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MERRILL LYNCH, PIERCE, FENNER & SMITH INC. v. SHAD

May 20, 1993

MERRILL LYNCH, PIERCE, FENNER & SMITH INC., Petitioner,
v.
SARAH WALL STEPHENSON SHADDOCK, WILLIAM F. STEPHENSON, as Personal Representative of the Estate of Audrey J. Stephenson, and SCOTT WEBSTER STEPHENSON, Respondents. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Petitioner, v. WILLIAM F. STEPHENSON, Respondent.



The opinion of the court was delivered by: WILLIAM C. CONNER

 Conner, D.J.:

 These two related cases were consolidated in this Court upon removal from New York State Supreme Court under 28 U.S.C. § 1446. Petitioner Merrill Lynch, Pierce, Fenner & Smith Inc., ("Merrill Lynch"), moves for an order permanently staying the arbitration proceedings initiated by respondents before the National Association of Securities Dealers, Inc. ("NASD"), on or about September 22, 1992. Respondents move for dismissal pursuant to Rule 12(b)(2), Fed. R. Civ. P., for lack of personal jurisdiction, and under Rule 12(b)(6) for failure to state a claim upon which relief can be granted. For the reasons discussed below, respondents' motion to dismiss for want of personal jurisdiction is denied. Merrill Lynch's petition for an order staying arbitration is also denied and consequently respondents' motion to dismiss under Rule 12(b)(6) is granted.

 The two arbitrations that are the subject of the actions consolidated in this Court are classic "Black Monday" cases. Respondents' claims are based on trading in uncovered equity options, beginning in 1985 and 1986, through accounts with petitioner Merrill Lynch, that ultimately resulted in respondents suffering substantial losses on October 19, 1987. Respondents allege causes of action for breach of fiduciary duty, negligent supervision, unsuitable trading, churning, federal and state securities violations, fraud, and negligent misrepresentation.

 Respondents' association with Merrill Lynch began in 1977 when respondent Stephenson entered into a relationship with Robert Swartz, a registered representative in Merrill Lynch's Denver office. Respondents, none of whom are New York residents, assert that their customer relationship with Merrill Lynch was maintained exclusively through Merrill Lynch's Denver office and that respondents had no contact with the State of New York or Merrill Lynch's New York offices either directly or via telephone communications in connection with any of the transactions that form the basis of respondents' claims. Respondents maintain that their only relevant contact with New York occurred in September 1992, when, in order to initiate arbitration proceedings before the NASD, respondents were required by NASD rules to file their claims initially with the NASD principal offices in New York. The claims remain before the NASD in New York through the pleading stage, after which they will be sent to the NASD regional offices in Denver, selected by respondents as the suitable location for arbitration of their claims.

 Respondents' Customer Agreement with Merrill Lynch--ostensibly the standard contract form used by Merrill Lynch--contains the following arbitration clause:

 
11. Agreement to Arbitrate Controversies
 
It is agreed that any controversy between us arising out of your business or this agreement shall be submitted to arbitration conducted under the provisions of the Constitution and Rules of the Board of Governors of the New York Stock Exchange, Inc., or pursuant to the Code of Arbitration Procedure of the National Association of Securities Dealers, Inc., as the undersigned may elect. If the controversy involves any security or commodity transaction or contract related thereto executed on an exchange located outside the United States, then such controversy shall, at the election of the undersigned, be submitted to arbitration conducted under the constitution of such exchange or under the provisions of the Constitution and Rules of the Board of Governors of the New York Stock Exchange, Inc., or the Code of Arbitration Procedure of the National Association of Securities Dealers, Inc. Arbitration must be commenced by service upon the other of a written demand for arbitration or a written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the undersigned does not make such designation within five (5) days of such demand or notice, then the undersigned authorizes you to do so on behalf of the undersigned.

 After the arbitration clause appears the following choice-of-law provision:

 
12. The Laws of the State of New York Govern
 
This agreement and its enforcement shall be governed by the laws of the State of New York; shall cover individually and collectively all accounts which the undersigned may open or reopen with you, and shall enure to the benefit of your successors whether by merger, consolidation or otherwise, and assigns, and you may transfer the accounts of the undersigned to your successors and assigns and this agreement shall be binding upon the heirs, executors, administrators, successors and assigns of the undersigned.

 After respondents initiated arbitration proceedings before the NASD, Merrill Lynch petitioned New York State Supreme Court, County of New York, seeking a permanent stay of the arbitrations pursuant to New York C.P.L.R. §§ 7502 and 7503, on grounds that respondents' claims were barred by applicable statutes of limitations. Respondents removed the actions to this Court on the basis of diversity jurisdiction, and now move for dismissal on grounds of lack of personal jurisdiction. Merrill Lynch moves to stay permanently the pending arbitration proceedings, to which respondents reply with a cross-motion to dismiss for failure to state a claim upon which relief can be granted.

 DISCUSSION

 I. Motion to Dismiss For Lack of Personal Jurisdiction

 The primary basis advanced by petitioner for the assertion of personal jurisdiction over respondents is grounded in the arbitration clause contained in Merrill Lynch's Customer Agreement signed by respondents. By virtue of agreeing to arbitrate "any controversy" in a New York forum (under the auspices of either the NYSE or the NASD), petitioner maintains ...


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