Arnold v. Arnold Corp.-Printed Communications For Business

Decision Date03 December 1990
Docket NumberNos. 87-3825,CORPORATION--PRINTED,88-4077 and 88-8366,s. 87-3825
Citation920 F.2d 1269
PartiesFed. Sec. L. Rep. P 95,656, RICO Bus.Disp.Guide 7636 Willard M. ARNOLD, individually and as Trustee for Charles V. Arnold and Steven T. Arnold, Plaintiff-Appellant, v. The ARNOLDCOMMUNICATIONS FOR BUSINESS; Wayne C. Jira; John E. Lautzenheiser; Jeffrey Kenner; John W. Jordan II; Howard P. Colhoun; Edward C. Mabbs; Richard T. Lindgren; and Carl Marks & Co., Inc., Defendants-Appellees.
CourtU.S. Court of Appeals — Sixth Circuit

Melissa A. Robertson, Willkie, Farr & Gallagher, Washington, D.C., Steven E. Sigalow, Joseph C. Weinstein, Jones, Day, Reavis & Pogue, Cleveland, Ohio, Richard L. Klein, Philippe M. Salomon, Willkie, Farr & Gallagher, New York City, Russell G. Ryan, Willkie, Farr & Gallagher, Washington, D.C., Diana B. Simon, New York City, for plaintiff-appellant.

Arthur M. Kaufman, Mark E. Staib, David C. Weiner, Patricia A. Hemann, Hahn, Loeser & Parks, Cleveland, Ohio, John R. Hupper, James L. Buchal, Cravath, Swaine & Moore, New York City, for defendants-appellees.

Before KENNEDY and MARTIN, Circuit Judges, and CONTIE, Senior Circuit Judge.

CONTIE, Senior Circuit Judge.

Plaintiff-appellant, Willard Arnold, individually and as Trustee for his grandsons, Charles and Steven Arnold, appeals from the district court's order requiring arbitration of the claims set forth in his amended complaint. For the following reasons, we affirm the order of the district court.


Willard Arnold founded Arnold Graphic Industries, Inc. (A.G.I.), predecessor of the Arnold Corporation--Printed Communications for Business (Arnold Corporation) in 1951, and ran the company for thirty years. During this time, Arnold was President, Chief Executive Officer, and principal stockholder of A.G.I.

In July of 1980, representatives of Carl Marks & Co., a broker-dealer registered pursuant to the Securities Exchange Act, approached Arnold with a proposal to acquire a substantial majority of the shares of A.G.I. Thereafter, through a series of transactions consummated in January of 1981, A.G.I. merged with and became a wholly-owned subsidiary of C.M.-Graphic Acquisitions, Inc. (CM-Graphic), a company formed by Carl Marks & Co. for the purposes of the merger.

Under the terms of a subscription agreement executed in connection with the merger, a trust for the benefit of Arnold's grandsons subscribed to twenty percent of the common stock of A.G.I., ultimately retaining seventeen percent thereof, and Arnold subscribed to an aggregate of twenty-three percent of the preferred stock of CM-Graphic for a total purchase price of $100,000 and $300,000 respectively. Arnold was elected Chairman of the Board of Directors of CM-Graphic. Appellees Jordan and Kenner were also elected to the Board of Directors of CM-Graphic. Additionally, Jordan was elected President and Kenner was elected Vice-President, Secretary, and Treasurer of the new parent corporation. At all times relevant to this litigation, the remaining appellees, with the exception of Carl Marks & Co., were also officers and/or on the Board of Directors. 1

Pursuant to a plan of merger and partial liquidation dated December 31, 1981, CM-Graphic changed its name back to Arnold Graphic Industries, Inc. (A.G.I.). In August of 1982, A.G.I. became The Arnold Corporation--Printed Communications for Business (Arnold Corporation).

On August 6, 1985, Arnold, individually and as Trustee, entered into a stock purchase agreement with Arnold Corporation. The stock purchase agreement provided, inter alia, for the sale by Arnold and the purchase by Arnold Corporation of the 300 shares of the preferred stock held by Arnold in his individual capacity and the 170,000 shares of the common stock held by Arnold as Trustee. The stock purchase agreement recited that Arnold Corporation was to purchase Arnold's preferred stock for the original subscription price of $300,000 and Arnold's common stock held in trust for $2.2 million or approximately thirteen dollars per share. Arnold Corporation accounted for the purchase of the common stock, however, at an aggregate price of $1.7 million or ten dollars per share.

The stock purchase agreement included an arbitration provision which has become the focus of the present case. The arbitration provision provides as follows:

This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio including its conflicts and choice of law principles. Any dispute arising under this Agreement shall be submitted to arbitration under the rules of the American Arbitration Association at its Cleveland office. The decision of the arbitrators shall be binding and entitled to be enforced as the judgment of a court of record.

Soon after Arnold's relinquishment of the Arnold Corporation stock, the company began acting in a manner which Arnold had not foreseen. Three months after the sale of Arnold's preferred stock to the company, the Board of Directors formally approved a plan which called for payment of accrued dividends on preferred stock in 1986 and 1987. 2

Additionally, appellees, Jira, Lautzenheiser, Mabbs, Lindgren, Colhoun, Jordan, Kenner and Carl Marks & Co. soon reissued a substantial number of the relinquished shares of common stock to themselves at a subscription price of only seven dollars per share. Appellees Jira and Lautzenheizer paid the subscription price partially in the form of long-term promissory notes payable upon the sale or merger of Arnold Corporation.

Arnold Corporation was sold to Reynolds and Reynolds Company soon thereafter, nine months after Arnold had entered into the stock purchase agreement. Reynolds and Reynolds paid over sixty dollars per share for the stock of Arnold Corporation. Appellees profited handsomely from this transaction.

On December 16, 1986, Arnold filed a complaint in the United States District Court for the Northern District of Ohio against Arnold Corporation, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, violations of the Ohio Securities Act, and common law fraud. On January 29, 1987, Arnold Corporation filed a motion to compel arbitration or in the alternative to dismiss for failure to plead fraud with the particularity required by Federal Rule of Civil Procedure 9(b). On April 6, 1987, Arnold filed a first amended complaint which added the remaining appellees. The first amended complaint also added allegations of Racketeer Influenced and Corrupt Organizations Act (RICO) violations and breach of fiduciary duty to the allegations contained in the first complaint. On May 20, 1987, appellees responded by filing a motion to compel arbitration and to stay this action pending arbitration or in the alternative to dismiss the first amended complaint for failure to state a claim upon which relief can be granted and for failure to plead fraud with particularity and to dismiss certain parties for lack of venue and lack of in personam jurisdiction.

On July 30, 1987, the district court filed a memorandum opinion and judgment entry which granted appellees' motion to compel arbitration. The court concluded that Arnold's allegations of fraud in the inducement to arbitrate were insufficient to justify an exception to the strong federal policy in favor of arbitration because they failed to comply with the pleading requirements of Federal Rule of Civil Procedure, Rule 9(b). The district court did not explicitly rule on appellees' motion to stay the proceedings pending arbitration.

On August 24, 1987, appellant Arnold filed a notice of appeal from the arbitration order (Appeal No. 87-3825). On June 10, 1988, appeal No. 87-3825 was argued orally before a panel of this court and the panel reserved decision.

On July 1, 1988, appellees advised the panel by letter that they wished to challenge the court's jurisdiction to entertain the appeal. On July 14, 1988, appellees filed a motion to dismiss the appeal, alleging that the demise of the Enelow-Ettelson, doctrine in Gulfstream Aerospace Corp. v. Mayacamas Corp., 485 U.S. 271, 108 S.Ct. 1133, 99 L.Ed.2d 296 (1988) precluded this court's appellate jurisdiction over the appeal. In Gulfstream, the Supreme Court overruled the cases establishing the Enelow-Ettelson doctrine that had allowed appeals from district court orders staying a legal action pending arbitration because an agreement to arbitrate a legal dispute was considered an equitable defense for Enelow-Ettelson purposes. Id. 485 U.S. at 287-88, 108 S.Ct. at 1142-43.

On October 12, 1988, this court issued an opinion, finding that the demise of the Enelow-Ettelson doctrine raised a "thorny issue of this court's appellate jurisdiction." Arnold v. The Arnold Corporation--Printed Communications for Business, No. 87-3825, slip op. at 7, 8 (6th Cir. Oct. 12, 1988) [860 F.2d 1078 (table) ]. The court found that several ambiguities existed in the district court's memorandum opinion and order, making it difficult to determine if the order was an interlocutory order or a final judgment. For example, although the district court had granted appellees' motion to compel arbitration, it was silent as to appellees' request to stay the proceedings pending arbitration. The court vacated the district court's judgment, remanded the case for clarification, asked the district court to specify which of appellees' requests it had granted, and invited the district court to certify for immediate appeal pursuant to section 1292(b) if its order was interlocutory.

On November 8, 1988, the district court entered an Order of Clarification. The order reads as follows:

[T]he Court's Order dated July 30, 1987 ... is CLARIFIED as follows:

(1) The motion of all defendants to compel arbitration of all claims in this litigation is GRANTED and plaintiff's First Amended Complaint is therefore DISMISSED;

(2) The alternative motions of all defendants are DENIED...

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