Three Valleys Mun. Water Dist. v. E.F. Hutton & Co., Inc.

• Decision Date: 05 February 1991
• Docket Number: Nos. 89-55138,89-55664,s. 89-55138
• Citation: 925 F.2d 1136
• Parties: , Fed. Sec. L. Rep. P 95,786, RICO Bus.Disp.Guide 7701 THREE VALLEYS MUNICIPAL WATER DISTRICT; City of Lawndale; City of San Marino, City of Palmdale; Community Redevelopment Agency of the City of Palmdale, Community Redevelopment Agency of the City of Maywood, Plaintiffs-Appellees, v. E.F. HUTTON & COMPANY, INC., David J. Lane; Todd Melillo, Defendants-Appellants. THREE VALLEYS MUNICIPAL WATER DISTRICT, a municipal water district; City of Lawndale, a municipal corporation; City of San Marino, a municipal corporation; City of Palmdale, a municipal corporation; The Community Redevelopment Agency of the City of Palmdale, a public body, corporate and politic; Community Redevelopment Agency of the City of Maywood, a public body, corporate and politic, Plaintiffs-Appellants, v. E.F. HUTTON & COMPANY, INC., a Delaware corporation; E.F. Hutton & Company, Inc.; Shearson Lehman Hutton Inc., a Delaware corporation; First Investment Securities, Inc., an Arkansas corporation; William E. Parodi, Sr.; Frederick W. Parodi; David J. Lane; Todd Melillo; William F. Smith; Ed Oritz, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1136

925 F.2d 1136

59 USLW 2544, Fed. Sec. L. Rep. P 95,786,

RICO Bus.Disp.Guide 7701

THREE VALLEYS MUNICIPAL WATER DISTRICT; City of Lawndale;

City of San Marino, City of Palmdale; Community

Redevelopment Agency of the City of Palmdale, Community

Redevelopment Agency of the City of Maywood, Plaintiffs-Appellees, v. E.F. HUTTON & COMPANY, INC., David J. Lane; Todd Melillo,

Defendants-Appellants.

THREE VALLEYS MUNICIPAL WATER DISTRICT, a municipal water

district; City of Lawndale, a municipal corporation; City

of San Marino, a municipal corporation; City of Palmdale, a

municipal corporation; The Community Redevelopment Agency

of the City of Palmdale, a public body, corporate and

politic; Community Redevelopment Agency of the City of

Maywood, a public body, corporate and politic, Plaintiffs-Appellants, v. E.F. HUTTON & COMPANY, INC., a Delaware corporation; E.F.

Hutton & Company, Inc.; Shearson Lehman Hutton Inc., a

Delaware corporation; First Investment Securities, Inc., an

Arkansas corporation; William E. Parodi, Sr.; Frederick W.

Parodi; David J. Lane; Todd Melillo; William F. Smith;

Ed Oritz, Defendants-Appellees.

Nos. 89-55138, 89-55664.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Oct. 3, 1990.

Decided Feb. 5, 1991.

William W. Wynder and Mark Smith Flynn, Rutan & Tucker, Costa Mesa, Cal., for plaintiffs-appellees-appellants.

Jeffrey L. Friedman, Shearson Lehman Brothers, Inc., Office of the Gen. Counsel, New York City, for defendants-appellants-appellees.

Appeal from the United States District Court for the Central District of California.

Before PREGERSON, REINHARDT and HALL, Circuit Judges.

PREGERSON, Circuit Judge:

On March 31, 1988, plaintiffs filed an action against E.F. Hutton & Co. ("Hutton") alleging that, as a result of Hutton's wrongful conduct, plaintiffs lost over $8 million on their investment accounts. The district court granted Hutton's motion to compel arbitration of plaintiffs' claims based on RICO and state law violations, but denied the motion with respect to plaintiffs' federal securities law claims. The plaintiffs appeal the court's order compelling arbitration on their RICO and state law claims while Hutton appeals the portion of the order denying arbitration on plaintiffs' federal securities law claims. We reverse and remand.

I. BACKGROUND

In September 1986, the cities of Lawndale, San Marino, and Palmdale, and the Palmdale Redevelopment Agency ("Palmdale RDA") opened securities accounts with E.F. Hutton & Company, Inc. Hutton is the predecessor to Shearson Lehman Hutton, Inc. ¹ In November 1986, Three Valleys Municipal Water District ("Three Valleys") also opened a securities account with Hutton.

When they opened their securities accounts, each plaintiff entered into a Client Agreement with Shearson. The Client Agreements entered into by Lawndale, San Marino, Palmdale, and Palmdale RDA were each executed by Clarence Raymond Wood, who worked in various financial capacities for those entities. The Client Agreement entered into by Three Valleys was executed by Muriel F. O'Brien, the President of its Board of Directors. Each client agreement contained the following language:

ARBITRATION AGREEMENT

It is understood that the following agreement to arbitrate does not constitute a waiver of the right to seek a judicial forum where such a waiver would be void under the federal securities laws.

The undersigned agrees, and by carrying an account for the undersigned [Shearson] agrees, that except as inconsistent with the foregoing sentence, all controversies which may arise between us concerning any transaction or the construction, performance or breach of this or any other agreement between us, whether entered into prior, on or subsequent to the date hereof, shall be determined by arbitration.

On March 31, 1988, Lawndale, San Marino, Palmdale, Palmdale RDA, and Three Valleys (collectively "plaintiffs") filed their first amended complaint in the District Court for the Central District of California alleging that, as a result of Shearson's wrongful conduct, they lost a total of $8.279 million on their investment accounts. ² Pursuant to Secs. 3 and 4 of the Federal Arbitration Act, Shearson filed a motion to compel arbitration and to stay the federal proceeding. The plaintiffs opposed the motion on the ground that the client agreements are void because the individual who signed the agreements, Clarence Wood, did not have authority to bind plaintiffs. ³ Plaintiffs also argued that, even if they were bound to the client agreements, the arbitration clauses contained in such agreements did not cover claims arising under the federal securities law.

On January 11, 1989, the district court entered an order granting in part and denying in part Shearson's motion to compel arbitration. The district court held that (1) the question whether the signatory, Clarence Wood, had authority to bind plaintiffs should be submitted to an arbitrator; (2) plaintiffs' claims under Sec. 10(b) of the Exchange Act and Sec. 12(2) of the Securities Act are not arbitrable; and (3) that plaintiffs' claims under RICO and state law are arbitrable.

Shearson appeals the portion of the district court's order denying the motion for a stay and refusing to compel arbitration of the plaintiffs' federal securities law claims. Shearson's notice of appeal was timely filed on January 10, 1989. We have jurisdiction over the appeal pursuant to 9 U.S.C. Secs. 15(a)(1)(A) & 15(a)(1)(B).

Plaintiffs filed a petition for permission to appeal the portion of the district court's order compelling arbitration pursuant to 28 U.S.C. Sec. 1292(b). An order directing arbitration is not ordinarily appealable. See 9 U.S.C. Sec. 15(b)(2). The district court, however, certified the portion of its order directing arbitration for immediate interlocutory appeal. On June 22, 1989, we granted plaintiffs' request to appeal under 28 U.S.C. Sec. 1292(b). On that same day, plaintiffs perfected their appeal pursuant to Fed.R.App.P. 5(d). Thus, this court now has before it all issues regarding the arbitrability of the underlying dispute.

II. DISCUSSION

In its January 11, 1989 order, the district court directed arbitration on plaintiffs' RICO and state law claims, but refused to direct arbitration on plaintiffs' claims under Sec. 10(b) of the Exchange Act and Sec. 12(2) of the Securities Act. There are two issues in this appeal. First, the plaintiffs' contend that the Client Agreements containing the arbitration clauses are void because the signatory did not have authority to bind the plaintiffs. They argue that the district court erred in determining that the threshold issue whether the Client Agreements bind the plaintiffs must be decided by an arbitrator, rather than the district court. Second, assuming plaintiffs are bound to the contracts--and Three Valleys does not deny that it is--Shearson contends that the district court erred in ruling that plaintiffs' claims under Sec. 10(b) of the Exchange Act and Sec. 12(2) of the Securities Act are not arbitrable.

"This court reviews decisions regarding the validity and scope of arbitration clauses de novo." First Investors Corp. v. American Capital Fin. Serv., Inc., 823 F.2d 307, 309 (9th Cir.1987).

A.

Plaintiffs opposed Shearson's motion to stay the federal proceeding and to compel arbitration on the ground that the Client Agreements containing the arbitration clauses are void because the individual who signed the agreements, Clarence Wood, did not have authority to bind the plaintiffs. The district court held that the question whether plaintiffs are bound to the Client Agreements must be decided by the arbitrators. We need not address whether Wood had authority to bind the plaintiffs; rather, the issue before this court is who decides whether plaintiffs are bound to the contracts--an arbitrator or the district court.

Federal law preempts state law on issues of arbitrability. Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983). Under the Federal Arbitration Act ("Act"), 9 U.S.C. Secs. 1-15, "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability." Id. But "[a]rbitration is a matter of contract and a party cannot be required to submit any dispute which he has not agreed so to submit." AT & T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 648, 106 S.Ct. 1415, 1418, 89 L.Ed.2d 648 (1986) (citing Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582, 80 S.Ct. 1347, 1352, 4 L.Ed.2d 1409 (1960), and Steelworkers v. American Mfg. Co., 363 U.S. 564, 570-71, 80 S.Ct. 1343, 1364, 4 L.Ed.2d 1403 (1960)). Thus, "as with any contract, the parties' intentions control, but those intentions are generously construed as to issues of arbitrability." Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626, 105 S.Ct. 3346, 3354, 87 L.Ed.2d 444 (1985).

Shearson contends that Prima Paint Corp. v. Flood & Conklin Manufacturing Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967), controls the threshold issue of who determines whether plaintiffs are bound to the arbitration agreements. In Prima Paint, the parties entered into a contract containing an arbitration clause which provided that "[a]ny controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration." Id. at 398, 87 S.Ct. at 1803. Prima Paint later filed suit seeking rescission of the contract on the ground that Flood & Conklin had fraudulently represented that it was solvent and able to perform its contractual obligations, when in fact it was insolvent. Flood & Conklin sought to submit the issue of fraudulent inducement to contract to the arbitrators pursuant to the contract, and...