McDonnell v. Dean Witter Reynolds, Inc., Civ. A. No. N-82-179 (RCZ).

• Decision Date: 08 July 1985
• Docket Number: Civ. A. No. N-82-179 (RCZ).
• Court: U.S. District Court — District of Connecticut
• Parties: Frank McDONNELL, Plaintiff, v. DEAN WITTER REYNOLDS, INC., and James Reid, Defendants.

620 F. Supp. 152

Frank McDONNELL, Plaintiff, v. DEAN WITTER REYNOLDS, INC., and James Reid, Defendants.

Civ. A. No. N-82-179 (RCZ).

United States District Court, D. Connecticut.

July 8, 1985.

Dennis N. Garvey, Barbara Cox, Garvey & Walsh, New Haven, Conn., for plaintiff.

Sharon S. Tisher, Kim M. Cooke, Day, Berry & Howard, Hartford, Conn., for defendants.

RULING ON MOTIONS TO COMPEL ARBITRATION, TO STAY PROCEEDINGS, AND TO AMEND ANSWER

ZAMPANO, Senior District Judge.

Plaintiff Frank McDonnell seeks damages against Dean Witter Reynolds, Inc. ("Dean Witter") and James Reid, formerly a Dean Witter employee, for the alleged mismanagement of his securities account. Plaintiff asserts causes of action under the Securities Act of 1933, 15 U.S.C. § 77q(a), the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78o(c) and 78t(a), the Connecticut Uniform Securities Act, Conn.Gen. Stat. §§ 36-470 to 36-502, the Connecticut Unfair Trade Practices Act ("CUTPA"), Conn.Gen.Stat. §§ 42-110a to 42-110q, the rules of the New York Stock Exchange, as well as various causes of action arising under the common law.

Pending are Dean Witter's motions to compel arbitration of the dispute and to stay these proceedings, and both defendants' motion to amend their answer to allege arbitration as special defense.¹

I.

The complaint alleges that plaintiff opened a securities account with Dean Witter in November 1980 with a $129,000 investment portfolio that plaintiff's mother left to him when she died. Plaintiff assertedly instructed Dean Witter and Reid, the account executive, merely to transfer the portfolio into plaintiff's name. Instead, plaintiff contends defendants not only transferred the stock into plaintiff's name, but they also sold most of the securities "without advising or consulting" him. The proceeds from the sales were, according to the plaintiff, used to buy "high risk and speculative over-the-counter securities" for plaintiff's account. The value of plaintiff's account fell to less than $19,755 by August 1981.

Plaintiff does not dispute that when he opened his account in November 1980 he signed a standard "Customer's Agreement." Paragraph 16 of that agreement states that "any controversy between you and the undersigned arising out of or relating to this contract or the breach thereof, shall be settled by arbitration...."²

Plaintiff filed this action on April 14, 1982, and defendants filed a motion to dismiss on May 14, 1982. The motion was based on several asserted pleading errors and ambiguities; the motion did not raise the arbitration defense. After several extensions of time requested by both sides, plaintiff filed an amended complaint. On January 11, 1983, Magistrate Thomas P. Smith denied the motion because most of defendants' arguments in favor of their motion were moot. Further, on that date Magistrate Smith granted plaintiff leave to file a second amended complaint, which added a cause of action arising under CUTPA.

On February 2, 1983, defendants filed a demand for jury trial and an answer with a series of special defenses. Inexplicably, they again failed to raise the defense of arbitration.

Thereafter for almost two years the parties engaged in lengthy discovery proceedings including interrogatories, depositions and production of documents. On several occasions, this Court's intervention was necessary to resolve disputes which arose during the discovery process.

Finally, in an effort to dispose of the case, the Court ordered the parties to try this action in January 1985. However, the matter was continued to the February 1985 calendar call to allow counsel time to complete final discovery. In February, the parties again requested and received permission to take an additional deposition. During the next month, the Court was also required to rule on several motions to compel.

In the meantime, the Court ordered that the case proceed to trial on April 4, 1985. Three days before jury selection, Dean Witter for the first time sought, under 9 U.S.C. § 4, to compel arbitration of plaintiff's common law and state statutory law claims pursuant to paragraph 16 of the Customer's Agreement. After plaintiff objected to the motion in a memorandum filed on April 4, Dean Witter amended its motion to request arbitration of plaintiff's federal law claims as well. Again, due to these eleventh-hour maneuvers, the trial date was continued.

In a letter from chambers dated April 16, 1985, the Court set oral argument on Dean Witter's motion for May 2, 1985. Further, the Court called to counsel's attention the recent decision of the Court of Appeals in Sweater Bee by Banff, Ltd. v. Manhattan Industries, Inc., 754 F.2d 457 (2 Cir.1985).

On April 26, 1985, defendants moved for permission to file an amendment to their February 2, 1984 answer. Specifically, they seek to set forth as a "Sixth Affirmative Defense" that "at or about the time that the plaintiff opened his securities account with the defendant Dean Witter Reynolds, Inc. , the plaintiff and Dean Witter entered into a Customer's Agreement which stipulated that any controversy between them arising out of or relating to the Customer's Agreement or the breach thereof shall be resolved by arbitration. Therefore, the plaintiff is precluded from pursuing his Complaint before this Court."³

Counsel filed memoranda discussing Sweater Bee on April 30, and May 1, and oral argument was held on May 2. Following questioning by the Court as to whether Dean Witter merely sought to compel arbitration pursuant to 9 U.S.C. § 4, as set forth in the April 1, 1985 motion, or whether it also sought a stay of the instant action pursuant to 9 U.S.C. § 3, Dean Witter filed a "Clarified Motion to Compel Arbitration and for a Stay of Proceedings." Supplemental memoranda addressing issues raised at oral argument have been submitted by both parties. The motions to compel arbitration and to stay have been thoroughly briefed, and all motions are ripe for decision.

II.

Although the parties have extensively briefed the issues regarding the Arbitration Act, the important question of whether the motion for leave to amend the answer should be granted has been virtually ignored. Defendants' motion was unaccompanied by a memorandum of law, and plaintiff has submitted nothing in direct response to the motion. The issue is critical because, under Fed.R.Civ.P. 8(c), the affirmative defense of arbitration must appear in the answer, and "a party's failure to plead an affirmative defense bars its invocation at later stages of the litigation." Doubleday & Company, Inc. v. Curtis, 763 F.2d 495, 503 (2 Cir.1985) (citing Satchell v. Dilworth, 745 F.2d 781, 784 (2 Cir. 1984)). Thus, absent a ruling granting the motion for leave to amend, Fed.R.Civ.P. 15(a), the motions to compel arbitration and to stay cannot be granted; if the defense is not set forth in the answer, Dean Witter "already waived the right to litigate the issue." Doubleday, at 503.

Under Rule 15(a), "leave to amend shall be freely given when justice so requires," and should be granted absent "some justification for refusal." See Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962). However, the "proviso `when justice so requires' necessarily implies justice to both parties." Pollux Marine Agencies, Inc. v. Louis Dreyfus Corp., 455 F.Supp. 211, 215 (S.D. N.Y.1978). See also 6 C. Wright & A. Miller, Federal Practice and Procedure § 1485, at 420-21 (1971).

Three of the most important factors in determining whether to grant a motion to amend are (1) injustice to the party opposing the motion if the motion is granted; (2) injustice to the moving party if leave to amend is denied; and (3) delay, as well as the reason why the moving party did not include in its original pleading the material sought to be included in the amended pleading. Foman, 371 U.S. at 182, 83 S.Ct. at 227; 6 C. Wright & A. Miller, supra, § 1487, at 429. The factors of delay and injustice or prejudice to the opposing party if the motion is granted often are intertwined, as Judge Kaufman noted in Strauss v. Douglas Aircraft Co., 404 F.2d 1152 (2 Cir.1968): "it is manifest that risk of substantial prejudice increases in proportion to the length of the defendant's delay in seeking the amendment." Id. at 1155.⁴

Applying these factors to the facts of the instant case, leave to amend should not be allowed. First, prejudice and injustice to plaintiff are apparent if the motion is granted. He has engaged in comprehensive and expensive discovery, motion practice, and other proceedings preparatory to a trial in this forum.⁵ Second, it is not unjust or prejudicial to defendants for their motion to be denied. They will have a forum in this Court to raise their defenses to plaintiff's claims. Defendants have already expended substantial sums for discovery in this forum, so that the only additional expense to be incurred is the expense of trial. Finally, although "delay alone is not a sufficient reason for denying leave," 6 C. Wright & A. Miller, supra, § 1488, at 438; see Hanson v. Hunt Oil Co., 398 F.2d 578, 582 (8 Cir.1968), in this case the delay is overwhelming and undue. Defendants have not proffered a persuasive reason for the blatantly tardy filing of the motion for leave to amend.⁶ The motion to amend was filed after this case was assigned for trial three times, and only three days before a jury was to be selected in this three-year-old case.

For these reasons, the Court finds that under the facts of this case it would be unfair and unjust to grant defendants' motion for leave to amend.

III.

Even if the motion for leave to amend was granted, however, the Court would not grant Dean Witter's motions to compel arbitration and for a stay.

A

The parties' positions on the arbitration issue may be summarized briefly as follows. Dean Witter claims that under the Supreme Court's decision in Dean Witter Reynolds, Inc. v. Byrd, ___ U.S. ___, 105 S.Ct. 1238, 84...