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BROADCORT CAPITAL CORP. v. DUTCHER

August 9, 1994

BROADCORT CAPITAL CORP., Plaintiff,
v.
JAMES P. DUTCHER, Defendant.



The opinion of the court was delivered by: ALLEN G. SCHWARTZ

 ALLEN G. SCHWARTZ, DISTRICT JUDGE:

 BACKGROUND

 Broadcort Capital Corp. ("Broadcort") is a clearing broker and cleared the accounts of Allied Capital Corp. ("Allied"), a stock brokerage firm. *fn1" James P. Dutcher ("Dutcher") purchased securities from Allied. Broadcort claims that Dutcher never paid for the securities. See Plaintiff's Sur-Reply Mem. (Dec. 29, 1993) at 1. As a result, on June 29, 1993 Broadcort commenced this action against Dutcher to recover the sum of $ 90,000.

 After obtaining from the court extensions of time to file an answer to Broadcort's complaint, Dutcher, on November 11, 1993, initiated an arbitration proceeding before the National Association of Securities Dealers ("NASD") in San Francisco, California naming Broadcort and ten others as respondents. Broadcort is a member of the NASD. In the arbitration proceeding, Dutcher alleges fraud on the part of Broadcort, Allied, and others in the trading of over-the-counter securities and seeks rescission of his transactions with the defendant brokers and their clearing agents.

 On November 11, 1993, upon the filing of the arbitration proceeding, Dutcher moved this court to stay Broadcort's action pursuant to the provisions of the Federal Arbitration Act ("FAA"), 9 U.S.C. Section 3. *fn2" Broadcort cross-moves pursuant to FAA Section 4 *fn3" to compel arbitration in New York if this court determines that the motion to stay this action should be granted. *fn4"

 DISCUSSION

 Two issues are presented by these motions. First, we must decide whether Dutcher is entitled to a stay of the action pending in this court pursuant to 9 U.S.C. Section 3. The second matter presented is whether this court may compel arbitration in New York pursuant to Broadcort's cross-motion under 9 U.S.C. Section 4.

 A. Dutcher's Action to Stay Proceedings in New York

 In order to be entitled to a stay of the New York action against him, Dutcher must show that the action is referable to arbitration and that he is not in default in proceeding with the arbitration in San Francisco. *fn5" 9 U.S.C. § 3.

 First, Broadcort's action is referable to NASD arbitration on Dutcher's demand. According to the NASD Code of Arbitration Procedure, arbitration is mandatory for "any dispute, claim or controversy eligible for submission under Part I of this Code between a customer and/or associated person arising in connection with the business of such member or in connection with the activities of such associated persons . . . as provided by any duly executed enforceable written agreement or upon the demand of the customer." NASD Code of Arbitration Procedure, Part II, Section 12(a) (1992). Broadcort's action is referable to arbitration because it arose in connection with Broadcort's business as a member of the NASD. *fn6"

 Second, according to Section 3, as long as a party is not in default in proceeding with arbitration, this court may grant a stay of an action upon that party's request. 9 U.S.C. § 3. Whether a party is in default in proceeding with arbitration is a factual determination. See Cotton v. Slone, 4 F.3d 176, 179 (2d Cir. 1993) ("waiver determination necessarily depends upon facts of particular case and is not susceptible to bright line rules."). If a party permits litigation to proceed to a significant extent and then requests that the dispute be arbitrated, that party may be in "default in proceeding with such arbitration." While Dutcher's repeated requests for extensions of time resulted in a delay of approximately five months between Broadcort's filing of its action on June 29, 1993 and the arbitration demand in San Francisco on November 11, 1993, the litigation in this court has not progressed beyond preliminary motions. Therefore, we find that Dutcher is not in default in proceeding with arbitration. See Bowers v. Transportacion Maritima Mexicana, S.A., 901 F.2d 258 (2d Cir. 1990) (mere participation in court action does not constitute a waiver of arbitration but when party participates in court action until determination on merits, waiver may be inferred).

 Accordingly, we find that Dutcher is entitled to a Section 3 stay of Broadcort's action ...


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