United States District Court, S.D. New York
April 6, 2005.
DR. STANLEY C. GRANDON, for himself and the Grandon Family Irrevocable Trust, and MICHAEL CAFFERTY, as Trustee for the Grandon Family Irrevocable Trust, on behalf of themselves and all others similarly situated, Plaintiffs,
MERRILL LYNCH AND CO., INC., and MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Defendants.
The opinion of the court was delivered by: SHIRLEY KRAM, Senior District Judge
OPINION AND ORDER
Defendants Merrill Lynch & Co., ("ML & Co.") and Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S") move to compel arbitration
of the claims of plaintiffs Dr. Stanley C. Grandon and Michael
Cafferty, as Trustee for the Grandon Family Irrevocable Trust
(the "Trustee") against MLPF&S. Defendants also request, pursuant
to Section 3 of the Federal Arbitration Act (the "FAA"),
9 U.S.C. § 3, that this action be stayed pending arbitration. For the
reasons set forth below, the motion is granted.
This action involves claims asserting that MLPF&S committed
securities fraud and breached its fiduciary duties by charging excessive markups on municipal bonds sold to Dr. Grandon and the
Trustee in four transactions in 1994 and 1995.*fn1 Between
1984 and 1994, Dr. Grandon opened several brokerage accounts with
Merrill Lynch, including individual accounts, accounts for his
family, and various trust accounts. Two of the accounts are at
For each account, plaintiffs executed a standard form account
agreement containing a provision to arbitrate all disputes
relating to the account and the transactions therein, to be
conducted only before the New York Stock Exchange, Inc. ("NYSE"),
the American Stock Exchange, Inc. ("AMEX"), or arbitration
facility provided by any other exchange, the National Association
of Securities Dealers, Inc. ("NASD") or the Municipal Securities
Rulemaking Board.*fn3 See McLaughlin Aff. Ex. A, B & C. Plaintiffs filed their initial Class Action Complaint on
December 20, 1995, and filed an Amended Class Action Complaint on
April 4, 1996. Following two dismissals for deficient pleading,
the first of which was reversed by the Second Circuit, plaintiffs
filed a Second Amended Class Action Complaint on November 16,
1999. After a six-month delay, the parties engaged in discovery
on the issue of class certification. Plaintiffs then moved for
class certification. The Court denied the motion for
certification of a class on September 11, 2003.
On September 26, 2003, plaintiffs filed a motion with the Court
of Appeals for the Second Circuit requesting leave to appeal the
denial of class certification. The Second Circuit denied that
request on August 9, 2004. There have been no official
proceedings since that date.
On October 8, 2004, plaintiffs' counsel informed defendants
that plaintiffs intended to pursue their individual claims.
Defendants requested, both orally and in writing, that plaintiffs
consent to arbitration of their claims against MLPF&S. Plaintiffs
refused. This motion followed.
The FAA embodies a strong federal policy favoring arbitration.
See Thomas James Associates, Inc. v. Jameson, 102 F.3d 60, 65
(2d Cir. 1996). Under the FAA, written agreements to arbitrate controversies in contracts involving commerce shall
be valid, irrevocable and enforceable. 9 U.S.C. § 2. All doubts
concerning the scope of arbitrable issues should be resolved in
favor of arbitration. Moses H. Cone Mem'l Hosp. v. Mercury
Constr. Corp., 460 U.S. 24, 25 (1983). Further, arbitration is
preferred "unless it may be said with positive assurance that the
arbitration clause is not susceptible of an interpretation that
covers the asserted dispute." Threlkeld & Co. v.
Metallgesellchaft, 923 F.2d 245, 250 (2d Cir. 1991), cert.
dismissed, 501 U.S. 1267 (1991). Any defenses to arbitration,
such as allegations of waiver or delay constitute "procedural
questions which grow out of the dispute and bear on its final
disposition" and are "presumptively not for the judge, but for
an arbitrator, to decide." Howsam v. Dean Witter Reynolds,
Inc., 537 U.S. 79, 84-85 (2002) (emphasis in original).
Here, plaintiffs do not deny that they entered into a valid and
enforceable arbitration agreement with MLPF&S. Rather, they
contest arbitration on two grounds: (1) it should be denied
because under the rules of NASD, NYSE and AMEX, no arbitration
agreement shall be enforced against a customer that has initiated
a "putative class action;" and (2) even if this action is no
longer a putative class action, defendants have waived their
right to arbitrate. See generally Plaintiffs' Memorandum Of Law In Opposition To Defendants' Motion To Compel Arbitration
And For A Stay, dated January 14, 2005. Plaintiffs are wrong on
both counts. With respect to the first argument, because this
action, as of the Second Circuit's denial of leave to appeal
class certification, is no longer a putative class action,
plaintiffs' position is unsustainable. As to the second argument
against arbitration, plaintiffs fare no better since, by explicit
agreement of the parties, the question of whether the defendants
waived their right to arbitrate is for the arbitrator to decide,
not this Court. See McLaughlin Aff. Ex. A, B & C.
Because plaintiffs entered into a valid and enforceable
arbitration agreement and because they have failed to demonstrate
any reason not to honor that agreement, the defendants' motion to
compel arbitration is granted. Additionally, the claims in this
action are hereby stayed pending arbitration.