Sinva, Inc. v. Merrill, Lynch, Pierce, Fenner & Smith, Inc.

• Decision Date: 12 April 1966
• Docket Number: No. 65 Civ. 1566.,65 Civ. 1566.
• Citation: 253 F. Supp. 359
• Parties: SINVA, INC., Plaintiff, v. MERRILL, LYNCH, PIERCE, FENNER & SMITH, INCORPORATED, Defendants.
• Court: U.S. District Court — Southern District of New York

253 F. Supp. 359

SINVA, INC., Plaintiff, v. MERRILL, LYNCH, PIERCE, FENNER & SMITH, INCORPORATED, Defendants.

No. 65 Civ. 1566.

United States District Court S. D. New York.

April 12, 1966.

Jackson, Nash, Brophy, Barringer & Brooks, New York City, for plaintiff; Lawrence P. McGauley, John G. Lipsett, New York City, of counsel.

Brown, Wood, Fuller, Caldwell & Ivey, New York City, for defendant; Richard Conway Casey, New York City, of counsel.

FREDERICK van PELT BRYAN, District Judge:

In this action against a broker for damages arising out of alleged unauthorized transactions in sugar futures contracts for plaintiff's commodity account defendant has moved (1) under 9 U.S.C. § 3 to stay the action pending arbitration; (2) under Rule 12(f), F.R. Civ.P., to strike as immaterial the allegations of the third claim in the amended complaint charging violations of the Securities Act of 1933, and the Securities Exchange Act of 1934. 15 U.S.C. §§ 77a, 78a.

Plaintiff Sinva, Inc. (Sinva) is a Panamanian corporation having its principal place of business in Berne, Switzerland. It has no office in the United States. Sinva is engaged primarily in financing and investment in various projects in Italy. Pasquale Paolo Sepe, an Italian national, is its sole shareholder and managing agent. Defendant Merrill, Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch) is a Delaware corporation engaged in the brokerage and investment business with offices in major cities in this country and abroad. Its principal place of business is in New York.

Apart from the Federal Arbitration Act and other federal question claims asserted here, there is diversity jurisdiction in this case. 28 U.S.C. § 1332(a) (2).

In 1961 Sinva, acting through its agent Sepe, opened a commodity account with Merrill Lynch's Paris office. At all relevant times plaintiff has also maintained a securities account with the defendant's New York office. The amended complaint alleges three claims for relief arising out of transactions relating to these accounts.

First, it is alleged that on May 21, 1963, plaintiff had a position of 45 sugar futures contracts in its commodity account in Paris; that thereafter defendant purchased 77 additional contracts for the plaintiff's account and sold 5 others, all in contravention of plaintiff's express instructions; and that defendant refused to cancel these transactions despite plaintiff's disavowal. It is further alleged that defendant failed to make timely execution of plaintiff's instructions to sell its original position of 45 contracts.

The second claim repeats the prior allegations and further avers that the defendant has kept for itself the proceeds from the sale of the 45 contracts, together with the cash balance in plaintiff's commodity account at the date of the commencement of the unauthorized transactions. It is also alleged that the defendant converted $58,041.25 from plaintiff's New York security account, presumably to offset a deficiency in the Paris account resulting from losses sustained in the sugar futures commodity transactions.

The third claim, against which defendant's motion to strike is directed, alleges sundry violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. Defendant's conduct, as described in the prior allegations, is said to constitute a breach of fiduciary duty by a broker dealer towards its customer. It is further averred that this breach of duty, with the attendant conversion of plaintiff's property, amounted to a course of business which operated as a fraud on plaintiff in connection with the purchase or sale of securities. Plaintiff seeks damages of $196,621.46.

Defendant has moved to stay the action pending arbitration and to strike as immaterial the allegations charging violations of the federal securities acts.

1. The Motion for a Stay.

Under the Federal Arbitration Act this court is empowered to "stay the trial of the action until * * * arbitration has been had in accordance with the terms of the agreement." 9 U.S.C. § 3. In support of its motion for a stay under this section defendant places primary reliance upon the so-called "General Agreement" admittedly entered into by the parties here. By its terms this contract extends to all "securities and commodities" accounts the customer maintains with Merrill Lynch.¹ It incorporates the "rules and regulations" — presumably including the arbitration requirements — of the Exchange where the transactions were executed.

Furthermore, the parties agree that each of the sugar futures contracts here involved was executed on the standard London Raw Sugar Terminal Contract No. 2. Each of those contracts in turn "is subject to the Rules and Regulations of the United Terminal Sugar Market Association (the Association)." And, as the final step in defendant's argument, those rules contain an arbitration clause upon which the motion for a stay is premised.²

Plaintiff contends in essence that the parties have never entered into any agreement to arbitrate and more particularly an agreement to arbitrate the questions posed in this case. It urges that unauthorized acts of an agent could not have the effect of binding plaintiff as a party to an agreement on a London Raw Sugar Terminal Contract No. 2 form. For this reason it is argued that plaintiff never became bound to arbitrate under the rules of the Association with respect to these unauthorized transactions.³

Viewed in these terms, the issue is whether the parties ever executed an agreement to arbitrate, and if so, whether that agreement encompasses the dispute which is the basis of the lawsuit; or more narrowly, whether a controversy over the authority of an agent entering into a contract on behalf of a principal constitutes a "question or dispute arising under the Contract" within the meaning of the operative terms of the arbitration clause.

The parties have raised a threshold question on this motion as to whether federal law or New York law is applicable. The defendant recognizes that in order to qualify for the requested stay under federal law the contract in which the arbitration clause is contained must be one "evidencing a transaction involving commerce." 9 U.S.C. § 2; see Metro Indust. Painting Corp. v. Terminal Constr. Co., 287 F.2d 382, 384 (2 Cir.), cert. den., 368 U.S. 817, 82 S.Ct. 31, 7 L.Ed.2d 24 (1961). "Commerce" is defined in 9 U.S.C. § 1 to embrace "commerce among the several States or with foreign nations." In limine, then, an issue arises as to whether the sugar futures contracts involved here fall within these definitions.⁴

The form No. 2 contract on its face certainly evidences no agreement involving the foreign commerce of the United States. It simply states that an "undetermined number of lots of 50 tons each" were purchased or sold for the client's (Sinva's) account. And the facts developed in the papers submitted on these motions do not establish that the sugar futures are "contracts evidencing a transaction involving commerce." The agreements, whether authorized or not, were entered into in the name of an Italian citizen, who was the sole stockholder of a Panamanian corporation having its principal office in Switzerland, at the Paris office of the defendant, a Delaware corporation. The contracts called for the purchase and sale of sugar for future delivery on the London Commodities Exchange.

The only connection with the foreign commerce of this country is that the party who entered into these contracts on plaintiff's behalf is a United States corporation.⁵ Compare Robinson v. Bache & Co., 227 F.Supp. 456 (S.D.N.Y.1964). No transaction involving the foreign commerce of the United States was anticipated. See Metro Indust. Painting Corp. v. Terminal Constr. Co., supra, 287 F.2d at 387 (Lumbard, C. J., concurring). None resulted. See Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1, 192, 6 L.Ed. 23 (1824); John W. Johnson, Inc. v. 2500 Wisconsin Ave., Inc., 98 U.S.App.D.C. 8, 231 F.2d 761 (1956). Certainly if an American citizen, acting as an agent for an Italian national, entered into an agreement with an Englishman to construct a house in London, an arbitration clause in that agreement would not sweep the contract within the ambit of the Federal Arbitration Act. Even assuming Congress had the constitutional power to regulate the sugar futures contracts involved in the case at bar, it is plain that it had no intention to do so under § 2 of the Act.

Rejection of the asserted jurisdictional basis under the Federal Arbitration Act, however, has no significance for purposes of the ultimate disposition of this motion. This court in any event has diversity jurisdiction under 28 U.S.C. § 1332(a) (2).⁶ Moreover. the Federal Arbitration Act prescribes no "mere form of procedure," but rather "touches on substantive rights." Bernhardt v. Polygraphic Co., 350 U.S. 198, 202, 76 S.Ct. 273, 100 L.Ed. 199 (1956); see Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F.2d 402 (2 Cir. 1959), petition for cert. dismissed, 364 U.S. 801, 81 S.Ct. 27, 5 L.Ed.2d 37 (1960). Since I have held that the sugar futures contracts do not evidence transactions involving commerce within the meaning of the substantive provisions of the Act, under Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), this court will apply the law of the state from which the right to arbitration is claimed to derive. Thus New York law, including its choice-of-law rules, see Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941), determines whether the dispute involved in this case — the alleged unauthorized and improper action of Merrill Lynch — is referable to arbitration.

Despite overtones to the contrary in Auten v. Auten, 308 N.Y. 155, 124 N.E. 2d 99, 50 A.L.R.2d 246 (1954), New York for conflicts purposes treats issues concerning arbitrability as part of its "law of remedies," so that New York local law would apply in the case at bar,...