Olde Discount Corp. v. Tupman
| Decision Date | 26 August 1993 |
| Docket Number | No. 92-7557,92-7557 |
| Citation | 1 F.3d 202 |
| Parties | , Fed. Sec. L. Rep. P 97,744 OLDE DISCOUNT CORPORATION v. W. Michael TUPMAN, and as Deputy Attorney General of the State of Delaware; Richard W. Hubbard, Securities Commissioner of the State of Delaware; Eugene H. Engelhardt and Carol D. Engelhardt, W. Michael Tupman, individually and as Deputy Attorney General of the State of Delaware; Richard W. Hubbard, Securities Commissioner of the State of Delaware; Eugene H. Engelhardt, Carol D. Engelhardt, Appellants. |
| Court | U.S. Court of Appeals — Third Circuit |
Richard E. Fairbanks, Jr. (argued), Chief of Appeals Div., Loren C. Meyers, Deputy Atty. Gen., DE Dept. of Justice, Wilmington, DE, for appellants.
James S. Green, Duane, Morris & Heckscher, Wilmington, DE, Robert P. Bramnik (argued), Thomas P. Fitzgerald, Michael I. Behn, Altheimer & Gray, Chicago, IL, for appellee.
Joseph C. Long, 300 Timberdell Road, Norman, OK, for amici curiae North American Securities Administrators Ass'n, Inc. and Nat. Consumers League.
Before: GREENBERG, NYGAARD and ROSENN, Circuit Judges.
This case presents a novel question of the relationship between a contracting party's right to enforcement of an arbitration agreement under the Federal Arbitration Act, 9 U.S.C. Secs. 1-16 (FAA), and a state's interest in pursuing a remedy of rescission in an administrative proceeding. The district court enjoined the Delaware securities commissioner from seeking rescission on behalf of two investors who had entered into a predispute arbitration agreement. 805 F.Supp. 1130. We will affirm the district court's order. Judge Greenberg votes to affirm on the grounds that the FAA preempts Delaware's rescission remedy in these circumstances and this opinion reflects the reasons why he has reached this conclusion. Judge Rosenn votes to affirm on the ground that the rescission remedy is barred by reason of contract law as set forth in his separate concurring opinion. Judge Nygaard dissents on this issue for the reasons set forth in his separate opinion. We unanimously hold that this claim, i.e., that a state statute is preempted to the extent it authorizes relief in conflict with rights secured by the FAA, necessarily falls within an exception to the abstention doctrine of Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971).
Appellee Olde Discount Corporation, a securities broker-dealer, is a Michigan corporation with its principal place of business in Detroit and numerous offices throughout the United States. Olde Discount is registered in Delaware as a broker-dealer and has an office in Wilmington. Appellants Eugene and Carol Engelhardt are former customers of Olde Discount. The Engelhardts, then Michigan residents, opened a brokerage account with Olde Discount's Detroit office in 1983. When they moved to Wilmington in 1986, the Engelhardts transferred their account to its Wilmington office.
Olde Discount is primarily, as its name implies, a discount broker. It also makes a market in a few selected stocks; at the times relevant to this action, Second National Federal Savings Bank (SNFS) was among those stocks. Allegedly at the instance of Olde Discount's Wilmington office manager, Michael Donohoe, the Engelhardts purchased 5,000 shares of SNFS stock on May 15, 1990. On May 25, 1990, the Engelhardts signed an account agreement with Olde Discount that required them "to submit any and all controversies or claims arising out of the relationship established by this agreement to arbitration to be conducted according to the rules and procedures of the New York Stock Exchange, Inc. (NYSE) or of the National Association of Securities Dealers, Inc. (NASD)...." Investors Account Agreement, p 18, J.A. at 53. Also on May 25, 1990, the Engelhardts provided Olde Discount with a "customer preference profile" that expressed their interest in "aggressive" investments for the purposes of "growth" and "speculation." J.A. at 48. On June 6, 1990, the Engelhardts purchased an additional 5,000 shares of SNFS. Thus, by early June 1990, the Engelhardts had purchased 10,000 shares of SNFS. These purchases cost the Engelhardts over $50,000.
The price of SNFS stock declined steadily during the summer and fall of 1990, as the bank suspended its dividend and came under the scrutiny of federal regulators because it failed to fulfill capital requirements. The Engelhardts, apparently because of their bad experience with this investment, terminated their Olde Discount brokerage account and removed their SNFS shares from Olde Discount on September 6, 1990. By then the Engelhardts' SNFS stock had declined in value to approximately $32,500.
Nearly a year later, in July 1991, the Engelhardts first contacted the Division of Securities of the Delaware Department of Justice with a complaint about their purchase of SNFS stock from Olde Discount. The Division, primarily through appellant Michael Tupman, a Delaware Deputy Attorney General responsible for securities law enforcement, investigated the Engelhardts' complaint. In early June 1992, after the Division substantially had completed its investigation, it sent Olde Discount a draft "Notice of Intent to Suspend or Revoke Broker-Dealer Registration." The draft Notice of Intent alleged that Olde Discount and its agent Donohoe had engaged in fraudulent and unethical practices in connection with the sales of SNFS stock to the Engelhardts, in violation of Del.Code Ann. tit. 6, Secs. 7303(2) and 7316(a) (1974 & Supp.1992).
In particular, the Notice asserted that Donohoe repeatedly had urged the Engelhardts to invest in SNFS and had made false statements of material fact about the stock. Further, the Notice alleged that Olde Discount had not kept the Engelhardts advised of information that could have been pertinent to their decision whether to hold or sell the stock. The Notice indicated that the Delaware securities commissioner sought the remedies of suspension or revocation of Olde Discount's broker-dealer registration and imposition of fines; and, central to the preemption question in this case, that the commissioner would seek rescission of the SNFS stock transactions between Olde Discount and the Engelhardts, as authorized by Del.Code Ann. tit. 6, Sec. 7325(b). The Notice, however, did not suggest that either Olde Discount or Donohoe had violated any duty to customers other than the Engelhardts; the Notice thus proposed individual relief for the Engelhardts only.
During the summer of 1992, the Division of Securities and Olde Discount tried to negotiate a settlement of the proposed charges. Ultimately Olde Discount, desiring to bring the settlement negotiations to fruition, offered to pay $15,000 to the Delaware Investors Protection Fund and to pay $20,375 to the Engelhardts. 1 The proposed payment to the Engelhardts represented the difference between the total price they had paid for the SNFS stock, and its value of approximately $32,500 on September 6, 1990, when the Engelhardts had closed their brokerage account with Olde Discount.
The appellants do not dispute that Tupman agreed in principle to accept $15,000 in partial settlement of the Division's proposed charges. Nevertheless, Tupman insisted that Olde Discount also must rescind the Engelhardts' SNFS purchases. This demand was not acceptable to Olde Discount, which apparently had consistently maintained that the securities commissioner could not properly pursue a rescission, because Olde had a contractual right to arbitrate the Engelhardts' claims. Tupman, however, viewed Olde Discount's claims of its contractual right to arbitration and of the federal preemption of Delaware's rescission remedy as "baffling." See Tupman's August 7, 1992 letter to Olde Discount, J.A. at 111. He consequently would not abandon the demand that it rescind the SNFS sales to the Engelhardts.
Olde Discount determined to pursue its right to arbitration, and served the Engelhardts with a demand to arbitrate on August 5, 1992. Shortly thereafter, on August 17, 1992, Tupman issued the Notice of Intent in substantially the same form as the June 1992 draft, i.e., including the demand for rescission of the Engelhardts' SNFS transactions. Notice of Intent, p 43, J.A. at 139. The Notice provided that Olde Discount would be entitled to a hearing before the Delaware securities commissioner if it made a written request within 30 days. However, if Olde Discount did not request a hearing, the allegations would be deemed admitted and the commissioner would issue a final order of suspension, revocation, rescission, fine and/or costs.
On August 25, 1992, Olde Discount commenced this action against Tupman, Delaware Securities Commissioner Richard W. Hubbard, and the Engelhardts. The complaint's four counts alleged that: (1) the rescission remedy of Del.Code Ann. tit. 6, Sec. 7325(b), as applied by the defendants, circumvents Olde Discount's rights under the FAA and thus violates the Supremacy Clause; (2) the application of Del.Code Ann. tit. 6, Sec. 7325(b), to Olde Discount's transactions with the Engelhardts in SNFS stock would constitute an ex post facto punishment in violation of the Due Process Clause; 2 (3) Tupman and Hubbard had violated 42 U.S.C. Sec. 1983 by employing the Delaware securities laws in a manner that impaired Olde Discount's federal constitutional and statutory rights; and (4) Tupman's actions constituted a common law abuse of process. Olde Discount sought an injunction, a declaratory judgment, compensatory damages, and punitive damages.
Olde Discount most immediately was concerned with preserving its federal right to arbitration of the Engelhardt dispute. It therefore vigorously pressed for a preliminary injunction to halt further proceedings before the Delaware Division of Securities. After expedited briefing and...
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