UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
decided: January 25, 1977.
WINTHROP J. ALLEGAERT, AS TRUSTEE OF DUPONT WALSTON INCORPORATED, PLAINTIFF-APPELLANT,
H. ROSS PEROT ELECTRONIC DATA SYSTEMS CORPORATION, DUPONT GLORE FORGAN INCORPORATED, WILLIAM K. GAYDEN, MORTON H. MEYERSON, MILLEDGE A. HART, III, MARGOT PEROT, MERVIN L. STAUFFER, PHM & CO., CHARLESTON INVESTMENT COMPANY, E. D. SYSTEMS CORPORATION, NEW YORK STOCK EXCHANGE, INC., DANIEL J. CULLEN, WILLIAM D. FLEMING, GEORGE T. THOMSON AND CHARLES W. COX, DEFENDANTS-APPELLEES, AND DOUGLAS E. DETATA, JOHN J. DOUGHTY, ALLAN BLAIR AND D. TIPP CULLEN, DEFENDANTS
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.
FEINBERG, Circuit Judge:
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 action against it should also be stayed were persuasive. This appeal followed.
The trustee's principal contentions before us are that he is not the same entity as the bankrupt, Walston, and is therefore not bound by the latter's executory arbitration contracts and that he cannot be compelled, in any event, to arbitrate the claims arising under the Bankruptcy Act and the securities laws. The trustee also claims that the arbitration agreements would not have been enforceable even against Walston. Finally, the trustee argues that even if he must arbitrate his claims against some defendants, the judge should not have stayed the action against the NYSE, which concededly has no right to compel arbitration of the trustee's dispute with it. Defendants respond that a bankruptcy trustee enjoys no special status which exempts him from the effect of arbitration clauses contained in nonexecutory contracts of the bankrupt, that the Bankruptcy Act and securities law claims are arbitrable, that the arbitration agreements were binding on Walston and the trustee, and that the district court acted properly in staying the action pending arbitration. Finally, defendants say that even if some of the trustee's claims are not arbitrable, his action upon them should be stayed pending arbitration of all the other issues.
These arguments obviously raise a number of substantial questions,*fn7 but we do not find it necessary to consider most of them. The trustee's position that he and the bankrupt are different legal entities is certainly correct. We said precisely that in Shopmen's Local 455 v. Kevin Steel Products, Inc., 519 F.2d 698, 704 (2d Cir. 1975), where we pointed out that a bankruptcy trustee is "[a] new entity . . . with its own rights and duties, subject to the supervision of the bankruptcy court." We again emphasized the point the following month in Brotherhood of Railway Clerks v. REA Express, Inc., 523 F.2d 164, 167 (2d Cir.), cert. denied, 423 U.S. 1017, 1073, 46 L. Ed. 2d 388, 96 S. Ct. 451 (1975, 1976). We recognize that the existence of this distinction between the bankrupt and the trustee is not necessarily dispositive. The significance of the distinction hinges on the facts of each situation.*fn7a But the trustee's complaint shows the lack of identity to be particularly important here. Seven counts state claims under various sections of the Bankruptcy Act,*fn8 and charge that the realignment scheme resulted in fraudulent, preferential or post-bankruptcy transfers of Walston's assets to the Perot interests, which the Act allows the trustee to set aside or recover for the benefit of Walston's creditors. These are statutory causes of action belonging to the trustee, not to the bankrupt, and the trustee asserts them for the benefit of the bankrupt's creditors, whose rights the trustee enforces. For example, if there had been no federal bankruptcy proceeding and if a creditor had independently asserted a claim under N.Y. Debt & Cred. Law § 278 to set aside a fraudulent transfer of assets, the creditor would not have been subject to any arbitration agreement. Since the trustee stands in the creditor's shoes for this purpose, he too should not be compelled to arbitrate these claims. See also Johnson v. England, 356 F.2d 44, 51 (9th Cir.), cert. denied, 384 U.S. 961, 86 S. Ct. 1587, 16 L. Ed. 2d 673 (1966). Cf. Buttrey v. Merrill Lynch, Pierce, Fenner & Smith, 410 F.2d 135 (7th Cir. 1969).
Moreover, seven counts in the complaint allege, in effect, violations of various anti-fraud provisions of the securities laws.*fn9 In the context of this case neither these claims nor the Bankruptcy Act claims should be arbitrable. In American Safety Equipment Corp. v. J. P. Maguire & Co., 391 F.2d 821, 825 (2d Cir. 1968), we analyzed at some length the considerations affecting whether a claim was "of a character inappropriate for enforcement by arbitration."*fn10 In holding that we would not there compel arbitration of private antitrust claims on the basis of an arbitration agreement made before the claim arose, we examined, among other things, the public interest in the dispute, the degree to which the nature of the evidence made the judicial forum preferable to arbitration and the extent to which the agreement to arbitrate was a product of free choice. At least the first two of these criteria cut sharply against arbitrability here. This is no mere dispute between private parties with public interest overtones, as in American Safety. We have here a claim by a trustee, appointed under the authority of a federal bankruptcy court, in connection with one of the most celebrated brokerage house failures in the history of Wall Street.*fn11 And the Bankruptcy Act claims are asserted on behalf of many hundreds of creditors. Unlike an operating business, the trustee employs no witnesses with knowledge of the relevant facts, and he has almost none of the relevant records. Under the Perot Plan, all "back-office" functions - accounting, record keeping, etc. - were performed by DGF Inc., which is now also defunct. Yet the availability of discovery in arbitration is uncertain.
The presence of the securities law claims further supports the need for a judicial tribunal here. In Greater Continental Corp. v. Schechter, 422 F.2d 1100, 1103 (2d Cir. 1970), we noted the "strong federal policy in favor of determining stock fraud questions in the federal courts" and observed:
This type of question concerning fraud within the meaning of Rule 10b-5 is properly litigated in the courts where a complete record is kept of the proceedings and findings and conclusions are made. It was for that reason that in both the 1933 and 1934 securities acts Congress provided that questions arising under those acts were not to be determined in arbitration proceedings (but rather in the courts) even if the contract between the parties contained an arbitration provision. Section 14 of the Securities Act of 1933, 15 U.S.C. § 77a, see Wilko v. Swan, 346 U.S. 427, 74 S. Ct. 182, 98 L. Ed. 168 (1953); section 29(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78cc . . . .
Id. It is true that we have recognized a limited exception to the policy behind Wilko v. Swan by allowing arbitration of disputes affecting member firms of stock exchanges. See e.g., Coenen v. R. W. Pressprich & Co., 453 F.2d 1209 (2d Cir. 1972); Axelrod & Co. v. Kordich, Victor & Neufeld, 451 F.2d 838 (2d Cir. 1971). In Coenen, plaintiff NYSE member was required to arbitrate his claim against another member for conspiring to force plaintiff to sell stock at a price held unconscionably low by refusing to allow plaintiff to transfer the shares free of a legend stating that registration was required. In Axelrod, a NYSE member firm unsuccessfully resisted arbitration of a claim against it by a nonmember securities firm that charged breach of a stock purchase contract. We held that in these intramural situations the Congressional intent to let the stock exchanges regulate themselves, embodied in section 28(b) of the Exchange Act,*fn12 creates an exception to the Wilko rule.*fn13 But the exceptions to the general rule for disputes between brokerage houses over industry matters make sense only when limited to their facts. A claim of wholesale fraud of institutional dimension, especially when raised by a trustee, does not fall within the rationale of the exception. This is more than a mere internal brokerage industry squabble; it raises broad questions of policy which ordinarily should be handled by the judiciary for reasons similar to those why an antitrust claim should not ordinarily be arbitrable. See American Safety Equipment Corp. v. J. P. Maguire & Co., 391 F.2d 821, 825-29 (2d Cir. 1968). Cf. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Ware, 414 U.S. 117, 38 L. Ed. 2d 348, 94 S. Ct. 383 (1973).
Citing Scherk v. Alberto-Culver Co., 417 U.S. 506, 510 & n.4, 41 L. Ed. 2d 270, 94 S. Ct. 2449 (1974), and Erving v. Virginia Squires Basketball Club, 468 F.2d 1064, 1067-68 (2d Cir. 1972), appellees argue that the trustee's "shrill cry against arbitration" invites us to return to the discredited notions of a bygone era when courts resisted arbitration to the bitter end. We agree that such judicial hostility to the arbitration process is, and should remain, a thing of the past. We accept without reluctance the "federal policy favoring arbitration," Carcich v. Rederi a/b Nordie, 389 F.2d 692, 696 (2d Cir. 1968), reflected in the United States Arbitration Act. But such acceptance does not decide this case, which involves the equally significant policies reflected in the securities acts and the Bankruptcy Act. In such a situation, generalities must give way to careful analysis of the different, sometimes competing, public policy interests. Thus, none of the cases stressed so heavily by appellees controls the disposition here, since each depends on its own facts. In Fallick v. Kehr, 369 F.2d 899 (2d Cir. 1966), we allowed an arbitrator to decide in a dispute between private parties whether a debt had been discharged in a completed bankruptcy proceeding. We did so after careful consideration of all the factors involved, including Congressional lack of concern over use of a non-bankruptcy court forum to decide such issues.*fn14 In any event, we did not hold that Kehr could force Fallick's bankruptcy trustee to arbitrate that question. Similarly, in Tobin v. Plein, 301 F.2d 378 (2d Cir. 1962), and in Truck Drivers Local 807 v. Bohack Corp., 541 F.2d 312 (2d Cir. 1976), we did not force arbitration upon an unwilling bankruptcy trustee and the trustee was not asserting the type of claims made here under the securities laws and the Bankruptcy Act. The latter is also true of Schilling v. Canadian Foreign Steamship Co., Ltd., 190 F. Supp. 462 (S.D.N.Y. 1961).
We conclude, therefore, that the trustee cannot be compelled to arbitrate his claims under the securities laws and the Bankruptcy Act. To that extent, the order of the district court staying the trustee's action was incorrect and should be reversed. The trustee should be allowed to pursue at least these causes of action immediately in the federal district court prior to any arbitration of the remaining claims. Cf. American Safety, supra, 391 F.2d at 828-29. Otherwise, the trustee's efforts to preserve the estate, of which this action is apparently the major asset, could be prejudiced by loss of evidence or witnesses, and by increased administrative expenses. Our decision, of course, means the trustee's action against the NYSE should go forward as well since there would then be no sufficient basis for staying it.*fn15 Finally, since the Bankruptcy Act and securities law claims involve so many of the basic factual and legal issues underlying the trustee's remaining claims, resolution of the former may make it unnecessary or inappropriate to proceed with the latter in any forum. Under the circumstances, no arbitration should be permitted at this time.
Judgment reversed and case remanded for proceedings consistent with this opinion.*fn16