill Lynch & Co., Inc. ("ML & Co.") (collectively "Merrill Lynch"),2 Merrill Lynch Bank and Trust company (Cayman) Limited, Merrill Lynch Cayman Holdings Incorporated, Merrill Lynch International Holdings, Inc., and Anil Chaturvedi ("Chaturvedi").

Beginning in 1990, N. Gupta met with Chaturvedi—a security broker employer employed by Merrill Lynch—to discuss wealth management strategies that would ultimately benefit the Gupta Sons. Chaturvedi recommended creating a revocable trust, which could be terminated and liquidated at any time. Pushpa Bajaj ("Bajaj")—N. Gupta's aunt—settled the Trust on April 10, 2001. The ultimate beneficiaries are S. Gupta and the Gupta Sons; N. Gupta is the secondary beneficiary. Merrill Lynch (through Chaturvedi) managed the funds of the Trust at all times.

On or about May 23, 2002, N. Gupta informed Chaturvedi that Bajaj had passed away. Chaturvedi subsequently obtained a copy of Bajaj's death certificate and changed the date of death. After altering the death certificate, Chaturvedi forged Bajaj's signature on a document that purported to instruct Chaturvedi to transfer $300,000 from the Trust to another Merrill Lynch account. Chaturvedi forged a similar document on September 18, 2003.

On or about February 28, 2007, N. Gupta instructed Chaturvedi to liquidate the Trust. Chaturvedi disregarded this instruction. N. Gupta and S. Gupta made a similar request of Chaturvedi in 2009. Despite his previous representations to the contrary, Chaturvedi advised the Trust could not be liquidated.

Plaintiffs eventually filed suit. Although far from pellucid, the first amended complaint appears to assert causes of action against all Defendants for violations of (1) the Investment Company Act ("ICA"), 15 U.S.C. § 80a et seq., (2) the Security and Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78a et seq., and (3) the Racketeer Influenced and Corrupt Organization Act ("RICO"), 18 U.S.C. § 1961 et seq. Plaintiffs have voluntarily dismissed all Defendants except MLPFS, ML & Co., and Chaturvedi.

LEGAL STANDARD

Defendants move to compel arbitration and dismiss this action for improper venue.3 The Fifth Circuit has repeatedly declined to address the proper procedural vehicle for bringing such motions.4 Because the Fifth Circuit has accepted Rule 12(b)(3) as a proper method for dismissal based on an arbitration clause,5 the Court analyzes Plaintiffs' motion under Rule 12(b)(3).6

On a Rule 12(b)(3) motion to dismiss for improper venue, the court must accept as true all allegations in the complaint and resolve all conflicts in favor of the plaintiff.7 In deciding such motions, the Court may examine all evidence in the record.8

When venue is challenged, district courts in the Fifth Circuit have been inconsistent in allocating the burden of proof.9 Most courts in this District, however, hold that a plaintiff bears the burden of proof.10 This Court follows their lead and holds that Plaintiffs bear the burden of establishing proper venue.11

LAW AND ANALYSIS

The primary issue before the Court is whether Plaintiffs' claims are subject to arbitration. The inquiry is governed by the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq., which broadly applies to any written provision in "a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction."12 Section 2 of the FAA reflects a "liberal federal policy favoring arbitration agreements."13 To implement this policy, the FAA empowers federal district courts to compel arbitration when a party has refused to comply with an arbitration agreement.14

A two-step analysis governs whether parties should be compelled to arbitrate a dispute.15 The Court must first determine whether the parties agreed to arbitrate the dispute.16 This determination involves two separate inquiries: (1) whether there is a valid agreement to arbitrate between the parties, and, if so, (2) whether the dispute in question falls within the scope of that agreement.17 Although both inquires are generally guided by ordinary principles of state contract law,18 the strong federal policy favoring arbitration does not apply to the initial determination of whether there is a valid agreement to arbitrate.19 If the Court finds the parties agreed to arbitrate, it must then proceed to the second step of the analysis and consider whether any federal statute or policy renders the claims non-arbitratable.20

I. Whether Plaintiffs Should be Compelled to Arbitrate

Defendants move to compel arbitration on the basis of four separate arbitration agreements. Specifically, Defendants invoke a Cash Management Account Agreement (the "CMA"), an Option Agreement, a Custodial Agreement, and an IRA Account Agreement (the "IRA Agreement"). The Court addresses each agreement separately.

A. CMA

The Trust entered into the CMA with MLPFS on April 24, 2001. Fiduciary Services, Ltd signed the CMA on behalf of the Trust. The CMA contains an arbitration provision.21 The question presented is whether MLPFS, as a signatory to the CMA,22 can compel to arbitration the beneficiaries of the Trust, who did not sign the agreement. For the reasons explained more fully below, the Court answers this question in the negative.

Before addressing the merits, the Court must first determine whether federal law or state law governs the circumstances in which a non-signatory can be compelled to arbitration.23 The Fifth Circuit precedent is inconsistent.24

When confronted by inconsistent precedent, the Fifth Circuit applies the rule of orderliness.25 Under this rule, the earliest panel decision controls, "absent an intervening change in the law, such as by a statutory amendment, or the Supreme Court or by our en banc court."26

Fleetwood is the first panel to consider whether a non-signatory can be bound to arbitrate. Fleetwood applied state law. Thus, one could argue that Fleetwood requires courts in the Fifth Circuit to apply state law. As explained below, this argument fails to persuade.

As a preliminary matter, Fleetwood did not even acknowledge, much less address in depth, whether state law or federal law should apply. Instead, after noting that "ordinary contract principles determine who is bound [by an arbitration agreement]," the court elected to apply Texas law without any further analysis.27 Moreover, the Fifth Circuit has recognized that the circumstances in which a non-signatory is bound to arbitrate are the same under both federal law and Texas law.28 Thus, Fleetwood had no occasion to address the issue before the Court today. Accordingly, that the Fleetwood Court applied Texas law does not necessarily foreclose the application of federal law in this case.29

Bailey was the first panel to acknowledge the inconsistency in Fifth Circuit law and definitively pronounce on the issue. The court noted "that because the determination of whether a non-signatory is bound by an arbitration provision `presents no state law question of contract formation or validity,' a court should `look to the federal substantive law of arbitrability to resolve this question.'"30 Bailey further noted that its decision to apply federal law is consistent with that of "all federal circuit courts" to address the issue.31 Accordingly, the Court finds that Bailey is controlling and therefore applies federal law to determine whether Plaintiffs are bound by the CMA.32

The Fifth Circuit recognizes six theories for binding a non-signatory to an arbitration agreement: (1) incorporation by reference; (2) assumption; (3) agency; (4) alter ego; (5) estoppel; and (6) third-party beneficiary.33 In applying these theories, the Court is mindful of the precept that "arbitration is a matter of consent, not coercion,"34 and that therefore "the strong federal policy favoring arbitration does not apply to the initial determination of whether there is a valid agreement to arbitrate."35 Thus, it is no surprise that arbitration agreements will apply to nonsignatories "only in rare circumstances."36

i. Incorporation by Reference

A non-signatory may be compelled to arbitration when that party enters into a contractual relationship which incorporates an arbitration provision from a separate contract.37 There is no evidence in the record that Plaintiffs have entered into any contracts which incorporate the CMA. Accordingly, this theory is inapplicable.

ii. Assumption

A party may be bound by an arbitration agreement "if its subsequent conduct indicates that it is assuming the obligation to arbitrate."38 Plaintiffs never manifested through their conduct any willingness to arbitrate. In fact, Plaintiffs have explicitly disavowed the obligation to arbitrate. Accordingly, it cannot be said that Plaintiffs assumed the obligation to arbitrate.

iii. Agency

A non-signatory may be bound to arbitrate if another party signed the agreement as an agent of the non-signatory.39 Modified to fit the contours of this case, Plaintiffs may be compelled to arbitrate if the Trust signed the CMA as agent for Plaintiffs.

The law is clear that a trustee is not ipso facto an agent for the beneficiaries of the trust.40 It follows that "the beneficiary of a trust `is not personally liable upon contracts made by the trustee in the course of the administration of the trust.'"41 A beneficiary only incurs personal liability when the trustee also acts as his agent.42 Defendants have presented no evidence of an agency relationship between Plaintiffs and the trustee. Accordingly, Plaintiffs cannot be compelled to arbitrate under an agency theory.43

iv. Veil-Piercing/Alter Ego

Under the alter ego doctrine, a parent corporation may be bound by an agreement entered into by its subsidiary if the two corporations are so closely related that "their conduct demonstrates a virtual abandonment of separateness."44 Neither the individual Plaintiffs nor the Trust is a corporation. Thus, the alter ego theory is clearly inapplicable to this case.

v. Estoppel

"Estoppel is an equitable doctrine invoked to avoid injustice in particular cases."45 The Fifth Circuit recognizes two versions of estoppel in the arbitration context. The first version applies when a non-signatory seeks to compel arbitration against a signatory.46 The inverse scenario—often called "direct-benefit estoppel"—addresses the circumstances in which a signatory can compel a non-signatory to arbitration.47 It is the latter version of equitable estoppel that applies in this case.

Direct-benefit estoppel "involve[s] non-signatories who, during the life of the contract, have embraced the contract despite their non-signatory status but then, during litigation, attempt to repudiate the arbitration clause in the contract."48 A non-signatory can "embrace" a contract containing an arbitration agreement by (1) "knowingly seeking and obtaining `direct benefits' from that contract," or (2) "seeking to enforce the terms of that contract or asserting claims that must be determined by reference to that contract."49

The first method of embracing a contract is clearly not present. N. Gupta and S. Gupta have submitted affidavits disclaiming any knowledge of or consent to the terms of the CMA. Defendants have failed to identify any evidence to the contrary. Because no evidence supports a conclusion that Plaintiffs knew of the terms of the CMA, they could not have had the knowledge necessary to have "knowingly exploited" it.50 Moreover, Plaintiffs alleged in the complaint that the Trust remains unliquidated. Accepting this allegation as true, Plaintiffs—as beneficiaries—have not obtained any direct benefits from the CMA.51

Nor do the circumstances support the second version of direct-benefit estoppel. Plaintiffs certainly did not sue to enforce the terms of the CMA, so the question presented is whether their claims "can only be determined by reference" to the CMA.52 Plaintiffs assert claims for violations of (1) the ICA, (2) the Exchange Act, and (3) RICO. The facts allegedly supporting these claims stem from the actions or inaction of Chaturvedi. Thus, the CMA will be largely irrelevant to establishing liability.53 Because Plaintiffs are not "required" to base their claims on the CMA, the second version of direct-benefits estoppel is not applicable.54 Given the foregoing, Plaintiffs are not estopped from raising their status as non-signatories to avoid arbitration.

vi. Third-Party Beneficiary

Whereas direct-benefit estoppel looks to the parties' conduct after the contract was executed, the third-party beneficiary doctrine requires the Court to examine the intentions of the parties at the time the contract was executed.55 The dispositive inquiry is whether "the intent to make someone a third-party beneficiary is clearly written or evidenced in the contract."56

The CMA does not evince the requisite clear intent to benefit Plaintiffs. Indeed, the CMA does not even mention Plaintiffs by name, much less suggest that Plaintiffs are intended beneficiaries. This omission is significant. The Fifth Circuit is more likely to compel arbitration when the non-signatory is expressly referenced in the contract.57 At most, Plaintiffs merely benefit from the existence of the CMA. But this is not enough to overcome the presumption that parties are contracting for themselves only.58

Additionally, as a general rule, the Fifth Circuit will not compel arbitration under a thirdparty beneficiary theory unless the non-signatory is suing to enforce the contract.59 That Plaintiffs are not suing to enforce the CMA militates strongly against compelling arbitration under a thirdparty beneficiary theory.

B. Option Agreement

Both N. Gupta and S. Gupta signed an Option Agreement with MLPFS related to a joint account. The following language appears directly above their signatures:

Paragraph 9 provides in pertinent part as follows in bold, capital letters:

The Option Agreement defines "me" as any signatory to the agreement, i.e., N. Gupta and S. Gupta.62

In deciding whether to compel arbitration under this agreement, the preliminary question is whether the parties have to agreed to arbitrate.63 This question bifurcates into separate, albeit interrelated, inquiries: (1) whether there is a valid agreement to arbitrate between the parties, and, if so, (2) whether the dispute in question falls within the scope of that agreement.64 New York law governs both inquiries.65

Under New York law, arbitration agreements are contracts, and, as such, are subject to the accepted rules of contractual interpretation.66 New York's highest court has indicated, however, "that a higher threshold of proof of contract formation applies to arbitration agreements than to other types of contracts."67 A court will not compel arbitration absent "clear, explicit, and unequivocal" evidence that the parties agreed to arbitrate.68

A party who signs a contract is conclusively presumed to assent to its terms, absent fraud or some other wrongful act by the other contracting party.69 N. Gupta and S. Gupta signed the Option Agreement, which contains a clear and unequivocal arbitration agreement.70 Given that Plaintiffs have not presented any evidence of misconduct on the part of MLPFS with respect to the Option Agreement, the Court finds that N. Gupta and S. Gupta agreed to arbitrate with MLPFS.

The next question is whether the claims asserted by N. Gupta and S. Gupta fall within the scope of their arbitration agreement. The Option Agreement contains a very broad arbitration agreement in which N. Gupta and S. Gupta agree to arbitrate any controversy with MPLFS, whether that controversy arises from the Option Agreement itself or any other agreement or transaction with MLPFS. Broad arbitration clauses like this one are valid under New York law and must be given full effect in order to effectuate the intent of the parties.71 Any limitation on the scope of a broad arbitration clause must be specifically enumerated in the agreement itself.72 There are no such limitations in the Option Agreement. Furthermore, any ambiguity in the scope of the arbitration provision must be resolved in favor of arbitration.73 This rule operates with particular force when the arbitration clause is broad.74 Given the foregoing, the Court finds that the arbitration provision in the Option Agreement is sufficiently broad to cover the claims asserted by N. Gupta and S. Gupta against MLPFS.

Having found the parties agreed to arbitrate, the Court next considers whether any federal statute or policy renders the claims non-arbitratable.75 The Court is aware of no such impediment to arbitration. Quite the contrary, the Supreme Court has expressly ruled that claims of the sort asserted by Plaintiffs are subject to arbitration.76 Accordingly, the claims of N. Gupta and S. Gupta against MLPFS are subject to arbitration under the clear terms of the Option Agreement.

As a concomitant to the finding that the claims against MLPFS are subject to arbitration, the Court also finds that the claims of N. Gupta and S. Gupta against Chaturvedi are subject to arbitration. The complaint explicitly alleges that Chaturvedi acted at all times on behalf of Merrill Lynch.77 The Fifth Circuit has not yet addressed whether an employee can invoke an arbitration agreement signed by his employer,78 but other circuits have. "Case law overwhelmingly holds that an employee is protected by an arbitration agreement signed by his or her employer."79 A rule to the contrary would allow plaintiffs to circumvent arbitration agreements merely by naming the employee as an individual defendant instead of the employer itself,80 which would in turn thwart the strong federal policy in favor of arbitration.

C. IRA Agreement and Custodial Agreement

Defendants reference two other arbitration agreements in support of their motion to compel—the IRA Agreement and the Custodial Agreement. The only signatories to these agreements are N. Gupta and MLPFS. For the reasons previously explained, N. Gupta's claims against MLPFS (as well as those asserted by S. Gupta) are subject to arbitration under the Option Agreement. Thus, the pertinent inquiry is whether the IRA Agreement or Custodial Agreement provides any basis for referring the claims of the Gupta Sons to arbitration. As non-signatories, their claims can only be subject to arbitration under the theories discussed in Subpart A of this Order and Reasons. Clearly, none of those theories are applicable here. Accordingly, neither the IRA Agreement nor the Custodial Agreement has any material impact on the motion to compel arbitration.

II. Whether N. Gupta and S. Gupta's Claims Should be Dismissed or Stayed

In the event the Court submits any claims to arbitration, Defendants move to dismiss those claims for improper venue. Although the FAA does not support dismissal of a claim in haec verba, the Fifth Circuit has held that dismissal is appropriate "when all of the issues raised in the district court must be submitted to arbitration."81 There are still claims remaining that are not subject to arbitration, namely, N. Gupta and S. Gupta's claims against ML & Co. and the claims of the Gupta Sons against all Defendants. Moreover, even assuming arguendo that all issues are referable to arbitration, the Fifth Circuit has since clarified that dismissal is not required but is instead a decision entrusted to the sound discretion of the district court.82 Given the foregoing, the Court declines to dismiss the claims subject to arbitration.

III. Whether the Remaining Claims Should Be Stayed

Having referred the claims of N. Gupta and S. Gupta against MLPFS and Chaturvedi to arbitration, the Court must now decide whether to stay the remaining claims pending arbitration. Although Defendants are not entitled to a stay as a matter of law,83 they may be entitled to a discretionary stay.84 Because the Court's discretionary authority is "largely unreviewable, it must not be abused."85 Accordingly, in deciding whether to stay proceedings, a Court "must weigh competing interests and maintain an even balance."86 Courts may consider such factors as whether (1) questions of fact common to all parties are likely to be decided in arbitration, (2) allowing the non-arbitrable claims to go forward would involve significant expense and inconvenience, and (3) the non-arbitrating parties would be prejudiced by a stay.87

All of these factors weigh in favor of staying the remaining claims pending arbitration. First, Plaintiffs assert identical causes of actions against each Defendant which share a common nucleus of underlying facts. Resolving these common issues of law and fact in arbitration eliminates any possibility of conflicting decisions, conserves judicial resources, and is the most efficient way to adjudicate Plaintiffs' claims. Second, in addition to promoting judicial economy, a stay of all remaining claims is most convenient for all involved in the litigation. Requiring the parties themselves, their counsel, and the witnesses to participate in parallel proceedings—one in New York, the other in Louisiana—would impose undue hardship. Third, Plaintiffs have failed to demonstrate any prejudice that would result from a temporary stay. Finally, if Plaintiffs were forced to adjudicate their remaining claims in this forum, the arbitration proceedings would essentially be rendered meaningless and the federal policy in favor of arbitration thwarted.88

CONCLUSION

Although arbitration is a matter of consent, that consent, when freely given, cannot be unilaterally withdrawn. N. Gupta and S. Gupta have clearly and unequivocally consented to arbitrate their claims against MLPFS and Chaturvedi. Accordingly, the FAA requires the Court to compel arbitration and impose a mandatory stay. Given that the claims subject to arbitration are virtually identical to those that are non-arbitratable, the Court will exercise its discretionary authority and stay all proceedings until the arbitration process has concluded.