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NATALIE KROOG v. STEVEN MAIT AND PAINE (07/15/83)

July 15, 1983

NATALIE KROOG, PLAINTIFF-APPELLEE,
v.
STEVEN MAIT AND PAINE, WEBBER, JACKSON & CURTIS, INC., A FOREIGN CORPORATION, DEFENDANTS-APPELLANTS



Appeal from the United States District Court for the Eastern District of Wisconsin. No. 82 C 363 -- Robert W. Warren, Judge.

Wood and Eschbach, Circuit Judges, and Campbell, Senior District Judge.*fn** Eschbach, Circuit Judge, dissenting.

Author: Wood

WOOD, Circuit Judge.

In this appeal, we are called on to decide whether a provision of the Wisconsin Uniform Securities Law which has the effect of negating an otherwise valid arbitration clause in a securities brokerage contract is preempted by Section 3 of the Federal Arbitration Act, 9 U.S.C. § 3, which requires that "if any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court . . . shall . . . stay the trial of the action until such arbitration has been had . . . ." Because this is a clear case of "actual conflict" between federal and state law as a result of which compliance with both is a "physical impossibility," Florida Lime and Avocado Growers, Inc. v. Paul, 373 U.S. 132, 141-43, 10 L. Ed. 2d 248, 83 S. Ct. 1210 (1963), we hold, contrary to the district court, that the Arbitration Act must prevail under the Supremacy Clause.

I.

Plaintiff-appellee originally commenced this action in the County Court for Milwaukee County, Wisconsin, seeking to recover losses in her securities brokerage account allegedly caused by defendants-appellees' conduct in violation of the Wisconsin Uniform Securities Law and in violation of the common law. The first cause of action alleged that defendant Mait, as an "agent," bought and sold securities in Wisconsin in violation of the registration requirements contained in the Wisconsin Uniform Securities Law, Wisc. Stat. §§ 551.31(1) and (2), 551.59(1). The second claim alleged that, because Mait was not properly registered, the brokerage contract between the parties was void and subject to rescission. The remaining three causes of action alleged defendants' liability under the common law theories of mismanagement, unsuitable purchases, excessive trading, and breach of fiduciary duty.

Defendants removed the action to federal district court on the basis of diversity. After answering the complaint, defendants moved to stay the proceedings and compel arbitration pursuant to paragraph 15 of the brokerage contract which provided,

Any controversy between us arising out of or relating to this contract or the breach thereof, shall be settled by arbitration in accordance with the rules, then obtaining, of either the Arbitration Committee of the New York Stock Exchange, American Stock Exchange, National Association of Securities Dealers or where appropriate, Chicago Board Option Exchange or Commodities Futures Trading Commission, as I may elect. I authorize you if I do not make such election, by registered mail addressed to you at your main office within fifteen (15) days after receipt of notification from you requesting such election, to make such election in my behalf. Any arbitration hereunder shall be before at least three arbitrators and the award of the arbitrators, or of a majority of them, shall be final, and judgment upon the award rendered may be entered in any court, state or federal, having jurisdiction. (emphasis added).

In further support of their motion to stay, defendants noted the requirements of the Federal Arbitration Act which provide,

If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.

9 U.S.C. § 3. Defendants argued that since the controversy at hand arose out of or related to the brokerage contract which was in interstate commerce, and was exactly the kind of dispute the arbitration clause was meant to deal with, the court was required to stay the action and compel arbitration.

Plaintiff opposed the motion to stay, arguing that submission of the dispute to arbitration was forbidden by the Wisconsin Uniform Securities Law, Wisc. Stat. § 551.59(8), which provided, "Any condition, stipulation or provision binding any person acquiring any security to waive compliance with any provision of this chapter or any rule or order hereunder is void." Submitting the dispute to arbitration, plaintiff argued (and defendants apparently conceded) would effectively deny plaintiff the protection of this non-waiver provision. And Congress, plaintiff argued, could not have intended the commands of the Arbitration Act to overcome such a provision forbidding arbitral waiver of state securities laws. In support of her argument, plaintiff noted that Section 15 of the Federal Securities Act of 1933 specifically forbade waiver of the protection of the Act's provisions, and that this section was subsequently held by the Supreme Court in Wilko v. Swan, 346 U.S. 427, 98 L. Ed. 168, 74 S. Ct. 182 (1953), to bar application of Section 3 of the Arbitration Act to stay actions arising under the Federal Securities Act in which the underlying contract contained an arbitration agreement. Plaintiff further argued that since Congress has specifically mandated dual federal-state regulation in the field of securities regulation through Section 18 of the 1933 Securities Act and Section 28(a) of the 1934 Exchange Act and Wisconsin has, pursuant to this authority, enacted an anti-waiver provision nearly identical to the federal provision which was held to eclipse the Arbitration Act in Wilko, surely under the pattern of legislative intent discerned in Wilko, Congress did not mean the federal Arbitration Act to overcome a state non-waiver provision promulgated pursuant to residual state securities regulation power.*fn1

The district court agreed with the plaintiff that the Federal Arbitration Act did not require that her first two claims alleging violation of the Wisconsin Securities Law be arbitrated in light of the anti-waiver provision contained in Wisc. Stat. § 551.59(8).*fn2 The district court began its analysis with the premise that

federal regulation of a field must not be deemed preemptive of state regulatory authority in the same field in the absence of good reason. The exercise by a state of its inherent police power, which would be perfectly valid in the absence of federal action, is not preempted unless the ...


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