Rhoades v. Powell

Decision Date05 September 1986
Docket NumberNo. CV-F-85-549 REC.,CV-F-85-549 REC.
Citation644 F. Supp. 645
CourtU.S. District Court — Eastern District of California
PartiesFloyd B. RHOADES, Jr. and Audrey Rhoades, Plaintiffs, v. William T. POWELL, et al., Defendants.

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Timothy J. Buchanan, Dietrich, Glasrud & Jones, Fresno, Cal., for plaintiffs.

Marilyn Kaplan, Orrick, Herrington & Sutcliffe, San Francisco, Cal., for defendant Merrill Lynch.

Steven Shahbazian, Fresno, Cal., for defendant William T. Powell.

J. Douglas MacArthur, Crossland, Crossland, Chambers & MacArthur, Fresno, Cal., for defendant Paine Webber and C. Jordan Ball.

MEMORANDUM OF DECISION AND ORDER RE PETITION TO COMPEL ARBITRATION AND MOTION TO DISMISS

COYLE, District Judge.

Plaintiffs commenced this lawsuit in October 1985 naming as defendants William T. Powell, a stockbroker who handled plaintiffs' accounts at Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch") and later at Paine Webber, Inc. ("Paine Webber"), the managing supervisors of the Merrill Lynch and Paine Webber offices at which Powell was employed, and against the brokerage firms themselves. Plaintiffs allege that defendants' operation of the successive accounts at Merrill Lynch and Paine Webber violated section 17(a) of the Securities Act of 1933, 15 U.S.C. ? 77q(a); sections 10(b) and 15(c) of the Securities Exchange Act of 1934, 15 U.S.C. ?? 78j(b) and 78o(c); Rule 10b-5 promulgated by the Securities and Exchange Commission ("SEC"), and the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. ?? 1961-1968. The complaint also contains pendent state claims for common law fraud, negligent misrepresentation, breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing, rescission, and violation of California Corporations Code section 25401.

This matter is presently before the court on defendants' petition to compel arbitration and motion to dismiss. Following oral argument on May 12, 1986 the court placed the motions under submission. After due consideration of the written and oral arguments of the parties, the court grants the petition to compel arbitration in part and denies it in part. Because the court declines to stay the non-arbitrable claims, it also rules upon the motion to dismiss, granting the motion in part and denying it in part.

PETITION TO COMPEL ARBITRATION

Defendants Merrill Lynch and Hollis D. Anderson ("Anderson") (collectively "Merrill Lynch") petition the court to compel arbitration of all plaintiff's claims against them. Merrill Lynch further moves that this action be stayed until such arbitration is completed. Defendants Paine, Webber and Jordan Ball (collectively "Paine Webber") have filed a separate petition to compel arbitration under a separate customer agreement, but join in Merrill Lynch's legal arguments. The remaining defendant, William T. Powell, joins in the other motions to compel arbitration.

I.

In October 1982, plaintiffs opened a customer margin account with Merrill Lynch's office in Jackson, Mississippi. Defendant Powell was plaintiffs' account executive. Defendant Anderson was and is resident Vice President of Merrill Lynch's Jackson office.

Before opening their account with Merrill Lynch in October 1982, plaintiffs signed a written Customer Agreement. See Petition for Arbitration, Exhibit 1. Paragraph 11 of the agreement is an arbitration clause which reads:

It is agreed that any controversy between us arising out of your business or this agreement shall be submitted to arbitration conducted under the provisions of the Constitution and Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the National Association of Securities Dealers, Inc. as the undersigned may elect.... Arbitration must be commenced by service upon the other of a written demand for arbitration or a written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the undersigned does not make such designation within five (5) days of such demand or notice, then the undersigned authorizes you to do so on the behalf of the undersigned.

Plaintiffs moved from Mississippi to California in July 1983, and Powell left Merrill Lynch to work at Paine Webber. Plaintiffs then transferred their account to Paine Webber and executed a Client's Agreement, which contained the following arbitration clause:

15. Any controversy between us arising out of or relating to this contract or the breach thereof, shall be settled by arbitration, in accordance with the rules, then obtaining, of either the Arbitration Committee of the New York Stock Exchange, American Stock Exchange, National Association of Securities Dealers or where appropriate, Chicago Board Option Exchange of Commodities Futures Trading Commission, as I may elect. I authorize you if I do not make such election, by registered mail addressed to you at your main office within fifteen (15) days after receipt of notification from you requesting such election, to make such election in my behalf. Any arbitration hereunder shall be before at least three arbitrators and the award of the arbitrators, or of a majority of them, shall be final, and judgment upon the award rendered may be entered in any court, state or federal, having jurisdiction.

See Petition for Order Compelling Arbitration, Exhibit A.

Defendants have requested that plaintiffs submit their disputes to arbitration as provided in these arbitration provisions. Because plaintiffs have refused to do so, Merrill Lynch and Paine Webber each petition the court to enforce the arbitration clauses.

II.

Statutory authorization for the enforcement of arbitration clauses is found in section 2 of the Federal Arbitration Act, 9 U.S.C. section 2, which provides in part:

A written provision in any ... contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

The Arbitration Act evinces a strong national policy favoring arbitration, and any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration. See Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983). Arbitration agreements are enforceable absent a basis for revocation of the contractual agreement or in cases involving certain specifically exempted federal claims. See Dean Witter Reynolds v. Byrd, 470 U.S. 213, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985).

A. Pendent State Law Claims.

Claims 6-10 are pendent state claims and arise out of the same basic facts upon which the federal securities violations are based. Defendants assert that these claims are subject to arbitration because they arise out of the customer agreements, an argument that plaintiffs do not dispute.

This issue is controlled by Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985). There, a dentist sold his practice and invested the proceeds in securities through a broker-dealer. The value of the account declined substantially, and the investor filed a complaint against the broker-dealer for violations of federal securities laws and various state law provisions. The investor had signed an agreement to arbitrate any controversy arising out of the securities account, and accordingly, the broker/defendant filed a motion to sever the pendent state claims, to compel their arbitration, and to stay arbitration of those claims pending resolution of the federal court action. The district court denied the motion in its entirety and the Ninth Circuit affirmed.

The Supreme Court reversed, and held that

The Arbitration Act requires district courts to compel arbitration of pendent arbitrable claims when one of the parties files a motion to compel, even where the result would be the possibly inefficient maintenance of separate proceedings in different forums.

470 U.S. at 217, 105 S.Ct. at 1241, 84 L.Ed.2d at 163. (emphasis added). Thus, Byrd mandates this court to require arbitration of the pendent state claims, regardless of its disposition on the federal claims.

Plaintiffs offer no formal written opposition to arbitration of the state claims; indeed, they state that "as it pertains to plaintiffs pendent state claims under California law, the petition to compel arbitration likely should be granted." Plaintiffs' Opposition Memo, page 1. Plaintiffs then say that because the complaint contains federal claims that are not subject to arbitration, "the petitions to arbitration sic the federal claims must be denied." Id. Plaintiffs may be arguing by this cryptic passage that because the federal claims are non-arbitrable, the entire petition should be denied. That contention would be directly contrary to the holding in Byrd. More likely, plaintiffs are being equivocal on the state claims and not conceding the federal claims.

Plaintiffs' attorney, Timothy Buchanan, explains his position somewhat in a letter dated April 30, 1986 and directed to Marilyn Kaplan, counsel for defendant Merrill Lynch. Paragraphs two and three of this letter read:

Ms. Kaplan raised the legitimate point that plaintiffs' memorandum of points and authorities in opposition to the petition to compel arbitration equivocated on the arbitrability of the state claims, stating the claims `likely' would be subject to arbitration. I apologize for this unclear language, but at the time felt an outright concession of the point was unwarranted because I was still examining various
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    ...rights to litigate in federal court, and does not alone prevent arbitration of federal securities claims." Rhoades v. Powell, 644 F.Supp. 645, 655 n. 1 (E.D.Cal.1986); see also Woodyard v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 640 F.Supp. 760, 765-66 (S.D.Tex.1986); Steinberg, 635 F.......
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