Wolf v. Gruntal & Co., Inc.

• Decision Date: 05 October 1994
• Docket Number: No. 94-1658,94-1658
• Court: U.S. Court of Appeals — First Circuit
• Parties: , Fed. Sec. L. Rep. P 98,520 Kenneth P. WOLF, Plaintiff, Appellant, v. GRUNTAL & CO., INC., Defendant, Appellee. . Heard

Page 524

45 F.3d 524

63 USLW 2488, Fed. Sec. L. Rep. P 98,520

Kenneth P. WOLF, Plaintiff, Appellant, v. GRUNTAL & CO., INC., Defendant, Appellee.

No. 94-1658.

United States Court of Appeals, First Circuit.

Heard Oct. 5, 1994.

Decided Jan. 25, 1995.

George S. Isaacson, with whom Brann & Isaacson and Peter D. Lowe, Lewiston, ME, were on brief for appellant.

Joseph P. Moodhe, New York City, with whom Debevoise & Plimpton, Ariadne D. Makris, Washington, DC, John P. McVeigh, Preti, Flaherty, Beliveau & Pachios, Portland, ME and Lionel G. Hest, New York City, were on brief for appellee.

Before CYR and STAHL, Circuit Judges, and DiCLERICO, ^* District Judge.

CYR, Circuit Judge.

Plaintiff Kenneth P. Wolf appeals a summary judgment order dismissing his Rule 10b-5 claim against defendant-appellee Gruntal & Co. ("Gruntal"), a securities brokerage firm, for fraudulently mismanaging Wolf's investment accounts in violation of Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. Sec. 78j(b). As the district court erred in ruling that Wolf's claim was precluded by an earlier arbitral award, we vacate the judgment and remand for further proceedings.

I BACKGROUND

Viewed in the light most favorable to appellant Wolf, see Velez-Gomez v. SMA Life Assurance Co., 8 F.3d 873, 874-75 (1st Cir.1993), the summary judgment record discloses the following facts. In March 1988, Wolf opened cash and margin accounts with Gruntal at its branch office in Portland, Maine. Wolf signed a Customer Agreement ("Agreement") which contained an arbitration clause: "[a]ny controversy between [Gruntal] and [Wolf] arising out of or relating to this contract or the breach thereof, shall be settled by arbitration.... Notwithstanding the foregoing, arbitration shall not be mandated on claims asserting violation(s) of Federal securities/commodities laws." Agreement p 16 (emphasis added). Paragraph 17 further provided that "th[e] agreement and its enforcement would be governed by New York law without giving effect to external law." Id. p 17. Thereafter, between 1988 and 1990, a Gruntal agent fraudulently mismanaged Wolf's accounts, causing a loss approximating $1 million.

In December 1991, Wolf initiated the present action against Gruntal in the United The district court ruled that the arbitration clause in the Agreement unambiguously permitted Wolf to forego arbitration and to litigate the Rule 10b-5 claim in district court, but that the seven state-law claims were arbitrable. Since no party had sought to compel arbitration, however, the district court refused to stay its proceedings on the Rule 10b-5 claim pending arbitration and the parties proceeded with discovery.

                States District Court for the District of Maine.  The complaint asserted seven state-law claims, as well as one federal claim under the Securities and Exchange Act of 1934, 15 U.S.C. Sec. 78j(b);  Rule 10b-5, 17 C.F.R. Sec. 240 (1993). 1  Gruntal moved to stay the district court proceedings pending arbitration on all eight claims
                

In March 1993, Wolf submitted a unilateral demand for arbitration on the seven state-law claims; in December 1993, he recovered a $200,000 arbitral award against Gruntal. Gruntal thereafter moved for summary judgment in the district court, contending that the final arbitral award on the state-law claims precluded the Rule 10b-5 claim under the doctrine of res judicata.

The district court granted summary judgment. Wolf v. Gruntal & Co., No. 91-426-P-H, 1994 WL 247814, 1994 U.S.Dist. LEXIS 7627 (D.Me. May 24, 1994). It correctly concluded that the Rule 10b-5 claim and the seven state-law claims arose out of the same "operative nucleus of fact" (i.e., the ongoing account mismanagement by Gruntal). Id. 1994 WL 247814 at * 2, 1994 U.S.Dist. LEXIS 7627 at * 4 (citing Kale v. Combined Ins. Co. of Am., 924 F.2d 1161, 1166 (1st Cir.), cert. denied, 502 U.S. 816, 112 S.Ct. 69, 116 L.Ed.2d 44 (1991)). As "Gruntal [had] made clear that it would accept arbitration of the [Rule 10b-5] claim," the district court envisioned no "jurisdictional obstacle" in the event Wolf had elected to submit the Rule 10b-5 claim to arbitration. Consequently, the court reasoned, the final arbitral award on the state-law claims precluded the Rule 10b-5 claim because Wolf "could have" presented the federal claim to arbitration. Id. 1994 WL 247814 at *2-3, 1994 U.S.Dist. LEXIS 7627 at *5, 6-7 (citing Restatement (Second) of Judgments Sec. 84 (1982)).

Wolf argues that he reasonably relied on the district court's retention of "exclusive" (i.e., sole and indefeasible) jurisdiction over the Rule 10b-5 claim and, as a consequence, that he was victimized by an unfair procedural ambush. Although we reject Wolf's characterization, ² we hold that the district court erred in ruling that the federal securities claim was precluded by the arbitral award on the state-law claims.

II

DISCUSSION

A. Standards Of Review

We review a grant of summary judgment de novo, under the identical legal

                standards governing the district court, in order to determine whether "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law."   Fed.R.Civ.P. 56(c) (emphasis added);  see Jirau-Bernal v. Agrait, 37 F.3d 1, 3 (1st Cir.1994).  As the preclusive effect of a prior "judgment" is a question of New York law, 3 it too is subject to de novo review.  See, e.g., Gonzalez v. Banco Central Corp., 27 F.3d 751, 755 (1st Cir.1994)
                

B. Res Judicata

Res judicata is not implicated if the forum which rendered the prior "judgment" (viz., the arbitral award) lacked "jurisdiction" over the putatively precluded claim (viz., the Rule 10b-5 claim). See, e.g., Fiore v. Oakwood Plaza Shopping Ctr., Inc., 189 A.D.2d 703, 592 N.Y.S.2d 720, 720-21 (1993); Handy v. Westbury Teachers Ass'n, 104 A.D.2d 923, 480 N.Y.S.2d 728, 731 (1984); see also Nottingham Partners v. Trans-Lux Corp., 925 F.2d 29, 34 (1st Cir.1991); Kale, 924 F.2d at 1167; Pasterczyk v. Fair, 819 F.2d 12, 14 (1st Cir.1987).

Unlike collateral estoppel (issue preclusion), res judicata (claim preclusion) normally bars (i) relitigation of claims actually asserted in a tribunal of competent jurisdiction, see Restatement (Second) of Judgments Sec. 26(1)(c) (1982), ⁴ and (ii) litigation of claims that arose from the same set of operative facts and could have been raised in the prior proceeding. See, e.g., Hodes v. Axelrod, 70 N.Y.2d 364, 520 N.Y.S.2d 933, 937, 515 N.E.2d 612, 616 (1987) (adopting "pragmatic" transaction test for determining which claims could have been raised in prior proceeding);

see also Federated Dep't Stores, Inc. v. Moitie, 452 U.S. 394, 398, 101 S.Ct. 2424, 2427-28, 69 L.Ed.2d 103 (1981).

C. Arbitral Awards

Final arbitral awards are entitled to the same preclusive effect as state court judgments, at least as concerns claims and issues actually raised. See Rembrandt Indus., Inc. v. Hodges Int'l, Inc., 38 N.Y.2d 502, 381 N.Y.S.2d 451, 452, 344 N.E.2d 383, 384 (1976); see also Khandhar v. Elfenbein, 943 F.2d 244, 247 (2d Cir.1991) (N.Y. law); Katz v. Financial Clearing & Servs. Corp., 794 F.Supp. 88, 94 (S.D.N.Y.1992) (same); cf. Pujol v. Shearson/American Express, Inc., 829 F.2d 1201, 1206-07 (1st Cir.1987); infra note 6 and accompanying text. By the same token, we conclude that New York recognizes the same "jurisdictional" limitation upon the reach of res judicata coverage with respect to prior arbitral awards as is generally applied to final judgments, cf. Restatement (Second) of Judgments Sec. 26(1)(c), supra note 4. We explain.

Because arbitral awards are not "judgments" per se, it cannot be presumed, as the district court did, that an arbitral tribunal acquired competent authority over the putative "precluded" claim for res judicata purposes. Unlike federal courts of limited jurisdiction and state courts of general jurisdiction, wherein a litigant, with standing, unilaterally may invoke the appropriate judicial tribunal's jurisdiction based on extrinsic constitutional, statutory, or common law authority, see Cine-Source, Inc. v. Burrows, 180 A.D.2d 592, 581 N.Y.S.2d 9, 10 (1992), arbitral tribunals' authority over particular "claims" is for the most part predetermined by contract; that is, by written agreement of the parties. Id. (noting, as basis for limiting res judicata effect of arbitral awards, that "the authority of an arbitrator to decide a controversy is derived entirely from the consent of the parties").

Arbitral "claims" comprise two subsets for purposes of the jurisdictional analysis required under the present analogue to Restatement Sec. 26(1)(c). First, where the parties have contracted to submit all disputes or controversies to arbitration, either party may compel arbitration simply by submitting a unilateral "demand for arbitration," relying on the broad-based agreement to arbitrate as the sole source of arbitral authority. See, e.g., N.Y.Civ.Prac.L. & R. Sec. 7503(c) (1993); Cohen v. Cohen, 17 A.D.2d 279, 233 N.Y.S.2d 787, 791 (1962) (describing arbitration proceedings which may be commenced on unilateral "demand"). Second, even where the contract either includes no arbitration clause or excludes particular kinds of "claims" from arbitration, the contracting parties later may agree in writing to arbitrate any or all such otherwise nonarbitrable claims ("uncovered claims"), simply by entering into a joint arbitral "submission." Id. As arbitral "jurisdiction" is dependent upon a written agreement between the parties, ⁵ however, any exercise of arbitral authority over uncovered claims--absent a "meeting of the minds" duly memorialized in a joint arbitral submission--would constitute an exces de pouvoir. See N.Y.Civ.Prac.L. & R. Sec. 7501 (putative agreements to arbitrate are unenforceable unless reduced to writing).

D. The Scope of the...