Three Valleys Municipal Water District v. E.F. Hutton & Co.

In 1986 the cities of Lawndale, San Marino, and Palmdale and the Palmdale Redevelopment Agency (collectively, the cities) (plaintiffs) opened securities accounts with the predecessor of Shearson Lehman Hutton, Inc. (Shearson) (defendant) and entered into client agreements. Each of the client agreements contained an arbitration clause and was executed by Clarence Raymond Wood, who worked for the cities in various capacities. Two years later, the cities filed a suit against Shearson in federal district court, alleging that due to Shearson’s wrongful conduct, the cities lost a total of $8.279 million on their investment accounts. Shearson filed a motion to stay the federal proceeding and compel arbitration based on the arbitration clauses in the client agreements. The cities opposed the motion, arguing that the client agreements were void because Wood did not have authority to bind plaintiffs when he signed the agreements. The cities further argued that even if the cities were bound by the arbitration clauses, such clauses did not cover claims arising under the federal securities law. The district court entered an order compelling arbitration of a portion of the cities’ claims. Specifically, in compelling arbitration, the district court held that the question of whether Wood had authority to bind plaintiffs should be submitted to an arbitrator. The cities immediately appealed the order compelling arbitration.