REPORT AND RECOMMENDATION
G. DONALD HANEKE, UNITED STATES MAGISTRATE
This matter has been referred to me by the Honorable Maryanne Trump Barry. I have read and considered all papers submitted. Additionally, I have provided both parties with a copy of an unpublished opinion upon which I have relied in reaching my decision. See, Frankel v. Shearson Lehman Brothers, Inc., et al., No. 86-2520 (D.N.J. Nov. 2, 1987) I hereby report the following facts and recommend that defendants' motion to compel arbitration be granted
The present motion arises from a complaint filed March 30, 1987. Willis alleges that Zim, an account executive of Paine Webber, conducted excessive and unauthorized trading activity in plaintiff's account for the sole purpose of obtaining substantial commissions for Zim and Paine Webber without regard to the financial impact upon plaintiff This is a practice commonly known as "churning." in addition to this "churning" scheme, plaintiff alleges that Zim made material misstatements of fact to plaintiff regarding the status and type (i.e. margin) of account, statements upon which plaintiff relied in maintaining her account with Paine Webber.
The First Count of the Complaint alleges violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78, and Rule 10b-5, 17 C.F.R. 240.10b-5 and Section 20(a) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78t. The remaining three counts allege pendent common law claims of fraud and breach of fiduciary duty (Second Count), negligence (Third Count) and negligent misrepresentation (Fourth Count). In this motion, defendants move (1) to compel arbitration of all state law claims and to strike the claim for punitive damages; (2) to compel arbitration of the federal securities law claims or to stay this case pending arbitration of the state law claims; (3) in the alternative, to dismiss the federal law claims for failure to plead fraud with specificity, as required by Fed.R.Civ.P. 9(b), or to otherwise state a cause of action under the theories alleged, in violation of Fed.R. Civ.P. 12(b)(6). In recognition of the recent decisions of the United States Supreme Court in Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 84 L. Ed. 2d 158, 105 S. Ct. 1238 (1985); and Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 107 S. Ct. 2332, 96 L. Ed. 2d 185 (1987), plaintiff does not oppose that part of the motion which seeks to compel arbitration of the state law claims. Accordingly, I recommend that defendant's motion to compel arbitration of the Second, Third and Fourth Counts be granted.
Violations of Section 10 and Rule 10b-5
The United States Supreme Court in Shearson/American Express v. McMahon, 482 U.S. 220, 107 S. Ct. 2332, 96 L. Ed. 2d 185 (1987) held that claims under Section 10b of the Securities Act of 1934 are arbitrable where there is in existence a valid predispute arbitration agreement. The essence of the present dispute is whether there is in existence a valid predispute agreement to arbitrate claims arising under federal securities laws. Plaintiff's opposition to the motion is based on the assertion that the predispute agreement specifically excludes arbitration of those federal claims. Therefore, I must first determine the boundaries of the predispute agreement. Before I proceed further, I must acknowledge my reliance on the unpublished decisions in Frankel v. Shearson Lehman Brothers, et al., No. 86-2520 (D.N.J. Nov. 2, 1987); and Campagna v. Shearson Lehman Brothers, Inc., et al., No. 86-4840 (Report and Recommendation Nov. 17, 1987) adopted (D.N.J. Dec. 2, 1987). The analysis and decision in those cases guides my decision in the instant case.
The arbitration clause at issue provides in pertinent part:
Any controversy between us arising out of or relating to this contract, or breach thereof, or any account(s) maintained by you, (except any claim for relief by a public customer for which a remedy may exist pursuant to an expressed or implied right of action, under the federal securities laws), shall be settled by arbitration . . . .*
Plaintiff asserts that the arbitration clause is "clear on its face" and thus must be enforced as written without reference to extrinsic facts. See, Buono Sales, Inc. v. Chrysler Motors Corp., 239 F. Supp. 839 (D.N.J. 1965), rev'd on other grounds, 363 F.2d 43 (3d Cir. 1966), cert. denied, 385 U.S. 971, 17 L. Ed. 2d 435, 87 S. Ct. 510 (1966). I disagree. The ambiguity is created by the "may exist" language in the instant arbitration clause. I could have found the contract to be clear and unambiguous if it had read: Any controversy between us . . . (except any claim for relief by a public customer for which a remedy exists pursuant to an expressed or implied right of action under the federal securities laws), shall be settled by arbitration. . . . While the clause clearly means to limit arbitration, it is unclear from the language itself whether "may exists" specifically excludes the arbitration of Section 10 and Rule 10-b5 claims in light of the McMahon decision.
Defendant persuasively argues that the words "may exist" were intended and understood to mean "except such right of action in federal court as may be determined to exist by the federal courts." the United States Supreme Court has now settled the issue whether arbitration was mandated for 1934 Act claims by holding in McMahon that a public customer does not have an existing express or implied right of action to proceed in federal court in the presence of an otherwise enforceable arbitration agreement. I agree with defendant that the term "may exists" can be viewed as "paralleling the evolving case law as it determined which securities disputes are arbitrable." Frankel v. Shearson Lehman Brothers, et al., No. 86-2520 (D.N.J.) Accordingly, those federal securities law claims would then be removed from the exclusion from arbitration. Id.
Plaintiff asserts that even if the clause is ambiguous, under standard contract analysis, that ambiguity would be construed against the drafter, in this case, defendant, Paine Webber. However, in Frankel, supra, Judge Bissell, when faced with this same issue, concluded that this clause must be interpreted within the context of arbitration. Id. at 7. "[W]hen contract language is ambiguous or unclear, a healthy regard for the federal policy favoring arbitration requires that any doubts concerning the scope of arbitrable issues be resolved in favor of arbitration." Id. at 7, quoting Barrowclough v. Kidder Peabody and Company, Inc., 752 F.2d 923, 938 (3d Cir. 1985) citing Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. at 24-25. In the Frankel case, Judge Bissell held that the language in the arbitration clause did not exclude arbitration of Section 10 and Rule 10b-5 claims.
Plaintiff argues that arbitration of a federal securities law claim is only mandated when there is in existence a signed customer agreement containing an arbitration clause requiring the customer to arbitrate federal securities claims. However, a customer agreement to that effect was barred by SEC Rule 15c 2-2, 17 C.F.R. § 240.15c 2-2. That rule provided:
It shall be a fraudulent, manipulative or deceptive act or practice for a broker or dealer to enter into an agreement with any public customer which purports to bind the customer to the arbitration of future disputes between them arising out of the federal securities laws, or to have in effect such an agreement, pursuant to which it effects transactions with or for a customer.
This rule has now been rescinded in light of the evolving case law. SEC Rescinds Fraud Arbitration Rule, Fed. Sec. Law Rep. (CCH) No. 1255, at 1 (October 21, 1987). In Frankel, Judge Bissell concluded that "the legislative history and the fact that the rule has been rescinded clearly indicates that the rationale for the rule was the Commission's assumption [based on Wilke v. Swan, 346 U.S. 427, 98 L. Ed. 168, 74 S. Ct. 182 (1953)] that Federal Securities claims were non-arbitrable." Frankel v. Shearson/Lehman Brothers, Inc., supra, at 6. Judge Bissell found that Shearson/Lehman had attempted to construct an arbitration clause that would place a public customer on notice that the requirement of arbitration would exclude only those certain federal securities claims which the Supreme Court held to preclude arbitration. Once the Supreme
Court in McMahon removed Section 10 and Rule 10b-5 claims from the exclusion from arbitration, if there was a valid predispute arbitration agreement, then those claims must be arbitrated.
I agree with Judge Bissell's analysis. In the instant case it seems clear that the arbitration close only meant to exclude from arbitration those federal securities claims which the Supreme Court held to be non-arbitrable. With McMahon now in effect, Section 10 and Rule 10b-5 claims are subject to arbitration.
Based on the foregoing, I find that the language in the arbitration clause does not exclude arbitration of plaintiff's Section 10 and Rule 10b-5 claims. In light of McMahon, I hereby recommend that plaintiff's Section 10 and Rule 10b-5 claims (First Count) be submitted to arbitration.
Violation of Section 20, 15 U.S.C. § 78t
The First Count also sets forth a claim for violation of Section 20(a) of the Securities and Exchange Act of 1934. Section 20(a) deals with the liability of controlling persons and provides:
(a) Joint and several liability; good faith defense. Every person who, directly or indirectly, controls any person liable under any provision of this title or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.
In an extensive analysis of the arbitrability of Section 20 claims in Frankel, supra, at 13, Judge Bissell noted the strong federal policy favoring arbitration and the statutory safeguard inherent in the authority granted the Securities and Exchange Commission. He concluded that claims alleging violations of 15 U.S.C. § 78t were arbitrable. Relying on his analysis and conclusion, I hereby recommend that the First Count, alleging violations of 15 U.S.C. § 78t be submitted to arbitration.
As I have recommended that defendants' motion to compel arbitration of the federal securities claims be granted, I need not address than part of the motion seeking a stay while plaintiff arbitrates her state law claims. Furthermore, in light of my recommendation, I need not address defendants' motion to dismiss Count One because fraud is not pled with the specificity required under Fed.R.Civ.P. 9(b) and because the count does not contain information sufficient to state a claim for which relief may be granted as required by Fed.R.Civ.P. 12(b)(6).
Defendants have also moved to strike the claim for punitive damages asserted in Count Two. Count Two alleges state law claims of fraud and fiduciary duty. As the parties have both agreed, this count will be submitted to arbitration. Moreover, as plaintiff has correctly pointed out, although she cannot assert a claim for punitive damages under federal securities laws, see e.g. Straub v. Vaisman & Co., Inc., 540 F.2d 591 (3d Cir. 1976); Hadad v. Deltona Corp., 535 F. Supp. 1364, 1370-71 (D.N.J. 1982), aff'd 725 F.2d 668 (3d Cir. 1983); that does not deprive her of such rights as she may have to assert a claim for punitive damages under state common law.
Finally, there is no suggestion in defendants' papers that the contract's arbitration clause is not broad enough to empower an arbitration panel to award punitive damages. Therefore, I do not address this issue. See, Willoughby Roofing and Supply v. Kajima Intern., 776 F.2d 269 (11th Cir. 1985). Accordingly, defendants' motion to strike the claim for punitive damages in Count Two is denied.
ALFRED M. WOLIN, UNITED STATES DISTRICT JUDGE
This matter was decided on the papers pursuant to Rule 78 of the Federal Rules of Civil Procedure.
This matter is before the Court on defendant's motion to compel arbitration of state and federal law claims or alternatively to dismiss plaintiff's complaint. By a report and recommendation dated January 19, 1988, the Magistrate recommended that defendant's motion to compel arbitration be granted. On February 1, 1988 plaintiff's counsel filed an objection to this recommendation. For the reasons set forth below, this Court adopts the report and recommendation of the Magistrate.
On March 30, 1987, plaintiff, Yvonne Willis, filed a complaint against securities broker Nilda Rubiera-Zim and Paine, Webber, Jackson & Curtis, the firm by which Zim is employed. The complaint pleads four causes of action. Count One sets forth a claim under the Securities & Exchange Act of 1934 for violations of Sections 10(b) and 20(a), as well as Rule 10b-5 of the Securities & Exchange Commission, based upon allegations of unsuitable trading, churning, and unauthorized trading within plaintiff's account for the sole purpose of obtaining commissions for Zim and Paine Webber. Counts Two through Four allege state law claims of common law fraud and breach of fiduciary duty, negligence, and negligent misrepresentation, respectively. Specifically, plaintiff contends that Zim made material misstatements of fact to plaintiff regarding the status and type of account, and that plaintiff relied upon such statements in maintaining her account with Paine Webber. In addition, plaintiff seeks compensatory damages, costs, and punitive damages with respect to Count Two.
Defendants presently move to (1) compel arbitration of all state law claims and strike the claim for punitive damages; (2) compel arbitration of the federal securities law claim or stay this case pending arbitration of the state law claims; (3) in the alternative, dismiss the federal law claim for failure to plead fraud with specificity as required by Fed. R. Civ. P. 9(b), or to otherwise state a cause of action for which relief can be granted pursuant to Fed. R. Civ. P. 12(b)(6).
As plaintiff does not object to the part of defendant's motion which seeks to compel arbitration of the state law claims, defendant's motion to compel arbitration of the Second, Third and Fourth Counts is granted.
A. Compulsory Arbitration of Federal Law Claims
In light of the recent decision of the U.S. Supreme Court in Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 96 L. Ed. 2d 185, 107 S. Ct. 2332 (1987), claims under Section 10(b) of the Securities Exchange Act are arbitrable where a valid predispute arbitration agreement has been entered into by the parties. Plaintiff in the instant matter claims that there is no agreement in existence which compels arbitration of its federal securities claims.
Defendant contends that plaintiff signed three contracts in which she agreed to arbitration on identical terms. One such contract, a client option agreement and qualification form dated March 11, 1985, provides in part:
Any controversy between us arising out of or relating to this contract, or breach thereof, or any account(s) maintained by you, (except any claim for relief by a public customer for which a remedy may exist pursuant to an expressed or implied right of action, under the federal securities laws), shall be settled by arbitration
(Client Option Agreement, para. 18) (emphasis supplied).
Plaintiff contends that this clause is clear on its face and should be enforced in accordance with its terms. However, the "may exist" language used in the agreement creates an ambiguity which makes it unclear whether the arbitration of Section 10 and Rule 10b-5 claims is meant to be excluded. Thus, the clause is not easily enforced on its face and requires some interpretation. As other courts have observed, "when contract language is ambiguous or unclear, a healthy regard for the federal policy favoring arbitration requires that any doubts concerning the scope of arbitrable issues be resolved in favor of arbitration." Frankel v. Shearson Lehman Brothers et al., No. 86-2520, slip op. at 7 (D.N.J. October 30, 1987) (quoting Barrowclough v. Kidder Peabody & Company, Inc., 752 F.2d 923, 938 (3d Cir. 1985) (citing Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25, 74 L. Ed. 2d 765, 103 S. Ct. 927 (1983)).
Defendant contends that the words "may exist" were intended and understood to mean "except such right of action in federal court as may be determined to exist by the federal courts." (Defendant's brief, at 7).
The issue of mandatory arbitration was recently addressed by this Court in Ryan v. Liss, Tenner & Goldberg Securities Corp., et al., 683 F. Supp. 480 (D.N.J. 1988). In that case a state court, having found an agreement to arbitrate in existence, granted defendant's motion to compel arbitration of plaintiff's state law claims. In a subsequent action before thin Court, defendant moved to compel arbitration of plaintiff's federal securities claims.
The arbitration agreement in Ryan concluded:
It is understood that this Agreement to arbitrate does not constitute a waiver of the right to a judicial forum where such waiver would be void under the securities laws and specifically does not prohibit the undersigned from pursuing any claim or claims arising under the federal securities laws in any court of competent jurisdiction.