Cardona Tirado v. SHEARSON LEHMAN AMERICAN EXP.

• Citation: 634 F. Supp. 158
• Decision Date: 16 April 1986
• Docket Number: Civ. No. 85-1758(JAF).
• Parties: Milton CARDONA TIRADO, Plaintiff, v. SHEARSON LEHMAN AMERICAN EXPRESS, INC., Prudential Bache Securities, Inc., and A.G. Becker Incorporated, Defendants.
• Court: U.S. District Court — District of Puerto Rico

634 F. Supp. 158

Milton CARDONA TIRADO, Plaintiff, v. SHEARSON LEHMAN AMERICAN EXPRESS, INC., Prudential Bache Securities, Inc., and A.G. Becker Incorporated, Defendants.

Civ. No. 85-1758(JAF).

United States District Court, D. Puerto Rico.

April 16, 1986.

Guillermo A. Nigaglioni, Hato Rey, P.R., for plaintiff.

Salvador Antonetti, Fiddler, Gonzalez & Rodriguez Law Offices, San Juan, P.R., for defendants.

OPINION AND ORDER

FUSTÉ, District Judge.

On August 22, 1985, Milton Cardona Tirado, a securities investor, filed a complaint against broker-dealers Shearson Lehman American Express, Inc., Prudential Bache Securities, Inc., and A.G. Becker, Inc. for alleged federal and state law violations resulting from unauthorized investments, fraud, and churning in the management of his account. Plaintiff asserts federal jurisdiction under the Securities Act of 1933, 15 U.S.C. Sec. 77a, the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78a, and diversity of citizenship. Prudential Bache counters with a motion to compel arbitration under the Federal Arbitration Act, 9 U.S.C. Secs. 1, 2, in which Shearson Lehman joins. Cardona opposes the arbitration petition filed by Prudential Bache on grounds that 1) there is no agreement to arbitrate, and 2) even if one exists, an agreement to arbitrate federal claims is unenforceable. Shearson Lehman's motion stands unopposed.¹

I.

We first turn to the Federal Arbitration Act. Under 9 U.S.C. Secs. 1, 2, a written agreement to arbitrate a dispute arising out of a "transaction involving commerce" is judicially enforceable unless arbitration has been waived. McMahon v. Shearson/American Express, 618 F.Supp. 384, 386 (S.D.N.Y.1985). It is undisputed that the facts in Cardona's complaint constitute a "transaction involving commerce." 9 U.S.C. Sec. 1; Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 401 n. 7, 87 S.Ct. 1801, 1805 n. 7, 18 L.Ed.2d 1270 (1967). The issues are: first, the existence of an arbitration agreement; second, the arbitrability of the underlying dispute and, if necessary, third, the place for arbitration. If the first two are decided for defendants, this Court has no choice but to compel arbitration and stay these proceedings, or alternatively, dismiss this case. Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, ___, 105 S.Ct. 1238, 1241, 84 L.Ed.2d 158 (1985).

Whether the parties have agreed to arbitration depends, as with any contract, on their intentions. See Ahn v. Rooney, Pace, Inc., 624 F.Supp. 368, 369 (S.D. N.Y.1985). This Court must give due regard to the federal policy favoring arbitration whenever reasonable doubts surround the parties' intentions. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, ___ U.S. ___, ___, 105 S.Ct. 3346, 3354-55, 87 L.Ed.2d 444 (1985). Prudential Bache has filed a motion submitting a photostatic copy of what purportedly is an arbitration agreement with Milton Cardona. The document appears to be signed by plaintiff and is dated August 26, 1982. Cardona does not refute that his own name and account number with Prudential Bache are captioned in the "Customer's Agreement." Instead, he argues that the document is inadmissible evidence because the signature is illegible. This argument strikes us as more formalistic than substantive. Cardona does not deny the existence of an arbitration agreement. He submits that the photostatic copy cannot be "evidence" of one. We disagree. Fed.R.Evid. 1001(3), 1003. Plaintiff cannot override the strong presumption favoring arbitration merely by engaging in a battle of forms. On the record before us, we are convinced that the parties have chosen arbitration.²

II.

Clause 14 of the Customer's Agreement provides for arbitration of any dispute arising out of or relating to Cardona's account with Prudential Bache. Plaintiff maintains that the federal claims underlying the dispute are nonarbitrable. We proceed to the conflicting, but reconcilable, policies behind the Federal Arbitration Act and the federal securities laws.

The disclosure provisions of the Securities Act of 1933 ensure against misrepresentations in the sale of securities. See C. Katsoris, The Arbitration of a Public Securities Dispute, 53 Fordham L.Rev. 279 (1984); Note, Mixed Arbitrable and Nonarbitrable Claims in Securities Litigation: Dean Witter Reynolds, Inc. v. Byrd, 34 Cath.U.L.Rev. 525 (1985). A tension between the competing federal policies of protecting the investor and honoring arbitration was resolved in Wilko v. Swan, 346 U.S. 427, 435-36, 74 S.Ct. 182, 186-87, 98 L.Ed. 168 (1953). That case held that an agreement to arbitrate section 12(2) claims of the 1933 Act, 15 U.S.C. Sec. 771(2), is unenforceable. Under section 77n, any "stipulation" waiving compliance with any "provision" of the Act is "void." Reasoning that the Securities Act confers to an aggrieved investor an express right of action, the Supreme Court concluded that an agreement to arbitrate section 12(2) claims amounts to a "stipulation" waiving the right to judicial recourse and, therefore, is "void." The federal interest favoring arbitration becomes more compelling than in Wilko when a complaint, as here, combines nonarbitrable federal claims with arbitrable state-law claims. In such case, a federal district court must compel arbitration of state-law claims despite the possibility of "inefficient maintenance of separate proceedings in different forums." Byrd, 105 S.Ct. at 1241.

Congress did not foresee a separate conflict between the Federal Arbitration Act and the Securities Exchange Act of 1934. The arbitrability of section 10(b), 15 U.S.C. Sec. 78j, and Rule 10b-5 claims, 17 C.F.R. Sec. 240.10b-5, is a novel question in the First Circuit, see Prawer v. Dean Witter Reynolds, Inc., 626 F.Supp. 642, 646 (D.Mass.1985), and one left unresolved by the Supreme Court in Byrd. There is a basis, however, for giving greater weight to the Federal Arbitration Act in the context of section 10(b) or Rule 10b-5. Both the Supreme Court in Scherk v. Alberto-Culver Co., 417 U.S. 506, 513-14, 94 S.Ct. 2449, 2454-55, 41 L.Ed.2d 270 (1974), and Justice White in Byrd, 105 S.Ct. at 1243-45 (concurring), noted that the 1934 Act is substantially different from the 1933 statute. A main difference is that the private right of action under section 10(b) and Rule 10b-5 is judicially implied, not express. Thus, the 1934 Act does not create the "special right" that the Supreme Court in Wilko considered important. Scherk, 417 U.S. at 514, 94 S.Ct. at 2454. Justice White also noted in Byrd that an implied right of action does not differ from an arbitrable common law action. Accordingly, most lower federal courts have expressed doubts about exercising federal jurisdiction when Congress has not created a judicial remedy and when the parties have voluntarily chosen arbitration. See McMahon, 618 F.Supp. at 388. Second, the "waiver" provision of the 1934 Act, 15 U.S.C. Sec. 78cc(a), is literally inapplicable for there is no express right of action which can be waived. Third, the jurisdictional section of the 1934 Act, 15 U.S.C. Sec. 78aa, is narrower than its 1933 Act counterpart, 15 U.S.C. Sec. 17u. For these reasons, this Court joins the growing number of federal courts holding that claims under section 10(b) and Rule 10b-5 are arbitrable.³

We are unpersuaded by the reasoning of a number of federal courts opposing arbitration. A few courts have relied on a rule promulgated by the Securities and Exchange Commission ("SEC"). Levendag v. Churchill, 623 F.Supp. 620, 623 (D.C.S.C. 1985); Scharp v. Cralin & Co., Inc., 617 F.Supp. 476, 480 (S.D.Fla.1985). Under 17 C.F.R. Sec. 240.1562-2(a) (1985), customers are not bound to arbitrate with broker-dealers any dispute "arising under the federal securities laws." This rule followed the Wilko decision. Its continuing vitality as to section 10(b) and Rule 10b-5 claims is questionable. In Byrd, 105 S.Ct. at 1244, Justice White warned: "Wilko's reasoning cannot be mechanically transplanted to the 1934 Act." Further, unlike some courts, the District of Puerto Rico is not bound by pre-Byrd precedent in other circuits holding the nonarbitrability of claims under the 1934 Act. See Rojas Cancanon v. Smith Barney, Harris Upham & Co., 612 F.Supp. 996, 999 (S.D.Fla.1985); Webb v. R. Rowland & Company, Inc., 613 F.Supp. 1123, 1124 (E.D.Mo.1985); Leone v. Advest, Inc., 624 F.Supp. 297, 302 (S.D.N.Y.1985). Finally, the Customer's Agreement here does not expressly prohibit waiver of the right to a judicial remedy as in Scharp, 617 F.Supp. at 479-80. Cardona's state-law, section 10(b) and Rule 10b-5 claims are arbitrable. Section 12(2) claims of the 1933 Act are not.

III.

The third and last consideration is the situs for arbitration. Prudential Bache inexplicably assumes that arbitration must be held in the State of New York. A court must order "... to proceed to arbitration in accordance with the terms of the agreement." 9 U.S.C. Sec. 4. In an apparent contradiction, section 4 also provides that "the hearing and proceedings, under such agreement, shall be within the district which the petition for an order directing such arbitration is filed." Generally, the place of filing the petition—here Puerto Rico—determines the arbitration locale. Econo-Car Int'l, Inc. v. Antilles Car Rentals, Inc., 499 F.2d 1391, 1394 (3rd Cir.1974). This seemingly parochial rule has an exception grounded on the robust federal policy honoring the parties' intentions in an arbitration agreement. Thus, where the parties have 1) expressly agreed to arbitrate in a particular place, and 2) the forum-selection clause is not unfair or unreasonable, a court cannot circumvent the clear intent of the parties. Snyder v. Smith, 736 F.2d 409, 419-20 (7th Cir.), cert. denied, ___ U.S. ___, 105 S.Ct. 513, 83 L.Ed.2d 403 (1984).⁴

Upon examining the record, we conclude that arbitration should take place in Puerto Rico. Clause 14 of the Customer's Agreement between Prudential Bache and ...