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UBS Financial Services, Inc., v. Zimmerman

United States District Court, E.D. North Carolina, Western Division

July 11, 2017



          LOUISE W. FLANAGAN United States District Judge.

         This matter is before the court on plaintiffs' motion for permanent injunction. (DE 75). Also pending before the court are plaintiffs' motion for pre-filing injunction (DE 66) and defendant's motion to dismiss. (DE 77). The issues raised are ripe for ruling. For the reasons that follow, the court grants plaintiffs' motion for permanent injunction and denies defendant's motion to dismiss. The court also denies as moot plaintiffs' motion for pre-filing injunction.


         This case has a lengthy history that is summarized more fully in the court's prior orders. As pertinent here, defendant initiated an arbitration proceeding against plaintiff UBS Financial Services, LLC, (“UBS Financial”) and Charles Schwab & Company (“Schwab”), before the Financial Industry Regulatory Authority (“FINRA”) (the “FINRA arbitration”) on January 6, 2016. On April 7, 2016, plaintiff UBS Financial initiated this action and moved for preliminary injunction, seeking to enjoin defendant from pursuing arbitration against it pursuant to the Federal Arbitration Act (“FAA”), 9 U.S.C. § 4. Defendant then filed a motion to dismiss, or in the alternative, motion to compel arbitration. Pending resolution of plaintiff UBS Financial's motion, the court issued a temporary restraining order, which prohibited defendant from proceeding with the FINRA arbitration. Thereafter, defendant answered plaintiff UBS Financial's complaint, asserting several counterclaims against it On June 17, 2016, the court held hearing on plaintiff UBS Financial's motion for preliminary injunction and defendant's motion to dismiss and compel arbitration. At hearing, the court granted plaintiff's motion and denied defendant's motion, which rulings were later memorialized by order dated June 21, 2016. On December 1, 2016, on motion by plaintiff UBS Financial, the court dismissed defendant's counterclaim, as amended.

         On November 9, 2016, plaintiff UBS Financial filed a motion to enforce preliminary injunction, or in the alternative to enjoin defendant from pursuing FINRA arbitration against UBS Securities, LLC (“UBS Securities”), UBS AG and UBS Group AG (“UBS Group”). While its motion to enforce preliminary injunction was still pending, plaintiff UBS Financial, together with UBS Securities, UBS AG and UBS Group, filed the instant motion for pre-filing injunction. By order dated March 28, 2017, the court denied plaintiff UBS Financial's motion to enforce the court's prior preliminary injunction order, granted its alternative motion to expand the court's prior preliminary injunction, and added UBS Securities, UBS AG, and UBS Group as plaintiffs to the action. The March 28, 2017, order also denied defendant's various motions to strike.

         On April 18, 2017, plaintiffs filed the instant motion for permanent injunction. Thereafter, defendant filed the instant motion to dismiss. Plaintiffs filed opposition to defendant's motion on May 19, 2017.


         The undisputed facts are summarized as follows. Plaintiffs are FINRA members. Plaintiff UBS Financial underwrote and issued an electronically traded note known as the “Monthly 2xLeveraged Exchange Traded Access Security, ” referred to by the parties by its call sign, “CEFL” (the “ CEFL security ”) . (See Prod. Supplement, DE 31 at 1).[1] The CEFL security is a leveraged debt security which allows investors to experience twice the rate of return of a certain index. (Id. at 5-6). The leveraged aspect of the CEFL security is essentially a loan made by plaintiff to investors in the amount of the security's face value, or $25.00. (See id.). In exchange for the loan's benefits, investors pay monthly fees. (Id. at 6). To collect those fees, plaintiffs garnish them from the monthly distributions provided to investors, known as “coupons.” (See id. at 23-24, 27, and 37).

         Defendant purchased a number of shares of the CEFL security from Schwab. Defendant does not own an account with any plaintiff. After defendant purchased shares of the CEFL security, the security declined in value approximately 40%, from $25.00 to $15.00. As a result, defendant lost at least $85, 000.00.


         A. Motion for Permanent Injunction

         “A plaintiff seeking a permanent injunction must satisfy a four-factor test before a court may grant such relief. A plaintiff must demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.” Monsanto Co. v. Geertson Seed Farms, 561 U.S. 139, 156-57 (2010) (quoting eBay Inc., v. MercExchange, L.L.C., 547 U.S. 388, 391 (2006)); see also Christopher Phelps & Assocs. L.L.C. v. Galloway, 492 F.3d 532, 543 (4th Cir. 2007). Even if a plaintiff satisfies the four-factor test, the court retains “equitable discretion” whether to grant an injunction. Christopher Phelps & Assocs., 492 F.3d at 543. “An injunction is a drastic and extraordinary remedy, which should not be granted as a matter of course.” Monsanto Co., 561 U.S. at 165 (citing Weinberger v. Romero-Barcelo, 456 U.S. 305, 311-12 (1982)). “An injunction should issue only where the intervention of a court of equity ‘is essential in order effectually to protect property rights against injuries otherwise irremediable.'” Weinberger, 456 U.S. at 312 (quoting Cavanaugh v. Looney, 248 U.S. 453, 456 (1919)).

         Any injunction must be narrowly tailored to the facts of the case. PBM Prods., LLC v. Mead Johnson & Co., 639 F.3d 111, 128 (4th Cir. 2011). An injunction is “narrowly tailored” when it is “no more burdensome to the defendant than necessary to provide complete relief to the plaintiff[].” Id. (citing Kentuckians for Commonwealth, Inc. v. Rivenburgh, 317 F.3d 425, 436 (4th Cir. 2006)).

         Under circumstances presented here, injunction is appropriate. First, plaintiffs have demonstrated that they have suffered irreparable injury for which there is no adequate remedy at law. Specifically, plaintiffs are being forced to participate in arbitration, despite absence of an arbitration agreement or requirement under FINRA rules. This injury is irreparable because plaintiffs are being forced to expend resources they cannot later recover. See Morgan Keegan & Co. v. Louise Silverman Trust, No. 11-2533, 2012 WL 113400, *5 (D. Md. Jan. 12, 2012), aff'd sub nom., 706 F.3d 563 (4th Cir. 2013) (collecting cases) (“[T]he harm suffered by an [entity] who is forced to arbitrate claims it did not agree to arbitrate is per se irreparable because it forces an individual to expend resources it cannot later recover.”)); see also Merrill Lynch Inv. Managers v. Optibase, Ltd.,337 F.3d 125, 129 (2d Cir. 2003) (internal citations omitted) (“[A] [party] would be irreparably harmed by ...

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