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Gilmore v. Shearson/American Express

decided: February 3, 1987.


Appeal from the judgment of the United States District Court for the Southern District of New York, holding that defendant had waived any contractual right it might have had to arbitrate the common law claims in plaintiff's complaint. Affirmed.

Author: Feinberg

Before: FEINBERG, Chief Judge, WINTER and MAHONEY, Circuit Judges.

FEINBERG, Chief Judge:

Shearson/American Express Inc. appeals from an order of the United States District Court for the Southern District of New York, Peter K. Leisure, J., refusing to require plaintiff, Rev. Brendan Gilmore, to submit to arbitration his common law claims against Shearson for alleged "churning" of his margin account. Judge Leisure held that Shearson's express withdrawal of an earlier motion to compel arbitration waived any contractual right it might have had to compel arbitration of those claims. In his appeal, Shearson argues that Gilmore's submission of an amended complaint revived Shearson's right to move to compel arbitration. For the reasons given below, we affirm the judgment of the district court.


In December 1984, Gilmore commenced this action against Stuart Travis, his former investment executive at Lehman Brothers Kuhn Loeb, a brokerage firm, and against Shearson, the successor by merger to that firm. Gilmore had maintained a margin account with Shearson from January 1976 through April 1980. He charged that he had lost most of his life's savings because of defendants' churning -- excessive trading for the primary purpose of generating commissions -- in his account in violation of section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j, and Rules 10b-3 and 10b-5. The complaint alleges that in this 52-month period, Gilmore's average investment (market value of securities less any margin debt) was approximately $60,000, but the total of commissions and other charges to his account exceeded $116,000. Gilmore also asserted claims for breach of fiduciary duty, breach of contract and common law fraud. Gilmore claimed actual losses of at least $143,000 and punitive damages of $3,000,000, and sought costs and disbursements including reasonable attorneys' fees. In its answer, Shearson claimed that the action should be stayed pending arbitration, pursuant to an agreement between the parties. Thereafter, Shearson moved in March 1985 to stay the district court proceedings and to compel arbitration of Gilmore's federal securities and common law claims. In May 1985, however, Shearson explicitly withdrew that motion.

In July 1985, Gilmore moved for leave to amend his complaint to assert a cause of action under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968. That motion followed the Supreme Court's decision in Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 105 S. Ct. 3275, 3281-84, 87 L. Ed. 2d 346 (1985), where the Court held in part that civil causes of action based on RICO do not have to allege a prior criminal conviction on the part of the defendant. The amended complaint sought treble damages -- $477,000 in actual damages and $10,000,000 in punitive damages. In response, Shearson filed a cross-motion opposing Gilmore's motion to amend and reasserting its claim of a contractual right to stay the litigation and to compel arbitration of the entire suit if leave to amend was granted.

The district court referred Gilmore's motion and Shearson's cross-motion to Magistrate Leonard Bernikow. In February 1986, the magistrate submitted his report to Judge Leisure, recommending that Gilmore be permitted to amend his complaint and that the action be stayed pending arbitration of the RICO claim. The magistrate also recommended that the remainder of Shearson's cross-motion be denied, finding that the federal securities claims were not arbitrable and that Shearson had waived any right it might have had to arbitrate the common law claims by withdrawing its earlier motion to compel arbitration.

In an order entered in May 1986, Judge Leisure accepted most of the magistrate's recommendations, but refused to stay the action pending arbitration of the RICO claim, finding that this court's intervening decision in McMahon v. Shearson/American Express Inc., 788 F.2d 94 (2d Cir.), cert. granted, 479 U.S. 812, 55 U.S.L.W. 3231, 93 L. Ed. 2d 20, 107 S. Ct. 60 (October 7, 1986) (No. 86-44), had rendered the RICO claim non-arbitrable. This appeal by Shearson followed.*fn1


As a preliminary matter, Gilmore argues that Judge Leisure's order denying Shearson's cross-motion to stay proceedings pending arbitration is not an appealable order. Gilmore questions the continued viability of the Enelow-Ettelson rule, on which Shearson relies for its right to appeal at this stage of the litigation. The line of authority that began with the cases that first announced that rule, Ettelson v. Metropolitan Life Insurance Co., 317 U.S. 188, 191, 87 L. Ed. 176, 63 S. Ct. 163 (1942); Enelow v. New York Life Insurance Co., 293 U.S. 379, 383, 79 L. Ed. 440, 55 S. Ct. 310 (1935), provides that "[a]n order refusing to stay proceedings in federal district court pending arbitration is . . . an appealable interlocutory order refusing an injunction, 28 U.S.C. § 1292(a)(1), if the action in which the order was made is an action which, before the fusion of law and equity, was by its nature an action at law." Poriss v. Aaacon Auto Transport, Inc., 685 F.2d 56, 59 (2d Cir. 1982). Gilmore describes this rule as "obsolete" and "anachronistic" and urges that it be overturned.

The Enelow-Ettelson rule has been severely criticized in recent years, see Matterhorn, Inc. v. NCR Corp., 763 F.2d 866, 870-71 (7th Cir. 1985); H. C. Lawton, Jr., Inc. v. Truck Drivers, Chauffeurs and Helpers Local Union No. 384, 755 F.2d 324, 327 n.2 (3d Cir. 1985); Mar-Len of Louisiana, Inc. v. Parsons-Gilbane, 732 F.2d 444, 445-47 (5th Cir. 1984) (Rubin, J., dissenting); Langley v. Colonial Leasing Co. of New England, 707 F.2d 1, 2 & n.2 (1st Cir. 1983), and is an awkward standard not always easy to apply. See Standard Chlorine of Delaware, Inc. v. Leonard, 384 F.2d 304, 308 (2d Cir. 1967). Nevertheless, this court has adhered to the rule and has recently applied it to review an order denying a motion to compel arbitration. See McMahon, 788 F.2d at 99 n.5. Further, the Supreme Court has explicitly declined the opportunity to overturn the rule, "concluding that it is better judicial practice to follow the precedents which limit appealability of interlocutory orders, leaving Congress to make such amendments as it may find proper." Baltimore Contractors, Inc. v. Bodinger, 348 U.S. 176, 185, 99 L. Ed. 233, 75 S. Ct. 249 (1955). Despite our difficulties with the Enelow-Ettelson rule, we find unpersuasive Gilmore's suggestion that Congress silently effected such an amendment in 1958 by enacting 28 U.S.C. § 1292(b), which allows a district court to certify an interlocutory appeal to a court of appeals. While we believe the rule should be changed, we feel bound by precedent to follow it until directed otherwise by higher authority or by Congress.*fn2

Alternatively, Gilmore argues that the underlying action here is essentially equitable, rather than legal, and that the Enelow-Ettelson exception to the rule of finality is therefore not applicable. Again, Gilmore's claim is unpersuasive. The amended complaint seeks monetary damages for violations of section 10(b) and RICO, breach of fiduciary duty, breach of contract and common law fraud and is clearly legal in nature. Recently, in McMahon, where these same arguments were raised in an action based on similar claims, this court upheld the appealability of the district court's interlocutory order denying arbitration. See 788 F.2d at 99 n.5. Gilmore's attempt in this appeal to describe his action in equitable terms, by claiming that he seeks not only the return of his lost investment, but also an "accounting" and the disgorgement of profits, cannot mask the legal character of his complaint. Any equitable elements of Gilmore's action are "merely incidental" and are not sufficient to exclude it from the Enelow-Ettelson rule. See Poriss, 685 F.2d at 59. Judge Leisure's denial of Shearson's cross-motion to stay proceedings pending arbitration is therefore an appealable order.

Before leaving this point, we note that Shearson has moved, pursuant to Rule 11 of the Federal Rules of Civil Procedure, for an award of sanctions against Gilmore's attorney for arguing that the district court order should not be appealable. By raising this argument Gilmore has prudently preserved his position, which would enable him to seek Supreme Court review on this issue. Although we find that we are constrained to follow the Enelow-Ettelson rule, as our previous discussion makes ...

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