Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-89-02230/USCOURTS-ca10-89-02230-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

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UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

SONJA HAYWARD, ) 

) 

Plaintiff-Appellee, ) 

P lLUD 

Unt,~ Srnr~~ t:ourt of Appeals 

Tenth Cirmit 

APR .. 4 1990 

ROBERT L. HOECKER 

Clerk 

) No. 89-2230 

V • ) 

) 

THE STUART-JAMES COMPANY, ) 

INCORPORATED, a New York ) 

corporation; GARY WILLIKY, and ) 

MICHAEL ARCUS, ) 

) 

Defendants-Appellants. ) 

(D.C. No. CV-89-0009-M) 

(D. New Mexico) 

ORDER AND JUDGMENT* 

Before McKAY, SEYMOUR, and EBEL, Circuit Judges. 

After examining the briefs and appellate record, this panel 

has determined unanimously that oral argument would not materially 

assist the determination of this appeal. See Fed. R. App. P. 

34(a); 10th Cir. R. 34.1.9. The cause is therefore ordered 

submitted without oral argument. 

Plaintiff Sonja Hayward, who had opened an investment account 

with The Stuart-James Company, filed suit in federal district 

court against Stuart-James and three named individual employees of 

*This order and judgment has no precedential value and shall not 

be cited, or used by any court within the Tenth Circuit, except 

for purposes of establishing the doctrines of the law of the case, 

res judicata, or collateral estoppel. 10th Cir. R. 36.3. 

Appellate Case: 89-2230 Document: 01019970788 Date Filed: 04/04/1990 Page: 1 
Stuart-James. In her complaint, Hayward alleged violations of the 

Securities Exchange Act of 1934, 15 u.s.c. § 78j(b) (1988), and 

Rule 10(b)(5), 17 C.F.R. § 240.l0b-5 (1989); the Racketeer 

Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961 et 

~ (1988); and the New Mexico Unfair Trade Practices Act, 

N.M. Stat. Ann. § 57-12-3 (1987). Relying on an arbitration 

clause in the Consumer Cash Account Agreement signed by Hayward, 

defendants moved to compel arbitration and to stay the subject 

claims pending arbitration. Hayward asserted that the arbitration 

clause was induced by fraud and was therefore void. After a bench 

trial on this issue, the district court agreed with Hayward and 

denied defendants' motion to compel arbitration. We affirm. 

Defendants' primary contention is that there is insufficient 

evidence to support . the finding that Hayward was fraudulently 

induced to consent to the arbitration clause in the agreement. 

They invoke Prima Paint Corp. v. Flood & Conklin Mfg., 388 U.S. 

395 (1967), in support of their argument that the evidence of 

fraudulent inducement presented by plaintiff goes to the agreement 

as a whole, and not to the arbitration clause specifically. In 

Prima Paint, the Supreme Court held that 

"if the claim is fraud in the inducement of the 

arbitration clause itself •.• the federal court may 

proceed to adjudicate it. But the statutory language 

does not permit the federal court to consider claims of 

fraud in the inducement of the contract generally." 

Id. at 403-04. 

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Appellate Case: 89-2230 Document: 01019970788 Date Filed: 04/04/1990 Page: 2 
• 

We have reviewed the record, and we conclude that there is 

sufficient evidence to support the district court's finding of 

fraud in the inducement of the arbitration clause itself. 

According to testimony by Hayward, Louis Kinlecheene, an employee 

of Stuart-James, told her that the arbitration clause in the 

agreement was required by law to be signed, see rec., vol. II, at 

15-17, but that it was "meaningless," id. at 16, 33-35. Both 

statements were false. 

Defendants also contend Hayward did not prove her claim of 

fraud in the inducement according to the standards of New Mexico 

law. As a preliminary matter, we note that federal substantive 

law, not state law, governs the resolution of this dispute. Moses 

H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 

(1983)(Congress has "create[d] a body of federal substantive law 

of 4arbitrability, applicable to any arbitration agreement within 

the coverage of the Act"). See also Southland Corp. v. Keating, 

465 U.S. 1, 12 (1984); Bayma v. Smith Barney, Harris Upham & Co., 

784 F.2d 1023, 1025 (9th Cir. 1986). Here, a Stuart-James 

employee sent the company's own Customer Cash Account Agreement to 

Hayward and then proceeded to misrepresent the terms of that 

agreement. Based on these facts, we cannot conclude that the 

district court's finding of fraud is clearly erroneous. 

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Appellate Case: 89-2230 Document: 01019970788 Date Filed: 04/04/1990 Page: 3 
Finally, we cannot say that the district court's finding of 

reliance by Hayward is clearly erroneous. We are not persuaded 

that the district court erred in refusing to enforce the 

arbitration provision. Accordingly, the judgment of the district 

court is AFFIRMED. The mandate shall issue forthwith. 

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Entered for the Court 

Stephanie K. Seymour 

Circuit Judge 

Appellate Case: 89-2230 Document: 01019970788 Date Filed: 04/04/1990 Page: 4