Rush v. Oppenheimer & Co., Inc., 650 F. Supp. 682 (S.D.N.Y. 1986)

*683 Christopher Lovell, P.C., New York City, for plaintiff, Christopher Lovell, of counsel.

Gold, Farrell & Marks, New York City, for defendants, Martin R. Gold, Robert P. Mulvey, of counsel.

SWEET, District Judge.

Defendants Oppenheimer & Co., Inc. ("Oppenheimer") and Scott Seskis ("Seskis") have moved for an order granting summary judgment on the preliminary issue of fraudulent inducement of an arbitration clause or, in the alternative, for an order directing that the issue of fraudulent inducement and the merits of the action be tried before separate juries. For the reasons stated below, both motions are denied.

In its opinion of June 25, 1986, 638 F. Supp. 872, this court concluded that a question of fact existed as to whether the plaintiff, R. Stockton Rush III ("Rush"), was fraudulently induced to enter an arbitration agreement with Oppenheimer based upon the statement by Seskis that he told Rush to read carefully before signing all documents required to transfer his account to Oppenheimer. Rush testified that he was told that there was no need to read the documents because they were merely a routine formality to open the account.

In connection with the present motion, Seskis has submitted an affidavit stating that he was unaware of the existence of the arbitration clause and did not know the import of such clauses. Thus, he argues, he lacked the requisite knowledge necessary to intentionally mislead Rush with respect to the consequences of arbitration.

First of all, scienter is not necessary to make a contract induced by a misrepresentation voidable; so long as the misrepresentation is material, an unknowing misstatement constitutes grounds for revocation or rescission. See Restatement (Second) of Contracts § 164 (1981).^[1] A factual *684 question therefore exists as to 1) whether the alleged misstatement was material, 2) whether it induced Rush to make the contract, and 3) whether Rush was justified in relying on the misrepresentation. See Restatement (Second) of Contracts § 164 comment a (1981).

While Rush has not submitted any evidence that Seskis did in fact know of the existence of the arbitration clause, Seskis was acting as agent for Oppenheimer, which did know the content of its form documents, including the arbitration clause. A factual issue exists as to whether Oppenheimer had the scienter required for a finding of fraudulent inducement.

As an alternative to summary judgment, Seskis and Oppenheimer argue that the arbitration clause issue should not be tried to the same jury impanelled to hear the federal securities and common law claims. Fed.R.Civ.P. 42(b) provides that:

(b) Separate Trials. The court, in furtherance of convenience or to avoid prejudice, or when separate trials will be conducive to expedition and economy, may order a separate trial of any claim, cross-claim, counterclaim, or third-party claim, or of any separate issue or of any number of claims, cross-claims, counterclaims, third-party claims, or issues, always preserving inviolate the right of trial by jury as declared by the Seventh Amendment to the Constitution or as given by a statute of the United States.

This court does not conclude that Seskis and Oppenheimer will be unduly prejudiced if the same jury hears allegations that Seskis fraudulently induced Rush to sign an arbitration agreement. The additional interest espoused in Rule 42(b) of "convenience" and "expedition and economy" weighs against the delay and cost of impanelling two juries and hearing testimony from Seskis and Rush before both.

Oppenheimer and Seskis further request that, should the jury decide that the arbitration clause was fraudulently induced, they be afforded an opportunity to appeal before the entire case is submitted to the jury. In the interests of convenience and economy, that request is denied.

IT IS SO ORDERED.

[1] Section 2 of the United States Arbitration Act, 9 U.S.C. § 2, preserves "such grounds as exist at law or in equity for the revocation of any contract." The Supreme Court has recently noted the applicability of § 2 in the context of defenses to arbitration agreements. See Dean Witter v. Byrd, 470 U.S. 213, 105 S. Ct. 1238, 1241, 84 L. Ed. 2d 158 (1985).