Coffey v. Dean Witter Reynolds, Inc.

• Decision Date: 16 July 1986
• Docket Number: Civ. A. No. 85-K-2256.
• Citation: 640 F. Supp. 874
• Parties: Florabelle COFFEY, Plaintiff, v. DEAN WITTER REYNOLDS, INC., a Delaware corporation; and Jeffrey Hines, an individual.
• Court: U.S. District Court — District of Colorado

640 F. Supp. 874

Florabelle COFFEY, Plaintiff, v. DEAN WITTER REYNOLDS, INC., a Delaware corporation; and Jeffrey Hines, an individual.

Civ. A. No. 85-K-2256.

United States District Court, D. Colorado.

July 16, 1986.

Richard K. Rufner, Makaroff & Rufner, Denver, Colo., for plaintiff.

William G. Imig, Neal S. Cohen, Ireland, Stapleton, Pryor & Pascoe, P.C., Denver, Colo., for defendant.

MEMORANDUM OPINION AND ORDER

KANE, District Judge.

On April 28, 1983, plaintiff Florabelle Coffey opened a commodities futures account, # 47697-4, with defendants Dean Witter Reynolds, Inc. and Jeffrey Hines. On September 4, 1984, plaintiff opened a stock trading account, # 053343, with defendants. She now brings suit against defendants alleging (1) violation of Section 10b of the Securities Exchange Act of 1934 15 U.S.C. § 78j and Rule 10b-5 17 C.F.R. § 240.10b-5; (2) breach of fiduciary duties; (3) negligence; (4) violation of the Colorado Securities Act, 1973 C.R.S. §§ 11-51-123 and 11-51-125(2); (5) intentional infliction of emotional distress; and (6) negligent supervision. She asserts defendants' alleged conduct was attended by circumstances of fraud, malice or insult, intentional misconduct, or a wanton and reckless disregard of her rights and feelings so as to merit an award of punitive damages. These claims are all brought with respect to the stock trading account only.

In regard to the federal securities claim, jurisdiction lies under 15 U.S.C. § 78a et seq. and 28 U.S.C. § 1331. Jurisdiction over the remaining state or statutory common law claims is invoked pursuant to the doctrine of pendent jurisdiction.¹ Venue is proper under 28 U.S.C. § 1391(b).

This matter is now before me on defendants' motion to dismiss plaintiffs' state claims pursuant to Fed.R.Civ.P. 12(b)(1) and for an order compelling arbitration and staying disposition of the federal securities claim pursuant to 9 U.S.C. §§ 3 and 4, (The Arbitration Act). For the reasons set forth below, I deny arbitration and dismiss plaintiff's state law claims.

Motion to Compel Arbitration/Stay

The commodities futures account contains, inter alia, the following provisions:

16. Any controversy between Dean Witter and the undersigned arising out of or relating to this Contract or the breach thereof, shall be settled by arbitration, in accordance with the rules, then obtaining, of either the Aribitration Committee of the Chamber of Commerce of the State of New York, or the American Arbitration Association, or the Board of Arbitration of the New York Stock Exchange, as the undersigned may elect ...

17. This agreement and its enforcement shall be governed by the laws of the State of New York and its provisions shall be continuous; shall cover individually and collectively all accounts which the undersigned may open or re-open with Dean Witter ...

The stock account is void of reference to arbitration.

Defendants contend that the commodities account arbitration clause is a valid agreement to arbitrate disputes arising under the stock account.² Defendants argue that, considered with federal statutes and policy favoring arbitration, the arbitration clause requires me to compel arbitration and stay this suit.

Federal policy favoring arbitration is reflected in the federal Arbitration Act, 9 U.S.C. §§ 1-14, which provides in § 2 that an arbitration agreement "shall be valid, irrevocable, and enforceable, save upon which grounds as exist at law or in equity for the revocation of any contract". Section 3 of the Act provides that in the absence of default by a party seeking arbitration, the court "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". Section 4 of the Act provides that if a party refuses to arbitrate in contravention of a written agreement, the court "shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement".

Notwithstanding the seemingly mandatory language of the Arbitration Act, judicial exceptions have been carved out of its applicability to claims brought under the federal securities laws. In Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953), the United States Supreme Court held that a pre-dispute agreement to arbitrate claims arising under the Securities Act of 1933, 15 U.S.C. § 771(2) is unenforceable. Section 22 of the '33 Act, 15 U.S.C. § 77v, affords the federal securities plaintiff resolution of his claim by a federal judicial forum, with a broad choice of venue and concomittant nationwide service. Section 14 of the '33 Act, 15 U.S.C. § 77n holds that "any condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of this subchapter or of rules and regulations of the commission shall be void". The Wilko court considered the arbitration agreement to be a "stipulation" which was "void" as it attempted to "waive" compliance with the "provision" affording the federal securities plaintiff access to the federal courts.

The rationale behind the Wilko courts' subordination of the Arbitration Act to the Securities Act of 1933 was that the latter was extraordinary legislation protecting disadvantaged securities purchasers which could be entirely circumvented if arbitration clauses would be given effect.

Employing the notion that the securities laws protect a purchaser in a market historically rife with abuses, courts since Wilko have expanded the Wilko doctrine to actions, such as the present one, under the Securities Exchange Act of 1934. In Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Moore, 590 F.2d 823 (10th Cir.1978), the 10th Circuit Court of Appeals held that arbitration agreements in cases involving § 10 and Rule 10b-5 of the '34 Act are void as they seek to waive the jurisdictional provisions of that Act.

Defendants rely on Justice White's solo concurrence in Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S.Ct. 1238, 1244, 84 L.Ed 2d 158 (1985), to assert that the continued viability of the 10th Circuit's extension of Wilko to '34 Act claims in Moore is "a matter of substantial doubt".³ Justice White's dicta is not law. The unanimous majority specifically declined to address the arbitrability of '34 Act claims. Until the majority of the Court decides this issue I am bound by the decision in Moore.

Accordingly, the portion of defendants' motion seeking an order compelling arbitration of the plaintiff's federal claims arising under the '34 Act is hereby denied.⁴

Motion to Dismiss Pendent Claims

Defendants contend that this court should deny its discretionary exercise of pendent jurisdiction over plaintiff's state law claims as there is no independent federal jurisdiction.

The doctrine of pendent jurisdiction permits a district court to decide all questions that the case presents. The Supreme Court in United Mine Workers of America v. Gibbs, 383 U.S. 715, 725, 86 S.Ct. 1130, 1138, 16 L.Ed.2d 218 (1966) ruled that the power to entertain pendent claims exists when the state and federal claims "derive from a common nucleus of operative fact". See, Hackbart v. Cincinnati Bengals, 601 F.2d 516 (10th Cir.1979) cert. denied 444 U.S. 931, 100 S.Ct. 275, 62 L.Ed.2d 188. The doctrine is discretionary and not a matter of right. Gibbs, 383 U.S. at 726, 86 S.Ct. at 1139.

For the reasons detailed by Judge Matsch in Kerby v. Commodity Resources, Inc., 395 F.Supp. 786 (D.Colo.1975), I decline...