Bird v. Shearson Lehman/American Exp., Inc.

• Decision Date: 28 March 1989
• Docket Number: D,No. 498,498
• Citation: 871 F.2d 292
• Parties: , 10 Employee Benefits Ca 2194 Frank L. BIRD, Trustee of the Frank L. Bird Profit Sharing Trust, Frank L. Bird, Individually, and Joan Shea, Plaintiffs-Appellees, v. SHEARSON LEHMAN/AMERICAN EXPRESS, INC., and Raymond R. Clements, Defendants-Appellants. ocket 88-7704.
• Court: U.S. Court of Appeals — Second Circuit

Page 292

871 F.2d 292

57 USLW 2588, 10 Employee Benefits Ca 2194

Frank L. BIRD, Trustee of the Frank L. Bird Profit Sharing Trust, Frank L. Bird, Individually, and Joan SheaPlaintiffs-Appellees, v.SHEARSON LEHMAN/AMERICAN EXPRESS, INC., and Raymond R Clements, Defendants-Appellants.

No. 498, Docket 88-7704.

United States Court of Appeals Second Circuit.

Argued Feb. 3, 1989.

Decided March 28, 1989.

Donald R. Holtman, Hartford, Conn. (Lester A. Katz, Katz & Seligman, Hartford, Conn., of counsel), for plaintiffs-appellees.

Jeffrey L. Friedman, New York City(Theodore A. Krebsbach, Shearson Lehman Hutton Inc., Office of the General Counsel, New York City, of counsel), for defendants-appellants.

Before KAUFMAN, TIMBERS, and CARDAMONE, Circuit Judges.

IRVING R. KAUFMAN, Circuit Judge:

We are asked to determine whether a statutory claim created by the Employee Retirement Income Security Act (ERISA) is subject to compulsory arbitration.Because Congress envisioned a judicial forum, particularly a federal court, as the central arena for implementing ERISA's underlying purpose--providing maximum protection to pension plan participants and beneficiaries--we hold that statutory ERISA claims are not compulsorily arbitrable.

Briefly, the background of this case is as follows.Appellants, Shearson Lehman/American Express ("Shearson")¹ and Raymond Clements, a Shearson Vice President, allegedly solicited Frank L. Bird, as trustee of the Frank L. Bird Profit Sharing Trust (the "Trust" or "Pension Plan"), to invest the assets of the Trust with them.Like his co-appellee, Joan Shea, Bird is also a participant and beneficiary of the Trust.Bird claims that during the first meeting with Clements, he emphasized that, because the Trust was a retirement fund, its investment objectives were long-term growth and safety of the corpus.Clements allegedly also knew that Bird was an unsophisticated investor who would rely on Shearson's skill and experience in investing securities.

Upon opening the account, Bird, in his capacity as trustee, signed Shearson's standard "Customer's Agreement."The contract contained a broad arbitration clause, under which Shearson's clients foreswore recourse to the courts.²Bird invested assets of the Trust totalling $62,205.56.After 55 transactions over a 22 month period, it is alleged the account entrusted to Clements and Shearson dwindled to a value of $13,427.53.Many of the purchases and sales, it is claimed, included high risk investments such as airline securities, warrants, and options.Each transaction generated commissions for appellants and some yielded interest on margin advances.

Specifically, the complaint charged that appellants' conduct constituted a breach of fiduciary duties under ERISA,29 U.S.C. Sec. 1104, and "churning," excess trading of an account in violation of Sec. 10(b) of the Securities Exchange Act of 1934,15 U.S.C. Sec. 78j, andRule 10b-5,17 C.F.R. Sec. 240-10b-5.Instead of submitting the claims to arbitration, appellees brought this action in the District of Connecticut.³On the basis of the arbitration provision, Clements and Shearson moved to stay the district court proceedings pending arbitration of the ERISA and securities claims.

In a ruling from the bench, Judge Cabranes found that because the arbitration clause was valid and binding upon Bird and Shea, the claims asserted pursuant to the 1934 Act were to be resolved by arbitration.The court determined, however, that the arbitration provision did not obligate appellees to arbitrate the ERISA claim.⁴We are of the view that claims asserting substantive ERISA violations can be brought in a federal forum notwithstanding an agreement to arbitrate.

Before reaching the arbitrability of ERISA claims, we consider other contentions of the parties.In Genesco, Inc. v. Kakiuchi & Co., 815 F.2d 840(2d Cir.1987), we set forth the factors to be considered on an application to compel arbitration.We must determine whether a valid arbitration agreement existed and, if so, the scope of that agreement.Id. at 844.Then, an assessment is made whether Congress intended the applicable claims to be nonarbitrable.Id.If only some of the claims are arbitrable, the court decides whether to stay the balance of the proceedings pending arbitration.Id.

We agree with the district court's determination that a valid arbitration agreement which bound all the parties continued in being.Seeking to free non-signatories from the terms of the customer agreement, appellees argued that Bird lacked the authority to compel all of the participants and beneficiaries of the Trust to abide by the arbitration clause.The court properly noted, however, that Bird, as trustee, could bind all participants and beneficiaries of the Trust to arbitration of "any controversy arising out of or relating to" the Trust.SeeBarrowclough v. Kidder, Peabody & Co., 752 F.2d 923, 938(3d Cir.1985);Fisser v. Int'l Bank, 282 F.2d 231, 233-34(2d Cir.1960).

The Supreme Court recently determined that the legislative intent underlying the Securities Exchange Act of 1934 did not bar compulsory arbitration of securities claims pursuant to section 10(b).Shearson Lehman/American Express v. McMahon, 482 U.S. 220, 107 S.Ct. 2332, 96 L.Ed.2d 185(1987).Accordingly, we affirm the district court's decision to compel arbitration of appellees' securities claims.⁵

We now turn to the question whether Congress intended to afford non-waivable access to a federal court for those asserting statutory violations of ERISA.In considering this issue, a discussion of the development of arbitrability doctrine will be helpful.

Although the Federal Arbitration Act,9 U.S.C. Secs. 1-14(1988)("Arbitration Act"), is "a congressional declaration of a liberal federal policy favoring arbitration agreements,"Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765(1983), it is, nevertheless, subject to a showing "that Congress intended to preclude a waiver of judicial remedies for the statutory rights at issue."McMahon, 482 U.S. at 225, 107 S.Ct. at 2336.The arbitrability of statutory claims is thus essentially a question whether, in enacting the statute upon which the claim is based, Congress intended the federal courts to be the exclusive forum for resolving disputes of substantive rights.

The requisite intent "will be deducible from [the act's] text or legislative history,"Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628, 105 S.Ct. 3346, 3354, 87 L.Ed.2d 444(1985), or "from an inherent conflict between arbitration and the statute's underlying purposes."McMahon, 482 U.S. at 225, 107 S.Ct. at 2336.The burden of demonstrating this intent is on the party opposing arbitration.Id.

When enacting remedial legislation, Congress has limited or prohibited waiver of a judicial forum.Most often these injunctions occur in statutes designed to provide minimum substantive guarantees.See, e.g., Barrentine v. Arkansas-Best Freight System, 450 U.S. 728, 737, 101 S.Ct. 1437, 1443, 67 L.Ed.2d 641(1981).In Barrentine, the Supreme Court concluded that claims asserted pursuant to minimum wage provisions of the Fair Labor Standards Act were not compulsorily arbitrable and could be maintained in federal court, notwithstanding an arbitration clause in the underlying collective bargaining agreement and an adverse ruling by a neutral arbitrator.450 U.S. 728, 101 S.Ct. 1437.The Court declared: "[D]ifferent considerations apply where the employee's claim is based on rights arising out of a statute designed to provide minimum substantive guarantees to individual workers."Id. at 737, 101 S.Ct. at 1443.

In making this statement, Justice Brennan referred to policy considerations espoused by Justice Powell, writing for a unanimous Court in Alexander v. Gardner-Denver Co., 415 U.S. 36, 94 S.Ct. 1011, 39 L.Ed.2d 147(1974).Despite an adverse arbitration decision, the Court held an individual could bring a wrongful termination claim under Title VII of the Civil Rights Act of 1964. Id.Justice Powell stated: "The purposes and procedures of Title VII indicate that Congress intended federal courts to exercise final responsibility for enforcement of Title VII; deferral to arbitral decisions would be inconsistent with that goal."Id. at 56, 94 S.Ct. at 1023.Indeed, he noted, "[t]his conclusion rests first on the special role of the arbitrator, whose task is to effectuate the intent of the parties rather than the requirements of enacted legislation."Id. at 56-57, 94 S.Ct. at 1023-24.The remedial intent of Congress tempers the right to privately order one's affairs.

In a more recent and unanimous pronouncement, the high court concluded that federal courts were not to accord preclusive effect to unappealed arbitration awards in suits brought pursuant to 42 U.S.C. Sec. 1983.McDonald v. City of West Branch, 466 U.S. 284, 104 S.Ct. 1799, 80 L.Ed.2d 302(1984).Justice Brennan offered a partial list of considerations supporting the Court's conclusion: an arbitrator may not possess the requisite expertise "to resolve the complex legal questions that arise in Sec. 1983 actions"; because an arbitrator's authority derives solely from the contract, he may not have the authority to enforce Sec. 1983; when the union has control over the grievance procedure, the interests of the union and those of the individual employee may conflict; and "arbitral factfinding is generally not equivalent to judicial factfinding."Id. at 290-91, 104 S.Ct. at 1803-04.These considerations illustrate the multifaceted concerns underlying Congress's desire to allow resolution of certain federal substantive rights in an Article III forum.⁶

Prior to the establishment of ERISA, pension issues were generally held arbitrable.See Schneider, Surviving ERISA Preemption: Pension Arbitration in the 1980's, 16 Colum.J.L. & Soc.Probs. 269, 276-77(1980...