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MERRILL LYNCH, PIERCE, FENNER & SMITH v. BARCHMAN

February 28, 1996

MERRILL LYNCH, PIERCE, FENNER & SMITH, et al., Plaintiffs,
v.
ROBERT and LOIS BARCHMAN, et al., Defendants.



The opinion of the court was delivered by: SHADUR

 Merrill Lynch, Pierce, Fenner & Smith ("Merrill Lynch"), Laurie Jones Canady ("Canady") and Stephen Lyders ("Lyders") have brought this action pursuant to Federal Arbitration Act ("Act") § 4, 9 U.S.C. § 4, to address several issues of claimed noncompliance with the arbitration agreement under which eight claimants *fn1" have brought a consolidated arbitration claim before the New York Stock Exchange ("NYSE"). *fn2" For the reasons stated in this memorandum opinion and order, Respondents' motion adverted to in n.3 is granted in part and denied in part.

 Factual Background *fn3"

 Although this dispute has a long and contentious history, its plot and present cast of characters are reasonably spare. Canady is a former Merrill Lynch financial consultant who, during her tenure at the firm's Davenport, Iowa office, allegedly exploited her relationship with eight of her investor-clients (now Claimants) to enrich herself and Merrill Lynch. Lyders was Canady's supervisor at Merrill Lynch. Essentially Claimants assert that from January 1982 through March 1990 Canady built up her clients' trust and then railroaded them into the excessive use of margin purchases, switched in and out of various investments to run up broker's fees, made riskier investments than were suitable for Claimants' "conservative" investment needs, and generally put her own (and Merrill Lynch's) financial interests ahead of Claimants'.

 At the outset of his or her relationship with Merrill Lynch, each Claimant signed a Cash Management Account agreement that included the following "Arbitration of Controversies" section (the "Arbitration Agreement"):

 
Except to the extent that controversies involving claims arising under the Federal securities laws may be litigated, I agree that any controversy arising out of your business or this Agreement shall be submitted to arbitration conducted according to the rules and procedures of the New York Stock Exchange, Inc. ("NYSE") or of the National Association of Securities Dealers, Inc. ("NASD") as I may elect.

 On March 6, 1992 Claimants invoked the Arbitration Agreement by filing a Claim in Arbitration with NYSE in which they proposed to act as representatives of a class of 600 investors that Canady had allegedly bilked. NYSE rejected the class action aspect of that claim. Then in October 1992 the nine original sets of Claimants filed the First Amended Claim in Arbitration ("First Amended Claim") at issue here, requesting that their individual claims be heard in a consolidated proceeding. Their First Amended Claim includes five counts: churning, common law fraud, breach of fiduciary duty, failure to supervise and lack of suitability.

 Respondents did not immediately file an answer to either the original claim or the First Amended Claim. On both November 25, 1992 and December 15, 1992 Respondents' counsel wrote to NYSE's Senior Arbitration Counsel to protest Claimants' efforts to arbitrate their individual claims in one consolidated action (C. Ex. D). Nothing in the record indicates that NYSE responded to Respondents' protestations.

 Apparently the parties negotiated throughout 1993. Still not having received an answer to the First Amended Claim, on April 22, 1994 Claimants filed suit in an Iowa state court to compel arbitration. One week later Respondents brought suit in a New York state court to enjoin certain parts of the arbitration. That New York action was dismissed on the ground that the court lacked personal jurisdiction over Claimants (C. Ex. F at 16). On August 31, 1994 the Iowa state court declined to exercise jurisdiction over the motion to compel (C. Ex. G at 3).

 Finally an initial arbitration hearing was scheduled for December 1995. Before that hearing could take place Respondents filed this Complaint on November 7, 1995, asking this Court to:

 
1. hold that claims originating before October 1986 are not eligible for arbitration because Rule 603 imposes a six-year eligibility requirement, thus ordering the scope of the arbitration to be limited to that extent;
 
2. order Claimants to resubmit their consolidated claim as eight individual claims because the claims are inappropriate for consolidation under Rule 612(d); and
 
3. order Claimants to amend their claim to specify the relevant facts and remedies sought in compliance with Rule 612(a).

 Underlying Legal Principles

 Before this opinion turns to the issues raised by Respondents, it is useful to discuss briefly the underlying legal principles involved. While some of the specifics raised here are new, the general lay of the land--even though its directional arrows still need some reconciliation (see PaineWebber Inc. v. Hofmann, 984 F.2d 1372, 1381 (3d Cir. 1993) *fn4" )--is well mapped out. On the one hand there is a strong federal policy favoring arbitration ( AT&T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 650, 89 L. Ed. 2d 648, 106 S. Ct. 1415 (1986), quoting United Steelworkers of America v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582-83, 4 L. Ed. 2d 1409, 80 S. Ct. 1347 (1960)):

 
An order to arbitrate...should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute. Doubts should be resolved in favor of coverage.

 At the same time arbitration agreements are private contracts, so that courts should not force parties to arbitrate issues on which, or in a manner to which, they have not agreed ( id. at 648). When those two concepts are placed side by side, the rule that emerges is that courts should allow arbitration to take its course, but only when the parties have agreed to do so in a written arbitration agreement.

 Congress, via Act § 4, has given federal district courts the power to straddle those interrelated principles by enforcing the terms of written arbitration agreements. *fn5" But that role is limited by the federal policy favoring arbitration. Although courts do resolve the threshold questions of whether a valid arbitration agreement exists and whether the parties have agreed to arbitrate particular issues, both such resolutions being based on the terms of the written arbitration agreement ( Nielsen v. Piper, Jaffray & Hopwood, Inc., 66 F.3d 145, 148 (7th Cir. 1995)), the seminal case of John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 557, 11 L. Ed. 2d 898, 84 S. Ct. 909 (1964) *fn6" makes it clear that courts are not to reach out and micromanage the procedural aspects of arbitration:

 
Once it is determined...that the parties are obligated to submit the subject matter of a dispute to arbitration, "procedural" questions which grow out of the dispute and bear on its final disposition should be left to the arbitrator. *fn7"

 As Niro, 827 F.2d at 176 later pointed out, John Wiley expressly rejected a classic substance-procedure dichotomy, instead making the arbitrability of the underlying subject matter a threshold question that, when answered in the affirmative, leaves all other issues (whether otherwise characterizable as substantive or procedural) for the arbitrators to decide:

 
This court and others have heeded John Wiley and are slow to enter the thicket of deciding whether, under a particular...agreement reached by the private parties, an alleged violation of the agreement should be characterized as essentially "procedural" or "substantive." Federal courts face sufficiently daunting tasks trying to classify statutory requirements for purposes of the diversity jurisdiction. The prospect of conducting similar analyses of private...agreements counsels caution. We agree, therefore, that once it is determined that the underlying dispute concerns a subject matter covered by arbitration provisions, the court's only role is to order arbitration. The arbitrator should determine the effect of any "procedural" shortcomings of either party.

 Essentially John Wiley puts the district court in a role like that of a ticket-taker at an unreserved-seating entertainment event whose job is to check whether the parties have a valid ticket for the performance, but who has no responsibility to decide for example where the parties should sit once inside, what time the show should begin and whether the guests' complaints about the quality of the show are valid.

 With that framework in mind, it is time to turn to Respondents' claims. Though they make their specificity argument last, this opinion deals with that point first because it impacts on the six-year eligibility issue.

 Rule 612(a) and Specificity

 Rule 612(a) provides (emphasis added):

 
The Claimant shall file with the Director of Arbitration an executed Submission Agreement, a Statement of Claim together with documents in support of the claim and the required deposit. Sufficient additional copies of the Submission Agreement and the Statement of Claim and supporting documents shall be provided to the Director of Arbitration for each party and each arbitrator. The Statement of Claim shall specify the relevant facts and the remedies sought. The Director of Arbitration shall endeavor to serve promptly by mail or otherwise on the Respondent(s) one (1) copy of the Submission Agreement and one (1) copy of the Statement of Claim.

 Respondents contend that Claimants have not complied with that emphasized requirement. They urge that the First Amended Claim is a "cursory summary" that does not adequately "specify the relevant facts and the remedies sought." And they argue that this Court has the power to order compliance with Rule 612(a) because such compliance is a procedural prerequisite to arbitrating a claim.


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