Appeal from a judgment of the United States District Court for the Southern District of New York, Goettel, J., denying a motion by Dean Witter Reynolds Inc. for a stay of all proceedings against it pending arbitration. Reversed.
Before Waterman, Oakes*fn* and Meskill, Circuit Judges.
Author: Meskill; Per Curiam
We are asked to determine in this case of first impression whether the failure of a brokerage firm to open a commodities account is a transaction subject to the arbitration regulations of the Commodities Futures Trading Commission (CFTC), 17 C.F.R. § 180.1 et seq. (1981). The district court held that it is. Shearson Hayden Stone, Inc. v. Scrivener, No. 79-4658 (S.D.N.Y. July 24, 1981). We disagree. We believe that the CFTC arbitration regulations were not intended to apply where a brokerage firm has yet to handle a customer's commodities account.
This appeal comes by way of a judgment of the United States District Court for the Southern District of New York, Goettel, J., which denied a motion by third-party defendant Dean Witter Reynolds Inc. ("DWR") to stay all proceedings against it pending arbitration. We assume familiarity with the facts giving rise to this litigation, which are described at length in an earlier decision, Shearson Hayden Stone, Inc. v. Scrivener, 480 F. Supp. 256 (S.D.N.Y.1979). Accordingly, we limit ourselves to a brief review of the pertinent facts.
Prior to the 1979 merger of Loeb Rhoades, Hornblower & Co. ("Loeb Rhoades") and Shearson Hayden Stone, Inc. ("Shearson"), third-party plaintiff Susan Scrivener maintained a commodities account at the Hong Kong branch of Loeb Rhoades. She also maintained a securities account at the same branch which constituted adequate margin to offset a substantial deficit position in her commodities account. Upon the merger of Shearson and Loeb Rhoades, Scrivener's commodities account was transferred to Shearson. The securities account, however, was never transferred. Instead, it was sent to DWR by orders of Scrivener's husband, who had just terminated his employment with Loeb Rhoades and had begun working for DWR.
Without the securities account, Scrivener's commodities account was vastly undermargined, and Shearson so informed Scrivener a short time later. While some equity was produced, the commodities account remained substantially undermargined, causing Shearson to liquidate the account. Following the liquidation, the net debit in the account was approximately $100,000.
Shearson then sought to recover its losses from the liquidation, beginning by suing Scrivener in the Supreme Court, New York County. The case was removed to the United States District Court for the Southern District of New York where Shearson obtained an order of attachment on Scrivener's securities account at DWR. 480 F. Supp. 256 (S.D.N.Y.1979). At that point, in addition to counterclaiming against Shearson, Scrivener filed a third-party complaint against DWR alleging, among many claims, that DWR was liable for wrongfully failing to accept her commodities account. The crux of Scrivener's argument was that DWR had given assurances that it would accept her commodities account and then wrongfully refused to do so.
DWR immediately moved to stay the proceedings against it pending arbitration pursuant to 9 U.S.C. § 3 (1976). DWR based its request for arbitration on clauses contained in a "Customers Agreement" and an "Options Trading Agreement" that Scrivener had signed.*fn1 Scrivener opposed the motion, however, asserting that the arbitration clauses were unenforceable because they failed to comply with the CFTC's requirement that arbitration agreements be voluntarily made. 17 C.F.R. § 180.3(a) (1981).
A brief review of the CFTC arbitration regulations will facilitate an understanding of the issue on appeal. The regulations require a customer's voluntary consent to an arbitration clause as a precondition to enforceability. To that end, the regulations "prohibit any agreement or understanding pursuant to which customers ... agree to submit claims or grievances for settlement under said procedures prior to the time when the claim or grievance arose, except in accordance with (certain specified conditions)." 17 C.F.R. § 180.3(a).
The term "claim or grievance" is defined as:
any dispute which arises out of any transaction on or subject to the rules of a contract market, executed by or effected through a member of that contract market or employee thereof which dispute does not require for adjudication the presence of essential witnesses or third parties over whom the contract market does not have jurisdiction and who are not otherwise available. The term claim or grievance does not include disputes arising from cash market transactions which are not a part of or directly connected with any transaction for the purchase or sale of any commodity for future delivery.
17 C.F.R. § 180.1(a). We see no reason to quote the conditions at length since it is undisputed in this case that they were not met. It will suffice to say that among the conditions are that the customer sign separately the clause providing for arbitration and that the agreement include a warning in bold-face ...