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

• Decision Date: 15 October 1993
• Docket Number: No. 93-1215,93-1215
• Citation: 7 F.3d 1110
• Parties: , 17 Employee Benefits Cas. 1719, Pens. Plan Guide P 23886Q Eli PRITZKER; Sol Cooperstein; Jack Levin, as trustees of Penn Electric Supply Company Profit Sharing Plan; Penn Electric Supply Company; Coatesville Electric Supply Company; Northeast Electric Supply Company; M & G Electric Supply Company; Doylestown Electric Supply Company, Appellees, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC.; Merrill Lynch Asset Management, Inc.; Belinda P. Stewart, Appellants.
• Court: U.S. Court of Appeals — Third Circuit

Page 1110

7 F.3d 1110

62 USLW 2258, 17 Employee Benefits Cas. 1719,

Pens. Plan Guide P 23886Q

Eli PRITZKER; Sol Cooperstein; Jack Levin, as trustees of Penn Electric Supply Company Profit Sharing Plan; Penn Electric Supply Company; Coatesville Electric Supply Company; Northeast Electric Supply Company; M & G Electric Supply Company; Doylestown Electric Supply Company, Appellees, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC.; Merrill Lynch Asset Management, Inc.; Belinda P. Stewart, Appellants.

No. 93-1215.

United States Court of Appeals Third Circuit.

Argued June 8, 1993.

Decided Oct. 15, 1993.

David C. Franceski, Jr. (argued), Stradley, Ronon, Stevens & Young, Philadelphia, PA, for appellants.

David L. Braverman (argued), Fellheimer, Eichen & Braverman, Philadelphia, PA, for appellees.

Before GREENBERG, NYGAARD and LEWIS, Circuit Judges.

OPINION OF THE COURT

LEWIS, Circuit Judge.

In this appeal, we revisit an issue which has commanded the attention of the Supreme Court and other courts of appeals since we last addressed it: whether claims of statutory violations of the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001 et seq. ("ERISA"), are subject to arbitration pursuant to section 2 of the Federal Arbitration Act ("FAA" or "Arbitration Act"), 9 U.S.C. § 2. In Barrowclough v. Kidder, Peabody & Co., Inc., 752 F.2d 923 (3d Cir.1985), we held that statutory ERISA claims are not subject to arbitration. Since Barrowclough, however, Supreme Court decisions have substantially revised the rationale we relied upon there. We now hold that such claims are subject to arbitration under the FAA. We will, therefore, overrule Barrowclough insofar as it held that arbitration of statutory ERISA claims is precluded, and reverse the district court's order denying defendant's motion to compel arbitration of the plaintiffs' claims in this case. We also hold that the arbitration clauses in the agreements in question here should be read to include all of the named defendants even though only one defendant signed them. Accordingly, we will instruct the district court to order arbitration of the claims against the non-signatory defendants as well. ¹

I.

A.

The plaintiffs in this case are Eli Pritzker, Sol Cooperstein and Jack Levin (collectively the "Trustees"), as trustees of the Penn Electric Supply Company Profit Sharing Plan, a pension plan formed on behalf of the Trustees' co-plaintiffs Penn Electric Supply Company, Northeast Electric Supply Company, Coatesville Electric Supply Company, M & G Electric Supply Company and Doylestown Electric Supply Company. (For ease of reference, we will refer to all plaintiffs as the Trustees.)

The defendants include the brokerage firm, Merrill Lynch, Pierce, Fenner & Smith, Inc. ("MLPF & S"), Belinda P. Stewart ("Stewart") and Merrill Lynch Asset Management, Inc. ("MLAM") (collectively "Merrill Lynch"). Stewart is a financial consultant who was employed by MLPF & S during the period relevant to this case. MLAM, like MLPF & S, is a wholly-owned subsidiary of Merrill Lynch & Co., Inc. It provides advisory services to pension plans and funds.

In December 1987, the Trustees opened Cash Management Accounts for Retirement Plans with MLPF & S (the "Accounts"). The Accounts were opened on behalf of five profit sharing trusts in which the assets of the plaintiff-companies' pension plan are held. For each trust, the Trustees executed a Merrill Lynch Cash Management Account for Retirement Plans Agreement (a "Cash Management Agreement"). Each Cash Management Agreement contained a clause specifying arbitration as the forum for resolving all controversies between the Trustees and MLPF & S. The Cash Management Agreements also stated that MLPF & S would neither exercise discretionary control or authority over the Trustees' investments nor offer investment advice to the Trustees on a regular basis. Neither Stewart nor a representative from MLAM signed any of the Cash Management Agreements.

As a financial consultant to the Accounts, Stewart also made investment purchases for them. Accepting as true the Trustees' allegations, the dispute in this case flows directly from Stewart's unauthorized purchase of several units of a limited partnership interest in ML Lee Acquisition Fund II, L.P. ("ML Lee"), which she deemed an appropriate investment for the Accounts, in October and November, 1989.

The Trustees alleged that the ML Lee purchases were inappropriate for the Accounts because the units were illiquid, lacked a secondary market and involved a high degree of risk. They also claimed that Stewart's purchases were contrary to the pension plan's stated investment objectives of avoiding high-risk securities with capital gains potential in favor of low-risk, liquid, conservative investments with consistent returns, and were adverse to the interests of the trusts.

B.

On November 6, 1992, the Trustees filed an amended complaint against Merrill Lynch in the United States District Court for the Eastern District of Pennsylvania. In Count I, the Trustees alleged that the defendants breached their fiduciary duties under ERISA by purchasing ML Lee fund units on behalf of the retirement plan without authorization. In Count II, they alleged that MLAM, as custodian of the Accounts, was liable for its "knowing participation" in the alleged breaches of statutory duties because it credited purchase transactions to the Accounts. In Count III, they alleged that the ML Lee purchases violated section 406 of ERISA, 29 U.S.C. § 1106, because Stewart received a six percent sales commission on the transactions and either MLPF & F or MLAM sponsored the fund. ²

Merrill Lynch moved to compel arbitration of the Trustees' claims pursuant to the FAA and the arbitration clause contained in the Cash Management Agreements. The district court denied that motion, stating that stare decisis compelled it to follow Barrowclough. Believing Barrowclough to be outmoded in light of recent Supreme Court cases addressing the arbitrability of statutory claims under the FAA, Merrill Lynch has appealed.

II.

The district court had subject matter jurisdiction over this case pursuant to 29 U.S.C. § 1132(e)(1). We have appellate jurisdiction under 9 U.S.C. § 16(a)(1)(C), which permits appeal as of right from orders denying motions to compel arbitration.

This appeal requires us to decide the legal question whether the Trustees may be compelled to arbitrate their claims pursuant to their agreement with MLPF & S. Our standard of review is plenary. Hays and Co. v. Merrill Lynch, 885 F.2d 1149, 1152 (3d Cir.1989).

III.

In addressing the parties' contentions, we must answer three rather straightforward questions. First, we must decide whether the Trustees agreed to arbitrate the claims they now raise; if they did, we must then decide whether their statutory ERISA claims are subject to arbitration despite our holding in Barrowclough. Finally, we must decide whether the Trustees' claims against Stewart and MLAM are subject to arbitration even though neither Stewart nor MLAM signed the arbitration agreements.

A.

Section 2 of the FAA provides:

A written provision in ... a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, ... shall be valid, irrevocable, and unenforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

9 U.S.C. § 2. The FAA was enacted to "revers[e] centuries of judicial hostility to arbitration agreements" by " 'plac[ing] arbitration agreements "upon the same footing as other contracts." ' " Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 225-26, 107 S.Ct. 2332, 2337, 96 L.Ed.2d 185 (1987), quoting Scherk v. Alberto-Culver Co., 417 U.S. 506, 510-511, 94 S.Ct. 2449, 2453, 41 L.Ed.2d 270 (1974). ³ Clearly, the Cash Management Agreements are contracts involving commerce and therefore come within the Act. ⁴

Section 3 of the FAA provides that federal courts hearing cases concerning issues which the parties have agreed to arbitrate shall, upon application of one of the litigants, stay a trial until arbitration has been completed in accordance with the terms of the agreement. 9 U.S.C. § 3. If a party refuses to participate in arbitration, the FAA requires a district court to order the parties "to proceed to arbitration in accordance with the terms of the agreement." 9 U.S.C. § 4.

The arbitration clauses in the Cash Management Agreements state:

It is understood that the following agreement to arbitrate does not constitute a waiver by the undersigned of the right to seek a judicial forum where such a waiver would be void under the Federal Securities Laws or the Employment Retirement Income Securities Act of 1974.

The undersigned agrees, and by carrying an account for the undersigned you agree, that except as inconsistent with the foregoing sentence, all controversies which may arise between us, including but not limited to, any transaction or the construction, performance or breach of this or any other agreement between us, whether entered into prior, on or subsequent to the date hereof, shall be determined by arbitration and shall be governed by the laws of the state of New York.

Any dispute hereunder shall be submitted to arbitration conducted under the provisions of the Constitution and Rules of the Board of Directors of the New York Stock Exchange, Inc., or pursuant to the Code of Arbitration Procedure of the National Association of Securities Dealers, Inc. as the undersigned may elect ...

"[A]s a matter of contract, no party can be forced to arbitrate unless that party has entered an agreement to do so." PaineWebber, Inc. v. Hartmann, 921 F.2d 507, 511 (3d Cir.1990). Thus, before it compels arbitration, a court should determine "that a valid agreement to arbitrate exists between the parties and that the specific...