FAA Preempts State Arbitration Code


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Arbitration therefore mandatory for signatories and third party beneficiaries

Nyko v. First Union Securities, Inc., B150211 (Cal. App., 2Dist., 2/7/02). Appealability * Arbitrability * FAA * Preemption-Federal * Waiver * State Law, Applicability of * Choice of Law * Breadth of Agreement.

FAA preempts state arbitration code unless arbitration clause incorporates California Code and renders arbitration mandatory for signatories and nonsignatory beneficiaries.

Plaintiffs Nyko, Marble Tek and Massan, companies controlled by Bahman Kaveh, appeal from a $40,000 arbitration judgment in their favor rendered against Freddy Lee and First Union Securities. Common law claims resulted from theft and embezzlement of $700,000 from the companies by their investment advisor Fung Yen, who deposited checks in plaintiffs’ First Union accounts and a fraudulent account set up by Fung Yen at Wells Fargo.

Lee and First Union successfully compelled plaintiffs’ claims to arbitration while other non-arbitrable claims against Wells Fargo remained in a court action, which the court stayed pending arbitration within 120 days. Arbitration was ordered as to Nyko and Marble Tek under securities and commodity account agreements with First Union signed by Kaveh. Arbitration was also ordered as to Massan, due to its depositing checks into Marble Tek’s account.

Although the Court discusses the effect of accepting the benefits of a judgment as impliedly waiving the right to appeal, it stops short of deciding on this basis in that plaintiffs were required to convert the arbitration Award into a judgment to be able to appeal the order compelling arbitration.

The Court finds other grounds for denying reversal: Even if there is a potential for inconsistent results, the FAA mandates arbitration. Significantly, the Court distinguishes Volt, holding that the California Code of Civil Procedure is preempted by the FAA unless, as in Volt, the arbitration agreement expressly incorporates the statute. However, the Court finds no abuse of discretion by the trial court in ordering arbitration in view of the strong policy in favor of arbitration and the lack of any extreme miscarriage of justice. There is also the difference in the issues in the Wells Fargo court case, which relates to the Bank’s defenses to forged check claims. (S. Anderson) (EIC: Our thanks to Renan I. Sugarman, First Union Securities, Chicago, IL for alerting us to this decision.) (SLC Ref. No. 02-12-01)

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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.