Petition — Perot v. Allegaert
Supreme Court brief1977
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Supreme Court, U.
~ FILED
, APR 25 977
IN THE MICHAEL RODAK, JR., CLERK
Supreme Court of the United States
H. Ross Perot, Evecrronic Data SysTteMs CoRPORA-
TION, duPont GLORE F'orGAN INCORPORATED, WILLIAM
K. Gaypen, Morton H. Meyerson, Mimepce A.
Hart, III, Marcor Perot, Mervin L. STAvUFFER,
PHM & Co., CHARLESTON INVESTMENT COMPANY,
E.D. Systems CorporaTION, DanreL J. CULLEN,
WuuM D. Fiemine, Georce T. THOMSON and
CHARLES W. Cox, Petitioners,
Vv.
WINTHROP J. ALLEGAERT,
as Trustee of duPont Walston Incorporated,
Respondent,
- and -
New York Stock Excuanag, Inc., Dovatas E.
DeTata, JoHN J. Doucuty, ALLAN Biam and
D. Trepp CULLEN, Additional Respondents.
PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
April 25, 1977
(Counsel on Inside of Cover)
Pumss ov Brnon S. ADAMS PRINTING, Inc., WASHINGTON, D. C.
815 Connecticut Avenue, N.W.
Washington, D.C. 20006
Telephone: 202/298-8020
Wet, Gorsna, & MANoeEs
767 Fifth Avenue
New York, New York 10022
Telephone: 212/758-7800
Hucues Luce Hennessy Smita
& Castie
1000 Mercantile Dallas Building
Dallas, Texas 75201
Telephone: 214/651-0477
GuGGENHEIMER & UNTERMEYER
80 Pine Street
New York, New York 10005
Telephone: 212/344-2040
15 Columbus Circle
New York, New York 10023
Telephone: 212/541-7118
oHaRD P, SHLAKMAN
AnprREw D. Weissman
815 Connecticut Avenue, N.W.
Washington, D.C, 20006
Telephone: 202/298-8020
Attorneys for Petitioners
E.D, Systems Corp. ;
Electronic Data Systems Corp.
New York, New York 10022
Telephone: 212/758-7800
Attorneys for Petitioners
H. Ross Perot;
Milledge A. Hart, IIT;
Morton H. Meyerson ;
PHM & Co.;
duPont Glore Forgan Incorporated
Tromas W. Luce, III
H. Rosert Powe.
1000 Mercantile Dallas Building
Dallas, Texas 75201
Telephone: 214/651-0477
Attorneys for Petitioners
William K. Gayden;
Mervin L, Stauffer;
Charleston Investment Co. ;
Margot Perot
Haroip Barr, Jr.
Samvuet M. Koeniassera
80 Pine Street
New York, New York 10005
Telephone: 212/344-2040
Attorneys for Petitioners
Daniel J. Cullen;
William D. Fleming;
Charles W. Cox;
George T. Thomson ,
TABLE OF CONTENTS
Page
Ovmmmome BLOW .....cccccccccccccccccsccccccccece 2
JURISDICTION OF THE COURT ........-e ee eeeeeeeeeeeee 2
Questions IE. gc ccnccccdccvcdoccsencesecees 2
SraTuTEs AND RULES INVOLVED .........00eeeeeeeeeee 3
STATEMENT OF THE CASE ........00 eee e cece ceeeeenes 4
PROCEEDINGS BELOW .....-.- 0c ee ee ce eeeeeeeeees 6
(a) District Court Proceedings .............. 6
(b) The Court of Appeals’ Opinion .......... 7
Reasons FOR GRANTING THE WRIT ........ Seustaseuds 9
I. Tue Decision Betow Errectivecy NuLuIFiIEs THE
Pouicy or THE Untrep Staves Arpirrarion Act
WHENEVER AN ARBITRABLE Dispute Arises UNDER
a Feperat Stature anp Drrecriy CoNnF.icts
Wir a Decision or Tuts Count .............. 11
IJ. Tz Decision Betow Conruicts wirH a Dzct-
SION OF THE First Circuit INTERPRETING SECTION
28(b) or THE Excuance Act, ConFLIcTs WITH
THE Poticy ARTICULATED IN THE CourRT’s Scherk
Decision AND SUBSTANTIALLY INVALIDATES THE
ARBITRATION Provisions of THE NYSE aAnp THE
SE, CEES... 6. 5 covacbavenrevocsecese 16
A. The Conflict with the First Circuit ........ 16
_B. The Conflict with This Court’s Decision in
sa a Ok le el a dk ig 18
C. The Impact on the Arbitration Provisions of
the NYSE and AMEX Constitutions ...... 19
ii Table of Contents Continued
Page
Ill. Tue Covurr or Appgats’ Rerusat To PERMIT
ARBITRATION OF THE TRUSTEE’s BanKruptcy Act
Cuamms Presents AN ImpoRTANT QUESTION OF
Fepera, Law Nor Previousty CoNsSIDERED BY
ye THis CounT .......- beeen eee en eee eeeeeeeees 21
Cote dc ictc ccdccodensodbeestecnsdeegenes 26
Dee © . icccvccusecestnestennhssesaebaeucaes la
Ran Da, . cuccctand ies eewns s656obded gehen eepens 15a
Ble ED sd inn vc Kc bnbnddntsbandoneee5$-sabesees 38a
Demme DD , oc cdcc cocdscobbecsdocep ¥esseeeenseees 45a
Denes OE. ...4 tives céensdbessdsvesedeessenetecess 47a
Pe Pg. ond 606d Cid COL KOWESATs ch ¥RROSESOR SEES 92a
TABLE OF AUTHORITIES
CasEs:
Alberto-Culver Co. v. Scherk, 484 F.2d 611 (7th Cir.
1973), rev’d, 417 U.S. 506 (1974) .........-- 3, 19-20
American Safety Equipment Corp. v. J. P. Maguire &
Co., 391 F.2d 821 (2d Cir. 1968) .............. 14-15
Axelrod & Co. v. Kordich, Victor & Neufeld, 451 F.2d
Se OU GR, TI cas dno ence ccsaces asnvenes 19
Ayres v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
: 538 F.2d 532 (3rd Cir. 1976), cert. denied, 45 U.S.
L.W. 3416 (December 6, 1976) ..........--eeeees
Bank of Marin v. England, 385 U.S. 99 (1966) ....... 21
Brotherhood of Railway Clerks v. REA Express, Inc.,
523 F.2d 164 (2d Cir. 1975), cert. denied, 423 U.S.
1017, 1073 (1976) ......ccccccccccccesccevecens 23
Brown v. Gilligan, Will & Co., 287 F. Supp. 766 (S.D.
WY. BOD scncoccccdessacedcnddsVagadeuas sant
Coenen v. R. W. Pressprich € Co., Inc., 453 F.2d 1209
(2d Cir.), cert. denied, 406 U.S. 949 (1972) ..... 19-20
— ———ew eee
Table of Authorities Continued iii
Page
Designers’ Guild v. Hers Apparel Industries, Inc., 76
CCH Lab. Cas. J 10,773 (S.D.N.Y. 1975) (not offi-
ORIEN, 3 id dat ecsts sacedanbs'tes cecds 22
Dickstein v. duPont, 443 F.2d 783 (1st Cir. 1971) .... 12
Fallick v. Kehr, 369 F.2d 899 (2d Cir. 1966) ........ 14, 24
Greater Continental Corp. v. Schechter, 422 F.2d 1100
ME Lethdeldh ob is beceedewdeése bisead 9
In the Matter .° Blair @ Co. (Cahn), No. 70 B 755
(S.D.N.Y., May 12, 1972), aff’d by Brieant, J.,
OE icin swede denuhondtedin Ve 25
In the Matter of Blair € Co. (Danford), No. 70 B 755
SE ee UNO MUD i vec dacdcdbdvccscsccese 25
In re Muskegon Motor Specialties Co., 313 F.2d 841
(6th Cir.), cert. denied, 375 U.S. 832 (1963) ..... 22
In Re Revenue Properties Litigation Cases (Cohn,
Delaire & Kaufman), 451 F.2d 310 (1st Cir.
AR Chote aeaEEaTS TMD 16-18
Isaacson v. Hayden, Stone, Inc., 319 F. Supp. 929 (S.D.
TE A cet cie cia dies Weadeccuueseseuweh 12
Johnson v. England, 356 F.2d 44 (9th Cir.), cert. de-
nied, 384 U.S. 961 (1966) ..............c eens 14, 22
Legg, Mason & Company v. Mackall & Coe, Inc., 351
#7. Sepp. 1967 (DDO. 1978) .....ccccccvcccccs 12, 20
Matter of Unishops, Inc., 543 F.2d 1017 (2d Cir. 1976) 23
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Ware,
414 U.S. 117 (1973)
Muh v. Newburger, Loeb & Co., Inc., 540 F.2d 970 (9th
IG Ss Re ee 12, 20
Nolde Bros., Inc. v. Local No. 358, Bakery & Confec-
tionary Workers Union, 45 U.S.L.W. 4251 (U.S.
EE ts ME WS el Cob dk eck Gie a cdereus, 13, 24
N.V. Maatschappij Voor Industriele Waarden v. A. O.
Smith Corp., 532 F.2d 874 (2d Cir. 1976) ........ 9
Osborne & Thurlow v. Hirsch ¢ Co., 10 Mise. 2d 225,
175 N.Y. Supp. 2d 522 (Sup. Ct. 1958) ......... 12-13
Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388
ME dilendivccncueawacnscous. 11-12, 21
iv Table of Authorities Continued
Page
Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974). .3, ae
Schilling v. Canadian Foreign S.S. Co., Ltd., 190 F.
Supp. 462 (S.D.N.Y¥. 1961) ....... 22. cece eeeee 22-23
Shopmen’s Local Union No. 455 v. Kevin Steel Prod-
ucts, Inc., 519 F.2d 698 (2d Cir. 1975) ........-. 23
Tobin v. Plein, 301 F.2d 378 (2d Cir. 1962) .......... 22
Truck Drivers Local Union No. 807 v. Bohack Corp.,
541 F.2d 312 (2d Cir. 1976) .............05- 22, 24-25
U.S. Bulk Carriers, Inc. v. Arguelles, 400 U.S. 351
GEDUED 0606s e6babeUWinrdbecécdiescesetaeenbane 14
Wilko v. Swan, 346 U.S. 427 (1953) ......... 3, 7, 9, 13-14,
18-19, 21
STaTUTES:
Section 2 of the United States Arbitration Act, 9 U.S.C.
¢ yetarrienee messapenpypere er 2-4, 6, 9, 11-12
Section 60b of the Bankruptcy Act, 11 U.S.C. § —_
, 5, 7
Section 67d of the Bankruptcy Act, 11 U.S.C. § peste |
5,7
Section 70b of the Bankruptcy Act, 11 U.S.C. §110(b) 24
Section 70e of the Bankruptcy Act, 11 U.S.C. § 110(e)
4,5,7
Section 14 of the Securities Act of 1933, 15 U.S.C. § 77n
4, 9, 16-18
Section 6(b) of the Securities Exchange Act of 1934,
ED Was BSE b6aec sacedie cesesassnanenes 15
)
C
Section 10(b) of the Securities Exchange Act of 1934,
BO Wah GO: OD’ bcws bchehuctandebeanmceseset 4,9
Table of Authorities Continued Vv
Page
Section 28(b) of the Securities Exchange Act of 1934,
15 U.S.C. § 78bb(b) .............. 3-4, 7, 16-17, 19, 21
Section 29(a) of the Securities Exchange Act of 1934,
, « - Pp ae 3-4, 17, 19, 21
SP EE Oh ED -nenucvceccécvosesoesbescocceses 2
Rugs:
Rule 919(b) of the Bankruptcy Rules .............. 4, 24
Rule 10b-5 of the Securities and Exchange Commis-
sion, 17 C.F.R. § 240.10b-5 .........cccccccccees 3-4
Orner AUTHORITIES:
H.R. Rep. No. 96, 68th Cong., Ist Sess. 1, 2 (1924) ... 12
Kriendler, The Convergence of Arbitration and Bank-
ruptcy, 26 Arb. J. 34 (1971) ........... ccc eeeee 22
IN THE
Supreme Court of the United States
OcrToBEerR TERM, 1976
BA cntitens
H. Ross Perot, Etecrronic Data SysTEMs CoRPORA-
TION, duPonT GLORE ForGAN INCORPORATED, WILLIAM
K. Gaypen, Morton H. Meyerson, MILLepce A.
Hart, ITI, Marcor Perot, Mervin L. STavrrer,
PHM & Co., CHARLESTON INVESTMENT COMPANY,
E.D. Systems CorporaTION, DANIEL J. CULLEN,
Wuu1aM D. Fiemrinc, Georce T. THomson and
CHARLES W. Cox, Petitioners,
v.
Winturop J. ALLEGAERT,
as Trustee of duPont Walston Incorporated,
Respondent,
and
New York Stock Excnanag, Inc., Dovanas E.
DeTata, JoHN J. Dovucuty, ALLAN Bair and
D. Tree CULLEN, Additional Respondents.
PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
Petitioners’ respectfully pray that a Writ of Cer-
tiorari issue to review the judgment of the United
States Court of Appeals for the Second Circuit, which
1 Petitioners, all of whom are named defendants in this action,
are four corporations (Electronic Data Systems Corporation, E. D.
Systems Corporation, duPont Glore Forgan Incorporated and
Charleston Investment Company), one partnership (PHM & Co.)
2
reversed a judgment of the United States District
Court for the Southern District of New York grant-
ing petitioners’ Motion to Stay Proceedings and to
Compel Arbitration brought pursuant to Section 3 of
the United States Arbitration Act.
The opinion of the Court of Appeals is reported
at 548 F.2d 432 and is set forth in Appendix A. The
unreported opinion of the District Court and its an-
cillary orders with respect thereto are set forth in
Appendix B.
JURISDICTION OF THE COURT
The judgment sought to be reviewed was entered
on January 25, 1977 (App. A, p. la). The jurisdiction
of this Court is invoked under 28 U.S.C. § 1254(1).
QUESTIONS PRESENTED
1. Whether a Federal court may refuse to enforce
comprehensive, binding arbitration agreements solely
on the grounds of its belief that there may be a ‘‘ public
interest’’ in the outcome of the dispute and that ‘‘the
availability of discovery in arbitration is uncertain’’?
The court below, adopting a case-by-case analysis ap-
proach, refused to enforce three governing arbitration
agreements for those two reasons.
2. Whether the provisions of the Constitutions of
the New York and American Stock Exchanges com-
pelling arbitration of disputes between exchange mem-
and ten individuals (H. Ross Perot, William K. Gayden, Morton
H. Meyerson, Milledge A. Hart, III, Margot Perot, Mervin L.
Stauffer, Daniel J. Cullen, William D. Fleming, George T. Thom-
son and Charles W. Cox).
3
bers, or between members and non-members at the in-
sistence of the non-members, become unenforceable
when disputes under the Federal securities laws arise
between member firms? Notwithstanding the mandate
of Section 28(b) of the Securities Exchange Act of
1934, the court below held that, except for ‘‘mere in-
ternal brokerage industry squabble[s],’’ arbitration
could not be compelled.
3. Whether a trustee in bankruptcy, who sues
alleged debtors of a bankrupt estate in a plenary ac-
tion, asserting claims which arise, in part, under sec-
tions of the Bankruptcy Act, but which concededly are
encompassed within the scope of arbitration agree-
ments binding on the bankrupt, is immune from arbi-
trating those claims? The court below held that a trus-
tee could not be compelled to arbitrate such claims.
4. Whether Section 29(a) of the Securities Ex-
change Act of 1934 bars arbitration of claims brought
pursuant to the implied right of action under Rule
10b-5 of the Securities and Exchange Commission?
The court below held that it did.’
STATUTES AND RULES INVOLVED
This case involves Sections 2 and 3 of the United
States Arbitration Act (the “Arbitration Act’’), 9
? This question, which is not discussed in the Reasons for Grant-
ing Certiorari, is stated here to preserve it if this petition is
granted. It is the same question noted but not decided in Justice
Stewart’s opinion for the Court in Scherk v. Alberto-Culver Co.,
417 U.S. 506, 513-514 (1974). See also Justice Stevens’ dissent in
the Seventh Circuit’s decision in Scherk, in which Justice Stevens
discussed at length the reasons Wilko v. Swan, 346 U.S. 427 (1953)
ought not to apply to Exchange Act claims arising from complex
business dealings among sophisticated equals. 484 F.2d 611, 615-
619 (1973).
4
U.S.C. §§ 2 and 3; Sections 10(b), 28(b) and 29(a)
of the Securities Exchange Act of 1934 (the “Ex-
change Act”), 15 U.S.C. §§ 78j(b), T8bb(b), 78ce(a) ;
Section 14 of the Securities Act of 1933 (the ‘“‘Securi-
ties Act”), 15 U.S.C. § 77n; Sections 26, 60b, 67d and
70e of the Bankruptcy Act, 11 U.S.C. §§ 49, 96(b),
107(d) and 110(e); Rule 10b-5 of the Securities and
Exchange Commission, 17 C.F.R. 240.10b-5; and Rule
919(b) of the Bankruptcy Rules, the texts of all of
which are set forth, in pertinent part, in Appendix C.
STATEMENT OF THE CASE
This petition arises from the refusal of the Court
of Appeals to enforce three separate and all-encom-
passing arbitration agreements. Contrary to the ex-
plicit mandate of Section 3 of the Arbitration Act and
the national policy enunciated therein, it was the
court’s view that arbitration would be ‘‘inappropriate’’
for resolution ef Federal securities laws and Bank-
ruptey Act claims. The undisputed material facts are
as follows:
For many years prior to its bankruptcy duPont
Walston Ine. (‘‘Walston”), a retail brokerage firm,
was a member of the New York Stock Exchange, Inc.
(“NYSE”), the American Stock Exchange, Ine.
(‘‘AMEX’’) and other national securities exchanges.
As such, Walston was bound by the Constitutions of the
NYSE and the AMEX, including the comprehensive
arbitration provisions contained in each which require
arbitration of ‘‘any’’ controversies between it and other
exchange members and “‘any’’ controversies between it
and non-members which arise out of its business when
the non-member elects arbitration of such controversies
(NYSE Const. Art. VIII, See. 1; AMEX Const. Art.
4)
VIII, See. 1 (Appendix D)). In addition to Walston,
twelve of the defendants below (of whom eight are
petitioners here) were also members or allied members
of the NYSE and/or the AMEX at the time the rele-
vant transactions took place. Seven of the defendants
below (all petitioners here) were non-members seeking
to enforce their right to compel arbitration of their
dispute with Walston, a member firm of both national
securities exchanges at the time the controversy arose.
This action was commenced on July 1, 1975 by Win-
throp J. Allegaert, the trustee in bankruptcy of Wal-
ston (hereinafter ‘‘ Allegaert’’ or the ‘‘Trustee’’). All
of Allegaert’s claims arise out of the July 2, 1973 re-
alignment of the businesses of Walston and petitioner
duPont Glore Forgan Incorporated (“DGF, Ine.’’),
another brokerage firm which also was a member cor-
poration of the NYSE and the AMEX. That realign-
ment was accomplished pursuant to a series of written
agreements (the “Realignment Agreements”) dated
and effective as of July 2, 1973, whereby Walston as-
‘sumed all front office operations and DGF, Ince. as-
sumed all back office functions of the two firms. (In
addition to the arbitration provisions in the NYSE
and AMEX Constitutions, one of the Realignment
Agreements (the Master Agreement) also contains a
broad and comprehensive arbitration clause covering
‘“‘any”’ dispute arising under the Realignment Agree-
ments (Article 10.11 of Master Agreement to Realign-
_ ment Agreements) (App. D, p. 45a).
The Trustee’s complaint (Appendix E) asserts
twenty-four separate counts including eight counts un-
der the Federal securities acts (both the Securities Act
and the Exchange Act), seven counts under Sections
60, 67 and 70 of the Bankruptcy Act, three counts un-
6
She
der New York and Delaware statutes, and six counts
under the common law.’
Allegaert’s allegations are whoily unproven. He has
stated of record that he has “‘no personal knowledge of
the facts’”’ alleged in his complaint. The Court of Ap-
peals noted in its opinion that it ‘‘of course, ex-
press[es] no view as to whether the trustee’s allega-
tions, particularly those charging fraud and wrongdo-
ing, are correct’’ (App. A, p. 5a n. 2).
PROCEEDINGS BELOW
(a) District Court Proceedings
After the complaint had been filed, fifteen of the de-
fendants, the petitioners herein, moved under Section 3
of the Arbitration Act (9 U.S.C. § 3), for a stay of the
proceedings pending arbitration of all of the claims
against them.
District Judge Whitman J. Knapp granted peti-
tioners’ motion and, in the exercise of his discretion
and inherent power to control his docket, stayed the
action as to the NYSE and the non-petitioning defend-
ants aswell (App. B, p. 34a). The District Court
found that: (i) all fifteen of the petitioners were per-
sons entitled to demand arbitration under one or more
of the three applicable arbitration agreements (App.
*The District Court correctly summarized the complaint as
charging in essence that the defendants had conspired to mislead
Walston into approving the realignment transaction and executing
the Realignment Agreements, that DGF, Inc. had breached the
Realignment Agreements, and that certain of the defendants had
misappropriated Walston’s assets in carrying out those agreements.
(App. B, p. 19a.) The complaint posits Federal jurisdiction upon
the claims asserted under the Securities and Exchange Acts and
the Bankruptcy Act and principles of pendent jurisdiction.
7
B, p. 22a n.6); (ii) Allegaert’s general status as a
trustee in bankruptcy did not relieve him of the obli-
gation to submit to arbitration pursuant to Walston’s
arbitration agreements where the claims sought to be
arbitrated were claims brought by the Trustee for the
benefit of the estate and were not claims against the
estate (App. B, pp. 24a-25a); (iii) the ‘‘only ar-
gument”’ which the Trustee could muster in support of
his ‘“‘rather vague’’ contentions ‘‘that arbitration
would be counter to public policy’’—to wit: Alle-
gaert’s fear ‘‘that somehow an arbitration tribunal
would be ‘friendly’ to the defendants’’—was unsub-
stantiated by any record evidence and contrary to de-
cided case law (App. B, p. 29a); (iv) Allegaert’s
securities law claims were not immune from arbitra-
tion because Section 28(b) of the Exchange Act ex-
empts the NYSE and AMEX Constitutions from the
nonwaiver provisions of the Federal securities laws
when arbitration is sought against an NYSE or
AMEX member and because the publie policy consid-
erations underlying the rule of Wilko v. Swan, 346
U.S. 427 (1953) (hereinafter ‘‘Wilko’’) were in ap-
plicable in such cases (App. B, pp. 29a-30a); and
(v) Allegaert’s specific bankruptcy law claims (under
Sections 60, 67 and 70) were also arbitrable, since the
contractual right to demand arbitration did not cease
to be effective ‘‘simply because [the Trustee] has the
power to recover fraudulent transfers and voidable
preferences,’’ and ‘‘nothing in the [Bankruptcy] Act
... grants the bankrupt an absolute right to a choice of
forum” (App. B, p. 28a).
(b) The Court of Appeals’ Opinion
The Court of Appeals reversed, holding that Alle-
gaert could not be compelled to arbitrate the Federal
8
securities laws and Bankruptcy Act claims asserted in
his complaint. It held, first, that the question of the
enforceability of an arbitration agreement should be
determined in each case arising under Federal statutes
based upon a nebulous three-prong test in which the
District Courts would be required to examine: (i) the
extent of ‘‘the public interest in the dispute’’;* (ii)
‘‘the degree to which the nature of the evidence made
the judicial forum preferable to arbitration’’;* and
(iii) the ‘‘extent to which the agreement to arbitrate
was a product of free choice.’’* (App. A, p. 10a.)
The court below then held the Bankruptcy Act
claims not arbitrable because ‘‘the trustee asserts them
for the benefit of the bankrupt’s creditors’? who, if
they had asserted such claims themselves ‘‘would not
have been subject to any arbitration agreement”’
(App. A, pp. 8a-9a).
*The court stated that it found a significant ‘‘public interest’
in this case because (i) the claims arose in connection with ‘‘one
of the most celebrated brokerage house failures in the history of
Wail Street,’’ and (ii) the Bankruptcy Act claims ‘‘are asserted
on behalf of many hundreds of creditors.’’ (App. A, p. 10a).
* With respect to this ‘‘test,’’ the court noted only that unlike
an operating business, the Trustee employs no witnesses with
knowledge of the relevant facts and claims that he has almost
none of the relevant documents. This is significant, the court
stated, because the ‘‘availability of discovery in arbitration is un-
eertain.’’ (App. A, p. 10a).
* Since the ents to arbitrate reflected in the NYSE and
AMEX Constitutions were entered into by Walston years before
the execution of the Realignment Agreements and were clearly
the product of Walston’s free choice in determining to join the
exchanges, the Court of Appeals recognized that this ‘‘considera-
tion’’ is not a factor in this case. (App. A, p. 10a).
OO OO EEE ee
nals ON alan ae, > Mae I tt at
9
The Court of Appeals also held that arbitrability
of the Federal securities laws claims asserted by Alle-
gaert could not be compelled even though the dispute
arose out of securities transactions between members
of the exchanges and non-members who sought to com-
pel arbitration. /It relied on this Court’s decision in
Wilko, supra,’ which had construed the effect of Sec-
tion 14 of the Securities Act on an arbitration provision
included in a customer’s margin agreement (App. A,
pp. 10a-1la).
Accordingly, the Court of Appeals remanded the
case to the District Court with an order that Allegaert
be allowed to pursue his claims under the Federal secu-
rities and bankruptcy laws ‘‘immediately ... prior to
arbitration of any of the remaining claims.’’* (App.
A, p. 13a.)
REASONS FOR GRANTING THE WRIT
This case raises fundamental questions regarding
the arbitrability of disputes arising under the Federal
securities laws and the bankruptcy laws, each of which
*It also relied on its own decision in Greater Continental Corp.
v. Schechter, 422 F.2d 1100 (1970) a case not involving exchange
members or the exchange Constitutions in any way, which, in
dicta, indicated the unavailability of arbitration to resolve Section
10(b) claims.
®*The order that trial of the Trustee’s securities and Bank-
ruptey Act claims precede arbitration is itself inconsistent with
the explicit language of Section 3 of the Arbitration Act which
states that upon determining that ‘‘any issue’’ in a case is refer-
able to arbitration under a written arbitration agreement, ‘‘the
court shall . . . stay the trial of the case until such arbitration
has been had in accordance with the terms of the agreement.’’
See, ¢.g., N.V. Maatschappij Voor Industriele Waarden v. A. O.
Smith Corp., 532 F.2d 874, 875-877 (2d Cir. 1976).
10
was resolved by the Court of Appeals in a way which
(i) effectively reverses the strong Federal policy in
favor of arbitration established by the Arbitration Act
and repeatedly endorsed by prior decisions of this
Court, and (ii) threatens to compel District Courts to
handle massive amounts of new substantive litigation
previously referable to arbitration when such disputes
arise under Federal statutes and expanded procedural
litigation relating to the enforceability of arbitration
agreements.
Even in its narrowest reading, the decision below
jeopardizes the unilateral right granted to customers
and others who deal with member firms of the national
securities exchanges to compel such members to arbi-
trate disputes and thereby to avoid the cost and delay
of court litigation. In its reasoning, the decision below
also threatens all arbitration agreements (including
the mandatory arbitration agreements typically con-
tained in the by-laws or other rules of business or
commercial associations) whenever disputes arise un-
der Federal statutes, for any party to such a dispute
can now make a colorable claim as to the unenforce-
ability of the arbitration agreement and thus effec-
tively delay the resolution of the dispute and geo-
metrically compound its cost, by merely filing a com-
plaint and alleging public interest overtones in the out-
come of the case and its need for discovery.
Moreover, the holding below directly conflicts with
a holding of the First Circuit that when disputes arise
among members of the national securities exchanges,
the compulsory arbitration provisions of the exchange
Constitutions must be enforced to effectuate Congress’
mandate of national stock exchange self-regulation.
ce NB el ee Oe ete wee
11
Finally, the decision presents ‘‘significant’’ questions
regarding the ‘“‘interplay”’ and ‘‘policy’’ of two Federal
statutes (App. A, pp. 3a, 12a) on which this Court
has yet to rule.
I. THE DECISION BELOW EFFECTIVELY NULLIFIES THE
POLICY OF THE UNITED STATES ARBITRATION ACT
WHENEVER AN ARBITRABLE DISPUTE ARISES UNDER A
FEDERAL STATUTE AND DIRECTLY CONFLICTS WITH A
DECISION OF THIS COURT.
The Arbitration Act sets forth clear standards for
determining the enforceability of arbitration agree-
ments satisfying the jurisdictional requirements of the
Act.’ Section 3 of the Act states that in any suit
brought in any Federal court, upon being satisfied
that any issue is referable to arbitration under a writ-
ten arbitration agreement:
“T]he court ... shall... stay the trial of the
action until such arbitration has been had in ac-
cordance with the terms of the agreement... .”
Interpreting this language in Prima Paint Corp.
v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967)
(hereinafter “‘Prima Paint’’), this Court held that
this provision means what it says:
‘*We hold, therefore, that in passing upon a §3
application for a stay while the ay arbitrate,
a federal court may consider only issues relating
to the making and performance of the agreement
to arbitrate. In so concluding, we not only honor
the plain meaning of the statute but also the un-
*In this case there is no question that the jurisdictional re-
quirements of the Act have been satisfied, since all three arbitra-
tion agreements sought to be enforced clearly involve interstate
commerce.
12
mistakably clear congressional purpose that the
arbitration procedure ... be speedy and not sub-
ject to delay and obstruction in the courts.”’ 395
U.S. at 404.
In holding that arbitrability of the Federal statutory
claims in this case was to be determined by a case-by-
case assessment of ‘‘whether such claims are of a char-
acter inappropriate for enforcement by arbitration,”
(App. A, p. 10a), the decision of the court below was
flatly inconsistent with both the clear and explicit lan-
guage of Section 3 of the Arbitration Act, as set forth
above, and the holding and policies articulated by this
Court in Prima Paint.
The Court of Appeals’ ‘‘appropriateness”’ test also
ignores the clear intent of Congress in enacting Sec-
tion 2 of the Arbitration Act that arbitration agree-
ments be placed ‘‘upon the same footing as other con-
tracts... .”*° In this case, in particular, two of the
arbitration agreements sought to be enforced—the
arbitration clauses of the NYSE and AMEX Consti-
tutions—were entered into years before this dispute
arose and cannot possibly be said to be invalid as a
matter of state contract law." The Court of Appeals’
10 H.R. Rep. No. 96, 68th Cong., Ist Sess. 1, 2 (1924), quoted
by the Court in Scherk v. Alberto-Culver Co., supra, 417 U.S. at
511.
11 Federal courts have considered the enforceability of these
agreements on numerous occasions, and uniformly have held that
they are valid and binding as a matter of state contract law, and
satisfy all the other requirements for enforcement under the Act.
Muh v. Newburger, Loeb & Co., Inc., 540 F.2d 970, 973 (9th Cir.
1976) ; Dickstein v. duPont, 443 F.2d 783, 785 (1st Cir. 1971);
Legg, Mason & Company v. Mackall & Coe, Inc., 351 F. Supp.
1367, 1369-1371 (D.D.C. 1972); Isaacson v. Hayden, Stone, Inc.,
319 F.Supp. 929, 930 (S.D.N.Y. 1970); Osborne & Thurlow v.
13
view that the asserted need for discovery makes litiga-
tion ‘‘preferable” to arbitration and that the supposed
‘‘publie interest’? in this dispute makes arbitration
**inappropriate,’’ simply is not a basis for refusing to
permit arbitration, any more than such a view would
permit a court to refuse to enforce any other contract.
Moreover, although not directly in conflict with their
narrowest holdings, the hostility to arbitration evi-
denced by the decision of the court below also conflicts
sharply with the policies articulated by this Court in
Nolde Bros., Inc. vy. Local No. 358, Bakery & Confec-
tionary Workers Union, 45 U.S.L.W. 4251 (March
7, 1977); Scherk v. Alberto-Culver Co., 417 U.S. 506
(1974) (hereinafter ‘“‘Scherk’’),"” and indeed Wilko
itself.”
Hirsch & Co., 10 Mise. 2d 225, 175 N.Y.Supp. 2d 522 (Sup.
Ct. 1958). Indeed, the Court of Appeals implicitly held that these
agreements were enforceable in this very case, by refusing to re-
verse that portion of Judge Knapp’s order which directed arbitra-
tion of Allegaert’s state statutory and common law counts, many
of which raise factual and legal issues virtually identical to the
Federal statutory claims.
* There, this Court said that ‘‘an agreement to arbitrate before
a specified tribunal is, in effect, a specialized kind of forum-selec-
tion clause’’ and that the ‘‘solemn promise’’ reflected by such an
agreement should not be invalidated simply because of a ‘‘paro-
chial concept that all disputes must be resolved . . . in our
courts.’’ 417 U.S. at 519.
* In Wilko, the majority opinion stated:
**The United States Arbitration Act establishes by statute
the desirability of arbitration as an alternative to the com-
plications of litigation. The reports of both Houses on that
Act stress the need for avoiding the delay and expense of
litigation, and practice under its terms raises hope for its
usefulness both im controversies based on statutes, or on
standards otherwise created.’’ 346 U.S. at 431-432 (footnotes
omitted) (emphasis supplied).
14
Prior to the unprecedented decision of the court be-
low, the arbitrability of claims under Federal statutes
generally, (and under the Federal securities acts and
the Bankruptey Act in particular), were governed by
clear, predictable and easily applied rules of law which
did not require the District Courts to determine arbi-
trability on a subjective case-by-case basis. Arbitration
agreements had been enforced in all manner of dis-
putes arising under Federal statutes (see, e.g., Wilko
at 432 n.13; Fallick v. Kehr, 369 F.2c 899, 903 n. 9).
Enforcement of arbitration agreements had been de-
nied only in a limited number of areas where whole
classes or categories of claims were held to be nonarbi-
trable, based upon explicit Federal statutes which de-
nied the enforceability of such agreements without
regard to the specific facts alleged in a particular com-
plaint."* Now, according to the court below, the arbi-
trability of claims under Federal statutes must be
determined, not as generic rules of law based upon
statute, but by the District Courts after analysis on
a case-by-case basis, conducted at the pleading stage,
and frequently, as here, before an answer has been
filed, of the alleged facts and circumstances of each
such case, in order to assess, “among other [unspeci-
fied] things’’ the essentially unquantifiable “public in-
%* F.g., all claims arising under the Securities Act in which a
customer was involved in a dispute with a broker and the cus-
tomer resisted arbitration (Wilko, supra); all claims arising un-
der the Sherman Antitrust Act where the alleged monopolist in-
sisted on arbitration in an adhesion contract (American Safety
Equip. Corp. v. J.P. Maguire & Co., 391 F.2d 821 (2d Cir. 1968) ) ;
all claims against a trustee in bankruptey which sought to diminish
the assets of the bankrupt estate (Johnson v. England, 356 F.2d 44
(9th Cir.), cert. denied, 384 U.S. 961 (1966)); all claims of sea-
men for wages arising under 46 U.S.C. § 596 (U.S. Bulk Carriers,
Inc. v. Arguelles, 400 U.S. 351 (1971)).
A — AT — canal. en a gle cate ill
15
terest’’ in the case, and the extent to which a judicial
forum is deemed more ‘‘preferable’’ for the resolu-
tion of the controversy because of the ‘‘nature of the
evidence” and the issues in the case, or the need of
discovery of the party resisting arbitration.” (App. A,
p. 10a.)
If allowed to stand, the Court of Appeals’ decision
will thus dramatically increase the burden on the Fed-
eral District Courts in administering the Arbitration
Act and the burden on parties to arbitration agree-
ments who seek to enforce such agreements against
adversaries who will gain tactically by delay and in-
creased expense in the resolution of controversies. It
concommitantly will decrease the ability of parties to
act predictably on the basis of their solemn promises
to arbitrate.
*In American Safety Equip. Corp. v. J. P. Maguire & Co.,
supra, the case on which the court below placed principal reli-
ance, the Court of Appeals specifically noted that, if the plaintiff's
allegations were correct, the agreement containing the arbitration
contract ‘‘itself was an instrument of illegality’’ under the Sher-
man Act. 391 F.2d at 827. Enforcing the arbitration clause of
such agreement thus would be allowing ‘‘contracts of adhesion
between alleged monopolists and their customers . . . [to] deter-
mine the forum for trying antitrust violations,’’ in contravention
of the purposes of the Federal statute (id.). In this case, the
arbitration agreements sought to be enforced are polar opposites
of contracts of adhesion, viz., arbitration provisions of exchange
Constitutions, established pursuant to en Act of Congress requir-
ing self-regulation by national stock exchanges and required to
be ‘‘fair’’ as a precondition to exchange registration under the
Exchange Act, Section 6(b), 15 U.S.C. § 78f(b), and entered into
by Walston years before the execution of the agreements from
which the dispute arises.
16
Il. THE DECISION BELOW CONFLICTS WITH A DECISION
OF THE FIRST CIRCUIT INTERPRETING SECTION 28(b) OF
THE EXCHANGE ACT, CONFLICTS WITH THE POLICY
ARTICULATED IN THE COURT’S SCHERK DECISION AND
SUBSTANTIALLY INVALIDATES THE ARBITRATION PROVI-
SIONS OF THE NYSE AND THE AMEX CONSTITUTIONS.
The court below held that ‘‘the presence of the se-
curities law claims further supports the need for a
judicial tribunal here.” (App. A, p. 10a.) Departing
from the unbroken line of cases in which arbitration
of securities fraud disputes encompassed by the arbi-
tration provisions of the NYSE or AMEX Constitu-
tions was compelled, the court held that ‘‘the strong
federal policy in favor of determining stock fraud
questions in the federal courts’”’ precluded arbitration
here. (App. A, pp. 10a-11a.)
In so holding, the court’s opinion squarely conflicts
with the decision of the First Circuit in In Re Rev-
enue Properties Litigation Cases (Cohn, Delaire &
Kaufman), 451 F.2d 310 (1971) (hereinafter “‘ evenue
Properties’’), conflicts with the policy articulated by
this Court in Scherk, and substantially invalidates the
mandatory arbitration clauses in the Constitutions of
the NYSE and AMEX—provisions which grant very
important rights of forum selection to customers and
others who deal with exchange member firms.
A. The Conflict with the First Circuit
In Revenue Properties, which, as here, involved dis-
putes among exchange member firms arising under the
Federal securities acts, the First Circuit held that the
nonwaiver section of the Securities Act—Section 14—
could have no applicability to the arbitration agree-
ment contained in the AMEX Constitution because Sec-
a ee ee
17
tion 14 is applicable only to any “condition . . . binding
any person acquiring a security.”
™ erwered was subject to a binding provision to
arbitrate but in its capacity as a member of the
exchange, with the attendant benefits and the con-
current statutorily-imposed responsibilities of
such position. The agreement to arbitrate was not
imposed as a requirement for the acquisition of a
security or as a supposed inducement to its sale.’’
451 F.2d at 313.
The First Circuit also held that the nonwaiver section
of the Exchange Act—Section 29(a)—could have no
applicability to the dispute before it which involved
two members of the AMEX because of the overriding
impact of Section 28(b) of the Exchange Act,
“‘which specifically recognizes the binding effect
of exchange action to settle disputes between
members.’ Id.
Finally, the First Circuit expressly rejected the argu-
ment which the court below accepted—that cases in-
volving securities act claims which raise ‘‘broad ques-
tions of policy which ordinarily should he handled by
the judiciary”’ are not encompassed within the ambit
of Section 28(b) of the Exchange Act. (App. A, p.
12a.) The First Circuit held:
[Broker] points out that if it is compelled to
arbitrate, issues important to the securities in-
dustry could be decided, with only the limited re-
view envisaged by 9 U.S.C. § 10. The logie of this
argument implies a prerequisite to arbitrability:
that only issues not heavily invested with legal
significance be decided. But no area of arbitration
is guaranteed to be kept insulated from important
issues of substantive law.’ Id.
a aa
“
18
The brokerage firm in the Revenue Properties case,
like Allegaert, had placed its reliance on Wilko.
The First Circuit held Wilko, which “dealt with
margin agreements containing arbitration clauses
which a buyer entered into in connection with his pur-
chases,’ inapplicable to disputes between exchange
members where the arbitration agreement ‘‘stemmed
... from the provisions of the exchange constitution
and rules’’ to which the brokers “had freely assented
when they became members of the exchange.’’ (/d.)
Totally ignoring the statutory rationale of Wilko, and
the policy considerations on which it turned,” the court
below held Wilko controlling.
B. The Conflict with This Court’s Decision in Scherk
The court below, in holding that ‘‘the strong federal
policy in favor of determining stock fraud questions
16In Wilko, the issue before this Court was whether § 14 of the
Securities Act barred arbitration of a customer’s Securities Act
claims pursuant to the arbitration clause of the customer’s margin
agreement with his broker-dealer entered into at the time of the
customer’s purchase of securities. In deciding this question, the
Court carefully weighed the competing policies embodied in § 14
of the Securities Act and the Arbitration Act—noting that these
competing statutory provisions presented it with ‘‘two policies,
not easily reconcilable’’—and then concluded that the customer’s
arbitration agreement was a ‘‘condition, stipulation, or provision
binding any person acquiring any security to waive compliance
with the provisions [of the Act]’’ within the scope of § 14, and
thus void under the express language of that section. Wilko, supra,
346 U.S. at 430, 434-435, 438. In reaching this conclusion, the
Court emphasized the importance of the policy established by the
Securities Act of protecting customers, such as the smal] investor
in that case, 346 U.S. at 431, 433. It also stressed the danger
that if customers could be compelled to arbitrate, broker-dealers
might be able to take advantage of the inferior bargaining position
of customers ‘‘at a time when [the customer] is less able to judge
the weight of the handicap the Securities Act places on his adver-
sary,’’ 346 U.S. at 435.
19
in the federal courts’’ was determinative, also ignored
the contrary conclusion of this Court in Scherk, supra.
There, this Court expressly required arbitration of
Alberto-Culver’s “stock fraud questions” at Scherk’s
insistence in enforcing the parties’ arbitration agree-
ment. The Court rejected Alberto-Culver’s misplaced
reliance on Wilko, and held that the applicable sec-
tions of the Arbitration Act (in that case §§ 201
et seq.) no longer permitted the ‘‘parochial concept’’
that only courts are capable of determining securities
fraud issues. 417 U.S. at 519. In Scherk, as here, the
arbitration clause was the product of bargaining among
sophisticated equals.
C. The Impact on the Arbitration Provisions of the NYSE and
| AMEX Constitutions *’
Every prior case in the Second Circuit (and else-
where) in which the courts have decided issues relating
to the arbitrability of securities fraud disputes involv-
ing members of the national securities exchanges has
held that such disputes are arbitrable pursuant to the
exchanges’ Constitutions which are an exercise of the
exchanges’ self-regulatory powers pursuant to Section
28(b) of the Exchange Act. See, e.g., Azelrod & Co. v.
Kordich, Victor & Neufeld, 451 F.2d 838 (2d Cir.
1971) ;* Coenen v. R. W. Pressprich & Co., Inc., 453
* This point is discussed more fully in the Brief of Respondent
New York Stock Exchange, Inc, in Support of Petition for Cer-
tiorari, and accordingly will be touched on only briefly here.
8 Which Justice Stevens read as ‘‘demonstrating that § 28(b) of
the 1934 Act made it perfectly clear that § 29(a) did not preclude
enforcement of the compulsory arbitration rules of the [NYSE],”’
Alberto-Culver Co. v. Scherk, 484 F.2d 611, 619 n.13 (7th Cir.
1973) (dissenting opinion), rev’d, 417 U.S. 347 (1974) (emphasis
supplied).
20
F.2d 1209 (2d Cir.), cert. denied, 406 U.S. 949 (1972) ;”
Brown vy. Gilligan, Will & Co., 287 F. Supp. . 766
(S.D.N.Y. 1968). The decision below, which for the
first time holds to the contrary, thus creates uncertain-
ty and enormous further litigation potential over the
enforceability of arbitration agreements in the very
Circuit in which the overwhelming majority of such
disputes ordinarily arise. By ignoring the overriding
statutory scheme of supervised self-regulation for
stock exchanges included in the Exchange Act, which
it had previously recognized and enforced, the court
below has turned a self-executing rule designed to pro-
mote the objective of speedy and inexpensive resolu-
tion of disputes into a fluid rule where any broker can
avoid the obligation to arbitrate with non-members or
other members who seek to compel arbitration of secu-
rities fraud disputes simply by asserting in a Federal
District Court that the dispute involves ‘‘broad ques-
tions of policy” and by labelling such disputes as not
1° There, the arbitration clauses of the exchange Constitutions
were characterized as ‘‘the most significant of the measures taken
to implement the self-regulation contemplated by the 1934 Act.’’
453 F.2d at 1215 (emphasis supplied).
2°The holdings in these cases also have been expressly approved
by the Ninth Circuit in Muh v. Newburger, Loeb, supra, 540 F.2d
at 972-973, by the Third Circuit in Ayres v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., 538 F.2d 532, 538 n. 18, cert. denied, 45 US.
L.W. 3416 (Dee. 6, 1976) and by the District Court for the Dis-
trict of Columbia in Legg, Mason & Co., Ine. v. Mackall & Coe,
Inc., supra, 351 F. Supp. at 1371-1372. See also this Court’s de-
cision in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Ware, 414
U.S. 117, 135 n. 15 (1973) which cited Coenen v. R. W. Pressprich
& Co., Inc., supra, with approval, and Justice Stevens’ dissent in
the Seventh Circuit’s opinion in Scherk v. Alberto-Culver Co.,
supra, 484 F.2d at 619 n.13.
21
merely an “intramural” dispute among ‘‘industry
members.’’ Thus, customers and other non-members—
like seven of the petitioners here—who assert their uni-
lateral right to demand arbitration against exchange
member firms can now have their arbitration demands
rejected by member firms who seek to deny their custo-
mers the speedy and inexpensive resolution of dis-
putes which arbitration affords, turning Wilko on its
head and effectively invalidating Section 28(b) of the
"34 Act and the actions taken by the exchanges pur-
suant thereto.
Ill. THE COURT OF APPEALS’ REFUSAL TO PERMIT ARBI-
TRATION OF THE TRUSTEE’S BANKRUPTCY ACT CLAIMS
PRESENTS AN IMPORTANT QUESTION OF FEDERAL LAW
NOT PREVIOUSLY CONSIDERED BY THIS COURT.
As the Second Circuit stated, this case raises “‘sig-
nificant questions’’ regarding the ‘‘interplay’’ be-
tween the “‘policy”’ of the Arbitration Act and the
Bankruptcy Act. (App. A, pp. 3a, 12a.) This Court
has never considered questions of arbitrability in a
ban‘kruptey context. Given the ever-increasing use of
arbitration agreements in all types of commercial ar-
rangements, due in large measure to this Court’s hold-
ing in cases like Prima Paint, the question of the sur-
vival of arbitration agreements after bankruptcy is
a matter of national importance which should be con-
sidered by this Court.
It is a fundamental rule of bankruptcy law that,
absent a specific statutory provision to the contrary,
a trustee in bankruptcy is bound by the contractual
obligations of the bankrupt. Bank of Marin v. Eng-
land, 385 U.S. 99, 101 (1966).
22
Consistent with this principle, prior to the decision
in this case, it had been repeatedly said that a trustee
is bound by the bankrupt’s pre-bankruptcy arbitration
agreements if the trustee seeks to bring suit outside
of the bankruptcy court against alleged wrongdoers
who had not asserted claims against the estate.
Truck Drivers Local Union No. 807 v. Bohack Corp.,
541 F.2d 312 (2d Cir. 1976) ; Tobin v. Plein, 301 F.2d
378 (2d Cir. 1962); Schilling v. Canadian Foreign
S.S. Co., Ltd., 190 F. Supp. 462 (S.D.N.Y. 1961). This
had been the rule regardless of whether it was the
trustee or the creditor who was seeking arbitration.”
In Schilling, which was expressly approved by the
Second Circuit in Tobin and most recently in Truck
Drivers, the court asked:
‘‘whether a trustee in reorganization who seeks to
recover on a contract made with his debtor prior
to the beginning of the reorganization proceeding
may be compelled to proceed to arbitration in ac-
cordance with a provision in the contract.’’ 190
F. Supp. at 461.
The answer was as follows:
“The right of a party to a contract to resort to
arbitration provided for in that contract is as
21 Conversely, it had been held that a trustee could not be com-
pelled to arbitrate claims asserted against the bankrupt’s estate
for arbitration of such claims would affect the amount, existence
and priority of claims to be paid out of the estate’s general funds,
matters which the Bankruptcy Act expressly places within the
exclusive jurisdiction of the bankruptcy court. See, e.g., In re
Muskegon Motor Specialties Co., 313 F.2d 841 (6th Cir.), cert.
denied, 375 U.S. 832 (1963); Johnson v. England, 356 F.2d 44,
supra; Designers’ Guild v. Hers Apparel Indus. Inc., 76 CCH
Lab. Cases J 10,773 (S.D.N.Y. 1975) ; Kriendler, The Convergence
of Arbitration and Bankruptcy, 26 Arb. J. 34, 38-39 (1971).
23
much a contract right as is the right to payment...
The trustee by forcing [the defendant] to trial
. . . would be depriving [the defendant] of the
right to arbitration for which it had bargained.
. . » Bankruptcy does not, however, deprive the
bankrupt’s debtors of their rights.’”’ Jd. at 463.
Other than noting the tautologically correct state-
ments that (i) a bankruptcy trustee is a ‘‘new entity
... With its own rights and duties, subject to the super-
vision of the bankruptcy court ;’’ * and (ii) the Bank-
ruptey Act claims asserted in the complaint ‘‘are stat-
utory causes of action belonging to the trustee, not to
the bankrupt, and the trustee asserts them for the
benefit of the bankrupt’s creditors, whose rights the
trustee enforces,’’ (App. A, pp. 8a-9a) the court below
offers no rationale or justification (and cites no au-
thority) for rejecting the clear mandate of the Arbi-
tration Act and holding that the Trustee is excused
from arbitrating his Bankruptcy Act claims. In fact,
there is no such authority in the statute or the cases.
Notably, the Court of Appeals. expressly acknowl-
edged that, irrespective of its ‘‘new entity’’ observa-
**The Court of Appeals had made this observation in Shop-
men’s Local Union No. 455 v. Kevin Steel Prod. Inc., 519 F.2d
698, 704 (2d Cir. 1975) and repeated it in Brotherhood of Rail-
way Clerks v. REA Express, Inc., 523 F.2d 164 (2d Cir. 1975),
cert. denied, 423 U.S. 1017, 1073 (1976). But in Matter of Uni-
shops, Inc., 543 F.2d 1017 (2d Cir. 1976) the court cautioned that
this precise language ‘‘should not be extended as a generalizaticn
in cases other than those involving labor collective bargaining
agreements where the claim is that .. . [a provision of the labor
laws] . . . precludes disaffirmance of the labor agreement in a
Chapter XI proceeding without taking steps required under [the
labor laws] . . .’’ 543 F.2d at 1018-1019. In the Court of Appeals’
decision below, it blithely ignored its own injunction.
24
tion, if a contract is executory under Section 70b of
the Bankruptcy Act, and the trustee affirms it, “‘the
trustee will have to accept the entire contract, includ-
ing an arbitration clause if the contract contains one.”’
(App. A, p. 8a n.7a.) The court below does not ex-
plain how the result can be any different with a fully
executed contract where the bankrupt has had the full
benefit of its contractual bargain before bankruptcy
proceedings. The rationale of this Court’s very recent
holding in Nolde Bros., Inc. v. Local No. 358, supra,
that the arbitration clause of a collective bargaining
agreement survives the termination of the agreement,
is persuasive precedent that such clauses should also
survive bankruptcy proceedings.
Implicit in the Court of Appeals’ decision is the view
that arbitration is in some way disfavored under the
Bankruptcy Act. The Court of Appeals argued that
the ‘‘federal policy favoring arbitration” was not dis-
positive of this case, since there were “different, some-
times competing public policy interests” allegedly re-
flected in the Bankruptcy Act (App. A, p. 12a). But,
the court cited no section of the Act and nothing in
the Bankrutcy Act itself even remotely suggests that
arbitration is in any way disfavored (much less pro-
hibited) thereunder. Indeed, the Second Circuit itself
has recognized that sections of the Bankruptcy Act
“evince a receptivity to arbitration,” Fallick v. Kehr,
supra, 369 F.2d at 904,” and shortly prior to its
decision in this case, reaffirmed that a contractual
‘obligation to arbitrate, solemnly undertaken, is not
subject to a unilateral disavowal” by a trustee and
"8 See also, Rule 919(b) of the Bankruptcy Rules expressing
this same receptivity to arbitral resolution of ‘‘any controversy
affecting the estate.’’
25
“survives the filing of a petition in bankruptcy.”’ Truck
Drivers Local Union No. 807 v. Bohack Corp., supra,
541 F.2d at 319-320.
Thus, without any precedent or other basis for doing
so, the Court of Appeals has ignored the rule that a
trustee in bankruptcy can be compelled to submit to
arbitration when he elects to sue alleged debtors of an
estate in a plenary proceeding and has invested the
Bankruptcy Act with a heretofor unrecognized ‘‘pub-
lic policy’’ which is assertedly ‘‘competing’’ with the
policy of the Arbitration Act. Because it makes
no reference whatever to any section or language of
the Bankruptcy Act to narrow its “‘publie policy’’
observations, it has again created the potential
for a vast multitude of suits in the District Courts
arising under every section of the Bankruptcy Act
which in the past would have been determined by arbi-
tration. At the least, its decision will spawn substantial
litigation as to the arbitrability of all disputes arising
under the Bankruptcy Act.
Se Bankruptcy Judge Babitt (the bankruptey Judge presiding
over Walston’s bankruptcy) has held:
“*, . . the federal policy in favor of arbitration is part of the
warp and woof of the fabric of our jurisprudence. . . . And
any doubt that the policy is clearly applicable in bankruptcy
proceedings is dispelled, not only by the plain agreement be-
tween the parties itself as here which the court recognizes, but
also by this court’s awareness that arbitration may be an ap-
propriate method for resolving controversies between trustees
or debtors-in-possession and others... .’’ (Citations omitted)
(Emphasis supplied).
In the Matter of Blair & Co. (Cahn), No. 70 B 755 (S.D.N.Y. May
12, 1972), aff’d, by Brieant, J., Sept. 6, 1972; accord, In the Mat-
ter of Blair & Co., (Danford), No. 70 B 755 (S.D.N.Y., June 1,
1973). (Both of these unreported opinions are printed at Ap-
pendix F.)
26 27
CONCLUSION Attorneys for Petitioners
For the foregoing reasons, this petition should be b teow hem ;
granted and a writ of certiorari should be issued to Sheeshocte a0 vw ; ,
review the decision below. r 7 —" ent Co.;
Respectfully submitted, a Bazan, Jn.
RicHarp P. SHLAKMAN SAMUEL M. KOENIGSBERG
ANDREW D. WEISSMAN 80 Pine Street
815 Connecticut Avenue, N.W.
Washington, D.C. 20006
Telephone: 202/298-8020
Attorneys for Petitioners
E.D. Systems Corp.;
Electronic Data Systems Corp.
PETER GRUENBERGER
Henry J. TASHMAN
Irwin H. WARREN
767 Fifth Avenue
New York, New York 10022
Telephone: 212/758-7800
Attorneys for Petitioners
H. Ross Perot;
Milledge A. Hart, IIT;
Morton H. Meyerson ;
PHM & Co.;
duPont Glore Forgan Incorporated
Tuomas W. Luce, IIT
H. Rosert POWELL
1000 Mercantile Dallas Building
Dallas, Texas 75201
Telephone: 214/651-0477
New York, New York 10005
Telephone : 212/344-2040
Attorneys for Petitioners
Daniel J. Cullen;
William D. Fleming;
Charles W. Cox;
George T. Thompson
Of Counsel:
Leva, Hawes, SyMIncTon,
MartTIn & OPPENHEIMER
815 Connecticut Avenue, N.W.
Washington, D.C. 20006
Telephone : 202/298-8020
Wet, GorsHaL & ManGeEs
767 Fifth Avenue
New York, New York 10022
Telephone : 212/758-7800
Huaues Luce Hennessy SMITH
& CasTLE
1000 Mercantile Dallas Building
Dallas, Texas 75201
Telephone : 214/651-0477
28
GUGGENHEIMER & UNTERMEYER
80 Pine Street
New York, New York 10005
Telephone : 212/344-2040
JAMES W. QuINN, Esq.
F'LEISHER & QUINN
15 Columbus Circle
New York, New York 10023
Telephone: 212/541-7118
Washington, D.C.
April 25, 1977
APPENDIX
la
APPENDIX A
Opinion and Judgment of the Court of Appeals
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
No. 257—September Term, 1976.
(Argued December 2, 1976 Decided January 25, 1977.)
Docket No. 76-7235
WintHrop J. ALLEGAERT,
as Trustee of duPont Walston Incorporate?,
Plaintiff-Appellant,
—against—
H. Ross Perot, E.ecrronic Data Systems Corporation,
duPont Guore Forcan Incorporatep, Wittiam K.
Gaypen, Morton H. Meyerson, Mitieper A. Hart, ITI,
Marcort Perot, Mervin L. Staurrern, PHM & Co.,
Cuar.Leston InvestMENT Company, E. D. Systems Cor-
PoRATION, New York Stock Excuanag, Inc., Dantew J.
Cutten, Wru1am D. FLemine, Georce T. THomson and
Cuaries W. Cox,
Defendants-A ppellees,
—and—
Dove.as E. Detata, Jonn J. Dovenrty,
Avian Buiar and D. Tire CuLen,
Defendants.
BEFORE:
Moore, Fernserc and Gurrein,
Circuit Judges.
2a
Appeal from orders of United States District Court for
the Southern District of New York, Whitman Knapp, J.,
granting stay pending arbitration of bankruptcy trustee’s
claims that defendants violated, inter alia, the Bankruptcy
Act, the securities laws and state corporate laws.
Judgment reversed and case remanded.
Grorce A. Davipson, New York, N.Y. (Hughes Hub-
bard & Reed; Robert J. Sisk, Karen G. Lind, on
the brief), for Plaintiff-Appellant.
Ricsarp P. S#iaxkmayn, Washington, D.C. (Leva,
Hawes, Symington, Martin & Oppenheimer; Andrew
D. Weissman, on the brief), for Defendant-Appellees
E. D. Systems Corp.; Electronic Data Systems Corp.
Samvet M. Koentesserc, New York, N.Y. (Guggen-
heimer & Untermyer; Harold Baer, Jr., on the
brief), for Defendants-Appellees Daniel J. Cullen,
William D. Fleming, Charles W. Cox, George T.
Thomson.
Russeitt E. Brooxs, New York, N.Y. (Milbank, Tweed,
Hadley & McCloy; Stephen Kowitt, on the brief),
for Defendant-Appellee New York Stock Exchange,
Inc.
Wen, Gorsnat & Mances; Peter Gruensercer, JAMES
W. Quinn, Henry J. Tasuman, New York, N.Y.,
for Defendants-Appellees H. Ross Perot, Milledge
A. Hart, III, Morton H. Meyerson, PHM € Co.,
duPont Glore Forgan Incorporated.
Luce Hennessy Smita & Castite; Toomas W. Luce,
III, Roserr Powet, Dallas, Texas, for Defendants-
Appellees William K. Gayden, Marvin L. Stauffer,
Charleston Investment Co., Margot Perot.
3a
Fernsere, Circuit Judge:
This case raises significant questions regarding the inter-
play between the powers of a bankruptcy trustee and the
United States Arbitration Act, 9 U.S.C. §§ 1-14. Winthrop
J. Allegaert, bankruptcy trustee of duPont Walston Incor-
porated (Walston), appeals from two orders of the United
States District Court for the Southern District of New
York, Whitman, Knapp, J., which stay the trustee’s action
against 20 defendants and, in effect, require the trustee
to arbitrate his claims. The trustee’s complaint states
various causes of action under federal and state law aris-
ing out of the realignment in July 1973, at the alleged
instance of H. Ross Perot, of the businesses of Walston
and duPont Glore Forgan Incorporated (DGF Ine.), both
then securities brokerage firms and members of the New
York Stock Exchange, Inc. (NYSE) and the American
Stock Exchange, Inc. (Amex). Defendants in the trustee’s
suit are Perot, DGF Ine., Electronic Data Systems Cor-
poration (EDS), which is controlled by Perot, the NYSE,
several Perot associates and investment vehicles, and the
Walston directors who voted in favor of the realignment
of Walston and DGF Ine. For reasons set forth below,
we conclude that the district court erred in staying all
causes of action in the trustee’s suit. Therefore, we re-
verse the orders of the district court, vacate the stay and
allow the trustee’s suit to continue at least with respect to
most of the causes of action stated in his complaint.
I
Background
To clarify the issues on appeal, it is necessary to state in
some detail the facts as claimed by the trustee in his com-
plaint or as they appear in the limited record before us.
The trustee alleges a complex scheme to defraud Walston,
under which defendants both siphoned off Walston’s assets
to DGF Ine. and also imposed the latter’s liabilities on
4a
Walston. According to the trustee, Perot was trying to get
out of a disastrous involvement with the brokerage busi-
ness and was the mastermind behind the scheme Perot is
the founder and controlling stockholder of EDS, which
operates data processing systems for corporate customers.
In the early 1970’s, Perot invested about $70 million in, and
took control of, the brokerage firm later known as DGF Ine.
Peret had borrowed most of the money and had pledged
EDS stock as collateral, but the value of that stock de-
pended on continued income from EDS’s contract with
DGF Ine. By spring 1973, however, DGF Ine. was in bad
shape; insufficient capital had brought it to the verge of
liquidation. That event would have threatened Perot’s
entire financial empire and to avoid it, Perot came up with
the scheme (the Perot Plan) that involved Walston, in
which Perot was a minority investor.
The trustee describes the Perot Plan as a series of un-
usual transactions by which Walston would assume all
front office operations of the two firms and DGF Ine. would
assume back office operations. All of the liabilities of DGF
Inc.’s failing branch office system would be shifted to
Walston, including lease liabilities on many offices, some
already closed. Walston would pay DGF Ine.’s expenses
and make a $3 million advance on them. In addition, Perot
would exchange his non-voting preferred stock in Walston
for a new series of preferred stock with more voting rights
than all of Walston’s common stock. Thus, the Plan would
protect DGF Ine.’s capital against future loss, while Wal-
ston would assume immense liabilities.
According to the trustee, the Perot Plan was railroaded
through the Walston Board of Directors in July 1973 by a
vote of 10-9, after insufficient notice of the lengthy and com-
plex realignment agreements and at a Sunday Board meet-
ing that lasted until the early hours of Monday morning,
during which the Perot representatives made numerous
misrepresentations and omissions of material information
5a
and promises of improper benefits. The trustee also alleges
that the NYSE, because of its own interest in preserving
the capital of DGF Inc.,* concealed the conclusions of its
own staff that Walston’s capital would be completely de-
pleted in eight months if the Perot Plan were adopted.
After the Plan went into effect, Walston allegedly lost over
$30 million and was forced to liquidate its business.
Court Proceedings
In March 1974, Walston filed a petition in the United
States District Court for the Southern District of New
York under Chapter XI of the Bankruptey Act. Two
months later, Bankruptey Judge Roy Babitt adjudicated
Walston a bankrupt and Allegaert was appointed trustee.
The trustee asserts that before the realignment agreements
went into effect, Walston had an equity of more than $30
million. At the time of bankruptcy it apparently had assets
of less than $2 million and creditors’ claims of over $75
million.
Based on this sorry picture,’ the trustee brought suit in
July 1975 against defendants, alleging violations of the
Securities Act of 1933, the Securities Exchange Act of
1934, the Bankruptey Act, the Delaware General Corpora-
tion Law, the New York Business Corporation Law, the
New York General Business Law and the common law. In
October 1975, most of the defendants moved under the
United States Arbitration Act to stay the action pending
1 According to the trustee, the NYSE was interested in saving
DGF Ine. because its liquidation would have made the Exchange
Special Trust Fund liable to Perot on a $15 million note, and the
Fund lacked funds sufficient to cover that amount.
2 Appellees dispute the accuracy of the trustee’s ‘‘facts,’’ point-
ing out that many of them are mere allegations in a complaint and
have not been proved. We, of course, express no view as to whether
the trustee’s allegations, particularly those charging fraud and
wrongdoing, are correct.
6a
arbitration of the claims alleged in the complaint.’ These
defendants relied upon three arbitration clauses, each of
which was allegedly binding upon Walston and, therefore,
upon its trustee. The first two were contained in the Con-
stitution of the NYSE and the Amex and required arbitra-
tion of all controversies between exchange members and all
controversies between a member and a nonmember who
seeks arbitration of any claim arising out of the member’s
business.‘ The third arbitration clause appeared in one of
the realignment agreements and covered all disputes aris-
ing out of those agreements.’ Although the NYSE is not a
*The nonmoving defendants are four former directors of Wal-
ston: Douglas E. DeTata, John J. Doughty, D. Tipp Cullen and
Allan Blair.
* Article VIII, section 1 of the New York Stock Exchange Con-
stitution provides :
Any controversy between parties who are members, allied
members, member firms or member corporations shall, at the
instance of any such party, and any controversy between a
non-member or allied member or member firm or member cor-
poration arising out of the business of such member, allied
member, member firm or member corporation, or the dissolu-
tion of a member firm or member corporation, shall, at the
instance of such non-member, be submitted for arbitration, in
accordance with the provisions of the Constitution and the
rules of the Board of Directors.
Article VIII, Section 1 of the American Stock Exchange Con-
stitution provides:
Members, member firms, partners of member firms, member
corporations and officers of member corporations shall arbi-
trate controversies arising in connection with their business
between or among themselves or between them and their cus-
tomers as required by any customer’s agreement or, in the
absence of a written agreement, if the customer chooses to
arbitrate.
5 Article 10.11 of the Master Agreement provides:
ARBITRATION. duPont and Walston agreed to submit any
dispute arising under this Agreement and the Ancillary Agree-
ments or with respect to any of the transactions contemplated
thereby to arbitration, in accordance with the provisions of
7a
party to the agreements to arbitrate, it moved to stay the
trustee’s action on the ground that the arbitration between
the trustee and the arbitrating defendants would resolve
many of the issues affecting the NYSE and may render
moot the action against it.
In April 1976, Judge Knapp granted the motion to stay.
In a memorandum opinion,’ he reasoned that the arbitra-
tion clauses were enforceable against the trustee and there
was no persuasive reason not to do so. Although the NYSE
could not compel arbitration, its arguments as to why the
action against it should also be stayed were persuasive.
This appeal followed.
II
The trustee’s principal contentions before us are that he
is not the same entity as the bankrupt, Walston, and is
therefore not bound by the latter’s executory arbitration
contracts and that he cannot be compelled, in any event, to
arbitrate the claims arising under the Bankruptcy Act and
the securities laws. The trustee also claims that the arbi-
tration agreements would not have been enforceable even
against Walston. Finally, the trustee argues that even if
he must arbitrate his claims against some defendants, the
judge should not have stayed the action against the NYSE,
which concededly has no right to compel arbitration of the
trustee’s dispute with it. Defendants respond that a bank-
ruptey trustee enjoys no special status which exempts him
from the effect of arbitration clauses contained in non-
the Constitution of the NYSE and the Rules of the NYSE,
except that disputes under the Clearing Agreement relating
to transactions executed on an exchange other than on the
NYSE, which has in its constitution or rules provisions com-
pelling arbitration among members thereof, shall be submitted
to arbitration in accordance with the Constitution and Rules
of such other exchange.
° This was followed by a formal order and a brief supplemental
memorandum.
8a
executory contracts of the bankrupt, that the Bankruptcy
Act and securities law claims are arbitrable, that the arbi-
tration agreements were binding on Walston and the trus-
tee, and that the district court acted properly in staying
the action pending arbitration. Finally, defendants say
that even if some of the trustee’s claims are not arbitrable,
his action upon them should be stayed pending arbitration
of all the other issues.
These arguments obviously raise a number of substan-
tial questions,’ but we do not find it necessary to consider
most of them. The trustee’s position that he and the bank-
rupt are different legal entities is certainly correct. We
said precisely that in Shopmen’s Local 455 v. Kevin Steel
Products, Inc., 519 F.2d 698, 704 (2d Cir. 1975), where
we pointed out that a bankruptcy trustee is ‘‘[a] new
entity ... with its own rights and duties, subject to the
supervision of the bankruptcy court.’’ We again em-
phasized the point the following month in Brotherhood of
Railway Clerks v. REA Express, Inc., 523 F.2d 164, 167
(2d Cir.), cert. denied, 423 U.S. 1017, 1073 (1975, 1976).
We recognize that the existence of this distinction between
the bankrupt and the trustee is not necessarily dispositive.
The significance of the distinction hinges on the facts of
each situation." But the trustee’s complaint shows the
* For example, if the parties have terminated or have fully per-
formed under a contract, but have not arbitrated their dispute
as the contract’s arbitration clause provides, is the arbitration
agreement an executory contract within the meaning of section
70b of the Bankruptey Act and, therefore, rejectable by the trus-
tee? See Countryman, Executory Contracts in Bankruptcy, Parts
I and II, 57 Minn. L. Rev. 439 (1973), 58 Minn. L. Rev. 479
(1974). If not, are there instances in which a bankruptcy trustee
is bound by an arbitration clause in an executed contract of the
bankrupt?
7 For example, when the trustee affirms an executory contract
under section 70b of the Bankruptcy Act, the difference is mini-
mized ; to obtain his rights under the contract the trustee will have
9a
lack of identity to be particularly important here. Seven
counts state claims under various sections of the Bank-
ruptey Act,® and charge that the realignment scheme re-
sulted in fraudulent, preferential or post-bankruptcy trans-
fers of Walston’s assets to the Perot interests, which the
Act allows the trustee to set aside or recover for the bene-
fit of Walston’s creditors. These are statutory causes of
action belonging to the trustee, not to the bankrupt, and
the trustee asserts them for the benefit of the bankrupt’s
creditors, whose rights the trustee enforces. For example,
if there had been no federal bankruptey proceedirg and if
a creditor had independently asserted a claim under N.Y.
Debt & Cred. Law § 278 to set aside a fraudulent transfer
of assets, the creditor would not have been subject to any
arbitration agreement. Since the trustee stands in the cred-
itor’s shoes for this purpose, he too should not be com-
pelled to arbitrate these claims. See also Johnson v.
England, 356 F.2d 44, 51 (9th Cir.), cert. denied, 384 U.S.
961 (1966). Cf. Buttrey v. Merrill Lynch, Pierce, Fenner
& Smith, 410 F.2d 135 (7th Cir. 1969).
Moreover, seven counts in the complaint allege, in effect,
violations of various anti-fraud provisions of the secu-
rities laws.* In the context of this case neither these claims
nor the Bankruptcy Act claims should be arbitrable. In
American Safety Equipment Corp. v. J. P. Maguire & Co.,
to accept the entire contract, including an arbitration clause if the
contract contains one. Truck Drivers Local 807 v. Bohack Corp.,
541 F.2d 312 (2d Cir. 1976).
§ Sections 60, 67 and 70.
® Three counts allege violations of § 10(b) of the Securities Ex-
change Act of 1934 and Rule 10b-5; one count rests on Section 29
(b) of the Exchange Act to void the realignment contract; one
count charges violations of Section 17(a) of the Securities Act
of 1933; one count is grounded in Section 12(2) of the Securities
Act; and one count seeks to impose liability on controlling persons
under Section 15 of the Securities Act and Section 20(a) of the
Exchange Act.
10a
391 F.2d 821, 825 (2d Cir. 1968), we analyzed at some
length the considerations affecting whether a claim was
‘‘of a character inappropriate for enforcement by arbi-
tration.’’*® In holding that we would not there compel
arbitration of private antitrust claims on the basis of an
arbitration agreement made before the claim arose, we
examined, among other things, the public interest in the
dispute, the degree to which the nature of the evidence
made the judicial forum preferable to arbitration and the
extent to which the agreement to arbitrate was a product
of free choice. At least the first two of these criteria cut
sharply against arbitrability here. This is no mere dis-
pute between private parties with public interest over-
tones, as in American Safety. We have here a claim by
a trustee, appointed under the authority of a federal bank-
ruptey court, in connection with one of the most celebrated
brokerage house failures in the history of Wall Street.”
And the Bankruptcy Act claims are asserted on behalf
of many hundreds of creditors. Unlike an operating busi-
ness, the trustee employs no witnesses with knowledge of
the relevant facts, and he has almost none of the relevant
records. Under the Perot Plan, all ‘‘back-office’’ functions
-——accounting, record keeping, ete.—were performed by
DGF Ine., which is now also defunct. Yet the availability
of discovery in arbitration is uncertain.
The presence of the securities law claims further sup-
ports the need for a judicial tribunal here. In Greater Con-
tinental Corp. v. Schechter, 422 F.2d 1100, 1103 (2d Cir.
1970), we noted the ‘‘strong federal policy in favor of de-
termining stock fraud questions in the federal courts”’
and observed:
1° The quotation was from Wilko v. Swan, 201 F.2d 439, 444 (2d
Cir.), rev’d, 346 U.S. 427 (1953).
™ See C. Welles, The Last Days of the Club 258-66 (1975). See
also Rustin, Who Bailed Out Whom When Walston Joined With
duPont Glore Forgan?, Wall St. J., August 13 ,1973, at 1.
lla
This type of question concerning fraud within the
meaning of Rule 10b-5 is properly litigated in the
courts where a complete record is kept of the proceed-
ings and findings and conclusions are made. It was for
that reason that in both the 1933 and 1934 securities
acts Congress provided that questions arising under
those acts were not to be determined in arbitration
proceedings (but rather in the courts) even if the con-
tract between the parties contained an arbitration pro-
vision. Section 14 of the Securities Act of 1933, 15
U.S.C. § 77a, see Wilko v. Swan, 346 U.S. 427, 748. Ct.
182, 98 L. Ed. 168 (1953); section 29(a) of the Se-
eurities Exchange Act of 1934, 15 U.S.C. § 78ee. ...
Id. It is true that we have recognized a limited exception
to the policy behind Wilko v. Swan by allowing arbitration
of disputes affecting member firms of stock exchanges. See
e.g., Coenen v. R. W. Pressprich & Co., 453 F.2d 1209 (2d
Cir. 1972); Awelrod & Co. v. Kordich, Victor & Neufeld, 451
F.2d 838 (2d Cir. 1971). In Coenen, plaintiff NYSE mem-
ber was required to arbitrate his claim against another
member for conspiring to force plaintiff to sell stock at a
price held unconscionably low by refusing to allow plaintiff
to transfer the shares free of a legend stating that registra-
tion was required. In Azelrod, a NYSE member firm un-
successfully resisted arbitration of a claim against it by a
nonmember securities firm that charged breach of a stock
purchase contract. We held that in these intramural situa-
tions the Congressional intent to let the stock exchanges
regulate themselves, embodied in section 28(b) of the Ex-
change Act,” creates an exception to the Wilko rule.” But
1215 U.S.C. § 78bb provides, in pertinent part:
(b) nothing in this chapter shal] be construed to modify exist-
ing law (1) with regard to the binding effect on any member
of an exchange of any action taken by the authorities of such
exchange to settle disputes between its members. .. .
In Coenen, we also stressed that the agreement to arbitrate
12a
the exceptions to the general rule for disputes between
brokerage houses over industry matters make sense only
when limited to their facts. A claim of wholesale fraud of
institutional dimension, especially when raised by a trustee,
does not fall within the rationale of the exception. This is
more than a mere internal brokerage industry squabble; it
raises broad questions of policy which ordinarily should be
handled by the judiciary for reasons similar to those why
an antitrust claim should not ordinarily be arbitrable. See
American Safety Equipment Corp. v. J. P. Maguire & Co.,
391 F.2d 821, 825-29 (2d Cir. 1968). Cf. Merrill Lynch,
Pierce, Fenner & Smith, Inc. v. Ware, 414 U.S. 117 (19738).
Citing Scherk v. Alberto-Culver Co., 417 U.S. 506, 510 &
n.4 (1974), and Erving v. Virginia Squires Basketball
Club, 468 F.2d 1064, 1067-68 (2d Cir. 1972), appellees argue
that the trustee’s ‘‘shrill ery against arbitration’’ invites
us to return to the discredited notions of a bygone era when
courts resisted arbitration to the bitter end. We agree that
such judicial hostility to the arbitration process is, and
should remain, a thing of the past. We accept without
reluctance the ‘‘federal policy favoring arbitration,’’ Car-
cich v. Rederi a/b Nordie, 389 F.2d 692, 696 (2d Cir. 1968),
reflected in the United States Arbitration Act. But such
acceptance does not decide this case, which involves the
equally significant policies reflected in the securities acts
and the Bankruptcy Act. In such a situation, generalities
must give way to careful analysis of the different, some-
times competing, public policy interests. Thus, none of the
eases stressed so heavily by appellees controls the disposi-
tion here, since each depends on its own facts. In Fallick
v. Kehr, 369 F.2d 899 (2d Cir. 1966), we allowed an arbitra-
tor to decide in a dispute between private parties whether
a debt had been discharged in a completed bankruptcy
was made after the cause of action arose, thus distinguishing Amer-
ican Safety, and was therefore, ‘‘in effect an agreement to settle
the dispute.’’ 453 F.2d at 1215.
13a
proceeding. We did so after careful consideration of all the
factors involved, including Congressional lack of concern
over use of a non-bankruptcy court forum to decide such
issues.* In any event, we did not hold that Kehr could
force Fallick’s bankruptcy trustee to arbitrate that ques-
tion. Similarly, in. Tobin v. Plein, 301 F.2d 378 (2d Cir.
1962), and in Truck Drivers Local 807 v. Bohack Corp., 541
F.2d 312 (2d Cir. 1974), we did not force arbitration upon
an unwilling bankruptcy trustee and the trustee was not
asserting the type of claims tnade here under the securities
laws and the Bankruptcy, Act. The latter is also true of
Schilling v. Canadian Foreign Steamship Co., Lid., 190 F.
Supp. 462 (S.D.N.Y. 1961).
We conclude, therefore, that the trustee cannot be com-
pelled to arbitrate his claims under the securities laws
and the Bankruptcy Act. To_that extent, the order of the
district court staying the trustee’s action was incorrect
and should be reversed. The trustee should be allowed to
pursue at least these causes of action immediately in the
federal district court prior to any arbitration of the re-
maining claims. Cf. American Safety, supra, 391 F.2d at
828-29. Otherwise, the trustee’s efforts to preserve the
estate, of which this action is apparently the major asset,
could be prejudiced by loss of evidence or witnesses, and
by increased administrative expenses. Our decision, of
course, means the trustee’s action against the NYSE
should go forward as well since there would then be no
sufficient basis for staying it.”* Finally, since the Bank-
% We pointed out that, in order to avoid potential ‘‘abuse by
unscrupulous creditors,’’ Congress might want to amend the Bank-
ruptey Act. 369 F.2d at 905. Congress thereafter did so. 11 U.S.C.
§ 35(e) (1970).
1° The NYSE argues that the order of the district court as to it
is not appealable and should not be considered by us. This is tech-
nically true, but we note that in light of the result here, a refusal
by the district court to reconsider and reverse its order would be
an abuse of discretion.
l4a
ruptey Act and securities law claims involve so many of
the basic factual and legal issues underlying the trustee’s
remaining claims, resolution of the former may make it
unnecessary or inappropriate to proceed with the latter
in any forum. Under the circumstances, no arbitration
should be permitted at this time.
Judgment reversed and case remanded for proceedings
consistent with this opinion.”
16 On this disposition, we see no need to consider and resolve the
other objections to arbitration raised by the trustee. |
15a
APPENDIX B
Opinion and Orders of the District Court
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
75 Civ. 3214
Winturop J. ALLEGAERT,
as Trustee of duPont Walston Incorporated,
Plaintiff,
—against—
H. Ross Perot, Evecrronic Dara Systems Corporation,
duPont Gtore Forcan Incorporatep, Wim K.
Gaypen, Morton H. Meyerson, Mutepce A. Hart, IIT,
Marcot Perrot, Mervin L. Staurrern, PHM & Co.,
CuarLeston InvestMENT Company, E. D. Systems Cor-
PORATION, New York Stock Excuanasg, Inc., Dantew J.
Cuuten, WriuiaM D. Fiemrne, Grorce T. THomson and
CHarLes W. Cox, Dovetas E. DeTata, Jonny J.
Dovenuty, ALLAN Bua, and D. Tree CuL.en,
Defendants.
Memorandum and Order
(Microfilm April 15, 1976)
APPEARANCES:
Hvueues Husparp & Reep
Attorneys for Plaintiff
One Wall Street
New York, New York 10005
By: Grorce A. Davinson, Esg.,
Of Counsel
l6a
Miupanr, Tweep, Haptey & McCoy
Attorneys for Defendant, The New York
Stock Exchange, Inc.
1 Chase Manhattan Plaza
New York, New York 10005
By: Russexu E. Brooks, Esq.,
SterHen Kowrrt, Esq.,
Of Counsel
Wen, Gorsoat & Mances
Attorneys for H. Ross Perot; Milledge A. Hart, ITI;
Morton H. Meyerson; PHM & Co.; duPont Glore
Forgan Incorporated
767 Fifth Avenue
New York, New York 10022
By: Perrr GruensBercer, Esq.,
James W. Quinn, Esq.,
Henry J. Tasuman, Esq.,
Of Counsel
Leva, Hawes, Symineton, Martin & OppENHEIMER
Attorneys for E. D. Systems Corp.; Electronic Data
Systems Corp.
815 Connecticut Avenue, N.W.
Washington, D.C. 20006
By: Ricuarp P. SxHiakman, Esq.,
Anprew WEIssMAN, Esq.,
Of Counsel
GuGGENHEIMER & UNTERMEYER
Attorneys for Daniel J. Cullen; William D. Fleming;
Charles W. Cox; George T. Thomson
80 Pine Street
New York, New York 10005
By: Haroxtp Barr, Jr., Esq.,
SamvueE.t Koentcssere, Esq.,
Of Counsel
17a
Lea, Gotpsere & Speiiun, P.C.
Attorneys for D. Tipp Cullen
120 Broadway
New York, New York 10005
By: Loxa 8S. Lega, Esg.,
Of Counsel
Luce Hennessy SmitrH & Caste
Attorneys for William K. Gayden; Mervin L. Stauffer;
Charleston Investment Co.; Margot Perot
3012 Fairmount
Dallas, Texas 75201
By: Tuomas W. Lvcz, III, Esq.,
Rosert PowE.1, Esq.,
Of Counsel
Carter, Lepyarp & MinpurN
Attorneys for Allan Blair; Douglas E. DeTata;
John J. Doughty
2 Wall Street, New York, New York 10005
Knapp, D.J.
Sixteen of the twenty defendants’ (hereinafter referred
to as the ‘‘Perot’’ group) in this complex securities
action growing out of the bankruptcy of the securities
brokerage firm of duPont Walston Inc. (‘‘Walston’’)
have moved pursuant to the federal Arbitration Act (9
U.S.C. §3) for an order staying all proceedings herein
pending arbitration as allegedly required by the constitu-
tions of the New York and American Stock Exchanges
and other agreements between the parties. The defendant
New York Stock Exchange has also moved to stay the
action as to it and to compel -arbitration. The plaintiff
trustee in bankruptcy opposes these motions on a num-
ber of grounds, none of which are persuasive and the
motions are, accordingly, granted.
1The only defendants who have not joined in this motion are
Douglas DeTata, John Doughty, Allan Blair and D. Tipp Cullen.
18a
FactuaL BackGRouND
This action was commenced on July 1, 1975 by the
Trustee * against 20 defendants, including 14 individuals,
5 corporations (including the New York Stock Exchange)
and 1 partnership, asserting claims under federal and state
securities laws, state statutory and common laws, and the
federal bankruptcy statute. All of these claims arise out
of and result from the July 2, 1973 realignment of the
businesses of Walston and defendant duPont Glore For-
gan Ine. (‘‘DGF’’), both of whom were member corpora-
tions of the New York and American Stock Exchanges
(‘“‘NYSE”’ and ‘‘Amex’’, respectively). The realignment—
whereby Walston assumed all front office operations of
the two firms and DGF assumed all of the back office fune-
tions—was effected by means of a series of Realignment
Agreements, instigated by the defendant H. Ross Perot,
who had invested heavily in DGF and was a minority
shareholder in Walston. The remaining defendants in this
action are: PHM & Co., which owns the majority of the
stock of DGF;; the following partners of PHM & Co.: Mil-
ledge A. Hart, III and Morton H. Meyerson; the follow-
ing directors of Walston who voted for the realignment:
Daniel J. Cullen, William D. Fleming, George T. Thomson,
Charles W. Cox, Douglas E. DeTata, John J. Doughty,
Allan Blair; D. T. Cullen, William K. Gayden and Mervin
L. Stauffer; Charleston Investment Co., which had a $15
million investment in Walston; Margot Perot, who owned
the common stock of Charleston; Electronic Data Systems
Corp., a computer company owned by Perot which had a
data processing contract with DGF; E. D. Systems Corp.,
a subsidiary of Electronic Data Systems, which had a data
processing contract with Walston; and the NYSE, of which
Walston and DGF were member corporations—as were
most of the other defendants as well—and which approved
the realignment.
? Walston was declared a bankrupt on May 29, 1974.
19a
The essence of the complaint can be distilled into three
categories of claims against these defendants: a) that they
conspired to mislead Walston into approving the realign-
ment transaction and executing the Realignment Agree-
ments; b) that DGF breached said Agreements; and c)
that certain defendants misappropriated Walston’s assets
in effectuating the realignment, leading to Walston’s fi-
nancial collapse and eventual demise. The Trustee seeks
compensatory damages of not less than $45 million, as well
as punitive damages against certain of the defendants.
By the present motion, the Perot defendants seek to
compel the Trustee to arbitrate his claims against them
in the first instance. They point to three sources upon
which they assert a right to arbitrate:
(1) Two separate provisions in the NYSE and Amex
constitutions, both of which mandate arbitration
of controversies between present and former
members or allied members—Walston and 12 of
the defendants so qualify (NYSE Constitution,
Art. VIII, § 1; Amex Constitution, Art. VIII, § 1).
(2) The NYSE constitution provision granting the
defendants who are non-members the right to
compel Walston to arbitrate all claims against
them rising out of the business or dissolution of
Walston—7 defendants qualify under this pro-
vision (NYSE Constitution, Article VIII, Section
1).
(3) The additional arbitration clause in the Realign-
ment Agreements requiring arbitration of dis-
putes involving the Rvalignment Agreements or
the transaction contemplated by the Realignment
Agreements (Article 10.11 of Master Agreement
to Realignment Agreements).
The NYSE itself, although concededly not entitled as of
right to compel arbitration of the claims against it, also
20a
seeks to stay the action as to it on the grounds that an
arbitration would resolve many of the issues in the action
and may even render it moot, and that failure to stay the
action as to it would result in duplicative effort and create
the possibility of inconsisient results.
The Trustee opposes the Perot motion to compel arbi-
tration on essentially four grounds:
I. Having rejected all contracts containing arbitra-
tion clauses pursuant to § 70(b) of the Bankruptcy
a the Trustee is relieved of any duty to arbi-
rate.
II. The arbitration clauses in the Exchange constitu-
pay and the Master Agreement are unenforce-
able.
III. A stay cannot be granted because the complaint
contains numerous non-arbitrable claims under the
federal securities and bankruptcy laws.
IV. Any right to arbitrate has been waived.
With respect to the NYSE motion, the Trustee argues that
the Exchange has not made the requisite showing of hard-
ship or inequity and that a stay would severely prejudice
the estate.
Because of the multiplicity of grounds alleged, this
opinion will treat each separately, in the order mentioned
above.
Perot Motion
I. Whether the Trustee’s rejection of all executory Wal-
ston contracts pursuant to §70(b) of the Bankruptcy
9 relieves it of any duty to arbitrate enunciated
therein.
The constitutions of both the NYSE* and the Amex‘
contain explicit provisions mandating arbitration of any
® Article VIII, Section 1 of the NYSE Constitution provides:
‘*Any controversy between parties who are members, allied
‘ 2la
and all controversies between parties who are members,
allied members, member firms and member corporations
arising out of their business if any party should so elect.
Exchange members automatically become bound by these
provisions—incorporated in the respective constitutions
pursuant to the self-regulatory duties imposed upon the
exchanges by § 6 of the 1934 Act—upon cntering into stock
exchange membership. The cases are unanimous in hold-
ing that NYSE and Amex members, member corporations
and allied members are bound by the arbitration provis-
ions, regardless of the subject matter or source of the dis-
pute. Coenen v. R. W. Pressprich & Co., Inc. (2d Cir.
1972) 453 F.2d 1209, 1211; In Re Revenue Properties Lati-
gation Cases (Ast Cir. 1971) 451 F.2d 310, 313, Legg, Mason
& Company v. Mackall & Coe, Inc. (D. D.C. 1972) 351 F.
Supp. 1367, 1371, Isaacson v. Hayden, Stone, Inc. (S.D.
N.Y. 1970) 319 F.Supp. 929, 930, Brown v. Gilligan, Will &
Co. (S.D. N.Y. 1968) 287 F. Supp. 766, 769-70. See also,
Ghiron v. Mayer (1st Dept. 1963) 241 N.Y.S. 2d 144, 19
App. Div. 2d 54, Osborne & Thurlow v. Hirsch & Co. (Sup.
Ct. N.Y. Co. 1958) 172 N.Y.S. 2d 522, 10 Mise. 2d 225. Ac-
cord, two unreported decisions involving DGF Inc. and the
members, member firms or member corporations shall, at the
instance of any such party, and any controversy between a
non-member and a member or allied member or member firm
or member corporation arising out of the business of such
member, allied member, member firm or member corporation,
or the dissolution of a member firm or member corporation,
shall, at the instance of such non-member, be submitted for
arbitration, in accordance with the provisions of the constitu-
tion and the rules of the Board of Directors.’’ (Emphasis sup
plied)
* Article VIII, Section 1 of the Amex Constitution provides:
‘*Members, member firms, partners of member firms, member
corporations and officers of member corporations shall arbi-
trate all controversies arising in connection with their busi-
ness between or among themselves or between them and their
customers as required by any customer’s agreement or, in the
absence of a written agreement, if the customer chooses to
arbitrate.’’ (Emphasis supplied)
22a
very same arbitration provisions, Hirsch v. F. I. duPont,
Glore Forgan & Co., Index No. 11514/72 (Sup. Ct. N.Y.
Co. 2/1/74) and Fraiman v. F. I. duPont, Glore Forgan &
Co., Index No. 23712/72 (Sup. Ct. N.Y. Co. 3/15/73). The
rationale for this rule is that § 6 of the 1934 Act, 15 U.S.C.
§ 78f ‘‘gave securities exchanges extensive powers of self-
regulation, imposing the responsibility for enforcement of
the rules upon the exchanges themselves’’. Legg, Mason &
Co., Inc. v. Mackall & Coe, Inc. (D. D.C. 1972) 351 F.Supp.
1367, 1371. Furthermore, as noted by the Second Circuit in
Coenen, supra, at 1212,
‘‘The purpose behind the drafting of such a broad
arbitration clause was, as much as possible, to keep
disputes between members out of the courts’’.
In addition to the constitutional provisions discussed
above, the Realignment Agreements—which are central to
all of the Trustee’s claims—contain an express arbitra-
tion clause providing for the arbitration of any and all
disputes arising under the Agreements.°
Notwithstanding the existence of these three arbitration
clauses, nor their concededly general applicability to the
parties at hand,° plaintiff nevertheless contends that he is
5 Article 10.11 of the Master Agreement provides as follows:
** Arbitration. duPont and Walston agreed te submit any dis-
pute arising under this Agreement and the Ancillary Agree-
ments [which together are the Realignment Agreements] or
with respect to any of the transactions contemplated thereby
to arbitration, in accordance with the provisions of the Con-
stitution of the NYSE and the Rules of the NYSE, except
that disputes under the Clearing Agreement relating to trans-
actions exeeuted on an exchange other than on the NYSE,
which has in its constitution or rules provisions compelling
arbitration among members thereof, shall be submitted to ar-
bitration in accordance with the Constitution and Rules of
such other exchange.”’
* During the period covered by the complaint herein :
(a) Walston was a member corporation of both the NYSE
and the Amex; ;
——ooe ee te
23a
relieved of any duty to arbitrate by virtue of his special
status as a trustee in bankruptcy. More specifically, under
the power conferred on him by § 70[b] of the Bankruptcy
Act, 11 U.S.C. §110(b), to reject executory contracts of
the bankrupt, the Trustee claims to have rejected all of the
Walston ‘‘contracts’’ on which the defendants rely, there-
by relieving himself of any duty to arbitrate defined
therein. The weakness in such a position is that it rests
on a false assumption: namely, that the various arbitra-
tion clauses constitute ‘‘executory contracts’’. Under none
of these contracts was there any benefit or asset left for
the Trustee to relinquish, nor any performance left to be
completed, at the time of the bankrupt’s adjudication. On
March 11, 1974—16 days prior to filing its petition under
Chapter XI and 79 days prior to its adjudication as a
bankrupt—Walston gave notice to the NYSE and Amex
that it was terminating its memberships. By May, 1974—
(b) DGF Inc. was a member corporation of both the NYSE
and the Amex;
(ec) Defendants Meyerson, D. J. Cullen, Fleming, Thomson,
Cox, DeTata, Doughty, Blair and D. T. Cullen were allied
members of both the NYSE and the Amex ;
(d) Defendant Hart was an allied member of the NYSE; and
(e) Defendant Stauffer was an allied member of the Amex.
The 7 non-member defendants (PHM & Co., H. Ross Perot, Wil-
liam Gayden, Margot Perot, Electronic Data Systems Corp., E. D.
Systems Corp. and Charleston Investment Co.) are also entitled at
their election pursuant to Article VIII of the NYSE constitution
to compel arbitration by virtue of the fact that the complaint here-
in states a ‘‘controversy between a non-member and a member cor-
poration [Walston] . . . arising out of the business of such...
member corporation . . .’’ Azelrod & Co. v. Kordich, Victor &
Neufeld (2d Cir. 1971) 451 F.2d 838, 841.
Nor does termination of an exchange membership end the duty
to arbitrate controversies predicated upon business relationships
between parties who were exchange members at the time the obli-
gation was created. Isaacson v. Hayden Stone, Inc. (S.D.N.Y. 1970)
319 F.Supp. 929.
24a
the time of its adjudication—Walston had ceased doing
any business under the rules of any exchange. Accordingly,
under the ‘‘contracts’’ contained in the NYSE and Amex
constitutions, there was no benefit or asset left for Wal-
ston or the Trustee to assume or reject, and no perforin-
ance in futuro was required or expected of Walston or the
Trustee. Once a contract has either been terminated or
materially breached prior to adjudication in bankruptcy,
the contract ceases to be executory for purposes of Sec-
tion 70b. Tobin v. Plein (2d Cir. 1962) 301 F.2d 378, 381;
Crittenden v. Iines (9th Cir. 1964) 327 F.2d 537, 542-543.
Nor can the inclusion in an otherwise nonexecutory con-
tract of an agreement to arbitrate that extends into the
future render such contract executory. Jd. An agreement
to arbitrate does not create an obligation to perform in
futuro, but rather, constitutes merely an acknowledgment
that should one elect to sue, one consents to confine the
dispute to a particular forum ox -orm of proceeding.’
The same considerations apply with equal force to the
arbitration clause in the Realignment Agreements, which
by their own terms are written memoranda of a sequence
of events and agreements already completed. Walston no
longer had any obligation to perform im futuro thereun-
der, particularly in light of the fact that its entire business
had disappeared long before adjudication. More impor-
tantly, the Trustee has in point of fact not rejected said
Agreements; witness Counts XV and XVI of the com-
plaint, which seek recovery on DGF'’s alleged failure to
perform its obligations under the Agreements.
The cases cited by the Trustee in support of his posi-
tion that he has the power to reject contracts requiring
arbitration are inapposite, for they all involved contracts
which were concededly executory. Equally significant is
7 Despite the non-executory nature of the contracts here involved,
the duty to arbitrate survives their completion, termination or
breach. Isaacson v. Hayden Stone, Inc , supra, at 930.
25a
the fact that in each instance, a creditor was seeking to
enforce rights against a bankrupt’s estate through arbi-
tration, and thereby creating the potential of a distribution
preference as against other creditors—a situation which
the courts are understandably anxious to avoid. The un-
derlying rationale of each court’s decision to ignore the
arbitration clause was that exclusive jurisdiction over
claims agaist the bankrupt—not by the bankrupt, as in
the instant case—must lie in one forum—the bankruptcy
court—in order to assure the statutory goal of non-prefer-
ential distribution to all of the bankrupt’s valid creditors.
Thus, in those instances where the trustee in bankruptcy
has been a plaintiff rather than a defendant, the courts
have held that arbitration is appropriate. Tobin v. Plein,
supra, Schilling v. Canadian Foreign Steamship Co. (S.D.
N.Y. 1961) 190 F.Supp. 462. This is consistent with the
‘‘overriding federal policy favoring arbitration’’ [Carcich
v. Rederei, a/b Nordie (2d Cir. 1968) 389 F.2d 692, 696]
not simply in general commercial litigation, but in bank-
ruptey matters as well. Faliick v. Kehr (2d Cir. 1966) 369
F.2d 899, 903-4; General Order in Bankruptcy 33, In the
Matter of Blair d Co. (Cahn), 70 B 755 (S.D.N.Y. 5/12/72)
(Babitt, J. at p. 5), aff’d, by Brieant, J., 9/6/72.
II. Whether the Three Arbitration Provisions are
Enforceable
A. Disqualification of Forums
The Trustee seeks to avoid enforcement of the 3 arbi-
tration clauses on the alternative ground that the specific
forums selected—the NYSE and the Amex, respectively
—are disqualified to serve as forums by reason of their
alleged involvement with the instant case. The NYSE is
a named defendant, charged with making false statements
of material fact in violation of 4 10b of the 1934 Act and
of knowingly permitting a fraudulent scheme to be imposed
upon Walston in violation of its self-regulatory duties
26a
under § 6 of the 1934 Act. Since the defendants have agreed
that, under such circumstances, any arbitration in this case
‘*should not be held under NYSE auspices’’,® in order to
‘‘avoid even the appearance of bias’’,’ we shall not discuss
the matter further except to say that we concur.
Unlike the NYSE, however, Amex has not been named
as a party defendant. Nevertheless, the Trustee somewhat
belatedly argues that the Amex would be in an ‘‘awkward’’
position if it were to hear and decide the claims in this
case, since it too reviewed and approved the subject Re-
alignment Agreements. The Trustee’s failure to sue the
Amex undermines this argument; if he genuinely thought
or even suspected that he had a claim against the Amex,
he would be derelict in his duty and potentially liable on
his bond not to name it as a party defendant. Conse-
quently, the Court is not persuaded by this belated claim
of bias. Klebanow v. Ira Haupt & Co. (Sup. Ct., N.Y. Co.
1964) (Index No. 1105/64) (unreported). Even if we were,
however, Article VIII, Section 2(c) of the Amex constitu-
tion provides for the alternative forum of the American
Arbitration Association, as to which neither party can
make any claims of bias.*® Moreover, in light of the man-
datory language of Section 5 of the Arbitration Act, 9
U.S.C. § 5," empowering the court to itself appoint an
: See Memorandum in Support of defendants’ Motion for Stay
of Action Pending Required Arbitration, p. 18.
®* Commonwealth Coatings Corp. v. Continental Casualty (1968)
393 U.S, 145, 150,
1 Furthermore, this provision for an alternative forum belies
the Trustee’s unsupported contention that the identity of the orig-
inal arbitration tribunal (NYSE or Amex) was so central to the
agreement to arbitrate that its unavailability destroys the obliga-
tion to arbitrate in its entirety.
u«é”.. upon the application of either party to the controversy
the court shall designate and appoint an arbitrator . . . who shall
act under the said agreement with the same force and effect as if
27a
arbitrator, federal courts have consistently held that ar-
bitration should not be denied ‘‘on the ground of impos-
sibility of following the procedure for designating the
arbitrator’’. Hawaii Teamsters and Workers, Local 996 v.
Honolulu Rapid Transit Co. (D. Hawaii, 1972) 343 F.Supp.
419, 425. See also Bethlehem Mines Corp. v. United Mine
Workers of America (3d Cir. 1974) 494 F.2d 723, Erving
vy. Virginia Squires Basketball Club (2d Cir. 1972) 468
F.2d 1064, 1067-8.
B. Arbitration Clause in Master Agreement was never
agreed to by Walston
The Trustee lists four reasons (all of which are also
alleged in the complaint) why, in his opinion, Walston
never agreed to the terms of the Realignment Agreements,
including the arbitration clause. The truth or falsity of
these claims—which are essentially of fraud in the induce-
ment of the contract rather than of the arbitration clause
—is a question to be resolved by the arbitrator, not the
Court. Prima Paint Corp. v. Flood & Conklin Mfg. Co.
(1967) 388 U.S. 395, 403; Robert Lawrence Co. v. Devon-
shire Fabrics, Inc. (2d Cir. 1959) 271 F.2d 402, cert.
granted, 362 U.S. 909, dism’d under R.60, 364 U.S. 801.
Recognizing this rule of law, the Trustee mounts a sec-
ond and more specific attack by also claiming fraud in the
inducement of the arbitration clause itself (which claim
would ordinarily be cognizable in a judicial forum), in
that had Walston known in advance of the NYSE’s alleged
financial interest in the salvage of DGF, it would never
have agreed to arbitrate disputes arising out of the re-
alignment in the forum of the NYSE. This argument,
however, misses the mark, for the arbitration clause in
question does not designate the NYSE as the exclusive
he or they had been specifically named therein. . . .’’ (emphasis
supplied )
28a
forum for arbitration. Even a cursory reading of $10.11”
reveals that the parties intended not to limit arbitration
to the NYSE, but rather to arbitrate all of their disputes
regardless of the forum. Thus, there is a reference therein
to possible arbitration on national securities exchanges
other than the NYSE.
III. Whether the various claims in the complaint are
arbitrable
A. Bankruptcy Act Claims
The Trustee’s contention that he cannot be required to
arbitrate the six counts in his complaint which seek pur-
suant to § 70[e] to recover fraudulent transfers and the one
count which seeks, pursuant to § 60[b], to recover voidable
preferences is unsupported by the cases* or considera-
tions of public policy. We agree with the defendants that
he has confused a statutorily created right—namely the
right of a trustee to realize assets for the estate—with the
issue of the forum in which those rights are to be asserted.
Simply because he has the power to recover fraudulent
transfers and voidable preferences does not mean that he
ean bar the defendants’ right to compel arbitration. It is
the rule in this Circuit that a trustee in bankruptcy can
be compelled to arbitrate claims. See, e.g., Tobin v. Plein
(1962) 301 F.2d 378; Schilling v. Canadian Foreign S.S.
Co. (S.D.N.Y. 1961) 190 F.Supp. 462. As Judge Feinberg
noted in Fallick v. Kehr (2d Cir. 1966) 369 F.2d 899, 904,
there is ‘‘nothing in the [Bankruptcy] Act that grants
the bankrupt an absolute right to a choice of forum.. .’’
Indeed, the Act itself has a section dealing with arbitra-
12 See n. 5, above.
18 The cases cited by the Trustee are inapposite, for they all arose
under a specific statutory scheme expressing an absolute and un-
qualified right to have rights arising thereunder adjudicated ex-
clusively by a court of law. No such policy is evidenced in the
Bankruptcy Act and the law in this Circuit concerning bankruptcy
matters is to the contrary. ;
29a
tion of controversies ‘‘arising in the settlement of the
estate’’, 11 U.S.C. § 49, which, as the Court noted, ‘‘evinces
a receptivity to arbitration’’. Id. Moreover, the provision
in the NYSE constitution for the arbitration of contro-
versies arising out of the ‘‘dissolution’’ of a member cor-
poration is a clear indication of an express intent to arbi-
trate questions which might arise under the Bankruptcy
Act.
The only argument the Trustee can muster in support
of his rather vague contention that arbitration would be
counter to ‘‘public policy’’ is his fear that somehow an
arbitration tribunal would be ‘‘friendly’’ to the defend-
ants. There is no evidence in the record to substantiate
such a fear and the Second Circuit rejected this very argu-
ment in Fallick, at 904.
B. Securities Laws Claims
In an effort to avoid this rule in this Cireuit—first an-
nounced in Brown v. Gilligan, Will € Co. (S.D.N.Y. 1968)
287 F.Supp. 766—that arbitration of securities ‘aws claims
is appropriate in suits against stock exchange members,
the Trustee urges us to apply instead the rule first an-
nounced in Wilko v. Swan (1953) 346 U.S. 427 that cus-
tomers and investors may not be compelled to arbitrate
such claims. This we decline to do, in the fact of the strong
authority in this Circuit to the contrary * and the policy
considerations underlying the distinction between broker-
dealers on the one hand and investors and customers on
the other. As Judge Cooper concluded in Brown, supra,
the Congressional intent to encourage stock exchange
‘*self-regulation’’ of the business conduct of its broker-
14 See also Coenen v. R. W. Pressprich & Co., Inc., supra; Arel-
rod & Co. v. Kordich, Victor & Neufeld, supra; Rust v. Drerel
Firestone Inc. (S.D.N.Y. 1972) 352 F.Supp. 715; Legg, Mason &
Co. v. Mackall & Coe, Inc., supra; Reich & Co. v. Imperial Invest-
ment Corp. (S.D.N.Y. 1972) CCH Fed. Sec. Rep. § 93,437 (not
officially reported).
30a
dealers justifies arbitration of securities law disputes be-
tween exchange members. Unlike suits involving custom-
ers, there is no statutory anti-waiver provision [15 U.S.C.
§ 78ee(a)] rendering void agreements to arbitrate between
broker-dealers. Whereas the 1933 and 1934 Acts were
specfically intended to protect investors, any protection
afforded to broker-dealers is merely incidental. Brown v.
Gilligan, Will & Co., supra, at 771-2. One of the primary
policy justifications reflected in the Wilko rule voiding
arbitration agreements binding customers was to prevent
a broker-dealer from taking advantage of the inferior
bargaining position of its customers. Such a consideration
is absent when arbitration is sought, as here, against a
broker-dealer pursuant to an exchange rule. Azelrod &
Co. v. Kordich, Victor & Neufeld, supra. Moreover, whereas
the Wilko rule derives from two statutory non-waiver pro-
visions—15 U.S.C. §§77n and 78ece(a)—the Brown rule
favoring arbitration as between exchange members derives
from a specific statutory exception to the non-waiver pro-
visions, § 28b of the 1934 Act, 15 U.S.C. § 78bb(b). Brown
v. Gilligan, Will & Co., supra, at 774-5. Finally, the Trus-
tee’s argument that the policies requiring an exchange
member to submit to arbitration are inapplicable where
the party resisting arbitration has resigned its member-
ship or is in bankruptcy is specifically contradicted by the
cases compelling former exchange members to submit to
arbitration. /saacson v. Hayden Stone, Inc., supra, at 930;
Osborne & Thurlow v. Hirsch & Co., supra; Cf., Ayres v.
Merrill, Lynch, Pierce, Fenner & Smith, Inc. (E.D. Pa.
1973) 353 F.Supp. 1084.
IV. Whether the defendants have waived their right to
arbitrate
In January 1974, Nella A. Walston, a major sharehold-
er of Walston and the widow of Walston’s founder, com-
menced a shareholder’s derivative action in New York
3la
Supreme Court against 16° of the 20 defendants named
in the present case (Walston v. duPont Glore Forgan, In-
dex No. 625/74). The complaint, which is only 10 para-
graphs long, seeks equitable relief only for alleged viola-
tions of state corporate fiduciary laws. Nowhere does it
mention the many violations of state and federal securi-
ties laws, federal bankruptcy laws and state statutory and
common law upon which the instant complaint seeking
damages is based, although it does question the basic
fairness of the realignment, as does the instant complaint.
All of the defendants named in the state action answered
on the merits, and four of them filed third-party counter-
claims on grounds different from the issues raised either
in the instant action or the Walston complaint, During
the eleven month period prior to suspension of discovery
in the state action in December, 1974, the defendants never
sought arbitration.
On the basis of the foregoing, the Trustee contends
that the present movants have waived whatever right to
arbitration they may have had. In order to establish a
waiver—a finding which is not lightly made in view of the
overriding federal policy favoring arbitration **“—the party
opposing arbitration must show (a) undue delay by the
party seeking arbitration, plus (b) inconsistent action by
the latter resulting in (c) substantial prejudice to the for-
mer. Weight Watchers of Quebec, Lid. v. Weight Watch-
ers International, Inc. (E.D.N.Y. 1975) 398 F.Supp. 1057,
1059, and cases there cited, at n.5. Plaintiff’s failure to
establish any one, much less all, of these tests precludes
a finding of waiver. The moving defendants have sought
to arbitrate here at the earliest available opportunity: at
the time they were required to answer or move against
the complaint.” There has been no discovery to date and
15 Eleven of whom are movants herein.
16 Carcich v. Rederei A/B Nordie, supra, at 696.
17 Several stipulations extending the defendants’ time to answer
32a
no motion practice other than the instant motions to stay
the proceeding and compel arbitration. Plaintiff has made
no effort to show any resultant prejudice, let alone ‘‘sub-
stantial’’ prejudice from the failure of some of the de-
fendants to demand arbitration in the state court proceed-
ing. Nor can the failure to demand arbitration in the state
case be imputed to the defendants herein, for even ex-
tensive participation in the same case, absent a clear show-
ing of substantial prejudice, will not be deemed a waiver.
Carcich v. Rederei A/B Novdie, supra, at 696.%° No dis-
or move were entered into by counsel, but they do not rise to the
level of a waiver. Macchiavelli v. Shearson Hammill & Co., Inc.
(E.D. Calif. 1974) 384 F.Supp. 21, 26.
8 As the court there observed,
**Yet the law is clear that such participation, standing alone,
does not constitute a waiver, Chatham Shipping Co. v. Fertex
Steamship Corp., 352 F.2d 291, 293 (2d Cir. 1965) (filing
complaint not waiver); Reynolds Jamaica Mines, Ltd. v. La
Societe Navale Caennaise, 239 F.2d 689 (4th Cir. 1956) (as-
serting counterclaim not waiver); Rootes Motors, Inc. v. SS
Carina, 1964 A.M.C. 2754 (S.D.N.Y. 1964) (filing answer
without mentioning arbitration not waiver), for there is an
overriding federal policy favoring arbitration. Waiver, there-
fore, is not to be lightly inferred, and mere delay in seeking
a stay of the proceedings without some resultant prejudice to
a party, Kulukundis, supra, cannot carry the day.’’ (empha-
sis supplied and footnotes omitted )
The court in Hiltie, Inc. v. Oldach (1st Cir. 1968) 392 F.2d 368,
relying on the identical rule, recited numerous examples of exten-
sive participation in cases where claims of waiver were rejected:
“‘The cases demonstrate with marked consistency the reluc-
tance of courts to find default despite substantial delay and
intervening proceedings. Robert Lawrence Co. v. Devonshire
Fabrics, Inc. (2d Cir. 1959) 271 F.2d 402, cert. granted, 362
U.S. 909, dismissed under Rule 60, 364 U.S. 801 (1960) (9
month delay; interim settlement discussions; disputed goods
tested ; held no default) ; Almacenes Fernandez, 8.A. v. Golo-
detz (2d Cir. 1945) 148 F.2d 625 (6 month delay; 7 third
party defendants joined ; held: no default) ; Kulukundis Ship-
ping Co.-v. Amtorg Trading Corp. (2d Cir. 1942) 126 F.2d
978 (9 month delay; answer amended two months before trial
to assert right to arbitration ; ‘no important intervening steps
33a
covery was taken in the state case by or addressed to the
defendants in that case who are the moving parties on this
motion. The merits of that case were never litigated and
the case has been dormant for over one and one-half years.
Given the above circumstances, we decline to find that
the movants have waived their right to arbitration.
NYSE Morton
Although the NYSE is admittedly not a party to the
three arbitration agreements successfully invoked by the
Perot group, it nevertheless has persuaded us that the
action as to it must be stayed as well so as to avoid dupli-
cative effort, the possibility of inconsistent results and
the potential for unnecessary waste of the estate’s limited
assets. If the Exchange is correct that the arbitration will
resolve many of the issues raised by this action, proceed-
ing with the action while arbitration is pending would
constitute waste of the estate and of judicial time as well.
On the other hand, if the Exchange is wrong in that re-
gard, nothing will have been lost. In the event that the
passage of time under a stay might prejudice the estate—
as in the loss of evidence—the Court could, upon a proper
showing of necessity, condition its stay to permit selective
discovery to go forward.”
... taken’; held: no default) ; Lumbermen’s Mut. Cas. Co. v.
Borden Co. (S.D.N.Y. 1967) 268 F.Supp. 303 (motion for stay
of proceedings delayed two years; no direct dispute between
plaintiff and movant until some 21 months after suit initiated ;
answer never filed; discovery initiated by plaintiff; held: no
default).’’ (392 F.2d at 372, fn. 9).
1 Indeed, such a procedure has already been adapted in the case
with respect to an elderly and sick non-party witness residing in
Florida.
34a
ConcLusion
The motion for a stay and to compe! arbitration, filed
by the Perot group is granted. So as to avoid even the
appearance of bias which designation of the Amex might
engender, the parties are directed to agree among them-
selves upon the appropriate arbitration tribunal, in de-
fault of which, the Court will, in accordance with the spirit
of the Amex constitution, designate the American Arbi-
tration Association. The motion of the NYSE to stay the
proceeding as to it pending arbitration is also granted. In
the exercise of the Court’s inherent power to control its
own docket, the action is stayed as to the four non-moving
defendants as well.
Settle order on notice,
So OnpERzp.
Dated: New York, New York
April 12, 1976.
/s/ Whitman Knapp
Waurirman Knapp, U.S.D.J.
35a
75 Civ. 3214
CapTion OMITTED IN PRINTING
(Fitzep May 6, 1976)
Counter-Order
A motion having been made by the defendants H. Ross
Perot, Electronic Data Systems Corporation, duPont
Glore Forgan Incorporated, William K. Gayden, Morton
H. Meyerson, Milledge A. Hart, III, Margot Perot, Mer-
vin L. Stauffer, PHM & Co., Charleston Investment Com-
pany, E. D. Systems Corporation, Daniel J. Cullen, Wil-
liam D. Fleming, George T. Thomson and Charles W. Cox,
for an order pursuant to 9 U.S.C. §3 staying the trial of
the action until arbitration of the claims asserted against
them in the action has been had, and a motion having been
made by the defendant New York Stock Exchange, Inc.
(the ‘‘Exchange’’), for an order pursuant to the inherent
powers of the court to control its docket that the trial of
the action be stayed as to it until arbitration of the claims
asserted against the above moving defendants has been
had; briefs and affidavits having been exchanged and filed;
oral argument having been had; the Court having duly de-
liberated and having issued its opinion and order filed
April 14, 1976:
It is hereby Orperep as follows:
1. The motion of the defendants H. Ross Perot, Elec-
tronic Data Systems Corporation, duPont Glore Forgan
Incorporated, William K. Gayden, Morton H. Meyerson,
Milledge A. Hart, III, Margot Perot, Mervin L. Stauffer,
PHM & Co., Charleston Investment Company, E. D. Sys-
tems Corporation, Daniel J. Cullen, William D. Fleming,
George T. Thomson and Charles W. Cox that the trial of
this action be stayed until arbitration of the claims as-
serted against them has been had is granted, provided,
36a
however, that plaintiff may apply to the court for permis-
sion to use the pretrial discovery procedures of the Fed-
eral Rules of Civil Procedure where circumstances warrant.
2. The motion of the Exchange that the trial of this
action be stayed as to it pending any arbitration of the
claims asserted in this action is granted, provided, how-
ever, that plaintiff may apply to the court for permission
to use the pretrial discovery procedures of the Federal
Rules of Civil Procedure where circumstances warrant.
3. In the exercise of the Court’s discretion and in-
herent power to control its own docket, the trial of this
action is stayed as to the defendants Douglas E. DeTata,
John J. Doughty, Allan Blair and D. Tipp Cullen pending
arbitration as aforesaid.
4. The parties are directed to agree among them-
selves upon the appropriate tribunal, in default of which
the Court will designate the American Arbitration Asso-
ciation as the arbitration tribunal.
Dated: New York, New York
April 30, 1976.
/s/ Wurrman Kwapp
U.S.D.J.
37a
75 Civ. 3214
Caption OmittTep In PRINTING
(Fimep May 14, 1976)
Memorandum and Order
Knapp, D.J.
The Court has signed the Order submitted by plaintiff.
In so doing it necessarily overruled the objections noted
in defense counsel’s letter of April 30, 1976. The Court
wishes to make clear that it does not intend to authorize
the unlimited discovery suggested in said letter. It does
not consider this Order to be any broader than the one
submitted by defendant. The Court simply prefers the
language employed.
The case is placed on the suspense calendar pending the
anticipated arbitration.
So ORDERED.
Dated; New York, New York
May 10, 1976.
/s/ Whitman Knapp
Wurman Kyapp, U.S.D.J.
38a
APPENDIX C
Statutes and Rules Involved
Unttep States ArsiTratTion Act
Section 2, 9 U.S.C. § 2
Validity, irrevocability, and enforcement of agreements to
arbitrate.
A written provision in any maritime transaction or a
contract evidencing a transaction involving commerce to
settle by arbitration a controversy thereafter arising out
of such contract or transaction, or the refusal to perform
the whole or any part thereof, or an agreement in writing
to submit to arbitration an existing controversy arising
out of such a contract, transaction, or refusal, shall be
valid, irrevocable, and enforceable, save upon such grounds
as exist at law or in equity for the revocation of any con-
tract.
Section 3, 9 U.S.C. §3
Stay of proceedings where issue therein referable to arbi-
tration.
If any suit or proceeding be broughi in any of the
courts of the United States upon any issue referable to
arbitration under an agreement in writing for such arbi-
tration, the court in which such suit is pending, upon being
satisfied that the issue involved in such suit or proceeding
is referable to arbitration under such an agreement, shall
on application of one of the parties stay the trial of the
action until such arbitration has been had in accordatice
with the terms of the agreement, providing the applicant
for the stay is not in default in proceeding with such
arbitration.
39a
Securities Excuance Act or 1934
Section 10, 15 U.S.C. § 78)
Regulation of the Use of Manipulative and Deceptive De-
vices.
It shall be unlawful for any person, directly or indirect-
ly, by the use of any means or instrumentality of inter-
state commerce or of the mails, or of any facility of any
national securities exchange—
(b) To use or employ, in connection with the purchase
or sale of any security registered on a national securities
exchange or any security not so registered, any manipu-
lative or deceptive device or contrivance in contravention
of such rules and regulations as the Commission may pre-
scribe as necessary or appropriate in the public interest
or for the protection of investors.
Section 28, 15 U.S.C. § 78bb
Effect on Existing Law.
(b) Nothing in this title shall be construed to modify
existing law with regard to the binding effect (1) on any
member of or participant in any self-regulatory organiza-
tion of any action taken by the authorities of such organi-
zation to settle disputes between its members or partici-
pants, (2) on any municipal securities dealer or municipal
securities broker of any action taken pursuant to a pro-
cedure established by the Municipal Securities Rulemaking
Board to settle disputes between municipal securities deal-
ers and municipal securities brokers, or (3) of any action
de*>ribed in paragraph (1) or (2) on any person who has
agreed to be bound thereby.
40a
Prior to June 4, 1975, § 28(b) provided as follows:
(b) Nothing in this title shall be construed to modify
existing law (1) with regard to the binding effect on any
member of any exchange of any action taken by the au-
thorities of such exchange to settle disputes between its
members, or (2) with regard to the binding effect of such
action on any person who has agreed to be bound thereby,
or (3) with regard to the binding effect on any such mem-
ber of any disciplinary action taken by the authorities of
the exchange as a result of violation of any rule of the
exchange, insofar as the action taken is not inconsistent
with the provisions of this title or the rules and regula-
tions thereunder.
Section 29, 15 U.S.C. § 78ce
Validity of Contracts.
2 * *
(a) Any condition, stipulation, or provision binding any
person to waive compliance with any provision of this
title or of any rule or regulation thereunder, or of any rule
of an exchange required thereby shall be void.
Securities Act or 1933
Section 14, 15 U.S.C. § 77n
Contrary Stipulations Void.
Any condition, stipulation, or provision binding any per-
son acquiring any security to waive compliance with any
provision of this title or of the rules and regulations of
the Commission shall be void.
Bankruptcy Act
Section 26, 11 U.S.C. § 49
Arbitration of Controversies.
a. The receiver or trustee may, pursuant to the direction
of the court, submit to arbitration any controversy arising
in the settlement of the estate.
dla
b. Three arbitrators shall be chosen by mutual consent,
or one by the receiver or trustee, one by the other party
to the controversy, and the third by the two so chosen or,
if they fail to agree in five days after their appointment,
the court shall appoint the third arbitrator.
e. The written finding of the arbitrators or of a major-
ity of them as to the issues presented may be filed in court
and shall have like force and effect as the verdict of a
jury.
Section 60, 11 U.S.C. § 96
Preferred Creditors.
® eo *
b. Any such preference may be avoided by the trustee
if the creditor receiving it or to be benefited thereby or his
agent acting with reference thereto has, at the time when
the transfer is made, reasonable cause to believe that the
debtor is insolvent. Where the preference is voidable, the
trustee may recover the property or, if it has been convert-
ed, its value from any person who has received or convert-
ed such property, except a bona-fide purchaser from or
lienor of the debtor’s transferee for a present fair equiva-
lent value: Provided, however, That where such purchaser
or lienor has given less than such value, he shall neverthe-
less have a lien upon such property, but only to the extent
of the consideration actually given by him. Where a pref-
erence by way of lien or security title is voidable, the court
may on due notice order such lien or title to be preserved
for the benefit of the estate, in which event such lien or
title shall pass to the trustee. For the purpose of any
recovery or avoidance under this section, where plenary
proceedings are necessary, any State court which would
have had jurisdiction if bankruptcy had not intervened
and any court of bankruptcy shall have concurrent juris-
diction.
42a
Section 67, 11 U.S.C. § 107
Liens and Fraudulent Transfers.
d.
® @ e
(2) Every transfer made and every obligation incurred
by a debtor within one year prior to the filing of a peti-
tion initiating a proceeding under this Act by or against
him is fraudulent (a) as to creditors existing at the time
of such transfer or obligation, if made or incurred with-
out fair consideration by a debtor who is or will be there-
by rendered insolvent, without regard to his actual intent;
or (b) as to then existing creditors and as to other per-
sons who become creditors during the continuance of a
business or transaction, if made or incurred without fair
consideration by a debtor who is engaged or is about to
engage in such business or transaction, for which the
property remaining in his hands is an unreasonably small
capital, without regard to his actual intent; or (c) as to
then existing and future creditors, if made or incurred
without fair consideration by a debtor who intends to in-
cur or believes that he will incur debts beyond his ability
to pay as they mature; or (d) as to then existing and fu-
ture creditors, if made or incurred with actual intent as
distinguished from intent presumed in law, to hinder, de-
lay, or defraud either existing or future creditors.
Section 70, 11 U.S.C. § 110
Title to Property.
e. (1) A transfer made or suffered or obligation in-
curred by a debtor adjudged a bankrupt under this Act
which, under any Federal or State law applicable thereto,
is fraudulent as against or voidable for any other reason
by any creditor of the debtor, having a claim provable
43a
under this Act, shall be null and void as against the trus-
tee of such debtor.
(2) All property of the debtor affected by any such
transfer shall be and remain a part of his assets and es-
tate, discharged and released from such transfer and shall
pass to, and every such transfer or obligation shall be
avoided by, the trustee for the benefit of the estate: Pro-
vided, however, That the court may on due notice order
such transfer or obligation to be preserved for the benefit
of the estate and in such event the trustee shall succeed
to and may enforce the ~ights of such transferee or obli-
gee. The trustee shall reclaim and recover such prceperty
or collect its value from and avoid such transfer or obli-
gation against whoever may hold or have received it, ex-
cept a person as to whom the transfer or obligation speci-
fied in paragraph (1) of this subdivision e is valid under
applicable Federal or State laws.
(3) For the purpose of such recovery or of the avoid-
ance of such transfer or obligation, where plenary pro-
ceedings are necessary, any State court which would have
had jurisdiction if bankruptcy had not intervened and any
court of bankruptcy shall have concurrent jurisdiction.
Rvuigs oF THE SECURITIES AND Excuancet ComMISSION
Rule 10b-5, 17 CFR § 240.10b-5
Employment of manipulative and deceptive devices.
It shall be unlawful for any person, directly or indirect-
ly, by the use of any means or instrumentality of inter-
state commerce, or of the mails or of any facility of any
national securities exchange,
(a) To employ any device, scheme, or artifice to de-
fraud,
(b) To make any untrue statement of a material fact
or to omit to state a material fact necessary in order to
doa
make the statements made, in the light of the circum-
stances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit upon
any person, in connection with the purchase or sale of any
security.
Bankruptcy Rugs
Rule 919.
Compromise and Arbitration.
* * *
(b) Arbitration. On stipulation of the parties to any con-
troversy affecting the estate the court may authorize the
matter to be submitted to final and binding arbitration.
45a
APPENDIX D
Arbitration Provisions
New York Stock Excuance Constitution, Articie VIII, §1
Any controversy between parties who are members, al-
lied members, member firms or member corporations shall,
at the instance of any such party, and any controversy
between a nonmember and a member or allied member or
member firm or member corporation arising out of the
business of such member, allied member, member firm or
member corporation, or the dissolution of a member firm
or member corporation, shall, at the instance of such non-
member, be submitted for arbitration, in accordance with
the provisions of the Constitution and the rules of the
Board of Directors.
American Stock Excuance Constitution, Artic.e VIII, §1
Members, member firms, partners of member firms,
member corporations and officers of member corporations
shall arbitrate all controversies arising in connection with
their business between or among themselves or between
them and their customers as required by any customer’s
agreement or, in the absence of a written agreement, if
the customer chooses to arbitrate.
Master AGREEMENT TO THE REALIGNMENT AGREEMENTS,
Artic.e 10.11
Arbitration. duPont and Walston agreed to submit any
dispute arising under this Agreement and the Ancillary
Agreements or with respect to any of the transactions
contemplated thereby to arbitration, in accordance with
the provisions of the Constitution of the NYSE and the
Rules of the NYSE, except that disputes under the Clear-
ing Agreement relating to transactions executed on an
exchange other than on the NYSE, which has in its con-
stitution or rules provisions compelling arbitration among
46a
members thereof, shall be submitted to arbitration in
accordance with the Constitution and Rules of such other
exchange.
47a
APPENDIX E
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
75 Civ. 3214
Wintnurop J. ALLEGAERT,
as Trustee of duPont Walston Incorporated,
Plaintiff,
—against— .
H. Ross Prerot, Exrecrronic Data Systems Corporation,
duPont Gtore Forcan Incorporatep, Wim K.
Gaypen, Morton H. Meyerson, Mrieper A. Hart, III,
Marcot Perrot, Mervin L. Staurrern, PHM & Co.,
CHARLESTON INVESTMENT Company, E. D. Systems Cor-
poraTion, New York Stock Excuanag, Inc., Daniew J.
Cutten, Wim D. Fiemine, Georcze T. THomson,
Cuartes W. Cox, Dovertas E. DeTata, Jonn J.
Doventy, ALLAN Buiar and D. Trepp CuLLen,
Defendants.
Complaint
Winthrop J. Allegaert, as Trustee of duPont Walston
Incorporated (the ‘‘Trustee’’), by his attorneys, Hughes
Hubbard & Reed, complaining of the defendants, alleges:
JURISDICTION
1. This action arises under Sections 6, 10(b), 20(a)
and 29(b) of the Securities Exchange Act of 1934, 15
U.S.C. §§ 78f, 78j(b), 78t(a), and 78cee(b) (the ‘‘ Exchange
Act’’); SEC Rule 10b-5 promulgated pursuant to Section
10(b) of the Exchange Act (‘‘Rule 10b-5’’); Sections
12(2), 15 and 17{a) of the Securities Act of 1933, 15 U.S.C.
§§ 771(2), 770 and 77q(a) (the ‘‘Securities Act’’); Sec-
tions 60(b), 67(d), 70(a) and 70(e) of the Bankruptcy
Act, 11 U.S.C. §§ 96(b), 107(d), 110(a) and 110(e); Sec-
48a
tion 352-c of the New York General Business Law, Sections
720 and 1317 of the New York Business Corporation Law,
Sections 273 through 276 of the New York Debtor and
Creditor Law; Sections 144(a), 251(c) and 271(a) of the
Delaware General Corporation Law; and the common law.
2. This court has jurisdiction pursuant to Section 27
of the Exchange Act, 15 U.S.C. § 78aa, Section 22(a) of
the Securities Act, 15 U.S.C. § 77v(a), Section 23(b) of the
Bankruptey Act, 11 U.S.C. 4 46(b), and ‘ais of pen-
dent, jurisdiction.
3. This court has personal jurisdiction over the de-
fendants pursuant to, among other things, Section 27 of
~ the Exchange Act, 15 U.S.C. § 78aa, Section 22(a) of the
Securities Act, 15 U.S.C. § 77v(a), and Sections 301 and
302 of the New York Civil Practice Law and Rules
(**CPLR’’). Personal jurisdiction exists under CPLR
Section 302 because the claims alleged herein arise from
the facts that each of the defendants or their agents
(a) transacted business within the State of New
York, or
(b) committed tortious acts within the State of New
York, or
(c) committed tortious acts without the State of
New York causing injury to duPont Walston Incor-
porated, also known as Walston & Co., Inc., within
the state and at all relevant times (i) regularly did
and solicited business or engaged in other persistent
courses of conduct in the state or derived substantial
revenue from goods used and consumed and services
rendered in the state, or (ii) expected or should rea-
sonably have expected such tortious acts to have con-
sequences in the state and derived substantial revenue
from interstate or foreign commerce.
49a
Tue Partiss
4. Plaintiff Winthrop J. Allegaert is Trustee in Bank-
ruptey of duPont Walston Incorporated, formerly known
as Walston & Co., Inc. (‘‘Walston’’). Plaintiff was ap-
pointed Trustee on May 29, 1974 by order of the Honor-
able Roy Babitt, Bankruptcy Judge, United States District
Court for the Southern District of New York.
5. Walston is, and at all times hereafter mentioned
was, a corporation organized and existing under the laws
of the State of Delaware with its principal place of busi-
ness in the City, County and State of New York. For
many years prior to July 1973 Walston had carried on a
general retail brokerage business and had been one of the
largest firms in the brokerage industry.
6. Through a series of fraudulent, unauthorized and
otherwise unlawful transactions beginning in or about
July 1973, defendants caused many millions of dollars
of Walston assets to be transferred to defendant duPont
Glore Forgan Incorporated and others and caused many
millions of dollars of duPont Glore Forgan Incorporated
liabilities to be transferred to Walston.
7. As a result of these transactions, Walsteg was
rendered insolvent. On Mareh 27, 1974, Walston filed a
petition for an arrangement under Chapter XI of the
Bankruptey Act, 11 U.S.C. §§ 701 et seq. On May 29, 1974,
Walston was declared bankrupt.
.8. Upon his appointment as Trustee, plaintiff was
vested by Section 70a of the Bankruptcy Act, 11 U.S.C.
§ 110a, with title to all non-exempt property of Walston,
including both property transferred by Walston in fraud
of its creditors and choses in action.
9. Defendant Electronic Data Systems liecaiiitees
(‘‘EDS’’) is, and at all times material hereto was, a
corporation organized and existing under the laws of the
50a
State of Texas. EDS is in the business of designing, in-
stalling and operating computerized business information
systems for corporate customers.
10. At all times material hereto, defendants H. Ross
Perot (‘‘Perot’’), William K. Gayden (‘‘Gayden’’), Mor-
ton H. Meyerson (‘‘Meyerson’) and Milledge A. Hart, III
(‘‘Hart’’) were members of the Board of Directors and
major stockholders of EDS. Perot has been Chairman of
the Board of Directors of EDS since he founded EDS in
1962 and at all times has been the owner of at least 62%
of its common stock. At all relevant times, Gayden, Meyer-
son and Hart operated subject to the direction, dominion
and control of EDS and acted as agents and instrumen-
talities of EDS with respect to the wrongful acts alleged
hereinbelow.
11. Defendant duPont Glore Forgan Incorporated
(‘*duPont Glore Forgan’’) is, and since May 1971 has
been, a corporation organized and existing under the laws
of the State of Delaware. At all times material hereto,
duPont Glore Forgan maintained its principal place of
business in the City, County and State of New York.
From May 1971 until July 2, 1973 duPont Glore Forgan
conducted a general retail brokerage business. duPont
Glore Forgan was the successor to the business previously
carried on by the partnership of F. I. duPont, Glore
Forgan & Co. (‘‘the duPont Glore Forgan partnership’’).
12. PHM & Co. (‘‘PHM’’) is, and at all times ma-
terial hereto was, a partnership formed by Perot, Gayden,
Meyerson and Hart to hold the investments of themselves
and others in duPont Glore Forgan.
13. Charleston Investment Company (‘‘Charleston’’)
iz, and at all times material hereto was, a corporation
organized and existing under the laws of the State of
Delaware owned entirely by Perot and his wife, Margot
Perot (‘‘Mrs. Perot’’). Charleston was formed to hold the
investments of Perot and Mrs. Perot in Walston.
5la
14. E.D. Systems Corporation (‘‘E.D. Systems’’) is,
and at all times material hereto was, a wholly owned sub-
sidiary of EDS formed to carry out the systems contract
EDS had negotiated with Walston. At all relevant times,
E.D. Systems operated subject to the direction, dominion
and control of EDS and acted as an agent and instrumen-
tality of EDS with respect to the wrongful acts alleged
hereinbelow.
15. At all times material hereto, defendants Gayden
and Mervin L. Stauffer (‘‘Stauffer’’) were offieers of
Charleston. Pursuant to Charleston designations, Gayden
became a member of the Walsivn Board of Directors and
a member of its Executive Committee in Nowember 1972
and Stauffer became a miember of those bodies in May
1973. Gayden and Stauffer are sometimes hereinafter re-
ferred to as the ‘‘ Nominee Directors’’.
16. At all times material hereto, defendants Gayden,
Meyerson, Hart, EDS, duPont Glore Forgan, E.D. Sys-
tems, PHM, Charlestes and Stauffer operated subject to
the direction, dominion and control of Perot and acted as
agents and instrumentalities of Perot with respect to the
wrongful acts alleged hereinbelow. Perot, Gayden, Meyer-
son, Hart, EDS, duPont Glore Forgan, E.D. Systems,
PHM, Charleston and Stauffer are sometimes hereinafter
referred to as the ‘‘ Perot Interests”’.
17. The New York Stock Exchange, Inc. (the ‘‘Ex-
change’’) is, and at all times material hereto was, a cor-
poration organized and existing under the laws of the
State of New York. The Exchange is a national securities
exchange registered with the Securities and Exchange
Commission pursuant to Section 6 of the Exchange Act.
At all times material hereto, Walston and duPont Glore
Forgan were member firms of the Exchange.
18. At all times material hereto, defendants Daniel
J. Cullen, William D. Fleming (‘‘Fleming’’), George T.
52a
Thomson (‘‘Thomson’’), Charles W. Cox (‘‘Cox’’), John
J. Doughty (‘‘Doughty’’), Douglas E. DeTata (‘‘De-
Tata’’), Allan Blair, and D. Tipp Cullen were members
of the Walston Board of Directors and were active in
Walston’s business. These directors are sometimes herein-
after referred to as the ‘‘Defendant Directors’’.
19. At all relevant times, certain defendants were
controlling persons of certain other defendants within the
meaning of Section 15 of the Securities Act and Section
20(a) of the Exchange Act as follows:
(a) Perot was a controlling person of EDS, duPont
Glore Forgan, Gayden, Meyerson, Hart, Stauffer,
PHM, Charleston, and E.D. Systems.
(b) EDS was a controlling person of duPont Glore
Forgan, Gayden, Meyerson, Hart, PHM, Charleston,
and E.D. Systems.
(c) Gayden was a controlling person of EDS. da-
Pont Glore Forgan, PHM, Charleston, and £.D.
Systems.
(d) Meyerson was a controlling person of EDS,
duPont Glore Forgan, PHM, Charlesten and E.D.
Systems.
(e) Hart was a controlling person of EDS, duPont
Glore Forgan, PHM, Charleston, and E.D. Systems.
(f) Mrs. Perot was a controlling person of Charles-
ton.
(g) Stauffer was a controlling person of Charleston.
(h) PHM was a controlling person of duPont Glore
Forgan.
BackGROUND OF OFFENSES CHARGED
20. Since its inception, EDS has derived most of its
revenues from long term systems contracts with corporate
53a
customers under which it assumes total operating responsi-
bility for the data processing systems of its customers
for periods ranging from approximately five to eight years.
21. At the time Perot first invested in the brokerage
industry, EDS stock had been trading at extraordinarily
high multiples of earnings—more than 100 to 1. The Perot
Interests knew that these price-earnings ratios reflected
dramatic growth in EDS revenues and earnings ; in each
year from 1964 through 1969, EDS’s net income for the
year was more than double that of the year before.
22. The Perot Interests knew that if EDS failed to
maintain significant earnings growth, the price of EDS
stock—most of which was owned by Perot, Mrs. Perot,
Gayden, Meyerson and Hart—would decline substantially.
23. To attempt te maximize its earnings, EDS had
developed an ‘‘industry center’’ coneept under which it
sought to build systems suitable for the needs of an entire
industry in eonjamction with one or more pilot companies.
Once the system was developed, EDS hoped to obtain
ecovtracts with other companies in the dustry. PDS en-
deavored to employ this coneept im the brokerage industry
by obtaining a contract with the duPont Glore Forgan
partnership.
Takroven or puPowr Guore Forcan sy Perot INTERESTS
24. Om or about July 3, 1970, EDS entered into a
long term systems eontract with the duPont Glore Forgan
partnership under which EDS was to provide all of the
duPont Glore Forgan partnership’s electronic data pro-
cessing requirements for a period of eight years at a
minimum average annual charge of $8,000,000. On the
same date EDS entered into another agreement with the
duPont Glore Forgan partnership to make a loan to the
partnership in the form of a subordinated account for an
amount in excess of $2 million.
o4a
25. Since EDS’s after-tax net income was then run-
ning at approximately 15% of revenues, the $8,000,000 in
anneal revenues from the duPont Glore Forgan partner-
ship eowld be expected to result in annual net income to
EDS of appreximately $1,200,000. At the price-earnings
ratios for EDS steck then prevailing, the $1,200,000 of
earnings would represent more than $100,000,000 in market
value for EDS stock.
26. Beginning im abeut the fall of 1970, the duPont
Glore Forgan partnership experienced a series of capital
erises which threatened the continued existence of the
firm. The liquidation of the duPont Glore Forgan part-
nership would have eliminated the substantial income ac-
cruing to EDS under its long term systems contract with
the partnership and thereby would have adversely affected
the price of EDS stock.
27. To prevent the collapse of the duPont Glore For-
gan partnership and the consequent loss to EDS of con-
tinued earnings from its contract, Perot, Gayden, Meyer-
son and Hart invested substantial additional capital in
the duPont Glore Forgan partnership and eventually ac-
quired virtually 100% control of the firm. In taking full
control of the firm, Perot, Gayden, Meyerson and Hart,
acting through PHM, formed duPont Glore Forgan as a
corporation to acquire the business of the duPont Glore
Forgan partnership.
28. The Exchange contributed to this effort to salvage
the duPont Glore Forgan partnership. Under an Indemni-
fication Agreement dated May 14, 1971, the Special Trust
Fund of the Exchange (the ‘‘Exchange Trust Fund’’)
indemnified PHM against losses of up to $15,000,000 aris-
ing out of potential differences between the actual and
recorded value of assets and liabilities of the duPont
Glore Forgan partnership. The indemnity was effected
through the Exchange Trust Fund’s issuance to PHM of
a non-interest bearing ten year note which was subject to
55a
a five year extension at the option of PHM. The dollar
amount ultimately payable pursuant to the Exchange Note
was dependent upon the outcome of a series of annual
audits of the partnership’s assets and liabilities. In April
1972, the Indemnification Agreement was amended to pro-
vide that the Exchange Trust Fund’s obligation to pay
for such losses would be accelerated to the time of any
insolvency, liquidation or other marshalling of the assets
of duPont Glore Forgan. As part of the indemnity ar-
rangement, duPont Glore Forgan issued a Certificate of
Special Interest (the ‘‘CSI’’) to the Exchange Trust Fund
which entitled the Exchange Trust Fund to receive cash,
securities or other consideration under certain circum-
stances. The Exchange Trust Fund’s right to receive any
distribution under the CSI, however, was subordinated to
the rights of present and future creditors of duPont Glore
Forgan.
29. As a part of the acquisition of the business of
the duPont Glore Forgan partnership, duPont Glore For-
gan assumed the partnership’s contract with EDS. There-
after, the contract between duPont Glore Forgan and EDS
was modified several times. After these modifications, the
contract was more profitable to EDS so that in the eleven
months prior to July 1, 1973 EDS was earning profits
of more than 30 per cent of revenues on the contract—
more than double EDS’s average rate of profitability on
its systems contracts.
30. By July 1, 1973 the Perot Interests had invested
more than $70 million in duPont Glore Forgan. Of this
sum, $65 million consisted of borrowings by PHM from
banks secured primarily by shares of EDS stock owned
by Perot.
31. However, the Perot Interests were unsuccessful in
operating the business of duPont Glore Forgan. From the
time the Perot Interests formed duPont Glore Forgan to
July 1, 1973, duPont Glore Forgan suffered huge operat-
56a
ing losses. In the one year period ending May 31, 1973
duPont Glore Forgan lost almost $24 million, of which
more than $10 million was lost in the last quarter of the
period. And in June 1973, the firm’s losses were nearly
$4 million.
32. As a result of these operating losses, duPont Glore
Forgan’s capital position deteriorated substantially. In
consequence, the firm, which had been on the Special Sur-
veillance List of the Exchange since July 1972, was placed
under restrictions by the Exchange pursuant to Exchange
Rules 325 and 326 (the ‘‘Net Capital Rules’’). The Net
Capital Rules provide in substance that a member firm
may not expand if its net capital ratio is in excess of
10-1 for more than 15 days, must reduce its business if
its net capital ratio is in excess of 12-1 for more than
15 days, and may not operate at all if its net capital ratio
is more than 15-1. The Net Capital Rules further provide
that the Exchange may impose additional capital restric-
tions on member firms,
33. On May 23, 1973, in response to reports that
duPont Glore Forgan’s net capital ratio had been sub-
stantially in excess of 11-1 since early May, the Exchange
restricted duPont Glore Forgan from expanding its busi-
ness, ordered it to reduce its net capital ratio to 10-1 by
May 29, 1973, and ordered the general partners of PHM
to commit in writing to maintain duPont Glore Forgan’s
net capital ratio at that level—duPont Glore Forgan failed
to reduce its net capital ratio as ordered, and by May 31,
1973, its net capital ratio exceeded 14-1.
34. On June 7, 1973, the Board of Directors of the
Exchange met and directed duPont Glore Forgan imme-
diately to reduce its net capital ratio to 11-1 and to further
reduce the ratio to 10-1 by June 13. If by June 13 duPont
Glore Forgan had decided to go forward with a combi-
nation with Walston, the reduction was to be accomplished
by an infusion of capital; if not, the ratio was to be
57a
reduced by immediately delivering out to other firms du-
Pont Glore Forgan accounts. Although duPont Glore For-
gan claimed to have reduced its net capital ratio to 11-1,
it did. not meet its obligation to attain a 10-1 ratio by
June 13.
35. Finally, on June 21, 1973 the Exchange ordered
duPont Glore Forgan to maintain its net capital ratio
under 11-1 until July 2 and to reduce it to 10-1 by that
date. The Exchange warned that if duPont Glore Forgan’s
net capital ratio were not less than 10-1 by July 2, it
would immediately give publicity to the firm’s financial
condition, a step which would have ended duPont Glore
Forgan’s ability to remain in business.
36. In the faee of these facts, the Perot Interest in
May 1973 prepared detailed plans to liquidate duPont
Glore Forgan and notified the Exchange that they ex-
pected to liquidate duPont Glore Forgan if no agreement
with Walston was reached.
Taxsovers or Watston BY Perot Interests
37. The Perot Interests had determined that if du-
Pont Glore Forgan were liquidated, substantially all of
their investment would be lost and there would be in-
sufficient funds remaining to repay the principal and in-
terest on the $65 million which had been borrowed from
banks to finance the investment.
38. The Perot Interests knew that if duPont Glore
Forgan were liquidated, the price of EDS stock would
decline because of the loss to EDS of revenues from the
duPont Glore Forgan contract and the loss to EDS of
the flagship company in its effort to establish an industry
center in the brokerage industry.
39. To avoid these consequences and to obtain other
benefits for themselves and others which they wished to
58a
favor, the Perot Interests determined to impose upon
Walston a fraudulent, improper and unlawful transaction.
40. The Perot Interests were able to accomplish this
objective in part because certain of their number—Gayden,
Stauffer, E.D. Systems, EDS, Perot, Mrs. Perot, and
Charleston—had fiduciary relationships with Walston, ac-
cess to its inner councils, and knowledge of its confidential
business information which they used to benefit the Perot
Interests in disregard of their fiduciary duties to Walston.
41. In July 1972, Walston had entered into two agree-
ments under which Perot had agreed to make a capital
investment in Walston and Walston had agreed to employ
EDS to do its data processing work. The data processing
contract, which formally had been entered into by E.D.
Systems, a wholly owned subsidiary of EDS, had been
substantially less profitable to EDS than its contract with
duPont Glore Forgan. The capital investment had been
made by Perot and Mrs. Perot through Charleston. The
total capital investment required of Charleston was $15
million, $10 million of which had been invested prior to
July 1, 1973. In return for the investment, Charleston had
received convertible preferred stock, warrants and notes,
and the power to name Gayden and Stauffer to Walston’s
Board of Directors and Executive Committee.
42. Beginning late in 1972 discussions were had from
time to time between representatives of Walston and rep-
resentatives of the Perot Interests regarding the possi-
bility of a merger between Walston and duPont Glore
Forgan. Then in late May 1973 at a time when duPont
Glore Forgan was in its deep capital crisis and on the
verge of liquidation, the Perot Interests proposed a trans-
action radically different from those previously discussed.
43. Although the proposed transaction contemplated
that all the operations of duPont Glore Forgan and Wal-
ston would be combined and a single comprehensive brok-
59a
erage business would result, it did not take the usual form.
Rather than a merger in which each party would receive
stock in the merged company in accordance with its con-
tribution and participate in all business risks of the com-
bined enterprise, the Perot Interests proposed a peculiar
form of transaction (the ‘‘Perot Plan’’) in which each of
the existing companies would perform exclusively certain
of the functions of a brokerage business while the other
company performed the remaining functions. In substance,
the Perot Plan called for duPont Glore Forgan to carry
out all back office operations, including clearing of securi-
ties, accounting, and the like, and for Walston to carry out
all front office operations, including sales and operation of
the branch office system. Thus, the Perot Plan would result
in two firms incapable of operating alone and wholly
dependent on each other since each would carry out only
a part of the necessary activities of a single business.
The Perot Interests demanded that Walston agree to the
Perot Plan no later than July 1, 1973. The Perot Interests
proposed this unusual form of transaction in order to
accomplish the improper and unlawful purposes set forth
below.
44. The Perot Interests sought to effectuate the Perot
Plan in order (a) to obtain Walston assets for grossly
inadequate consideration, (b) to transfer duPont Glore
Forgan liabilities to Walston without paying Walston for
assuming them, (c) to gain control of Walston without
paying any consideration in order to use its assets to
benefit themselves and others which they wished to favor,
(d) to insulate duPont Glore Forgan from all losses from
the operations of the combined brokerage business, there-
by preserving a substantial part of their investment re-
quired to repay PHM’s bank loans, and (e) to maintain
and extend as long as possible an unreasonably high flow
of revenues and profits to EDS.
45. The Perot Plan was to be implemented by a series
of agreements (the ‘‘Realignment Agreements’’). Defend-
60a
ants Thomson and Cox under the general supervision of
defendants Daniel J. Cullen and Fleming were responsible
for negotiating with the Perot Interests on behalf of
Walston with regard to the Realignment Agreements.
During such negotiations, defendants Thomson, Cox,
Daniel J. Cullen and Fleming failed to protect the in-
terests of Walston and acceded to numerous unfair, im-
proper and unlawful terms proposed by the Perot In-
terests.
46. In June 1973, the Perot Interests prepared pro-
jections showing what Walston’s income and expenses
would be if the Perot Plan were adopted. On or about
June 13, 1973 the Exchange staff prepared a report an-
alyzing these projections. The report concluded that these
projections were unduly optimistic; rather than the profit
envisioned in the projections, the Exchange staff con-
cluded that Walston would lose in excess of $1,300,000
per month under the Perot Plan and that Walston could
remain in business for only eight months under the plan
before its excess capital would be completely depleted. On
or about June 23, 1973, copies of the Exchange staff report
were furnished to duPont Glore Forgan, Meyerson, Thom-
son and Cox.
47. Prior to July 1, 1973, representatives of the Perot
Interests met with the Department of Justice with regard
to the application of the antitrust laws to the Perot Plan
The representatives of the Perot Interests informed the
Department of Justice that duPont Glore Forgan was a
failing company and submitted documentation of duPont
Glore Forgan’s record of losses, its extensive and fruit-
less efforts to find another merger partner or major in-
vestor, and its detailed plans of liquidation if Walston
did not agree to the Perot Plan.
48. Despite the enormous consequences of the Perot
Plan to Walston and the complexity and unusual nature
6la
of the arrangements developed to effectuate it, most mem-
bers of Walston’s Board of Directors were given very
little information as to the Perot Plan until the day before
the vote was to be taken on the plan. The sole item of
written material concerning the Perot Plan furnished to
most directors prior to that date was a four page memo-
randum containing barely more than a page as to the
financial aspects of the plan and omitting most of the
unfair terms that were included in the final agreements.
49. The Realignment Agreements were numerous,
lengthy and complex. They consisted of a Master Agree-
ment and various ancillary agreements, notably a Clear-
ing And Related Services Agreement (‘‘Clearing Agree-
ment’’), a ‘‘Transfer Agreement’’, a ‘‘Capital Agree-
ment, an Agreement For Electronic Data Processing Sup-
plies And Services (‘‘EDP Agreement’’) and an Amend-
ment to the Purchase Agreement (‘‘Charleston Amend-
ment’’). Drafts of the lengthy and complex Realignment
Agreements were not furnished to most members of the
Walston Board of Directors until the day before the July
1, 1973 meeting at which the Perot Plan was to be voted
on. Defendants Thomson, Cox, Daniel J. Cullen and Flem-
ing and the Perot Interests knew that the other Walston
directors would be unable to digest and comprehend the
substance of the agreements in the short span of time
available.
50. In fact, the Realignment Agreements were grossly
unfair, inequitable, disadvantageous and hazardous to
Walston and excessively favorably to the Perot Interests.
The following are among the respects in which the agree-
ments were unfair:
a. Pursuant to the Capital Agreement, Wa
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