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SALOMON BROS. v. CAREY

January 24, 1983

SALOMON BROTHERS, INC., Plaintiff,
v.
William J. CAREY, Defendant



The opinion of the court was delivered by: MOTLEY

MEMORANDUM OPINION AND ORDER

 MOTLEY, Chief Judge.

 Plaintiff Salomon Brothers, Inc. (Salomon Brothers) brought this action for a declaratory judgment pursuant to 28 U.S.C. § 2201 (1976) and Rule 57 of The Federal Rules of Civil Procedure. Defendant William J. Carey (Carey), a citizen of Dallas, Texas, has moved pursuant to Fed.R.Civ.P. 12(b)(6) to dismiss the complaint for failure to state a claim upon which relief can be granted within the meaning of the Declaratory Judgment Act. Jurisdiction of this action is conferred by 28 U.S.C. § 1332 (1976). For the reasons set forth below, defendant's motion to dismiss is denied.

 Facts

 Salomon Brothers is a Delaware corporation with its principal place of business in New York City. Salomon Brothers is engaged in the business of, among other things, buying, selling, and trading securities and commodities. On October 7, 1980, after several days of negotiations in New York, Carey and Salomon Brothers entered into a written agreement pursuant to which Salomon Brothers agreed to act as Carey's broker in the purchase and sale of securities. On December 28, 1981, Carey's attorneys, a Denver law firm, sent a letter (attached herein as Appendix A) to Salomon Brothers in New York in which they stated that Carey had certain legally cognizable claims against Salomon Brothers with respect to the handling of Carey's account. These claims arise from Salomon Brothers' alleged breach of the customer agreement and of certain general fiduciary duties owed by Salomon Brothers to Carey. Specifically, Carey's attorneys claimed that Salomon Brothers 1) failed to follow certain procedures agreed upon with Carey at the outset of his investing; 2) failed to exercise reasonable care in carrying out certain directions given to Salomon Brothers by Carey with respect to his account; and 3) breached fiduciary obligations owed to Carey in the handling of his account. Carey claims that as a result of Salomon Brothers' mismanagement of his account, he suffered a loss of $1,500,000.

 In the letter to Salomon Brothers, Carey's attorneys stated that while Carey had the basis of a lawsuit, the purpose of that letter was to initiate settlement negotiations and avoid litigation. Upon receipt of this letter, however, Salomon Brothers consulted with its New York attorneys and then filed the instant lawsuit for a judgment declaring that Salomon Brothers is not liable to Carey.

 Issues

 At the outset, it is important to distinguish two separate issues before the court. First, there is the question of subject matter jurisdiction, i.e. whether the complaint alleges a case or controversy within the meaning of Article III of the Constitution since the Declaratory Judgment Act applies only in "a case of actual controversy." 28 U.S.C. § 2201 (emphasis added); Aetna Life Insurance Co. v. Haworth, 300 U.S. 227, 240, 57 S. Ct. 461, 463, 81 L. Ed. 617 (1936) ("The word 'actual' is one of emphasis rather than of definition"); see also Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 272-74, 61 S. Ct. 510, 511-12, 85 L. Ed. 826 (1941). It is clear that unless plaintiff's allegations allege an actual controversy, the court is without power to grant declaratory relief and must dismiss for lack of subject matter jurisdiction. Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U.S. at 272, 61 S. Ct. at 511. Second, assuming that an actual controversy exists, there is the question of whether the court should, in the exercise of its sound discretion, assume subject matter jurisdiction and entertain the declaratory judgment action. Public Affairs Associates v. Rickover, 369 U.S. 111, 112, 82 S. Ct. 580, 582, 7 L. Ed. 2d 604 (1962) ("The Declaratory Judgment Act was an authorization not a command. It gave the federal courts competence to make a declaration of rights; it did not impose a duty to do so"); Eccles v. Peoples Bank, 333 U.S. 426, 431, 68 S. Ct. 641, 644, 92 L. Ed. 784 (1948); Brillhart v. Excess Ins. Co. of America, 316 U.S. 491, 494, 62 S. Ct. 1173, 1175, 86 L. Ed. 1620 (1941); see also Beacon Const. Co. v. Matco Electric Co., 521 F.2d 392, 397 (2d Cir.1975); Dr. Beck & Co. G.M.B.H. v. General Electric Co., 317 F.2d 538, 539 (2d Cir.1963).

 Discussion

 The court notes that the parties have confused these two questions. For instance, Carey's motion to dismiss raises the jurisdictional issue, but Carey cites cases in support of the court's discretionary power to dismiss. See Defendant's Brief at 2-4, 5; Defendant's Reply Brief at 1, 3-4. While Salomon Brothers claims that the court should not, in the exercise of its discretion, dismiss its complaint, see Plaintiff's Opposition Brief at 1, it cites cases in which courts found subject matter jurisdiction in business tort cases involving similar circumstances as the instant case. Id. at 8-9.

 This court believes that a proper analysis of this case requires an examination of both these questions. Since the court believes that the applicable equitable doctrines governing its discretion require the court to entertain the case if the court has subject matter jurisdiction, the court turns now to the issue of whether an actual controversy exists.

 In determining whether an actual controversy exists, this court is guided by the principles enunciated by Justice Murphy:

 
The difference between an abstract question and a "controversy" contemplated by the Declaratory Judgment Act is necessarily one of degree, and it would be difficult, if it would be possible, to fashion a precise test for determining in every case whether there is such a controversy. Basically, the question in each case is whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment. . . . It is immaterial that frequently, in the declaratory judgment suit, the positions of the parties in the conventional suit are reversed; the inquiry is the same in either case.

 Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 273, 61 S. Ct. 510, 512, 85 L. Ed. 826 (1941) (emphasis added); see also Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 240, 57 S. Ct. 461, 463, 81 L. Ed. 617 (1937). Whether a particular case is sufficiently real and immediate is a matter of degree and is to be determined on a case by case basis. Muller v. Olin Mathieson Chemical Corporation, 404 F.2d 501, 504 (2d Cir.1968). In examining the individual case, the court is guided by certain general principles. As Professors Wright and Miller have stated:

 
There is little difficulty in finding an actual controversy if all the acts that are alleged to create liability already have occurred. The court is then merely asked, as in any litigation, to determine the legal consequences of past events and it is immaterial that it may be the one allegedly liable, rather than the person to whom he would be liable, who asks for the judicial determination. The problem is when a declaration is sought on the legal consequences of some act that may or may not occur.

 10 C. Wright and A. Miller, Federal Practice and Procedure, § 2757 (1973) (footnote omitted). See also Armour and Company v. Ball, 468 F.2d 76, 79 (6th Cir.1972) (where acts violating statute and prosecutions for violations had already occurred, a "live controversy" existed), cert. denied, 411 U.S. 981, 93 S. Ct. 2267, 36 L. Ed. 2d 957 (1973).

 In this case, all of the acts in question occurred between October 7, 1980 and December 28, 1981 (Complaint paras. 7, 9). Carey has fixed his damages at $1.5 million (id. at 9). There is no issue of future contingent events which might result in liability This court believes that there is a substantial controversy between the parties with respect to the performance of Salomon Brothers under its customer agreement with Carey. In addition, an actual controversy exists between the parties with respect to the fiduciary duties owed by Salomon Brothers to Carey. The parties here have sharply adverse legal interests since Carey asserts legally cognizable claims sounding in contract and agency law and Salomon Brothers asserts a number of defenses denying liability for any damages. Thus, this court concludes that an actual controversy exists and that it has jurisdiction under the Declaratory Judgment Act.

 Turning now to the issue of the court's discretion, the court notes that this question of judicial discretion is governed by equitable principles. As the defendant correctly argues, one of the factors to be considered by the court is whether the party seeking declaratory relief is anticipating suit in an inconvenient forum and seeks to secure a more favorable forum by filing an action for a declaratory judgment. See, e.g., Hanes Corporation v. Millard, 174 U.S. App. D.C. 253, 531 F.2d 585, 592-93 (D.C.Cir.1976) ("The anticipation of defenses is ordinarily not a proper use of the declaratory judgment act. It deprives the plaintiff of his traditional choice of forum and timing, and it provokes a disorderly race to the courthouse"); Cunningham Brothers, Inc. v. Bail, 407 F.2d 1165 (7th Cir.), cert. denied, 395 U.S. 959, 89 S. Ct. 2100, 23 L. Ed. 2d 745 (1969). This court, however, is constrained to follow the equitable doctrines as set forth by the Second Circuit in Broadview Chemical Corporation v. Loctite Corporation, 417 F.2d 998 (2d Cir.), cert. denied, 397 U.S. 1064, 90 S. Ct. 1502, 25 L. Ed. 2d 686 (1969). In Broadview Chemical, the Second Circuit first noted that "in reviewing the trial court's exercise of discretion to grant or refuse declaratory relief, a sound position is that the appellate court may substitute its judgment for that of the lower court. The determination of the trial court may, therefore, be reversed where, though not arbitrary or capricious, it was nevertheless erroneous." Id. at 1000 quoting 6A Moore's Federal Practice, 3030 (2d ed. 1966). The court then stated:

 
Applying the test enunciated above, we hold that the district court committed error. "The two principal criteria guiding the policy in favor of rendering declaratory judgments are (1) when the judgment will serve a useful purpose in clarifying and settling the legal relations in issue, and (2) when it will terminate and afford relief from the uncertainty, insecurity, and controversy giving rise to proceeding." . . . It follows as a general corollary to this rule that if either of these objectives can be achieved the action should be entertained and the failure to do so is error.

 417 F.2d 1001 quoting Borchard, Declaratory Judgments 299 (2d ed. 1941); see also Maryland Casualty Company v. Rosen, 445 F.2d 1012, 1014 (2d Cir.1971) (citing the two criteria); New York Guardian Mortgagee Corp. v. Cleland, 473 F. Supp. 409, 418 (S.D.N.Y.1979) (Lasker, J.) (citing Broadview Chemical for the admonition that if either criteria is present, action should be entertained).

 In this case, at least one if not both of these criteria will be satisfied by a declaratory judgment. This court's judgment will serve a useful purpose in alerting other Salomon Brothers customers, who have entered into similar agreements, of the legal consequences of Salomon Brothers' actions under both contract and agency law (see Appendix at 5). This judgment will both clarify and settle the legal relations in issue as well as finally terminate the uncertainty and controversy giving rise to the proceeding. Carey has made no indication that he cannot resolve all the issues involved herein, including the issue of damages, by asserting a counterclaim. See Washington Scientific Industries, Inc. v. American Safeguard Corporation, 308 F. Supp. 736, 740 (D.Minn.1970) (in action against corporation and president for declaration of rights under contract, defendants' motion to dismiss was denied and court noted that Fed.R.Civ. P. 57 retains to parties right to jury trial which certainly encompasses a defendant's counterclaim).

 As the court has already noted, significant equities do weigh in Carey's favor. Carey's attorneys sent Salomon Brothers a letter in New York City in a good faith effort to settle the controversy without litigation. Salomon Brothers responded by immediately racing to the courthouse. While this unseemly "race for res judicata," see, C. Wright and A. Miller, supra, § 2759, is an equitable factor worthy of consideration, the law of this Circuit gives greater consideration to two other criteria, both of which are satisfied in this case.

 Accordingly, the motion to dismiss is denied. The next pretrial conference will be held on February 4, ...


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