Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Haydu

• Decision Date: 19 February 1981
• Docket Number: No. 79-2993,79-2993
• Citation: 637 F.2d 391
• Parties: In the Matter of the Arbitration between MERRILL LYNCH, PIERCE, FENNER & SMITH, INCORPORATED, Plaintiff-Appellee, v. Helen Echo HAYDU, Defendant-Appellant. . Unit B
• Court: U.S. Court of Appeals — Fifth Circuit

Page 391

637 F.2d 391

In the Matter of the Arbitration between MERRILL LYNCH,

PIERCE, FENNER & SMITH, INCORPORATED, Plaintiff-Appellee, v. Helen Echo HAYDU, Defendant-Appellant.

No. 79-2993.

United States Court of Appeals, Fifth Circuit.

Unit B

Feb. 19, 1981.

Bartel & Shuford, Bill Shuford, Jr., Miami, Fla., for defendant-appellant.

Walton, Lantaff, Schroeder & Carson, N. James Turner, Miller Walton, Bennett Falk, Miami, Fla., for plaintiff-appellee.

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

Before GEWIN, RONEY and FRANK M. JOHNSON, Jr., Circuit Judges.

FRANK M. JOHNSON, Jr., Circuit Judge:

On January 10, 1979, Helen Echo Haydu, appellant, filed a complaint in Florida state court alleging negligence, fraud, and breach of fiduciary duties in the handling of two of her stock option accounts by appellee Merrill Lynch, Pierce, Fenner & Smith, Incorporated (Merrill Lynch). The stock option agreements contained an arbitration clause that provided that any disputes between the parties would be settled through arbitration. ¹ Haydu admits that she signed both agreements but claims that she did so under duress. ²

On February 5, 1979, Merrill Lynch removed the state action to the United States District Court for the Southern District of Florida (district court I). Merrill Lynch then filed a motion to compel arbitration and stay further proceedings pursuant to the Federal Arbitration Act, 9 U.S.C.A. §§ 1-14, on February 9, 1979. Haydu moved to remand the case to state court and on February 17, 1979, district court I granted Haydu's motion. District court I remanded the case pursuant to 28 U.S.C.A. § 1447(c) after concluding that the action was "improvidently removed" because (1) there was no invocation of the federal securities laws thus no federal question jurisdiction and (2) there were inadequate allegations of diversity jurisdiction since the removal petition failed to allege diversity at the time the action was removed as well as at the time the action commenced.

After the remand to state court Merrill Lynch supplemented its motion to compel arbitration by changing its basis for the motion from the United States Arbitration Act, 9 U.S.C.A. §§ 1-14, to the Florida Arbitration Code, Florida Statutes, Chapter 682. The state court denied Merrill Lynch's original and supplemental motions to compel arbitration on July 2, 1979, and ordered a trial.

After the remand, Merrill Lynch filed an independent petition to compel arbitration pursuant to the United States Arbitration Act in the United States District Court for the Southern District of Florida (district court II). ³ In response, Haydu moved to dismiss the petition or to stay the federal action pending resolution of the state proceedings. On July 11, 1979, district court II granted Merrill Lynch's motion to compel arbitration. Haydu did not plead the July 2nd state court judgment in district court II until July 13, 1979, in a motion Haydu filed to reconsider the July 11th order. District court II denied the motion to reconsider on July 19, 1979.

The state court, apparently uncertain of its jurisdiction in light of district court II's July 11th order, vacated its July 2nd order. However, on November 7, 1979, the state court fully reinstated its July 2nd order nunc pro tunc when it denied Merrill Lynch's motion to abate the state proceedings. Merrill Lynch's appeal from the denial of its motion to abate was actively pending in state court until district court II, acting upon Merrill Lynch's motion, enjoined further state proceedings on January 11, 1980. Haydu had moved district court II to stay the federal proceedings pending her appeal of the July 11th order. On December 17, 1979, this Court granted Haydu's motion to stay pending appeal but relinquished to district court II jurisdiction for the restricted purpose of entertaining Merrill Lynch's application for injunctive relief to determine whether such relief was warranted and permissible in order to protect or effectuate its July 11th order pursuant to 28 U.S.C.A. § 2283. Thus the proceedings in both federal and state courts are stayed pending the outcome of the instant appeal of the July 11th order. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Haydu, 482 F.Supp. 788 (S.D.Fla.1980).

On appeal, Haydu makes the following contentions: (1) that district court II did not have jurisdiction to entertain Merrill Lynch's motion to compel arbitration, (2) that the doctrines of res judicata or collateral estoppel bar entry of district court II's July 11th order and (3) that the July 11th order deprived Haydu of due process of law.

IMPACT OF THE PRIOR REMOVAL AND REMAND

The United States Arbitration Act grants both state and federal courts concurrent jurisdiction over disputes involving arbitration agreements. 9 U.S.C.A. § 3. However, the Act alone is insufficient to confer federal jurisdiction: not only must the transactions involved constitute "interstate commerce" within the meaning of 9 U.S.C.A. § 2, but also an independent basis for jurisdiction such as diversity or a federal question must exist before a federal court may properly assume jurisdiction. See Commercial Metals Co. v. Balfour, Guthrie & Co. Ltd, 577 F.2d 264, 268-69 (5th Cir. 1978) (discussing Coastal States Gas Producing Co., et al. v. Producing Properties, Inc., et al., 203 F.Supp. 956 (S.D.Tex.1962)); Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F.2d 402, 408 (2d Cir. 1959), cert. dismissed per stipulation, 364 U.S. 801, 81 S.Ct. 27, 5 L.Ed.2d 37 (1960). ⁴ Because the United States Arbitration Act is a national substantive law that supplants state arbitration laws, a state court is bound to apply the Act if the statutory requisites are present; further, if an action involving arbitration is filed initially in state court, such an action may be removed to federal court so long as the jurisdictional requirements are satisfied. Commercial Metals, supra, 577 F.2d at 269; Robert Lawrence, supra, 271 F.2d at 406; Warren Bros., supra, 386 F.Supp. at 663. Since Merrill Lynch's independent petition to compel arbitration alleged that (a) diversity of citizenship existed, (b) the signed stock option agreements contained an arbitration clause, and (c) the agreements constituted commerce, it would appear that district court II had jurisdiction to entertain that motion, notwithstanding a pending state court action. Ballantine Books, Inc. v. Capital Distributing Co., 302 F.2d 17, 19 (2d Cir. 1962). ⁵

However, it is the nature of the pending state court action that complicates the issue of whether district court II properly assumed jurisdiction. First, the action initially filed by Haydu was remanded to the state court after Merrill Lynch had attempted removal to district court I. Moreover, district court I ordered a remand because it found that Merrill Lynch's allegations of diversity were insufficient ⁶ and that as Haydu's complaint did not involve the Securities Act of 1933 a federal question did not exist. ⁷ Furthermore, the state court entered an order prior to district court II's July 11th order denying Merrill Lynch's motion to compel arbitration. ⁸ Thus, one issue presented by this appeal is whether a federal court under the facts of this case has the power to entertain an independent action involving the same subject matter and parties as those in a pending state court action that was remanded after an unsuccessful removal to federal court.

If district court I had adjudicated the merits of Merrill Lynch's motion to compel arbitration pursuant to the United States Arbitration Act in its remand order, it is clear that Merrill Lynch could not attack that order collaterally by alleging an independent action involving the same parties and claims that were present in the initial action. ⁹ Compare Chandler v. O'Bryan, 445 F.2d 1045 (10th Cir. 1971) cert. denied 405 U.S. 964, 92 S.Ct. 1176, 31 L.Ed.2d 241, with Rath Packing Co. v. Becker, 530 F.2d 1295, 1303 (9th Cir. 1975), aff'd sub nom. Jones v. Rath Packing Co., 430 U.S. 519, 97 S.Ct. 1305, 51 L.Ed.2d 604 (1977). However, on the record before us it is clear that district court I did not adjudicate the merits of Merrill Lynch's motion in finding that the action was "improvidently removed"; it simply decided that it lacked jurisdiction to hear and determine the removed action. While district court I did have Merrill Lynch's motion to compel before it and could have reviewed it in deciding whether or not federal jurisdiction existed, Villarreal v. Brown Express, Inc., 529 F.2d 1219, 1221 (5th Cir. 1976), it appears that the court did not consider the propriety of arbitration. Cf. Rath Packing Co. v. Becker, supra, 530 F.2d at 1303 (defendant's federal claims were not before district court when it remanded cause; subsequent federal action permissible since those federal claims were not necessarily adjudicated by court in deciding to remand). Thus, Merrill Lynch's second suit would not constitute an impermissible collateral attack on district court I's remand order since district court I did not decide the question of the applicability of the United States Arbitration Act prior to the remand order.

In response to Merrill Lynch's motion to compel arbitration in district court II, Haydu timely filed a motion to dismiss or stay the federal proceedings pending the outcome of the state action. See Ballantine Books, supra, 302 F.2d at 19. However, district court II never specifically ruled on this issue in its July 11th order. Given the concurrent jurisdiction of the state and federal courts that existed in this instance and especially in view of the prior remand, a stay of Merrill Lynch's independent action by district court II would have been appropriate. Id. at 20. In view of district court I's remand order involving the same parties and possibly the same claims, we must also review what effect, if any, the state court judgment of July 2nd had on ...