Kidder, Peabody & Co., Inc. v. Zinsmeyer Trusts Partnership
| Decision Date | 27 July 1964 |
| Citation | 41 F.3d 861 |
| Parties | Fed. Sec. L. Rep. P 98,472 KIDDER, PEABODY & CO., INC., Plaintiff-Appellant, v. ZINSMEYER TRUSTS PARTNERSHIP, A Missouri General Partnership, By Andrew Roberts Zinsmeyer dtd |
| Court | U.S. Court of Appeals — Second Circuit |
Thomas A. Dubbs, New York City, for plaintiff-appellant.
Thomas E. Douglass, St. Louis, MO (Ellen E. Bonacorsi, Coburn & Croft, on the brief) for defendants-appellees.
Before: WINTER, JACOBS and CABRANES, Circuit Judges.
A general partnership composed of several family trusts has commenced two arbitration proceedings alleging the mishandling of its accounts by a brokerage firm. The brokerage firm, Kidder, Peabody & Co., Inc. ("Kidder"), commenced this action seeking a declaration that it breached no duty to the partnership and that it has no duty to arbitrate because the parties crossed out a clause of Kidder's standard-form Customer's Agreement requiring the parties to submit their disputes to arbitration. The United States District Court for the Southern District of New York (Knapp, J.) dismissed Kidder's complaint on the ground that Kidder has an obligation to arbitrate that is independent of the deleted contract term. The district court reasoned that Kidder, as a member of the National Association of Securities Dealers ("NASD"), is bound by the NASD Code to arbitrate disputes, at its customers' option, and that the crossed out language left intact a separate contract provision binding Kidder to the rules and usages of the NASD and acknowledging the existence of a pre-dispute arbitration clause.
We affirm.
In June, 1991, the Zinsmeyer Trusts Partnership ("Zinsmeyer") made arrangements to transfer a very large sum of money to Kidder for investment purposes. As part of the account opening documentation, Kidder sent Zinsmeyer its standard-form Customer's Agreement. Two paragraphs of the two-page document specifically reference arbitration. Paragraph 3 reads in relevant part:
3. I [the Zinsmeyer Trusts Partnership] UNDERSTAND THAT THIS AGREEMENT INCLUDES A PREDISPUTE ARBITRATION CLAUSE. I agree to be bound by the constitutions, rules, regulations, customs and usages of the National Association of Securities Dealers, Inc. ("NASD") and the exchanges and other markets or clearinghouses through which transactions may be effected for my account....
Paragraph 16 reads:
16. I understand that:
(a) ARBITRATION IS FINAL AND BINDING ON THE PARTIES.
(b) THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT, INCLUDING THE RIGHT TO JURY TRIAL.
(c) PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND DIFFERENT FROM COURT PROCEEDINGS.
(d) THE ARBITRATORS' AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR TO SEEK MODIFICATION OF RULINGS BY THE ARBITRATORS IS STRICTLY LIMITED.
(e) THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF ARBITRATORS WHO WERE OR ARE AFFILIATED WITH THE SECURITIES INDUSTRY.
ANY CONTROVERSY BETWEEN US (INCLUDING ANY CONTROVERSY BETWEEN ME AND YOUR AGENTS, REPRESENTATIVES OR EMPLOYEES) ARISING OUT OF OR RELATING IN ANYWAY TO ANY ACCOUNTS OF OR TRANSACTIONS WITH OR FOR ME[,] OR TO THIS OR ANY OTHER AGREEMENT BETWEEN US[,] SHALL BE SETTLED BY ARBITRATION. ANY ARBITRATION BETWEEN US SHALL BE CONDUCTED BEFORE AN ARBITRATION PANEL OF, AND IN ACCORDANCE WITH THE ARBITRATION RULES THEN IN EFFECT OF, THE NASD OR OF ANY EXCHANGE OF WHICH YOU ARE A MEMBER, AS I MAY ELECT. IF YOU DEMAND THAT I MAKE SUCH AN ELECTION AND I DO NOT DO SO BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO YOU AT YOUR MAIN OFFICE IN NEW YORK CITY AND MAILED WITHIN FIVE (5) DAYS AFTER MY RECEIPT OF YOUR DEMAND, THEN YOU MAY MAKE THE ELECTION. THE AWARD OF THE ARBITRATORS, OR A MAJORITY OF THEM, SHALL BE FINAL, AND JUDGMENT UPON THE AWARD RENDERED MAY BE ENTERED IN ANY COURT HAVING JURISDICTION THEREOF.
On or about June 14, 1991, Zinsmeyer's managing partner mailed to Kidder a proposal that paragraph 16 be modified to refine the scope of arbitrable controversies and to designate the American Arbitration Association to serve as the forum for any disputes. Kidder rejected the proposed change and on June 21, 1991 mailed Zinsmeyer a new copy of the standard-form Customer's Agreement with paragraph 16 removed by cross-hatching. The letter from Kidder to Zinsmeyer accompanying the modified document read in part:
In lieu of attaching the amendment regarding arbitration to the Kidder, Peabody margin agreement you signed and sent to me, I have crossed out entirely the section on arbitration. This effectively waives the arbitration clause. As we need your approval to delete this section, please initial and date this adjustment and return the agreement to my attention.
(Emphasis added.) Zinsmeyer claims it did not receive this counter-proposal until June 29, 1991. By that time, several trades had already been made with the Zinsmeyer funds. Kidder informed Zinsmeyer that the agreement needed to be signed immediately, and back-dated to prevent the trades from being reversed. A representative of Zinsmeyer back-dated and initialed the agreement as modified by Kidder on July 2, 1991.
As a member of the NASD, Kidder is bound by the NASD Code. Section 12 of the NASD Code requires members to submit to arbitration at the request and option of its customers.
In July 1993, Zinsmeyer commenced arbitration proceedings before the American Arbitration Association ("AAA"), alleging that Kidder mishandled Zinsmeyer's funds in violation of various provisions of federal securities law including section 10(b) of the Securities Exchange Act and section 206 of the Investment Advisors Act of 1940. Kidder resisted arbitration and filed this declaratory judgment action on December 8, 1993. In February 1994, Zinsmeyer commenced another arbitration proceeding, this one before the NASD, asserting claims identical to the ones raised in the AAA proceeding.
On May 20, 1994, Judge Knapp conducted a hearing on Zinsmeyer's motion to dismiss the complaint or, in the alternative, to compel arbitration. The district court granted the motion for dismissal from the bench at the end of the hearing, relying upon the text of paragraph 3. Judge Knapp concluded that the NASD Code is incorporated in paragraph 3, and that Section 12 of that Code gives customers the power to elect arbitration by the NASD. According to Judge Knapp, the excision of paragraph 16 "in no way affect[ed] paragraph 3." Paragraph 3 therefore compels the brokerage house to submit to arbitration in accordance with the arbitration provision of the NASD Code. Judge Knapp further found that the parties had not done "anything to suggest" that they wished to contract out of the requirements imposed on them by the NASD Code.
The district court's ruling is based on "pure textual construction" of a contract. Appellate review is therefore de novo. Bellefonte Reinsurance Co. v. Aetna Casualty & Sur. Co., 903 F.2d 910, 912 (2d Cir.1990).
The cross-hatching that excised paragraph 16 left intact paragraph 3 of the Customer's Agreement. Paragraph 3 recites that the Zinsmeyer Trust Partnership agrees "to be bound by the constitutions, rules, regulations, customs and usages of the National Association of Securities Dealers, Inc. ('NASD')." The NASD code guarantees that the customer has the right to demand arbitration:
Any dispute, claim or controversy eligible for submission ... between a customer and a member and/or associated person arising in connection with the business of such member or in connection with the activities of such associated persons shall be arbitrated under this Code, as provided by any duly executed and enforceable written agreement or upon the demand of the customer.
NASD Code, Sec. 12(a) (emphasis added).
As a member of the NASD, Kidder is bound to adhere to the organization's rules and regulations. Scobee Combs Funeral Home, Inc. v. E.F. Hutton & Co., Inc., 711 F.Supp. 605, 606 (S.D.Fla.1989); Drexel Burnham Lambert, Inc. v. Pyles, 701 F.Supp. 217, 220 (N.D.Ga.1988). "[T]he rules of a securities exchange are contractual in nature." Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Georgiadis, 903 F.2d 109, 113 (2d Cir.1990); see also Paine, Webber, Jackson & Curtis, Inc. v. Chase Manhattan Bank, N.A., 728 F.2d 577, 580 (2d Cir.1984) (). Like the NYSE rules at issue in Paine, Webber,...
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