Harris v. Shearson Hayden Stone, Inc. , 441 N.Y.S.2d 70 ( 1981 )

OPINION OF THE COURT

Sullivan, J.

Defendant Shearson Hayden Stone, Inc., a securities and commodities broker, sued by two of its customers, Dr. & Mrs. Harris, for breach of fiduciary duty in the handling of their commodities account, successfully moved at Special Term (102 Mise 2d 635) to compel arbitration and to stay the action pending determination of the arbitration proceeding. Plaintiffs have appealed. The issue is the arbitrability of the dispute.

The complaint is styled as a class action, putatively brought on behalf of “all of the commodity customers of ‘Shearson’, who during the period beginning January 1st, 1978 and thereafter continuing to date, maintained brokerage accounts at the offices [of] Shearson located in New York State, and were not given interest on funds held by. Shearson.” Two causes of action are alleged. The first charges defendant with the failure, even on request, to invest customers’ funds held by it, so as to allow interest to accrue for the benefit of its customers. The second cause of action revolves around defendant’s practice of making remittances to its customers who reside in New York by drawing checks on out-of-State banks, thereby receiving the benefit of a longer “float” period between the time the check is drawn and when it is ultimately presented for payment. Thus, in addition to having the use of the customers’ funds for the longer period of time that it takes for the checks to clear, defendant receives the additional interest derived therefrom, which presumably represents a significant sum when the aggregate number of all such transactions is considered. An accounting is sought for each of these causes of action as well as injunctive relief.

The underlying contract between the parties, known as a customer’s agreement, which both plaintiffs signed, calls for the arbitration of “[a]ny controversy arising out of or relating to” the customer’s accounts, the transactions between the parties or the agreement itself. At the top of the first page of the document, blocked off in capital letters and separated from the body of the agreement by over an inch of blank space is the caution, “please read carefully, sign and return.” Thus, we note initially that the facts here are not at all comparable to those in Matter of Riverdale Fabrics Corp. (Tillinghast-Stiles Co.) (306 NY 288) where enforcement of an arbitration agreement which was incorporated by reference into a contract was denied. The court noted that the form of language used in the standard contract “appears to have been designed to avoid any resistance that might arise if arbitration were brought to the attention of the contracting parties as the exclusive remedy in case of disputes.” (Supra, at p 292.)

Plaintiffs argue, instead, that the arbitration agreement is unenforceable because it is violative of Federal public policy which proscribes the use of a clause in a customer’s brokerage agreement which relegates to arbitration all future disputes between the parties. They also contend that the public policy of this State mandates that claims of fiduciary misconduct be subjected to judicial scrutiny and not mere arbitral review.

As evidence of the public policy against arbitration agreements between a securities broker and its customers, plaintiffs cite a release of the Securities and Exchange Commission which concluded that “ [r] equiring the signing of an arbitration agreement without adequate disclosure as to its meaning and effect violates standards of fair dealing with customers and constitutes conduct that is inconsistent with just and equitable principles of trade.” (Securities & Exch. Comm. Release No. 34-15984, 44 Fed Reg 40462, 40464 [No. 133, July 10, 1979].) We note that the release, issued more than two years after the partiesVéxecuted the customer’s agreement, does not propose the voiding of arbitration agreements such as the one here involved. Moreover, as is shown, infra, decisional law on the issue of the validity of arbitration provisions in customer’s - brokerage agreements provides neither a legal basis for, nor the compelling public policy argument to justify, the complete avoidance of this arbitration agreement.

In Matter of Bear, Stearns & Co. (Weiss) (104 Misc 2d 876, 878), upon which plaintiffs rely, the court held that an agreement which “fails to distinguish between disputes which are subject to arbitration and those which are not * * * is in contravention of Release No. 34-15984 and shall not be enforced by the court.” In so ruling, the court cited Wilco v Swan (346 US 427) which held that a predispute arbitration clause was not enforceable, when applied to a claim arising under the civil liability provisions of the Securities Act of 1933 (US Code, tit 15, § 77a et seq.) for alleged misrepresentation in the sale of securities. Noting that section 14 of the Securities Act (US Code, tit 15, § 77n) specifically prohibits any stipulation waiving compliance with any of the act’s provisions the Supreme Court found that “the intention of Congress concerning the sale of securities is better carried out by holding invalid * * * an agreement for arbitration of issues arising under the Act.” (Wilko v Swan, supra, at p 438.)

The statutory restriction on arbitration does not, however, apply to claims which do not involve a violation of the Federal securities laws. Thus, the Federal courts, faced with allegations of breach of fiduciary duty, have enforced the arbitration agreement between the parties, even where the arbitration agreement, like the one here, would, by its terms, appear to govern nonarbitrable claims under the Securities Act. (See, e.g., Matter of Conticommodity Servs. [Philipp & Lion}, 613 F2d 1222; Sibley v Tandy Corp., 543 F2d 540, 542-543, cert den 434 US 824; De Hart v Moore, 424 F Supp 55, 56-57.)

This court reached a similar conclusion in Barbi v Hutton & Co. (53 AD2d 562). There, the plaintiff loaned $77,000 to the defendant, a brokerage firm, pursuant to the terms of a cash subordination agreement which also provided that any controversy arising thereunder would be submitted to arbitration under the rules of the New York Stock Exchange. The plaintiff commenced an action on the contract. In response to the defendant’s motion for a stay of the action based on the arbitration clause, the plaintiff, asserting that the agreement was a security, contended that under Wilko (supra) she could not be compelled to arbitrate. In finding the arbitration provision controlling, we held: “Wilko is not the absolute bar to arbitration of security controversies claimed by the plaintiff. It is applicable, not to common-law actions such as this, but to claims arising under the Securities Act of 1933”. (Barbi v Hutton & Co., supra, at p 563, citing Scherk v Alberto-Culver Co., 417 US 506.) Thus, Wilko does not bar arbitration of the common-law claims which plaintiffs have asserted in this action.

Plaintiffs urge that on the basis of the decision in Matter of Bear, Stearns & Co. (Weiss) (104 Misc 2d 876, supra) this court should retreat from its earlier decision in Barbi (supra), depart from an unbroken claim of Federal court precedent, and hold that the present agreement to arbitrate is unenforceable for all purposes. As already noted, Weiss relied on a release issued by the Securities and Exchange Commission (Securities & Exch. Comm. Release No. 34-15984). Significantly, in the period since the issuance of the release, no court, with the exception of Weiss, has ever relied upon it to vitiate an arbitration agreement in a dispute limited to common-law claims. Where the claims asserted do not involve Securities Act violations, broad predispute arbitration clauses in brokerage house customer agreements continue to be enforced, even where no mention of nonarbitrability of Securities Act claims is made. (See Matter of Conticommodity Servs. [Philipp & Lion], 613 F2d 1222, supra.)

Moreover, adherence to the Barbi rationale does not result in a curtailment of any rights under the Securities Act. Under Wilko (346 US 427, supra) Federal securities claims must be litigated in a judicial forum. Where a complaint alleges both Federal securities and common-law claims, the court will stay adjudication of the Federal securities claims until the common-law claims are resolved in arbitration. (See Sibley v Tandy Corp., 543 F2d 540, 543-544, supra; see, also, Fox v Merrill Lynch & Co., 453 F Supp 561, 567.)^*

Plaintiffs also claim that the public policy of this State precludes arbitration of the present dispute. It is well established in New York that absent some prohibition derived from constitutional, statutory or common-law principles arbitration is a permissible forum for dispute resolution. (Matter of Port Jefferson Sta. Teachers Assn, v Brookhaven-Comsewogue Union Free School Dist., 45 NY2d 898, 899-900; Matter of Board of Educ. v Yonkers Federation of Teachers, 40 NY2d 268, 271.) Our courts have not hesitated to find certain issues outside the scope of arbitration. For instance, child custody cases, which require a sensitive balancing of factors determinative of a child’s best interests, have been held to be best left exclusively to the judicial process. (See Nestel v Nestel, 38 AD2d 942, 943.) The distribution of an estate cannot be the subject of arbitration. (Matter of Jacobovitz, 58 Misc 2d 330.) Criminal violations, for obvious reasons, have been excluded from the ambit of arbitration. (Matter of Goldmar Hotel Corp. [Morningside Studios], 283 App Div 935.) But the conduct of a fiduciary has never been held to fall within that class of issues which are nonarbitrable for public policy reasons. In fact, the Court of Appeals has explicitly found a claim of breach of fiduciary duty to be arbitrable. (See Matter of Lane [Abel-Bey], 50 NY2d 864.)

The dissenters view this appeal in terms of a conflict between two countervailing public policies, arbitration and class action. The difficulty with this analysis is that it overlooks the strong public policy which underlies arbitration. That policy, embodied in CPLR article 75 and the plethora of judicial decisions holding that arbitration must be compelled upon application, except in certain limited circumstances not applicable here, is succinctly stated in CPLR 7503 (subd [a]) : “Application to compel arbitration; stay of action. A party aggrieved by the failure of another to arbitrate may apply for an order compelling arbitration. When there is no substantial question whether a valid agreement was made or complied with * * * the court shall direct the parties to arbitrate.” The Court of Appeals has recognized that the grounds which may be asserted to defeat arbitration are limited. “When arbitration is invoked the only questions to be resolved by the courts (unless the dispute is barred by the Statute of Limitations) are whether ‘a valid agreement was made’ and whether such agreement was ‘complied with’ (CPLR 7503).” (Matter of Prinze [Jonas], 38 NY2d 570, 574.) Defendant established that a valid arbitration agreement had been made and that the conditions precedent to arbitration had been complied with. Indeed, plaintiffs have not offered any factual allegations addressed to either issue. Their only opposition to the application to stay arbitration was an affirmation by their attorney in which he argued that the agreement to arbitrate, made by plaintiffs individually, could not be binding on a class.

“[T]his State favors and encourages arbitration as a means of conserving the time and resources of the courts and the contracting parties.” (Matter of Nationwide Gen. Ins. Co. v Investors Ins. Co. of Amer., 37 NY2d 91, 95; see Matter of Maye [Bluestein], 40 NY2d 113.) Moreover, “[p]arties to a contract may agree, if they will, that any and all controversies growing out of it in any way shall be submitted to arbitration. If they do, the courts of New York will give effect to their intention.” (Matter of Marchant v Mead-Morrison Mfg. Co., 252 NY 284, 298.) “It has long been this State’s policy that, where parties enter into an agreement and, in one of its provisions, promise that any dispute arising out of or in connection with it shall be settled by arbitration, any controversy which arises between them and is within the compass of the provision must go to arbitration.” (Matter of Exercycle Corp. [Maratta], 9 NY2d 329, 334, citing cases.)

Of course, “ [n] o one is under a duty to arbitrate unless by clear language he has agreed to do so.” (Matter of Arthur Philip Export Corp. [Leatherstone, Inc.], 275 App Div 102, 104, citing cases.) “Though the principle of arbitration in commercial disputes is a sound one and should be encouraged, no one may be compelled to give up his right to resort to established judicial tribunals with all of their safeguards unless he has agreed by a writing to do so.” (Supra, at p 104.) Plaintiffs, however, do not claim that they did not voluntarily agree to arbitration. And, as already noted, the agreement itself cautions the contracting party to read the document before signing.

The dissenters would allow plaintiffs to avoid their agreement to arbitrate because they have alleged a breach of fiduciary duty, the consequences of which would adversely affect a significant number of defendant’s customers. No authority is cited to support the argument that the mere allegation of breach of fiduciary duty urged on behalf of a putative class justifies excusing a party from a contract validly made.

The proposition that by the naked assertion of such a claim a party can evade an arbitration agreement fails because it would require the rejection of arbitration for reasons other than those set forth exclusively in CPLR 7503. The dissent argues, however, that the significance of the availability of the class action device outweighs the substance of an otherwise valid agreement to arbitrate. CPLR 7503 allows for no such balancing of interests, and indeed specifically precludes any balancing not addressed to the validity of the agreement itself. Thus, although no case in this State has previously addressed the question of the effect of class action allegations on arbitrability, the CPLR provides a definitive answer to that question.

Even were a balancing of interests permissible, it is clear, however, as Special Term found (102 Mise 2d 635, swpra), that the interests favoring arbitration should prevail over those favoring the class action, both in general and in the present instance. In other jurisdictions where a weighing of interests has been undertaken, the courts have consistently held that arbitration will be compelled despite class action allegations. (See, e.g., Vernon v Drexel Burnham & Co., 52 Cal App 3d 706; Frame v Merrill Lynch, Pierce, Fenner & Smith, 20 Cal App 3d 668; see, also, Gordon v Thor Power Tool Co., 55 Ill App 2d 389.)

In Vernon v Drexel Burnham & Co. (supra) the facts were remarkably similar to those in the present action. The plaintiffs had brought a putative class action against Drexel Burnham, a securities firm, seeking recovery of alleged excess margin interest charges. Drexel Burnham moved to compel arbitration with the individual plaintiffs pursuant to the terms of its customer agreement. The court weighed the conflicting policies favoring class actions against those favoring arbitration, and held that arbitration prevailed. The language of the court is instructive and will be quoted at length:

“We hold that, in the instant case, the policy of law favoring arbitration prevails over the policy of law pertaining to class actions for the following reasons:

“First, clearly arbitration is a recognized and favored means by which parties expeditiously and efficiently may settle disputes which might otherwise take years to resolve * * * There is a strong public policy in favor of arbitration agreements and the law is designed to encourage persons ‘who wish to avoid delays incident to a civil action to obtain an adjustment of their differences by a tribunal of their own choosing.’ * * * Arbitration provides a means of giving effect to the intention of the parties, easing court congestion, and providing a method more expeditious and less expensive for the resolution of disputes. * * *

“Second, there is perhaps no higher public policy than to uphold and give effect to contracts validly entered into and legally permissible in subject matter. The arbitration provision in the instant case is an integral part of a valid and enforceable contract. The sanctity of valid contractual agreements in a free society, such as ours, is of paramount importance and is rooted in both the United States and California Constitutions,, which predate and outweigh the body of law on class actions as presently evolving.

“Finally, the substantive law of contractual agreement takes precedence over the class action, which is merely a procedural device for consolidating matters properly before the Court. ‘Class actions are provided only as a means to enforce substantive law. Altering the substantive law to accommodate procedure would be to confuse the means with the ends — to sacrifice the goal for the going.’ ” (Vernon v Drexel Burnham & Co., supra, at pp 715-716.)

Insofar as these plaintiffs are concerned, arbitration provides a relatively uncostly procedure for resolving their dispute with defendant. Concededly, if no arbitration agreement existed plaintiffs might have a strong case for class action certification, since the institution of an individual lawsuit for the paltry sum at issue would be self-defeating. (Cf. Gilman v Merrill Lynch, Pierce, Fenner & Smith, 93 Misc 2d 941.) But, maintenance of a class action here by assertion of a claim for which a forum is provided elsewhere, would defeat the aim of arbitration, and undercut an avowed purpose of the class action itself — the “conservation of judicial effort.” (See Governor’s Memoranda, NY Legis Ann, 1975, p 426.)

We have examined plaintiffs’ other contentions and find them to be without merit.

Accordingly, the order of the Supreme Court, New York County (Mercorella, J.), entered February 8,1980, should be affirmed without costs or disbursements.

* Of course, if it is impossible, or at least impractical to separate Federal securities claims for arbitrable claims, a court should deny arbitration to preserve its exclusive jurisdiction over the Federal Securities Act claims. (Shapiro v Jaslow, 320 F Supp 598.)