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STONE v. DOERGE

October 15, 2002

AVERY J. STONE, AS TRUST OF THE ANITA M. STONE FAMILY TRUST AND AVERY J. STONE TRUST, PLAINTIFF,
V.
DAVID DOERGE, DAVID DOERGE D/B/A DOERGE CAPITAL MANAGEMENT, AND BALIS, LEWITTES & COLEMAN, INC., DEFENDANTS.



The opinion of the court was delivered by: Amy J. St. Eve, District Judge.

MEMORANDUM OPINION AND ORDER

Defendants Balis, Lewittes & Coleman, Inc., David Doerge, and David Doerge d/b/a Doerge Capital Management Company petition, pursuant to 9 U.S.C. § 1, et seq., for an order compelling Plaintiff Avery J. Stone, as trustee of the Anita M. Stone Family Trust and Avery J. Stone Trust, to arbitrate the issues in Stone's pending complaint against Defendants and to dismiss or stay the instant litigation. For the reasons set forth below, Defendants' petition is denied.

BACKGROUND

Plaintiff Avery J. Stone serves as the trustee for two brokerage accounts opened with Bear Stearns Securities Corporation ("Bear Stearns") in January 1995: the Anita M. Stone Family Trust and the Avery J. Stone Trust (collectively, the "Stone Trusts"). Avery Stone, as trustee, executed Professional Account Agreements with Bear Stearns for each of the Stone Trusts. Defendant Balis, Lewittes & Coleman, Inc. ("BLC") served as the introducing broker for these accounts, and Bear Stearns acted at the clearing agent for BLC. Defendant David Doerge was an employee of BLC who acted as an investment adviser to the Stone Trusts. Further, Doerge Capital Management is a division of BLC.

In addition to serving as an investment advisor to the Stone Trusts, purchasing and selling securities which were processed and held by Bear Stearns as a clearing agent, Doerge also sold the Stone Trusts private investments involving various limited partnerships or limited liability companies. Bear Stearns did not serve as the clearing agent for these private investment transactions. It is the sale of these private investments that gives rise to this lawsuit.

Stone executed two Professional Account Agreements ("the Account Agreements") with Bear Stearns. The Account Agreements note that each "sets forth the terms and conditions under which subsidiaries of The Bear Stearns Companies Inc. will open and maintain account(s) in your name and otherwise transact business with you." (See R. 8-1, Pet. to Compel Arbitration and to Dismiss or Stay Litigation, at Ex. B.) Each Account Agreement mandates arbitration of "controversies arising between you and any Bear Stearns entity or any broker for which Bear Stearns acts as clearing agent . . ." (Id. at ¶ 24 (emphasis added).) Finally, the Account Agreements provide the "broker and its employees are third-party beneficiaries of this Agreement and that the terms and conditions hereof, including the arbitration provision, shall be applicable to all matters between or among any of you, your broker and its employees and Bear Stearns and its employees." (Id. at ¶ 9 (emphasis added)).

Defendants petitioned the court to compel arbitration and stay the pending litigation. On July 31, 2002, Judge Lefkow denied the petition to compel and stayed the petition to stay the proceedings. Because the Defendants chose New York under the Account Agreements' forum selection clause and because only a court in the district of the forum where the arbitration will occur can compel arbitration, Judge Lefkow concluded that she could not compel arbitration. Judge Lefkow, however, granted Defendants' petition for a stay, staying the lawsuit until October 1, 2002.

Defendants subsequently requested that Plaintiff select a forum for arbitration, and Plaintiffs announced that if the Court determined that the dispute was subject to arbitration, they would select the Chicago, Illinois office of the National Association of Securities Dealers as the forum. On August 30, 2002, the case was transferred from Judge Lefkow to this Court by Executive Committee order.

ANALYSIS

Defendants argue that the Account Agreements require the Plaintiffs to arbitrate the present controversy. Defendants seek to compel the Plaintiff to proceed in arbitration and to stay the lawsuit pursuant to the Federal Arbitration Act ("FAA").

A. The Applicable Standard

The FAA reflects a "strong federal policy favoring arbitration as a means of dispute resolution." Morrie & Shirlee Mages Foundation v. Thrifty Corp., 916 F.2d 402, 405 (7th Cir. 1990); see also Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 625-26, 105 S.Ct. 3346, 3353, 87 L.Ed.2d 444 (1985) ("`The preeminent concern of Congress in passing the [FAA] was to enforce private agreements into which parties had entered,' a concern which `requires that we rigorously enforce agreements to arbitrate.'") (citations omitted). Accordingly, "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability." Moses H. Cone Memorial Hospital v. Mercury Construct. Corp., 460 U.S. 1, 24-25 (1983).

Even though federal policy favors arbitration, an enforceable agreement to arbitrate must first exist between the parties before the courts can compel arbitration. Adamovic v. METME Corp., 961 F.2d 652, 654 (7th Cir. 1992); Graphic Communications Union, Local No. 2 v. Chicago Tribune, 794 F.2d 1222, 1225 (7th Cir. 1986) ("[I]t is equally clear that, since the duty to arbitrate is a contractual obligation, federal courts lack the authority to compel a party to arbitrate in the absence of an agreement to do so."); see also AT&T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 648-49 106 S.Ct. 1415, 1418, 89 L.Ed.2d 648 (1986) ("[A]rbitrators derive their authority to resolve disputes only because the parties have agreed in advance to submit such grievances to arbitration.").

When deciding whether to compel arbitration, the court must determine that (1) there is a "valid agreement to arbitrate"; and (2) the "specific dispute falls within the substantive scope of that agreement." Grundstadt v. Ritt, No. 96 C 1857, 1996 WL 2197000, at *2 (N.D. Ill. April 26, 1996) (citing AT&T Technologies, 475 U.S. at 649, 106 S.Ct. at 1418-19). The interpretation of the contract is a question of law determined by the court. Florida East Coast Ry. v. CSX Transp. Inc., 42 F.3d 1125, 1128 (7th Cir. 1994). In order to determine whether a binding arbitration agreement exists, the court looks to state contract law principles. See First Options of Chicago, Inc. v. ...


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