Stone v. Doerge

• Decision Date: 02 May 2003
• Docket Number: No. 02-3873.,02-3873.
• Citation: 328 F.3d 343
• Parties: Avery J. STONE, as Trustee of the Anita M. Stone Family Trust and the Avery J. Stone Trust, Plaintiff-Appellee, v. David J. DOERGE, et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

328 F.3d 343

Avery J. STONE, as Trustee of the Anita M. Stone Family Trust and the Avery J. Stone Trust, Plaintiff-Appellee, v. David J. DOERGE, et al., Defendants-Appellants.

No. 02-3873.

United States Court of Appeals, Seventh Circuit.

Argued April 4, 2003.

Decided May 2, 2003.

Juris Kins (argued), Abramson & Fox, Chicago, IL, for Plaintiff-Appellee.

Christopher L. Gallinari (argued), Bellows & Bellows, Chicago, IL, for Defendants-Appellants.

Before POSNER, EASTERBROOK, and ROVNER, Circuit Judges.

EASTERBROOK, Circuit Judge.

Balis, Lewittes & Coleman, Inc., a broker-dealer, handled securities transactions for two trusts of which Avery Stone is the trustee. In some of these transactions, Bear Stearns Securities Corp. served as the clearing broker. In this suit under the federal securities laws, Stone contends that Balis and David Doerge (one of Balis's employees, who served as investment adviser to the trusts) committed fraud in connection with several private placements. (We refer to the defendants collectively as Balis.) Bear Stearns played no role in either the advice given or the execution of the private placements. Nonetheless, Balis contends that arbitration agreements between Stone and Bear Stearns preclude Stone's access to federal court. When the district court declined to stay the litigation pending arbitration, see 245 F.Supp.2d 878 (N.D.Ill. 2002), Balis filed an interlocutory appeal on the authority of 9 U.S.C. § 16(a)(1)(A).

Before Bear Stearns undertook to clear any of the trusts' purchases or sales of securities, it insisted that Stone agree to arbitrate any ensuing dispute. The contract that Stone signed with Bear Stearns commits the parties to arbitrate any "controversies arising between [the trusts] and any Bear Stearns entity or any broker for which Bear Stearns acts as clearing agent"; a separate clause makes entities such as Balis third-party beneficiaries of this promise, so that arbitration will be comprehensive. (It would make little sense to have disputes about a transaction litigated between the customer and the introducing broker in parallel with arbitration between the customer and the clearing broker.) Balis observes that it is a "broker for which Bear Stearns acts as clearing agent" and contends that Stone therefore must arbitrate any controversy the trusts may have with it, even if Bear Stearns played no role in the transactions and will not participate in the arbitration. The phrase "acts as clearing agent" is incomplete, however. It could be completed with the words "in any transaction" (Balis's preferred reading) or with the words "in the transaction subject to this dispute"; the district judge chose the latter reading as more sensible given the economic and linguistic context of the arbitration clause.

When reaching this conclusion, the district judge referred to New York law, to which the contract itself points. Balis nevertheless contends that any dispute about the scope or meaning of an arbitration clause must be resolved under federal law, starting with the text of the Federal Arbitration Act and continuing with federal common law to the extent that the Act does not resolve a given controversy. If this were so, however, then any demand for arbitration would arise under federal law, supporting jurisdiction under 28 U.S.C. § 1331; yet it is settled that federal courts have jurisdiction over suits seeking to compel arbitration (or enforce awards) only if the parties are of diverse citizenship, or some grant of jurisdiction other than § 1331 applies. See, e.g., Minor v. Prudential Securities, Inc., 94 F.3d 1103, 1104-05 (7th Cir.1996). Thus most interpretive disputes must be resolved under state law. Federal law does affect, however, the extent to which state law may specify special rules for arbitration: any rule of state law disfavoring or prohibiting arbitration for a class of transactions is preempted, see Southland Corp. v. Keating, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984), "save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. Thus generally applicable rules of New York contract law govern, but any rules of state law that give special treatment to arbitration agreements are inapplicable. Some of the state opinions to which the district court referred read as if they state special rules for arbitration, and to that extent they must give way. Remaining principles of New York law just tell courts to enforce the parties' bargain and need not be discussed separately.

Stone does not contend that the agreement is invalid; he argues only that as a matter of normal interpretive principles it does not cover this dispute. Balis contends that federal law supplies a strong presumption in favor of arbitration, but as interpretive rules in contract cases come from state law this is a non-starter. Nothing in the Federal Arbitration Act overrides normal rules of contractual interpretation; the Act's goal was to put arbitration on a par with other contracts and eliminate any vestige of old rules disfavoring arbitration. Arbitration...