Broadcort Capital Corp. v. Dutcher

Citations: 859 F. Supp. 1517; 1994 U.S. Dist. LEXIS 11140; 1994 WL 442514Docket: 93 Civ. 4402 (AGS)

Court: District Court, S.D. New York; August 9, 1994; Federal District Court

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Broadcort Capital Corp. filed a lawsuit against James P. Dutcher on June 29, 1993, for $90,000, claiming Dutcher failed to pay for securities purchased through Allied Capital Corp. After receiving extensions to respond to the lawsuit, Dutcher initiated arbitration with the National Association of Securities Dealers (NASD) on November 11, 1993, alleging fraud related to his transactions and seeking rescission against Broadcort and others. Dutcher then requested a stay of the New York action under the Federal Arbitration Act (FAA) Section 3, while Broadcort cross-moved to compel arbitration in New York under FAA Section 4.

The court must determine two issues: whether Dutcher is entitled to a stay of the New York action and whether arbitration can be compelled in New York. The court found that Broadcort's action is referable to NASD arbitration since it pertains to its business as an NASD member. Additionally, Dutcher was not in default regarding arbitration, as there was no substantial progress in the New York litigation beyond preliminary motions. The court emphasized that mere participation in court does not waive the right to arbitration, and thus, Dutcher’s delay in requesting arbitration did not constitute default.

Dutcher is granted a stay of Broadcort's legal action against him in New York, as he has not refused to arbitrate but instead initiated arbitration proceedings in San Francisco. Broadcort's cross-motion to compel arbitration in New York is denied because it is not "aggrieved" by Dutcher's actions; he has shown a willingness to arbitrate by naming Broadcort as a respondent in a San Francisco proceeding. The court references the case Aaacon Auto Transp. Inc. v. Barnes, where the plaintiff was found not to be aggrieved since the defendant had made a demand for arbitration. The court emphasizes that arbitration should proceed in San Francisco as determined by the American Arbitration Association (AAA), even if this may lead to less efficient outcomes. The findings align with the Federal Arbitration Act (FAA), which mandates the enforcement of arbitration agreements regardless of potential inefficiencies. Broadcort is directed to seek a severance from the San Francisco arbitration if necessary.

Under Section 4 of the Federal Arbitration Act (FAA), a party may petition a U.S. district court to compel arbitration if another party refuses to arbitrate as per a written agreement. Dutcher initiated arbitration proceedings in San Francisco, which Broadcort was ordered to participate in but subsequently refused. The court determined that Dutcher possesses a present right to compel arbitration, thus entitling him to a stay under Section 3. Unlike the case in Downing v. Merrill Lynch, where arbitration had not been initiated by either party, Dutcher's situation involved an initiated arbitration process, justifying his request.

Furthermore, courts have held that a motion to compel arbitration under Section 4 does not need to be paired with a motion for a stay under Section 3. Dutcher, as a customer, is entitled to demand arbitration as a third-party beneficiary of Broadcort's agreement with the NASD, which provides for dispute resolution through arbitration—even in the absence of a written agreement. The case of Broadcort is distinguished from Dean Witter Reynolds, Inc. v. Prouse, where the opposing party had not refused to arbitrate; here, Broadcort has explicitly declined to arbitrate in the designated forum, making the application of Prouse inapplicable. The court noted that the precedent set in Aaacon Auto Transport, Inc. supports that a party is not entitled to compel arbitration if the other party has already initiated arbitration in a different forum.