Tamari v. Bache & Co. (Lebanon) S. A. L.

• Decision Date: 28 November 1977
• Docket Number: No. 76-1728,76-1728
• Parties: Abdallah W. TAMARI, Ludwig W. Tamari and Farah W. Tamari, co-partners doing business as Wahbe Tamari & Sons Co., Plaintiffs-Appellants, v. BACHE & CO. (LEBANON) S. A. L., a Lebanese Corporation, Bache & Co. Incorporated, a Delaware Corporation, and the Board of Trade of the City of Chicago, an Illinois Corporation, Defendants- Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1194

565 F.2d 1194

Abdallah W. TAMARI, Ludwig W. Tamari and Farah W. Tamari,

co-partners doing business as Wahbe Tamari & Sons

Co., Plaintiffs-Appellants, v. BACHE & CO. (LEBANON) S. A. L., a Lebanese Corporation,

Bache & Co. Incorporated, a Delaware Corporation,

and the Board of Trade of the City of

Chicago, an Illinois

Corporation,

Defendants-

Appellees.

No. 76-1728.

United States Court of Appeals,

Seventh Circuit.

Argued Feb. 25, 1977.

Decided Oct. 19, 1977.

Rehearing and Rehearing Denied Nov. 28, 1977.

Donald C. Shine, Chicago, Ill., for plaintiffs-appellants.

N. A. Giambalvo, Philip F. Johnson, Chicago, Ill., for defendants-appellees.

Before SWYGERT and WOOD, Circuit Judges, and CHRISTENSEN, Senior District Judge. ^*

HARLINGTON WOOD, Jr., Circuit Judge.

This is the second in a series of four cases growing out of the same transactions brought by plaintiffs, a Lebanese partnership and its partners (hereinafter "Tamari"), principally against Bache & Co., Incorporated, a Delaware corporation, now Bache Halsey Stuart, Inc. (hereinafter "Bache"), in an effort to obtain declaratory relief for alleged fraud in violation of the Commodity Exchange Act, 7 U.S.C. § 1, et seq. ¹ Service was not secured upon Bache & Co. (Lebanon) S.A.L., a Lebanese corporation.

The present or second case is an appeal from the order of the district court entered on May 19, 1976, dismissing plaintiff's one count complaint on the ground that the complaint failed to state a claim upon which relief could be granted. The complaint seeking declaratory and injunctive relief under the Commodity Exchange Act, as amended, 7 U.S.C. § 1, et seq., and 28 U.S.C. § 2201, prayed for the termination of the arbitration proceeding then in progress between Tamari and Bache being conducted by the Chicago Board of Trade (hereinafter CBOT). The complaint alleged in general the existence of a dispute between Tamari and Bache, Tamari's establishment of commodity futures trading accounts with Bache, trading in those accounts and monies paid and allegedly owing to Tamari as a result of the trading. The grounds alleged for the relief sought were summarized by Tamari as follows: Tamari's agreement to participate in arbitration was induced by fraud and coercion which rendered the arbitration agreement invalid; Section 5a(11) of the Commodity Exchange Act, 7 U.S.C. § 7a(11), which became effective on April 21, 1975, applied and operated to bar arbitration; and there were infirmities which arose out of the arbitration proceedings themselves. We do not, however, read Tamari's complaint as alleging that the "agreement" to arbitrate contained in the original total agreement was specifically induced by fraud and coercion as distinguished from the contract generally. What is alleged in addition to fraud relating to the total agreement generally is that the "submission" of the dispute to arbitration was caused by fraud; that Tamari did not "voluntarily submit" to the jurisdiction of the CBOT; and that "participation" in the arbitration was coerced. These conclusionary and general allegations read together appear to us to refer primarily to events occurring after the original agreements containing the arbitration clauses were entered into.

Preceding the district court's order of dismissal the court entered on April 21, 1976, what was captioned a "Preliminary Opinion." In that opinion the court concluded that Tamari and Bache had entered into a valid arbitration agreement covering the underlying dispute; that the Federal Arbitration Act applied and that under Sections 3 and 4 of that Act, 9 U.S.C. §§ 3-4, ² the case should be stayed as to Bache (Lebanon), dismissed as to Bache and CBOT, and Tamari ordered to arbitrate; that Section 5a(11) of the Commodity Exchange Act, 7 U.S.C. § 7a(11), did not apply to the case, since the savings provision of that Act, 7 U.S.C. § 4a, note, ³ precluded its application; and that Tamari's other claims were premature and could only be raised after completion of arbitration pursuant to Section 10 of the Federal Arbitration Act, 9 U.S.C. § 10. ⁴ That preliminary opinion was entered jointly in both the first case and in this case. Against that background the district court's subsequent sua sponte dismissal of the complaint in this case upon the ground that it failed to state a claim upon which relief could be granted must be interpreted. Plaintiff argues that the factual assumptions made by the court in the preliminary opinion, principally that there was a valid agreement to arbitrate, denote the dismissal a grant of summary judgment under Rule 56 of the Federal Rules of Civil Procedure. Plaintiff's position is that certain material factual assumptions made by the court have no proper foundation in the record and are in dispute. Therefore, plaintiff argues the court's subsequent order was the improper entry of summary judgment. Were we to view the order as granting summary judgment we would agree with plaintiffs, but we perceive the order instead to be a dismissal under Rule 12(b)(6) of the Federal Rules of Civil Procedure which provides for dismissal upon motion for failure to state a claim upon which relief can be granted, the exact language used by the court in its dismissal order. The defendants had filed no motions seeking relief in either form. The court was not however precluded, although it generally may be considered hazardous, from entering the order of dismissal on its own motion provided that sufficient basis for the court's action was otherwise apparent from the plaintiff's pleadings. For the purpose of testing the trial court's action, well pleaded allegations of the complaint are to be taken as admitted, but mere unsupported conclusions of fact or mixed fact and law are not admitted. Hess v. Petrillo, 259 F.2d 735 (7th Cir. 1958), cert. denied, 359 U.S. 954, 79 S.Ct. 743, 3 L.Ed.2d 761; Homan Manufacturing Co. v. Russo, 233 F.2d 547 (7th Cir. 1956). Since the relief sought was declaratory, that becomes another critical ingredient to be considered in judging the propriety of the dismissal. It has long been established that the grant of declaratory relief is discretionary. The appellate court may substitute its own judgment for that of the trial court if the trial court's exercise of that discretion is considered erroneous. Brillhart v. Excess Ins. Co., 316 U.S. 491, 62 S.Ct. 1173, 86 L.Ed. 1620 (1942); Sears, Roebuck & Co. v. American Mutual Liability Ins. Co., 372 F.2d 435 (7th Cir. 1967); Cunningham Brothers Inc. v. Bail, 407 F.2d 1165 (7th Cir. 1969), cert. denied, 395 U.S. 959, 89 S.Ct. 2100, 23 L.Ed.2d 745.

The specific issues argued by Tamari are these:

1) What is the effect, if any, of Sec. 5a(11) of the Commodity Exchange Act, 7 U.S.C. § 7a(11) as amended, as applied to the arbitration proceedings in this case.

2) Was the CBOT estopped from arbitrating the underlying dispute.

3) Is there a factual basis for the district court's finding of a valid agreement to arbitrate.

4) Was there a procedural due process violation in the district court's dismissal.

5) Did the district court err in not finding a conflict of interest within CBOT affecting the arbitration proceeding.

6) Does Section 10 of the Federal Arbitration Act preclude the district court's consideration of allegations of misconduct by the arbitrators during the arbitration proceedings.

I.

The preliminary opinion of the district court directed that the arbitration proceedings continue, but Tamari argues that Section 7a(11) prohibited the CBOT from conducting the arbitration. The district court relied on Section 4a, note, the savings provisions, providing that pending arbitration proceedings were not to be abated by the Section 5a(11) amendment. Tamari interprets the act as prohibiting arbitration of claims in excess of $15,000.00, and since the claims of Bache and counterclaim of Tamari each exceeds that limitation, Tamari argues the controversy could no longer be arbitrated. Tamari also leans heavily on Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953), a securities case, as analogous federal authority supporting the application of Section 7a(11) to this case to prevent arbitration. In Wilko the court held that an agreement for arbitration of any controversy that might arise in the future between the parties was void under Section 14 of the Securities Act of 1933 notwithstanding the provisions of the Arbitration Act Section 14 of the Securities Act ⁵ provides that "any condition, stipulation, or provision binding any person acquiring a security to waive compliance with any provision of this subchapter or of the rules and regulations of the Commission shall be void." The Wilko arbitration agreement was held, considering Congressional policy, to be a stipulation waiving the benefits of the Security Act and therefore void. Two justices dissented, refusing to find that the Section 14 anti-waiver provision was a general limitation on the Arbitration Act. The Commodity Exchange Act, however, has no provision comparable to Section 14 of the Securities Act of 1933. Tamari similarly cites Danford v. Schwabacher, 342 F.Supp. 65 (N.D. Calif. 1972), appeal dismissed, 488 F.2d 454 (9th Cir. 1974), and Laupheimer v. McDonnell & Co., Inc., 500 F.2d 21 (2d Cir. 1974), both securities cases. Danford and Laupheimer are cases in which the respective plaintiff each claimed to have been induced by fraud to become a partner or officer in brokerage firms in order for the firms to gain control over the customer account of each. Both firms were in financial difficulty and by joining the firms each plaintiff found himself thereby subject to arbitration agreements. Both cases refused to enforce the arbitration agreements in the subsequent disputes, but both cases turned on Wilko's interpretation of the Securities Act of 1933 with its Section 14 waiver provision with which we are not faced. The Securities Exchange Act of 1934 likewise contains a similar...