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MERRILL LYNCH COMMODITIES v. RICHAL SHIPPING CORP.

February 21, 1984

MERRILL LYNCH COMMODITIES INC., Plaintiff, against RICHAL SHIPPING CORPORATION and ARISTIDIS I. ALAFOUZOS, Defendants, against MERRILL LYNCH INTERNATIONAL BANK (PANAMA) and MERRILL LYNCH, PIERCE, FENNER & SMITH (HELLAS) LTD., Counterclaim Defendants.


The opinion of the court was delivered by: CANNELLA

MEMORANDUM AND ORDER

CANNELLA, D.J.:

 Plaintiff's and third-party defendants' motions for a stay of this action pending arbitration and for an order compelling parties to proceed to arbitration are granted. 9 U.S.C. §§ 3, 4.

 Plaintiff's and third-party defendants' motions for a protective order and an order dismissing counterclaims against third-party defendants are denied without prejudice. Fed. R. Civ. P. 26(c); 12(b)(2), (6).

 FACTS

 On July 26, 1982, defendant Richal Shipping Corporation ["Richal"], a Liberian corporation with its principal place of business in Athens, Greece, executed a Commodity Account Agreement in connection with Account No. 152-08075 ["075 Account"], with plaintiff Merill Lynch Commodities Incorporated ["MLC"], a Delaware corporation with its principal place of business in New York. The parties agreed to arbitrate their disputes pursuant to an arbitration agreement signed on behalf of Richal by Aristides I. Alafouzos ["Alafouzos"], a Greek citizen. *fn1" Alafouzos also executed a Continuing Guaranty with respect to the 075 Account on July 26, 1982 that provided in part: "This shall be a continuing Guaranty for such indebtedness which [Richal] shall incur to you, in accordance with the rules and customs of any exchange upon which [its] orders are executed and in accordance with any special agreements now or hereafter existing between you and [Richall]."

 Richal used the 075 Account to engage in foreign exchange transactions. On October 6, 1982, MLC liquidated the 975 Account as a result of Richal's refusal to meet new margin demands requested by MLC. A debit balance of $1,062,820.40 remaining in the 075 Account after its liquidation was offset on November 5, 1982 by a transfer of $1,000,000 to MLC from a Richal account maintained for the benefit of MLC with Merrill Lynch International Bank Ltd. ["MLIB"]. By letter dated November 16, 1982, MLC served an arbitration demand upon Richal. By letter dated December 3, 1982, Richal elected arbitration under the rules of the American Arbitration Association but maintained that Alafouzos was not a party to the arbitration agreement and that the foreign currency transactions were not within the scope of the agreement. By letter dated December 6, 1982, MLC claimed that Richal failed to comply with selection provisions of the arbitration agreement and instead, elected arbitration pursuant to the rules of the New York Stock Exchange.

 Three lawsuits have been instituted between the parties. On October 8, 1982, Richal commenced proceedings against Merrill Lynch, Pierce, Fenner & Smith (Hellas) Ltd. in the Greek courts. Following a hearing, the action was dismissed on January 11, 1983. A second lawsuit was commenced by Richal against MLIB on November 17, 1982 in British courts which is still pending.The instant action was commenced by MLC against Richal and Alafouzos on December 10, 1982 seeking recovery of the $62,820.40 debit balance remaining in the 075 Account which was not offset by the MLIB transfer. Defendants have counterclaimed for damages arising from the liquidation of the 075 Account.

 On May 17, 1983, the Commodity Futures Trading Commission ["CFTC"] amended its arbitration regulations to become effective on August 15, 1983. On August 8, 1983, MLC sent Richal a notice which provided for a revised arbitration agreement that incorporated the CFTC amendments. *fn2" The section that set out the proposed arbitration terms included the following provision:

 If you signed the Arbitration Agreement when you opened your account and wish to be bound by the terms of this new agreement you need not respond to this notice. If, however, you signed the Arbitration Agreement before and DO NOT wish to be bound by the terms of this new agreement, sign the form below and return it in the enclosed envelope within 30 days. By doing so, you will not only reject the new agreement, you will not be subject to or bound by the former agreement which will be null and void as of August 15, 1983. Your failure to respond within 30 days will be presumed as an indication that you accept the terms of the new agreement and agree to be bound by it (emphasis in original).

 On September 1, 1983, Richal and Alafouzos elected not to be bound by the new arbitration provisions and now maintain that the original arbitration agreement is null and void ad initio. MLC asserts that the notice applied only to "new" arbitration agreements or to those accounts in which a previous arbitration agreement had not been invoked as of August 15, 1983.

 DISCUSSION

 9 U.S.C. § ["Section 3"]

 This Court is empowered under Section 3 of the Federal Arbitration Act [the "Act"] to stay proceedings when issues are referrable to arbitration pursuant to a written agreement. *fn3" See Bernhardt v. Polygraphic Co., 350 U.S. 198, 201, 100 L. Ed. 199, 76 S. Ct. 273 (1956); Ocean Industries, Inc. v. Soros Associates International, Inc., 328 F. Supp. 944, 947 (S.D.N.Y. 1971); see also Paine, Webber, Jackson & Curtis, Inc. v. Chase Manhattan Bank, N.A., 728 F.2d 577, slip op. at 1669 (2d Cir. 1984) (arbitration of disputes not incorporated in a written agreement). Pursuant to Section 3 the Court may only consider (1) whether there exists an agreement to arbitrate and (2) its scope. See Prima Paint Corp. v. Flood & Conklin Manufacturing Co., 388 U.S. 395, 404, 18 L. Ed. 2d 1270, 87 S. Ct. 1801 (1967); Netherlands Curacao Co. v. Kenton Corp., 366 ...


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