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Cavallaro v. Mendelsohn

United States District Court, D. Massachusetts

May 9, 2019

CHRISTOPHER C. CAVALLARO, Plaintiff,
v.
ARTHUR MENDELSOHN, Trustee of the Pearl Mendelsohn Revocable Living Trust, Defendant.

          MEMORANDUM AND ORDER ON DEFENDANT'S MOTION TO DISMISS FOR LACK OF SUBJECT-MATTER JURISDICTION

          F. Dennis Saylor IV United States District Judge.

         This case relates to an arbitration proceeding before the Financial Industry Regulatory Authority (“FINRA”), a self-regulatory organization for the financial services sector. Defendant Arthur Mendelsohn, acting as trustee for his mother's living trust, filed a claim against the trust's financial adviser, plaintiff Christopher Cavallaro. The claim asserted, among other things, that Cavallaro had breached his fiduciary duties to the trust and violated FINRA rules. However, FINRA rules require that claims against “associated persons” such as Cavallaro should be arbitrated. Cavallaro brought suit for equitable relief, seeking to enjoin Mendelsohn from arbitrating his claim.

         Mendelsohn moved to dismiss the complaint for lack of subject-matter jurisdiction, which the Court granted in a short electronic order. The motion was granted for the following reasons.

         I. Background

         A. Factual Background

         The facts are set forth as described in the complaint.

         Christopher Cavallaro is a Massachusetts resident and was formerly an investment adviser with Lincoln Financial Advisors Corporation, an SEC-registered broker-dealer and FINRA member. (Compl. ¶¶ 5, 10). By virtue of his employment with Lincoln, he was also an “associated person” under FINRA. (Id. ¶ 5).

         Arthur Mendelsohn is a Massachusetts resident and a long-time client of Cavallaro. (Id. ¶¶ 6, 11). He is also the trustee of the Pearl Mendelsohn Revocable Living Trust, the beneficiary of which is his elderly mother, Pearl Mendelsohn. (Id. ¶ 7)

         In 2015, Arthur created an estate plan for Pearl. (Id. ¶ 12). As part of that estate plan, he directed Cavallaro to find an annuity or other structured income product that would yield a regular income to cover his mother's elder-care expenses. (Id. ¶ 13). He attempted to secure an annuity from a Lincoln-approved insurance broker called Innovative Insurance Partners (“IIP”), but there was no product available given Pearl's advanced age. (Id. ¶ 14). Instead, IIP recommended that the trust purchase a product sold by another entity, Future Income Payments (“FIP”). (Id. ¶ 15). The complaint does not say whether FIP was also a Lincoln-approved insurance broker. FIP funded its operations by buying streams of future pension payments from pensioners at a discount. (Id. ¶ 16). The FIP product in question was neither an annuity nor any other type of recognized security investment. (Id. ¶ 17). It can be inferred from the complaint that the trust purchased the FIP product, which was an unfit investment and caused a substantial loss.

         On January 7, 2019, Arthur, on behalf of the trust, filed a FINRA “Statement of Claim” against Lincoln and Cavallaro for breach of fiduciary duty, negligence, violation of various FINRA rules, and breach of contract. (Id. ¶ 18). However, FINRA Rule 12200 requires FINRA members (such as Lincoln) and “associated persons” (such as Cavallaro) “to submit to arbitration to resolve claims brought by customers, ” so long as “the dispute . . . arises in connection with the ‘business activities' of the [FINRA] member or associated person.” (Id. ¶ 19).

         B. Procedural Background

         The complaint was filed in this action on March 18, 2019, and asserts two claims. Count One asserts a claim for declaratory relief in the form of a court order stating that the trust's claim before FINRA did not arise out of Cavallaro's “business activities” such that arbitration is not binding. (Compl. ¶¶ 28-30). Count Two asserts a claim for injunctive relief seeking to enjoin the trust from bringing its claim before a FINRA arbitration forum. (Id. ¶¶ 31-36). Cavallaro filed a separate motion for a preliminary injunction seeking the same equitable relief, also on March 18, 2019. Two days later, on March 20, 2019, Lincoln Financial Advisors Corporation filed a motion to intervene as a plaintiff.

         Defendant moved to dismiss the complaint for lack of subject-matter jurisdiction on April 2, 2019. The Court granted the motion to dismiss after a hearing on April 9, 2019, and stated that it would issue a memorandum and order setting forth its reasoning at a later date.

         II. L ...


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