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OKCUOGLU v. HESS

February 22, 1984

CETIN A. OKCUOGLU, et al.
v.
HESS, GRANT & CO., INC., et al.



The opinion of the court was delivered by: GILES

 GILES, J.

 Plaintiffs are options transactions customers of Hess, Grant & Company ("Hess Grant"), a stock brokerage firm. Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch"), also a stock brokerage firm, has a clearing agent agreement with Hess Grant pursuant to which it performs centralized cashiering, bookkeeping and execution functions for margin accounts serviced by Hess Grant for the plaintiffs. Cetin A. Okcuoglu ("Okcuoglu") is an individual who is the sole stockholder and officer of Geotech, Inc. ("Geotech"). At all times, Mr. Okcuoglu, dealt with Hess Grant for himself and Geotech. Transactions were intermingled between their accounts. Knowledge of this fact and consent are imputed to both plaintiffs. Mr. Okcuoglu at all times acted as agent for Geotech and for all purposes hereafter discussed plaintiffs shall be considered a single investor.

 Plaintiffs' complaint consists of ten counts. Counts I through VI are against Hess Grant, only, for alleged breach of agreement, warranty, express and implied, and fiduciary duty relating to options transactions occurring in March, 1982 when Pershing & Co., Inc. was predecessor clearing agent for Hess Grant.

 Counts VII through X set forth claims against both Hess Grant and Merrill Lynch. They pertain to a series of options purchases made between September 20 and October 6, 1982 by Hess Grant for plaintiffs. Some of these purchases resulted in Regulation T calls against plaintiffs' margin accounts. Hess Grant determined after consultation with Merrill Lynch that it was necessary to liquidate promptly 4,000 shares of Telex stock held in plaintiffs' account to meet that margin call. Plaintiffs complain that defendants followed through with the liquidation decision despite Mr. Okcuoglu's protests and that they had given him insufficient time and opportunity to meet the call with other resources.

 Jurisdiction is based upon diversity of citizenship and the amount in controversy, exclusive of interests and costs, exceeds $10,000. The complaint does not allege any claims arising under the securities laws or other statutes conferring exclusive jurisdiction upon the federal courts.

 Plaintiffs seek a jury trial to resolve their state law claims against defendants. Defendants have filed separate motions to stay proceedings in this court pending arbitration of plaintiffs' claims. They contend that arbitration is mandated by several agreements to which Mr. Okcuoglu, and inferentially, Geotech are parties. As to Counts VII through X, defendants claim that plaintiffs are bound to arbitrate pursuant to an options agreement, a Merrill Lynch form, dated October 28, 1982. As to Counts I through VI, Hess Grant contends that arbitration is compelled by a customer agreement and an options agreement with the immediate predecessor clearing agent, Pershing & Company, Inc. Hess Grant claims that it was understood, despite the absence of clear language in the documents in question to that effect, that it was an agent of Pershing & Co. and Merrill Lynch for purposes of all options transactions. Specifically, defendants seek to compel arbitration pursuant to the Federal Arbitration Act, 9 U.S.C. §§ 2-4.

 The parties agree that where there is a motion to arbitrate the court must decide if a party has agreed to arbitrate. Vespe Contracting Co. v. Anvan Corp., 399 F. Supp. 516, 519 (E.D. Pa. 1975). Whether a matter is subject to arbitration "depends upon the intent of the parties as it appears from the language used, its context within the instrument, and the circumstances surrounding its formation and execution." Bruno v. Pepperidge Farm, Inc., 256 F. Supp. 865, 868 (E.D. Pa. 1966). Essentially, the court must determine whether there was a clear meeting of the minds on the issue.

 
Whether a party has agreed to arbitration is determined on the basis of ordinary contract principles. A valid arbitration provision must be in writing, but a party may be bound by that provision without having signed an exemplar.

 Fox v. Merrill Lynch & Co., Inc., 453 F. Supp. 561, 564 (S.D.N.Y. 1978). See also First Citizens Municipal Corp. v. Pershing Division of Donaldson, Lufkin & Jenrette Securities Corp., 546 F. Supp. 884 (N.D. Ga. 1982).

 The lynchpin of the analysis, however, is whether the facts and circumstances surrounding the formation and execution of the document demonstrate that there was mutual assent to arbitration. A party who has not agreed cannot be forced to arbitrate a dispute, even though the law favors arbitration as a nonjudicial means for prompt resolution of differences. First Citizens Municipal Corp., 546 F. Supp. at 887. Once it is determined that such an agreement was reached, "any 'doubts as to whether an arbitration clause may be interpreted to cover the asserted dispute should be resolved in favor of arbitration unless a court can state with "positive assurance" that this dispute was not meant to be arbitrated.'" Becker Autoradio v. Becker Autoradiowerk Gmbh, 585 F.2d 39, 44 (3d Cir. 1978).

 On or about January 24, 1977, Mr. Okcuoglu signed a Standard Pershing Customer Agreement wherein he recognized Pershing as broker for the sale and purchase of securities. Hess Grant was the introducing broker in the relationship. Pershing had, by agreement with Hess Grant, only clearing agent functions. The Customer Agreement contained an arbitration clause. Although it was not signed by Pershing's representatives, unquestionably, by their conduct all parties adopted the terms thereof governing the relationships. For over five (5) years, each operated under it in complete mutual reliance and with confidence that the terms were fully enforceable. On November 15, 1979, plaintiff was approved by Hess Grant and Pershing for an options transaction account. An option agreement was executed by Mr. Okcuoglu as governing the options account and trading. Paragraph 1 specified that Pershing and its correspondent firms and agents were to be held harmless for any loss occasioned by trading in that highly speculative market. Paragraph 8, by general reference to any and all prior agreements, incorporated the terms of the Pershing Customer Agreement which contained the arbitration provision.

 Hess Grant maintains that as introducing broker in the relationship it was a correspondent firm and acted as agent for Pershing in approving plaintiffs for options trading. Plaintiffs contend that Hess Grant was not specifically named in either document and that its representatives did not execute the agreement on behalf of Pershing. Therefore, plaintiffs argue, Hess Grant cannot benefit from the arbitration provision. Plaintiffs also allege that, by the express language of the arbitration clause in the Customer Agreement, i.e., "any controversy arising between us," any arbitration was agreed to be limited to disputes between Pershing and them, to the exclusion of plaintiffs' claims against Hess Grant. Finally, plaintiffs assert that the claims against Hess Grant do not involve Pershing.

 Plaintiffs allege the following transactions, or lack thereof, in their margin accounts starting in March of 1982 which were to be effected by ...


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