Glazer v. Lehman Bros., Inc.

• Decision Date: 12 January 2005
• Docket Number: No. 03-4312.,No. 03-4415.,03-4312.,03-4415.
• Parties: Samuel GLAZER, Plaintiff-Appellee, v. LEHMAN BROTHERS, INC., Defendant, SG Cowen Securities Corporation; Societe Generale, Defendants-Appellants. Samuel Glazer, Plaintiff-Appellee, v. Lehman Brothers, Inc.; Lehman Brothers Holdings, Inc., Defendants-Appellants, SG Cowen Securities Corporation, Defendant.
• Court: U.S. Court of Appeals — Sixth Circuit

394 F.3d 444

Samuel GLAZER, Plaintiff-Appellee, v. LEHMAN BROTHERS, INC., Defendant, SG Cowen Securities Corporation; Societe Generale, Defendants-Appellants.

Samuel Glazer, Plaintiff-Appellee, v. Lehman Brothers, Inc.; Lehman Brothers Holdings, Inc., Defendants-Appellants, SG Cowen Securities Corporation, Defendant.

No. 03-4312.

No. 03-4415.

United States Court of Appeals, Sixth Circuit.

Argued: October 26, 2004.

Decided and Filed: January 12, 2005.

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ARGUED: P. Benjamin Duke, Covington & Burling, New York, New York, H. Nicholas Berberian, Neal, Gerber & Eisenberg, Chicago, Illinois, for Appellants. Robert P. Duvin, Duvin, Cahn & Hutton, Cleveland, Ohio, for Appellee. ON BRIEF: P. Benjamin Duke, Laurence A. Silverman, Aaron R. Marcu, Covington & Burling, New York, New York, H. Nicholas Berberian, Neal, Gerber & Eisenberg, Chicago, Illinois, Douglas V. Bartman, Kahn Kleinman, Cleveland, Ohio, Mark O'Neill, Weston, Hurd, Fallon, Paisley & Howley, Cleveland, Ohio, for Appellants. Robert P. Duvin, Kenneth D. Schwartz, Duvin, Cahn & Hutton, Cleveland, Ohio, for Appellee.

Before: DAUGHTREY and SUTTON, Circuit Judges; FORESTER, Chief District Judge.^*

OPINION

FORESTER, Chief District Judge.

The Defendants-Appellants appeal the District Court's denial of their motion to compel arbitration. The District Court held that the arbitration provisions contained in five agreements between the Plaintiff-Appellee and the Defendants-Appellants were not enforceable because four of those provisions were fraudulently induced, based on oral representations made by a broker who worked for Appellants, and because a fifth agreement was superseded by subsequent criminal conduct and the other four agreements. We AFFIRM, in part, REVERSE, in part, and REMAND for further proceedings consistent with this opinion.

OVERVIEW

This appeal asks this Court to again review the Supreme Court's decision in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 402-04, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967), and to construe the breadth of the Supreme Court's holding therein. Specifically, this appeal requires the Court to examine two areas of law, the "severability" of arbitration provisions under Prima Paint and the application of the parol evidence rule under Ohio law, as applied to the former. Although the primary issue presented by the parties concerns the application of the parol evidence rule under Ohio law, the severability issue must first be addressed.

JURISDICTION

We have jurisdiction over this interlocutory appeal pursuant to 28 U.S.C. §§ 1331, 1332 and 1367(a). Further, because the District Court denied the Appellants' motion to stay this action pending arbitration pursuant to section 3 of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 3, we also have jurisdiction under 9 U.S.C. § 16(a)(1)(A).

While a "claim of fraud in the inducement of the entire contract" is a matter to be resolved by an arbitrator, "a claim of fraud in the inducement of the arbitration clause itself... the federal court" has jurisdiction to adjudicate it. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. at 402-04, 87 S.Ct. 1801 (emphasis added). See C.B.S. Employees Fed. Credit Union v. Donaldson, Lufkin & Jenrette Sec. Corp., 912 F.2d 1563, 1567 (6th Cir.1990) (stating that if a fraud claim relates to the making of the arbitration provision, the court must first adjudicate the fraud claim). Because the instant appeal involves allegations that the arbitration provisions at issue were fraudulently induced, the Court has jurisdiction over this appeal.

BACKGROUND

The Appellee, Samuel Glazer ("Glazer" or "Appellee"), brought this action against Appellants Lehman Brothers, Inc. and affiliated investment companies (the "Lehman Brothers" companies) and Appellants SG Cowen Securities Corp. and Societe Generale (the "SG Cowen" companies) (collectively, the "Appellants")¹ based on the alleged theft of Frank Gruttadauria ("Gruttadauria"), a former employee and broker with the Appellants. Glazer had several investment accounts with the Appellants through Gruttadauria.² Gruttadauria engaged in a complex system of fraud and theft as an investment broker during his approximately fifteen years working for the Appellants and has previously pled guilty to criminal charges relating to this wrongdoing.

In 1998, Glazer established investment accounts with the Appellants through Gruttadauria. In doing so, Glazer signed four contracts with SG Cowen: an account agreement, a margin agreement, an option contract, and an account agreement in connection with a prior, 1996 Option Agreement (collectively, the "Account Agreements"). Prior to the creation of those accounts with Gruttadauria, Glazer signed an Option Agreement with SG Cowen through broker David Tissue in 1996 (the "Tissue Account" or the "1996 Option Agreement"). Each of these five agreements contain broad arbitration provisions³ that are now at issue.

Glazer filed this action in 2002, seeking damages from the Appellants for Gruttadauria's misconduct and theft. Specifically, Glazer brings claims under the Securities and Exchange Act, 15 U.S.C. § 78j(b), other federal securities laws and Ohio state law. The Appellants claim that Glazer's claims should be submitted to arbitration pursuant to arbitration clauses contained in the five agreements.

This is the second time Glazer's claims have been presented to this Court. Previously, his claims were heard with six similar actions in a consolidated appeal, Fazio v. Lehman Brothers, Inc., 340 F.3d 386 (6th Cir.2003), after the District Court denied the appellants' motions to stay pending arbitration in those cases. The facts underlying this and other stockbroker fraud cases involving the Appellants and Gruttadauria were set forth in Fazio. Id. at 391-92.

In the prior appeal, a panel of this Court reversed the District Court's refusal to enforce the various arbitration agreements contained in the investment contracts with the Appellants. Id. at 395. The only question presented in that interlocutory appeal was whether similarly worded arbitration clauses in the various plaintiffs' brokerage account agreements mandated arbitration of their claims. Id. at 391. Because the panel could not reach the "fact-intensive issues" regarding whether the arbitration clauses were enforceable, it remanded each action for a case-by-case "determination of whether the arbitration clauses, analyzed independently from the account agreements, are valid." Id. at 397-98. Thus, this Court specifically remanded with instructions to consider the particular claims of the plaintiffs regarding the validity of the arbitration clauses standing apart from the account agreements as a whole. Id. at 392.

Turning to the instant action, upon remand and following a period of discovery, the District Court held an evidentiary hearing on September 3, 2003, pursuant to 9 U.S.C. § 4. Subsequent to the hearing, on October 3, 2003, the District Court issued an Order and Memorandum Opinion that again denied the Appellants' motions to stay pending arbitration. Specifically, the District Court held that: (1) the parol evidence rule did not bar consideration of Gruttadauria's alleged oral promise to Glazer that SG Cowen would not enforce the arbitration provisions; (2) Glazer proved the elements of fraud in the inducement by clear and convincing evidence; and (3) the 1996 account agreement was superseded by Gruttaduaria's subsequent fraud and, therefore, the arbitration provision therein was not binding upon Glazer. [J.A. at 244-261]

In reaching its decision, the District Court held that "the arbitration provisions must be treated as contracts separate and distinct from the broader account agreements." [J.A. at 254] Yet, in reaching this conclusion, the District Court merely adopted Glazer's position without explaining how or why it reached this conclusion; nor did the District Court cite any authority for this legal proposition. Notably, the District Court framed the issue as:

if an issue arises as to whether the parties intended to be bound by an alleged written contract, parol evidence is admissible to show that despite the writing, the parties did not enter any agreement.... [H]owever, if the parties generally intended to be bound by a written agreement, parol evidence is inadmissible to directly contradict one of its terms. The parties essentially dispute which situation is present in the current case.

[J.A. at 254] We find that the District Court properly identified the main issue, but, as discussed infra, engaged in an improper application of the appropriate rules.

Relying on Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270, the District Court held that the "severability doctrine" dictates that the "arbitration provisions must be treated as contracts separate and distinct from the broader account agreements." [J.A. at 254] Thus, the District Court held that parol evidence was admissible to prove that the parties lacked intent to be bound by the "separate" arbitration clause notwithstanding the signed Account Agreements. [J.A. at 254] Based on these legal conclusions, the District Court then found that Glazer proved each element of fraudulent inducement by clear and convincing evidence. [J.A. at 256-260] In addition, the District Court also held that the 1996 Option Agreement did not require arbitration because it was superseded by Gruttadauria's conduct and by the closing of the Tissue account. [J.A. at 260]

Appellants SG Cowen filed a timely Notice of Appeal on October 6, 2003, and Appellants Lehman Brothers timely filed their Notice of Appeal on October 21, 2003.

LEGAL STANDARD

We review de novo the district court's conclusions of law and determination on whether to compel arbitration pursuant to the FAA. Burden v. Check into Cash of Kentucky, LLC, 267 F.3d 483, 487 (6th Cir.2001). A district court's...