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ILAN v. SHEARSON/AMERICAN EXPRESS

December 20, 1985

RONY ILAN, Plaintiff,
v.
SHEARSON/AMERICAN EXPRESS, INC. and GILA ALTMAN, Defendants



The opinion of the court was delivered by: CONNER

CONNER, D. J.

OPINION AND ORDER

Plaintiff Rony Ilan ("Ilan") brought this action against Shearson/American Express, Inc. ("Shearson"), a securities brokerage firm, and Gila Altman ("Altman"), one of Shearson's brokers, alleging in essence that Altman, with Shearson's knowledge and consent, fraudulently induced him to trade on margin and churned his account, resulting in losses of approximately $100,000. Ilan alleges that Altman and Shearson thereby violated section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1982), and rule lOb-5, 17 C.F.R. § 240.lOb-5 (1985), promulgated thereunder. He also alleges pendent state law claims for fraud, breach of fiduciary duty, and breach of contract. *fn1"

 This matter is now before the Court on defendants' motion pursuant to sections 2 and 3 of the Federal Arbitration Act, 9 U.S.C. §§ 2, 3 (1982), to compel arbitration of Ilan's federal and state law claims. For the reasons stated below, defendants' motion is granted.

 Background

 When Ilan opened his account at Shearson in February 1982, he 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 Board of Directors of the New York Stock Exchange, Inc. and/or the American Stock Exchange, Inc. as I may elect. If I do not make such an election by registered mail addressed to you at your main office within 5 days after demand by you that I make such election, then you may make such election. Judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction thereof.

 Affidavit of Harry D. Frisch, Exh. 3, P 13 (emphasis added). As noted above, defendants seek to enforce this provision under sections 2 and 3 of the Federal Arbitration Act. Section 2 provides in pertinent part:

 
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.

 9 U.S.C. § 2 (1982).

 There is little dispute that Ilan's agreement with Shearson falls within the broad scope of the Arbitration Act. His account with Shearson "evidence[s] a transaction involving commerce," and his claims clearly "aris[e] out of [the] contract" in that they all pertain to allegedly improper actions taken with respect to his account. See, e.g., Rojas Cancanon v. Smith Barney, Harris Upham & Co., 612 F. Supp. 996, 998 (S.D. Fla. 1985). However, Ilan contends that he cannot be compelled to arbitrate his claims because (1) defendants waived any right to arbitration by failing to timely assert it, and (2) the arbitration provision constitutes an unenforceable contract of adhesion.

 Discussion

 Before addressing Ilan's specific waiver and contract of adhesion arguments, it is necessary to consider the general arbitrability of his claims. Until recently, there was considerable disagreement concerning the arbitrability of state law claims that were pendent to or "intertwined" with federal claims. The Supreme Court ended that debate in Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S. Ct. 1238, 84 L. Ed. 2d 158 (1985), in which it held that federal courts must respect and enforce agreements to arbitrate state law claims even if the federal claim to which they are pendent is nonarbitrable. Thus, it is clear that, at the very least, Ilan's state law claims must be sent to arbitration.

 Unfortunately, in the process of resolving that troublesome issue, the Court created new uncertainty with respect to the arbitrability of claims under the Securities Exchange Act of 1934 ("the 1934 Act"). Most lower federal courts had considered such claims nonarbitrable on the ...


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