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Bird v. Shearson Lehman/American Express Inc.

decided: March 28, 1989.

FRANK L. BIRD, TRUSTEE OF THE FRANK L. BIRD PROFIT SHARING TRUST, FRANK L. BIRD, INDIVIDUALLY, AND JOAN SHEA, PLAINTIFFS-APPELLEES,
v.
SHEARSON LEHMAN/AMERICAN EXPRESS, INC., AND RAYMOND R. CLEMENTS, DEFENDANTS-APPELLANTS



Appeal from an order of the United States District Court for the District of Connecticut, Jose A. Cabranes, J., denying appellants' motion to stay proceedings pending arbitration of appellees' claim pursuant to the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001 et seq. (1985) ("ERISA"). Affirmed.

Kaufman, Timbers, and Cardamone, Circuit Judges. Judge Cardamone dissents in a separate opinion.

Author: Kaufman

KAUFMAN, Circuit Judge:

We are asked to determine whether a statutory claim created by the Employee Retirement Income Security Act (ERISA) is subject to compulsory arbitration. Because Congress envisioned a judicial forum, particularly a federal court, as the central arena for implementing ERISA's underlying purpose --providing maximum protection to pension plan participants and beneficiaries --we hold that statutory ERISA claims are not compulsorily arbitrable.

Briefly, the background of this case is as follows. Appellants, Shearson Lehman/American Express ("Shearson")*fn1 and Raymond Clements, a Shearson Vice President, allegedly solicited Frank L. Bird, as trustee of the Frank L. Bird Profit Sharing Trust (the "Trust" or "Pension Plan"), to invest the assets of the Trust with them. Like his co-appellee, Joan Shea, Bird is also a participant and beneficiary of the Trust. Bird claims that during the first meeting with Clements, he emphasized that, because the Trust was a retirement fund, its investment objectives were long-term growth and safety of the corpus. Clements allegedly also knew that Bird was an unsophisticated investor who would rely on Shearson's skill and experience in investing securities.

Upon opening the account, Bird, in his capacity as trustee, signed Shearson's standard "Customer's Agreement." The contract contained a broad arbitration clause, under which Shearson's clients foreswore recourse to the courts.*fn2 Bird invested assets of the Trust totalling $62,205.56. After 55 transactions over a 22 month period, it is alleged the account entrusted to Clements and Shearson dwindled to a value of $13,427.53. Many of the purchases and sales, it is claimed, included high risk Investments such as airline securities, warrants, and options. Each transaction generated commissions for appellants and some yielded interest on margin advances.

Specifically, the complaint charged that appellants' conduct constituted a breach of fiduciary duties under ERISA, 29 U.S.C. § 1104, and "churning," excess trading of an account in violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and Rule 10b-5, 17 C.F.R. § 240-10b-5. Instead of submitting the claims to arbitration, appellees brought this action in the District of Connecticut.*fn3 On the basis of the arbitration provision, Clements and Shearson moved to stay the district court proceedings pending arbitration of the ERISA and securities claims.

In a ruling from the bench, Judge Cabranes found that because the arbitration clause was valid and binding upon Bird and Shea, the claims asserted pursuant to the 1934 Act were to be resolved by arbitration. The court determined, however, that the arbitration provision did not obligate appellees to arbitrate the ERISA claim.*fn4 We are of the view that claims asserting substantive ERISA violations can be brought in a federal forum notwithstanding an agreement to arbitrate.

Before reaching the arbitrability of ERISA claims, we consider other contentions of the parties. In Genesco, Inc. v. Kakiuchi & Co., 815 F.2d 840 (2d Cir. 1987), we set forth the factors to be considered on an application to compel arbitration. We must determine whether a valid arbitration agreement existed and, if so, the scope of that agreement. Id. at 844. Then, an assessment is made whether Congress intended the applicable claims to be nonarbitrable. Id. If only some of the claims are arbitrable, the court decides whether to stay the balance of the proceedings pending arbitration. Id.

We agree with the district court's determination that a valid arbitration agreement which bound all the parties continued in being. Seeking to free non-signatories from the terms of the customer agreement, appellees argued that Bird lacked the authority to compel all of the participants and beneficiaries of the Trust to abide by the arbitration clause. The court properly noted, however, that Bird, as trustee, could bind all participants and beneficiaries of the Trust to arbitration of "any controversy arising out of or relating to" the Trust. See Barrowclough v. Kidder, Peabody & Co., 752 F.2d 923, 938 (3d Cir. 1985); Fisser v. Int'l Bank, 282 F.2d 231, 233-234 (2d Cir. 1960).

The Supreme Court recently determined that the legislative intent underlying the Securities Exchange Act of 1934 did not bar compulsory arbitration of securities claims pursuant to section 10(b). Shearson Lehman/American Express v. McMahon, 482 U.S. 220, 107 S. Ct. 2332, 96 L. Ed. 2d 185 (1987). Accordingly, we affirm the district court's decision to compel arbitration of appellees' securities claims.*fn5

We now turn to the question whether Congress intended to afford non-waivable access to a federal court for those asserting statutory violations of ERISA. In considering this issue, a discussion of the development of arbitrability doctrine will be helpful.

Although the Federal Arbitration Act, 9 U.S.C. §§ 1-14 (1988) ("Arbitration Act"), is "a congressional declaration of a liberal federal policy favoring arbitration agreements," Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24, 74 L. Ed. 2d 765, 103 S. Ct. 927 (1983), it is, nevertheless, subject to a showing "that Congress intended to preclude a waiver of judicial remedies for the statutory rights at issue." McMahon, 482 U.S. at 225. The arbitrability of statutory claims is thus essentially a question whether, in enacting the statute upon which the claim is based, Congress intended the federal courts to be the exclusive forum for resolving disputes of substantive rights.

The requisite intent "will be deducible from [the act's] text or legislative history," Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628, 87 L. Ed. 2d 444, 105 S. Ct. 3346 (1985), or "from an inherent conflict between arbitration and the statute's underlying purposes." McMahon, 482 U.S. at 225. ...


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