Blow v. Shaughnessy

• Decision Date: 17 April 1984
• Docket Number: No. 8310SC340,8310SC340
• Citation: 68 N.C.App. 1,313 S.E.2d 868
• Parties: Elizabeth BLOW, et al. v. Jeffrey John SHAUGHNESSY, et al.
• Court: North Carolina Court of Appeals

Page 868

313 S.E.2d 868

68 N.C.App. 1

Elizabeth BLOW, et al. v. Jeffrey John SHAUGHNESSY, et al.

No. 8310SC340.

Court of Appeals of North Carolina.

April 17, 1984.

Harrell & Titus by Bernard A. Harrell, and Akins, Mann, Pike & Mercer by J. Jerome Hartzell, Raleigh, for plaintiffs-appellees.

Hunton and Williams by Odes L. Stroupe, Jr., Raleigh, James E. Farnam, Richmond, Va., and David Dreifus, Raleigh, for defendants-appellants Wheat, First Securities, Inc., Ownley and Folger.

Fleming, Robinson, Bradshaw & Hinson by Richard A. Vinroot and John R. Wester, Charlotte, for defendants-appellants Bache Halsey Stuart Shields, Inc., Walterman and Berry.

Rogers & Hardin by Paul W. Stivers and Janice E. Garlitz, Atlanta, Ga., pro hac vice, and Manning, Fulton & Skinner by Michael T. Medford, Raleigh, for defendants-appellants Merrill Lynch, Pierce, Fenner and Smith, Inc., and Grove.

North Carolina Dept. of Justice by Associate Atty. Gen. Philip A. Telfer, and North

Carolina Dept. of State by Roland S. Jones, Raleigh, as amici curiae.

No appearance for defendant Shaughnessy.

EAGLES, Judge.

The issue in this case is whether it was proper for the Superior Court to deny the defendants' motions to stay proceedings in the trial court pending arbitration of the matters raised in plaintiffs' complaint. We hold that it was.

The underlying suit here involves a group of investors, plaintiffs, who are suing the person to whom they allegedly entrusted their money, defendant Shaughnessy, along with three national stock brokerage firms and named individual securities dealers employed by those firms. The complaint alleges that defendant Shaughnessy and the individual securities dealers, using the money supplied by plaintiffs, engaged in a course of trading in securities that was highly speculative, reckless and in violation of the fiduciary duties owed by them to plaintiffs. The complaint further alleges that when the trades and investments so made began to lose money, the defendants conspired to misrepresent and to avoid disclosing to plaintiffs the full extent of their activities and the losses sustained. Plaintiffs contend that defendants' continued reckless trading without the knowledge or permission of plaintiffs resulted ultimately in the loss of over 95% of the funds invested by plaintiffs, over $500,000.00. Plaintiffs claim that defendants' conduct was illegal and fraudulent and they seek actual and punitive damages amounting to over 15 million dollars.

a.

Defendants assert that the claims alleged in plaintiffs' complaint are properly the subject of arbitration. They filed motions seeking to stay judicial proceedings pending the arbitration of the dispute. The motions were denied and defendants have appealed.

Defendants' motions were made pursuant to G.S. 1-567.3 and 9 U.S.C. § 1 et seq. G.S. 1-567.3 provides, in pertinent part, as follows:

(a) On application of a party showing an agreement described in G.S. 1-567.2; and the opposing party's refusal to arbitrate, the court shall order the parties to proceed with arbitration, but if the opposing party denies the existence of the agreement to arbitrate, the court shall proceed summarily to the determination of the issue so raised and shall order arbitration if found for the moving party, otherwise, the application shall be denied.

Denial of an application to compel arbitration under this provision is an appealable interlocutory order. G.S. 1-567.18(a)(1). See Sims v. Ritter Constr. Co., 62 N.C.App. 52, 302 S.E.2d 293 (1983) (arbitration is a "substantial right"). But see Peloquin Assocs. v. Polcaro, 61 N.C.App. 345, 300 S.E.2d 477 (1983) (order staying arbitration pending judicial determination of a collateral issue held non-appealable). Defendants' appeal therefore is not premature.

b.

We note at the outset that our courts have approved arbitration as a manner of settling disputes. This Court, in Thomas v. Howard, 51 N.C.App. 350, 276 S.E.2d 743 (1981), noted that the intent of the legislature in enacting the Uniform Arbitration Act, G.S. Ch. 1, Art. 45A, was to encourage parties to submit disputed matters to arbitration when feasible and expedient. See Sims v. Ritter Constr. Co., supra. This policy of encouraging arbitration in appropriate cases is consistent with federal policy regarding arbitration. Federal law provides for the enforceability of agreements to arbitrate as follows:

A written provision in any maritime transaction or 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, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

9 U.S.C. § 2. The effect of this particular provision was recently considered by the U.S. Supreme Court in the case of Southland Corp. v. Keating, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984). Southland was a case originating in California and involving a franchise agreement containing a provision regarding arbitration. That provision is similar to the provisions involved in this case. It provided as follows:

Any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration in accordance with the rules of the American Arbitration Association ... and judgment upon any award rendered by the arbitrator may be entered in any court having jurisdiction thereof.

Id. at ----, 104 S.Ct. at 855.

The plaintiffs in Southland had sued defendants for fraud, oral misrepresentation, breach of contract, breach of fiduciary duty and other violations of California's Franchise Investment Law. Plaintiffs relied on the following provision of the California Statutes:

Any condition, stipulation or provision purporting to bind any person acquiring any franchise to waive compliance with any provision of this law or any rule or order hereunder is void.

Cal.Corp.Code § 31512 (West 1977). The California Supreme Court held that, because of the quoted statute, the arbitration provision in the franchise agreement was void and that plaintiffs' claims were not subject to arbitration.

In an opinion by Chief Justice Burger, the Supreme Court reversed the California Supreme Court holding that the California law violated the Supremacy Clause of the U.S. Constitution and that the Federal Arbitration Act preempts any state laws purporting to create non-arbitrable claims. The opinion notes that the legislative intent of the federal act was to encourage the non-judicial resolution of the claims of contracting parties and to dispel the traditional hostility toward arbitration inherited from English common law. Southland holds that § 2 of the federal act is a rule of substantive law intended to apply in state as well as federal courts.

In an earlier opinion, Moses H. Cone Hospital v. Mercury Constr., 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983), the Court affirmed the reversal of a federal district court order staying arbitration under a provision in a construction contract. The Court there said that § 2 of the Federal Arbitration Act was a "congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary." Id. at ----, 103 S.Ct. at 941, 74 L.Ed.2d at 785. See also Prima Paint Corp. v. Flood and Conklin Mfg. Corp., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967) (Federal Arbitration Act applied to federal diversity jurisdiction cases).

c.

These cases should be compared with the earlier case of Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953). That case more closely resembles the case sub judice in that it involved an agreement to arbitrate between a securities brokerage firm and one of its customers. Regarding the federal policy and congressional intent behind the Federal Arbitration Act, Wilko makes essentially the same observations as Southland and Moses Cone. Wilko, however, involves neither a franchise agreement nor a construction contract. Rather, Wilko concerns securities dealing, a subject with respect to which the Court noted a strong countervailing federal policy underlying the Securities Act of 1933.

Designed to protect investors, the act requires issuers, underwriters, and dealers to make full and fair disclosure of the character of securities sold in interstate and foreign commerce and to prevent fraud in their sale. To effectuate this policy, § 12(2) created a special right to recover for misrepresentation which differs substantially from the common-law action ....

346 U.S. at 431, 74 S.Ct. at 184. In concluding, the Court held:

Two policies, not easily reconcilable, are involved in this case. Congress has afforded participants in transactions subject to its legislative power an opportunity generally to secure prompt, economical and adequate solution of controversies through arbitration if the parties are willing to accept less certainty of legally correct adjustment. On the other hand, it has enacted the Securities Act to protect the rights of investors and has forbidden a waiver of any of those rights. Recognizing the advantages that prior agreements for arbitration may provide for the solution of commercial controversies, we decide that the intention of Congress concerning the sale of securities is better carried out by holding invalid such an agreement for arbitration of issues arising under the Act.

d.

We note also that the Securities Exchange Commission recently codified its policy, based on Wilko v. Swan, supra, of discouraging the use of arbitration provisions by brokerage firms in their customer agreements, particularly where individual customers are involved. Rule 15 c 2-2, 48 Fed.Reg....