Tinaway v. Merrill Lynch and Co., Inc.

• Decision Date: 28 July 1988
• Docket Number: No. 83 CIV. 8298 (SWK).,83 CIV. 8298 (SWK).
• Citation: 692 F. Supp. 220
• Parties: C.A. TINAWAY, Plaintiff, v. MERRILL LYNCH AND CO., INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

692 F. Supp. 220

C.A. TINAWAY, Plaintiff, v. MERRILL LYNCH AND CO., INC., et al., Defendants.

No. 83 CIV. 8298 (SWK).

United States District Court, S.D. New York.

July 28, 1988.

C.A. Tinaway, Jackson Heights, N.Y., pro se.

Mandel, Weiner & Block by Philip M. Mandel, New York City, for defendants.

MEMORANDUM OPINION AND ORDER

KRAM, District Judge.

Presently before the Court is defendants' motion to renew and grant their motion for an order amending this Court's Memorandum Opinion and Orders dated April 7, 1987, 658 F.Supp. 576 (S.D.N.Y.1987), and May 20, 1987, 661 F.Supp. 937 (S.D.N.Y. 1987), ("April 7 opinion" and "May 20 opinion", respectively) so as to confirm the arbitration award made in this matter, or in the alternative, for an order certifying an interlocutory appeal pursuant to 28 U.S.C. § 1292 from the April 7 and May 20 opinions. Plaintiff brought this action pursuant to sections 9 and 10(b) of the Securities Exchange Act of 1934, as amended, 15 U.S. C. § 78i, 78j, and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. Plaintiff, a seventy-eight year old retired attorney, initially brought this action pro se but is now represented by counsel. Defendants Merrill Lynch and Company ("Merrill Lynch") and certain of its employees allegedly invested Tinaway's monies in a stock as to which it had previously been disclosed to the Securities and Exchange Commission ("SEC") two months before the investment was made that a strike had suspended all of the company's production for the preceding seven months. Tinaway alleges that the broker with whom he dealt lulled him into making unwise investments that ultimately cost him his life savings of approximately $40,000.

Background

1. Arbitration

The facts of this case have been set forth in detail in both the April 7 and May 20 opinions, and familiarity with each is presumed. Certain facts germane to this discussion are developed here. Tinaway entered into a standard Customer Agreement with Merrill Lynch at the time he opened his commodities trading account in June, 1980. Paragraph 11 of the Customer Agreement states in relevant part that the parties agree to submit to arbitration any controversy arising out of the customer's business or the Customer Agreement. See Exhibit A to Affidavit of Scott Tross ("Tross Affidavit"). Tinaway commenced this action in January, 1983, alleging violations of the securities laws. Defendants moved for an order dismissing the claims and compelling arbitration in accordance with the Federal Arbitration Act, 9 U.S.C. § 1 et seq. Plaintiff wrote this Court in June, 1984 to state that he withdrew his opposition to defendants' motion to compel arbitration. He further stated that the choice of arbitrators and of the procedure to be followed would be left to the discretion of Merrill Lynch provided that they acted within thirty days. See Exh. C to Tross Aff.

Tinaway commenced an arbitration proceeding in August, 1984 before the National Association of Securities Dealers, Inc. ("NASD") and signed NASD's Uniform Submission Agreement, which provides at paragraph 4 that

the undersigned parties further agree to abide by and perform any award(s) rendered pursuant to this Submission Agreement and further agree that a judgment and any interest due thereon, may be entered upon such award(s) and, for these purposes, the undersigned parties hereby voluntarily consent to submit to the jurisdiction of any court of competent jurisdiction which may properly enter such judgment.

See Exh. E to Tross Aff. Three NASD arbitrators, following a hearing, awarded Tinaway $1000 each against Merrill Lynch and Robert Brinkerhoff, the broker with whom Tinaway dealt. The arbitrators dismissed Tinaway's claims against another Merrill Lynch employee who is not a party to this action. Defendants tendered a $2000 check to Tinaway in June, 1986 in satisfaction of the award. Plaintiff returned the check, informing defendants that he was seeking reconsideration of the award by the arbitrators and restoration of this action to the Court's active docket. NASD subsequently informed Tinaway in July, 1986 that it would not reconsider its decision, and as a consequence the Court restored the action to the active docket.

2. Motion Practice

Plaintiff moved to vacate the arbitrators' award, and defendants cross-moved to confirm it. In the April 7th opinion, the Court vacated the arbitrators' award pursuant to 9 U.S.C. § 10(b), on the grounds that the small size of the award in light of the amount claimed, and the Court's inability to infer a basis for the arbitrators' decision when none was given, presented evidence of "evident partiality" on the part of the arbitrators:

The Court, however, is unable to infer a ground for the arbitrators' decision from the facts of this case. Merrill Lynch admits that it knew of the tenuous position of Tinaway's investment and did not disclose the circumstances to Tinaway when it invested his monies in that stock. Under these circumstances, reduction of the amount of the award by ninety-five percent can only represent "evident partiality" on the part of the arbitrators toward Merrill Lynch.

658 F.Supp. at 579. The Court vacated the arbitrators' decision in its entirety and retained jurisdiction over the action, refusing to remand the action for further arbitration.

The Court subsequently considered plaintiff's motion for appointment of counsel and defendants' motion to alter or amend the Court's April 7 opinion. In its May 20 opinion, the Court granted plaintiff's application, but denied defendants' motion. Merrill Lynch argued that as a matter of law evident partiality could not be inferred from the size of the award. The Court disagreed and reasoned as follows:

While there is no contention here that the arbitrators had a pecuniary interest in the outcome of this arbitration, the Court may infer some other type of personal interest here where the Court is unable to infer a ground for the award and the claim is a Section 10b-5 securities fraud claim.

661 F.Supp. at 941. The Court based its decision, at least in part, on McMahon v. Shearson/American Express, Inc., 788 F.2d 94 (2d Cir.1986), rev'd, ___ U.S. ___, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987), which noted this Circuit's disapproval of arbitration in § 10(b) cases "on the ground that plaintiffs have a statutory right to have such claims decided in federal court." Tinaway, supra, 661 F.Supp. at 942.

The Court noted in the May 20 opinion that the Supreme Court had recently granted certiorari in McMahon and denied defendants' motion without prejudice to renewal upon an appropriate showing of change in existing law. Id. at 944. The Supreme Court decided McMahon on June 3, 1988, and this motion ensued.

Discussion

The Supreme Court in McMahon explicitly extended the applicability of the Arbitration Act to securities fraud claims brought pursuant to § 10(b). The Supreme Court first noted that the "Arbitration Act ... establishes a `federal policy favoring arbitration,' Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983), requiring that `we rigorously enforce agreements to arbitrate.' Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 221, 105 S.Ct. 1238, 1242 84 L.Ed.2d 158 (1985)." McMahon, supra, 107 S.Ct. at 2337. The "centerpiece provision" of the Arbitration Act "makes a written agreement to arbitrate ... `valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.'" Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 625, 105 S.Ct. 3346, 3353, 87 L.Ed.2d 444 (1985) (quoting section 2 of the Arbitration Act, 9 U.S.C. § 2).

The McMahon Court concluded that a pre-dispute agreement to arbitrate would not waive any substantive rights granted by the securities laws and should be enforced with the same rigor as other arbitration clauses. Id., 107 S.Ct. at 2343. The Court rejected the notion, expressed in Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953), that a judicial forum was required to protect the substantive rights created by the securities laws. Id., 107 S.Ct. at 2338. The Court found it "difficult to reconcile Wilko's mistrust of the arbitral process with this Court's subsequent decisions involving the Arbitration Act * * * The mistrust of arbitration that formed the basis for the Wilko opinion in 1953 is difficult to square with the assessment of arbitration that has prevailed since that time." Id. at 2340-41. Based on this line of analysis, the Court will reexamine its conclusions in the April 7 and May 20 opinions.

The general principles of law enunciated in this Court's earlier opinions remains valid. As this Court stated in its April 7 opinion and repeated in the May 20 opinion,

This Court's jurisdiction under Sections 9 and 10 of the Federal Arbitration Act is severely limited, since, if it were otherwise, the ostensible purpose for resort to arbitration, which is the avoidance of litigation, would be frustrated. Amicizia Societa Navegazione v. Chilean Nitrate & Iodine Sales Corp., 274 F.2d 805, 808 (2d Cir.), cert. denied, 363 U.S. 843, 80 S.Ct. 1612, 4 L.Ed.2d 1727 (1960). The Court's role is restricted to ascertaining whether there exists one of the specific grounds for vacating the award, and, if none exists, Section 9 requires that, on application of any party to the arbitration proceedings, the Court confirm the award. Stemaship Co. v. Multifacs International Traders, Inc., 375 F.2d 577, 582 (2d Cir.1967).

658 F.Supp. at 578; 661 F.Supp. at 940. Each of the two opinions concluded that the arbitrators' decision to award only $2000, roughly five percent of the amount allegedly lost, manifested "evident partiality", one of the grounds for vacating an arbitration award. See 9 U.S.C. § 10(b). The May 20 opinion rejected defendants' argument that evident partiality, as a matter of law, could not be deduced...