The opinion of the court was delivered by: BARBARA JONES, District Judge
MEMORANDUM OPINION, ORDER, AND ORDER TO SHOW CAUSE
This is a petition to enjoin an arbitration currently pending before
the New York Stock Exchange ("NYSE"). For reasons set forth below the
petition is denied. The arbitration sought by Respondent will proceed
according to a schedule set by the arbitrators. Denial of the petition
intimates no view of the Court on Petitioner's proposed statute of
limitations defense, which may be presented to the arbitrators at
Petitioner's discretion. In addition to denying the petition, the Court
will direct an order to show cause to Petitioner's counsel under Federal
Rule of Civil Procedure 11(c)(1)(B).
According to the memoranda and supporting papers filed with this Court
by the parties in the above captioned action, Respondent, Roman
Mrzyglocki, was a client of HD Brous & Co., Inc., Petitioner, from
late 1996 until March of 1998. HD Brous is a financial services
organization and a New York Corporation. Mrzyglocki is a resident of New
Jersey. During the period of their business relationship, Respondent
alleges that he lost over $180,000 as a result of
transactions and investments made by and through Petitioner that
were at odds both with responsible business practices and with
Respondent's expectations and instructions.
As part of the business relationship entered into by Petitioner and
Respondent, Mrzyglocki signed a Margin Account Agreement (the
"Agreement"), which included an arbitration agreement. A copy of the
Agreement has been provided to the Court as Exhibit C, attached to the
sworn affidavit of Robert Brous, Chief Executive Officer of HD Brous. In
his affidavit Brous testifies that the Agreement was completed and signed
during the course of opening Respondent's account with HD Brous. Brous
Affidavit at 2. Brous further relies upon Exhibit C, asserting that it,
by a choice of law provision, binds the parties to apply Maryland law to
their disputes. Id. at 3. These assertions are repeated in the
petition filed by HD Brous in the State court.
On June 26, 2003 Respondent filed a Statement of Claim, in accordance
with the arbitration rules of the New York Stock Exchange ("NYSE"),
demanding arbitration of claims against Petitioner arising from HD
Brous's alleged mishandling of his account. In his Claim, Respondent
alleges that Petitioner and its agent, Timothy Mann, breached their
fiduciary duties to Respondent by engaging in a series of high-risk
transactions that resulted in the above-mentioned losses. Respondent
further alleges violations of National Association of Securities Dealers
("NASD") and NYSE rules and regulations, citing, inter alia,
alleged failures to inform Respondent about critical investment
transactions and failures to act on Respondent's directions.
On July 18, 2003 the NYSE served Petitioner with Respondent's Statement
of Claim. On October 3, 2003 HD Brous filed a petition before the Supreme
Court of New York, New York County, seeking to enjoin the arbitration
pursuant to Section 7502(b) of the New York Civil Practice Law and Rules,
asserting that Respondent's claims were time-barred. On that date
Justice Emily Jane Goodman issued an Order to Show Cause wherein
Respondent was directed to appear in New York Supreme Court on October
30, 2003. Justice Goodman declined to issue a Temporary Restraining Order
as part of the Order to Show Cause.*fn1
Respondent filed a Notice of Removal in this Court on October 23, 2003.
The matter was subsequently referred to me by normal administrative
procedures. With the Notice of Removal, Respondent filed his "Memorandum
of Law in Opposition to Petitioner's Application to Stay Arbitration"
(the "Response"). On November 20, 2003 Petitioner filed a timely Reply
(the "Reply"). The events recounted above have put HD Brous's
fully-briefed petition before this Court.
In the course of reviewing papers submitted by the parties the Court
became concerned with a series of shifts in Petitioner's positions on
critical issues of law and fact. Foremost of these was Petitioner's
reversal as to whether or not the arbitration agreement, presented to the
Court by Robert Brous himself, formed part of a binding contract between
the parties. To resolve this question, amongst others, the Court
scheduled an oral argument on the petition by an Order dated January 13,
2004 (the "January 13, 2004 Order").
That argument was commenced, as scheduled, on January 21, 2004. At the
end of the hearing the Court invited the parties to provide the Court
with written submissions detailing any additional cases or other sources
of law the Court should consider. Petitioner obliged in the form of a
letter dated January 28, 2004. Respondent, in conformance with the
directions of the Court, responded with his own letter on February 2,
2004. The Court has given full consideration to the
arguments of the parties and the relevant law. For reasons set
forth below it declines to issue the requested order enjoining
arbitration. This Court makes no comment on the merits of either
Petitioner's statute of limitations defense or Respondent's claims. In
their present posture, these issues are rightfully the concern of the
arbitrators, not this Court.
The weight of Petitioner's argument for a court imposed stay on the
arbitration pending before the NYSE is borne by the assertion that
Respondent's claims are time-barred. Petitioner points out that March
1998 marks the end of its business relationship with Respondent.
Therefore, Petitioner argues, Respondent's claim for arbitration, filed
in June of 2003, relies on events more than five years in the past.
Petitioner further claims, in its original petition, that this five-year
period exceeds the statutes of limitation on Respondent's claims under
both federal law and Maryland law.*fn2
Mrzyglocki responds, after having removed the petition to this Court,
with a series of conditional arguments, beginning with an assertion that
HD Brous can neither file a petition under N.Y. CPLR §§ 7502 and
7503 nor rely on New York case law because New York law does not govern
the dispute. Respondent contends that New Jersey law should apply in this
case and argues that his claim for arbitration is timely under the
six-year statute of limitations that governs his claims under New Jersey
common law. Next, Respondent argues that, "even if New
York law did apply, the issue of whether Mrzyglocki's claims are
time-barred is a question for the arbitrators, rather than the courts, to
decide" under the broad-form arbitration agreement signed by the parties.
Response at 5. Finally, Respondent argues that, even if New York law
applies and all issues relating to his claims were not destined for the
arbitrators by way of the arbitration agreement, HD Brous was untimely in
making its petition under N.Y. CPLR §§ 7502 and 7503.
In reply, Petitioner again contends that it may move for an injunction
in this Court pursuant to N.Y. CPLR § 7502. In support of this
contention counsel point out that the only basis for this Court to assert
jurisdiction over the subject-matter in this case is pursuant to
28 U.S.C. § 1332. Thus, counsel conclude, the Court is bound to receive
and consider the petition pursuant to N.Y. CPLR § 7502 because, in
diversity cases, "state substantive law must be applied." Reply at 1. In
their Reply counsel for Petitioner also, for the first time and after
having relied upon the Agreement in earlier submissions to the State
court, claim that HD Brous is not a signatory to the Agreement and is,
therefore, not bound by either the choice of law provisions in numbered
paragraph 17, Reply at 11, of the Agreement or the broad-form arbitration
agreement in numbered paragraph 19 of the Agreement, Reply at 7-8.
The Court finds that the terms of the Margin Account Agreement are
enforceable over Petitioner. Numbered paragraph 19 of the Agreement
contains a broad-form arbitration clause in which "[i]t is agreed" that
all disputes between Petitioner and Respondent will be resolved in
arbitration. This Court is bound to respect this agreement. It will,
therefore, decline to grant the petition. Without commenting on the
merits of Respondent's claims or Petitioner's proposed defenses, the
Court will leave the arbitrators to do their duties.
A. Petitioner is Bound by the Terms of the Margin Agreement
Petitioner, through the affidavit of Robert Brous and in its original
petition, presents the Agreement as a document forming part of its
business relationship with Respondent. In its petition, HD Brous relies
upon numbered paragraph 17 of the Agreement to argue that Maryland and
federal law should apply to Respondent's claims. In a radical change of
position, counsel for Petitioner assert in their Reply that Petitioner is
not bound by the terms of the Agreement because it is not a signatory.
Counsel repeated this claim at the oral argument and do so again in the
letter to their January 28 letter. Counsel's attempts to distance their
client from the Agreement are misleading and fruitless. The Agreement
serves as evidence that Petitioner agreed, along with Respondent, to
arbitrate all controversies between them. Petitioner has also claimed
benefits from the Agreement and is, on this basis, estopped from
disclaiming the arbitration clause.
1. The Margin Agreement Documents Terms Affecting Respondent's
Business Relationship with Petitioner
Petitioner is not a signatory to the Agreement. In their Reply, counsel
for Petitioner represent that the Agreement is signed "by a Maryland
clearing firm, Alex, Brown & Sons, Inc." Reply at 7. From these
facts, counsel would have this Court conclude that the Agreement is a
contract between Alex, Brown and Respondent in which Petitioner does not
participate, from which Petitioner does not benefit, and by which
Petitioner is not bound. Counsel are wrong on all scores.
To start, counsel's claim that Alex, Brown signed the Agreement is not
accurate. The agreement is, in fact, only signed by Respondent. Alex,
Brown & Sons ("Alex, Brown") is
named in the agreement and its corporate name and address appear at
the top of the document. There is, however, no signature line for Alex,
Brown, its representative, or any parties other than prospective clients.
Alex, Brown also does not appear in a first-person speaking role at any
point in the Agreement.
The document does not purport to speak for anyone other than
Respondent. There are three parties contemplated in the Agreement: the
signatory client (Respondent), Alex, Brown, and the client's "Financial
Services Organization." At the oral argument, counsel for Petitioner
admitted that HD Brous is the Financial Services Organization named in
the Agreement. Pursuant to paragraph 1 of the Agreement, all uses of the
first-person in the Agreement refer to Respondent. Most of the
substantive paragraphs in the Agreement find Respondent acting or
reporting in his own voice. By contrast, Alex, Brown and HD Brous are
silent in the Agreement. At no point in the document do Alex, Brown or HD
Brous speak or take action in the first-person.
In the first unnumbered paragraphs of the document, Respondent
acknowledges that he has been informed by HD Brous that Alex, Brown will
provide certain services to HD Brous relating to Respondent's account.
Respondent also agrees that he has been informed about and accepts
certain features of and limitations on his business relationship with
Alex, Brown and HD Brous. These features and limitations are documented
in the remaining eighteen numbered paragraphs, all of which have
Respondent acknowledging and agreeing to features and limitations on his
margin accounts with HD Brous that are, as per HD Brous's arrangements
with Alex, Brown, serviced by Alex, Brown.
According to the affidavit of Robert Brous, Respondent signed the
Agreement "in the course of opening his account." Brous Affidavit at 2.
It became clear at the oral argument that,
consistent with the normal business practices of HD Brous,
Petitioner presented the Agreement to Respondent along with a "new
account form" and "account transfer documents." The "new account form,"
Exhibit B attached to the affidavit of Robert Brous, consists of one page
and provides no details as to the features and limitations of the
business relationship between Petitioner and Respondent. The "account
transfer documents" perform the job suggested by their title, but provide
no details whatever as to the business relationship between Petitioner
and Respondent. The Agreement, presented to Respondent by Petitioner, is
the only document of substance offered by either party relating to the
business relationship formed between the parties when Respondent opened
his account with Petitioner.
The Agreement is not, as counsel for Petitioner want the Court to
believe, an agreement solely between and affecting Respondent and Alex,
Brown. The Agreement makes reference to Petitioner no fewer than twenty
times. That is so, notwithstanding the fact that HD Brous's name does not
appear in the Agreement. The Agreement's references are to the "Financial
Services Organization," and to the "correspondent." It is not disputed
that HD Brous is the subject of these references. As examples, in
numbered paragraph 2 Respondent agrees to delegate authority to
Petitioner; in numbered paragraphs 3, 11, and 13 Respondent describes how
Petitioner will be involved in the financing and handling of his
accounts; in numbered paragraph 4 Respondent agrees to make certain
disclosures to Petitioner; in numbered paragraph 14 Respondent sets forth
the procedure by which he can object to Petitioner's handling of his
funds and accounts; in numbered paragraph 19 Respondent recites an
agreement amongst the parties that any disputes between them will be sent
to arbitration pursuant to the Federal Arbitration Act.
These facts and the form of the Agreement itself make the absence of
Petitioner's signature on the document irrelevant. In its form and
content the Agreement demonstrates that Respondent has been informed of
and agrees to certain features and requirements of his account with HD
Brous. It documents Respondent's acceptance of terms on an offer
of services extended by Petitioner and Alex, Brown. According to the
Agreement, these terms and information relating to the respective duties
of the parties were provided to Respondent by Petitioner. The Agreement
itself was, according to Robert Brous, provided to Respondent by
Petitioner. The terms documented in the Agreement are Petitioner's terms
of service. The Agreement does no more or less than document that
Respondent, at the time he opened his account with Petitioner, understood
and accepted these terms. Pursuant to terms documented in the Agreement,
Petitioner began to perform services for Respondent and to claim benefits
from their business relationship. Petitioner is, therefore, bound to
abide by the terms of the Agreement.
The grammatical construction of the Agreement also provides strong
evidence that it documents an agreement between the parties as opposed to
creating one. Most paragraphs in the Agreement are animated by a
first-person present tense declarative such as "I acknowledge," "I
agree," and "I authorize." These paragraphs present a picture of duties,
conditions, and limitations being proposed to Respondent with Respondent
acting affirmatively to accept them. Consistent with the use of these
first-person declarations, the duties, acknowledgments, and agreements
found in these paragraphs are uniquely Respondent's.
The contrasting choice of the phrase "It is agreed" at the beginning of
paragraph 19 is, in this context, quite revealing. The use of the
third-person singular present tense indicative in combination with the
past participle clearly communicate the fact that the speaker, here
Respondent, is reporting rather than acting. Specifically, he is
reciting, from an objective point of view, an agreement between Alex,
Brown, HD Brous, and Respondent, "that all past, present, or future
controversies between myself, any persons having an interest in my
account, Alex, Brown, [HD Brous], or any of the employees or affiliates
of either . . . shall be submitted to arbitration pursuant to the
Federal Arbitration Act."
If Petitioner did not, as its counsel now claims, intend or want to be
bound by contract terms that it presented to Respondent for his
acceptance, then it could have taken action to avoid any commitment. It
could have disclaimed the contract terms set forth in Respondent's
acceptance. Having done so, Petitioner could have altered the Agreement
or negotiated a separate and superceding agreement. At the very least, a
representative of HD Brous, one of whom was present when Respondent
signed, could have manifested an unwillingness to be bound by the
arbitration clause in numbered paragraph 19 before accepting the signed
Agreement and commencing a business relationship with Respondent.
Petitioner did none of these things.
The title "Agreement" may be misleading to Petitioner, but the Court
suspects not. Petitioner presented to Respondent the terms set forth in
the Agreement. Petitioner was present when Respondent accepted these
terms. The terms accepted by Respondent document details pertaining to
the business relationship being formed between Petitioner and Respondent.
Respondent specifically names Petitioner as a beneficiary of his
acceptance of terms. Agreement at para. 2 ("I intend that my Financial
Service Organization be a beneficiary of this Agreement"). Petitioner,
through its officer Robert Brous, is also the first party to use the
Agreement as evidence of contract terms between itself and Respondent.
All of this suggests
that Petitioner knows that the Agreement accurately reports the
terms of its business relationship with Respondent. Petitioner certainly
relied upon this being the case in its petition.
Petitioner made an offer of financial services to Respondent.
Respondent accepted. Petitioner presented an Agreement to Respondent.
According to Respondent's reports in the Agreement, Petitioner provided
information and explanation pertinent to the contract terms described in
the Agreement. Respondent signed the Agreement. Petitioner accepted it
without alteration and without disclaiming Respondent's report, at
paragraph 19 of the Agreement, that he, Petitioner, and Alex, Brown had
agreed to arbitrate "all past, present, or future controversies" between
them. Petitioner has not produced any other document of substance that
purports to set additional or alternative terms for its contract
relationship with Respondent. After the Agreement was signed, Petitioner
accepted funds from Respondent and ...