Loche v. Dean Witter Reynolds, Inc.

• Decision Date: 12 August 1988
• Docket Number: No. 87-829,87-829
• Citation: 526 N.E.2d 1296,26 Mass.App.Ct. 296
• Parties: John LOCHE v. DEAN WITTER REYNOLDS, INC. et al. 1
• Court: Appeals Court of Massachusetts

Page 1296

526 N.E.2d 1296

26 Mass.App.Ct. 296

John LOCHE v. DEAN WITTER REYNOLDS, INC. et al. ¹ No. 87-829.

Appeals Court of Massachusetts Suffolk.

Argued April 14, 1988.

Decided Aug. 12, 1988.

Susan Hughes Banning (Edward Notis-McConarty, Boston, with her), for plaintiff.

Jody E. Forchheimer, Boston, for Dean Witter Reynolds, Inc.

Before KASS, CUTTER and FINE, JJ.

CUTTER, Justice.

On March 31, 1987, Loche brought an action against Dean Witter Reynolds, Inc. (DWR), and two brokers employed by that firm. The complaint in four counts alleged that Kearney and Mallozzi (sometimes referred to hereafter as "the brokers"), acting for DWR, had committed fraud, conversion, violations of Federal securities laws (see note 4, infra ), and a breach of contract in connection with an investment by Loche.

On April 24, 1987, DWR's counsel by letter demanded that Loche submit his claim to arbitration under a "Securities Account Agreement" (the agreement) between Loche and DWR which contained the provisions set out in the margin for arbitration and governing law. ² To this letter Loche's counsel replied by letter dated April 29, 1987, saying, among other things, "At this time, we decline to submit ... Loche's claims to arbitration." With respect to Loche's claims under § 10(b) of the Securities Exchange Act of 1934, Loche's counsel pointed out that a similar issue concerning arbitration was presented in a case then pending before the Supreme Court of the United States. With respect to Loche's remaining claims, counsel "disagree[d] that these ... are claims 'arising out of or relating to' the ... [a]greement between Loche and ... [DWR]" and also "decline[d] to submit these claims to arbitration." ³

DWR, on May 5, 1987, filed a motion under the Federal Arbitration Act, 9 U.S.C. §§ 3 & 4 (1982), for an order that Loche be compelled to arbitrate as provided in the agreement. On May 18, 1987, a Superior Court judge denied DWR's motion (without comment or stating reasons which might have been helpful to the parties and others in a somewhat novel situation in this Commonwealth). A single justice of this court (acting under the first paragraph of G.L. c. 231, § 118) granted DWR leave to appeal to a panel of this court and stayed proceedings pending appeal. That appeal is now before us.

Allegations of the Complaint

The nature of the case must be determined principally on the allegations of the complaint. Those allegations are summarized in the following paragraphs.

At all relevant times, Loche had an account with DWR, where Kearney and Mallozzi were said to be brokers. In October, 1984, Loche consulted Kearney about an investment in shares to be issued by Mosaic Technologies (Mosaic). Kearney later informed Loche that the proposed stock purchase called for him to invest as a limited partner in Weston Venture Partners I (Weston), which would hold the Mosaic common stock. Loche delivered to Kearney a $5,000 check for the commission and a $25,000 check payable to Weston for an equity interest in Mosaic common stock. Loche also signed a subscription agreement and a power of attorney to Mallozzi as a general partner of Weston.

Loche later learned that his money had been invested in preferred stock of Mosaic through Wellesley Venture Partners I (Wellesley), rather than in voting common stock through Weston. Only $20,000 had been invested in Wellesley, with the remaining $5,000 going to Mallozzi as a sales commission. Loche was informed, when he inquired about what had taken place, that the Wellesley investment had been made pursuant to a Wellesley subscription agreement and power of attorney. Upon inspecting copies of those documents, Loche discovered that his signature had been forged.

Loche alleges in Count I that Kearney and Mallozzi fraudulently induced him to pay over his money to them by false representations that the funds would be invested in Mosaic common stock through Weston. In Count II Loche alleges that he entrusted Kearney and Mallozzi with $30,000 for the Weston investment, and that by forgeries the brokers converted the funds by investing them in Wellesley. Finally, in Count IV ⁴ Loche alleges that he had agreed with Kearney and Mallozzi, as general partners of Weston, that his funds would be invested in Mosaic common stock through Weston, and that Kearney and Mallozzi broke that agreement by investing Loche's funds through Wellesley.

In each count, Loche also alleges that DWR is liable because Kearney and Mallozzi were acting as brokers within the scope of their employment by DWR. DWR has filed an answer largely stating that it was without information sufficient to enable it to answer the complaint and also denying that it knew of the brokers' wrongful activities as alleged, or that it authorized or approved of them, or that either Kearney or Mallozzi was acting within the scope of his employment when they, respectively, allegedly took part in the activities charged in the complaint. DWR expressly denied an allegation of paragraph 4 of the complaint that Mallozzi was a broker at DWR. Mallozzi has filed a formal answer to the complaint containing mostly denials of allegations or assertions of insufficient knowledge to permit an answer, but denying that he has ever been a broker at DWR. Kearney does not appear to have filed a formal answer in this proceeding but the record appendix contains a letter from him to Loche's counsel purporting to clarify the facts.

Contentions of the Parties

Loche now contends that the agreement must be interpreted under the State law of New York rather than under Federal law, and that (even under Federal law) the arbitration provision (note 2, supra ) "does not encompass Loche's claims." He also contends that, if the claims are decided to be arbitrable, he remains entitled to select the arbitrator in accordance with the arbitration provision of the agreement.

DWR contends that Loche's claims against it are arbitrable under the Federal Arbitration Act and the terms of the agreement and that (as Loche did not select an arbitral tribunal within the time specified in the agreement's arbitration provision, note 2, supra ) DWR's selection of the arbitration committee of the New York Stock Exchange is binding upon the parties.

Discussion

1. The Federal Arbitration Act, 9 U.S.C. § 2 (1982), makes enforceable a written arbitration agreement in any contract with respect to a transaction involving interstate commerce (see definition of "commerce" in § 1). ⁵ It constitutes "a [C]ongressional declaration of a liberal [F]ederal policy favoring arbitration agreements, notwithstanding any [S]tate substantive or procedural policies to the contrary." Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983). It preempts State arbitration law for contracts involving interstate commerce. Southland Corp. v. Keating, 465 U.S. 1, 10-16, 104 S.Ct. 852, 858-861, 79 L.Ed.2d 1 (1984).

Section 3 of the act requires Federal courts to stay judicial proceedings concerning any dispute covered by an arbitration agreement relating to interstate commerce. ⁶ This requirement applies to State courts as well as Federal courts. See the Cone Memorial Hosp. case, 460 U.S. at 26-27, 103 S.Ct. at 942-943. Under § 4, a party aggrieved by another party's refusal to arbitrate a dispute covered by the agreement to arbitrate may seek a court order to compel the refusing party to arbitrate. It is, perhaps, less certain that § 4 requires State courts to grant orders compelling arbitration, but the Federal act certainly does not prohibit such an order. See the Southland Corp. case, 465 U.S. at 16 & n. 10, 104 S.Ct. at 861 & n. 10. Whether the controversy is arbitrable under the Federal act must be decided by the court (and not by an arbitrator). In making that decision, however, the court is not required (and, indeed, not permitted) "to rule on the potential merits of the underlying claims." See AT & T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 649-650, 106 S.Ct. 1415, 1419, 89 L.Ed.2d 648 (1986), cited in Old Rochester Regional Teacher's Club v. Old Rochester Regional School Dist. Comm., 398 Mass. 695, 700, 500 N.E.2d 1315 (1986). See, as to the broadly interpreted Federal preemption of possibly conflicting State arbitration and other statutes, Perry v. Thomas, 482 U.S. 483, 107 S.Ct. 2520, 2525-2527, 96 L.Ed.2d 426 (1987), which discusses a California statute provision which seems more explicit in its conflict than any other State statute brought to our attention in the present case.

In determining whether the present controversy relates to interstate commerce, the motion judge should have looked at the arbitration provision of the agreement (note 2, supra ) and the complete situation alleged in the complaint, to determine whether the arbitration provision was intended to apply to every aspect of the investment relationship between Loche and DWR and whether that relationship contemplated transactions in interstate commerce. See Metro Industrial Painting Corp. v. Terminal Constr. Co., 287 F.2d 382, 387 (2d Cir.1961). Contracts whose very purpose is to create a relationship for the purchase and sale of securities almost necessarily will involve interstate commerce. See discussion in Wilko v. Swan, 346 U.S. 427, 430-438, 74 S.Ct. 182, 184-189, 98 L.Ed. 168 (1953, margin agreement, although waiver of all judicial relief by an agreement to arbitrate may be precluded under some Federal statutes); Robinson v. Bache & Co., 227 F.Supp. 456, 457-458 (S.D.N.Y.1964, margin and lending account); Macchiavelli v. Shearson, Hammill & Co., 384 F.Supp. 21, 30 (E.D.Cal.1974). See also Corey v. New York Stock Exchange, 493 F.Supp. 51, 54 (W.D.Mich.1980), aff'd, 691 F.2d 1205 (6th Cir.1982); Willis v. Shearson/American Express, Inc., 569 F.Supp. 821, 822-823 (M.D.N.C.1983). ⁷

Loche (for the position mentioned in note 7) relies upon miscellaneous...