Greenblatt v. Drexel Burnham Lambert, Inc.

• Decision Date: 25 June 1985
• Docket Number: No. 84-8522,84-8522
• Citation: 763 F.2d 1352
• Parties: , Fed. Sec. L. Rep. P 92,200 Edward L. GREENBLATT, Plaintiff-Appellant, v. DREXEL BURNHAM LAMBERT, INCORPORATED, Defendant-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1352

763 F.2d 1352

54 USLW 2033, Fed. Sec. L. Rep. P 92,200

Edward L. GREENBLATT, Plaintiff-Appellant, v. DREXEL BURNHAM LAMBERT, INCORPORATED, Defendant-Appellee.

No. 84-8522.

United States Court of Appeals, Eleventh Circuit.

June 25, 1985.

Theodore G. Frankel, Marilyn S. Bright, Atlanta, Ga., for plaintiff-appellant.

Paul W. Stivers, Janice E. Garlitz, Atlanta, Ga., for defendant-appellee.

Appeal from the United States District Court for the Northern District of Georgia.

Before RONEY and HILL, Circuit Judges, and TUTTLE, Senior Circuit Judge.

JAMES C. HILL, Circuit Judge:

This case arises from a dispute over the balance owed by plaintiff/appellant on a securities margin account opened with defendant/appellee. The district court granted summary judgment in favor of the defendant, finding that plaintiff was collaterally estopped from prosecuting a RICO claim due to findings made in an earlier arbitration, and that a two-year statute of limitations precluded plaintiff's federal securities claims. We affirm the grant of summary judgment on these claims, but remand for further consideration of a pendent issue.

I. FACTS

In April, 1975, appellant Greenblatt, a practicing attorney in Atlanta, transferred his securities margin account to appellee Drexel Burnham Lambert, Inc. (Drexel Burnham). A customer's agreement (margin agreement) was executed, which contained an arbitration clause providing that any controversy arising out of or relating to the contract or the breach thereof would be settled by binding arbitration. It was and is Drexel Burnham's practice to send every new margin account a letter describing the method of computing interest on a margin account, ¹ although there is no evidence in the record as to whether Greenblatt actually received such a letter.

There was limited trading in Greenblatt's account through August, 1976. The account contained a 1976 year-end debit balance of $11,694.83. From then until May, 1983, when the account was liquidated, there was no activity in the account except for the receipt of dividends and the charging of interest on the debit balance. Each month during the time the account was open, Greenblatt received a statement from Drexel Burnham which showed all transactions in the account during the month, all positions, the opening and closing balances, the average daily balance, the monthly interest rate, and the amount of interest charged for the month. All information necessary to calculate the margin interest appeared in the monthly statements. There is no indication that Greenblatt ever notified Drexel Burnham of any discrepancies in calculation of interest on the account until the present dispute arose in 1982.

In June, 1982, due to a decline in the stock market, Drexel Burnham sent a margin call to Greenblatt, who replied that he owed no money on the account.

On August 10, 1982, Drexel Burnham made demand upon Greenblatt to arbitrate the dispute concerning the balance owed on the margin account, and subsequently initiated arbitration proceedings with the New York Stock Exchange. The arbitration hearing was initially scheduled for January 19, 1983, but was postponed and rescheduled for May 17, 1983, due to a conflict with Greenblatt's schedule.

On March 29, 1983, Greenblatt filed a complaint against Drexel Burnham in Georgia state court, asserting various state common law claims (including breach of fiduciary duty, fraud, and misapplication of funds). On April 26, 1983, Drexel Burnham removed the case to federal district court and moved to stay the proceedings pending the scheduled arbitration hearing.

On May 16, 1983, the day before the scheduled arbitration hearing, Greenblatt filed an amended complaint in federal court setting forth eight claims against Drexel Burnham: a violation of Rule 10b-16, 17 C.F.R. Sec. 240.10b-16, promulgated under the Securities Exchange Act of 1934; a violation of the Racketeering Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Secs. 1961, 1964; a violation of Rule 10b-5, 17 C.F.R. Sec. 240.10b-5; and various state common law claims. In essence, Greenblatt's complaint alleged that Drexel Burnham misrepresented the amount of interest to be charged on the account; failed to make proper disclosure concerning the methods for computing interest; and charged an unreasonable and usurious amount of interest on the account.

Along with the amended complaint, Greenblatt moved for a temporary restraining order to stay the arbitration scheduled for the next day on the grounds that his federal securities claims were not arbitrable and were intertwined with his other claims. The district court held a hearing on the morning of May 17, and the T.R.O. was denied.

On May 17, the arbitration hearing took place. Both parties were represented by counsel, presented and cross-examined witnesses, and introduced documentary evidence. Extensive evidence was presented as to the disclosures made by Drexel Burnham to Greenblatt, the computation of interest charges on the margin account, the contents of the monthly statements sent to Greenblatt, and the possibility that the interest charges were usurious. Greenblatt admitted receiving monthly statements from Drexel Burnham detailing the interest charged on the debit balance in his account. He also admitted that he took no action to close the account or to notify Drexel Burnham as to problems in the computation of interest. The arbitration panel ruled in favor of Drexel Burnham, finding that it was legally entitled to the debit balance and all of the interest charged on the balance, in the amount of $26,974.67. ² No specific factual findings were set forth in the panel's decision.

On July 7, 1983, the district court dismissed the state common law claims on the grounds that those claims were arbitrable and had in fact been arbitrated and determined on May 17th. The district court granted Greenblatt twenty days in which to amend the remaining counts (10b-5, 10b-16, and RICO) of his complaint in order to comply with the specificity requirement of Rule 9(b), Fed.R.Civ.P. These counts were amended on July 27. ³

On May 30, 1984, the district court granted summary judgment to Drexel Burnham on the three remaining counts in Greenblatt's complaint. The 10b-5 and 10b-16 claims were held to be barred by the statute of limitations. Greenblatt was held to be collaterally estopped from litigating his RICO claim by the arbitrators' adverse determination of the facts underlying the claim. A final order was entered, granting summary judgment for Drexel Burnham on all counts.

II. DISCUSSION

Appellant Greenblatt raises three issues on appeal: (1) whether his Rule 10b-16 claim is barred by the statute of limitations; (2) whether the RICO claim was properly dismissed on collateral estoppel grounds; and (3) whether the district court decided all the claims presented to it.

A. Rule 10b-16 Claim

The district court assumed arguendo that a private cause of action could be implied under Rule 10b-16, but held that the claim was barred in the present case by the two-year statute of limitations ⁴ borrowed from the Georgia Securities Act pursuant to the holding in Diamond v. LaMotte, 709 F.2d 1419 (11th Cir.1983). ⁵ Appellant contends that a longer statute of limitation applies, and alternatively, that continuous violations of Rule 10b-16 occurred, some of which fell within the two-year period.

Rule 10b-16, 17 C.F.R. Sec. 240.10b-16, ⁶ makes it unlawful for a broker or dealer to extend credit to any customer in connection with any securities margin transaction unless the broker or dealer has disclosed to the customer the terms and conditions by which costs of credit will be imposed. ⁷ The rule does not create an express private right to enforce the duties it sets forth. Whether there exists a private cause of action is an open question in the Eleventh Circuit; there is a split among the courts that have determined the issue. Compare Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 534-39 (9th Cir.1984) and Liang v. Dean Witter & Co., 540 F.2d 1107, 1113 n. 25 (D.C.Cir.1976) (implied cause of action exists) with Establissement Tomis v. Shearson Hayden Stone, Inc., 459 F.Supp. 1355, 1361 (S.D.N.Y.1978) (no implied cause of action).

We need not determine whether there is an implied private cause of action under Rule 10b-16 or whether the statute of limitations bars such an action, ⁸ because the record in the present case clearly indicates that Drexel Burnham complied with all the disclosure requirements of Rule 10b-16. The district court found that Drexel Burnham had established required disclosure procedures at the time Greenblatt opened his account, and that Drexel Burnham did not violate the "notification of changes in the costs of credit" provisions. See supra, n. 4. These findings are overwhelmingly supported by the record, and establish compliance with Rule 10b-16(a)(1) and (b). Furthermore, the monthly account statements sent to appellant, which he admittedly received, contained all information required by Rule 10b-16(a)(2). Therefore, summary judgment was properly granted on the Rule 10b-16 claim.

B. RICO Claim

Title 18 U.S.C. Sec. 1964(c) provides a private, civil cause of action under RICO for "[a]ny person injured in his business or property by reason of a violation of section 1962." A person violates RICO only if he participates in a "pattern of racketeering activity" or "collection of an unlawful debt." 18 U.S.C. Sec. 1962. "Unlawful debt" means a debt illegally incurred in a gambling activity, or a debt unenforceable because of usury laws. 18 U.S.C. Sec. 1961(6). A "pattern of racketeering activity" requires at least two predicate acts of "racketeering activity" ⁹ designated in section 1961(1). 18 U.S.C. Sec. 1961(5).

Appellant's RICO claim alleges that Drexel Burnham participated in a scheme to defraud and obtain money by false pretenses and representations through the mailing of false...