EF Hutton & Co., Inc. v. Schank

• Decision Date: 22 November 1976
• Docket Number: No. C 76-48.,C 76-48.
• Citation: 456 F. Supp. 507
• Parties: E. F. HUTTON & COMPANY, INC., Plaintiff, v. Brian C. SCHANK, Defendant.
• Court: U.S. District Court — District of Utah

456 F. Supp. 507

E. F. HUTTON & COMPANY, INC., Plaintiff, v. Brian C. SCHANK, Defendant.

No. C 76-48.

United States District Court, D. Utah, C. D.

November 22, 1976.

W. Jerry Ungricht, Salt Lake City, Utah, for plaintiff.

Steven H. Gunn, Salt Lake City, Utah, for defendant.

ORDER GRANTING MOTION FOR SUMMARY JUDGMENT

ALDON J. ANDERSON, Chief Judge.

The issues herein discussed and decided are before the court by way of plaintiff's motion for summary judgment as to all issues raised in the complaint and counterclaim in the captioned action. The motion for summary judgment with a supporting memorandum of points and authorities was filed with the court on August 20, 1976. Thereafter, defendant filed a memorandum opposing the motion and counsel for plaintiff availed himself of the opportunity to respond to that opposition by way of an additional memorandum. The court has considered carefully the memoranda, affidavits and depositions submitted by both parties with respect to this motion. Being fully advised thereon, the court enters this order in accordance with the following analysis.

FACTUAL CIRCUMSTANCES

Central to this case is a commodities futures trading account which was established in the name of the defendant with the plaintiff. Plaintiff, E. F. Hutton and Company, Inc., is a Delaware corporation with its principal place of business in New York City. Plaintiff is a nationally known securities and commodities brokerage firm qualified to do, and doing, business in the State of Utah. Plaintiff handles accounts for customers seeking to invest funds in securities as well as in commodities futures contracts. Underlying the complaint and petition brought by the plaintiff herein for an order granting specific performance of the arbitration clause of a customer's agreement between plaintiff and defendant is a debt allegedly owing plaintiff on defendant's commodities account. The debt was the result of activity in that account which resulted in substantial losses. Plaintiff originally attempted to recover the obligation from defendant by initiating a collection action in state court. However, when the defendant in answering the state court complaint raised a counterclaim alleging violation of the state securities laws, plaintiff made a demand for arbitration of the issues pursuant to the arbitration clause of the standard customer's agreement allegedly signed by the defendant. When defendant refused to submit the dispute to arbitration, plaintiff filed this action.

ANALYSIS

Defendant opposes plaintiff's motion for summary judgment by 1) assailing the validity of the customer's agreement and arbitration clause included therein, and 2) by claiming that his commodities account is, or, depending upon the resolution of factual issues material thereto, might be a "security," and therefore not subject to arbitration under the Supreme Court holding in Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 99 L.Ed.2d 168 (1953).

1. Defendant's attack upon the validity of the customer's agreement and the included arbitration clause.

To the defendant's claim that the customer's agreement and the included arbitration provision are invalid based upon the facts as presented in a light most favorable to the defendant, plaintiff first argues that the question is controlled by the holding of the U.S. Supreme Court in Prima Paint Corp. v. Flood and Conklin, 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967). This court finds that the Supreme Court decision there is applicable to the circumstances of this case, but in a way contrary to the proposition for which plaintiff advances it. Plaintiff argues that because defendant has raised questions as to the validity of the entire contract (customer's agreement), this court is barred from deciding the question because the Court in Prima held that such questions are the exclusive province of the arbitrator under the policy and practice of the Federal Arbitration Act, 9 U.S.C. §§ 1 et. seq. That conclusion does not adequately and completely represent the full import of the Supreme Court's holding in Prima. The very language from that opinion cited to this court by plaintiff raises clearly another important aspect of that decision. This second aspect, especially when considered in the factual context of the case, is a strikingly clear mandate. The Supreme Court said, with reference to § 4 of the Federal Arbitration Act:

. . . the federal court is instructed to order arbitration to proceed once it is satisfied that "the making of the agreement for arbitration or failure to comply with the arbitration agreement is not in issue." Accordingly, if the claim is fraud in the inducement of the arbitration clause itself — an issue which goes to the "making" of the agreement to arbitrate — the federal court may proceed to adjudicate it. But the statutory language does not permit the federal court to consider claims of fraud in the inducement of the contract generally. (emphasis added) Id. at 403, 87 S.Ct. at 1806.

In Prima, Prima Paint had initiated an action for rescission of a consulting agreement between it and Flood & Conklin. The suit was brought in federal district court and the basis for the action was fraud in the inducement of the entire contract. Prima Paint alleged that Flood & Conklin had falsely represented its solvency in inducing the signing of the agreement. Flood & Conklin petitioned the district court for a stay pursuant to § 3 of the Federal Arbitration Act pending a resolution of the dispute by arbitration pursuant to the arbitration clause of the consulting agreement. Prima Paint, in arguing against the entry of the stay, did not attack the validity of the arbitration clause itself. Essentially, the question of law presented by the case was simply one concerning the separability of an arbitration clause from the remainder of an agreement being attacked on a general claim of fraudulent inducement. The holding of the Supreme Court was, therefore, that in the absence of some claim or circumstances which specifically raised the question of the validity of the arbitration provision, separate and apart from the rest of the agreement, the clause was separable. Admittedly, in this case, the defendant has said that he attacks the validity of the entire customer's agreement. However, an examination of the factual and legal bases of that attack leads this court to conclude that, not only is the making of the customer's agreement at issue, but so is the making of the arbitration agreement itself. A primary factual allegation leading to that conclusion is the claim of defendant that he had no knowledge that there was an arbitration provision in the customer's agreement. In light of this conclusion, this court now proceeds to the consideration and analysis of defendant's attack on the validity of the arbitration agreement in opposition to the plaintiff's motion for summary judgment.

First, the defendant's arguments concerning the validity of the arbitration agreement are an admixture of claims of fraudulent inducement, unconscionability and undue influence; however, clear, correct analysis requires that this court consider each of these claims separately.

Both in an earlier motion to dismiss, and in the present opposition to plaintiff's motion for summary judgment, the defendant has asserted rather flatly that the contract is void because it was unconscionable. This court holds that as a matter of law the facts of this case, when taken in a light most favorable to the defendant, do not give rise to a claim of unconscionability. The court believes that the defendant has misconceived the nature of a claim of unconscionability. This misconception is evidenced by the following statement made concerning the alleged failure of Mr. Lybbert to fully explain the terms of the customer's agreement concerning margin requirements and arbitration:

The scope and importance of Clause 4, dealing with margin requirements and discretionary selling by the broker, and of Clause 7, dealing with arbitration, are of such magnitude that to distract Defendant's attention from them by a totally inadequate presentation of the contract's meaning would render any contract including them unconscionable and thereby invalid.

The court believes that the elements of failure to disclose and distracting described by the defendant are more appropriately raised in claims of undue influence and fraudulent inducement. Neither the plaintiff nor defendant has supplied the court with further argument on the elements of unconscionability. The court notes the law of the State of Utah is stated in Carlson v. Hamilton, 8 Utah 2d 272, 332 P.2d 989 (1958). The Utah Supreme Court there said:

People should be entitled to contract on their own terms without the indulgence of paternalism by courts in the alleviation of one side or another from the effects of a bad bargain. Also, they should be permitted to enter into contracts that actually may be unreasonable or which may lead to hardship on one side. It is only where it turns out that one side or the other is to be penalized by the enforcement of the terms of a contract so unconscionable that no decent, fairminded person would view the ensuing result without being possessed of a profound sense of injustice, that equity will deny the use of its good offices in the enforcement of such unconscionability. Id. at 990-91.

The court cannot conclude that the arbitration clause of the customer's agreement is a term which is so unconscionable as to arouse a "profound sense of injustice" in any "decent, fairminded person."

The court finds that there is an initial issue of fact regarding the authenticity of the signature of the defendant which appears upon the customer's agreement. The evidence before the court on this issue includes deposition testimony and the signed document. Plaintiff has made a prima facie showing that the signature is indeed the signature of the defendant. Defendant, on the...