Appeal from orders of United States District Court for the Southern District of New York, Whitman Knapp, J., granting stay pending arbitration of bankruptcy trustee's claims that defendants violated, inter alia, the Bankruptcy Act, the securities laws and state corporate laws. Judgment reversed and case remanded.
Moore, Feinberg and Gurfein, Circuit Judges.
This case raises significant questions regarding the interplay between the powers of a bankruptcy trustee and the United States Arbitration Act, 9 U.S.C. §§ 1-14. Winthrop J. Allegaert, bankruptcy trustee of duPont Walston Incorporated (Walston), appeals from two orders of the United States District Court for the Southern District of New York, Whitman Knapp, J., which stay the trustee's action against 20 defendants and, in effect, require the trustee to arbitrate his claims. The trustee's complaint states various causes of action under federal and state law arising out of the realignment in July 1973, at the alleged instance of H. Ross Perot, of the businesses of Walston and duPont Glore Forgan Incorporated (DGF Inc.), both then securities brokerage firms and members of the New York Stock Exchange, Inc. (NYSE) and the American Stock Exchange, Inc. (Amex). Defendants in the trustee's suit are Perot, DGF Inc., Electronic Data Systems Corporation (EDS), which is controlled by Perot, the NYSE, several Perot associates and investment vehicles, and the Walston directors who voted in favor of the realignment of Walston and DGF Inc. For reasons set forth below, we conclude that the district court erred in staying all causes of action in the trustee's suit. Therefore, we reverse the orders of the district court, vacate the stay and allow the trustee's suit to continue at least with respect to most of the causes of action stated in his complaint.
To clarify the issues on appeal, it is necessary to state in some detail the facts as claimed by the trustee in his complaint or as they appear in the limited record before us. The trustee alleges a complex scheme to defraud Walston, under which defendants both siphoned off Walston's assets to DGF Inc. and also imposed the latter's liabilities on Walston. According to the trustee, Perot was trying to get out of a disastrous involvement with the brokerage business and was the mastermind behind the scheme. Perot is the founder and controlling stockholder of EDS, which operates data processing systems for corporate customers. In the early 1970's, Perot invested about $70 million in, and took control of, the brokerage firm later known as DGF Inc. Perot had borrowed most of the money and had pledged EDS stock as collateral, but the value of that stock depended on continued income from EDS's contract with DGF Inc. By spring 1973, however, DGF Inc. was in bad shape; insufficient capital had brought it to the verge of liquidation. That event would have threatened Perot's entire financial empire and to avoid it, Perot came up with the scheme (the Perot Plan) that involved Walston, in which Perot was a minority investor.
The trustee describes the Perot Plan as a series of unusual transactions by which Walston would assume all front office operations of the two firms and DGF Inc. would assume back office operations. All of the liabilities of DGF Inc.'s failing branch office system would be shifted to Walston, including lease liabilities on many offices, some already closed. Walston would pay DGF Inc.'s expenses and make a $3 million advance on them. In addition, Perot would exchange his non-voting preferred stock in Walston for a new series of preferred stock with more voting rights than all of Walston's common stock. Thus, the Plan would protect DGF Inc.'s capital against future loss, while Walston would assume immense liabilities.
According to the trustee, the Perot Plan was railroaded through the Walston Board of Directors in July 1973 by a vote of 10-9, after insufficient notice of the lengthy and complex realignment agreements and at a Sunday Board meeting that lasted until the early hours of Monday morning, during which the Perot representatives made numerous misrepresentations and omissions of material information and promises of improper benefits. The trustee also alleges that the NYSE, because of its own interest in preserving the capital of DGF Inc.,*fn1 concealed the conclusions of its own staff that Walston's capital would be completely depleted in eight months if the Perot Plan were adopted. After the Plan went into effect, Walston allegedly lost over $30 million and was forced to liquidate its business.
In March 1974, Walston filed a petition in the United States District Court for the Southern District of New York under Chapter XI of the Bankruptcy Act. Two months later, Bankruptcy Judge Roy Babitt adjudicated Walston a bankrupt and Allegaert was appointed trustee. The trustee asserts that before the realignment agreements went into effect, Walston had an equity of more than $30 million. At the time of bankruptcy it apparently had assets of less than $2 million and creditors' claims of over $75 million.
Based on this sorry picture,*fn2 the trustee brought suit in July 1975 against defendants, alleging violations of the Securities Act of 1933, the Securities Exchange Act of 1934, the Bankruptcy Act, the Delaware General Corporation Law, the New York Business Corporation Law, the New York General Business Law and the common law. In October 1975, most of the defendants moved under the United States Arbitration Act to stay the action pending arbitration of the claims alleged in the complaint.*fn3 These defendants relied upon three arbitration clauses, each of which was allegedly binding upon Walston and, therefore, upon its trustee. The first two were contained in the Constitutions of the NYSE and the Amex and required arbitration of all controversies between exchange members and all controversies between a member and a nonmember who seeks arbitration of any claim arising out of the member's business.*fn4 The third arbitration clause appeared in one of the realignment agreements and covered all disputes arising out of those agreements.*fn5 Although the NYSE is not a party to the agreements to arbitrate, it moved to stay the trustee's action on the ground that the arbitration between the trustee and the arbitrating defendants would resolve many of the issues affecting the NYSE and may render moot the action against it.
In April 1976, Judge Knapp granted the motion to stay. In a memorandum opinion,*fn6 he reasoned that the arbitration clauses were enforceable against the trustee and there was no persuasive reason not to do so. Although the NYSE could not compel arbitration, its arguments as to why the ...