Glass v. Kidder Peabody & Co., Inc.

• Decision Date: 22 May 1997
• Docket Number: No. 91-1756,91-1756
• Citation: 114 F.3d 446
• Parties: Martin GLASS, Plaintiff-Appellant, v. KIDDER PEABODY & CO., INC., a Delaware Corporation, Defendant-Appellee, and Daniel J. Mulhaul; William F. Branston, Defendants.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 446

114 F.3d 446

Martin GLASS, Plaintiff-Appellant, v. KIDDER PEABODY & CO., INC., a Delaware Corporation, Defendant-Appellee and Daniel J. Mulhaul; William F. Branston, Defendants.

No. 91-1756.

United States Court of Appeals Fourth Circuit.

Argued Sept. 30, 1992.

Decided May 22, 1997.

ARGUED: Michael Louis Schwartz, Fila, Schwartz & Bloomberg, Columbia, Maryland, for Appellant. Henry Robbins Lord, Piper & Marbury, Baltimore, Maryland, for Appellee.

Before RUSSELL, HALL, and WILLIAMS, Circuit Judges.

Reversed and remanded with instructions by published opinion. Judge DONALD S. RUSSELL wrote the opinion, in which Judge K.K. HALL and Judge WILLIAMS joined.

OPINION

DONALD S. RUSSELL, Circuit Judge:

In this action, appellant Martin Glass ("Glass") seeks recovery from Kidder, Peabody & Co., Inc. ("Kidder") for the losses he allegedly sustained because of Kidder's improper and fraudulent mishandling of Glass's stock brokerage account, which Glass opened with Kidder in May 1982, and continued until October 1984. Although the initial agreement covering the account did not include an arbitration clause, the district court, pursuant to an arbitration clause in a revised brokerage agreement, entered an order to arbitrate this dispute on August 22, 1988. Because Glass, however, waited approximately two and one-half years before filing a demand for arbitration, the district court subsequently entered an order terminating the arbitration and dismissing Glass's cause of action on the ground of laches. Glass appeals both the termination of arbitration and the dismissal of his suit. We reverse the district court's order. Accordingly, we remand the case to the district court, instructing it to return the case to the arbitrators to resolve the parties' disputes pursuant to the terms of their brokerage agreement.

I.

As indicated above, the original brokerage agreement covering Glass's account did not contain an arbitration clause. On October 1, 1983, however, the parties revised the original agreement by adding a put-and-call provision, as well as a standard arbitration clause covering any disputed transaction occurring in connection with the agreement. The arbitration clause limited the arbitration process to only those transactions which had occurred between the parties after October 1, 1983.

Glass's brokerage account was relatively active during its existence. At some point in 1983, however, Glass became dissatisfied with the way in which Kidder was handling his account. He began expressing his strong dissatisfaction in written and oral complaints, which he registered with Kidder and its Compliance Manager. During the ensuing discussions, Glass, on several occasions, indicated to Kidder representatives his intention to sue Kidder for improperly managing and churning ¹ his account. Glass terminated his brokerage account on October 23, 1984. Despite having closed his account, Glass continued to demand payment from Kidder, in whole or in part, for the losses his account incurred. Unable to resolve his claims successfully, Glass filed suit against Kidder on July 23, 1985, in United States District Court in Maryland. Judge Young presided over the suit.

Glass set forth his cause of action in nine counts. Counts I-VIII sought judgment for losses, which he allegedly sustained as a direct result of Kidder's violation of state and federal security statutes and stock exchange regulations. Count IX sought damages for "common law fraud" allegedly committed by Kidder in connection with the account. Upon Kidder's motion for summary judgment, the district court dismissed Counts I-VIII.

With respect to Count IX, Kidder moved to stay the litigation and compel arbitration pursuant to section 3 of the Federal Arbitration Act of 1925 (the "Act"). ² Glass opposed the motion to arbitrate. He believed that Kidder's activities were not subject to arbitration because the fraud involved actions broader than the put-and-call option aspect of their relationship. Glass also opposed arbitration because the scope of the arbitration clause was vague, not understandable, and unenforceable.

By an order dated December 9, 1985, the district court granted Kidder's section 3 motion to stay the proceedings and to compel arbitration under the put-and-call option agreement. Judge Young ruled that:

The arbitration clause is not so vague as to be unenforceable, and provides that any controversies arising out of options transactions shall be subject to arbitration at the election of either party. Thus any of plaintiff's claims arising out of put-and-call options after October 1, 1983 are subject to arbitration. ³

Thus, the parties should have proceeded toward arbitration at this time. Yet, for the two years following this order, the parties were unable to agree upon either the arbitration format for resolving Count IX or upon an acceptable way to handle the punitive damages issues.

After Judge Young ordered Count IX to arbitration, Kidder filed successive motions aimed at dismissing the case. ⁴ Kidder's first motion sought to dismiss the proceedings because Glass's pleadings failed to allege the cause of action for common law fraud with particularity. Kidder also filed two motions seeking to change venue of the proceedings to New York federal court. Judge Young ruled on these motions by letter dated July 28, 1986. He denied Kidder's first motion, finding that Glass's complaint sufficiently alleged the fraud in paragraphs 9, 10, and 12. ⁵ Judge Young dismissed the change of venue motions, reasoning that venue was proper in Maryland. He commented that a transfer motion would only have been appropriate when Kidder initially filed its response. ⁶

In his letter, Judge Young reiterated that he had ordered the parties to arbitrate Count IX in 1985, and requested that Glass file a status report with him within six months if arbitration had not been concluded. For reasons unknown, the parties failed to arbitrate within the six-month period and fifteen months later, Judge Young consolidated the issue of punitive damages with the question of general liability and ordered they be resolved by arbitration.

In May 1988, Judge Young elected to take senior status, and Judge Motz began overseeing the court proceedings. Upon learning that Judge Motz was replacing Judge Young, Glass requested that Judge Motz resolve the issues preventing them from proceeding to arbitration. Judge Motz set a hearing for July 8, 1988, expressly to resolve the impasse in the proceedings.

At that hearing, the attorneys for the parties agreed, subject to the confirmation by their respective clients, that Judge Motz order that "all of [Glass's] claims for compensatory damages shall be considered by the arbitration panel whether these claims arose before or after [Glass's] execution of a Put-and-Call Options Agreement on October 1, 1983;" ⁷ and that the matters in dispute be referred to the American Arbitration Association (the "AAA"). Judge Motz, however, did not enter his order until August 22, 1988, because the agreement could not take effect without the approval of the parties. ⁸ The parties later agreed that the arbitration panel would also make a finding as to whether punitive damages should be awarded and the amount of said damages if they were warranted. ⁹ Judge Motz' arbitration order removed Judge Young's limitation that the arbitration proceedings only consider those put-and-call option transactions occurring after October 1, 1983, and extended the arbitration proceedings to encompass all of the transactions between the parties during the life of Glass's account with Kidder.

Despite the agreement at the hearing, the parties still failed to progress toward arbitration. The reason causing their delay is not identified in the record. Whether or not they differed over the arbitration "format" or the issue of punitive damages is unclear. In any event, in early 1991, Glass changed counsel and filed a demand for arbitration with the AAA. As a result, the parties initiated affirmative steps toward arbitration. They began selecting arbitrators from a proposed list of names. After striking certain individuals, the parties selected a panel of three arbitrators and decided that arbitration would commence in Baltimore, Maryland, on July 22, 1991.

While preparing for the arbitration hearing, Glass discovered that William Francis Branston, the Kidder broker who had handled Glass's account, was not registered as a licensed agent in the State of Maryland in violation of the Maryland Securities Act. Glass disclosed his discovery to Kidder by letter on April 30, 1991. ¹⁰ In his letter, he also enclosed a subpoena from the AAA for various documents and records relating to Branston's actions as an unlicensed agent in Kidder's employ. Kidder objected to the subpoena and sought to dismiss the case from arbitration. Kidder requested that the AAA hold an administrative conference on these matters prior to arbitration. The arbitrators denied Kidder's request and scheduled the matters for hearing on the date the parties were to commence arbitration.

Kidder then turned to the district court in an attempt to halt the arbitration proceedings by getting the court to dismiss Count IX. With less than two weeks remaining before the starting date of the arbitration hearing, Kidder filed a motion with the district court, requesting the case be dismissed on the grounds of laches. Kidder argued that because "[a] demand for arbitration must be made within a reasonable time after the right to seek arbitration arose," ¹¹ Glass had waived his right of arbitration due to his failure to timely file his demand for arbitration. ¹² Kidder's motion relied on the fact that Glass made a demand for arbitration with the AAA on February 18, 1991--almost two and one-half years after Judge Motz had ordered the case to arbitration on August 22, 1988.

In the alternative, Kidder sought to limit the scope of the arbitration...