Cotton v. Slone

• Decision Date: 10 September 1993
• Docket Number: Nos. 1599,D,1769,s. 1599
• Citation: 4 F.3d 176
• Parties: , Fed. Sec. L. Rep. P 97,748 Julie COTTON, Plaintiff-Appellee-Cross-Appellant, v. William SLONE, Defendant-Appellant-Cross-Appellee. ockets 93-7112, 93-7114.
• Court: U.S. Court of Appeals — Second Circuit

Page 176

4 F.3d 176

62 USLW 2232, Fed. Sec. L. Rep. P 97,748

Julie COTTON, Plaintiff-Appellee-Cross-Appellant, v. William SLONE, Defendant-Appellant-Cross-Appellee.

Nos. 1599, 1769, Dockets 93-7112, 93-7114.

United States Court of Appeals Second Circuit.

Argued June 4, 1993.

Decided Sept. 10, 1993.

Anthony A. Ball, Hartford, CT (Leslee B. Ives, Gillen & Ball, P.C., Hartford, CT, of counsel), for defendant-appellant-cross-appellee.

Eliot B. Gersten, Hartford, CT (Gersten & Clifford, Hartford, CT, of counsel) for plaintiff-appellee-cross-appellant.

Before: PIERCE, WALKER and JACOBS, Circuit Judges.

JACOBS, Circuit Judge:

In October 1989, Julie Cotton, a small-scale investor, sued William Slone, a licensed stockbroker, claiming he mishandled her investment account. Cotton's complaint, brought in the United States District Court for the District of Connecticut (Cabranes, J.), alleges violations of federal and state securities laws, and breach of contract. On January 19, 1993, after more than three years of litigation, the district court granted a default judgment to Cotton in the amount of $40,000 plus post-judgment interest. Slone appeals from the judgment, raising only the issue of whether the district court, at the outset of the lawsuit, properly denied his motion to compel arbitration and stay proceedings pending arbitration. Cotton cross-appeals the district court's denial of an award of attorney's fees.

In the district court, Slone's motion to compel arbitration raised the issue of whether an arbitration agreement between a brokerage firm and a customer confers upon the firm's employees the right to compel arbitration of a dispute with the customer arising out of acts performed in the course of employment. This Court has not decided that question, although we recently noted that "[c]ourts in this and other circuits consistently have held that employees or disclosed agents of an entity that is a party to an arbitration agreement are protected by that agreement." Roby v. Corporation of Lloyd's, 996 F.2d 1353, 1360 (2d Cir.1993). While the district court rejected Slone's asserted right to arbitration, we do not reach that issue because we find that Slone waived whatever right he had to arbitrate this dispute. On that ground of waiver, we affirm the decision of the district court with respect to arbitrability.

Cotton argues on her cross-appeal that the district court erred in denying her application for an award of attorney's fees under Connecticut securities laws. We vacate the district court's denial of attorney's fees and remand for further proceedings consistent with this opinion.

BACKGROUND

Slone is a stockbroker licensed by the National Association of Securities Dealers and the State of Connecticut. At the time of the 1987 stock market crash--which indirectly precipitated this dispute--Slone was employed as a registered representative by the brokerage firm of Advest, Inc. ("Advest"). Cotton had been Slone's customer since approximately 1984 when he was employed by another brokerage firm, and she continued to invest through Slone when he moved to Advest. Cotton signed a customer agreement with Advest in March 1987 containing an arbitration clause which provides in relevant part:

The undersigned [Cotton] agrees, and by carrying an account for the undersigned you [Advest] agree, that ... all controversies which may arise between us concerning any transaction or the construction, performance or breach of this or any other agreement between us, whether entered into prior, on or subsequent to the date hereof, shall be determined by arbitration in accordance with the rules then prevailing of the Arbitration Committee of the National Association of Securities Dealers, Inc., the American Arbitration Association, the Board of Arbitration of the New York Stock Exchange or the Board of Arbitration of the American Stock Exchange as I may elect.

Cotton claims that, throughout her relationship with Slone, she emphasized that her investment goals were conservative: maintenance and moderate growth of her savings at fairly low risk. She contends that her account sustained approximately $75,000 in losses because Slone, while employed by Advest, made unauthorized and unsuitable purchases, churned the account to generate commissions, and lied to Cotton whenever she questioned Slone about her account statements.

Cotton came to learn of Slone's malfeasance when, in the aftermath of the October 1987 stock market crash, she received a margin call on her account even though she had never authorized trades on margin. Advest conducted an investigation and at first denied wrongdoing. Cotton then retained counsel and, in January 1989, Advest paid Cotton $30,000 as settlement for any securities fraud claims Cotton had against Advest. The record on appeal does not disclose whether Advest secured a release for its employees as well as itself at the time of the settlement. Nor does the record on appeal, which omits Slone's answer, indicate whether he pleaded release as a defense.

On October 6, 1989, Cotton filed suit against Slone, alleging breach of contract and securities fraud in violation of section 10(b) of the Securities and Exchange Act of 1934 and Rules 10b-5 and 10b-16 promulgated thereunder (15 U.S.C. Sec. 78j(b) and 17 C.F.R. Secs. 240.10b-5 and 240.10b-16), and in violation of the Connecticut Uniform Securities Act (C.G.S. Secs. 36-472, 36-498).

On December 28, 1989, Slone invoked the arbitration provision in the Advest customer agreement, and filed a motion to compel arbitration and to stay proceedings pending arbitration, pursuant to section 3 of the Federal Arbitration Act. 9 U.S.C. Sec. 3 (1988). The district court denied Slone's motion. Slone then moved for certification of an interlocutory appeal under 28 U.S.C. Sec. 1292(b). The district court denied this motion, properly so because certification under section 1292(b) was unnecessary; Slone could have taken an appeal as of right under section 16(a) of the Federal Arbitration Act, added by the 1988 Judicial Improvements and Access to Justice Act. Section 16(a) of the Act provides:

An appeal may be taken from--

(1) an order--

(A) refusing a stay of any action under section 3 of this title, [or]

(B) denying a petition under section 4 of this title to order arbitration to proceed....

9 U.S.C. Sec. 16(a) (1990 Supp. II). The record does not explain why Slone did not take an immediate interlocutory appeal available under section 16(a).

Slone thereafter answered the complaint and (according to the appellate briefs) pleaded arbitrability as a defense. Although he ultimately defaulted, Slone proceeded to participate actively in discovery and motion practice concerning Cotton's claims over the next three years.

In November 1990, discovery apparently completed, Cotton filed her portion of the joint pretrial submission required by the district court. She subsequently moved for default based on Slone's failure to help prepare or respond to the pretrial submission. Slone's counsel then moved to withdraw from his engagement. The district court denied both motions without prejudice to permit the parties to explore compromise. Settlement discussions failed, and in October 1991 Slone's counsel moved for summary judgment on Slone's statute of limitations defense. Cotton submitted opposition papers, but Slone's counsel withdrew the motion shortly before its hearing date.

In June 1992, the district court ordered the submission of a jointly prepared pretrial memorandum, cautioning Slone that failure to comply would result in default. Before the required date of that submission, however, the court granted the renewed motion by Slone's counsel to withdraw from the engagement based in part on Slone's failure "to meet certain obligations." Slone, acting pro se, failed to comply with the court's order regarding preparation of a pretrial memorandum and Cotton moved for entry of default. Slone then moved for court-appointed counsel, which motion was denied "in view of [Slone's] substantial annual income" of $120,000. Slone was ordered to respond to the motion for default by October 5, 1992, either through counsel or pro se. He did so by a letter asking the court to reconsider (1) its denial of his motion to appoint counsel, and (2) its denial of his motion to compel arbitration. The district court granted reconsideration and adhered to its previous rulings. On October 20, 1992, the district court granted Cotton's motion for default.

In her application for judgment upon default, Cotton sought damages of $45,000 and attorney's fees of $47,583. Slone filed no objection. The district court awarded Cotton damages of $40,000 plus post-judgment interest, but denied an award of attorney's fees, stating only that "[t]he court has determined, in the exercise of its discretion, that an award of attorney's fees is not appropriate in this case."

After entry of the default judgment, Slone filed a notice of appeal, retained counsel, and now seeks review of the district court's denial of Slone's motion to compel arbitration and stay proceedings pending arbitration. Cotton responds by arguing, among other things, that, even if Slone once had a right to compel arbitration, he waived that right by failing to take a timely appeal and by causing substantial prejudice to Cotton by his active participation in the lawsuit. Cotton also cross-appeals the district court's denial of attorney's fees.

DISCUSSION

I. Waiver

We have emphasized that there is a strong presumption in favor of arbitration, see Rush v. Oppenheimer & Co., 779 F.2d 885, 887 (2d Cir.1985), and that waiver of the right to arbitration "is not to be lightly inferred." Carcich v. Rederi A/B Nordie, 389 F.2d 692, 696 (2d Cir.1968). To avoid waiver, however, it is not enough merely to assert a right without taking appropriate steps to secure it. Waiver will be inferred when a party engages in protracted litigation that results...