Miller v. Drexel Burnham Lambert, Inc.

791 F.2d 850, 55 USLW 2052, Fed. Sec. L. Rep. P 92,783

United States Court of Appeals, Eleventh Circuit.

David MILLER, Plaintiff-Appellant,
v.
DREXEL BURNHAM LAMBERT, INC., David Sullivan, Defendants-Appellees.
Elliot VARON, Plaintiff,
v.
DREXEL BURNHAM LAMBERT, INC., David Sullivan, Defendants.
Clint RAMSDEN, Plaintiff,
v.
DREXEL BURNHAM LAMBERT, INC., David Sullivan, Defendants.

No. 85-5692.

June 17, 1986.

Investor sued his broker and the latter's employer for violations of federal securities laws as well as for breach of fiduciary duty. The United States District Court for the Southern District of Florida, Alcee L. Hastings, J., ordered arbitration of claim under Securities Exchange Act of 1934 and fiduciary duty claim, and defendants appealed. The Court of Appeals held that: (1) orders compelling arbitration were immediately reviewable; (2) there was no waiver of right to arbitrate; and (3) no claims based on Federal Securities Acts were arbitrable.
Affirmed in part, reversed in part and remanded.

West Headnotes


[1] Headnote Citing References KeyCite Citing References for this Headnote

Key Number Symbol 25T Alternative Dispute Resolution
Key Number Symbol 25TII Arbitration
Key Number Symbol 25TII(I) Exchanges and Dealer Associations
Key Number Symbol 25Tk411 Relations Between Customer-Investors and Broker-Dealers
Key Number Symbol 25Tk412 k. In General. Most Cited Cases
(Formerly 33k91 Arbitration, 160k11(11.1), 160k11(11))

Claim under § 12(2) of the Securities Act of 1933 was nonarbitrable. Securities Act of 1933, §§ 12(2), 14, 15 U.S.C.A. §§ 77 l (2) , 77n.
[2] Headnote Citing References KeyCite Citing References for this Headnote

Key Number Symbol 25T Alternative Dispute Resolution
Key Number Symbol 25TII Arbitration
Key Number Symbol 25TII(D) Performance, Breach, Enforcement, and Contest
Key Number Symbol 25Tk204 Remedies and Proceedings for Enforcement in General
Key Number Symbol 25Tk213 Review
Key Number Symbol 25Tk213(3) k. Decisions Reviewable; Finality. Most Cited Cases
(Formerly 33k23.20, 33k23.17 Arbitration)

Key Number Symbol 25T Alternative Dispute Resolution Headnote Citing References KeyCite Citing References for this Headnote
Key Number Symbol 25TII Arbitration
Key Number Symbol 25TII(I) Exchanges and Dealer Associations
Key Number Symbol 25Tk411 Relations Between Customer-Investors and Broker-Dealers
Key Number Symbol 25Tk414 k. Performance, Breach, Enforcement, and Contest of Agreement. Most Cited Cases
(Formerly 33k91 Arbitration, 160k11(11.1), 160k11(11))

Order compelling arbitration of some, but not all, claims in a pending lawsuit is reviewable as an order in nature of an injunction precluding further judicial proceedings on the arbitrable claims, regardless of whether nonarbitrable claims are also stayed; hence, appeal would lie from order compelling arbitration of fiduciary duty claim and claim under Securities Exchange Act of 1934, notwithstanding that claim under Securities Act of 1933 was excluded from arbitration. Securities Exchange Act of 1934, §§ 1 et seq., 10(b), 15 U.S.C.A. §§ 78a et seq., 78j(b); Securities Act of 1933, §§ 1 et seq., 12(2), 15 U.S.C.A. §§ 77a et seq., 77 l (2) ; 28 U.S.C.A. § 1292(a)(1).
[3] Headnote Citing References KeyCite Citing References for this Headnote

Key Number Symbol 25T Alternative Dispute Resolution
Key Number Symbol 25TII Arbitration
Key Number Symbol 25TII(D) Performance, Breach, Enforcement, and Contest
Key Number Symbol 25Tk177 Right to Enforcement and Defenses in General
Key Number Symbol 25Tk182 Waiver or Estoppel
Key Number Symbol 25Tk182(1) k. In General. Most Cited Cases
(Formerly 33k23.3(1), 33k23.3 Arbitration)

Right to arbitrate under the Federal Arbitration Act can be waived. 9 U.S.C.A. § 4.
[4] Headnote Citing References KeyCite Citing References for this Headnote

Key Number Symbol 25T Alternative Dispute Resolution
Key Number Symbol 25TII Arbitration
Key Number Symbol 25TII(D) Performance, Breach, Enforcement, and Contest
Key Number Symbol 25Tk204 Remedies and Proceedings for Enforcement in General
Key Number Symbol 25Tk205 k. In General. Most Cited Cases
(Formerly 33k23.7 Arbitration)

District court was wrong in ordering arbitration of claim otherwise arbitrable under Federal Arbitration Act without withdrawing its prior finding waiver of right to arbitrate. 9 U.S.C.A. § 4.
[5] Headnote Citing References KeyCite Citing References for this Headnote

Key Number Symbol 156 Estoppel
Key Number Symbol 156III Equitable Estoppel
Key Number Symbol 156III(A) Nature and Essentials in General
Key Number Symbol 156k52.10 Waiver Distinguished
Key Number Symbol 156k52.10(3) k. Implied Waiver and Conduct Constituting Waiver. Most Cited Cases

A litigant is not required to engage in futile gestures merely to avoid a claim of waiver.
[6] Headnote Citing References KeyCite Citing References for this Headnote

Key Number Symbol 25T Alternative Dispute Resolution
Key Number Symbol 25TII Arbitration
Key Number Symbol 25TII(D) Performance, Breach, Enforcement, and Contest
Key Number Symbol 25Tk177 Right to Enforcement and Defenses in General
Key Number Symbol 25Tk182 Waiver or Estoppel
Key Number Symbol 25Tk182(2) k. Suing or Participating in Suit. Most Cited Cases
(Formerly 33k23.3(2), 33k23.4 Arbitration)

Fifteen-month delay in moving to compel arbitration of arbitrable claims that were joined with nonarbitral claims did not waive right to arbitrate the former where under law existing at time complaint was filed and for twelve and a half months thereafter the law precluded arbitration in such cases and most of the two and a half month delay in seeking arbitration following change in law was attributable to consolidation and filing of amended complaint. 9 U.S.C.A. § 4.
[7] Headnote Citing References KeyCite Citing References for this Headnote

Key Number Symbol 25T Alternative Dispute Resolution
Key Number Symbol 25TII Arbitration
Key Number Symbol 25TII(I) Exchanges and Dealer Associations
Key Number Symbol 25Tk411 Relations Between Customer-Investors and Broker-Dealers
Key Number Symbol 25Tk412 k. In General. Most Cited Cases
(Formerly 33k91 Arbitration, 160k11(11.1), 160k11(11))

No claims based on the federal securities acts are arbitrable. Securities Exchange Act of 1934, §§ 1 et seq., 10(b), 15 U.S.C.A. §§ 78a et seq., 78j(b); Securities Act of 1933, §§ 1 et seq., 12(2), 15 U.S.C.A. §§ 77a et seq., 77 l (2) .
[8] Headnote Citing References KeyCite Citing References for this Headnote

Key Number Symbol 25T Alternative Dispute Resolution
Key Number Symbol 25TII Arbitration
Key Number Symbol 25TII(I) Exchanges and Dealer Associations
Key Number Symbol 25Tk411 Relations Between Customer-Investors and Broker-Dealers
Key Number Symbol 25Tk412 k. In General. Most Cited Cases
(Formerly 33k91 Arbitration, 160k11(11.1), 160k11(11))

State law claim for breach of fiduciary duty by stockbroker and his employer was subject to arbitration under Federal Arbitration Act. 9 U.S.C.A. § 4.
[9] Headnote Citing References KeyCite Citing References for this Headnote

Key Number Symbol 25T Alternative Dispute Resolution
Key Number Symbol 25TII Arbitration
Key Number Symbol 25TII(D) Performance, Breach, Enforcement, and Contest
Key Number Symbol 25Tk204 Remedies and Proceedings for Enforcement in General
Key Number Symbol 25Tk205 k. In General. Most Cited Cases
(Formerly 33k23.7 Arbitration)

A court may not order arbitration under the Federal Arbitration Act until it is satisfied that a valid arbitration agreement exists. 9 U.S.C.A. § 4.
[10] Headnote Citing References KeyCite Citing References for this Headnote

Key Number Symbol 25T Alternative Dispute Resolution
Key Number Symbol 25TII Arbitration
Key Number Symbol 25TII(D) Performance, Breach, Enforcement, and Contest
Key Number Symbol 25Tk197 Matters to Be Determined by Court
Key Number Symbol 25Tk199 k. Existence and Validity of Agreement. Most Cited Cases
(Formerly 33k23.13 Arbitration)

Any claim of fraud, duress or unconscionability in formation of an arbitration agreement subject to Federal Arbitration Act is a matter of judicial concern; allegations of unconscionability in the contract as a whole are matters to be resolved in arbitration. 9 U.S.C.A. § 4.
*851 Russell L. Forkey, Cara L. Eisenberg, Boca Raton, Fla., for plaintiff-appellant.

*852 Edward J. Marko, Boca Raton, Fla., for defendants-appellees.

Appeal from the United States District Court for the Southern District of Florida.

Before FAY, CLARK and NIES FN* , Circuit Judges.

FN* Honorable Helen W. Nies, U.S. Circuit Judge for the Federal Circuit, sitting by designation.

PER CURIAM:


Appellant-plaintiff David Miller brings this appeal from a district court order compelling arbitration of certain federal securities and state common law claims. Appellant had brought suit against his broker, appellee David Sullivan, and Sullivan's employer, appellee Drexel Burnham Lambert, Inc. for violations of the 1933 and 1934 Securities Acts FN1 as well as for breach of fiduciary duty. Appellant had accused his broker of diverting $50,000 from appellant's money market account to unauthorized margin purchases of speculative stock. When the case was fifteen months old, it was consolidated with two similar cases and appellant filed an amended complaint. In response, appellees filed motions to compel arbitration pursuant to the parties' brokerage agreements and to stay judicial proceedings pending arbitration. Those motions were denied with respect to appellant's claims, on the grounds that appellees had waived their rights to arbitrate. Several months later, however, the district court ordered sua sponte that the 1934 Act claim and the fiduciary duty claim should proceed to arbitration. Appellant contends that the district court erred in compelling arbitration and vacating its previous order.

FN1. Specifically, appellant alleged violations of section 12(2) of the Securities Act of 1933 (the 1933 Act) and section 10(b) and Rule 10b-5g of the Securities Exchange Act of 1934 (the 1934 Act).


Appellant's argument presents three issues for our consideration: first, whether the district court improperly ignored its previous finding that appellees had waived their rights to arbitration; second, whether the district court erred as a matter of law in ordering arbitration of claims under the Securities Exchange Act of 1934; and third, whether appellant's claim of unconscionability in the parties' brokerage agreement should prevent arbitration of any claims. Before discussing these issues, we raise a fourth: whether this court has jurisdiction to review a district court order compelling arbitration.
Ordinarily, this court's jurisdiction is confined to review of final judgments. Certain orders compelling arbitration are indeed final under 28 U.S.C. § 1291 because they completely dispose of all issues before the district court. The classic example is that of an action brought solely to obtain an arbitration order pursuant to § 4 of the Federal Arbitration Act, 9 U.S.C. § 4. See, e.g., N.V. Maatschappij Voor Industriele Waarden v. A.O. Smith Corp., 532 F.2d 874 (2d Cir.1976) . Also considered final are arbitration orders issued on motion of a defendant in a pending suit. So long as the motion directs all claims to arbitration, typically pursuant to a contractual agreement to arbitrate, the order is final under § 1291 even if not issued in an independent § 4 proceeding. See, e.g., Coastal Industries, Inc. v. Automatic Steam Products Corp., 654 F.2d 375 (5th Cir. Unit B 1981) ; City of Naples v. Prepakt Concrete, 494 F.2d 511 (5th Cir.1974) . But see Matterhorn, Inc. v. NCR Corp., 763 F.2d 866 (7th Cir.1985) (order granting or denying arbitration is not final if made in a pending suit).
[1] Headnote Citing References [2] Headnote Citing References The case at hand does not fit into either of these categories, however, since the motion for arbitration arose in a pending suit but no order compelling arbitration could dispose of all the claims. Appellant's claim under § 12(2) of the 1933 Act is clearly not arbitrable because § 14 of that Act prohibits waiver of the right to litigate any claims arising under the 1933 Act. See Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953) . Thus, the order in this case cannot be final under § 1291 and the question remains whether it is reviewable *853 under any exception to the finality requirement.
We believe that an order compelling arbitration of some, but not all, claims in a pending suit is nevertheless reviewable under § 1292(a)(1). This section provides jurisdiction for appeals of interlocutory orders "granting, continuing, modifying, refusing or dissolving injunctions." An order compelling arbitration has the obvious practical effect of enjoining any further judicial proceedings on the arbitrable claims, regardless of whether non-arbitrable claims are also stayed. FN2 Yet, the practical effect of an injunction is not always enough to satisfy § 1292(a)(1), for any order compelling an action functions as a mandatory injunction. An order compelling arbitration, however, is deemed to be an injunction whenever the order is granted in an action which would have been an action at law prior to the fusion of law and equity. See Sweater Bee By Banff v. Manhattan Industries, 754 F.2d 457, 460 n. 2 (2d Cir.) , cert. denied, 474 U.S. 819, 106 S.Ct. 68, 88 L.Ed.2d 55 (1985); Langley v. Colonial Leasing Co., 707 F.2d 1, 5 (1st Cir.1983) .

FN2. In this case, appellee never sought review of the denial of stay or the denial of arbitration. Appellant had no reason to contest the denial of stay either, at least not until arbitration was ordered. By that time, however, the right to appeal the denial of stay had lapsed. Consequently, we have before us the uncommon case of an appeal solely from an order compelling arbitration.


This result derives from the much maligned but still controlling Enelow-Ettelson doctrine, FN3 which holds that in actions at law, an order granting or denying a stay based on an "equitable defense" is immediately appealable as an order granting or denying an injunction. See Langley, supra at 2. Here the underlying action is "legal" and arbitration is interposed as an equitable defense. We recognize that the order at issue is not precisely within Enelow-Ettelson since it is an order to compel arbitration rather than a stay pending such proceedings. Nonetheless, we concur in the First Circuit's observation that for purposes of this doctrine, there is no "principled distinction" between stays and orders to compel arbitration. See id. at 5. The Federal Arbitration Act authorizes motions both for stays and for orders to arbitrate. Both types of orders are frequently appealed from together, and the propriety of either one raises substantially the same issues on review. Any rule holding one immediately appealable and the other not would be easily circumvented. Consequently, we hold that orders to compel arbitration are immediately appealable under the Enelow-Ettelson doctrine.

FN3. See Enelow v. New York Life Insurance Co., 293 U.S. 379, 55 S.Ct. 310, 79 L.Ed. 440 (1935) ; Ettelson v. Metropolitan Life Insurance Co., 317 U.S. 188, 63 S.Ct. 163, 87 L.Ed. 176 (1942) . For a concise criticism of the rule, see Matterhorn, Inc., supra at 870-71 (Posner, J.). Despite Judge Posner's apt criticism, Enelow-Ettelson is alive and well in this circuit by virtue of binding precedent. See Coastal Industries, Inc., supra. For the reasons set out above, we feel compelled to apply it in this case.


[3] Headnote Citing References [4] Headnote Citing References Having resolved this jurisdictional issue, we proceed to the merits of an order compelling arbitration of a 1934 Act claim and a common law breach of fiduciary duty claim. Appellant contends that the order is erroneous because the district court had already found appellees had waived their contractual rights to arbitrate. In its order of June 12, 1985, the trial court did make a finding of waiver and that finding was affirmed in a subsequent order of July 24. In its July 31 order, the trial court did not vacate its finding of waiver. It simply held that the federal policy in favor of arbitration overrides a waiver and therefore arbitration should ensue. The district court was incorrect in suggesting that one cannot waive a right to arbitrate under the Federal Arbitration Act. Despite the federal preference for arbitration rather than litigation, waiver has long been recognized in the federal scheme. See, e.g., La Nacional Platanera, S.C.L. v. North American Fruit & Steamship Corp., 84 F.2d 881 (5th Cir.1936) ; E.C. Ernst, Inc. v. Manhattan Construction Co., 551 F.2d 1026, 1040 (5th Cir.1977) . Consequently, the district court was wrong in ordering arbitration *854 without withdrawing its finding of waiver. Nonetheless, we cannot vacate the order on that ground, since we agree with appellees that the initial finding of waiver was erroneous.
[5] Headnote Citing References [6] Headnote Citing References Appellant's original complaint was filed on December 13, 1983 and alleged federal and common law claims based on a common nucleus of operative facts. As the law of this circuit stood at that time, appellees could not have obtained an order compelling arbitration of any of these claims, despite the fact that the state law claim was clearly arbitrable. When arbitrable claims were joined with non-arbitrable claims, and all were "inextricably intertwined" on a factual basis, arbitration of any claim was generally denied "in order to protect the jurisdiction of the federal court and avoid any possible preclusive effect." Belke v. Merrill Lynch, Pierce, Fenner & Smith, 693 F.2d 1023 (11th Cir.1982) . Until this rule was overturned by the Supreme Court on March 4, 1985, see Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S.Ct. 1238, 84 L.Ed.2d 158, any motion to compel arbitration would almost certainly have been futile. This circuit does not require a litigant to engage in futile gestures merely to avoid a claim of waiver. See Belke, supra. Thus, appellees' failure to request arbitration prior to the Byrd decision is irrelevant to the issue of waiver. Subsequent to that decision, appellees delayed only two and a half months in making their request. Much of that delay is attributable to consolidation of the cases and appellant's filing of an amended complaint. In light of these facts, we find no waiver of the right to arbitrate.
[7] Headnote Citing References [8] Headnote Citing References Notwithstanding appellees' continuing rights to a non-judicial forum, we must vacate that portion of the district court order which compels arbitration of the 1934 Act fraud claim. Under the rule of Belke, supra, no claims based on the federal securities acts are arbitrable. Nothing in Dean Witter v. Byrd holds otherwise since the Supreme Court expressly declined to reach arbitrability of 1934 Act claims. See Byrd, supra at 1240 n. 1. Belke remains the law of this circuit, and therefore the only claim which may be arbitrated is the state law claim for breach of fiduciary duty. See Gorman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 780 F.2d 1032, slip op. at 3 (11th Cir.1985).
[9] Headnote Citing References [10] Headnote Citing References Appellant argues, however, that not even a single issue should be arbitrated in this case. He claims that the arbitration clause in the parties' brokerage agreement was invalid as an adhesion contract. Consequently, an indispensable prerequisite to arbitration is lacking. Appellant is correct in noting that a court may not order arbitration until it is satisfied that a valid arbitration agreement exists. See 9 U.S.C. § 4. In making this determination, the district court must observe the following distinction. Any claim of fraud, duress or unconscionability in the formation of the arbitration agreement is a matter for judicial consideration. See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967) . Allegations of unconscionability in the contract as a whole, however, are matters to be resolved in arbitration. See id.; Merrill Lynch, Pierce, Fenner & Smith v. Haydu, 637 F.2d 391 (5th Cir. Unit B 1981) . Thus, appellant's claim bars arbitration only if it goes to the arbitration clause itself and not the whole contract.
Having framed the issue, we find that we cannot conclusively decide it based on the record before us. Appellant's "allegations" of unconscionability are not found in the pleadings, probably because arbitration was an unlikely defense under prevailing case law. Appellant did argue unconscionability in his memorandum opposing appellees' motion to compel arbitration, but the district court never held a hearing on the claim nor did it reach the issue in any of its orders. Consequently, we have only appellant's generalized assertions of unequal bargaining power and fundamental unfairness. Therefore, we remand this case to the district court for a more thorough exploration of the issue and the district court's considered opinion as to the precise *855 nature and sufficiency of appellant's allegations of unconscionability.
AFFIRMED IN PART, REVERSED IN PART and REMANDED.
C.A.11 (Fla.),1986.
Miller v. Drexel Burnham Lambert, Inc.
791 F.2d 850, 55 USLW 2052, Fed. Sec. L. Rep. P 92,783