Ilan v. Shearson/American Express, Inc.

• Decision Date: 20 December 1985
• Docket Number: No. 83 Civ. 9319 (WCC).,83 Civ. 9319 (WCC).
• Parties: Rony ILAN, Plaintiff, v. SHEARSON/AMERICAN EXPRESS, INC. and Gila Altman, Defendants.
• Court: U.S. District Court — Southern District of New York

632 F. Supp. 886

Rony ILAN, Plaintiff, v. SHEARSON/AMERICAN EXPRESS, INC. and Gila Altman, Defendants.

No. 83 Civ. 9319 (WCC).

United States District Court, S.D. New York.

December 20, 1985.

Mannarino Bader & Bloom, P.C., New York City, for plaintiff; Howard D. Bader, Harvey L. Woll, of counsel.

Shearson Lehman Bros., Inc., New York City, for defendants; Harry D. Frisch, Theodore A. Krebsbach, of counsel.

OPINION AND ORDER

WILLIAM C. CONNER, District Judge:

Plaintiff Rony Ilan ("Ilan") brought this action against Shearson/American Express, Inc. ("Shearson"), a securities brokerage firm, and Gila Altman ("Altman"), one of Shearson's brokers, alleging in essence that Altman, with Shearson's knowledge and consent, fraudulently induced him to trade on margin and churned his account, resulting in losses of approximately $100,000. Ilan alleges that Altman and Shearson thereby violated section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1982), and rule 10b-5, 17 C.F.R. § 240.10b-5 (1985), promulgated thereunder. He also alleges pendent state law claims for fraud, breach of fiduciary duty, and breach of contract.¹

This matter is now before the Court on defendants' motion pursuant to sections 2 and 3 of the Federal Arbitration Act, 9 U.S.C. §§ 2, 3 (1982), to compel arbitration of Ilan's federal and state law claims. For the reasons stated below, defendants' motion is granted.

Background

When Ilan opened his account at Shearson in February 1982, he entered into a customer's agreement which contained the following arbitration provision:

Unless unenforceable due to federal or state law, any controversy arising out of or relating to my accounts, to transactions with you for me or to this agreement or the breach thereof, shall be settled by arbitration in accordance with the rules then in effect, of the National Association of Securities Dealers, Inc. or the Board of Directors of the New York Stock Exchange, Inc. and/or the American Stock Exchange, Inc. as I may elect. If I do not make such an election by registered mail addressed to you at your main office within 5 days after demand by you that I make such election, then you may make such election. Judgement upon any award rendered by the arbitrators may be entered in any court having jurisdiction thereof.

Affidavit of Harry D. Frisch, Exh. 3, ¶ 13 (emphasis added). As noted above, defendants seek to enforce this provision under sections 2 and 3 of the Federal Arbitration Act. Section 2 provides in pertinent part:

A written provision in ... a contract evidencing a transaction involving commerce to settle by arbitration a controversy arising out of such contract or transactions ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

9 U.S.C. § 2 (1982).

There is little dispute that Ilan's agreement with Shearson falls within the broad scope of the Arbitration Act. His account with Shearson "evidences a transaction involving commerce," and his claims clearly "arise out of the contract" in that they all pertain to allegedly improper actions taken with respect to his account. See, e.g., Rojas Cancanon v. Smith Barney, Harris Upham & Co., 612 F.Supp. 996, 998 (S.D.Fla.1985). However, Ilan contends that he cannot be compelled to arbitrate his claims because (1) defendants waived any right to arbitration by failing to timely assert it, and (2) the arbitration provision constitutes an unenforceable contract of adhesion.

Discussion

Before addressing Ilan's specific waiver and contract of adhesion arguments, it is necessary to consider the general arbitrability of his claims. Until recently, there was considerable disagreement concerning the arbitrability of state law claims that were pendent to or "intertwined" with federal claims. The Supreme Court ended that debate in Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985), in which it held that federal courts must respect and enforce agreements to arbitrate state law claims even if the federal claim to which they are pendent is nonarbitrable. Thus, it is clear that, at the very least, Ilan's state law claims must be sent to arbitration.

Unfortunately, in the process of resolving that troublesome issue, the Court created new uncertainty with respect to the arbitrability of claims under the Securities Exchange Act of 1934 ("the 1934 Act"). Most lower federal courts had considered such claims nonarbitrable on the authority of Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953).

In Wilko, the Supreme Court held that predispute agreements to arbitrate claims arising under the Securities Act of 1933 ("the 1933 Act") were void. The Court's decision was based on three interrelated provisions of the 1933 Act: section 14, which voids any "stipulation ... binding any person acquiring any security to waive compliance with any provision" of the Act; section 12(2), which provides a "special right to recover for misrepresentation which differs substantially from the common-law action," 346 U.S. at 431, 74 S.Ct. at 184; and section 22, which allows a plaintiff to sue in any state or federal court of competent jurisdiction and provides for nationwide service of process. The Court found that with these three provisions Congress intended to proscribe enforcement of agreements to arbitrate 1933 Act claims, concluding that such agreements would constitute "stipulations waiving compliance" with that "provision" of the 1933 Act granting plaintiffs the special right to sue in court. Id. at 434-35, 74 S.Ct. at 186-87. The Court acknowledged that in the Federal Arbitration Act Congress had also expressed a strong federal policy in favor of arbitration, but concluded that that Congress did not intend that policy to apply to 1933 Act claims. Id. at 431, 438, 74 S.Ct. at 184, 188.

Lower federal courts extended Wilko, ruling that agreements to arbitrate claims under the 1934 Act were also void, but in Scherk v. Alberto-Culver Co., 417 U.S. 506, 94 S.Ct. 2449, 41 L.Ed.2d 270 (1974), the Supreme Court questioned whether this extension of Wilko was appropriate. The Court noted that unlike section 12(2) of the 1933 Act, the 1934 Act contains no special private right of action. Id. at 513, 94 S.Ct. at 2454. The Court contrasted the express right of action of the 1933 Act with the implied right of action federal courts had found in section 10(b), and compared the broad jurisdiction of the 1934 Act with the more limited jurisdiction of the 1934 Act. Id. at 513-14, 94 S.Ct. at 2454-55. Yet, while it pointed out these differences between the statutes, the Court found it unnecessary to decide whether Wilko did in fact apply to claims under the 1934 Act.

Notwithstanding the Supreme Court's comments in Scherk, lower federal courts, including the Court of Appeals for the Second Circuit, see Allegaert v. Perot, 548 F.2d 432 (2d Cir.), cert. denied, 432 U.S. 910, 97 S.Ct. 2959, 53 L.Ed.2d 1084 (1977), continued to hold that claims arising under the 1934 Act are not arbitrable. However, in its recent decision in Byrd, the Supreme Court again questioned the applicability of Wilko to claims arising under section 10(b). The Court reviewed the comments it had made in Scherk, but again declined to resolve the issue, stating that the question was not properly before it. 105 S.Ct. at 1240 n. 1.

Justice White, writing in concurrence, expressed his views more directly. He reiterated the differences between the 1933 and 1934 Acts that the Court had noted in Scherk, and stressed that "Wilko's reasoning cannot be mechanically transplanted to the 1934 Act." 105 S.Ct. at 1244. He reasoned that because the right of action under section 10(b) is implied rather than express, the 1933 Act's proscription against stipulations waiving its provisions was "literally inapplicable," to section 10(b) claims. Id. Justice White also stated that "Wilko's solicitude for the federal cause of action — the `special right' established by Congress in the 1933 Act — is not necessarily appropriate where the cause of action is judicially implied and not so different from the common law fraud action." Id. (quoting Wilko, 346 U.S. at 431, 74 S.Ct. at 184.). Justice White concluded that lower-court decisions extending Wilko to 1934 Act claims "must be viewed with some doubt." Id.

A growing number of district judges, including at least three in this circuit, have accepted the Supreme Court's invitation to reexamine the applicability of Wilko to 1934 Act claims and have held that section 10(b) actions are arbitrable. See, e.g., Finkle & Ross v. A.G. Becker Paribas, Inc., 622 F.Supp. 1505, 1508-09 (S.D.N.Y.1985); McMahon v. Shearson/American Express, Inc., 618 F.Supp. 384, 387-89 (S.D.N.Y. 1985); Jarvis v. Dean Witter Reynolds, Inc., 614 F.Supp. 1146, 1150-52 (D.Vt. 1985). Other judges in this circuit have declined the opportunity, holding that we are still bound by the court of appeals' decision in Allegaert v. Perot, 548 F.2d 432 (2d Cir.), cert. denied, 432 U.S. 910, 97 S.Ct. 2959, 53 L.Ed.2d 1084 (1977), that section 10(b) claims are not arbitrable. See, e.g., Leone v. Advest, Inc., 624 F.Supp. 297 (S.D.N.Y.1985); Weizman v. Adornato, No. 84 Civ. 3603 (LDW) (E.D.N.Y. Apr. 24, 1985).

While the choice between these two approaches is a difficult one, I join those judges who have followed the Supreme Court's cautious lead, and conclude that section 10(b) claims are arbitrable. In particular, I find persuasive Justice White's reasoning that unlike the 1933 Act, the 1934 Act does not reveal a congressional intent to carve out an exception to the strong federal policy in favor of arbitration.

I also agree with Justice White that the Supreme Court's repeated suggestion that Wilko may not be applicable to claims under section 10(b) calls contrary authority into question. It is therefore not at all clear that the Second Circuit's opinion in Allegaer...