Torrence v. Murphy

• Decision Date: 23 February 1993
• Docket Number: Civ. A. No. J91-0105(W).
• Citation: 815 F. Supp. 965
• Parties: J. Allan TORRENCE, Plaintiff, v. John R. MURPHY, III, Fran Finch Murphy, and Merrill Lynch, Pierce, Fenner & Smith, Inc., Defendants.
• Court: U.S. District Court — Southern District of Mississippi

815 F. Supp. 965

J. Allan TORRENCE, Plaintiff, v. John R. MURPHY, III, Fran Finch Murphy, and Merrill Lynch, Pierce, Fenner & Smith, Inc., Defendants.

Civ. A. No. J91-0105(W).

United States District Court, S.D. Mississippi, Jackson Division.

February 23, 1993.

Crymes G. Pittman, Dale Hubbard, Jackson, MS, for plaintiff.

Dale Danks, Jr., James L. Jones, Jackson, MS, for defendants.

ORDER DENYING MOTION TO STAY AND COMPEL ARBITRATION AND MOTION OF COUNTERCLAIMANT FOR SUMMARY JUDGMENT

WINGATE, District Judge.

Removed from state court in Mississippi to this federal court pursuant to 28 U.S.C. § 1441¹ on the grounds of federal question jurisdiction, this lawsuit is between the plaintiff, an aggrieved investor in securities, and the defendants, plaintiff's brokerage house, accountant and account representative. Plaintiff alleges in his complaint that the defendants conspired to defraud the plaintiff in violation of various state and federal laws.

Having denied plaintiff's assertions in their answer, the defendants have taken the offensive and fired rounds at plaintiff's case aimed at terminating the dispute in this forum. Firstly, defendants Merrill Lynch, Pierce, Fenner & Smith (hereinafter "Merrill Lynch") and defendant Fran Finch Murphy pursuant to the Federal Arbitration Act, 9 U.S.C. § 1, et seq.,² have moved the court to stay this lawsuit and to order the parties to arbitrate all of plaintiff's claims, the state law claims as well as the federal claims, as allegedly required by the Cash Management Account Agreement entered into by plaintiff and Merrill Lynch. Plaintiff's response is that while the Agreement includes an arbitration clause which embraces his state law claims, the Agreement does not obligate him to arbitrate his federal securities claims.

The core issue raised by defendants' motion is whether the plaintiff is obligated to arbitrate his federal securities claim under an arbitration provision negotiated at a time when the law forbade brokers from binding customers to arbitrate controversies arising under the federal security laws and where the arbitration provision itself mandates arbitration of federal claims "except to the extent that controversies involving claims arising under the Federal Securities Law may be litigated."

In harmony with the wisdom espoused in Blue Gray Corporations I and II v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 921 F.2d 267 (11th Cir.1991), this court holds that while this arbitration provision obligates plaintiff to submit his state law claims to arbitration, the arbitration provision does not require the plaintiff to arbitrate his federal securities claims before he may litigate same in federal court. The court's reasoning on these points is set out in Part II of this opinion.

The second motion which occupies the court's attention hails from defendant John R. Murphy, III, who, in his counterclaim against plaintiff, alleges abuse of process and violation of Title 11 U.S.C. §§ 362(a)(1)³ and 524(a)(2)⁴ of the United States Bankruptcy Code. In his motion for summary judgment filed pursuant to Rule 56,⁵ Federal Rules of Civil Procedure, defendant Murphy avers that he is an adjudicated bankrupt; that among the debts he discharged was a promissory note which listed plaintiff as a guarantor; that plaintiff filed this lawsuit after the discharge, seeking to recover nevertheless on the promissory note; and that, as such, plaintiff's disguised aim offends the bankruptcy code.

Plaintiff decries both this characterization of his lawsuit as well as plaintiff's reliance upon §§ 362(a)(1) and 524(a)(2). Plaintiff answers that any fair reading of his complaint clearly reveals that his lawsuit is not brought to collect the amount due on the promissory note. Instead, says plaintiff, it is a suit based upon breach of fiduciary duty and conspiracy to defraud. Moreover, says plaintiff, there is no personal right of action for a violation of 11 U.S.C. § 524(a)(2). Any such violation, says plaintiff, would be civil contempt of the bankruptcy court's order of discharge and would not be the basis for a private cause of action or a counterclaim in federal court. Persuaded that plaintiff's averments strike closer to the bull's eye, this court denies defendants' motion. The reasons undergirding the court's decision on these matters are found in Part III of this opinion.

I. The Pertinent Facts

The plaintiff filed a complaint in the Chancery Court of Hinds County, Mississippi, wherein he asserted the claims of conspiracy to commit fraud, misrepresentation, breach of fiduciary duties, and the duty of good faith and fair dealing. The defendants, Merrill Lynch and Fran Finch Murphy, moved to stay the state court proceeding pursuant to the dictates of the Cash Management Agreement and to compel arbitration. Plaintiff then amended his state court complaint and additionally charged defendants with violations of Sections 12(a)⁶ and 10(b)⁷ of the Securities Exchange Act of 1934 and Sections 12(2)⁸, 15(c),⁹ and 17(a)¹⁰ of the Securities Act of 1933. After the amended complaint was filed, Merrill Lynch and Fran Finch Murphy promptly removed this case to federal court under 28 U.S.C. § 1441.

Plaintiff's amended complaint contends that John R. Murphy, III, while acting as the plaintiff's accountant, induced plaintiff to loan money and execute loan guarantees in connection with certain business ventures. Fran Finch Murphy, a Merrill Lynch account representative, is accused of conspiring with John R. Murphy, III, to carry out fraudulent conduct in violation of the aforesaid securities laws and certain regulations imposed by the National Association of Securities Dealers and the Securities Exchange Commission in handling plaintiff's investment account. Merrill Lynch is charged with being the employer of stockbroker, Fran Finch Murphy, who, says plaintiff, at all times was acting within the course and scope of her employment with Merrill Lynch.

In 1985, when the parties initially came together, the plaintiff and defendant Merrill Lynch reduced their business relationship to writing in a Cash Management Account Agreement. This Agreement contains the following arbitration provision:

Except to the extent that controversies involving claims arising under the Federal Securities Laws may be litigated, I agree that any controversy arising out of your business or this Agreement shall be submitted to arbitration conducted according to the rules and procedures of the New York Stock Exchange, Inc. ("NYSE") or of the National Association of Securities Dealers, Inc. ("NASD") as I may elect....

Defendants, Merrill Lynch and Fran Finch Murphy, contend that this provision requires the plaintiff to submit his claims to arbitration in accordance with 9 U.S.C. § 1, et seq., particularly Section 2 of the Act which provides in pertinent part:

... the Act will apply, "where there is 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...."

According to the defendants, it is abundantly clear from the language of the provision that all of the plaintiff's claims, both the plaintiff's state law and federal security claims must be submitted to arbitration.

Relative to the clause begun by the word "except" in the arbitration provision of the Cash Management Account Agreement, defendants say that this language merely referred to the state of the law of arbitration at the time the Cash Management Account was executed in 1985. The law at that time held that federal securities claims arising under the Securities Act of 1933 were not arbitrable. See Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953); Sawyer v. Raymond, James & Associates, Inc., 642 F.2d 791 (5th Cir.1981). Defendants then point out that pursuant to this case law the Securities Exchange Commission in December of 1983 promulgated Rule 15c2-2 which provided in relevant part that:

(a) It shall be a fraudulent, manipulative or deceptive act or practice for a broker or dealer to enter into an agreement with any public customer which purports to bind the customer to the arbitration of future disputes between them arising under the federal securities laws, ...

Accordingly, says defendant Merrill Lynch, thereafter it began incorporating into its arbitration provisions certain "notice clauses" such as the one before the court sub judice which reads, "Except to the extent that controversies involving claims arising under the Federal Securities Laws may be litigated," in order to inform its customers that the courts had held that federal securities claims were not subject to binding arbitration.

Later, in the case of Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987), upon addressing the arbitrability of claims arising under the Securities Exchange Act of 1934, the United States Supreme Court cast doubt upon the continued viability of Wilko v. Swan, supra. The Supreme Court in McMahon found that customer claims against a broker were arbitrable pursuant to the parties' predispute arbitration agreement and that the Securities Exchange Commission had sufficient statutory authority to ensure that arbitration was adequate to vindicate the customers' rights. Id., 482 U.S. at page 236, 107 S.Ct. at page 2343. Recognizing the implications cast by McMahon upon the arbitrability of 1933 Act claims, the Securities Exchange Commission rescinded Rule 15c2-2 in October of 1987.

Inasmuch as Rule 15c2-2 has been rescinded and inasmuch as since 1987 the United States Supreme Court now has expressly overruled Wilko v. Swan, supra, in Rodriguez De Quijas v. Shearson/American Exp. Inc., 490 U.S. 477, 484, 109 S.Ct. 1917, 1922, 104 L.Ed.2d 526 (1989), the defendants point out that there is no longer a federal prohibition against agreements to arbitrate federal securities claims. Therefore, say the...