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Patten Securities Corp. v. Diamond Greyhound & Genetics Inc.

argued: March 6, 1987.

PATTEN SECURITIES CORP., INC., APPELLANT
v.
DIAMOND GREYHOUND & GENETICS, INC., APPELLEE



ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY, D.C. Civil No. 86-1774.

Gibbons, Chief Judge, and Seitz and Aldisert, Circuit Judges.

Author: Gibbons

GIBBONS, Chief Judge:

Patten Securities Corp. (Patten) appeals from an order of the district court denying its motion for an order directing Diamond Greyhound & Genetics, Inc. (Diamond) to discontinue a pending arbitration proceeding, and granting Diamond's cross motion to dismiss or stay the instant action pending the resolution of that arbitration. We hold that we have appellate jurisdiction, and that the order should be affirmed.

I.

Diamond is a Colorado corporation engaged in the business of breeding and training greyhound dogs. Patten, a New Jersey corporation, is a securities broker/dealer, and a member of the National Association of Securities Dealers (NASD). Diamond negotiated to have Patten act as the coordinating underwriter for the sale of 200,000 units of Diamond shares and warrants at $4.50 per unit. These negotiations led to an agreement, dated October 15, 1985, in which Patten was designated as the coordinating underwriter, and in which the underwriters undertook to buy the 200,000 units at $4.50 per unit, subject to various conditions.

The sale of the securities never occurred. Patten contends that Diamond failed to perform several conditions precedent, and that some of Diamond's representations and warranties were unfulfilled. Diamond contends that Patten was obligated to purchase the securities, that Patten breached the underwriting agreement, and that Patten should pay damages for that breach.

As a NASD member, Patten is bound by its rules. NASD Rules of Fair Practice, Art. I, Sec. 5, para. 2005, reprinted in NASD Manual (CCH) 2011. NASD has adopted a Code of Arbitration Procedure under which a customer may compel arbitration of any dispute eligible for arbitration. NASD Code of Arbitration Procedures, Sec. 12, para. 3712, reprinted in NASD Manual (CCH) 3713. Contending that it is a public customer within the meaning of the Code of Arbitration, Diamond filed a statement of claim against Patten with the NASD Director of Arbitration on January 29, 1986. NASD accepted the claim and instituted arbitration proceedings. Patten, in an answer to the claim, contended that Diamond is not a public customer and the claim is not arbitrable.

Patten also filed a complaint in the district court against Diamond seeking a declaratory judgment that it has no liability to Diamond because no binding underwriting agreement exists. In the alternative, Patten contends that if an agreement exists, Diamond is in breach, or has failed to perform necessary conditions precedent to Patten's obligation. One Count also alleges that if there is a binding contract, Diamond failed to deliver certificates representing the securities at the time specified by the contract, and seeks compensatory damages for such nondelivery in an amount to be determined at trial. Federal jurisdiction is predicated on 28 U.S.C. ยง 1332 (1982), and it is alleged that the amount in controversy exceeds $10,000. Thus the declaratory judgment sought by Patten is a judgment that it is not liable to Diamond for money damages. The non-declaratory relief sought, alternatively, is money damages for Diamond's breach of contract.

Patten moved in the district court for an order compelling Diamond to discontinue the NASD arbitration. In support of this motion Patten urged: (1) that Diamond is not a public customer within the meaning of section 12(a) of the NASD Code of Arbitration Procedure, and thus could not compel arbitration; and (2) that even if Diamond is a public customer it waived the right to demand arbitration by agreeing in Section 14 of the Underwriting Agreement to a forum selection clause designating courts in New Jersey for suit. Diamond made a cross motion to dismiss the action for failure to state a claim upon which relief could be granted, or alternatively to stay the action pending the outcome of the arbitration proceeding. The district court entered the following order:

It is on this 2nd day of September, 1986 ORDERED that plaintiff's motion to compel defendant to discontinue the arbitration proceeding be and the same is hereby DENIED; and it is further

Ordered, that defendant's cross motion to dismiss is denied; and it is further

Ordered that the within action be and the same is hereby administratively terminated, pending the result of an arbitration proceeding involving the same parties now pending before the National Association of Securities Dealers in Denver, ...


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