McPheeters v. McGinn, Smith and Co., Inc.

• Decision Date: 08 January 1992
• Docket Number: No. 91-7719,No. 542,D,542,91-7719
• Citation: 953 F.2d 771
• Parties: , Fed. Sec. L. Rep. P 96,485 Thomas S. McPHEETERS, III, Plaintiff-Appellee, v. McGINN, SMITH AND COMPANY, INC.; Robert O. O'Farrell; and David Smith, Defendants-Appellants. ocket
• Court: U.S. Court of Appeals — Second Circuit

Page 771

953 F.2d 771

60 USLW 2496, Fed. Sec. L. Rep. P 96,485

Thomas S. McPHEETERS, III, Plaintiff-Appellee, v. McGINN, SMITH AND COMPANY, INC.; Robert O. O'Farrell; and David Smith, Defendants-Appellants.

No. 542, Docket No. 91-7719.

United States Court of Appeals Second Circuit.

Argued Nov. 27, 1991.

Decided Jan. 8, 1992.

Michael J. Smith, Carol Gerster Carter, Roemer & Featherstonhaugh, P.C., Albany, N.Y., for defendants-appellants.

Leslie F. Couch, Couch, White, Brenner, Howard & Feigenbaum, Albany, N.Y., for plaintiff-appellee.

Before TIMBERS, PIERCE and WALKER, Circuit Judges.

PER CURIAM.

McGinn, Smith and Co., Robert O. O'Farrell, and David Smith, defendant-appellants ("McGinn, Smith"), appeal from an order of the United States District Court for the Northern District of New York (Thomas J.

McAvoy, Judge), dated June 28, 1991, denying McGinn, Smith's motion to compel arbitration.

In August of 1987, plaintiff-appellee Thomas S. McPheeters ("McPheeters") became a customer of McGinn, Smith, a securities brokerage and investment banking firm. McGinn, Smith, which does not own a seat on any of the securities exchanges, utilizes the services of the Securities Settlement Corporation ("SSC"), a clearing broker, to execute the actual purchases and sales of securities on behalf of its clients. Upon opening the account with McGinn, Smith, McPheeters and SSC executed a Customer's and Margin Agreement and an Option Approval Form and Agreement, which contain virtually identical arbitration provisions.

On February 20, 1991, McPheeters filed a complaint against McGinn, Smith alleging violations of § 10(b) of the Securities Exchange Act of 1934, and Rule 10(b)-5 promulgated thereunder. SSC was not named in the complaint and the dispute in no way involved SSC. Defendants moved for an order dismissing the complaint for failure to state a claim, and compelling arbitration of those claims which survived the motion to dismiss. By order dated June 28, 1991, the district court dismissed those claims related to alleged violations occurring more than three years prior to the filing of the complaint, and denied defendants' motion to compel arbitration on the remaining claims. McGinn, Smith appeals only the denial of its motion to compel arbitration.

On appeal, McGinn, Smith claims that the district court erred in determining that McGinn, Smith was not party to the Customer's and Margin Agreement, and in ruling that, even if McGinn, Smith were party to the Agreement, the arbitration provision does not cover it. We fail to find error in the district court's conclusion that McPheeters' dispute with McGinn, Smith was not covered by the arbitration agreement and thus not arbitrable, and we therefore affirm.

We consider first McGinn, Smith's claim that it is party to the Agreement and entitled to enforce it. The Agreement falls within the ambit of the Federal Arbitration Act, 9 U.S.C. §§ 1-16 ("FAA"). See Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 238, 107 S.Ct. 2332, 2343, 96 L.Ed.2d 185 (1987), reh'g denied 483 U.S. 1056, 108 S.Ct. 31, 97 L.Ed.2d 819 (1987) (FAA applicable to written agreements to arbitrate controversies arising under § 10(b) of the Exchange Act). Federal law, therefore, governs the current dispute as to the scope of the Agreement. See Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983) (FAA creates a "body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act."); Coenen v. R.W. Pressprich & Co., 453 F.2d 1209, 1211 (2nd Cir.1972), cert. denied, 406 U.S. 949, 92 S.Ct. 2045, 32 L.Ed.2d 337 (1972) (dispute concerning sale of securities is covered by Federal Arbitration Act and "[o]nce a dispute is covered by the Act, federal law applies to all questions of interpretation, construction, validity, revocability, and enforceability."); Church v. Gruntal & Co., 698 F.Supp. 465, 467 (S.D.N.Y.1988) ("In determining whether the parties entered into an arbitration agreement, and in determining the exact scope of that agreement, the court must apply the 'federal substantive law of arbitrability.' ") (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626, 105 S.Ct. 3346, 3352, 87 L.Ed.2d 444 (1985)). Where the dispute concerns an issue of contract, the application of federal law "simply 'comprises generally accepted principles of contract law.' " Church v. Gruntal & Co., 698 F.Supp. 465, 467 (S.D.N.Y.1988) (quoting Genesco, Inc. v. T. Kakiuchi & Co., 815 F.2d 840, 845 (2nd Cir.1987)).

McGinn, Smith is correct that, under general contract principles, we may deem non-signatories to fall within the scope of an arbitration agreement where that is the intent of the parties. See McAllister Bros., Inc. v. A & S Transp. Co., 621 F.2d 519, 524 (2nd Cir.1980); Creative Securities Corp. v. Bear Stearns & Co., 671 F.Supp. 961, 965 (S.D.N.Y.1987), aff'd without McGinn, Smith further argues that SSC, as its agent, has bound it to the Agreement. While the Agreement does specify that SSC acts as McGinn, Smith's agent, it limits the agency relationship to SSC's actions in carrying out the securities transactions for McGinn, Smith. For example, paragraph 1 states that "with respect to the account" SSC acts as McGinn, Smith's agent; similarly, paragraph 12, dealing with "Agency Capacity," states that "[i]n all transactions for my account" SSC will act as the agent of McGinn, Smith. It is nowhere stated that SSC acts as McGinn, Smith's agent in entering into the Agreement generally, and we refuse to read such a provision into the document.

                op. 847 F.2d 834 (2nd Cir.1988);  S.A. Mineracao Da Trindade-Samitri v. Utah Int'l, Inc., 576 F.Supp. 566, 570 (S.D.N.Y.1983), amended 579 F.Supp. 1049 (S.D.N.Y.1984), aff'd 745 F.2d 190 (2nd Cir.1984).   The Agreement, however, indicates no such intent.   The introductory paragraph sets out the scope of the contract with the words:  "I agree with you as follows."   It expressly defines "you" to mean SSC, thereby leaving McGinn, Smith entirely out of the picture.   Nor can we accept McGinn, Smith's argument that the Agreement's numerous references to it as the "Introducing Firm" evidences an intent to include them as a party.   The Agreement refers to McGinn, Smith only where necessary to explain the relationship between SSC and

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