Jarvis v. Dean Witter Reynolds, Inc.

• Decision Date: 06 August 1985
• Docket Number: Civ. A. No. 83-383.
• Citation: 614 F. Supp. 1146
• Court: U.S. District Court — District of Vermont
• Parties: Tim JARVIS v. DEAN WITTER REYNOLDS, INC., Edward Sullivan and Peter R. Woodworth.

614 F. Supp. 1146

Tim JARVIS v. DEAN WITTER REYNOLDS, INC., Edward Sullivan and Peter R. Woodworth.

Civ. A. No. 83-383.

United States District Court, D. Vermont.

August 6, 1985.

Robert B. Hemley, Gravel & Shea, Burlington, Vt., for plaintiff.

Gary Barnes, Downs, Rachlin & Martin, South Burlington, Vt., for defendants.

COFFRIN, Chief Judge.

Plaintiff Tim Jarvis brought this action against Defendants Dean Witter Reynolds, Inc. ("Dean Witter"), Edward Sullivan and Peter R. Woodworth, alleging violations of the Securities Exchange Act of 1934 (the "1934 Act"), and the following state law claims: fraud, breach of contract, negligence and breach of fiduciary duty. Defendants move to compel arbitration of all claims or, alternatively, to stay the proceedings of the federal claims.

This is the second time Defendants' motion is before this court. In an earlier opinion issued in this case, Jarvis v. Dean Witter Reynolds, Inc., No. 83-383 (D.Vt. Feb. 13, 1985), we denied Defendants' motion to compel arbitration on the ground that the federal and state claims were so inextricably intertwined that they should be heard in the same proceeding. Since our decision,¹ however, the Supreme Court has expressly rejected the doctrine on which our holding was based and ruled that the Federal Arbitration Act, 9 U.S.C. §§ 1-14 (1982), requires district courts to compel arbitration of pendent arbitrable claims upon a party's motion to compel. Having reconsidered Defendants' motion under the law as it now stands, we hereby GRANT Defendants' motion to compel arbitration of both the federal and the state claims.

Background

Because of the familiarity with the facts of this case by the parties, the facts, as alleged, require only a brief summary. Plaintiff Tim Jarvis, a young, inexperienced investor, opened up an account with Dean Witter in November, 1982. Plaintiff claims that he informed the Dean Witter representative, Defendant Woodworth, that he was interested in investing in stable, high tech companies. Based on the reputation of Dean Witter and on Woodworth's representation that he could double Plaintiff's initial investment of $32,000 in one year, Plaintiff authorized Woodworth to buy and sell securities in his account, provided that Woodworth inform him of each purchase or sale before it was made.

According to Plaintiff, Defendants immediately began to buy and sell securities, and to trade stock options, without Plaintiff's prior approval and without having provided Plaintiff with any options prospectus. Plaintiff claims that such trading was excessive in terms of size and frequency. Based on further representations of Defendants, Plaintiff invested an additional sum of approximately $6,000.

Plaintiff claims that he never executed any written options agreement with Defendants until January 19, 1983, when Woodworth informed him that Plaintiff's option agreement was lost and requested that he sign another.² The options agreement contained the following arbitration clause:

Any controversy between us arising out of or relating to this agreement or the breach thereof, shall be settled by arbitration.

Section 6, Options Trading Agreement, ¶ 16 Amended Complaint.

In March, 1983, Plaintiff changed account executives at Dean Witter. By July, 1983, Plaintiff claims, Defendants had lost a substantial portion of his account.

The issue presently before the court is whether the options trading agreement executed by the parties mandates arbitration or whether some or all of Plaintiff's claims may be litigated in this court.

DISCUSSION

1. Determination of the validity of the arbitration clause.

There are two preliminary issues which arise in ruling on a motion to compel arbitration: one, whether a valid arbitration agreement exists and second, whether the court or the arbitrator should determine the validity of the arbitration agreement. Defendants assert that the question of the validity of the arbitration clause contained in the option agreement is a question for the arbitrator; Plaintiff contends that it is for the court.

The law in this area has been clearly set forth in Prima Paint Corp. v. Flood and Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967). In that case a consulting contract between the parties contained an arbitration clause similar to that currently in issue. Plaintiff sought to invalidate the arbitration clause on the ground that defendant fraudulently induced it to enter into the consulting agreement. The court held that since the claim of fraud was not directed at the arbitration clause itself, the issue of fraudulent inducement as to the entire agreement was an issue for the arbitrator to decide. Id., at 406, 87 S.Ct. at 1807.

In devising the above analysis, the Court relied on section 4 of the Arbitration Act, which provides a remedy to a party seeking to compel compliance with an arbitration agreement. Under section 4, as soon as jurisdiction but for the existence of the arbitration clause is established, the federal court, once it is satisfied that "the making of the agreement for arbitration or the failure to comply ... is not in issue, is instructed to order arbitration to proceed." Id., at 403, 87 S.Ct. at 1806. Thus, to raise an issue as to the making of the agreement to arbitrate there must be a specific allegation that the arbitration clause, taken separately, was induced by fraud.

Plaintiff claims that his allegations of fraudulent inducement "implicate specifically the agreement to arbitrate itself," as opposed to the entire contract. Plaintiff's Supp. Reply Brief, at 9. See ¶ 52a Amended Complaint. As support, Plaintiff relies on Moseley v. Electronic & Missile Facilities, Inc., 374 U.S. 167, 83 S.Ct. 1815, 10 L.Ed.2d 818 (1963). In Moseley a plumbing and heating subcontractor, seeking compensation in the amount of $125,000, for work performed in Georgia, brought suit against the prime contractor, who had instituted arbitration proceedings in New York under provisions of a subcontract, alleging breach of contract or, alternatively, recission for fraud.³ Petitioner attacked both the subcontracts and the arbitration provision. Petitioner claimed that the subcontract with him, as well as with other subcontractors, was part of a fraudulent scheme to obtain work and materials from the subcontractors while forcing them to accept much less than the value of their claims. To effect the fraudulent scheme, petitioner contended that the prime contractor inserted an arbitration clause requiring arbitration in New York, despite the fact that the place of performance was Georgia. After determining that the allegation of fraud "goes to the arbitration clause itself," id., the Court determined that the court, and not the arbitrator, should rule on the issue of the validity of the arbitration clause.

Plaintiff claims that his allegation of fraud is similar to that of the petitioner in Moseley, since he has alleged that he was induced to sign the option agreement, which included an arbitration clause, "as part of a pattern and scheme of fraud."

We are not persuaded by Plaintiff's analogy. Moseley is distinguishable from the instant case in at least one significant respect. The petitioner in that case alleged that the arbitration clause itself was procured by fraud. The clause stated that arbitration would occur in New York City. By providing that arbitration would take place in New York, instead of in Georgia, where the worksite was located and the subcontracts performed, the subcontract gave the prime contractor the right to nullify the provisions of the Miller Act, which expressly guarantees a plaintiff's right to sue on a contract in federal court in the district in which the contract was to be performed — which was Georgia, not New York.

In contrast to the petitioner in Moseley, Plaintiff Jarvis has not alleged anything fraudulent about the arbitration clause itself. The language of his amendment to the complaint makes it clear that the fraudulent inducement claim goes to the signing of the option agreement as a whole, of which the arbitration clause is but one provision:

Defendants fraudulently induced and coerced Plaintiff to sign the option agreement dated January 19, 1983, and specifically the arbitration provisions therein ...

Amended Complaint ¶ 52e (emphasis supplied).

Absent a showing that the arbitration clause itself was impermissibly obtained, we are bound to submit the matter to an arbitrator. Prima Paint, supra, at 403-404, 87 S.Ct. at 1805-1806. "Section 4 of the Arbitration Act does not permit the federal court to consider claims of fraud in the inducement of the contract generally." Id. See also Southland Corp. v. Keating, 465 U.S. 1, 104 S.Ct. 852, 858-89, 79 L.Ed.2d 1 (1984); Sharon Steel Corp. v. Jewell Coal and Coke Co., 735 F.2d 775 (3rd Cir.1984). See generally Annot., 11 A.L.R. 4th 774 (1982).

Recently, the Supreme Court had occasion to address the issue of the enforceability of arbitration agreements. Dean Witter Reynolds, Inc. v. Byrd, ___ U.S. ___, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985). In considering a motion to compel arbitration, the Court emphasized the strong presumption in favor of arbitrability: "`The Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.'" id., at ___, 105 S.Ct. at 1242, quoting Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941-942, 74 L.Ed.2d 765 (1983). Moreover, the Court pointed out that under the Arbitration Act a district court has no discretion to hear matters that the parties have agreed to arbitrate: "By its terms, the Act leaves no place for the exercise of discretion by a District Court, but instead mandates that District Courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed." Id., ___ U.S. at ___, ...