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Weissbuch v. Lynch

July 26, 1977

HENRY AND ELAINE WEISSBUCH, PLAINTIFFS-APPELLEES,
v.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, DEFENDANT-APPELLANT



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 76 C 1976 - Alfred Y. Kirkland, Judge.

Fairchild and Tone, Circuit Judges, and Grant, Senior District Judge.*fn*

Author: Grant

GRANT, Senior District Judge.

We are faced in this case with the matter of deciding what affect an arbitration clause in an agreement has upon a claim for relief under S.E.C. Rule 10b-5. The litigation arises from the decision of Plaintiff Henry Weissbuch to open a trading account and participate in Merrill Lynch's Money Management Option Program. Paragraph 5 of the Standard Option Agreement signed by plaintiff specifically provides that:

Any controversy between us arising out of such option transactions or this agreement shall be settled by arbitration before the National Association of Securities Dealers, Incorporated, or the New York Stock Exchange, or the American Stock Exchange, only.

After making their investment, the Weissbuchs not only failed to realize a return on their investment, but lost a substantial amount of their investment as well. Believing that the defendant had misled them with certain untrue and deceptive representations, warranties, and assurances, the plaintiffs filed this suit in the Northern District of Illinois.

The complaint consists of three counts: Action under Rule 10b-5 of the S.E.C. (Count I), Fraud and Deceit (Count II), and Breach of Contract (Count III). Plaintiff seeks both legal and equitable relief.

Defendant, relying on the arbitration clause in the written agreement, moved for a stay of proceedings in the district court. After plaintiffs resisted this motion to stay, the court entered an order holding that the action under Rule 10b-5 was not subject to arbitration, but that the fraud and contract claims were properly arbitrable. The district court denied defendant's motion but stayed arbitration of Counts II and III until the court's final determination of Count I. Defendant brought this appeal pursuant to 28 U.S.C. § 1292(a)(1). It argues that Count I is legally insufficient because it does not adequately allege scienter and, further, that an arbitration agreement is valid and enforcible with respect to a claim arising under Rule 10b-5. Subsequent to the filing of the appeal, plaintiff moved to dismiss the appeal on the grounds that there was no appealable interlocutory order present. Defendant responded and this court deferred ruling on this jurisdictional issue until the presentation of oral argument.

JURISDICTION OF THE APPEAL

Plaintiffs seek to preclude this appeal by arguing that Judge Kirkland's stay order is not an appealable interlocutory order under 28 U.S.C. § 1292(a)(1). In essence the plaintiffs argue that their claim is essentially equitable in nature and that therefore the order of the district court was not an order appealable as an injunction. They point out that the Supreme Court has recognized that stay orders in proceedings at law are appealable while those in equitable proceedings are not. Baltimore Contractors v. Bodinger, 348 U.S. 176, 184-185, 99 L. Ed. 233, 75 S. Ct. 249 (1955).

The stay order issued by the district court enjoined the arbitration of the two counts seeking money damages. Accordingly, we cannot accept plaintiffs' characterization of this lawsuit as an equitable proceeding for purposes of appeal. This court has explicitly held that a stay order preliminary enjoining a proceeding in arbitration and denying a stay of its own proceeding as to a Rule 10b-5 claim is an interlocutory injunction within the meaning of 28 U.S.C. § 1292(a)(1). Alberto-Culver v. Scherk, 484 F.2d 611, 614 (CA7 1973), rev'd on other grounds, 417 U.S. 506, 41 L. Ed. 2d 270, 94 S. Ct. 2449 (1974). The district court's ruling here is an appealable interlocutory injunction order and the plaintiffs' motion to dismiss the appeal is hereby denied.

SUFFICIENCY OF THE COMPLAINT

Defendant maintains that Count I of the complaint fails to allege facts sufficient to state a claim for relief under Rule 10b-5 because it does not state the presence of "intentional wrongdoing" or "scienter" as recently required by the Supreme Court in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 47 L. Ed. 2d 668, 96 S. Ct. 1375 (1976). The Court stated there that:

We granted certiorari to resolve the question whether a private cause of action for damages will lie under § 10(b) and Rule 10b-5 in the absence of any allegation of "scienter" - intent to deceive, manipulate, or defraud. . . . We conclude that it will ...


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