behalf of the limited partnership or on behalf of his general partner, Mr. Mainardi.
Mr. Ferreri's complaint is comprised of six counts. Count one alleges fraudulent conduct on the part of First Options against Mr. Ferreri. Count two is a claim against First Options based on negligent representation to Mr. Ferreri. Count three alleges that First Options breached an oral agreement with Mr. Ferreri. Count four alleges that First Options breached a fiduciary duty to Mr. Ferreri. Count five alleges that First Options breached an agency relationship with Mr. Ferreri, and count six alleges that the action of First Options against Mr. Ferreri violated the Pennsylvania Securities Act of 1972, 70 P.S. § 1-101 et seq.
Mr. Ferreri is seeking compensatory and punitive damages from First Options, as well as an accounting for any profits generated by First Options when it liquidated the partnership account.
Application of the Federal Arbitration Act
The Federal Arbitration Act is applicable to this case. I will first make a finding that this transaction was in interstate commerce for purposes of the Federal Arbitration Act. See Goodwin v. Elkins & Co., 730 F.2d 99, 108-09 (3d Cir. 1984), cert. denied, 469 U.S. 831, 105 S. Ct. 118, 83 L. Ed. 2d 61 (1984); Stateside Machinery Co., Ltd. v. Alperin, 591 F.2d 234, 238-39 (3d Cir. 1979); Gavlik Construction Co. v. H. F. Campbell Co., 526 F.2d 777, 784 (3d Cir. 1975); Merritt-Chapman & Scott Corp. v. Pennsylvania Turnpike Commission, 387 F.2d 768, 772 (3d Cir. 1967). Section 2 of the Act provides that the scope of the Act embraces contracts "evidencing a transaction involving commerce." 9 U.S.C. § 2. Commerce, as used in this provision, is defined by Section 1 of the Act to include "commerce among the several states. . . ." 9 U.S.C. § 1.
The phrase, "involving commerce," as used in Section 2, which determines the scope of the Act, is not to be construed narrowly. See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 401-02, 18 L. Ed. 2d 1270, 87 S. Ct. 1801 n.7 (1967); Fairchild & Co., Inc. v. Richmond, Fredericksburg & Potomac Railroad Co., 516 F. Supp. 1305, 1310 (D. D.C. 1981). The Court in Prima Paint noted that Congress indicated in the legislative history of the Act that, "'commerce reaches not only the actual physical interstate shipment of goods, but also contracts relating to interstate commerce.'" Id. (quoting H.R. Rep. No. 96, 68th Cong., 1st Sess. 1 (1924)). The Supreme Court has suggested the broad interpretation that a contract evidences a transaction involving commerce within the meaning of Section 2 of the Act where contractual activity facilitates interstate commercial transactions, id., or where it affects commerce. Bernhardt v. Polygraphic Co., 350 U.S. 198, 201, 100 L. Ed. 199, 76 S. Ct. 273 (1956). The district court in Fairchild noted that a number of courts have also used this broad "affecting commerce" language to describe contracts evidencing transactions involving commerce. Fairchild & Co., Inc. Richmond Fredericksburg & Potomac Railroad Co., supra, 516 F. Supp. at 1310 (and cases cited therein).
I find that the conduct contemplated by the Market Maker's Agreement was a contract "involving commerce" within the meaning of Section 2 of the Arbitration Act.
Mr. Mainardi and Mr. Ferreri formed their partnership in order to "engage in the business of acting as brokers and dealers in, and of buying, selling, trading, holding and otherwise dealing in stocks, bonds, options and other securities." Ferreri Deposition, Exhibit 1, at para. 3. Because the partnership did not have the facilities to clear its own trades, it was required to open an account with one of the options clearing houses offering such services -- in this case, First Options. The Market Maker's Agreement between First Options and the partnership established a customer account for the partnership at First Options. The Agreement contemplates that the partnership will be buying and selling various securities. Establishing a customer account, then, affected commerce since it facilitated the trading of securities on the Philadelphia Stock Exchange. See Prima Paint Corp. v. Flood & Conklin Mfg. Company, supra, 388 U.S. at 401-02 n.7; Bernhardt v. Polygraphic Co., supra, 350 U.S. at 201.
Federal Policy Favors Enforcing Private Agreements To Arbitrate
In recent years, the Supreme Court has applied a "liberal federal policy favoring arbitration agreements." Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24, 74 L. Ed. 2d 765, 103 S. Ct. 927 (1983). The Supreme Court has noted that Section 2 of the Act "and the Act as a whole, is at bottom a policy guaranteeing the enforcement of private contractual arrangements: the Act simply 'creates a body of federal substantive law establishing and regulating the duty to honor an agreement to arbitrate.'" Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 105 S. Ct. 3346, 3353-54, 87 L. Ed. 2d 444 (quoting Moses H. Cone Memorial Hospital v. Mercury Construction Corp., supra, 460 U.S. at 25 n.32). Congress' principal concern in passing the Act was "'to enforce private agreements into which parties had entered,' a concern which 'requires federal courts to enforce agreements to arbitrate vigorously.'" Id. at 3354 (quoting Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S. Ct. 1238, 1243, 84 L. Ed. 2d 158 (1985).
The Court in Mitsubishi also noted that when a district court is asked to compel arbitration of a dispute, it must "determine whether the parties agreed to arbitrate the dispute. The court is to make that determination by applying the 'federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act.' Id. (quoting Moses H. Cone Memorial Hospital v. Mercury Construction Corp., supra 460 U.S., at 24). That body of law establishes that a district court should resolve any doubts concerning the scope of arbitrable issues in favor of arbitration. Moses H. Cone Memorial Hospital, supra, 460 U.S. at 24-25. As in other contract litigation, the intentions of the parties control, "but those intentions are generously construed as to issues of arbitrability." Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 105 S. Ct. at 3354.
Meeting Of Minds On Agreement To Arbitrate Disputes In Question
The Federal Arbitration Act, then, "mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed." Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 105 S. Ct. 1238, 1243, 84 L. Ed. 2d 158 (1985) (emphasis in original). But this mandate arises only after the district court has determined that the parties have agreed to arbitrate their disputes. Section 4 of the Act directs the district court to order the parties to arbitrate only "upon being satisfied that the making of the agreement for arbitration . . . is not in issue . . . ." 9 U.S.C. § 4. Should the district court find that the making of the arbitration agreement is at issue, "the court shall proceed immediately to the trial thereof." Id.
Mr. Ferreri has, indeed, placed the making of the arbitration agreement in issue. He claims that he is not a party to the Market Maker's Agreement and that he never saw a copy of that Agreement, which contains the arbitration clause in question, before the onset of this litigation. Ferreri Affidavit, at para. 13. He claims that no one at First Options informed him that he would be required to arbitrate disputes; nor did his partner, Mr. Mainardi, tell him that he would be required to arbitrate disputes with First Options. Ferreri Affidavit, at para. 14-15. Finally, Mr. Ferreri alleges that he never gave Mr. Mainardi the authority to bind him to arbitrate any disputes that he had with First Options. Ferreri Affidavit, at para. 18.
The criteria for resolving the issue of whether there was a meeting of the minds with respect to arbitration were set forth in Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., 636 F.2d 51 (3d Cir. 1980). In Par-Knit, the buyer's production manager signed a contract for the sale of goods that had previously been reviewed by the highest ranking official at the buyer's plant. The contract contained an arbitration provision, which the seller sought to enforce when a dispute between the parties arose. The buyer sought to avoid arbitration and claimed that there had been no meeting of minds on the issue of arbitration. The buyer also asserted that the production manager lacked the authority to bind the buyer to the arbitration provision.
Par-Knit held that a party should be "deprived of a day in court" only when there is an "express, unequivocal agreement" to arbitrate disputes. 636 F.2d at 54. Compelling a party to arbitrate a dispute was appropriate "only when there is no genuine issue of fact concerning the formation of the agreement . . . ." Id. A district court should give the party opposing arbitration "the benefit of all reasonable doubts and inferences that may arise." Id.6
To withstand a motion to compel arbitration, an "unequivocal denial that the agreement had been made, accompanied by supporting affidavits, . . . in most cases should be sufficient to require a jury determination on whether there had in fact been a 'meeting of the minds.'" Id. at 55 (citation omitted).
In Par-Knit, the court remanded the case for a jury trial on the "meeting of the minds" issue, noting with regard to the authority of the production manager to bind the buyer-corporation:
"If the production manager did not have the actual or apparent authority to execute the contract, the corporation cannot be bound, no matter how clearly the document was labeled." Id.
In the instant litigation, Mr. Ferreri has unequivocally denied that an agreement to arbitrate was made and has submitted an affidavit in which he denies that he gave Mr. Mainardi, his partner, the authority to bind him to arbitrate disputes with First Options. This, according to the Par-Knit court, is sufficient in most cases to require a jury trial on whether there was a meeting of the minds to arbitrate. However, the additional discovery that was taken in this matter shows that a jury trial is needed to resolve this issue.
In his deposition, Mr. Mainardi, who signed the agreement on behalf of Mr. Ferreri's partnership, stated that as general partner of Idraniam Trading Partners he had the authority to enter into the Market Maker's Agreement on behalf of the partnership and Mr. Ferreri. Deposition of Andrew Mainardi, III, at 14-18. He believed that this authority extended to the power to agree to the arbitration provision. Id. at 16-18. However, he was surprised to learn that the Agreement contained an arbitration provision. Id. at 16-17.
The deposition of Mr. Huber, who executed the Agreement on behalf of First Options, also shows that there is a factual issue as to whether there was a meeting of the minds about arbitration.
Mr. Huber, prior to the execution of the Agreement, never discussed the arbitration clause with either Mr. Ferreri or Mr. Mainardi. Deposition of Christian Huber, Jr., at 23. Nor did he make any inquiries as to whether Mr. Mainardi had the authority to agree to arbitrate any disputes that might arise in connection with the opening of the account. Id. at 45-46. However, he believed that Mr. Mainardi had the authority to sign the agreement on behalf of Mr. Ferreri and the partnership. Id. at 14.
Mr. Ferreri, for his part, acknowledged in his deposition that Mr. Mainardi was authorized to open the market maker account on behalf of the partnership (Deposition of Alfred Ferreri, at 66), but denied that Mr. Mainardi had the power to submit disputes to arbitration.
The arbitration provision was vital to the agreement between the parties. First Options states that without the arbitration provision "First Options would not have permitted the account to be opened." Memorandum in Support of the Motion of First Options of Chicago, Inc. to Compel Arbitration, at 8. First Options also submitted the affidavit of Raymond L. Aronson, Associate Director of the Legal and Compliance Department of Bear, Stearns & Co., a securities broker, to support its contention that "it is customary in the industry for account agreements to be signed by the general partner of a limited partnership on behalf of the partnership and all partners and for such agreements to contain arbitration requirements." Id. at 10.
First Options appears to miss the point. The issue is not whether such agreements customarily contain arbitration provisions or whether First Options customarily relies on the authority of the general partner of a limited partnership to bind the other partners and the partnership to the arbitration provision. Rather, the issue is "whether the facts and circumstances surrounding the formation of the document demonstrate that there was mutual assent to arbitration." Okcuoglu v. Hess, Grant & Co., Inc., 580 F. Supp. 749, 750 (E.D. Pa. 1984). On the record before me, there is a genuine issue of material fact as to whether these parties agreed to arbitrate. Par-Knit, 636 F.2d at 54.
First Options attempts to distinguish this case from Par-Knit because of the difference in authority between a production manager in a corporation and a general partner in a limited partnership.
However, the authority of a general partner with respect to submitting firm disputes to arbitration is not as clear as First Options would have it.
It is true that the authority to manage the partnership business carries with it the authority "to make contracts which are incidental to such business, are usually made in it, or are reasonably necessary in conducting it . . . and . . . to direct the ordinary operations of the business." Restatement (Second) of Agency § 73; 68 C.J.S. § 141, at 576-77. Such authority would extend to binding the partners and the partnership to contracts in the usual form containing the usual terms. Restatement (Second) of Agency § 51(a). There is no question that entering into the Market Maker's Agreement with First Options was incidental if not necessary to conduct the partnership business. Nor is there any dispute that the contract was in standard form and contained the usual terms. The problem concerns the general partner's power to submit these disputes to arbitration.
Mr. Ferreri and Mr. Mainardi's partnership, Idraniam Trading Partners,
was a limited partnership. Under the Uniform Limited Partnership Act of 1916, a general partner in a limited partnership has "all the rights and powers and [is] subject to all the restrictions and liabilities of a partner in a partnership without limited partners . . . ." Uniform Limited Partnership Act of 1916, § 9(1).
Since a general partner in a limited partnership has powers similar to those of a partner in a partnership without limited partners, we then look to the Uniform Partnership Act. This Act, on its face, appears to forbid partners from submitting firm disputes to arbitration unless the other partners authorize that partner to do so.
Section 9(3) of the Uniform Partnership Act provides:
"Unless authorized by the other partners . . ., one or more but less than all the partners have no authority to . . . s]ubmit a partnership claim or liability to arbitration or reference."
Uniform Partnership Act, § 9(3).
There is little authority dealing with Section 9(3) of the Uniform Partnership Act. See Wydel Associates v. Thermasol, Ltd., 452 F. Supp. 739, 741-42 (W.D. Tex. 1978) (Section 9(3) clearly purports to limit the authority of partners to submit existing claims to arbitration, rather than agreements to arbitrate future disputes. In any case, plaintiff in this matter had clearly ratified the contract); Hartford Financial Systems v. Florida Software Services, Inc., 550 F. Supp. 1079, 1087 n.12 (D. Me. 1982), appeal dismissed, 712 F.2d 724 (1st Cir. 1983) (ditto); Arbitration between Baker and Board of Education of Central School District No. 2 of Towns Bath, et al., 309 N.Y. 551, 132 N.E.2d 837, 839 (N.Y. 1956) (Section 9(3) prohibited submission of a dispute to arbitration by one partner only in the absence of a contract containing an arbitration clause); Stein-Tex, Inc. v. Scappatillio, 193 Misc. 402, 87 N.Y.S.2d 317 (N.Y. Sup. Ct. 1948), modified on other grounds, 275 A.D. 749, 88 N.Y.S.2d 270 (N.Y. App. Div. 1949) (even if partner exceeded his authority in submitting dispute to arbitration, other partners, by their conduct, gave their assent to the whole contract, including the arbitration provision).
I find that the issue turns on whether Mainardi had actual or apparent authority to agree to arbitrate these disputes. I cannot, as a matter of law, determine that Mr. Mainardi, the general partner, had actual authority to enter into the Market Maker's Agreement. That is a matter for a jury. Nor can I find that he had apparent authority to do so. That is also a matter for a jury. "The existence of apparent authority turns on matters . . . of a type rarely susceptible to treatment on summary judgment." Ebasco Services Inc. v. Pennsylvania Power and Light Co., 402 F. Supp. 421, 448 (E.D. Pa. 1975). There is a factual issue as to whether there was any manifestation of the existence of authority to arbitrate on which defendant relied. Ferreri's version is that First Options opened the account in reliance on his oral understanding with Huber, not Mainardi's "authority." See p. 8 supra.
Because of the need for a trial to determine whether there was an agreement between the parties to arbitrate their disputes, I hold in abeyance the motion of First Options to compel arbitration.
Pursuant to section 4 of the Federal Arbitration Act, the parties will proceed to trial on this issue. Mr. Ferreri has requested a trial by jury on this matter, as is his right under section 4 of the Act. Ferreri Affidavit, at para. 19.
The motion of First Options to stay proceedings pending arbitration will also be held in abeyance pending the results of the jury trial on the meeting of the minds issue. See Matterhorn, Inc. v. NCR Corporation, 763 F.2d 866, 869-70 (7th Cir. 1985) (decision that trial was necessary to resolve issue of whether parties had agreed to arbitrate disputes was not a denial of a motion to stay -- such a decision is akin to a denial of a motion for summary judgment on a claim for injunction).
Scope of the Arbitration Clause
Since the issue is raised, I will rule now on the scope of the arbitration provision. Should the jury decide that the parties did agree to arbitrate their disputes, I find that the first five counts of Mr. Ferreri's complaints present issues that are arbitrable. However, plaintiff's sixth count, which sets forth a claim under the Pennsylvania Securities Act (70 P.S. §§ 1-101 et seq.), is not arbitrable. See Martin v. ITM/International Trading & Marketing Ltd., 343 Pa. Super. 250, 494 A.2d 451 (Pa. Super. Ct. 1985).
The provision governing arbitration in this case is extremely broad, covering disputes that develop either before or after the date of execution of the Market Maker's Agreement. The provision requires the parties to arbitrate any controversy "arising out of the undersigned's business or this Agreement, whether arising before or after the date hereof." (emphasis added). Mainardi Deposition, Exhibit 4, at para. 21.
The first five counts in Mr. Ferreri's complaint allege that First Options, in its dealings with Mr. Mainardi, committed fraud and misrepresentation as well as breached an oral contract, a fiduciary duty, and an agency relationship. In order to decide whether these counts are arbitrable, I must determine whether the arbitration provision covers the following disputes between Mr. Ferreri and First Options:
1. whether Mr. Huber misrepresented Mr. Mainardi's abilities as a market maker to Mr. Ferreri;