Leonard v. Stuart-James Co., Inc., Civ. A. No. 1:89-CV-2051-JOF.

• Decision Date: 23 June 1990
• Docket Number: Civ. A. No. 1:89-CV-2051-JOF.
• Citation: 742 F. Supp. 653
• Parties: James R. LEONARD, Plaintiff, v. STUART-JAMES COMPANY, INC., et al., Defendants.
• Court: U.S. District Court — Northern District of Georgia

742 F. Supp. 653

James R. LEONARD, Plaintiff, v. STUART-JAMES COMPANY, INC., et al., Defendants.

Civ. A. No. 1:89-CV-2051-JOF.

United States District Court, N.D. Georgia, Atlanta Division.

June 23, 1990.

COPYRIGHT MATERIAL OMITTED

William E. Sumner, Sumner & Hewes, Atlanta, Ga., for plaintiff.

Rufus Thomas Dorsey, IV, Parker Hudson Rainer & Dobbs, Atlanta, Ga., Donald T. Trinen, Christa D. Taylor, Hart & Trinen, Denver, Colo., for defendants.

ORDER

FORRESTER, District Judge.

This matter is before the court on defendant Stuart-James's motion to compel plaintiff to arbitrate, Stuart-James's motion to dismiss for failure to state a claim, and defendant Michael J. Whalen's motion to dismiss pursuant to Fed.R.Civ.P. 4(j). This complaint was filed September 11, 1989, and amended December 5, 1989, against the Stuart-James Company and Michael J. Whalen. Claims are asserted under the Securities Act of 1933, the Securities Exchange Act of 1934, the Georgia Securities Act, Federal and State RICO, as well as state law claims of breach of fiduciary duty, breach of contract, and negligence. See First Amended Complaint.¹

I. MOTION TO COMPEL ARBITRATION

When plaintiff opened an investment account with Stuart-James in June 1987, he signed an agreement entitled "Customer Cash Account Agreement." This agreement had an arbitration provision, which provided as follows:

The undersigned agrees that any and all claims which may arise by and between the undersigned and The Stuart-James Company, Inc. shall be submitted to arbitration as provided for in the Code of Arbitration Procedure regulated by the National Association of Securities Dealers, Inc. However, this paragraph does not prevent the undersigned from judicial recourse with respect to federal securities claims.

The defendant requests that this court compel arbitration pursuant to the Federal Arbitration Act, 9 U.S.C. § 1, et seq. The defendant contends that the last section of that paragraph excepting the federal securities claims from arbitration was inserted merely because of the requirements of a Securities Exchange Commission rule, SEC Rule 15c2-2, 17 C.F.R. § 240.15c2-2 (1987). This rule has since been rescinded because the law on arbitration has changed, and therefore the defendant says, it has not waived its right to arbitration of the federal securities claims. Plaintiff, on the other hand, argues that the contract specifically excludes federal securities laws from the arbitration provision, and the change in the law and the SEC rule is irrelevant.

It is clear that the arbitration provision covers all claims other than the federal securities claims, including the RICO, state, and common law claims. Therefore, those will be referred to arbitration pursuant to the agreement and will be stayed in this court.

The Federal Arbitration Act provides for enforcement of privately negotiated arbitration agreements, which the court must rigorously enforce even if such enforcement results in piecemeal litigation. Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 219-21, 105 S.Ct. 1238, 1241-43, 84 L.Ed.2d 158 (1985). The court's first task in analyzing a motion to compel arbitration "is to determine whether the parties agreed to arbitrate that dispute." Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626, 105 S.Ct. 3346, 3353, 87 L.Ed.2d 444 (1985). The court is to apply general state law principles of contract interpretation, with due regard given to the federal policy favoring arbitration, and ambiguities in the scope of the arbitration provision are resolved in favor of arbitration. Volt Information Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989). Parties are not obligated to arbitrate where they have not agreed to, and parties may exclude certain claims from the scope of their arbitration agreement. Id. The court must enforce the privately negotiated agreements in accordance with their terms. Id.

In the past federal securities claims were not arbitrable. Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953). In connection with this legal climate, the Securities Exchange Commission promulgated Rule 15c22, which essentially provided that it was a fraudulent, manipulative or deceptive act or practice to purport to bind the customer to arbitration of disputes arising under the federal securities laws. The SEC rescinded this rule in 1987 following the Supreme Court's decision in Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987), which held that pre-dispute agreements under the 1934 Act are enforceable. The Supreme Court has recently expanded on McMahon and overruled Wilko, holding that 1933 Act claims are also arbitrable. Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 109 S.Ct. 1917, 104 L.Ed.2d 526 (1989). There is no longer any legal impediment to arbitration of all federal securities claims.

The Eleventh Circuit has not addressed the issue presented in this case, where contract language drafted so as to comply with Rule 15c2-2 excepts federal securities claims from arbitration. However, many district courts and some appellate courts have addressed the issue. The clear consensus among these courts is that the language of the contract is the key to the analysis and controls whether arbitration must be compelled. The fact that the language was put into the contract pursuant to the rule is irrelevant when the language of the contract is plain. Gooding v. Shearson Lehman Bros., 878 F.2d 281 (9th Cir. 1989); Ballay v. Legg Mason Wood Walker, Inc., 878 F.2d 729 (3d Cir.1989); Stander v. Financial Clearing and Services Corp., 718 F.Supp. 1204 (S.D.N.Y.1989); Amodio v. Blinder, Robinson & Co., 715 F.Supp. 32 (D.Conn.1989); Kadow v. A. G. Edwards & Sons, Inc., 721 F.Supp. 201 (W.D.Ark.1989); Church v. Gruntal & Co., Inc., 698 F.Supp. 465 (S.D.N.Y.1988); Brick v. J. C. Bradford & Co., Inc., 677 F.Supp. 1251 (D.D.C.1987). Where the language specifically excludes federal securities claims from the arbitration provision, arbitration is not compelled. Ballay, 878 F.2d at 729; Gooding, 878 F.2d at 281; Kadow, 721 F.Supp. at 201; Church, 698 F.Supp. at 465; Brick, 677 F.Supp. at 1251. Where the language provides notice only, or provides for a change in the law, arbitration has been compelled. Scher v. Bear Stearns & Co., Inc., 723 F.Supp. 211 (S.D. N.Y.1989); see cases cited in Stander, 718 F.Supp. at 1204. Cases that look to the regulatory history are not persuasive, as they ignore the specific language of the contract at issue, which is the first step in determining whether arbitration should be compelled. See Ottenritter v. Shearson Lehman Hutton, Inc., 727 F.Supp. 980 (D.Md.1989); McCowan v. Dean Witter Reynolds, Inc., 682 F.Supp. 741 (S.D.N.Y. 1987), appeal dismissed, 889 F.2d 451 (2d Cir.1989); Finkle & Ross v. A. G. Becker Paribas, Inc., 622 F.Supp. 1505 (S.D.N.Y. 1985).

The language in this case is somewhat different from every other case the court has read on this issue, but it is similar enough for cases to give guidance. The sentence which reads, "however, this paragraph does not prevent the undersigned from judicial recourse with respect to federal securities claims," creates an exception to arbitration and allows the plaintiff to have federal securities claims heard in a judicial forum. The language makes no reference to Rule 15c2-2, nor does it provide for potential changes in the law. See Ballay, 878 F.2d at 744; Kadow, 721 F.Supp. at 201; Church, 698 F.Supp. at 465. The fact that the rule was rescinded and the law was changed to encompass arbitration of all federal securities claims is irrelevant where the contract terms control in the first instance. The contract here provided an exclusion for federal securities claims, and therefore the court is unable to compel arbitration as to those claims. Those claims will proceed in this court.

In the event that the motion to compel was denied as to the federal claims, the defendant asked for a stay of those proceedings in this court pending arbitration for reasons of judicial economy. However, the Eleventh Circuit has rejected the judicial economy excuse as a reason for staying federal claims pending the arbitration of other claims. Benoay v. Prudential-Bache Securities, Inc., 805 F.2d 1437, 1441 (11th Cir.1986) (citing Byrd, 470 U.S. at 217, 105 S.Ct. at 1240-41). Therefore, the court declines to stay the federal claims pending arbitration.

II. DEFENDANT STUART-JAMES'S MOTION TO DISMISS

Defendant moved to dismiss the complaint, and following plaintiff's filing of the first amended complaint, moved to dismiss that complaint as well. Defendant seeks dismissal of the federal causes of action for failure to state a claim, failure to plead facts showing that the complaint was timely filed, and failing to state fraud with particularity required under Fed.R.Civ.P. 9(b).

The amended complaint, which is considered to be true on a motion to dismiss for failure to state a claim, Blum v. Morgan Guaranty Trust Co., 709 F.2d 1463 (11th Cir.1983), reveals the following facts. On or about June 2, 1987 plaintiff opened an account with Stuart-James, in response to repeated urgings by defendant Whalen to invest in certain "penny stocks." Amended Complaint, ¶¶ 12-14. Plaintiff purchased securities in four companies in June and July 1987 after Whalen either contacted him by telephone or sent him a memorandum about the particular security. Id. at ¶¶ 17-34. On October 12, 1987 plaintiff decided to sell all his securities because Whalen's sales tactics were too aggressive and because Whalen was calling the plaintiff too frequently. Id. at ¶ 35. Whalen refused to sell the securities. Id. at ¶¶ 37-39. After this time, the market value of the stocks decreased, and Whalen sold the stocks during 1988, though securities from two companies could not be sold because their market value was zero. Id. at...