Hays and Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc.

• Decision Date: 15 September 1989
• Docket Number: No. 88-1680,88-1680
• Citation: 885 F.2d 1149,19 Bankr.Ct.Dec. 1344
• Court: U.S. Court of Appeals — Third Circuit
• Parties: , Fed. Sec. L. Rep. P 94,568, 19 Bankr.Ct.Dec. 1344, Bankr. L. Rep. P 73,091 HAYS AND COMPANY, as Trustee for Monge Oil Corporation v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Appellant.

Page 1149

885 F.2d 1149

58 USLW 2191, Fed. Sec. L. Rep. P 94,568,

19 Bankr.Ct.Dec. 1344, Bankr. L. Rep. P 73,091

HAYS AND COMPANY, as Trustee for Monge Oil Corporation v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Appellant.

No. 88-1680.

United States Court of Appeals, Third Circuit.

Argued Jan. 24, 1989.

Decided Sept. 15, 1989.

C. Clark Hodgson, Jr. (argued), John J. Murphy, III, Stradley, Ronon, Stevens & Young, Philadelphia, Pa., for appellant.

Jeffrey Cooper (argued), Mesirov, Gelman, Jaffe, Cramer & Jamieson, Philadelphia, Pa., for appellee.

Before STAPLETON, MANSMANN, and GARTH, Circuit Judges.

OPINION OF THE COURT

STAPLETON, Circuit Judge.

I.

This is an appeal from an order denying defendant Merrill Lynch's motion to compel arbitration of claims asserted against it by Hays & Co. ("Hays"), the Chapter 11 trustee in bankruptcy for Monge Oil Corporation ("Monge" or "debtor"). Hays' complaint alleges various federal and state securities violations in addition to fraudulent conveyance and constructive trust claims under the trustee's powers pursuant to 11 U.S.C.A. Sec. 544(b).

We are presented with three principal issues. Whether this court has jurisdiction over Merrill Lynch's appeal under section 1019 of the Judicial Improvements and Access to Justice Act, Pub.L. No. 100-702, 102 Stat. 4670, 4671, codified at 9 U.S.C.A. Sec. 15, ("Judicial Improvements Act") signed November 19, 1988. Second, whether and to what extent the trustee is bound by the debtor's pre-petition arbitration agreement. And, third, whether the Bankruptcy Reform Act of 1978, Pub.L. No. 95-598, 92 Stat. 2549, codified principally at 11 U.S.C.A. Secs. 101-1330, as amended by the Bankruptcy Amendments and Federal Judgeship Act of 1984 (the "1984 Amendments"), Pub.L. No. 98-353, 98 Stat. 333, conflicts with the Federal Arbitration Act of 1947, Pub.L. No. 80-282, 61 Stat. 669, codified at 9 U.S.C.A. Secs. 1-14 ("Arbitration Act") in such a way as to bestow upon a district court discretion to decline to enforce an arbitration agreement in situations like that before us.

We conclude that we do have jurisdiction over this appeal, and that the trustee is bound by the arbitration agreement to the same extent as the debtor. We also conclude that the Bankruptcy Code, as amended, does not conflict with the Arbitration Act so as to permit a district court to deny enforcement of an arbitration clause in a non-core adversary proceeding brought by the trustee in a district court. We will reverse the district court with respect to all claims other than those arising under 11 U.S.C.A. Sec. 544(b).

II.

Between 1981 and 1984, Monge had two corporate trading accounts with Merrill Lynch. In addition, William Mongeau, President of Monge, together with his wife, had six personal accounts with Merrill Lynch. At least one Monge account was opened on July 15, 1982. At that time Monge, through its duly authorized representatives, signed a Customer Agreement with Merrill Lynch which contained an arbitration clause compelling arbitration of controversies between the parties arising out of their brokerage relationship.

At the time the accounts were opened, Merrill Lynch was allegedly advised that the investments in the corporate accounts were only to be in "long term good quality" securities. Hays also alleges that despite these instructions Merrill Lynch employees engaged in "churning" and invested in speculative securities without disclosing the risks inherent in those transactions to Monge. Hays further alleges that Merrill Lynch mingled the funds in the personal and corporate accounts contrary to instructions and its fiduciary responsibilities. Hays estimates that Monge lost approximately $200,000.

On August 14, 1984, Monge Oil Corporation filed for relief under Chapter 11 of the Bankruptcy Code. Hays was appointed trustee for Monge. Hays thereafter filed this action in the district court alleging claims under section 17(a) of the Securities Act of 1933, 15 U.S.C.A. Sec. 77q(a), and section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C.A. Sec. 78j(b); common law claims for breach of contract and fiduciary duties, gross negligence, and conversion; claims under the New Jersey Uniform Securities Law, N.J.S.A. Sec. 49:3-47 to 49:3-76, the Pennsylvania Securities Act of 1972, 70 P.S. Secs. 1-101 to 1-704; several claims under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C.A. Secs. 1961-1968 ("RICO"), and equitable claims pursuant to section 544(b) of the Bankruptcy Code under: 1) the Uniform Fraudulent Conveyances Act as adopted by New York, New Jersey and the Commonwealth of Pennsylvania; and 2) a constructive trust theory.

Hays filed a motion with the bankruptcy court seeking leave to reject the Merrill Lynch Customer Agreement as an executory contract. On March 7, 1988, the court denied Hays' motion, concluding that the existence of an arbitration clause alone did not render the contract executory when neither party had any other obligation under the Customer Agreement. The bankruptcy court's decision was not appealed.

Merrill Lynch filed a motion to dismiss the RICO claims and the claim asserted under section 17(a) of the Securities Act of 1933. Merrill Lynch, based upon the written agreement between Merrill Lynch and Monge, also requested that the district court compel arbitration of Hays' claims and stay the proceedings before it. The court dismissed the RICO claims and the claim under section 17(a), but refused to compel arbitration.

In denying Merrill Lynch's motion to compel arbitration and to stay, the district court concluded that under this court's decision in Zimmerman v. Continental Airlines, 712 F.2d 55 (3d Cir.1983), cert. denied, 464 U.S. 1038, 104 S.Ct. 699, 79 L.Ed.2d 165 (1984), it had discretion to nullify a mandatory arbitration clause. The court also stated that since neither the trustee, nor the creditors it represents, signed the arbitration clause in question, they should not be bound by its terms.

III.

First, it is clear that the district court's order of August 16, 1988, is not a final order for the purposes of 28 U.S.C.A. Sec. 1291. Nevertheless, until recently we would have had jurisdiction under the Enelow-Ettelson doctrine. See Osterneck v. Merrill Lynch, 841 F.2d 508, 509-10 (3d Cir.1988). In late 1988, however, the Supreme Court repudiated that doctrine in Gulfstream Aerospace Corp. v. Mayacamas Corp., 485 U.S. 271, 108 S.Ct. 1133, 99 L.Ed.2d 296 (1988), thus implicitly overruling Osterneck. Consequently, the first question we need to address is whether we have appellate jurisdiction.

On November 19, 1988, some three months after the district court's order and approximately two months after the filing of the notice of appeal, President Reagan signed into law the Judicial Improvements Act. ¹ Section 1019 of the Act amends the Arbitration Act and states:

Sec. 1019. APPEALS UNDER TITLE 9, UNITED STATES CODE.

(A) In General.--Chapter 1 of title 9, United States Code, is amended by adding at the end thereof the following new section:

15. Appeals ²

(a) An appeal may be taken from--

(1) an order--

(A) refusing a stay of any action under section 3 of this title,

(B) denying a petition under section 4 of this title to order Arbitration to proceed,

(C) denying an application under section 206 of this title to compel arbitration,

(D) confirming or denying confirmation of an award or partial award, or

(E) modifying, correcting, or vacating an award;

(2) an interlocutory order granting, continuing, or modifying an injunction against an arbitration that is subject to this title; or

(3) a final decision with respect to an arbitration that is subject to this title.

(b) Except as otherwise provided in section 1292(b) of title 28, an appeal may not be taken from an interlocutory order--

(1) granting a stay of any action under section 3 of this title;

(2) directing arbitration to proceed under section 4 of this title;

(3) compelling arbitration under section 206 of this title; or

(4) refusing to enjoin an arbitration that is subject to this title.

As Merrill Lynch's motion to compel arbitration and to stay was denied, the district court's order clearly comes within section 15(a)(1)(A). Accordingly, we must decide whether section 15 is to be applied retroactively to this appeal.

In Bradley v. School Bd. of Richmond, 416 U.S. 696, 711, 94 S.Ct. 2006, 2016, 40 L.Ed.2d 476 (1974), the Supreme Court held that "a court is to apply the law in effect at the time it renders its decision, unless doing so would result in manifest injustice or there is statutory direction or legislative history to the contrary." The Court, quoting Thorpe v. Housing Auth. of Durham, 393 U.S. 268, 281, 89 S.Ct. 518, 526, 21 L.Ed.2d 474 (1969), made it clear that this rule extends to appellate courts, stating that " 'an appellate court must apply the law in effect at the time it renders its decision.' " 416 U.S. at 714, 94 S.Ct. at 2017. Accord Danbury, Inc. v. Olive, 820 F.2d 618, 625 (3d Cir.), cert. denied, 484 U.S. 964, 108 S.Ct. 453, 98 L.Ed.2d 393 (1987) ("This court ... must apply the law in effect when it resolves an appeal. The court will apply a statute passed after [the] decision in the trial court if that law is a valid enactment.").

Neither of Bradley's exceptions to the general rule is applicable here. Applying section 15 retroactively clearly would not result in manifest injustice; its sole effect would be to accelerate appellate review. See Delta Computer v. Samsung Semiconductor & Telecommunications Co., 879 F.2d 662 (9th Cir.1989). Nor is there legislative history evidencing a congressional intent that the amendment be given prospective application only. Id. at n. 2 ("Nothing in the text of the Act or its legislative history reproduced at 1988 U.S.Code Cong. & Admin.News 5982 indicates that we should not apply Section 15 to this case.")

To the contrary, given the content and context of section...