Jeske v. Brooks

Decision Date11 May 1989
Docket NumberNos. 86-2146,87-2047 and 87-2048,86-2167,s. 86-2146
Citation875 F.2d 71
PartiesFed. Sec. L. Rep. P 94,494, RICO Bus.Disp.Guide 7203 Herbert A. JESKE, Plaintiff-Appellee, v. George E. BROOKS; Robinson-Humphrey Company, Inc.; Shearson Lehman Brothers, Inc., Defendants-Appellants (Two Cases). Herbert A. JESKE, Plaintiff-Appellant, v. George E. BROOKS; Robinson-Humphrey Company, Inc.; Shearson Lehman Brothers, Inc., Defendants-Appellees (Two Cases).
CourtU.S. Court of Appeals — Fourth Circuit

Randel Eugene Phillips (James P. McLoughlin, Jr., Moore & Van Allen, Charlotte, N.C., Theodore A. Krebsbach, Jeffrey L. Friedman, Mary E. Reisert, Shearson Lehman Hutton, Inc., on brief), for defendants-appellants.

David L. Terry (Ernest W. Machen, Jr., Paul B. Taylor, Blakeney, Alexander & Machen, Charlotte, N.C., on brief), for plaintiff-appellee.

Before HALL, MURNAGHAN and WILKINS, Circuit Judges.

MURNAGHAN, Circuit Judge:

We are called upon to decide two issues: (1) whether the district court erred in refusing to order arbitration of federal claims under the Securities Act of 1933 ("Securities Act"), the Securities Exchange Act of 1934 ("Exchange Act"), and the Racketeer Influenced and Corrupt Organization Act ("RICO"), and (2) whether the district court erred in compelling arbitration of various state law claims. We conclude that the district court should have ordered arbitration of the federal claims and should have stayed litigation of those claims pending the arbitration. However, we lack jurisdiction to review the district court's order compelling arbitration of the state claims.

I.

The case before us arose out of a dispute between an investor and his former stockbroker. The investor is Herbert A. Jeske, who began dealing with George E. Brooks, a broker, in late January 1983. At that time Brooks was an employee of Robinson-Humphrey Company, Inc. ("Robinson-Humphrey"), a subsidiary of Shearson-Lehman Brothers, Inc. ("Shearson-Lehman"). Jeske signed a standard customer's agreement with Brooks in March 1983. Paragraph 13 of the agreement contained an arbitration clause covering all disputes over matters relating to the agreement. 1 Paragraph 15 of the agreement provided that any provisions of the agreement that conflicted with laws or administrative regulations "shall be deemed to be rescinded or modified in accordance with any such rule, law, or regulation."

Eight months after Jeske signed the agreement, the Securities and Exchange Commission ("SEC") adopted Rule 15c2-2, which provided, in pertinent part, that:

[i]t shall be a fraudulent, manipulative or deceptive act or practice for a broker or dealer to enter into an agreement with any public customer which purports to bind the customer to the arbitration of future disputes between them arising under the Federal securities laws, or to have in effect such an agreement, pursuant to which it effects transactions with or for a customer.

17 C.F.R. Sec. 240.15c2-2(a) (1987). The rule took effect December 28, 1983. The SEC rescinded the rule effective October 21, 1987.

Jeske filed suit in 1986 against Brooks, Robinson-Humphrey and Shearson-Lehman, seeking recovery under Sections 12(2) and 17 of the Securities Act, 2 15 U.S.C. Secs. 77l (2) and 77q; Section 10(b) of the Exchange Act, 15 U.S.C. Sec. 78j(b) and SEC Rule 10b-5; and RICO, 18 U.S.C. Sec. 1961 et seq. Jeske also asserted a variety of state law claims against the defendants, based on theories of fraud, breach of contract, negligence, breach of fiduciary duty, and violations of the North Carolina Securities Act, N.C.Gen.Stat. Sec. 78A-1 et seq., and the North Carolina Unfair Trade Practices Act, N.C.Gen.Stat. Sec. 75-1.1. Jeske alleges that Brooks advised him to make certain inappropriate investments that resulted in losses.

Brooks and the other defendants, relying on the arbitration clause in the customer's agreement, moved to stay litigation pending arbitration. The district court ruled that Jeske's state law claims were arbitrable but that his federal claims were not. Accordingly, the district court compelled arbitration of the state claims but refused to order arbitration of the federal claims. 3

Parties on both sides of the dispute appealed. 4

II.

While the parties' appeals were pending, our jurisdiction was called into question by the Supreme Court's decision in Gulfstream Aerospace Corp. v. Mayacamas Corp., 485 U.S. 271, 108 S.Ct. 1133, 99 L.Ed.2d 296 (1988). Gulfstream abolished the Enelow-Ettelson 5 doctrine, which had provided courts a basis of jurisdiction to review interlocutory orders granting or denying motions to stay litigation pending arbitration. We subsequently held in two unrelated cases that orders denying stays pending arbitration or refusing to compel arbitration were appealable under 28 U.S.C. Sec. 1292(a)(1), notwithstanding the holding in Gulfstream. J.J. Ryan & Sons, Inc. v. Rhone Poulenc Textile, S.A., 863 F.2d 315, 318 (4th Cir.1988); Kansas Gas & Elec. Co. v. Westinghouse Elec. Corp., 861 F.2d 420, 422 (4th Cir.1988). However, it remained unclear after Gulfstream whether we had jurisdiction to review orders compelling arbitration or staying legal proceedings pending arbitration. 6

Congress recently dispelled doubts about our jurisdiction by amending the Federal Arbitration Act, 9 U.S.C. Sec. 1 et seq. The amendment makes clear that we have jurisdiction to consider an appeal from an order refusing a stay pending arbitration or an order denying a motion to compel arbitration. See 9 U.S.C. Sec. 15(a)(1). However, we have no jurisdiction, absent certain exceptions not applicable here, to review an interlocutory order compelling arbitration or granting a stay pending arbitration. See id. Sec. 15(b). 7

Thus, we will address the merits of the defendants' appeals challenging the district court's refusal to compel arbitration of the federal claims. However, we must dismiss Jeske's appeals challenging the order to compel arbitration of the state law claims.

III.

Turning to the merits, we must first decide whether Jeske's federal claims are arbitrable. If they are, we must then address Jeske's assertion that the arbitration clause in the customer's agreement is invalid, and thus, no basis exists for compelling arbitration.

A. Arbitrability of Federal Claims

Clearly, claims under RICO and Sec. 10(b) of the Exchange Act are arbitrable. The Supreme Court so held in Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987).

Jeske's Securities Act claim presents a more difficult problem. In Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953), the Supreme Court held that claims under Sec. 12(2) of the Securities Act were non-arbitrable. However, the Supreme Court in McMahon refused to apply Wilko 's holding to preclude arbitration of claims arising under the Exchange Act. Although McMahon did not expressly overrule Wilko, see 482 U.S. at 232-34, 107 S.Ct. at 2341, McMahon repudiated Wilko 's rationale. We conclude that Wilko is no longer good law insofar as it holds that claims under the Securities Act of 1933 are non-arbitrable.

The circuits disagree on the question whether Wilko remains binding precedent. Although acknowledging that McMahon has called the rationale of Wilko into question, the Second and Third Circuits still consider Wilko good law. See Chang v. Lin, 824 F.2d 219, 222 (2d Cir.1987); Osterneck v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 841 F.2d 508, 512 (3rd Cir.1988) (dictum). By contrast, the Fifth Circuit has held that McMahon effectively overruled Wilko, and thus claims under Sec. 12(2) of the Securities Act are arbitrable. Rodriguez De Quijas v. Shearson/Lehman Bros., Inc., 845 F.2d 1296, 1298-99 (5th Cir.1988), cert. granted, --- U.S. ----, 109 S.Ct. 389, 102 L.Ed.2d 379 (1988). See also Noble v. Drexel, Burnham, Lambert, Inc., 823 F.2d 849, 850 n. 3 (5th Cir.1987) ("McMahon undercuts every aspect of Wilko v. Swan ...; a formal overruling of Wilko appears inevitable--or, perhaps, superfluous"); Peterson v. Shearson/American Express, Inc., 849 F.2d 464, 466 (10th Cir.1988) ("In McMahon, the Supreme Court essentially overruled Wilko ").

We agree with the Fifth Circuit's opinion in Rodriguez De Quijas. Wilko was premised on a mistrust of arbitration and a suspicion about the competence of arbitral tribunals. See 346 U.S. at 435-37, 74 S.Ct. at 186-88. McMahon, however, declared that Wilko 's assumptions about arbitration no longer have validity:

Thus, the mistrust of arbitration that formed the basis for the Wilko opinion in 1953 is difficult to square with the assessment of arbitration that has prevailed since that time. This is especially so in light of the intervening changes in the regulatory structure of the securities laws. Even if Wilko 's assumptions regarding arbitration were valid at the time Wilko was decided, most certainly they do not hold true today for arbitration procedures subject to the SEC's oversight authority.

482 U.S. at 232-34, 107 S.Ct. at 2341. The Fifth Circuit has correctly read McMahon as completely undercutting the rationale for the Wilko holding. Rodriguez De Quijas, 845 F.2d at 1299. Thus, Wilko no longer is binding authority on the question of arbitrability of Sec. 12(2) claims under the Securities Act of 1933.

We conclude that all of Jeske's federal claims are arbitrable, including the ones arising under the Securities Act. Thus, we must turn to Jeske's assertions that the arbitration clause in the parties' agreement is invalid.

B. Validity of Arbitration Clause

Jeske contends that the arbitration clause is invalid and, therefore, no basis exists for compelling arbitration of his federal claims. First, he argues that SEC Rule 15c2-2 and Paragraph 15 of the parties' agreement rendered the arbitration clause "null and void." Jeske also argues that the agreement containing the arbitration clause is itself void for lack of consideration...

To continue reading

Request your trial
37 cases
  • Doughty v. Underwriters at Lloyd's, London
    • United States
    • U.S. Court of Appeals — First Circuit
    • 2 Agosto 1993
    ...Co., 892 F.2d 566, 574 (7th Cir.1989) (finding district court's order appealable under Federal Arbitration Act) with Jeske v. Brooks, 875 F.2d 71, 73 (4th Cir.1989) (finding district court's order inappropriate for appeal). To hold otherwise would be mechanically to elevate form over substa......
  • Muriithi v. Shuttle Express, Inc.
    • United States
    • U.S. Court of Appeals — Fourth Circuit
    • 1 Abril 2013
    ...consider challenges that “relate specifically to the arbitration clause and not just to the contract as a whole”); Jeske v. Brooks, 875 F.2d 71, 75 (4th Cir.1989) (“Because the alleged defects pertain to the entire contract, rather than specifically to the arbitration clause, they are prope......
  • Coffey v. Dean Witter Reynolds, Inc., 88-2286
    • United States
    • U.S. Court of Appeals — Tenth Circuit
    • 5 Diciembre 1989
    ...no attention to the contractual modifications and resultant changed expectations effected during the life of the Rule. See Jeske v. Brooks, 875 F.2d 71 (4th Cir.1989); Adrian v. Smith Barney, Harris, Upham & Co., 841 F.2d 1059 (11th Cir.1988); Villa Garcia v. Merrill Lynch, Pierce, Fenner a......
  • Banks v. City Finance Co., 2001-CA-00862-SCT.
    • United States
    • Mississippi Supreme Court
    • 5 Septiembre 2002
    ...that this Court should dismiss the appeal for lack of jurisdiction over interlocutory orders, Union Security cites Jeske v. Brooks, 875 F.2d 71 (4th Cir.1989) and Purdy v. Monex Int'l Ltd., 867 F.2d 1521 (5th ¶ 23. In Jeske, an investor filed several federal and state claims against his bro......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT