Mowbray v. Moseley, Hallgarten, Estabrook & Weeden, Inc., 85-1647

• Decision Date: 03 July 1986
• Docket Number: No. 85-1647,85-1647
• Citation: 795 F.2d 1111
• Parties: Robert M. MOWBRAY and Rose A. Mowbray, Plaintiffs, Appellants, v. MOSELEY, HALLGARTEN, ESTABROOK & WEEDEN, INC. and Michael French, Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

Page 1111

795 F.2d 1111

Robert M. MOWBRAY and Rose A. Mowbray, Plaintiffs, Appellants, v. MOSELEY, HALLGARTEN, ESTABROOK & WEEDEN, INC. and Michael French, Defendants, Appellees.

No. 85-1647.

United States Court of Appeals, First Circuit.

Argued Dec. 2, 1985.

Decided July 3, 1986.

Edward F. Haber, Boston, Mass., was on brief, for plaintiffs, appellants.

James C. Heigham, with whom Choate, Hall & Stewart, Boston, Mass., was on brief, for defendants, appellees.

Before COFFIN, BOWNES and TORRUELLA, Circuit Judges.

TORRUELLA, Circuit Judge.

This action was brought below by plaintiffs-appellants, Robert M. Mowbray and Rose A. Mowbray, against their former stockbroker Michael French, and his employer, a Burlington, Vermont stock brokerage firm known as Moseley, Hallgarten, Estabrook & Weeden, Inc. ("Moseley"). Plaintiffs' basic claim below was for alleged excessive trading or "churning" of their accounts by defendants. Plaintiffs also alleged fraudulent misrepresentation by defendant French in recommending particular investments. Plaintiffs sought to recover damages pursuant to Rule 10b of the Securities Act of 1934 and Rule 10b-5 promulgated thereunder, and pursuant to several state statutory and common law causes of action.

After discovery was completed and less than two months before trial, defendants, citing the Supreme Court decision in Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985), moved to compel arbitration on all plaintiffs' claims and for a stay of district court proceedings. The district court allowed the motion without opinion, and this appeal followed.

Five issues are raised on appeal, but only two of these are necessary for our decision today. First, defendants-appellees question this court's jurisdiction, arguing that the district court order compelling arbitration is not an appealable order. For the reasons stated below, we disagree and find that appellate jurisdiction exists. Second, plaintiffs-appellants argue that the district court erred in finding defendants to be the beneficiaries of an arbitration agreement signed between plaintiffs and Securities Settlement Corporation, a "clearing house" broker not a party to this suit. For the reasons stated below, we agree with appellants that appellees were not parties to the arbitration agreement, and hence, could not invoke it. Thus, on this ground alone, we find that the district court erred in compelling arbitration and remand for trial to proceed on the merits. ¹

I. Appellate Jurisdiction

The motion filed by defendants-appellees below was brought pursuant to the Federal Arbitration Act, 9 U.S.C. Secs. 3 and 4. ² Specifically the motion requested "that plaintiffs be ordered to arbitrate all claims set forth in their complaint ... and that further proceedings in this action be stayed pending such arbitration." Thus, defendants below sought, and were granted, both a Sec. 4 order to compel arbitration and a Sec. 3 order to stay proceedings pending such arbitration.

On appeal, defendants-appellees assert that the "mixed" Sec. 3 and Sec. 4 order below was not a "final" order, and hence, is not appealable. To support this claim of lack of appellate jurisdiction, defendants-appellees make the following three-step argument: (1) that despite the explicit request and granting of a stay under Sec. 3 of the Arbitration Act, the "thrust" of the motion below was to compel arbitration under Sec. 4 of the Act; (2) that, under Hartford Financial Systems, Inc. v. Florida Software Services, Inc., 712 F.2d 724 (1st Cir.1983), Sec. 4 orders to compel arbitration are generally not appealable; and (3) that because the motion and order below is "essentially" a Sec. 4 motion and order, it cannot be appealed.

Appellees misconstrue both the law and the nature of the order below. First, we do not accept appellees' contention that the motion and order below "essentially" involved Sec. 4. Rather, the explicit request, as granted, was for an order to compel and a stay. Thus, the current appeal involves a "mixed" Sec. 3 and Sec. 4 order both compelling arbitration and staying district court proceedings.

Second, as a matter of law, and given the fact that plaintiffs-appellants' underlying action is "legal" rather than "equitable" in nature, the characterization of the order below as "essentially" a Sec. 4 order or as a Sec. 4 order joined to a Sec. 3 order is immaterial. As plaintiffs-appellants note, Sec. 4 orders can always be appealed under 28 U.S.C. 1292(a)(1)--whether standing alone, "embedded" to ongoing litigation, or joined to Sec. 3 orders--where the Sec. 4 order fits within the "Enelow-Ettelson " exception, i.e., where the underlying action rests in law and not in equity. See Hartford Financial Systems, supra at 729; Langley v. Colonial Leasing Co. of New England, 707 F.2d 1, 5 (1st Cir.1983); see also Ettelson v. Metropolitan Life Insurance Co., 317 U.S. 188, 63 S.Ct. 163, 87 L.Ed. 176 (1942); Enelow v. New York Life Insurance Co., 293 U.S. 379, 55 S.Ct. 310, 79 L.Ed. 440 (1935). ³ Thus framed, the issue of our appellate jurisdiction over the order below--whether viewed as a Sec. 4 order standing alone or as a Sec. 4 order joined to a Sec. 3 order--turns on whether plaintiffs-appellants' action lies in law or in equity.

To determine whether an action is brought in law or in equity, courts have applied either a "historical" or "dominant purpose" test. See 16 Wright, Miller, Cooper & Gressman, Federal Practice and Procedure, Sec. 3923, pp. 61-63, n. 36-38, and cases cited therein. The historical test involves an inquiry as to whether, given the prayers in the complaint, the action historically could have been brought as an action in equity. Id. Thus, if due to prayers for equitable relief, the suit originally could have been brought in equity, then an "equitable" characterization of the underlying suit would be proper, and appellate jurisdiction would not exist. See USM Corporation v. GKN Fasteners, Ltd., 574 F.2d 17, 22 & n. 10 (1st Cir.1978). Moreover, the presence of legal along with equitable prayers in the complaint would not be fatal to the "equitable" characterization of the action, since equity courts presumably would exercise jurisdiction over the legal claims under the doctrine of "equitable clean-up." Id.

Despite our intimations in USM Corporation, supra at 22, that the historical test may be necessary, we are reluctant to apply it in this case and instead, along with every other circuit that has addressed the matter, opt to apply the "dominant purpose" test initially announced by Judge Friendly in Schine v. Schine, 367 F.2d 685, 688 (2d Cir.1966) (Friendly, J., concurring). Under this test, while "any fair doubt [should be] resolved against the claim that the action was predominantly one at law," id., a "legal" characterization of the underlying action (and hence, appellate jurisdiction) is permissible where the complaint is "wholly or basically and predominantly an action at law," Alexander v. Pacific Maritime Ass'n, 332 F.2d 266, 277 (9th Cir.1964), and where the prayers for equitable relief, if present, are "merely incidental." Standard Chlorine of Delaware, Inc. v. Leonard, 384 F.2d 304, 309 (2d Cir.1967); Medtronic, Inc. v. Intermedics, Inc., 725 F.2d 440, 444-445 (7th Cir.1984) (Posner, J.) ("the equitable relief sought [must be] more than merely incidental" to preclude appellate jurisdiction); Lee v. Ply*Gem Industries, Inc., 593 F.2d 1266, 1269 (D.C.Cir.), cert. denied, 441 U.S. 967, 99 S.Ct. 2417, 60 L.Ed.2d 1073 (1979) (the "presumption [is] that the pending action is equitable, but that may be overborne if the request for equitable relief is incidental or clearly subordinate to essentially legal claims"); Thompson v. House of Nine, Inc., 482 F.2d 888, 890 (5th Cir.1973) (same); Chapman v. International Ladies' Garment Workers' Union, 401 F.2d 626, 629 (4th Cir.1968) (same). ⁴

Applying the dominant purpose test to the instant case, we first note that plaintiffs case is brought as a declaratory judgment, "a chameleon-like statutory remedy which is neither 'legal' nor 'equitable'," Hartford Financial Systems, supra at 727, and that courts faced with requests for declaratory relief in these circumstances have sought to determine whether, in the absence of the Declaratory Judgment Act, the suit brought would have been legal or equitable in nature. See Diematic Manufacturing Corp. v. Packaging Industries, Inc., 516 F.2d 975, 978 (2d Cir.), cert. denied, 423 U.S. 913, 96 S.Ct. 217, 46 L.Ed.2d 141 (1975); Wallace v. Norman Industries, Inc., 467 F.2d 824, 827 (5th Cir.1972); American Safety Equipment Corp. v. J.P. Maguire & Co., 391 F.2d 821, 824 (2d Cir.1968).

As we now enter the "Serbonian Bog" imposed by Enelow-Ettelson, ⁵ our inquiry is whether, absent the availability of declaratory relief, the action brought would have been legal in nature, and also, whether the prayers for equitable relief are "merely incidental" in an action that is "wholly or basically and predominantly one at law." See Langley v. Colonial Leasing Co. of New England, 707 F.2d 1, 6 (1st Cir.1983). Applying these tests, we find, for the reasons stated below, that plaintiffs-appellants' action is "legal" under Enelow-Ettelson, and accordingly, conclude that appellate jurisdiction exists.

Plaintiffs' complaint contains nine relevant prayers for relief, eight of which seek damages from the defendants upon a district court finding of violations of Rule 10b-5 under the federal securities law as well as breaches of fiduciary duty under plaintiffs' common law fraud and state law claims. ⁶ Plaintiffs' only prayer for equitable relief was that the district court "issue a permanent injunction against the [defendants], enjoining them from violating Rule 10b-5 of the Securities and Exchange Commission, Title 9, Sec. 2453 and Title 9, Sec. 4224 of the laws of the State of Vermont."

Following the mandate that we resolve "any fair...