Macchiavelli v. Shearson, Hammill & Co., Inc.

• Decision Date: 15 October 1974
• Docket Number: Civ. No. S-2593.
• Citation: 384 F. Supp. 21
• Court: U.S. District Court — Eastern District of California
• Parties: Armand MACCHIAVELLI, Plaintiff, v. SHEARSON, HAMMILL & CO., INCORPORATED, a Delaware corporation, Does I through C, Defendant.

384 F. Supp. 21

Armand MACCHIAVELLI, Plaintiff, v. SHEARSON, HAMMILL & CO., INCORPORATED, a Delaware corporation, Does I through C, Defendant.

Civ. No. S-2593.

United States District Court, E. D. California.

October 15, 1974.

COPYRIGHT MATERIAL OMITTED

Robert E. Proaps, Jr., Proaps, Gregor & Brophy, Sacramento, Cal., for plaintiff.

Chester A. Skinner and Arthur L. Sherwood, Gibson, Dunn & Crutcher, Los Angeles, Cal., for defendant.

MEMORANDUM AND ORDER

MacBRIDE, Chief Judge.

Armand Macchiavelli (hereafter plaintiff) an investor in stocks, files this complaint against Shearson, Hammill & Co. Incorporated (hereafter defendant), a stock brokerage firm and several Does, alleging two causes of action. Initially, it should be noted that there is no provision in the Federal statutes or Federal Rules of Civil Procedure for use of fictitious parties. The Ninth Circuit has consistently rejected the inclusion of "Does" in the complaint and we do the same here. Fifty Associates v. Prudential Insurance Co., 446 F.2d 1187 (9th Cir. 1970); Craig v. United States, 413 F.2d 854 (9th Cir. 1969); Molnar v. National Broadcasting Corporation, 231 F.2d 684 (9th Cir. 1956).

As a first cause of action, plaintiff here alleges generally a breach of contract arising from the relationship of plaintiff and defendant as customer-stockbroker and violation of Regulation T (12 CFR 220) dealing with margin requirements and withdrawal of funds from margin accounts. He alleges that defendant accepted plaintiff's stock account on September 16 and 17, 1971, on a margin account basis; that defendant made margin maintenance calls on the account; and that defendant had agreed to manage plaintiff's account with the condition that plaintiff could withdraw his account in any amount exceeding a 30 percent equity maintenance. The breach of contract claim is grounded in the allegation that defendant refused to allow plaintiff to withdraw the amount of $33,000.00 from his account and thereby damaged plaintiff in reputation and portfolio.

Plaintiff's second cause of action actually encompasses several separate claims. Plaintiff alleges generally that defendant violated federal rules and regulations governing credit in stockholder accounts; acted on a confidential credit report in violation of law pertaining to credit reports; employed fraudulent and manipulative methods and practices in notifying plaintiff as to liquidation due for maintenance; submitted or released deceptive account reports to another brokerage house that was willing to accept plaintiff's account; and, because of all these actions, hoped to generate additional income by forced liquidation, due to the poor investment grade securities contained in the account.

Jurisdiction is claimed under the Federal Securities and Exchange Act of 1934 (15 U.S.C. § 78a et seq.) and under diversity of citizenship.

Defendant in lieu of answer has moved to stay proceedings and has petitioned for an order to compel arbitration pursuant to Title 9 U.S.C. § 1 et seq. of the Federal Arbitration Act. The case is here on that motion.

Title 9 U.S.C. § 3 provides as follows:

"If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration."

On September 17, 1971, plaintiff and defendant entered into a written contract entitled "Customer's Margin Agreement," paragraph 10 of which reads as follows:

"This agreement shall inure to the benefit of your successors and assigns, shall be binding on the undersigned, his heirs, executors, administrators, and assigns, and shall be governed by the laws of the State of New York. Any controversy arising out of or relating to my account, to transactions with you for me or to this agreement or the breach thereof shall be settled by arbitration in accordance with the rules, then in effect, of the American Arbitration Association or the Board of Governors of the New York Stock Exchange as I may elect. If I do not make such election by registered mail addressed to you at your main office within 5 days after demand by you that I make such election, then you may make such election. Judgment upon any award rendered by the arbitrator may be entered in any court having jurisdiction thereof."

Neither party has attacked the validity of the "Customer's Margin Agreement" or specifically paragraph 10, dealing with the arbitration of disputes. Therefore, the arbitration agreement is the only proper remedy between the parties as to disputes referable to arbitration in accordance with the Federal Arbitration Act, 9 U.S.C. § 3.

Plaintiff in response, however, has raised four grounds in opposition to defendant's motions. Plaintiff asserts that the motions should be denied because: (1) A letter of September 24, 1971, constitutes a superseding agreement between the parties which is not subject to the arbitration agreement of September 17, 1971; (2) Arbitration is waived by defendant's delay; (3) Arbitration in this case would be in restraint of trade; and (4) If jurisdiction is proper under the Securities and Exchange Act of 1934, then no effect can be given to the arbitration agreement. Each of these grounds will be hereafter examined.

(1) DOES THE CONTRACT IN QUESTION REQUIRE ARBITRATION?

Plaintiff contends that although the "Customer's Margin Agreement," which included the arbitration clause, was signed by plaintiff and defendant on September 17, 1971, a subsequent letter of September 24, 1971, constitutes a new agreement between the parties and is not subject to the September 17 agreement or arbitration clause. The September 24, 1971, letter was sent by one Joaquin P. Horton apparently a representative of defendant to one James J. Macchiavelli apparently a manager of some of plaintiff Armand Macchiavelli's accounts. See Addendum to this Opinion which sets out in their entirety the September 17, 1971, "Customer's Margin Agreement" and the September 24, 1971, letter.

Even if it could be said that the September 24, 1971, letter from Horton to James Macchiavelli rises to the level of a binding contract between plaintiff and defendant, there is nothing in the letter which could be construed as creating a new or superseding agreement as to the September 17, 1971, margin agreement. At most, the September 24, 1971, letter clarifies terms and sets standards which the September 17, 1971, margin agreement gave defendant discretion to set. For example, paragraphs 5, 6 and 7 of the margin agreement give defendant broad discretion to set margin requirements, transfer among accounts, and set rates of interest and service charges. The provisions of the September 24, 1971, letter serve only to implement the discretion and management authority conferred by plaintiff to defendant in the margin agreement.

Furthermore, as noted previously, paragraph 10 of the margin agreement of September 17, 1971, contains the following language:

". . . Any controversy arising out of or relating to my account, to transactions with you for me or to this agreement or the breach thereof shall be settled by arbitration."

This language makes clear that the arbitration clause was intended to apply not only to claimed breaches of the margin agreement, but to all transactions or controversies arising out of the customer-broker relationship.

Two cases, both from the District Court for the Southern District of New York, are applicable and we accept their reasoning here. In Tepper Realty Co. v. Mosaic Tile Co., 259 F.Supp. 688, 691 (S.D.N.Y.1966), an arbitration clause was included in agreement A between the parties, but not specifically included in agreements B and C between the parties. Suit was brought on agreements B and C and plaintiff's contention that the arbitration clause of agreement A was inapplicable was rejected:

"In the face of the complaint and the express provisions of the written contracts, plaintiff's contention that there is no arbitration agreement simply because the parties to the agreements did not choose to express an arbitration clause in the body of their contracts or resort to the rubric of incorporating the specifications by express reference is untenable. The question is not whether the parties, like the scrivener of old, followed some talismanic formula, but whether they manifested a mutual intent to arbitrate disputes arising out of the contracts, and it is plain on the immutable facts that they did." 259 F.Supp. at 691.

In Robinson v. Bache & Co., 227 F.Supp. 456 (S.D.N.Y.1964), an arbitration clause virtually identical to the one in the instant case was in question. Plaintiff alleged that the arbitration clause which was contained in a margin and lending agreement between plaintiff and defendant was inapplicable since (1) the cause of action arose outside the margin and lending agreement and related to alleged bad advice by defendant, and (2) the cause of action sounded in tort. The court rejected these contentions and applied the arbitration clause:

"The controversy between plaintiff and defendant as framed by the complaint and the papers on this motion is arbitrable under the terms of their agreement as being `out of or relating to plaintiff's account, to transactions with or for plaintiff or to this agreement or the breach thereof'. It is immaterial that the complaint `sounds in tort', citations omitted or that plaintiff believes that the arbitration clause is limited to his margin and lending relationship with defendant since the clause cannot be so construed." 227 F.Supp. at

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