Kadow v. AG Edwards and Sons, Inc., Civ. 89-5069.

• Decision Date: 13 September 1989
• Docket Number: No. Civ. 89-5069.,Civ. 89-5069.
• Citation: 721 F. Supp. 201
• Parties: Casimir J. KADOW and Elaine J. Kadow, Husband and Wife, Plaintiffs, v. A.G. EDWARDS AND SONS, INC. and Jay Rumberger, Defendants.
• Court: U.S. District Court — Western District of Arkansas

721 F. Supp. 201

Casimir J. KADOW and Elaine J. Kadow, Husband and Wife, Plaintiffs, v. A.G. EDWARDS AND SONS, INC. and Jay Rumberger, Defendants.

No. Civ. 89-5069.

United States District Court, W.D. Arkansas, Fayetteville Division.

September 13, 1989.

Michael H. Mashburn, Mashburn & Taylor, Fayetteville, Ark., for plaintiffs.

Thomas D. Stockland, Pettus Law Firm, Fayetteville, Ark., for defendants.

MEMORANDUM OPINION

H. FRANKLIN WATERS, Chief Judge.

On June 2, 1989, Casimir J. Kadow and Elaine J. Kadow filed this cause of action against their securities broker, Jay Rumberger, and his employer, A.G. Edwards & Sons, Inc. (Edwards). The Kadows in July, 1986, sought the investment advice and brokerage services of the defendant. After suffering losses in their accounts, the plaintiffs brought this suit alleging, among other things, that defendants violated § 10 of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and Rule 10(b)(5), 17 C.F.R. § 240.10b-5, promulgated thereunder. Plaintiffs further alleged violations of the Arkansas Securities Act.

Plaintiffs allege these violations occurred in connection with the investment of their funds in American Capital Government Securities, a mutual fund. The gravamen of the complaint is that defendants misrepresented American Capital in such a way as to lead plaintiffs to believe their principal investment was guaranteed by the United States Government. On the basis of an arbitration clause in an agreement executed by the parties in connection with plaintiffs' accounts, the defendants have moved to compel arbitration and to dismiss or stay proceedings pending arbitration pursuant to Sections 3 and 4 of the Federal Arbitration Act. 9 U.S.C. §§ 1-15 (1989).

When Mr. Kadow opened the plaintiffs' account, he executed a document referred to as an A.G. Edwards and Sons, Inc. IRA/SEP Adoption Agreement. The adoption agreement appears at the end of a new account card filled out by the parties and provides as follows:

I hereby adopt the A.G. Edwards & Sons Inc. Custodian Account Agreement; provided, that the Custodial Account Agreement shall be in force if, and only if, this Adoption Agreement is accepted below. In witness whereof, I, the Depositor, hereby execute this Adoption Agreement, acknowledge receipt of and have read the Disclosure Statement, understand that there are fees for this account, and appoint A.G. Edwards & Sons Inc. to serve as Custodian in accordance with the terms and conditions of this Agreement on this ____ day of ____, 19__.

THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES.

Depositor's Signature: X Casimir J. Kadow

The foregoing Adoption Agreement is approved and accepted by A.G. Edwards & Sons, Inc. as Custodian this 7/22/88 day of ____, 19__.

By Branch Manager: Don Trumbo

Exhibit 1, Affidavit of Stephen G. Sneeringer.

Article XI, Paragraph 12 of the Custodian Agreement provides:

(12) Any controversy between the Depositor and the Custodian or any of the Custodian's officers, directors, agents, or employees, arising out of this Agreement or the performance or breach of this Agreement, or any account with the Custodian, or any transaction by the Depositor with or through the Custodian, or any other cause whatsoever, shall be settled by arbitration in accordance with the applicable state or federal arbitration statutes and in accordance with the rules of the American Arbitration Association, the National Association of Securities Dealers, Inc. or such securities exchange as the Depositor as applicable may elect. If the Depositor fails to notify the Custodian of such election in writing within five (5) days after receipt from the Custodian of a request for arbitration, then the Custodian may make such election on behalf of the undersigned. At least one of the arbitrators appointed to hear any controversy to be settled by arbitration shall be employed in the securities industry unless otherwise agreed prior to the time of the arbitration. The award of any arbitrators appointed to hear any controversy to be settled by arbitration shall be employed in the securities industry unless otherwise agreed prior to the time of the arbitration. The award of any arbitrators appointed pursuant hereto shall be final, and judgment upon the award rendered may be entered in any court having jurisdiction. Arbitration cannot be compelled with respect to disputes arising under the federal securities laws. (emphasis added).

Exhibit 2, Affidavit of Stephen G. Sneeringer. The position of the defendants is that the dispute is arbitrable pursuant to the above quoted provisions.

I. Arbitrability of Claims

The Federal Arbitration Act, 9 U.S.C. §§ 1-15, creates a body of substantive federal law governing agreements to arbitrate. Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 25 n. 32, 103 S.Ct. 927, 942 n. 32, 74 L.Ed.2d 765 (1983). The act states arbitration agreements "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. The act further provides parallel devices for seeking the enforcement of arbitration clauses. Section 3 requires a federal court in which suit has been brought "upon any issue referable to arbitration under an agreement in writing for such arbitration" to stay the court action pending arbitration once it is satisfied that the issue is arbitrable under the agreement. 9 U.S.C. § 3. Section 4 provides a method under which a party aggrieved by the failure or refusal of the other party to arbitrate may petition the federal court for an order compelling arbitration. 9 U.S.C. § 4.

As the Supreme Court cases cited herein indicate, there is a strong federal policy favoring arbitration. Arbitration agreements are to be vigorously enforced with due regard given to the federal policy favoring arbitration. Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 221, 105 S.Ct. 1238, 1242-43, 84 L.Ed.2d 158 (1985); Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24, 105 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983). See also Rodriguez de Quijas v. Shearson/American Express, Inc., ___ U.S. ___, ___-___, 109 S.Ct. 1917, 1919-20, 104 L.Ed.2d 526 (1989). In fact, "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability." Moses H. Cone, 460 U.S. at 24-25, 105 S.Ct. at 941.

Of course, "an agreement to arbitrate is simply a contract, fashioned by the parties to their intentions. Although the Federal Arbitration Act establishes a presumption in favor of arbitrability when arbitrability is in doubt, it does not prevent parties from agreeing to exclude matters from arbitration if they so desire." Ballay v. Legg Mason Wood Walker, Inc., 878 F.2d 729, 733 (3d Cir.1989), citing, Volt Information Sciences, Inc. v. Board of Trustees of the Leland Stanford Junior Univ., ___ U.S. ___, ___, 109 S.Ct. 1248, 1255, 103 L.Ed.2d 488 (1989). "As with any other contract, the parties' intentions control, but those intentions are generously construed as to issues of arbitrability." Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626, 105 S.Ct. 3346, 3354, 87 L.Ed.2d 444 (1985).

II. State Law Claims

The plaintiffs raise several objections to the enforceability of the arbitration clause. They contend the arbitration clause is unenforceable because the form contract created ambiguity by referring to another document with respect to a disclosure statement, fees, and appointment of the custodian without specific reference to a supplementary arbitration provision. In addition, plaintiffs deny they received the arbitration agreement referred to. Plaintiffs also contend the specific placement of the arbitration clause created an ambiguity.

The written contract signed by Mr. Kadow in a separate section provides "I hereby adopt the A.G. Edwards & Sons, Inc. Custodian Account Agreement; provided, that the Custodial Agreement shall be in force if, and only if, this Adoption Agreement is accepted below." Below this statement the agreement states in bold print "this contract contains a binding arbitration provision which may be enforced by the parties." Immediately below this, Mr. Kadow was required to separately sign the adoption agreement.

The court concludes there is no ambiguity which requires an evidentiary hearing. Parties entering into a contract have the duty to read the contracts before they sign them. Cohen v. Wedbush, Noble, Cooke, Inc., 841 F.2d 282, 287 (9th Cir. 1988). The mere incorporation of another document does not create an ambiguity. Thus, the court finds no basis to deny arbitration of the state law claims. Indeed, the Supreme Court has stated arbitration agreements encompassing state law claims must be enforced "even where the result would be the possible inefficient maintenance of separate proceedings in different forums." Dean Witter Reynolds v. Byrd, 470 U.S. 213, 217, 105 S.Ct. 1238, 1241, 84 L.Ed.2d 158 (1985).

III. The Federal Claims

At the time the account agreement was executed, the enforceability of predispute arbitration under the Federal Securities Act of 1933 and the Federal Securities Exchange Act of 1934 was doubtful. In Wilko v. Swan, the Supreme Court had invalidated predispute agreements to arbitrate claims arising under the Securities Act of 1933. Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953) overruled by Rodriguez De Quijas v. Shearson/American Express, Inc., ___ U.S. ___, 109 S.Ct. 1917, 104 L.Ed.2d 526 (1989). The nonarbitrability rule was extended by the lower courts to claims arising under the Securities Exchange Act. Ballay v. Legg Mason Wood Walker, Inc., 878 F.2d 729, 732 (3d Cir.1989). In accord with the position taken in Wilko v. Swan, the ...