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Shearson Loeb Rhoades Inc. v. Much

February 13, 1985


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 81 C 4225 - James B. Moran, Judge.

Author: Wood

Before WOOD, Circuit Judge, PELL, Senior Circuit Judge, and CAMPBELL, Senior District Judge.*fn*

WOOD, Circuit Judge.

This appeal arises from plaintiff-appellant Shearson's action to vacate an arbitrator's award of $89,110.20 in favor of defendant-appellee Joseph Much. The district court vacated the damages portion of the award and remanded that issue to the arbitrator. Shearson appealed, but we dismiss the appeal for lack of appellate jurisdiction.


Defendant Joseph Much operates a retail grocery in Chicago and owns several pieces of real estate and one corporation, whose assets consist of real estate and securities. Between 1967 and 1973, Much opened five investment accounts with Shearson, e.g., "Joseph Much," his personal account; "Joseph Much and Todd Much," a joint account in which Joseph owned 80% and his son Todd owned 20%; and "Cornell Building Co., c/o Joseph Much," an account for the 7541 Building Corporation, the corporation Much owned. The present action involves only the "Joseph Much" account and Much's purchase on margin*fn1 of $125,000 of Government National Mortgage Association ("GNMA" or "Ginnie Mae") bonds in April, 1973.

Based on a recommendation from Shearson in early 1973, James Refakes, the Shearson account executive handling Much's account, suggested that Much purchase on margin some "Ginnie Mae" bonds. Much alleges that he told Refakes and Robert Dipisa, the operations manager at Shearson's Chicago office, that he wanted to open a new account for the bonds. That way, Much thought, Shearson would not consider his equity in the bonds when it calculated whether his "Joseph Much" account had sufficient equity to satisfy the maintenance margins. Much testified that Refakes and Dipisa assured him that he did not need a separate account and that losses on other securities in the account would not affect his equity in the bonds. Much then bought 125 $1,000 "Ginnie Mae" bonds, put them in his "Joseph Much" account, and paid Shearson $30,000 ($25,000 as the initial margin and $5,000 to reduce the amount of the loan from Shearson).

Contrary to what Much believed, Shearson included the bond equity when calculating whether the "Joseph Much" account satisfied the maintenance margin. Moreover, because the maintenance rate was 10%, only $12,500 of the $30,000 was needed to satisfy the margin. The remaining $17,500 was available to meet the maintenance margin on other securities in the account, and when the value of Much's other securities fell in 1973, the $17,500 offset losses of equity in those securities and enabled the account to continue to meet the maintenance margin. Eventually the value of the other securities fell so low that, even with the $17,500 surplus bond equity, Much's account did not meet Shearson's maintenance margin. Shearson issued maintenance calls to Much on August 22, September 11, November 26, November 29, December 7, and December 12, 1973. To satisfy these calls, Much sold a number of his securities at a loss; on December 12, 1973, he sold the "Ginnie Mae" bonds for $4,230.47 less than he had paid for them.

When Much learned that Shearson had included the $30,000 when calculating the maintenance margin for the entire account, he wrote to Shearson complaining that the alleged misrepresentations by Refakes and Dipisa had caused him to suffer the very loss he was trying to protect himself against. Much subsequently submitted a demand for arbitration.*fn2 After hearing testimony for three days and receiving post-hearing briefs, the arbitrator awarded Joseph Much $89,110.20. The arbitrator did not specify his reasoning, but both parties agree that $43,585.20 is for stock and bond losses that Much claimed on his 1973 federal income tax return. The other $45,525.00 represents the $30,000 Much paid when he bought the "Ginnie Mae" bonds plus six years of interest at 8 5/8%.

Shearson brought the present action in federal district court to vacate the damage portion of the arbitration award. Pleading hypothetically under Civil Procedure Rule 8(e)(2), Shearson assumed liability for $4,230.47 (the loss on the bonds) but contended that the remaining $84,879.73 should be vacated as fundamentally irrational. The district court agreed that the damage award was based on "sheer speculation" and enforced the arbitrator's finding of liability, but remanded the case to the arbitrator for a recalculation of damages. Shearson appeals on the ground that, because the district court found the damage award fundamentally irrational, the court could not remand on the damages issue. Shearson also argues that if remand is appropriate, the court should assign the case to a different arbitrator. Much counters that this court has no jurisdiction to hear the appeal.


This case presents a rather novel issue of appellate jurisdiction. Defendant-appellee Much argues that the district court order is neither a final judgment under 28 U.S.C. § 1291 nor an appealable injunction under 28 U.S.C. § 1292(a)(1). Plaintiff-appellant Shearson contends that the remand is, in substance, the same as an order compelling arbitration, which would be appealable under section 1291. Shearson also argues that because Much's claim is an action at law, the district court order is appealable under section 1292(a)(1).

As a general rule, only a final decision of a district court is appealable to a court of appeals. 28 U.S.C. § 1291 (1982). This court would clearly have jurisdiction under section 1291 if the district court had confirmed the arbitrator's entire award or had partially vacated the award and enforced the remainder without remanding. See, e.g., Randall v. Lodge No. 1076, International Association of Machinists and Aerospace Workers, 648 F.2d 462 (7th Cir. 1981); Totem Marine Tug & Barge, Inc. v. North American Towing, Inc., 607 F.2d 649 (5th Cir. 1979). Appellate jurisdiction would also lie if the district court had entered an order compelling arbitration for the first time. University Life Insurance Co. of America v. Unimarc Ltd., 699 F.2d 846, 848 (7th Cir. 1983). But the district court did none of these; instead the court agreed with Shearson that the arbitrator's damages award was based on sheer speculation and remanded the action to the arbitrator for a recalculation of damages. Thus the issue becomes whether a district court order vacating and remanding the damages portion of an arbitration award is a final judgment under section 1291.

Only three cases explicitly discuss whether a remand order is appealable under section 1291, and they reach three different results. In Stathatos v. Arnold Bernstein S.S. Corp., 202 F.2d 525 (2nd Cir. 1953), the district court had vacated an arbitration award for partiality and had ordered the dispute resubmitted to arbitration. The Second Circuit held that it lacked jurisdiction to hear the appeal. 202 F.2d at 527-28. The Fifth Circuit reached the opposite conclusion, finding appellate jurisdiction after a district court ordered a new hearing before an arbitration panel. Wells v. Southern Airways, Inc., 517 F.2d 132, 134 n.3 (5th Cir. 1975), cert. denied, 425 U.S. 914, 47 L. Ed. 2d 765, 96 S. Ct. 1512 (1976). Finally, the First Circuit considered the appealability of a district court order remanding a dispute over computation of lost earnings to the original Board of Arbitrators. Locals 2222, 2320-2327, International Brotherhood of Electrical Workers v. New England Telephone and Telegraph Co., 628 ...

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