Opinion
01 C 2827
November 28, 2001
Steven Faso and Paul Dietz were friends in college. In the years thereafter, Dietz became a securities broker at NatCity Investments, Inc. ("NatCity"), and from time to time, Faso invested small amounts in the stock market with Dietz's advice. In September 1998, Dietz encouraged Faso to open an investment account at NatCity. On his friend's recommendation, Faso placed several hundred thousand dollars in an investment account ("the Account") with Dietz as broker.
About a year later, Faso mentioned that he had purchased a condominium and needed to obtain a bridge loan until the closing date. Dietz advised Paso that he could obtain a bridge loan through National City Bank of Indiana ("NCB"), where he could use the Account to secure the loan. Faso followed this advice and obtained a $125,000 loan. As part of the deal, he signed an Account Control Agreement that gave NCB a security interest in the NatCity Account.
In the meantime, Dietz was making a mess of his friend's investments. He allegedly traded Account funds without permission and invested in high risk stocks contrary to Faso's express instructions. Faso lost about $167,000. He complained about Dietz's performance, so NCB transferred the rest of the money in the Account to another brokerage firm.
Ever since the investment debacle with Dietz, Faso has refused to make any payments on the loan from NCB. He is now in default. NCB brought this lawsuit to recover the proceeds plus interest. Faso, in turn, asserts a slew of counterclaims against Dietz, NatCity, NCB, and National City Corporation, including breach of contract, breach of fiduciary duty, fraud, excessive trading, failure to supervise, and negligence.
I have before me counter-defendants' motion to sever the counterclaim and a related motion to compel arbitration of the counterclaim.
Motion to Compel Arbitration
The relationship between Paso and NatCity was governed by written agreements related to the creation and operation of the investment accounts. Each account agreement contained an arbitration clause which required Paso to arbitrate his claims against NatCity and Dietz instead of proceeding in this court. An arbitration agreement must be enforced "save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2; Hill v. Gateway 2000, Inc., 105 F.3d 1147, 1148 (7th Cir. 1997). There is really no dispute here. Paso agrees that there was a valid arbitration agreement and he offers no reason why it should not be enforced. Since the investment account and the loan involved two separate contracts with two entities, there is no mutuality of obligation issue. The counterclaim will be resolved in arbitration.
Motion to Sever Counterclaim
Counter-defendants move to sever the claims on the ground that they are unrelated; they ask me to proceed with the original claim against Paso while the counterclaims are in arbitration. Faso first opposes severance because his counterclaim is "tantamount to a set off against the Bank's claims." This is not much of a defense to the original claim. In fact, it could be construed as an admission of liability.
There is a second argument that I think Faso is making which is more persuasive. The argument is that NCB should not recover (or should recover less) since it unjustifiably impaired the value of the collateral when its agents tortiously lost his money and took funds out of the Account. This argument depends upon the assumption that NCB and NatCity are one and the same entity, or at least function as such, an assumption that defendants challenge. Construing the facts in favor of Paso, as I must, however, it is possible that the claims are linked, and I will not sever them. I do not see any ground for a counterclaim against NCB in the responsive pleadings or briefs, but there may be a valid defense to the original action which involves NCB and the alleged mishandling of monies in the Account.
The motion to compel arbitration [5] is granted. The motion to sever the counterclaim [7] is denied without prejudice. NCB's case is stayed pending arbitration.