Romnes v. Bache & Co., Inc.

• Decision Date: 10 November 1977
• Docket Number: Civ. A. No. 73-C-232.
• Citation: 439 F. Supp. 833
• Parties: Jon R. ROMNES and Thomas R. Stoker, Plaintiffs, v. BACHE & CO., INCORPORATED, Defendant.
• Court: U.S. District Court — Western District of Wisconsin

439 F. Supp. 833

Jon R. ROMNES and Thomas R. Stoker, Plaintiffs, v. BACHE & CO., INCORPORATED, Defendant.

Civ. A. No. 73-C-232.

United States District Court, W. D. Wisconsin.

November 10, 1977.

Daniel W. Hildebrand and Robert D. Martin, Madison, Wis., for plaintiffs.

W. Stuart Parsons and J. Paul Jacobson, Milwaukee, Wis., for defendant.

DECISION AND ORDER

REYNOLDS, District Judge.

This action was commenced against defendant Bache & Co., Incorporated (hereinafter "Bache"), on July 24, 1973, by plaintiffs Jon R. Romnes and Thomas R. Stoker. Plaintiffs seek $10,006.00 in damages and a declaratory judgment that they do not owe defendant $44,312.00.

Plaintiffs entered into a partnership agreement in April 1973 with one David A. Goff who was a day trader at Bache. The purpose of the partnership was to trade commodities future contracts at the Madison, Wisconsin, office of Bache. The partnership agreement provided that there would be a maximum loss on any position of 10% of the total capital of the partnership, and no more than 50% of the total capital of the partnership would be at risk in any one commodity. The partnership was named Future Associates. Each partner invested $5,000.00 in the partnership, and Mr. Goff carried on the active trading for the partnership. Bache had actual knowledge of the agreement, had required that certain changes be made in it before the account was opened, and at all times had an executed copy in its file. The partnership operated in April and May of 1973.

The amended complaint alleges that the defendant violated its duties according to the Commodity Exchange Act (hereinafter "CEA"), 7 U.S.C. § 1 et seq., more specifically 7 U.S.C. §§ 6b and 6d, the Wisconsin Uniform Securities Act, Chapter 551 Wisconsin Statutes, and under the common law with respect to plaintiffs' account. Bache is in the brokerage business in securities and commodities and is regulated by the Commodities Exchange Commission, the Securities and Exchange Commission, and the Wisconsin Commissioner of Securities.

The amended complaint also alleges other irregularities, including Goff's financial irresponsibility, Bache's failure to communicate it to plaintiffs, Bache's having put the plaintiffs' account on "minimums" (reduced margin requirements) at Goff's request, and Bache's failure "* * * to advise plaintiffs that the Chicago Board of Trade could or would increase the permitted maximum daily price fluctuation * * *." (First paragraph numbered 15.) The alleged factual basis for the plaintiffs' allegations is that on May 16-18, 1973, Goff and the defendant executed orders in violation of the partnership agreement by putting the entire account into short sales of soybeans. Such sales could not be "covered," i. e., contracts purchased, late in May because of restrictions applied by the Chicago Board of Trade, and in consequence the account lost $59,330.00 when the short positions were closed out on May 30, 1973. The $15,018.00 amount was covered by the margin in the account, and plaintiffs claim two-thirds of that amount in damages. The balance of $44,312.00 allegedly owed Bache is the subject of plaintiffs' prayer for declaratory relief.

The court has jurisdiction of this action pursuant to 28 U.S.C. §§ 1331, 1332, 1337, and 2201.

Negotiations were conducted between plaintiffs and Bache from May 31, 1973 to July 23, 1973, in reference to Bache's demand that plaintiffs pay to it the $44,312.00 which it claimed was owing. At several times Bache threatened litigation if plaintiffs failed to pay, and after negotiations broke down, plaintiffs filed the present suit on July 24, 1973. Thereafter discovery was conducted by both sides during August and September. On September 21, 1973, Bache served a motion for a more definite statement and moved for an order staying proceedings pending arbitration under paragraph 14 of Future Associate's "Customer's Agreement" dated April 3, 1973, and § 3 of the Federal Arbitration Act, 9 U.S.C. § 3. The motion was withdrawn on November 15, 1973, following plaintiffs' agreement to file an amended complaint. The amended complaint was filed on December 6, 1973. Thereafter the parties agreed to an extension of time until February 8, 1974, for defendant to file an answer, and on February 8, 1974, Bache moved before answering for an order staying proceedings pending arbitration. It is this motion which is the subject matter of this order. For the reasons hereafter stated, Bache's motion will be granted.

Paragraph 1 of the Customer's Agreement dated April 3, 1973, provides that the contract shall apply "* * * with respect to all of my accounts in which I have an interest alone or with others * * * for the purchase and sale of securities and commodities." Paragraph 14 provides:

"14. This contract shall be governed by the laws of the State of New York, and shall inure to the benefit of your successors and assignees and shall be binding on the undersigned, his heirs, executors, administrators and assigns. Any controversy arising out of or relating to my account, to transactions with or for me or to this agreement or the breach thereof, shall be settled by arbitration in accordance with the rules then obtaining of either the American Arbitration Association or the Board of Governors of the New York Stock Exchange as I may elect, except that any controversy arising out of or relating to transactions in commodities, or contracts relating thereto, whether executed or to be executed within or outside of the United States shall be settled by arbitration in accordance with the rules then obtaining of the Exchange (if any) where the transaction took place, if within the United States, and provided such Exchange has arbitration facilities or under the rules of the American Arbitration Association as I may elect. If I do not make such election by registered mail addressed to you at your main office within five days after demand by you that I make such election, then you may make such election. Notice preliminary to, in transaction with or incident to such arbitration proceeding, may be sent to me by mail and personal service is hereby waived. Judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction thereof, without notice to me."

The agreement was signed by both of the plaintiffs.

Section 3 of the Federal Arbitration Act, 9 U.S.C. § 3, provides:

"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."

The above-quoted § 3 applies to contracts evidencing transactions "involving commerce" pursuant to 9 U.S.C. § 2. There is no dispute between the parties that the contract involved is one "involving commerce" and therefore that 9 U.S.C. § 3 on its face applies.

Plaintiffs claim, however, that to require arbitration in this case would be contrary to public policy and also that defendant is "in default in proceeding with such arbitration," and that therefore 9 U.S.C. § 3 does not apply. Defendant claims that the Customer's Agreement provides for arbitration, that 9 U.S.C. § 3 provides for a stay of court proceedings pending arbitration, and that it is entitled to such a stay. Defendant also denies that it is in default in proceeding with such arbitration.

In general, when a motion is brought to stay proceedings in an action based on a contract involving interstate commerce, which contract provides that disputes arising out of the contract shall be decided by arbitration, Section 3 of the Federal Arbitration Act, 9 U.S.C. § 3, requires a federal district court to issue a stay of its proceedings pending arbitration of such disputes as the contract provides for. Lawson Fabrics, Inc. v. Akzona, Inc., 355 F.Supp. 1146 (S.D.N.Y.1973), aff'd 486 F.2d 1394 (2d Cir. 1973); Prima Paint Corporation v. Flood & Conklin Mfg. Co., 360 F.2d 315 (2d Cir. 1966), aff'd 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967); American Airlines, Inc. v. Louisville & Jefferson County Air Board, 269 F.2d 811 (6th Cir. 1959); United States Fidelity and Guaranty Co. v. Bangor Area Joint School Authority, 355 F.Supp. 913 (E.D.Pa.1973); Robinson v. Bache & Co., 227 F.Supp. 456 (D.C.N.Y.1964). In Robinson v. Bache & Co., supra, for example, wherein a customer brought a suit for negligence against a brokerage firm, the Court held that an arbitration clause contained in the Customer's Agreement was binding on the customer and ordered a stay of proceedings.

There are some recognized exceptions to the general rule; for example, where grounds exist for revoking the contract containing the arbitration agreement or where fraud in the inducement is alleged in regard to the making of the arbitration clause. Prima Paint Corporation v. Flood & Conklin Mfg. Co., supra; American Airlines, Inc. v. Jefferson County Air Board, supra. The fact that a federal court will thereby be prevented from hearing a claim which it could otherwise decide, however, is not in itself sufficient reason to deny the stay. American Airlines, Inc. v. Jefferson County Air Board, supra.

A motion for a stay will be denied where the federal statute by its terms prohibits arbitration of actions arising under the statute. For example, § 14 of the Securities Act of 1933, 15 U.S.C. § 77n, and § 29 of the Securities Exchange Act of 1934, 15 U.S.C. § 78cc, which are prohibitions against waiver of rights under the Acts, have been interpreted to void arbitration agreements entered into between customers and...