Liskey v. Oppenheimer & Co., Inc.

• Decision Date: 21 September 1983
• Docket Number: Nos. 82-1118,82-1159,s. 82-1118
• Citation: 717 F.2d 314
• Parties: Fed. Sec. L. Rep. P 99,507 John R. LISKEY, Plaintiff-Appellee, Cross-Appellant, v. OPPENHEIMER & CO., INC., and Warren K. Hayes, Defendants-Appellants, Cross-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 314

717 F.2d 314

Fed. Sec. L. Rep. P 99,507

John R. LISKEY, Plaintiff-Appellee, Cross-Appellant, v. OPPENHEIMER & CO., INC., and Warren K. Hayes Defendants-Appellants, Cross-Appellees.

Nos. 82-1118, 82-1159.

United States Court of Appeals Sixth Circuit.

Sept. 21, 1983.

Thomas G. Parachini, Brown, Colman & DeMent, Kalamazoo, Mich., James E. Beckley (argued), Mary E. Keefe, J. David Montague, Chicago, Ill., for defendants-appellants, cross-appellee.

Gary P. Schenk, Ward, Schenk & Boncher, William P. Hodgkins, Jr., Grand Rapids, Mich., John R. Liskey (argued), Lansing, Mich., for plaintiff-appellee, cross-appellant.

Before MERRITT and MARTIN, Circuit Judges, and PORTER, Senior District Judge. ^*

DAVID S. PORTER, Senior District Judge.

This "churning" case presents the problem of what a court should do where arbitrable claims are joined with non-arbitrable claims. The district court denied defendants' motion to sever Counts III through VIII of plaintiff's complaint, which allege violations of stock exchange and association rules as well as state and common law, and compel arbitration of those claims following judicial resolution of Counts I and II of plaintiff's complaint, which allege violations of the federal securities laws. Defendants now appeal that portion of the district court's order. This court has jurisdiction over the appeal under 28 U.S.C. Sec. 1292(a)(1) (1976) as an interlocutory decision refusing an injunction. Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017, 1022 (6th Cir.1979).

The district court, in the same order, granted defendants' motions to dismiss Count III and part of Count VII of the complaint for failure to state claims upon which relief could be granted. Plaintiff filed a notice of cross-appeal from that portion of the district court's order. Plaintiff asserts that pendent jurisdiction exists for the cross-appeal.

I. THE APPEAL

Plaintiff-appellee, John R. Liskey, ("Liskey"), opened several types of accounts with defendant Oppenheimer & Co., Inc. ("Oppenheimer") in late October 1976. Defendants-appellants maintain that at the time Liskey opened the accounts, he signed a "Consent to Loan of Securities" commonly referred to as a "margin agreement," ¹ and a "Client's Option Agreement." ² These documents provide that all disputes relating to the management of a client's account shall be settled by arbitration.

Liskey alleges that defendant-appellant Hayes, one of Oppenheimer's brokers, induced him to invest over $100,000 in a bond-option program by giving him specific assurances of the low-risk nature of the investment. Within a year, Liskey's account was worth approximately $30,000. Liskey then filed an eight-count complaint, seeking to recover the amount he lost plus exemplary damages.

Counts I and II of Liskey's complaint allege violations of various provisions of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78a et seq. (1976). Appellants concede that these claims are non-arbitrable, despite the existence of the agreements to arbitrate, because of the well-recognized exception to the rule established by the Federal Arbitration Act, 9 U.S.C. Sec. 1 et seq. (1976). ("Arbitration Act"), providing for the exclusive jurisdiction of the federal courts over federal securities claims. See e.g., Wilko v. Swan, 346 U.S. 427, 438, 74 S.Ct. 182, 188, 98 L.Ed. 168 (1953); Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017, 1030 (6th Cir.1979); Sibley v. Tandy Corp., 543 F.2d 540, 543 (5th Cir.1976), cert. denied, 434 U.S. 824, 98 S.Ct. 71, 54 L.Ed.2d 82 (1977); Greater Continental Corp. v Schechter, 422 F.2d 1100, 1103 (2d Cir.1970). Nevertheless, appellants maintain that Counts III through VIII, which allege claims that are pendent to the first two federal claims, should be severed and arbitrated following adjudication of the federal claims.

The district court recognized that,

[a]rbitration clauses like the ones involved in this case are generally valid, irrevocable and enforceable. 9 U.S.C. Sec. 2 (1976). ³ The plaintiff has not disputed that he signed the agreements which contain arbitration clauses, see, e.g., Complaint p 49, nor has he alleged a valid defense to the enforcement of the clause. See 9 U.S.C. Sec. 2 (1976). The sole basis for his objection to arbitration is that this court will resolve federal counts which necessarily affect the disposition of the pendent state claims. The issue, therefore, becomes whether the existence of the federal securities claims should preclude arbitration of the non-federal causes of action.

Liskey v. Oppenheimer & Co., Inc., No. 79-672 (W.D.Mich. Jan. 12, 1982).

The district court followed the directive of this court's decision in Mansbach, supra, which provides: ⁴

If the district court determines that ... the federal claims contain substantially the same elements as the state law claims, so that resolution of the federal claims will necessarily resolve the state claims, then the court should consolidate the federal and state claims ... and not refer such counts to arbitration.

In the alternative, if the federal and state claims are deemed not similar enough for such consolidation ... then the district court should proceed only on the federal claims and stay all proceedings on the state claims pending resolution of the federal claims. If ... [plaintiff] is unsuccessful on the federal claims, the district court should then refer the state claims to arbitration.

598 F.2d at 1030-31 (footnotes omitted). This court in Mansbach also stated that differences in jurisdictional elements and scienter requirements "should be regarded as insubstantial." 598 F.2d at 1031 n. 15.

In following this standard, the court below noted that "the plaintiff allegedly has suffered a single wrong and has asserted alternative theories of recovery." It found that in ruling on the federal securities counts (regarding "churning"), "the court will reach factual conclusions necessary to the disposition of the pendent state claims." The court concluded on that basis that Mansbach did not require severance and arbitration.

Appellants argue that the plain meaning of the Federal Arbitration Act as well as the strong federal policy favoring enforcement of arbitration agreements require that plaintiff's claims be arbitrated pursuant to the agreements between the parties. They suggest either that the district court's reliance upon Mansbach was misplaced ⁵ or that this court consider more fully enunciating the Mansbach directive in light of Dickinson v. Heinold Securities, Inc., 661 F.2d 638 (7th Cir.1981). Brief of Defendants-Appellants at 5-6.

In Dickinson, the plaintiff, upon opening an account with the defendant brokerage company, signed an options agreement containing an arbitration clause. The plaintiff filed an action alleging violations of the Securities Exchange Act of 1934 and various rules promulgated thereunder, as well as contract and state tort claims "based upon essentially the same facts relevant to the federal claim." 661 F.2d at 640.

The plaintiff in Dickinson, like plaintiff-appellee here, maintained that there was "no duty to arbitrate under the contract given the need for a judicial resolution of Count I [federal securities claim] and the substantial duplication of proof required as between Count I and the arbitrable counts." 661 F.2d at 642. The magistrate and the district court apparently agreed with plaintiff's position. The district court, in accordance with the magistrate's recommendation, retained the arbitrable claims for a judicial resolution together with the federal securities claim. The defendant appealed from the denial of its motion to compel arbitration of the state claims, and to stay arbitration pending judicial resolution of the non-arbitrable federal claim. 661 F.2d at 641. On appeal, the Seventh Circuit spurned plaintiff's so-called "efficiency argument," stating "[a] requirement to arbitrate may, in a particular instance, result in some duplication of effort, but this prospect cannot vitiate the agreement of the parties." 661 F.2d at 643.

The Dickinson court notes that the plaintiff's argument derives "from the 'doctrine of intertwining' as primarily enunciated in a line of Fifth Circuit cases. Miley v. Oppenheimer & Co., 637 F.2d 318, 334-37 (5th Cir.1981); Sibley v. Tandy Corp., 543 F.2d 540 (5th Cir.1976), cert. denied, 434 U.S. 824, 98 S.Ct. 71, 54 L.Ed.2d 82 (1977)" (parallel citations omitted). ⁶ This doctrine is a judicially-created exception to the application of the Arbitration Act which instructs that when arbitrable and non-arbitrable claims are sufficiently intertwined factually and legally, a court should deny arbitration of the arbitrable claims and try all the claims together in federal court. See Dickinson, 661 F.2d at 643; Miley, 637 F.2d at 335; ⁷ Cunningham v. Dean Witter Reynolds, Inc., 550 F.Supp. 578, 581 (E.D.Cal.1982). The Dickinson court observes that two reasons have been advanced to justify this judicially-created exception: preservation of exclusive jurisdiction over the non-arbitrable claim; and efficiency. 661 F.2d at 633-64.

In examining the first proffered rationale, the Seventh Circuit notes that the threat to the jurisdiction of the federal courts over non-arbitrable claims arises only when arbitration of an "intertwined" state claim precedes the federal proceeding, so that "the federal forum might find itself bound through collateral estoppel." 661 F.2d at 644. Nevertheless, the court dismisses this rationale as justification for denying arbitration of otherwise arbitrable claims. 661 F.2d at 644,citing Lee v. Ply ^*Gem Industries, Inc.,> 593 F.2d 1266, 1275 (D.C.Cir.), cert. denied, 441 U.S. 967, 99 S.Ct. 2417, 60 L.Ed.2d 1073 (1979) ("intertwining" or "permeation" doctrine provides "no authority for the ruling ... that arbitrable claims become subject to adjudication in court merely because they are related to non-arbitrable claims"). The Dickinson court resolves the...