Surman v. Merrill Lynch, Pierce, Fenner & Smith

• Citation: 733 F.2d 59
• Decision Date: 24 April 1984
• Docket Number: No. 83-1455,83-1455
• Parties: Blue Sky L. Rep. P 71,968, Fed. Sec. L. Rep. P 91,443 Roger A. SURMAN and Kathleen M., his wife, Appellees, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, and David Richard Wulf, Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

Page 59

733 F.2d 59

Blue Sky L. Rep. P 71,968, Fed. Sec. L. Rep. P 91,443

Roger A. SURMAN and Kathleen M., his wife, Appellees, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, and David Richard Wulf, Appellants.

No. 83-1455.

United States Court of Appeals,

Eighth Circuit.

Submitted Jan. 12, 1984.

Decided April 24, 1984.

John J. Cole, Edwin L. Noel, Glenn E. Davis, St. Louis, Mo., for appellants; Armstrong, Teasdale, Kramer & Vaughan, St. Louis, Mo., of counsel.

Robert H. Kubie, St. Louis, Mo., for appellees.

Before McMILLIAN, JOHN R. GIBSON and BOWMAN, Circuit Judges.

McMILLIAN, Circuit Judge.

Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch) and David Richard Wulf, an account executive for Merrill Lynch, appeal from the order of the District Court for the Eastern District of Missouri, 559 F.Supp. 388, denying their motion to compel arbitration of appellees' pendent state law fraud claims and to stay such arbitration pending judicial resolution of appellees' federal and state securities law claims. Appellees Roger and Kathleen Surman are individual investors who entered into three standard brokerage agreements with Merrill Lynch, each containing an arbitration clause. For reversal appellants argue that the district court erred in refusing to enforce the arbitration agreements because of the joinder of non-arbitrable claims arising out of the same facts as the arbitrable claims. For the reasons discussed below, we reverse the judgment of the district court and remand with instructions.

Between December 1, 1979, and December 31, 1980, appellees opened several types of investment accounts with Merrill Lynch. Appellees signed three separate agreements with Merrill Lynch in order to obtain the firm's services as brokers. The first was a standard broker-investor agreement; the second was a standard option agreement; the third was a standard commodity account agreement. Each agreement contained a clause stating that any dispute arising between the parties would be submitted to arbitration. ¹

On July 28, 1982, appellees filed a four-count complaint in federal district court against appellants alleging loss of funds due to improper management of appellees' accounts and misrepresentations concerning the risk and profitability of the accounts. Count I sought damages under Sec. 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j (1976), and Rule 10b-5 of the Securities and Exchange Commission promulgated thereunder, 17 C.F.R. 240.10b-5 (1979) (anti-fraud provision). Count II sought damages under Missouri's Blue Sky law, Mo.Rev.Stat. Sec. 409.101 et seq. (1976). Count III sought damages based on common law fraud and Count IV sought actual and punitive damages also based on tort theory. The same acts and conduct of appellants formed the gravamen of each count.

On September 10, 1982, appellants brought a motion to compel arbitration of counts III and IV, the pendent state common law counts, and to stay such arbitration pending judicial resolution of counts I and II, the counts based on federal and state securities law. The district court denied the motion because the two sets of claims were based on the same facts and this appeal followed. Denial of the motion to compel arbitration is appealable under 28 U.S.C. Sec. 1292(a)(1) (1976) as an interlocutory decision refusing an injunction in an action requesting legal relief. Lee v. Ply*Gem Industries, Inc., 593 F.2d 1266, 1268-70 (D.C.Cir.), cert. denied, 441 U.S. 967, 99 S.Ct. 2417, 60 L.Ed.2d 1073 (1979) (Ply*Gem Industries ).

This case presents a dilemma arising out of an inherent conflict between two federal acts. The United States Arbitration Act, 9 U.S.C. Secs. 1-14 (1982), provides that "[a] written provision in ... a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." Id. Sec. 2. The Act was designed "to place arbitration agreements upon the same footing as other contracts." Scherk v. Alberto-Culver Co., 417 U.S. 506, 511, 94 S.Ct. 2449, 2453, 41 L.Ed.2d 270 (1974) (quoting H.R.Rep. No. 96, 68th Cong., 1st Sess. 1, 2 (1924)). It requires a federal court in which suit is brought "upon any issue referable to arbitration under an agreement in writing for such arbitration" to stay its hand while arbitration ensues. 9 U.S.C. Sec. 3. ²

There is, however, an exception to the broad language of the Arbitration Act in the case of claims asserted under federal securities law. In Wilko v. Swan, 346 U.S. 427, 438, 74 S.Ct. 182, 188, 98 L.Ed. 168 (1953) (Wilko ), the Supreme Court held that an agreement for arbitration of issues arising under the Securities Act of 1933 is invalid and not enforceable against an investor. Recognizing that its holding did not comport with the language and underlying policy of the Arbitration Act, the Court reasoned and concluded as follows:

Two policies, not easily reconcilable, are involved in this case. Congress has afforded participants in transactions subject to its legislative power an opportunity generally to secure prompt, economical and adequate solution of controversies through arbitration if the parties are willing to accept less certainty of legally correct adjustment. On the other hand, it has enacted the Securities Act to protect the rights of investors and has forbidden a waiver of any of those rights. Recognizing the advantages that prior agreements for arbitration may provide for the solution of commercial controversies, we decide that the intention of Congress concerning the sale of securities is better carried out by holding invalid such an agreement for arbitration of issues arising under the Act.

Id. at 438, 74 S.Ct. at 188 (footnote omitted).

Lower federal courts have since held with consistency that Wilko applies equally to claims arising under the Securities Exchange Act of 1934 or regulations promulgated thereunder. See, e.g., Weissbuch v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 558 F.2d 831 (7th Cir.1977); Sibley v. Tandy Corp., 543 F.2d 540 (5th Cir.1976) (Sibley ), cert. denied, 434 U.S. 824, 98 S.Ct. 71, 54 L.Ed.2d 82 (1977); Ayres v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 538 F.2d 532 (3d Cir.), cert. denied, 429 U.S. 1010, 97 S.Ct. 542, 50 L.Ed.2d 619 (1976).

The bar to agreements that would compel arbitration of federal securities law claims is limited to claims expressly arising under the federal securities laws. Thus, in the present case the district court was presented with a complaint containing a federal security law claim which was clearly not referable to arbitration under the arbitration agreement and common law fraud claims which were. ³ Where arbitrable and non-arbitrable claims that are legally and factually separable are joined in a single action, courts have no difficulty in severing the action and compelling arbitration of the arbitrable claims while litigating the non-arbitrable claims. See, e.g., Macchiavelli v. Shearson, Hammill & Co., 384 F.Supp. 21, 30 (E.D.Cal.1974) (arbitrable contract claim severed from Rule 10b-5 claim).

There is a split of authority among the federal circuits, however, on whether this procedure should be followed when the arbitrable and non-arbitrable claims are factually intertwined, as they are in the present case. The Ninth Circuit has recently joined the Fifth and Eleventh Circuits in adopting the "intertwining doctrine," which permits federal courts to refuse to refer to arbitration arbitrable state claims when these claims are factually inextricable from non-arbitrable federal securities law claims. See Byrd v. Dean Witter Reynolds, Inc., 726 F.2d 552 (9th Cir.1984) (Byrd ); Belke v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 693 F.2d 1023 (11th Cir.1982); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Haydu, 675 F.2d 1169 (11th Cir.1982); Sawyer v. Raymond, James & Associates, Inc., 642 F.2d 791 (5th Cir.1981); Miley v. Oppenheimer & Co., 637 F.2d 318 (5th Cir.1981) (Miley ); Sibley, 543 F.2d 540.

Two reasons are advanced to justify this judicially-created exception to the application of the Arbitration Act. First, it is maintained that denial of arbitration of the arbitrable claims is necessary in order to avoid any possible collateral estoppel effect of arbitration on the non-arbitrable federal securities law claims which would threaten the exclusive jurisdiction of the federal court over these claims. Miley, 637 F.2d at 335; Sibley, 543 F.2d at 542-43. Second, it is argued that it would be inefficient to bifurcate these mixed lawsuits into two separate proceedings, thereby frustrating the purpose of the Arbitration Act to encourage fast, inexpensive dispute resolution. Byrd, at 554. See also Cunningham v. Dean Witter Reynolds, Inc., 550 F.Supp. 578 (E.D.Cal.1982).

The Sixth and Seventh Circuits have rejected the federal securities law "intertwining" exception to the Arbitration Act. Liskey v. Oppenheimer & Co., 717 F.2d 314 (6th Cir.1983); Dickinson v. Heinold Securities, Inc., 661 F.2d 638 (7th Cir.1981) (Dickinson ). See also Kavit v. A.L. Stamm & Co., 491 F.2d 1176, 1182 (2d Cir.1974) (intertwining doctrine rejected in dictum). The D.C. Circuit has rejected the doctrine in the analogous situation of arbitrable pendent state claims joined with non-arbitrable federal antitrust claims. Lee v. Ply*Gem Industries, 593 F.2d at 1274-75. These courts...