UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
February 24, 1978
RAYMOND ROTHBERG, Plaintiff,
LOEB, RHOADES & CO., Defendant
The opinion of the court was delivered by: PIERCE
MEMORANDUM OPINION AND ORDER
LAWRENCE W. PIERCE, D.J.
Defendant Loeb, Rhoades & Co., moves to compel arbitration to resolve a dispute which has arisen between the defendant broker and its customer, the plaintiff herein. Plaintiff cross-moves to stay arbitration pending the determination of a reparation proceeding
before the Commodity Futures Trading Commission (CFTC). The principal issue before the Court is whether the parties should litigate their dispute through arbitration or through a reparation proceeding. For reasons that follow, the Court grants plaintiff's motion to stay arbitration pending the reparation proceeding before the CFTC.
In March of 1976, plaintiff and defendant, a CFTC registrant, entered into a customer's agreement which provided that all controversies between the parties be submitted to arbitration.
Subsequently, a dispute arose between the parties concerning a deficit in plaintiff's brokerage account, with plaintiff contending that defendant had engaged in a series of fraudulent acts in connection with the account. On August 12, 1976, Loeb, Rhoades mailed to plaintiff notice of intention to arbitrate.
On August 17, 1976 plaintiff timely informed defendant in writing that he intended to petition a court of competent jurisdiction to stay arbitration; that he conditionally elected the American Arbitration Association pending a decision on the petition; and that he did not recognize the conditional election as a waiver of any of his rights under the Commodity Exchange Act of 1974.
Defendant then agreed to extend plaintiff's time to petition to stay arbitration until September 10, 1976. On September 13, 1976, Loeb, Rhoades filed its claim with the American Arbitration Association. On November 3, 1976, plaintiff then applied to the CFTC for a reparation hearing pursuant to Section 14 of the Commodity Exchange Act of 1974, as amended, 7 U.S.C. § 18 (1976). On November 19, 1976, plaintiff brought the present action to stay arbitration pursuant to Rule 65 Fed.R.Civ.P. The arbitration proceeding which had been scheduled to commence on January 31, 1977 was adjourned upon consent of the parties.
Initially, defendant claims that plaintiff has waived his right to challenge the arbitration clause of the agreement because he failed to apply to stay arbitration within the twenty day period mandated by N.Y. C.P.L.R. § 7503(c). Defendant's reliance on the New York statute is misplaced. Since the question here is whether the Court should direct arbitration pursuant to the Federal Arbitration Act, 9 U.S.C. § 4, or reparation under the Commodity Exchange Act, federal, and not state, law controls. See Prima Paint v. Flood & Conklin, 388 U.S. 395, 405, 18 L. Ed. 2d 1270, 87 S. Ct. 1801 (1967). Even though the customer agreement provides that it be governed by New York law, New York courts, in dealing with arbitration disputes where the contract involves interstate commerce, apply federal, and not state, arbitration law. Hornblower & Weeks-Hemphill Noyes, Inc. v. Csaky, 427 F. Supp. 814 (S.D.N.Y. 1977); see Shearson Hayden Stone v. Miles, 54 N.Y.L.J. 7, Oct. 13, 1976 (Sup. Ct., N.Y. County, Oct. 8, 1976). Since there is no comparable timetable such as N.Y. C.P.L.R. § 7503(c) in the Federal Arbitration Act, the Court finds that plaintiff is not barred by virtue of any applicable arbitration law time limits.
Alternatively, defendant contends that plaintiff is barred under federal law because he failed to file his reparation complaint within 45 days of receiving defendant's notice of intention to arbitrate. 17 C.F.R. § 180.3(b)(3) (1977), promulgated by the CFTC pursuant to the Commodity Exchange Act § 8a, 7 U.S.C. § 12a (1976), provides for a 45-day time period.
The subsection further provides that the broker must notify the customer in the notice of intention to arbitrate of his right to seek reparations. The defendant failed to comply with this requirement.
Accordingly, the defendant is not entitled to rely on this subsection. Having found the 45-day rule not applicable, the Court determines that plaintiff's petition for reparations is timely in that it complied with the two year statute of limitations prescribed by Section 14 of the Commodity Exchange Act, 7 U.S.C. § 18(a) (1976).
In addition, the CFTC regulations did not become effective until November 29, 1976, after the commencement of the present action. In order to rely on the aforementioned argument, the Court must find that the regulations are to be applied retroactively. However, if the regulations are applied retroactively, another subsection, 17 C.F.R. § 180.3(b)(4) (1977) would render invalid the very arbitration clause upon which defendant's motion is predicated. That subsection provides that the customer agreement must contain certain cautionary language alerting the customer that he is not required to consent to an arbitration clause in the agreement.
The customer agreement herein fails to contain such language. Accordingly, plaintiff urges the Court to apply the regulations retroactively and hold the arbitration clause invalid. The question, therefore, is whether the regulations, effective after the agreement was made and after the dispute between the parties arose, should be applied retroactively.
In Ames v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 567 F.2d 1174 (2d Cir. 1977), reversing 76 Civ. 3085 (S.D.N.Y. March 21, 1977), the Court of Appeals stated that "[a] court must apply the law as it exists at the time of its decision, even where the law has changed during the pendency of the action, unless the statute or legislative history reveals an intention of prospective application only, or retroactive application would lead to 'manifest injustice'". Id., at 1177 (footnote omitted). In Ames, plaintiff brought suit in the District Court for the Southern District of New York alleging violations of the Commodity Exchange Act. Defendant moved to stay the action pending arbitration pursuant to a customer agreement between the parties. In reversing the district court's grant of an order to compel arbitration, the Court of Appeals found that retroactive application would not result in manifest injustice even where both the predispute agreement and the dispute itself arose before the effective date of the CFTC regulation. In reaching this conclusion, the appellate court considered that at the time the rules were promulgated the CFTC itself favored their retroactive application (Id., slip op. at 616-18);
that the CFTC recognized that customer agreements are often adhesion contracts which could exclude from the market customers who objected to the arbitration provisions (Id., slip op. at 619); and that "the power of Congress [or its delegate] to abrogate an arbitration procedure previously contracted for [should be] upheld" (Id., at 1180).
The Court concludes that the reasoning in Ames is applicable to the present case, even though in Ames the plaintiff sought trial in the district court notwithstanding the arbitration clause, and the plaintiff herein seeks reparations under the Commodity Exchange Act. The present situation presents even less attractive circumstances than Ames to validate a predispute arbitration clause. The legislative history of the Commodity Exchange Act indicates that the reparation procedure was "intended as a separate remedy designed to supplement the informal 'settlement procedures' contemplated of the contract markets . .." H.R. Rep. No. 93-975, 93d Cong., 2d Sess. 22 (1974). In addition, the rules relating to reparation proceedings, 17 C.F.R. § 12.1 et seq. (1977), provides that they "shall be construed liberally so as to secure the just, speedy and inexpensive determination of the issues presented with full protection for the rights of all parties to the proceedings envisioned by the Commodity Exchange Act, as amended." 17 C.F.R. § 12.1 (1977). Given the greater similarity of arbitration to a reparation procedure than to a trial, it appears that defendant would be less prejudiced by resort to a reparation proceeding. The Court also notes that in the reparation proceeding defendant may raise any claim which it has "against the complainant if it arises out of the transaction or occurrence or series of transactions or occurrences set forth in the complaint." 17 C.F.R. § 12.23(b)(2) (1977).
Accordingly, the Court finds that the predispute arbitration clause herein is not enforceable. Given this finding, the Court cannot compel the plaintiff to arbitrate the present dispute and therefore grants plaintiff's application for a stay of the arbitration proceeding pending determination of the reparation proceeding. Defendant's requests for a stay of the reparation proceeding and to dismiss this action are therefore mooted. However, the Court notes that "neither the Commodity Futures Trading Act nor the Federal Arbitration Act authorizes the Court to grant [such a] stay . . . " Hornblower & Weeks-Hemphill Noyes, Inc. v. Csaky, 427 F. Supp. 814, 819 (S.D.N.Y. 1977).
In a manner analogous to the Federal Arbitration Act, 9 U.S.C. § 4, plaintiff has also moved the Court for an order to compel the reparation proceeding. However, the Commodity Exchange Act and the regulations promulgated thereunder provide for no such procedure. Accordingly, the Court declines to compel defendant to participate in the reparation proceeding and leaves application for such relief to the CFTC.
For the foregoing reasons, defendant's motion to compel arbitration is denied and plaintiff's motion for an order in the nature of an injunction pursuant to Fed.R.Civ.P. 65 to stay arbitration pending the determination of the reparation proceeding is granted.
LAWRENCE W. PIERCE U.S.D.J.