PaineWebber Inc. v. Farnam

• Decision Date: 22 March 1989
• Docket Number: No. 88-1169,88-1169
• Citation: 870 F.2d 1286
• Parties: PAINEWEBBER INCORPORATED, Plaintiff-Appellant, v. Franklin FARNAM, Robert Farnam, John Farnam and Edward Jacks, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1286

870 F.2d 1286

PAINEWEBBER INCORPORATED, Plaintiff-Appellant, v. Franklin FARNAM, Robert Farnam, John Farnam and Edward

Jacks, Defendants-Appellees.

No. 88-1169.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 7, 1988.

Decided March 22, 1989.

L. Andrew Brehm, Schuyler, Roche & Zwirner, Chicago, Ill., for plaintiff-appellant.

Robert F. Fuchs, Fuchs, Temple & Berman, Chicago, Ill., for defendants-appellees.

Before WOOD, Jr. and COFFEY, Circuit Judges, and GRANT, Senior District Judge. ^*

GRANT, Senior District Judge.

In this appeal we are asked to review the propriety of a district court order granting summary judgment based on issue preclusion principles. The appellant, PaineWebber Incorporated, filed a civil action in Illinois state court against Edward Jacks. Jacks, along with Franklin Farnam, Robert Farnam, and John Farnam, subsequently filed arbitration complaints against PaineWebber with the National Association of Securities Dealers, Incorporated, and moved to stay the state court proceedings. PaineWebber filed for declaratory judgment in United States District Court, but, prior to a ruling on the matter by the district court, the state court issued a stay order pending the arbitration of Jacks' claims. In granting the defendants' motion for summary judgment, the district court gave the state court order issue preclusive effect. We now hold that the vagueness of the state court order renders both the law of the case and collateral estoppel doctrines, the two bases for the district court decision, inapplicable, and therefore reverse the holding of the district court. Inasmuch as there is no genuine issue of material fact, we grant summary judgment in favor of PaineWebber on the defendants' arbitration claims.

I.

On July 1, 1986, PaineWebber Incorporated (PaineWebber) filed a civil suit against Edward Jacks (Jacks) in the Circuit Court of Cook County, Illinois, to recover monies allegedly due as a result of certain bookkeeping errors in an account maintained by Jacks.

In late October or November of 1986, Jacks filed an arbitration complaint against PaineWebber and Robert Fanning, Sr., the PaineWebber representative responsible for the accounts in question, with the National Association of Securities Dealers, Incorporated (NASD). ¹ The arbitration complaint alleged that Mr. Fanning made unsuitable investments and material misrepresentations as to the nature of certain transactions. Jacks sought an arbitral decree compelling PaineWebber to arbitrate pursuant to a 1979 Customer Agreement (the Agreement) with Blyth, Eastman, Dillon and Company, PaineWebber's predecessor in interest, which provided that:

Any controversy arising out of or relating to my [Jacks'] accounts, to transactions with or for me or to this agreement or breach thereof shall, at the written election of either of us, or sent by registered mail to the other, be submitted to arbitration, in accordance with the laws of the State of New York and the arbitration rules of the New York Stock Exchange.

* * *

* * *

This agreement and its enforcement shall be governed by the laws of the State of New York.

At or about the same time, Franklin Farnam, Robert Farnam, and John Farnam (the Farnams) filed similar arbitration complaints against PaineWebber and Mr. Fanning.

On October 28, 1986, Jacks moved to stay the state court proceedings pending arbitration. PaineWebber opposed the motion to stay, primarily on the grounds that: (1) the state court action was not intimately related to the arbitration complaint and therefore not arbitrable; (2) the court, rather than an arbitrator, should determine whether a claim is arbitrable; and (3) the arbitration claims were barred by Sec. 15 of the NASD Code of Arbitration Procedure (the Code), which states that:

No dispute, claim or controversy shall be eligible for submission to arbitration under this code where six years shall have elapsed from the occurrence or event giving rise to the act or the dispute, claim or controversy.

PaineWebber argued that, given the fact that Mr. Fanning left its employ on April 11, 1980, any arbitration claim regarding Mr. Fanning's activities had to be filed on or before April 11, 1986 to meet the eligibility requirement established by Sec. 15 of the NASD Code. Thus, the arbitration complaints filed by Jacks and the Farnams in late October and November of 1986 were untimely under the Code.

On April 13, 1987, Jacks filed a reply in support of his motion to stay, and, on April 15, the state court requested briefs on the issue of whether the court or an arbitrator should determine the arbitrability of a claim. Prior to the submission of the memoranda to the state court, PaineWebber moved for a declaratory judgment in federal court pursuant to 28 U.S.C. Sec. 2201. PaineWebber sought a declaration that it need not enter into arbitration with the defendants, inasmuch as there was not a presently enforceable agreement to arbitrate between the parties and the arbitration claims were barred by Sec. 15 of the NASD Code. PaineWebber relied upon Sec. 2(b) of the Illinois Uniform Arbitration Act, which provides that On application, the court may stay an arbitration proceeding commenced or threatened on a showing that there is no agreement to arbitrate.

Ill.Rev.Stat. ch. 10, p 102(b).

Judge Gomberg, presiding over the proceedings in state court, issued a stay order pending arbitration of the defendant's claims on May 15, 1987, two days after receiving the final brief on the issue of whether the court or an arbitrator should decide the arbitrability question. The stay order declared, in its entirety:

This cause coming on to be heard on Defendant's Motion to Stay, upon due notice and upon briefs and arguments for counsel, the Court being fully advised in the premises, it is hereby ordered that the Defendant's Motion to Stay is sustained and that this cause is stayed pending arbitration between the parties.

The parties each filed motions for summary judgment in district court following the issuance of the stay order, with the district court granting the defendants' motion for summary judgment and denying PaineWebber's motion for declaratory judgment and cross-motion for summary judgment. In a memorandum opinion and order entered December 30, 1987, the district court concluded that PaineWebber was not entitled to relitigate the arbitrability question, inasmuch as the state court order constituted the law of the case or, in the alternative, that the order was to be given collateral estoppel effect. PaineWebber appeals.

II.

Although the district court was presented with several issues, the court found it "necessary to address only the preclusive effect of Judge Gomberg's decision of May 15, 1987." PaineWebber Inc. v. Farnam, No. 87 C 3595, 1987 WL 34110 (N.D.Ill. Dec. 30, 1987). The district court began by noting that, inasmuch as the state court ruling was one of law rather than one of fact, the law of the case doctrine was the appropriate preclusion doctrine under which to examine the order. In doing so, the district court concluded that "Judge Gomberg ruled that the arbitrator should decide the limitations issue" and that his ruling constituted the law of the case.

Because the parties presented the preclusion issue as one of collateral estoppel, the district court went on to consider whether the order should be given collateral estoppel effect. Under the four-part test enunciated by this Court in Kunzelman v. Thompson, 799 F.2d 1172 (7th Cir.1986), a court should generally invoke collateral estoppel when: (1) the party against whom the doctrine is asserted was a party to the earlier proceeding; (2) the issue was actually litigated and decided on the merits; (3) the resolution of the particular issue was necessary to the result; and (4) the issues are identical. Id. at 1176.

In applying the Kunzelman criteria, the district court correctly noted that PaineWebber, the party against whom the doctrine was asserted, was a party to the earlier proceeding and, relying upon the fact that the state court issued the stay order just two days after briefs were submitted on the question of whether the court or an arbitrator should decide the arbitrability of a claim, determined that Judge Gomberg actually decided the issue of who should decide the arbitrability question. As to whether the ruling was necessary to the result, the district court acknowledged that this presented "a more difficult question." The district court reasoned that "Judge Gomberg must have concluded that the arbitration complaint did encompass Paine Webber's state claims. The only way in which Judge Gomberg could rationally have stayed the proceedings before him was if he concluded that Jacks' NASD complaint encompassed Paine Webber's state court allegations, and if he concluded that Jacks had a right to have the arbitrator decide the statute of limitations question." Insofar as PaineWebber sought to have the district court address the issue of who should decide the arbitrability question, the district court concluded that the issue presented was identical to the one already decided by the state court. Thus, the district court found that each of the Kunzelman criteria was met in the instant case and ruled that both the law of the case and collateral estoppel doctrines precluded PaineWebber from obtaining a judgment in federal court. As such, the court granted the defendants' motion for summary judgment and denied the PaineWebber motions for summary and declaratory judgment.

III.

We begin our analysis by looking to 28 U.S.C. Sec. 1738, which directs federal courts to give state court judgments the same effect such judgments would be given by the courts of the state in which judgment was rendered. ² See, e.g., Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S.Ct. 1327, 1331-32, 84 L.Ed.2d 274 (1985); Allen v. McCurry, 449 U.S. 90, 95, 101 S.Ct. 411, 415, 66 L.Ed.2d...