728 F.2d 577 (2nd Cir. 1984), 451, Paine, Webber, Jackson & Curtis, Inc. v. Chase Manhattan Bank, N.A.
| Citation | 728 F.2d 577 |
| Party Name | PAINE, WEBBER, JACKSON & CURTIS, INC., Plaintiff-Appellee, v. The CHASE MANHATTAN BANK, N.A. and In-Suk Oh, Defendants-Appellants. |
| Case Date | February 14, 1984 |
| Court | United States Courts of Appeals, U.S. Court of Appeals — Second Circuit |
Page 577
Argued Dec. 5, 1983.
Gerald Harris, New York City (Rubin, Baum, Levin, Constant & Friedman, New York City, on brief), for plaintiff-appellee.
Joseph Angland, New York City (Robert C. Myers, Thomas R. DeRosa, and Dewey, Ballantine, Bushby, Palmer & Wood, New York City, on brief), for defendants-appellants.
Before TIMBERS, VAN GRAAFEILAND and NEWMAN, Circuit Judges.
TIMBERS, Circuit Judge.
This is an appeal from an order entered June 13, 1983 in the Southern District of New York, Robert J. Ward, District Judge,
Page 578
denying defendants' motion, pursuant to Section 3 of the Federal Arbitration Act, 9 U.S.C. Sec. 3 (1982), for an order staying all proceedings in the underlying action pending arbitration in accordance with the Constitution and Rules of the New York Stock Exchange (NYSE).
The narrow question presented is whether the district court correctly held that non-members of the NYSE cannot compel a member of the NYSE to submit to NYSE arbitration a controversy not arising out of the exchange-related business of the member. We affirm.
I.
Paine, Webber, Jackson & Curtis, Inc. (Paine Webber), a broker-dealer and a member of the NYSE, commenced this action on May 5, 1982 against the Chase Manhattan Bank, N.A. (Chase) and In-Suk Oh (Oh), a former Vice-President of Chase, alleging six causes of action and demanding compensatory damages of approximately $1.5 million. Three of the six causes of action alleged violations of federal statutes: Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b) (1982), and Rule 10b-5 promulgated thereunder; Section 17(a) of the Securities Act of 1933, 15 U.S.C. Sec. 77q(a) (1982); and Section 2(c) and (d) of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. Sec. 1962(c)-(d) (1982). The three remaining causes of action asserted pendent state claims: alleged violation of Section 352-c of the General Business Law, N.Y.Gen.Bus.Law Sec. 352-c (McKinney 1968 & Supp.1983); alleged common law fraud; and alleged common law negligent misrepresentation.
The facts alleged in the complaint may be summarized briefly to the extent relevant to the narrow issue on this appeal. 1
In October 1978, four individuals agreed to form an Illinois general partnership to be known as Sheridan Associates (Sheridan). The business of Sheridan was to include trading in government and government-backed securities. In November 1978, the four partners agreed that they would invest $5 million in equity capital in order to attract the necessary outside financing. They further agreed that, upon the issuance of a certified financial statement for the new partnership, they would withdraw up to $3 million of the initial capitalization and would operate the business with only $2 million paid-in capital.
On November 14, 1978, two individuals from Sheridan met with Oh and another Chase officer to discuss the possibility of Sheridan's obtaining financing from Chase. The Sheridan representatives disclosed to Chase their intention not to maintain the $5 million paid-in capital once the financial statements were certified. Chase eventually decided not to provide Sheridan the financial help it requested but did agree to help Sheridan obtain the financing elsewhere.
The Sheridan partnership agreement was signed on or about December 13, 1978. The financial statements through December 15, 1978 were certified by an accounting firm on December 29, 1978. Even before the certification was made, the $3 million was withdrawn from Sheridan by its partners.
Sheridan then approached Paine Webber in late January or early February 1979 to obtain a $50 million credit line and to urge Paine Webber to trade government securities with Sheridan. As part of the process of verifying the information furnished by Sheridan, Paine Webber requested the Morgan Guaranty Trust Company (Morgan) to conduct a credit check of Sheridan. In due course, a representative of Morgan called Oh at Chase and sought information about the creditworthiness of Sheridan and its partners. Oh gave a positive recommendation concerning Sheridan.
The crux of the underlying action is Paine Webber's claim that Oh failed to disclose both his knowledge of the Sheridan
Page 579
partners' alleged fraudulent scheme to mislead investors and the fact that Chase had chosen not to extend credit to Sheridan. Paine Webber contends that it relied upon the information furnished by Oh and Chase in extending credit to and in trading government securities with Sheridan. When Sheridan eventually declared itself bankrupt, Paine Webber lost approximately $1.5 million. Paine Webber claims that Chase is jointly and severally liable with Oh for Paine Webber's loss because Chase had supervisory control over Oh and because Oh was acting within the scope of his employment by Chase.
On June 21, 1982, Chase filed its answer consisting of a denial of the material allegations of the complaint and the assertion of seven affirmative defenses. In a letter to Paine Webber dated June 25, 1982, Chase demanded arbitration. In a letter to Paine Webber dated July 2, 1982, Oh likewise demanded arbitration. Paine Webber refused to submit to arbitration. On July 7, 1982, Chase and Oh moved, pursuant to 9 U.S.C. Sec. 3, for an order staying all proceedings and discovery pending arbitration. In an opinion dated June 13, 1983, Judge Ward denied defendants' motion for a stay and set a schedule for completion of discovery and the filing of a pre-trial order. This appeal followed. 2
II.
The sole issue on this appeal is whether defendants, neither of which are members of the NYSE, can compel Paine Webber, which is a NYSE member, to submit its claims against defendants to NYSE arbitration.
A good starting point is the provision of the Federal Arbitration Act pursuant to which defendants seek to compel arbitration:
"If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration."
9 U.S.C. Sec. 3 (1982).
Defendants make no claim that they have an agreement with Paine Webber requiring the submission to arbitration of any disputes they have with Paine Webber. Rather, they point to the Constitution and Rules of the NYSE, which require NYSE members to submit to arbitration any controversies with non-members arising out of the member's business. 3
The district court denied defendants' motion for a stay...
To continue reading
Request your trial