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KATZ v. SHEARSON HAYDEN STONE

June 18, 1977

ARNOLD KATZ, Plaintiff,
v.
SHEARSON HAYDEN STONE, INC., Defendant



The opinion of the court was delivered by: DUFFY

MEMORANDUM AND ORDER

 KEVIN THOMAS DUFFY, D.J.

 Plaintiff, a former officer and employee of defendant, a member firm of the New York Stock Exchange ("NYSE") and the National Association of Securities Dealers ("NASD"), commenced this diversity action for indemnity pursuant to Section 145(c) of the Delaware General Corporation Law, and to Article XVI of defendant's Certificate of Incorporation, for attorneys' fees and expenses incurred as a result of his defense of an action brought against the parties alleging various securities frauds and resulting in a defendant's verdict.

 Defendant has moved, pursuant to 9 U.S.C. § 3, to stay this action until arbitration can be had in accordance with either the Code of Arbitration Procedure of NASD or the Constitution and Rules of the NYSE, and has indicated its readiness, willingness and ability to proceed with arbitration. This willingness was purportedly conveyed to plaintiff's counsel by demands via letter and telephone prior to the making of this motion.

 Plaintiff has opposed the stay on the grounds of inapplicability of the NASD provisions, non-arbitrability of its claim under the NYSE Rules, invalidity of the agreement to arbitrate, and waiver of defendant's right to arbitrate; and has cross-moved for summary judgment.

 Plaintiff disputes ever having registered with the NASD so as to bind him to arbitration before that body, and no NASD registration or agreement has been produced. However, plaintiff does concede the execution of an agreement providing for arbitration under the rules of the NYSE, and it is on that agreement that this opinion will focus.

 Rule 345 of the NYSE requires all prospective registered representatives -- and plaintiff was such a representative when employed by defendant -- to execute and file with the NYSE an application for employment countersigned by the member employer. This application contains an arbitration provision in paragraph 31(j) which states:

 
[Employee] [agrees] that any controversy between me and any member or member organization arising out of my employment or the termination of any employment by and with such member or member organization shall be settled by arbitration at the instance of any such party in accordance with the Constitution and rules then obtaining of the New York Stock Exchange.

 Rule 347(b) of the NYSE likewise provides:

 
Any controversy between a registered representative and any member or member organization arising out of the employment or termination of employment of such registered representative by and with such member or member organization shall be settled by arbitration, at the instance of any such party, . . .

 Under paragraph 30(d) of the application, the applicant-employee expressly agrees to abide by the Constitution and Rules of the NYSE, which pledge encompasses adherence to Rule 347.

 Plaintiff completed such an application known as Form RE-1, on February 25, 1964, when he commenced employment as a representative with defendant, and defendant executed the application on March 2 of that year. Unless plaintiff's position is sustained, the arbitration provisions in issue are enforceable under the United States Arbitration Act, 9 U.S.C. § 2 as "evidencing a transaction involving commerce" or, since this is a diversity suit, under New York Law. N.Y.C.P.L.R. § 7501. *fn1" Bernhardt v. Polygraphic Co., 350 U.S. 198, 100 L. Ed. 199, 76 S. Ct. 273 (1955); Rust v. Drexel Firestone, Inc., 352 F. Supp. 715 (S.D.N.Y. 1972).

 Plaintiff's objection relating to the arbitrability of his claim is multi-faceted. He contends initially that under Article VIII § 1 of the NYSE Constitution, arbitration of disputes between member firms and non-members is available only at the instance of a non-member, and since plaintiff did not seek arbitration, defendant has no authority to do so. The NYSE rules, however, expressly provide for arbitration at the instance of either party; Rule 481, which governs initiation of arbitration proceedings, expressly differentiates between arbitration sought pursuant to the Constitution and initiated by a non-member, and that which may be "instituted by either party" under an agreement to arbitrate disputes in accordance with NYSE procedure. *fn2" Since plaintiff has consented in Form RE-1 to be bound not only by the Constitution, but also by the Rules and the arbitration provision of paragraph 31(j), his contention is without merit.

 Plaintiff next maintains that his indemnification claim is without the scope of the arbitration agreement since it does not "[arise] out of [his] employment" with defendant as mandated by paragraph 31(j) and Rule 347(b). However, plaintiff would have me recognize his employment nexus for the purposes of his indemnity claim, for that claim exists solely by virtue of his employment by defendant. 8 Del. Code § 145(c). Plaintiff cannot have it both ways; ...


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