Ketchum v. Almahurst Bloodstock IV

• Citation: 685 F. Supp. 786
• Decision Date: 12 February 1988
• Docket Number: Civ. A. No. 86-2498,86-2523 and 86-2535.
• Parties: Lynn D. KETCHUM, Plaintiff, v. ALMAHURST BLOODSTOCK IV, et al., Defendants. Lynn D. KETCHUM, Plaintiff, v. SPENDTHRIFT THOROUGHBRED BREEDING NO. 1, et al., Defendants. Lynn D. KETCHUM, Plaintiff, v. PRUDENTIAL-BACHE SECURITIES, INC., et al., Defendants.
• Court: U.S. District Court — District of Kansas

685 F. Supp. 786

Lynn D. KETCHUM, Plaintiff, v. ALMAHURST BLOODSTOCK IV, et al., Defendants.

Lynn D. KETCHUM, Plaintiff, v. SPENDTHRIFT THOROUGHBRED BREEDING NO. 1, et al., Defendants.

Lynn D. KETCHUM, Plaintiff, v. PRUDENTIAL-BACHE SECURITIES, INC., et al., Defendants.

Civ. A. Nos. 86-2498, 86-2523 and 86-2535.

United States District Court, D. Kansas.

February 12, 1988.

Theodore C. Beckett, Don R. Lolli, Emmett J. McMahon, Beckett & Steinkamp, Kansas City, Mo., Charles C. Rankin, Lawrence, Kan., for plaintiff.

William G. Beck, Field, Gentry, Benjamin & Robertson, P.C., Kansas City, Mo., Robert P. Numrich, Field, Gentry, Benjamin & Robertson, P.C., Overland Park, Kan., Laurence R. Tucker, Morris, Larson, King & Stamper, Kansas City, Mo., William M. Modrcin, Overland Park, Kan., Jerome T. Wolf, Sandra L. Schermerhorn, Spencer, Fane, Britt & Browne, Kansas City, Mo., J. Nick Badgerow, Overland Park, Kan., for defendants.

Patrick Keel, pro se.

MEMORANDUM AND ORDER

EARL E. O'CONNOR, Chief Judge.

These consolidated cases arose from various securities transactions between plaintiff and the eight named defendants. Plaintiff's claims against various defendants include violations of section 12(2) of the 1933 Securities Act, violations of section 10(b) and rule 10b-5 of the 1934 Securities Exchange Act, violations of Kansas Securities laws, misrepresentation, concealment, breach of fiduciary duty, and breach of contract. Additionally, plaintiff seeks an accounting from two defendants, rescission of certain contracts, and damages. This matter is now before the court on defendant Prudential-Bache Securities' motion to compel arbitration, for stay of proceeding, and for a protective order.¹ The court has determined that oral argument would not be of material assistance in this matter. D.Kan. Rule 206(d).

Plaintiff and defendant Prudential-Bache Securities, Inc. hereinafter "Bache Securities" entered into multiple client's agreements and option agreements, all of which contained arbitration clauses. Paragraph 14 of the client's agreements provides in pertinent part:

Any controversy arising out of or relating to my account, to transactions with or for me or to this Agreement or the breach thereof ... shall be settled by arbitration in accordance with the rules then obtaining of either the American Arbitration Association or the Board of Governors of the New York Stock Exchange as I may elect.

Similarly, paragraph 10 of the option agreements provides:

In the event of any dispute between us or claim by me or claim by you on account of the purchase, sale, handling, execution or endorsement of puts or calls for my account, the same shall be arbitrated in accordance with the rules of the exchange on which the put or call which is the subject of the dispute is traded or in accordance with the rules of the New York Stock Exchange Incorporated or the NASD, if the put or call is not traded on a national securities exchange.

As the Fifth Circuit recently stated, "when deciding whether to compel arbitration ..., the district court usually begins by asking whether `the parties agreed to arbitrate the disputes in question.'" Villa Garcia v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 833 F.2d 545, 546 (5th Cir.1987) (quoting Mayaja, Inc. v. Bodkin, 803 F.2d 157, 160 (5th Cir.1986)). Plaintiff raises no claim regarding the contracts' validity in his pleadings, and all of his claims fall explicitly within the above-quoted contract language. Consequently, we have no reason to question the contracts' validity and conclude that the parties did, in fact, agree to arbitrate the disputes presented in these consolidated cases.

Despite these agreements to arbitrate, plaintiff, relying on a 1953 Supreme Court decision and its progeny, contends that his claims under the 1933 Securities Act hereinafter "1933 Act" and the 1934 Securities Exchange Act hereinafter "1934 Act" are not arbitrable. Given the recent Supreme Court decision in Shearson/American Express, Inc. v. McMahon, ___ U.S. ___, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987), however, we conclude that plaintiff's claims under the 1934 Act, as well as his various state law claims, are arbitrable. However, plaintiff's 1933 Act claims are not arbitrable. Therefore, defendants' motion will be granted in part and denied in part.

Background

In Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953), the Court held that a predispute arbitration agreement could not be enforced to compel arbitration of a claim arising under section 12(2) of the 1933 Act. Id. at 438. Following this lead, several courts of appeals extended Wilko to claims arising under section 10(b) and rule 10b-5 of the 1934 Act. See, e.g., Sterne v. Dean Witter Reynolds, Inc., 808 F.2d 480 (6th Cir.1987); Wolfe v. E.F. Hutton & Co., 800 F.2d 1032 (11th Cir.1986); Jacobson v. Merrill Lynch, Pierce, Fenner & Smith, 797 F.2d 1197 (3d Cir.1986); King v. Drexel Burnham Lambert, 796 F.2d 59 (5th Cir.1986); Conover v. Dean Witter Reynolds, Inc., 794 F.2d 520 (9th Cir.1986); McMahon v. Shearson/American Express, Inc., 788 F.2d 94 (2d Cir. 1986); Merrill Lynch, Pierce, Fenner & Smith v. Moore, 590 F.2d 823 (10th Cir. 1978). (NOTE: McMahon abrogated these decisions.) Notwithstanding these appellate court extensions of Wilko, the Court held in McMahon that agreements to arbitrate 1934 Act claims were enforceable. McMahon, ___ U.S. at ___, 107 S.Ct. at 2344, 96 L.Ed.2d at 201.

Although the McMahon decision did reverse precedents in a majority of the federal circuit courts, the opinion follows the Court's consistent trend of broadening the scope of and strengthening the policy underlying the Federal Arbitration Act, 9 U.S. C. § 1 et seq. For example, in Prima Paint Corp. v. Flood & Conklin Mfg., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967), the Court held that the issue of whether a contract had been fraudulently induced (i.e., whether the contract containing the arbitration clause was valid) was an arbitrable issue. Id. at 402-04, 87 S.Ct. at 1805-06. The Prima Paint decision spawned in the lower courts consistent conclusions that arbitrability questions must be addressed with a healthy regard for the federal policy favoring arbitration. Only seven years after the Prima Paint decision, the Court foreshadowed its McMahon holding in Sherk v. Alberto-Culver Co., 417 U.S. 506, 94 S.Ct. 2449, 41 L.Ed.2d 270, reh'g denied, 419 U.S. 885, 95 S.Ct. 157, 42 L.Ed.2d 129 (1974). In Sherk, the Court upheld an arbitration agreement in an international commercial contract and compelled the parties to arbitrate the alleged violations of section 10(b) of the 1934 Act. Id. at 519-21, 94 S.Ct. at 2457-58. The Court again emphasized its support of the federal policy favoring arbitration in Moses H. Cone Memorial Hospital v. Mercury Construction Co. when it concluded that "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." 460 U.S. 1, 24-25, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1982). Finally, in Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1984), the Court rejected the "intertwining doctrine"² and broadened the reach of the Arbitration Act by holding that "the Arbitration Act requires district courts to compel arbitration of pendent state law arbitrable claims when one of the parties files a motion to compel, even where the result would be the possibly inefficient maintenance of separate proceedings in different forums." Id. at 217, 105 S.Ct. at 1239. All of these cases indicate the Court's desire to assure that the Arbitration Act would serve its intended purpose of giving arbitration agreements the same force and effect as other valid contracts. See Sherk, 417 U.S. at 511, 94 S.Ct. at 2453 (quoting H.R.Rep. 96, 68th Cong., 1st Sess. 1, 2 (1924)). Moreover, these cases evidence a trend which McMahon continued—a trend toward expanding the Arbitration Act's scope and toward enforcing valid arbitration agreements.

Applicability of McMahon

Although the plaintiff attempts to factually distinguish McMahon, we are convinced that McMahon directly speaks to one issue presented by defendant's motion: are plaintiff's 1934 Act claims arbitrable pursuant to the arbitration clauses contained in the various client's and option agreements? Because plaintiff filed these lawsuits prior to the Court's deciding McMahon, however, we must determine whether McMahon applies to the case at hand.

The general rule is that "federal cases should be decided in accordance with the law existing at the time of decision." St. Francis College v. Al-Khazraji, ___ U.S. ___, ___, 107 S.Ct. 2022, 2025, 95 L.Ed.2d 582, 589, reh'g denied, ___ U.S. ___, 107 S.Ct. 3244, 97 L.Ed.2d 749 (1987). Nevertheless, a court may make case-by-case exceptions to this general rule "when a change in the law is unfairly disruptive of a litigant's course of conduct or reasonable expectations." Noble v. Drexel, Burn-ham, Lambert, Inc., 823 F.2d 849, 850 (5th Cir.1987). The Supreme Court provided an analytical framework for determining whether a judicial decision should be applied retroactively in Chevron Oil Co. v. Huson, 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 (1971):

In our cases dealing with the nonretroactivity question, we have generally considered three separate factors. First, the decision to be applied must establish a new principle of law, either by overruling clear past precedent on which litigants may have relied, or by deciding an issue of first impression whose resolution was not clearly foreshadowed. Second, it has been stressed that we must weigh the merits and demerits in each case by looking to the prior history of the rule in question, its purpose and effect, and whether retrospective operation will further or retard its operation. Finally, we have weighed the inequity imposed by retroactive application, for where a decision of this Court could produce substantial inequitable results if

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