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PRUDENTIAL SECS. INC. v. GO SUGIURA

January 18, 1994

PRUDENTIAL SECURITIES INCORPORATED, et al., Plaintiffs, GO SUGIURA, et al., Defendants.


The opinion of the court was delivered by: MILTON I. SHADUR

 Prudential Securities Incorporated, J. Frederic Storaska ("Storaska"), J. Frederic Storaska Management, Inc. d/b/a Corporate Executive Services and George Ball *fn1" (collectively "Prudential Securities," used here as a singular noun *fn1" ) have brought a Complaint for Declaratory Judgment against Go Sugiura and Kaoru Sugiura (collectively "Sugiuras"), "seeking an order declaring that they have no obligation to arbitrate claims previously released by the Sugiuras or claims ineligible for arbitration under the rules of the American Stock Exchange ("AMEX")" (Complaint P 1). Sugiuras responded with a motion pursuant to Federal Arbitration Act ("Act") § 3, 9 U.S.C. § 3, *fn2" "to compel arbitration and to stay this litigation until an arbitration shall be had on all of the Sugiuras' claims against the Plaintiffs, in accordance with the terms of the Agreement entered into by the parties."

 With the issues thus drawn, the parties have briefed their respective positions and the questions are ripe for decision. For the reasons stated in this memorandum opinion and order, this Court has determined that Sugiuras have the better of the dispute in one respect, while Prudential Securities prevails on the other controverted issue.

 Background3

 After opening two brokerage accounts with Prudential Securities in about May 1987 (Complaint P 9), Sugiuras engaged in extensive investments through those accounts (Complaint P 10 adverts to more than $ 3.3 million before August 23, 1987 *fn4" ). Their Client's Agreements included this Paragraph 14:

 
Any controversy arising out of or relating to my account, to transactions with or for me or to this Agreement or the breach thereof, and whether executed or to be executed within or outside of the United States, except for any controversy arising out of or relating to transactions in commodities or contracts related thereto executed on or subject to the rules of a contract market designated as such under the Commodity Exchange Act, as amended, shall be settled by arbitration in accordance with the rules then obtaining of either the American Arbitration Association or the Board of Governors of the New York Stock Exchange *fn5" as I may elect.

 Sugiuras' relationship with Prudential Securities extended over several years. As a result of dissatisfaction that arose when (as Sugiuras contend) Go Sugiura learned that Storaska--the original representative of Prudential Securities with whom Sugiuras dealt--had not carried out the investment representations he had made to them, Sugiuras transferred their accounts to another Prudential Securities broker.

 After a period during which Sugiuras had no further contact with Storaska (who had in the meantime left Prudential Securities), Sugiuras assert that in December 1992 Storaska called Go Sugiura to see whether Sugiuras were interested in settling on one of the investment deals that had turned sour--a specific limited partnership. According to Sugiuras, they signed what they believed were releases limited in that fashion, but what instead turned out to be general releases, based on Storaska's fraudulent misrepresentation that the releases covered only the single disputed item. Those January 28, 1993 releases (the "Releases," Complaint Ex. B) are the basis on which Prudential Securities urges that this Court should decide that no obligation to arbitrate exists at all.

 To understand the other issue posed by Prudential Securities in the current litigation, it is necessary to set out one of the provisions of AMEX's arbitration rules. Although Complaint 120 quotes only the first sentence of AMEX Rule ("Rule") 605(a), that selective quotation misleadingly omits the critical second sentence. Here is Rule 605 (a) in its entirety:

 
No dispute, claim, or controversy shall be eligible for submission to arbitration where six (6) years shall have elapsed from the occurrence or event giving rise to the act or dispute, claim or controversy. This Section shall not extend applicable statutes of limitations, nor shall it apply to any case which is directed to arbitration by a court of competent jurisdiction.

 Arbitrability of Sugiuras' Claims

 Prudential Securities invokes the general rule that the legal question of arbitrability is for the court and not the arbitrators to resolve--a kind of anti-bootstrapping principle. Because Prudential Securities contends that the Releases also extinguished Sugiuras' right to invoke the arbitration agreement that the parties had entered into, it would like this Court to cut off the AMEX arbitration at the pass.

 But that approach is at odds with more than three decades of judicial deference to the arbitral process whenever the parties have voluntarily selected that form of dispute resolution, as well as the most recent decision from our Court of Appeals in Sweet Dreams Unlimited, Inc. v. Dial-A-Mattress Int'l, Ltd., 1 F.3d 639 (7th Cir. 1993). *fn6" As Sweet Dreams, id. at 641 began its substantive discussion:

 
It is beyond peradventure that the Federal Arbitration Act embodies a strong federal policy in favor of arbitration. See, e.g., Moses H. Cone Mem. Hosp. v. Mercury Constr., 460 U.S. 1, 103 S. Ct. 927, 74 L. Ed. 2d 765 (1983). But the duty to arbitrate remains one assumed by contract, and we will ...

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