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MCMAHON v. SHEARSON/AMERICAN EXPRESS

September 25, 1985

EUGENE McMAHON and JULIA McMAHON, individually and as Trustee of The David J. Hodder & Son, Inc. Employees Pension Plan; The David J. Hodder & Son, Inc. Profit Sharing Plan; The Laurie Funeral Home, Inc. Employee Pension Plan; The Laurie Funeral Home Profit Sharing Plan, Plaintiffs, against SHEARSON/AMERICAN EXPRESS, INC., and MARY ANN McNULTY, Defendants


The opinion of the court was delivered by: MACMAHON

MacMAHON, District Judge.

Defendants move, pursuant to 9 U.S.C. ยง 3 (1970), for an order staying his action pending arbitration, or, in the alternative, pursuant to Rules 12(b)(6), 12(f) and 9(b), Fed.R.Civ.P., for an order dismissing plaintiffs' amended complaint for failure to state a claim upon which relief can be granted.

 FACTS

 This is an action brought by plaintiffs, Eugene and Julia A. McMahon, individually and as trustees of the David J. Hodder & Son, Inc. Employee Pension Plan; the David J. Hodder & Son, Inc. Profit Sharing Plan; the Laurie Funeral Home, Inc. Employee Pension Plan; and the Laurie Funeral Home, Inc. Profit Sharing Plan ("the trusts"), against Shearson/American Express, Inc. ("Shearson"), a brokerage firm, and Mary Ann McNulty ("McNulty"), a registered representative who was responsible for plaintiffs' accounts at Shearson.

 On June 15, 1982, in connection with the opening of her joint account at Shearson, Julia McMahon entered into a customer's agreement which contained the following arbitration provision:

 
"Unless unenforceable due to federal or state law, any controversy arising out of or relating to my accounts, to transactions with you for me or to this agreement or the breach thereof, shall be settled by arbitration in accordance with the rules, then in effect, of the National Association of Securities Dealers, Inc. or the Boards of Directors of the New York Stock Exchange, Inc. and/or the American Stock Exchange, Inc. as I may elect. * * * Judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction thereof (emphasis added)." *fn1"

 On October 26, 1984, plaintiffs filed an amended complaint, alleging, in essence, that McNulty, with the knowledge and consent of Shearson, (1) engaged in "churning" or the fraudulent and wilful practice of trading extensively solely to maximize commissions, (2) intentionally and recklessly violated Section 10(b) of the Securities Exchange Act of 1934 ("the 1934 Act") *fn2" and Rule 10b-5 promulgated thereunder, by making false statements and omitting material facts from the advice given plaintiffs, and (3) violated the Racketeer Influenced and Corrupt Organization Act of 1974 ("RICO"). *fn3"

 Defendants move for an order compelling plaintiffs to arbitrate their state law claims, as well as their claims under Section 10(b) of the 1934 Act and RICO. Alternatively, defendants move to dismiss the amended complaint on the following grounds: (1) failure to comply with the pleading requirements of Rule 9(b), Fed.R.Civ.P.; (2) lack of subject matter and pendent jurisdiction; (3) absence of an implied private cause of action for alleged violation of the rules of the New York Stock Exchange, Inc. and the National Association of Securities Dealers, Inc.; (4) failure to state a claim under RICO; and (5) unavailability of punitive damages.

 DISCUSSION

 The United States Arbitration Act, *fn4" "reversing centuries of judicial hostility to arbitration agreements, was designed to allow parties to avoid 'the costliness and delays of litigation,' and to place arbitration agreements 'upon the same footing as other contracts . . . '" *fn5" Accordingly, the Act provides:

 
"A written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy arising out of such contract or transactions . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."

 The customer's agreement, entered into between Shearson and McMahon, contains McMahon's agreement to arbitrate "any controversy arising out of or relating to" her securities at Shearson or to any "transactions" with Shearson for her. Defendants have therefore petitioned this court for an order compelling arbitration of this action. *fn6"

 To prevail on a motion to compel arbitration, a party needs only to establish (1) the existence of an agreement to arbitrate, (2) arbitrable claims, and (3) no waiver of the right to arbitrate. *fn7" Plaintiffs contend that the aribtration provision in the customer's agreement is not enforceable because (1) the customer's agreement is a contract of adhesion, (2) fraud is not an arbitrable issue, and (3) defendants have waived their right to arbitrate.

 We find that plaintiffs' arguments are wholly unconvincing. First, it is well settled that one who signs a contract, in the absence of fraud or misconduct by another contracting party, is conclusively presumed to know its contents and to assent to them. *fn8" Julia McMahon signed the customer's agreement and has not demonstrated that it was entered into under fraud or duress. Arbitration clauses are routinely upheld by the courts, and, given plaintiffs' sizeable investment, there is nothing to indicate that they were without bargaining power. Moreover, in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 402-404, 18 L. Ed. 2d 1270, 87 S. Ct. 1801 (1967), the Supreme Court held that "a broad arbitration clause will be held to encompass arbitration of the claim that the contract itself was induced by fraud." ...


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