Russolillo v. Thomson McKinnon Securities, Inc.

• Citation: 694 F. Supp. 1042
• Decision Date: 15 September 1988
• Docket Number: Civ. No. H-88-277 (PCD).
• Parties: Gary E. RUSSOLILLO, Individually and as Trustee v. THOMSON McKINNON SECURITIES, INC., et al.
• Court: U.S. District Court — District of Connecticut

694 F. Supp. 1042

Gary E. RUSSOLILLO, Individually and as Trustee v. THOMSON McKINNON SECURITIES, INC., et al.

Civ. No. H-88-277 (PCD).

United States District Court, D. Connecticut.

September 15, 1988.

Robert A. White, Elizabeth J. Stewart, Murtha, Cullina, Richter & Pinney, Hartford, Conn., for plaintiff.

Peter C. Schwartz, Gordon, Muri & Foley, Hartford, Conn., for Charles H. Howard, III.

Philip S. Walker, Day, Berry & Howard, Hartford, Conn., for Thomson McKinnon Securities, Inc. and James Daly.

John Huot, Tyler, Cooper & Alcorn, New Haven, Conn., for Michael Devine.

RULING ON MOTION TO COMPEL ARBITRATION

DORSEY, District Judge.

Facts and Procedural History

Plaintiff, Gary E. Russolillo, brings this action against two brokers, Charles H. Howard, III and Michael Devine, and their employer, Thomson McKinnon Securities, Inc. ("McKinnon"), to recover damages and to rescind various securities purchases made through two accounts with McKinnon. Plaintiff alleges that the individual defendants were not registered with the Connecticut Banking Commissioner as required by Connecticut law and that he is entitled, pursuant to Section 36-498 of the Connecticut Uniform Securities Act, to damages from the purchase through those accounts of any securities that were sold at a loss and to rescind purchases of any securities he has not sold.

Defendants move to compel arbitration and to stay or dismiss this action on the ground that the account agreements, allegedly signed by Russolillo, contained arbitration clauses which must be enforced under the Federal Arbitration Act, 9 U.S.C. §§ 1-14.

Discussion

I.

Section 2 of the Arbitration Act provides in relevant part that:

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 ... 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 "was intended to `reverse centuries of judicial hostility to arbitration agreements.'" Shearson/American Express v. McMahon, ___ U.S. ___, 107 S.Ct. 2332, 2337, 96 L.Ed.2d 185 (1987), quoting Scherk v. Alberto-Culver Co., 417 U.S. 506, 510, 94 S.Ct. 2449, 2452, 41 L.Ed. 2d 270 (1974). It is an expression of a "liberal federal policy favoring arbitration agreements." Moses H. Cone Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983). See also McMahon, 107 S.Ct. at 2337; Mitsubishi Motors v. Soler Chrysler-Plymouth, 473 U.S. 614, 625, 105 S.Ct. 3346, 3353, 87 L.Ed.2d 444 (1985); Southland Corp. v. Keating, 465 U.S. 1, 10, 104 S.Ct. 852, 858, 79 L.Ed.2d 1 (1984). "`The act was to assure those who desired arbitration and whose contracts related to interstate commerce that their expectations would not be undermined by federal judges, or, ... by state courts or legislatures.'" Southland Corp., 465 U.S. at 13, 104 S.Ct. at 859, quoting Metro Indus. Painting Corp. v. Terminal Constr. Co., 287 F.2d 382, 387 (2d Cir.1961). The Act creates a body of federal substantive law and "establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Moses H. Cone Hosp., 460 U.S. at 24-25, 103 S.Ct. at 941. See also McMahon, 107 S.Ct. at 2337. "The Arbitration Act, standing alone, therefore mandates enforcement of agreements to arbitrate statutory claims." Id.

Plaintiff asserts that he does not recall signing the account agreements, that the signatures do not appear to be his, and that he did not agree to arbitrate any disputes regarding amounts. Plaintiff's Affidavit ¶¶ 3, 8.

Paragraph 6 of both account agreements state:

It is agreed that any dispute, claim or controversy between Russolillo and McKinnon which does not arise out of the federal securities laws shall be resolved by arbitration....

In considering a motion to compel arbitration, the court's first inquiry is whether the parties agreed to arbitrate the dispute. Mitsubishi, 473 U.S. at 626, 105 S.Ct. at 3353; see also Prima Paint v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04, 87 S.Ct. 1801, 1805-06, 18 L.Ed.2d 1270 (1967) (stating that a federal court may only consider issues relating to the making and performance of the agreement to arbitrate itself when considering an application for a stay pending arbitration under 9 U.S.C. § 3). Section 4 of the Federal Arbitration Act provides that the court shall order the parties to proceed to arbitration only "upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue." However, "if the making of the arbitration agreement or the failure, neglect, or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereof. ... Where such an issue is raised, the party alleged to be in default may, ... on or before the return day of the notice of application, demand a jury trial on such issue...." 9 U.S.C. § 4. Parties cannot be compelled to arbitrate if no valid agreement to arbitrate exists. See McAllister Bros. v. A & S Transp. Co., 621 F.2d 519 (2d Cir.1980) (concluding that district court erred in not holding a trial on the issue of whether the defendants were bound by the agreement to arbitrate); Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., 636 F.2d 51 (3d Cir.1980) (remanding to determine whether an agreement was made and, if so, whether it included an agreement to arbitrate where plaintiff claimed there was no "meeting of the minds"); Interocean Shipping Co. v. National Shipping & Trading Corp., 462 F.2d 673 (2d Cir.1972) (remanding to determine whether parties had entered into a valid agreement to arbitrate); Donato v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 663 F.Supp. 669 (N.D.Ill. 1987) (ordering summary disposition of whether the document contained forged signatures); Dougherty v. Mieczkowski, 661 F.Supp. 267 (D.Del.1987) (ordering further proceedings on the existence of an agreement to arbitrate where plaintiffs alleged their signatures were forged); cf. Interbras Cayman Co. v. Orient Victory Shipping, 663 F.2d 4, 7 (2d Cir.1981) (remanding for trial on whether agency relationship existed to bind defendant to arbitrate).

Ordinary principles of contract law determine whether a valid agreement exists. Mitsubishi, 473 U.S. at 626, 105 S.Ct. at 3353. McAllister Bros., 621 F.2d at 522; Par-Knit Mills, 636 F.2d at 54-55; Dougherty, 661 F.Supp. at 275. "Thus, as with any other contract, the parties' intentions control, but those intentions are generously construed as to issues of arbitrability." Mitsubishi, 473 U.S. at 626, 105 S.Ct. at 3354. Courts must also determine whether the agreement to arbitrate includes a provision to arbitrate the claims in question. Id. at 628, 105 S.Ct. at 3354; McAllister Bros., 621 F.2d at 522. Here, the arbitration clause, if valid, is easily broad enough to encompass plaintiff's nonregistration claims.

Such an agreement must first be found to have been made. Plaintiff's affidavit sufficiently raises an issue of fact as to the existence of an agreement including the arbitration clause. 9 U.S.C. § 4. However, plaintiff has not made a timely demand for a jury trial of that issue. Id. Accordingly, this matter shall be heard on October 3, 1988, at 2:00 p.m., for the sole purpose of determining whether the account agreements were signed by him or by an agent with authority to sign them on his behalf. See, e.g., Interocean Shipping Co., 462 F.2d at 677 (remanding for trial on whether agents of defendants had authority to act for them); Dougherty, 661 F.Supp. at 275 (discussing issue of ratification of arbitration agreement); Interbras Cayman Co., 663 F.2d at 7 (genuine issue of fact as to agency relationship requires trial).

II.

Without intimating a view of the outcome of such a hearing, it is appropriate to reach the issue of whether defendants are entitled to compel arbitration if an arbitration agreement was entered into by the plaintiff. The parties have briefed the issue extensively and a resolution favorable to plaintiff would obviate the need for a hearing. On the other hand, resolution favorable to defendants would permit the case to go forward on the merits immediately after the hearing, either in arbitration or in this court.

Plaintiff first asserts that the account agreements are illegal and revocable under Conn.Gen.Stat. § 36-498(g)¹ and thus are excepted from the coverage of the Arbitration Act. However, § 36-498(g) does not by its terms revoke any contract, the performance of which would violate a provision of the Connecticut Securities Act. Rather, that section merely bars one who enters such a contract with knowledge of the illegality from basing any suit on the contract. In short, § 36-498(g) codifies the equitable doctrine of unclean hands. As defendants are not basing any cause of action on the contract, § 36-498(g) is inapplicable.

Moreover, even if the account agreements as a whole are unenforceable under the Connecticut Uniform Securities Act, the arbitration clause is severable from the underlying contract as a matter of federal law. Kroog v. Mait, 712 F.2d 1148, 1150-51 n. 1 (7th Cir.1983), cert. denied, 465 U.S. 1007, 104 S.Ct. 1001, 79 L.Ed.2d 233 (1984); S.A. Mineracao da Trindade-Samitri v. Utah Int'l, 576 F.Supp. 566, 570 (S.D.N.Y. 1983), aff'd, 745 F.2d 190 (2d Cir.1984); see Prima Paint Corp., 388 U.S. at 402-04, 87 S.Ct. at 1805-06. An allegation of general illegality or fraudulent inducement of the contract, not connected to the making of the agreement to arbitrate itself, is not sufficient to prevent application of Section 3 of the Arbitration Act. Prima Paint Corp., 388 U.S. at 403-04, 87 S.Ct. at 1805-06; Kroog, 712 F.2d at 1151 n. 1. Thus, since the claim of illegality or violation of public policy is not specifically directed to the arbitration...