Petition — Sibley v. Tandy Corp.

In the

Supreme Court of the

United States

OCTOBER TERM, 1977

No%76-1614

Harper Sietey, Ja.,

Petitioner,

v.

Tanpy CORPORATION, ET AL,

Respondent.

PETITION FOR WRIT OF CERTIORARI

Marvin S. SLOMAN

Rosert L. BLUMENTHAL

Eant F. Hare, Jr.

Rop PHELAN

Counsel for Petitioner

Of Counsel:

CARRINGTON, COLEMAN, SLOMAN, JOHNSON & BLUMENTHAL

3000 One Main Place

Dallas, Texas 75250

(214) 741-2121

Counsel of Record:

Marvin S, SLOMAN

3000 One Main Place

Dallas, Texas 75250

(214) 741-2121

Nee

INDEX

Page

Opinion Below l

Jurisdiction 1-2

Questions Presented 2

Statutory Provisions Involved 2

Statement of the Case . 3-6

Reasons for Graming the Writ 6-23

| Appendix:

1. Arbitration Opinion of the United States District

| Court for the Northern District of Texas,

Dallas Division A-1-A-3

2. Principal Opinion of the United States Court

of Appeals for the Fifth Circuit A-4-A-13

3. Opinion of the United States Court of Appeals

for the Fifth Circuit, Denying Rehearing A-14—-A-16

CITATIONS

Cases

Page

A. & EF. Plastik Pak Co., Ine. v. Monsanto Co.,

396 F.2d 710 (9th Cir, 1968) 9n

Aimcee Wholesale Corp. v. Tomar Products, Inc.,

21 N.Y.2d 621, 289 N.Y.S.2d 968 (1968) On

Alexander v. Gardner-Denver Company,

415 U.S. 36 (1974) 21

American Safety Equipment Corp.

v. J. P. Maguire and Co. v. Hickok Mfg. Co., Inc.,

391 F.2d 821 (2d Cir. 1968) On

Ayres v. Merrill Lynch, Pierce, Fenner & Smith,

538 F.2d 532 (3rd Cir. 1976), cert. denied—U.S.— 7n, 20

Borel v. United States Cas. Co.,

233 F.2d 385 (Sth Cir. 1956) 22n

Bullen v. DeBretteville, 239 F.2d 824

Oth Cir. 1956), cert. denied 353 U.S, 947... 22n

Collins Radio Company v. Ex-Cell-O Corporation,

467 F.2d 995 (8th Cir. 1972) oe ee 8B

Colonial Realty Corp. v. Bache & Co.,

358 F.2d 178 (2d Cir. 1966) . la le

Danford v. Schwabacher, 342 F Supp. 65

(N.D. Ca. 1972) ............. HEED 7n

Frier Industries, Inc. v. Glickman, {94,845 Fed. Sec. L. Rep.

[1974-75 Transfer Binder] (S.D.N.Y. 1974)... 8, 11

Galt v. Libbey-Owens-F ord Glass Co.,

376 F.2d 711 (7th Cir. 1967) : 19.20

Loux v. Rhay, 375 F.2d 55 (9th Cir. 1967) | 22n

Lubin v. Chicago Title and Trust Company,

260 F.2d 411 (7th Cir. 1958) 22n

Macchiavelli v. Shearson, Hammill & Co., Inc.,

384 F.Supp. 21 (E.D.Ca. 1974) 8.9, 11

Maheu v. Reynolds & Co., 282 F Supp. 423

(S.D.N.Y. 1968) 7n

Moran v. Paine, Webber, Jackson & Curtis,

389 F.2d 242 (3rd Cir. 1968) 7n

Nisbet v. Van Tuyl, 224 F.2d 66 (7th Cir. 1955) 22n

Newman v. Shearson, Hammill & Co., Inc.,

383 F.Supp. 265 (W.D. Tex. 1974) 7n

Pawgan v. Silverstein, 265 F.Supp. 898

(S.D.N.Y. 1967) . ) 7n

Proctor & Gamble Defense Corp. v. Bean,

146 F.2d 598 (Sth Cir. 1945) 22n

Prudential Petroleum Corp. v. Rauscher, Pierce & Co., Inc.,

281 S.W.2d 457 (Tex. Civ. App. 1955) writ ref'd ne. 15

Reader v. Hirsch & Co., 197 F.Supp. 111

(S.D.N.Y. 1961) 7n

Sam Reisfeld & Son Import Company v. S. A. Eteco,

530 F.2d 679 (Sth Cir. 1976) 8, 11

Sandor Petroleum Corp. v. Williams, 321 S.W.2d 614

(Tex. Civ. App. 1959) writ ref’d n.r.e. 14,15

Shapiro v. Jaslow, 320 F.Supp. 598 (S.D.N.Y. 1970) 7, 7n, 13

Sibley v. Tandy Corporation, 543 F.2d 540

(Sth Cir. 1976) 1, 6, 8, 10, 12, 22n

Starkman v. Seroussi, 377 F Supp. 518

(S.D.N.Y. 1974) | 7n

Stockwell v. Reynolds & Co., 252 F Supp. 215

(S.D.N.Y. 1965) 8,9, 13

Tcherepnin v. Knight, 389 U.S. 332 (1967) 19

Wilko v. Swan, 346 U.S, 427 (1953) 7n, 20, 21, 22-23, 23

9 U.S.C, §3

1S U.S.C. §77n

15 U.S.C, §78ee(a)

15 U.S.C, $78;

28 U.S.C. §1254(1)

28 U.S.C. $1291

28 U.S.C, §$1292(b)

iv

Statutes

Page

2, 7n, 13, 22-23

7n

2, 4, 7n, 13, 22-23

| 3

2

4, 12n

4, 12n

In the

Supreme Court of the

United States

OCTOBER TERM, 1977

aE

Haarer Siecey, Ja.,

Petitioner

vb.

Tanpy CORPORATION, ET AL,

Respondent

Petitioner Harper Sibley, Jr. respectfully prays that a writ

of certiorari issue to review the judgment and opinions of the

United States Court of Appeals for the Fifth Circuit entered in

this proceeding on December 3, 1976 and on February 18, 1977.

OPINIONS BELOW

The principal opinion of the Court of Appeals is reported at

543 F.2d 540 (Sth Cir. 1976); it also appears in the appendix

hereto, as does the opinion denying rehearing, which is not

reported. The opinion of the District Court denying respondent's

arbitration motion is also included in the appendix hereto.

JURISDICTION

The judgment of the Court of Appeals was entered on

December 3, 1976. A timely petition for rehearing was denied,

2

with opinion, on February 18, 1977, and this petition for

certiorari was filed within 90 days of that date. This Court's

jurisdiction is invoked under 28 U.S.C. $1254(1).

QUESTIONS PRESENTED

1. Whether the decision of the Court of Appeals establishes

an unworkable and potentially wasteful standard for determin-

ing the arbitrability of disputes involving both arbitrable and

nonarbitrable issues?

fraud claims?

STATUTORY PROVISIONS INVOLVED

United States Code, Title 15:

§78ce(a). Validity of Contracts

— ee eee

3

STATEMENT OF THE CASE

Petitioner Harper Sibley, Jr., on his own behalf and as the

contractually-stipulated representative of the former share-

holders of P. J. Parker, Inc., obtained a favorable jury verdict

against respondent Tandy Corporation for securities fraud in

violation of §10(b) of the Exchange Act, 15 U.S.C. $78), and

Rule 10b-5 promulgated thereunder’; this verdict also vindi-

cated petitioner's state-law claims of fraud, conversion, and

specific performance of « contract. (A. 9-60, 90-100)

Petitioner's complaint, filed June 12, 1973, derived from

respondent's June 4, 1971 acquisition of P. J. Parker, Inc. and

its wholly-owned subsidiary, Hickok Manufacturing Company.

Through Sibley, the former P. J. Parker, Inc. shareholders

sought actual and punitive damages for respondent's fraudulent

scheme to obtain P. J. Parker, Inc. and Hickok for two-thirds

of the represented price, a scheme culminating in respondent's

conversion of 33,281 shares of Tandy common stock held in

escrow pending the completion of an acquisition audit.’

In its answer, respondent denied petitioner's allegations and

counterclaimed for the escrowed shares, charging that petitioner

had breached the acquisition agreement. (R. 04-76) Relying

upon an arbitration provision in the same agreement, respondent

simultaneously (A. 2) moved for arbitration of the non-fraud

issues and a stay of that part of the court proceedings not

‘Jurisdiction further based on diversity, petitioner being a citi-

exp of Castie end cxpentient being © Gdewesn esnperetion wth tm

!

i

4

involving any such issues, which respondent conceded were not

arbitrable. (A. 63, 68) The trial court denied respondent's

motion on the ground that the nonarbitrable issues were “so

intertwined” with the arbitrable issues that to submit any part

of the dispute to arbitration “would be to violate the mandate”

of $29(a) of the Exchange Act, 15 U.S.C. §78ce(a) (A. 91),

which renders void antecedent agreements to arbitrate claimed

violations of the Exchange Act, like those alleged herein by

petitioner. Respondent neither appealed that ruling under 28

U.S.C. $1291 nor asked the trial court to certify its ruling for

interlocutory review under 28 U.S.C. $1292(b), and the parties

thereupon proceeded with discovery and eventually a 10-day

jury trial (October 21-November 1, 1974).

This dispute has always turned upon what petitioner contends

was a variance between respondent's preacquisition representa-

tions and its pestacquisition conduct. 33,281 shares of Tandy

stock, one-third of the represented purchase price to be paid

to P. J. Parker, Inc., were held in escrow pending au audit of

the June 30, 1971 financial statements of P. J. Parker, Inc. by

respondent's accountants; the purpose of the audit was to verify

that those financials met a net-worth warranty that was part of

the acquisition agreement. If the audited net worth were to fall

below that warranted figure, the agreement provided that re-

spondent would be entitled to retrieve $1.96 of its stock (at an

agreed value) from the escrow account for every $1.00 of

net-worth deficit. (A. 1984, 1769)

etitioner has claimed that respondent fraudulently in-

duced the execution of the acquisition agreement by the share-

helders and schemed to prepare financial statements of

5

P. J. Parker, Inc. that would show an audited net worth less

than the warranted figure, thereby giving rise to the appearance

of a breach of contract by petitioner and ostensibly permitting

respondent to recover the escrowed stock. Petitioner's trial plead-

ings further contended that this scheme was advanced by three

critical preclosing misrepresentations by respondent as to the

manner in which the net-worth verification would proceed:

(1) inventory pricing would correspond with the pricing prac-

tices of P. J. Parker, Inc., as reflected in the December 31, 1970

certified Parker financial statements; (2) certain P. J. Parker,

Inc. expenditures for computer software (referred to as the

“Touchette” account) would be capitalized, and would not be

subtracted from net worth; and (3) the 1971 calendar-year

accruals for annually-recurring payments for taxes, fringe bene-

fits, insurance and vacation pay would only be prorated for the

1971 calendar year. (A. 93 — Amended Complaint) Finally,

petitioner's trial pleadings alleged that respondent acted with

malice and in bad faith in causing the impoundment of the

escrowed stock. (A. 93) This act, petitioner contends, consum-

mated the fraud and gave rise to a conversion of the escrowed

stock by respondent.

The jury trial resulted in answers to special interrogatories

favorable to petitioner (A. 145-153) after 10 days of testimony

from 22 witnesses and the introduction of more than 100 docu-

mentary exhibits. In particular, the jury found that each of the

three misrepresentations had been made (A. 145; special issue

11) with no intention of fulfillment (A. 149; special issues

12-13), that each was material (A. 150; special issues 14-15),

and that each was relied upon (A. 150; special issues 16-17).

6

The jury also vindicated petitioner's claim of malicious and

bad faith impoundment (A. 147; special issues 9-104), and

awarded $3,000,000 in exemplary damages (A. 147; special

issue 1OA).

The trial court awarded judgment to petitioner of $463,853.93

in actual damages, plus delivery of the 33,281 escrowed Tandy

shares. Petitioner appealed the trial court's denial of exemplary

damages and its erroneous measure of actual damages, and

respondent cross-appealed on liability and arbitrability. With-

out reaching the merits, the Fifth Circuit reversed and remanded

bece ise it viewed petitioner's arbitrable and nonarbitrable

clans as “dependent” and only “to some degree intertwined

and overlapping,” 543 F.2d at 544 rather than being

“so intertwined” as to preclude arbitration. The remand order

was that trial of petitioner's fraud claims should be stayed

pending arbitration ©f unspecified “contractual disputes.”

543 F.2d at 544.

REASONS FOR GRANTING THE WRIT

I. THE DECISION BELOW ESTABLISHES AN UN.

WORKABLE AND POTENTIALLY WASTEFUL STAN.

DARD FOR DETERMINING ARBITRABILITY OF

DISPUTES INVOLVING BOTH ARBITRABLE AND

NONARBITRABLE ISSUES.

A. The law before and after the opinion below.

This controversy involves federal securities fraud issues as

well as issues of breach of contract, common law fraud and

conversion.

Until now, the law has been clear that federal securities fraud

claims are not arbitrable,’ while nonsecurities fraud claims are

arbitrable, and that suits which include both types of issues are

not arbitrable, in whole or in part, if those issues are “imprac-

tical, if not impossible” to separate. Shapiro v. Jaslow, 320

F.Supp. 598, 600 (S.D.N.Y. 1970).

Until now, when a trial court has been confronted with mixed

arbitrable and nonarbitrable issues, the Shapiro test has neces-

sitated an inquiry into the underlying question of whether any

of the same facts affect both the arbitrable and the nonarbitrable

legal theories with the result that a dispute must be tried in its en-

tirety and not arbitrated, if the arbitrator charged with deciding

‘Section 29(a) of the Exchange Act, 15 U.S.C. §78cc(a), voids any

contractual condition requiring a party to a securities transaction to

waive compliance with any other provision of that Act. This Court

my le boy ities Act (15 U.S.C. §77n), the counter.

part of ) of the Exchange Act, to prohibit enforcement of an

to arbitrate a claimed violation of the Securities Act.

ilko v. Swan, 346 U.S. 427 (1953). Other courts have reasoned that

§29(a) of the Exchange Act and the logic of Wilko similarly prohibit

arbitration of alleged violations of the antifraud provisions of the

Act. Ayres v. Merrill Lynch, Pierce, Fenner & Smith, 538

F.2d 536-37 (3d Cir. 1976), cert. denied, —— U.S. ———-; Colonial

ey Sp 0 ee Se 178, 183, n. 5 (2d Cir. 1966);

v. Paine, W , Jackson & Curtis, 389 F.2d 242, 245 (3rd Cir.

1968); Newman v. Shearson Hammill & Co., Inc., 383 te 265

deg Tex. 1974); Starkman v. oY; 377 F. 7 wig

1974) ; v. Schwabacher, 342 aie tenn d5

ja eng RK, 265 F 898 (S.D.N.Y. 1967); Shapiro v.

Jaslow, 320 F 598 (S.D.N.Y. 1970); Maheu v. Reynolds & Co.,

282 F 423 (S.D.N.Y. 1968) ; Reader v. Hirsch & Co., 197 F.Supp.

111 (S.D.N.Y. 1961).

Section ? of the Federal Arbitration Act requires a stay of litigation

“if the issue [sic] involved in such suit is referable to arbitration under

[an] agreement” between the litigants. 9 U.S.C. §3. This statute wrongly

assumes that all disputes consist of a single issue which is eit

arbitrable or nonarbitrable.

the arbitrable non fraud questions would have to deal with many

of the same facts as would the court charged with deciding the

federal securities fraud questions. Stockwell vr. Revnolds & Co..

252 F. Supp. 215 (S.D.N.¥, 1965). Such a test was applied by

the trial court in the instant case, (A. 84-86)

Cntil now, it was settled that determinations of arbitrability

were within the trial court's sound discretion. Collins Radio

Company v. Ex-Cell-O Corporation, 407 F.2d 995, 1000 (8th

Cir, 1972): Sam Reisfeld & Son Import Company v. 8. A. Eteco,

530 F.2d O79, O81 (Sth Cir, 1976).

Vow, the opinion of the Fifth Cireuit hae upset this rela-

tively stable state of the law by fashioning two unprecedented

rulings. First, the Fifth Cireuit has rejected the notion of

deferential treatment of trial court determinations of arbi-

trability, in favor of a completely de nore appellate determina-

tion, notwithstanding the passage of literally years of litigation

and full resolution of the merits of the controversy by jury

trial. In addition, the Fifth Cireuit has superimposed upon

the Shapiro test an inscrutable requirement that a dispute be

deemed (i) wholly nonarbitrable if the arbitrable and non-

arbitrable issues are “intertwined in the legal sense” (543

F.2d at 543), but (ii) pea y arbitrable if those issues “are

lonly] to some degree intertwined and overlapping” or “de-

pendent” (543 F.2d at 543.544).

The impact of these errors is profound. Situations abound

in which arbitrable claims are joined with nonarbitrable claims

and in which contractual arbitration clauses are involved.

See, eg. Frier Industries, Inc. v. Glickman, 994,845 Fed. Sec.

L.. Rep. [1974-75 Transfer Binder] (S.D.N.Y. 1974); Mae-

chiavelli v. Shearson, Hammill & Co. Inc., 384 F.Supp 21,

9

30 (E.D. Ca. 1974); Stockwell +. Reynolds, supra. With the

widespread use of form agreements containing arbitration

clauses in the brokerage industry, it is predictable that arbi-

trable and nonarbitrable claims will continued to be joined -

frequently. And it is not at all unreasonable to suppose that

many commercial transactions involving securities (acquisi-

tions, mergers, compensation programs, etc.) and providing for

arbitration of disputes will eventually present both arbitrable

questions and questions of securities fraud. In all such cases,

a clear, predictable and workable standard for deciding (and

for reviewing the decision of) arbitrability issues is absolutely

critical to the reconciliation of the aims of both the anti-waiver

provisions of the securities fraud statutos and the arbitration

statute.’ A standard which is so unclear as always to require

appellate review, or which in virtually every instance is to be

applied de novo on appeal, will necessarily have one of two

failings: either it will fail to keep cleims out of the courts

and thereby fail to achieve the economies thought to flow from

arbitration, or it will discourage the use of arbitration clauses

and thereby relegate all disputes to judicial resolution.

arising

under the antitrust laws of the United States. See Aimcee Wholesale

Corp. v. Tomar Products, Inc., 21 N.Y.2d 621, 289 N.Y5.2d 968

(1968); American Safety Equipment Corp. v. J. P. Maguire and Co.

v. Hickok Mig. Co., Ine., 391 F.2d 821 (2d Cir, 1968); A. & E. Plastik

Co., Ine. v. Monsanto Co., 996 F.2d 710 (%h Cir, 1968). District

Courts in the Fifth Cireuit will be compelled to apply the decision in

the sub judice to disputes mixing antitrust claims and arbitrable

and will undoubtedly find themselves equally perplexed and

guessed in doing *

10

Kh. The distinction between “legal intertwinement™ and

“somewhat intertwined.”

The new Fifth Circuit policy — de novo appellate determina-

tions of whether arbitrable and nonarbitrable issues are “legally

intertwined” (nonarbitrable), or merely “to some degree inter-

twined and overlapping” (arbitrable) — is, of course, with-

out substance. The test has no real value either for practitioners

or trial courts who must, respectively, advise clients and rule

regarding whether to arbitrate, at the risk of finding their

judgments overturned after years of extensive discovery and

litigation.

\ll the more deleterious are the effects of the Fifth Circuit's

“test” when considered in light of its additional holding —

an interlocutory appeal from an order denying a motion to

stay pending arbitration is neither appropriate nor required.’

543 F.2d at 542. Without a relatively quick determination that

arbitration is required, the economies of time and money in

the arbitration process become as they are in this case —

non-existent. On the other hand, to require arbitration when,

in fact, the anti-waiver provisions of the federal securities laws

would preserve the right to trial is eventually to require at

least two proceedings when only one is either necessary or

appropriate.’ Something more than appellate sorcery must be

*Should this Court issue its writ this issue of appealability of orders

staying (or not staying) litigation arbitration for clari-

Govsien, expecially ia vlow ot the Fi sy Ato

de novo determination of the question.

"By virtue of the Fifth Circuit's there is « possibility of

at least three proceedings: the original trial, the arbitration now re-

quired. and a trial of the federal securities and common law fraud

claims after arbitration. By any rational assessment, such a result

is absurd.

relied upon to resolve with eficiency the vast number of que

tions of arbitrability arising from disputes including both ar-

bitrable and nonarbitrable issues; the Fifth Cireuit’s distinction

between “legal intertwinement™ and “somewhat intertwined”

is no help to the trial courts which must make these ever-so-

critical arbitrability determinations. Rather, any fair reading

of the Fifth Circuit opinion reveals more propensity to turn

a quotable phrase than to analyze, as did the trial court,

the question of whether the arbitrator and the court would be

reviewing the same evidence. (See pp. 13-19, infra)

C. De novo determination by the appellate court.

But even the untenable distinction made by the Fifth Cir-

cuit would not be so harmful if the appellate court did not also

hold itself out as the sole arbiter of the issue. The Fifth

Cireuit failed to find that the trial court had abused its dis-

cretion in deciding to try the case — even while citing a number

of cases illustrating the discretionary prerogative of the trial

court in this area. Frier Industries Inc. v. Glickman, {94,845

Fed. Sec. L. Rep. [1974-75 Transfer Binder] (S.D.N.Y. 1974),

supra; Macchiavelli v. Shearson, Hammill & Co., Inc., 384

F.Supp. 21, supra; Sam Reisfeld & Son Import Co. v. S. A.

Eteco, 530 F.2d 679, supra.

There are several practical advantages to be gained from

between arbitration and trial in cases involving both securities

fraud and nonarbitrable issues. In the first place, the trial judge

can decide this question at any of a number of times (utilizing

pleadings, amended pleadings, hearings and whatever discovery

the record contains) that will «till permit realization of the

12

economies of arbitration.’ Secondly, for an appellate court to

arrogate the right to review de novo what the trial court decided

vears before and reverse and remand for arbitration after a

full trial on merits reveals an attachment for arbitration not

because of “considerations of judicial economy” (543 F.2d at

544) but rather irrespective of any such considerations. Finally,

no possible advantage derives from making the parties proceed

(either with litigation or arbitration) under the cloud of de

novo review. If the appellate court is to be free to make the

determination afresh (and on a completely inscrutable stan-

dard) then the appellate court should decide the issue before

either litigation or arbitration is advanced.” To let stand the

uncertainty created by the decision below is to guarantee but

one unfortunate result: no practitioner in his right mind will

let his client enter into an agreement providing for arbitration

where there exists even the remote chance of becoming em-

broiled in years of litigation, including certain appellate review,

just on the question of which forum should be used.

"One pitfall of the de novo approach is illustrated by the appellate

court's failure to understand the issues as well as the trial judge. The

principal opinion of the Fifth Circuit assumed that respondent had

“by a timely motion” moved to at rr irr time

arbitration. In fact, Tandy's motion did pot ask to stay trial of fr

issues, but only to arbitrate the so-called non-fraud issues. (A.63)

appellate curt pen sending the case to arbitration.

13

This Court should reaffirm the rule of Shapiro v. Jaslow and

Stockwell v. Reynolds, and the duty of the trial court to analyze,

as did the trial court here, the degree to which overlapping legal

and factual disputes will be decided in a trial (or by an arbitra-

tor). This analysis must enjoy a presumption of validity, subject

to reversal for abuse of discretion. It must not be subject to

facile reversal by an appellate court perceiving itself capable

of distinguishing between “legal intertwinement” and “some-

what intertwined.”

D. Application of the Shapiro and Stockwell rules.

While citing the Shapiro and Stockwell cases, the Court of

Appeals completely misapplied them, and in doing so satisfied

neither the ends of §29(a) of the Exchange Act nor those of

§3 of the Federal Arbitration Act. Apparently proceeding on

the assumption that all facts bear labels such as “fraud,” or

“contract,” or “conversion,” the Fifth Circuit implicitly con-

cluded that arbitration will not require the arbitrator to hear

any of the evidence which previously persuaded a jury that in

converting the escrowed stock, respondent worked a fraud on

the shareholders of P. J. Parker, Inc. Nothing in either appellate

opinion undertakes to segregate this evidence; the parties have

not received even a hint as to what facts, if any, must be with-

held from the arbitrator because they are “fraud” facts.

There is an obvious explanation for the Fifth Circuit's silence

on this matter: the “fraud” facts, the “contract” facts and the

“conversion” facts are one and the same. A few illustrations

make the point:

1. Inventory Pricing. The jury found that respondent had

represented that the acquisition audit would price inventory at

June 30, 1971, by the same methods as had been used in the

December 31, 1970 audit. (A. 148; issue 11(a)) This finding

14

was essential to petitioner's fraud case, because the represen-

tation was plainly false. (Issues 1, 24 and 25; A. 323-324,

487-488, 508-510, 792, 794, 823, 960, 991, 1291, 1293)

The jury also found, however, that the agreement did not

permit the massive inventory writedown’ taken by respondent,

and that the acquisition audit therefore improperly priced

inventory. (A. 145, 153; issues 1, 24 and 25)

All these findings (issues 1, 11(a), 24 and 25) estab-

lished that respondent's contract counterclaim (to capture the

escrowed stock) was untenable, because it was in part based

on the inventory writedown, and that respondent's impoundment

of the escrowed stock was a conversion. [See Sandor Petroleum

Corp. v. Williams, 321 S.W.2d 614 (Tex.Civ.App. 1959) writ

ref'd n.t.e., holding that a conversion arises from a wrongful

interference with another's property, even where that inter-

ference is based on a claimed contractual right that is later

proven invalid.] The same evidence supported all these findings.

(A. 312-313, 317-319, 323-324, 335-336, 369-370, 431-432,

536, 702, 708-714, 736, 761, 1132, 1352-53, 1367)

An arbitrator will necessarily hear this evidence, just as a

court and jury already have.

2. Touchette. The jury found that the respondent represented

that costs'® associated with a purchase of computer software

from a company called “Touchette” would not be subtracted

from the net worth of P. J. Parker, Inc. for purposes of the

acquisition audit. (A. 148; issue 11(b)) This finding was part

of and essential to petitioner's fraud verdict, because the repre-

"$331,492 (PX 18; A. 1849).

893,721 1A. 384, 499.502, 1879).

15

sentation was undisputedly false. (PX 18; A. 1842, 384)

A similar jury finding undermined respondent's claim that

it was entitled to charge the Touchette expenses against Parker's

net worth, as it did. (A. 146-47; issue 7)

Both these findings (issues 7 and 11(b)) served (i) to repu-

diate respondent's counterclaim for breach of contract, because

it was in part based on subtracting the Touchette expenses from

net worth, and (ii) to establish petitioner's claim of conversion

— if respondent had no contractual right to the escrowed stock,

the impoundment was a conversion. See Sandor v. Williams,

supra, and Prudential Petroleum Corp. v. Rauscher, Pierce &

Co., Inc., 281 §.W.2d 457 (Tex.Civ.App. 1955) writ ref'd n.r.e.

The same evidence supported both findings. (A. 308-310, 312,

499.502, 714-715, 1879)

An arbitrator will necessarily hear this evidence, just as a

court and jury already have.

3. Insurance and Vacation Pay. The jury found that respon-

dent represented that in accordance with past Parker practice,

these annually recurring expenses (for union employee life and

hospitalization insurance and management vacations) would

only be prorated for the 1971 calendar year in preparation of

the June 30, 1971 audit. (A. 148; issues 11(c) and 11(d))

Those findings were essential to and part of petitioner's fraud

verdict, because the representations were false. (The acquisition

audit charged $486,016 and $65,000 to net worth for insurance

(A. 1260) and vacation pay (A. 1842), respectively, even

though past practice had been a $12,000 annual charge for

insurance (A. 1208-1209, 555-556) and no accrual for vaca-

tion pay (A. 1045, 1465).

16

The jury also found that the acquisition audit departed from

the parties’ agreement in its treatment of insurance and vaca-

tion pay. (Issues 3-6, 20, 22, 23; A. 145-146, 151-153)

All these findings undermined respondent's contract counter-

claim, which was based, in part, on charging Parker's net worth

with these unfounded insurance and vacation pay accruals, and

validated petitioner's claim of conversion. The same evidence

supported all these findings. (A. 369-371, 385, 553, 555-56,

561, 702-703, 716-717, 763, 1132, 1045, 1208-09, 1438-39,

1465-67, 1478, 1495-97, 1546-47).

An arbitrator will necessarily hear all this evidence, just as

a court and jury already have.

4. False Inventory Certificate. In order to get its accountants

(Price Waterhouse & Co.) to give a clean opinion with respect

to the inventory valuation on the Parker financials prepared

for audit by respondent, respondent delivered to Price Water-

house a document which respondent described as proof of the

fact that it had correctly valued the Parke: inventory, in accor-

dance with past Parker pricing practices. (PX 41) Without such

a document Price Waterhouse would never have issued its audit,

certifying that the inventory valuation was correct (A. 1398.

1401), and the inventory-deficiency portion of Tandy’s counter-

claim would have failed.

This document was proven at trial to have been completely

phony — fraudulent, if you will. (A. 1000, 969-970, 868-869,

808, 956-958, 1210-1212) Proof that this document was born

in sin was part of petitioner's proof of fraud — it helped

establish Tandy’s scienter; it also disproved Tandy's contract

counterclaim, which was based, in part, on what Tandy claimed

was a net-worth deficit arising out of an inventory overvalua-

17

tion; and it virtually assured the jury finding that the conversion

(impoundment) was done with malice and in bad faith. The

evidence that proved the unreliability of this document was

offered both in support of petitioner's fraud theory and in

opposition to respondent's contract counterclaim.

An arbitrator will necessarily hear this evidence, just as a

court and jury already have.

5. Offer to Buy Inventory. After the acquisition agreement

had closed and respondent had begun the systematic process of

writing down the value of the Parker inventory, disregarding

the pre-closing representations, Patrick J. Parker, the president

of P. J. Parker, Inc., offered to buy all the marked-down inven-

tory at a price that would prevent there from being any net-

worth deficiency attributable to invemory. (A. 335-336, 431-

432, 1352-1353) Respondent rejected that offer, and insisted

on its write-down, to maintain its claim to the escrowed stock.

(A. 335-336) That evidence was undisputed. It proved fraud

(scienter), it disproved respondent's claim that Parker had

breached the net worth warranty, and it therefore demonstrated

that the impoundment was an act of conversion.

been heard by a judge and jury, but as things stand now, an

arbitrator will have to hear it again.

6. Impoundment. The act which damaged petitioner was

respondent's letter to the escrow agent impounding the escrowed

stock (PX 38; A. 1982). That letter was written six months

before Price Waterhouse had delivered its opinion; it was writ-

ten at a time when the only draft of the Price Waterhouse report

(PX 29) — a draft never disclosed to petitioner and obtained

only through discovery — showed petitioner to be entitled to

all the escrowed stock’: it was written after respondent had

rejected the offer to buy the allegedly overvalued inventory at

book value (A. 335-336); it was written at a time when respon-

dent was selling Parker's inventory at prices exceeding the

marked-down figures which respondent had insisted upon (A.

997); it was written after respondent had fired Pat Parker for

his refusal to accept a “compromise” valuation of inventory

(A. 333-334, 337, 340, 1380); it claimed as Parker liabilities

management insurance benefit. which respondent had terminated

after the closing (A. 1214, 1982, 1998; PX 38); it further

claimed as liabilities certain life and hospitalization insurance

benefits as to which respondent had then received (but not dis-

closed) two legal opinions stating that these liabilities would

providing them (P\ 44; DX 56; A. 1118-1119, 1996, 2066,

1217); and it was written at a time when respondent had been

advised by Price Waterhouse that generally accepted accounting

principles did not require accrual of either management vaca-

tion pay or life and hospitalization insurance for union employ-

ees (PX 29 [paragraph 2, p. 2]; A. 1893).

Based on these facts, the jury found that respondent had

acted in bad faith and with malice in impounding the stock,

19

the fraud and converted petitioner's stock. The jury had heard

the evidence proving the maliciousness of this tort. An arbitrator

will, too — because petitioner’ conversion claim i- pre-umably

arbitrable, even though it is inseparable from petitioner's fraud

claim.

The waste of what lies ahead is evident. The ends of public

and private economy and prompt resolution of controversies,

so often described as the primary advantages of arbitration, are

hardly advanced by the decision below — not in this case, of

course, nor in any other. In this case, an arbitrator will hear

facts on which a jury verdict of fraud has already been handed

down; and petitioner will be required to prove twice, if not

three times, what he has already proved once — that respon-

dent's claim to the escrowed stock was and is knowingly ground-

less. In all subsequent cases, this decision will first baffle trial

courts and lawyers alike, then hang like a deadly pall over

whatever decisions are initially made. Petitioner deserves a

better holding, and trial courts, lawyers, and businessmen con-

sidering arbitration agreements — justice — deserves a better

opinion. The decision below is wasteful, inscrutable, unpre-

dictable and unfair. It should be reversed.

2. THE DECISION BELOW IMPROPERLY RECONCILES

THE FEDERAL POLICY FAVORING ARBITRATION

WITH THAT PRECLUDING WAIVER OF THE RIGHT

TO LITIGATE CLAIMS OF SECURITIES FRAUD.

rities laws are at least as numerous and as authoritative as

those favoring arbitration. Compare Tcherepnin v. Knight, 389

U.S. 332, 336 (1967) with Galt v. Libbey-Owens-F ord Glass

20

Co., 376 F.2d 711, 714 (7th Cir. 1967). The instant case and

others like it present an undeniable tension between the two

policies. This Court has established the proper accommodation:

Wilko v. Swan, 346 U.S. 427, 438 (1953). Based on this

holding, the Third Circuit recently observed that “the existence

of countervailing federal policies . . . makes cases showing an

hospitable judicial attitude to the construction of arbitration

clauses inapposite.” Ayres v. Merrill Lynch, 538 F.2d at 536,

n. 9, supra.

The decision below conflicts with these principles. Ten days

of trial involving 22 witnesses, over 100 documentary exhibits,

and careful consideration by a jury, plus extraordinarily expen-

sive merits-briefing on appeal and no less than four years of

litigation — all is to be wasted in the interest of a “prompt

economical and adequate solution” that is no longer possible

——and never was possible without the benefit of discovery

afforded by judicial procedures. We ask this Court to recall its

own view of the relative disadvantages of arbitration:

21

[ The factfinding process in arbitration usually is not equis-

alent to judicial factfinding. The record of the arbitration

proceedings is not as complete; the usual rules of evidence

do not apply; and rights and procedures common to civil

trials, such as discovery, compulsory process, cross-exam-

ination, and testimony under oath, are often severely

limited or unavailable.

Alexander v. Gardner-Denver Company, 415 U.S. 36, 57-58

(1974) (emphasis supplied). Many of the indicia of fraud in

this case were the product of discovery. To give but a few

examples: petitioner discovered PX 32 (a memorandum reveal:

ing respondent's pre-closing plan to write down the value of

the Parker inventory (A. 1926), PX 41 (a fraudulent inventory

certificate — see pp. 16-17, supra), and PX 29 (a draft of

the Price Waterhouse audit report showing petitioner to be

entitled to all the escrowed Tandy stock — see n. 11, supra,

and accompanying text) well after filing the lawsuit. These and

other discoveries resulted in an amended complaint in which

petitioner's claim of fraud was pled with unmistakable inde-

pendence.

The Court of Appeals would have had petitioner proceed

straight to arbitration and forego his right to discover, and, to

a large extent, prove the extent of the fraud visited upon him.

It was no doubt to avoid the unfairness of results of this nature

that this Court rendered its Wilko and Alexander rulings, and

that the formerly prevailing rule was to deny arbitration when

arbitrable and nonarbitrable claims were joined in such a way

that some of the same facts formed the basis of both. The deci-

sion below ignores these considerations. Its result therefore con-

flicts with the spirit of Wilko and its progeny, and it should be

reversed.

22

There is more than irony here. This is fundamentally unfair.

Based on petitioner's original complaint,” neither Wilko v Swan

"The Fifth Circuit's arbitration order asserts that petitioner's 10b-5

claim is necessarily “dependent” upon his having lost the dispute

(raised by 's counterclaim and by — A claim for

specific performance) concerning what the acquisition

meant, 543 F.2d at 543. This * " notion was

STalioeett caps vad cet caged So

The original complaint did couch one (but only one) part of

petitioner's fraud in terms of an alternative of

~~ those in Count [TV (A. 1415); those Waseda

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413 (7th Cir, 1958); Nisbet vo. Van Tuyl, 224 F 7

1955); Proctor & Gamble Defense Corp. v. Bean, 146 F.2d

Cir, 1945); Bullen v. DeBretteville, 239 F.2d 824 (%h Cir.

cert. denied 353 U.S. 947; Borel v. United States Cas, Co., 233 F.2d

4

388 (Sth Cir, 1956) [superseded cannot be used

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23

nor §29(a) of the Exchange Act means anything if a proven

case of fraud in violation of Rule 10b-5 can be tossed out on

the strength of a contractual arbitration clause and $3 of the

Federal Arbitration \et.

CONCLUSION

The decision below did not reach the merits. It ignored the

fact that petitioner has proven fraud under the federal securities

laws, and ordered arbitration of a dispute already fully litigated.

It disregarded the fact that an arbitrator will have to hear the

same facts as have already persuaded a jury to find fraud, and

as may be heard by yet a third dispute-solving body. It deprived

the trial court of discretion in deciding whether a dispute should

be arbitrated or tried, and it did so by adopting a policy of

de novo review of such decisions. It permitted respondent the

unprecedented luxury of a free look at a jury verdict, without

even requiring an attemp! to get interlocutory review of the

arbitration question, It left the law of arbitrability in a state of

hopeless confusion. It based its holding on a superseded plead.

ing. It repudiated the underlying premise of this Court's deei-

sion in Wilko v. Swan, and, worst of all, it reached a result that

is enormously wasteful and unfair — to petitioner, to the trial

court, and to all other lawyers and trial judges who must try

now to guess which forum the appellate court will ultimately

prefer.

For all these reasons, petitioner respectfully prays that this

Court issue a writ of certiorari to review the judgment and

opinions of the Fifth Circuit.

24

Respectfully submitted,

Marvin S. Stoman

Rosert L. Buumentuar

Eant F. Hace Jr.

Rov PHetan

Attorneys for Petitioner

CERTIFICATE OF SERVICE

I, Marvin S. Sloman, counsel for Harper Sibley, Jr., peti-

tioner herein, ard a member of the Bar of the Supreme Court

of the United States, hereby certify that on May 19, 1977, I

served three copies of the foregoing Petition for Writ of Cer-

tiorari on respondent herein, by hand-delivering same to Warren

W. Shipman Ill, at his office at 1800 Commerce Building,

Ft. Worth, Texas, and to Cecil E. Munn, at his Office at 1800

First National Bank Building, Fort Worth, Texas.

Marvin S. Stoman

3000 One Main Place

Dallas, Texas 75250

Counsel for Petitioner

\.1

APPENDIX

1. Opinion of the United States District Court for the

Northern District of Texas, Dallas Division.

In the

United States

District Court

For the Northern District of Texas

Dallas Division

Hanrer Siacey, Jn. i

. Civil Action 3-7300-B

TANDY CORPORATION, ET AL

MEMORANDUM OPINION AND ORDER

On June 12, 1973, plaintiff Harper Sibley, Jr., filed his six

count complaint in the above styled and numbered cause seeking

the release of certain escrowed stock, reformation of a merger

agreement, money damages, and exemplary damages all arising

out of the merger of P. J. Parker, Inc., with and into HTT, Ine.,

a wholly owned subsidiary of defendant Tandy Corporation.

Plaintiff asserts that this action arises under 15 U.S.C. 78j(b)

(1970) (Section 10b of the Securities Exchange Act of 1934)

and the rules promulgated thereunder with resulting pendent

jurisdiction of the state common law and statutory claims. There

is an additional allegation of diversity jurisdiction.

Defendant Tandy filed a Motion to Stay Proceedings on July

24, 1973, contending inter alia that the parties had agreed con-

tractually to arbitrate any disputes arising out of the merger

A-2

and that arbitration agreement is enforceable under the Federal

Arbitration Act, 9 U.S.C. 1 et seg. (1970).

After a careful examination of the pleadings and the briefs

submitted by counsel, the Court is of the opinion that arbitration

would be inappropriate in this cause and, therefore, declines

to enter an order that would stay the proceedings.

The Plan and Agreement of Merger executed by P. J. Parker,

Inc. and HTT, Inc. is, a“. . . contract evidencing a transaction

involving commerce . . .” that contains an arbitration agreement

and comes, therefore, within the scope of the Federal Arbitration

Act. 9 U.S.C, 2 (1970). “Once a dispute is covered by the Act,

federal law applies to all questions of interpretation, construc-

tion, validity, revocability, and enforceability.” Coenen v. R. W.

Pressprich Co., 453 F.2d 1209, 1211 (2nd Cir.), cert. den. 406

U.S. 949 (1972). This is the accepted rule in both the federal

judiciary and in the Texas judiciary. See Erving v. Virginia

Squires Basketball Club, 468 F.2d 1064, 1067 (2nd Cir. 1972) ;

Collins Radio Co. v. Ex-Cell-O Corp., 467 F.2d 995, 998 (8th

Cir. 1972; Coenen v. R. W. Pressrich, supra; Hart v. Orlon Ins.

Co., 453 F.2d 1358, 1361 (10th Cir. 1971); Boston & Maine

Corp. v. Chicago, Burlington and Quincy R.R., 381 F.2d 365

(2nd Cir. 1967); Lummas Co. v. Commonwealth Oil Refining

Co., 297 F.2d 80, 86 n.4 (2nd Cir.) cert. den. 368 U.S. 986

1961); Robert Lawrence Co. v. Devonshire Fabrics, Inv., 271

F.2d 402 (2nd Cir. 1959), cert. granted 362 U.S. 909 (1960),

cert. dismissed pursuant to stipulation of counsel 364 U.S. 801

(1961); Mamlin v. Susan Thomas, Inc., 490 S.W.2d 634 (Tex.

Civ. App. 1973).

Plaintiff's complaint may be analysed as follows: (1) Count

IV alleges a violation of rule 10b-5 of section 10b of the

ee

\.3

Securities Exchange Act of 1934, 15 U.S.C. 78j(b) (1970):

(2) Counts 1, 11, UL, V and V1 allege claims grounded in the

contract of merger relating to defaults on the part of defen

dants or reformation of the merger agreement.

Counsel for both parties agree that section 29 of the Act, 15

U.S.C. 78ce (1970) precludes submission of Count IV of the

Complaint to arbitration, see Wilco v. Swan, 346 U.S. 427

(1953); however, defendant argues for the severance and

submission to arbitration of the remaining counts.

But Counts I, Il, IL, V and VI of the Complaint are so

intertwined with the rule 10b-5 allegations in Count IV that to

submit any of those counts to arbitration would be to violate

the mandate of section 78ce of the Act. This is especially true

when one considers that Counts I, I, Il, V and VI involve

intricate questions of law and findings of fact that, when

rendered, would likely resolve the issues presented in Count IV.

IT IS THEREFORE ORDERED, ADJUDGED and DE-

CREED that the Motion to Stay Proceedings filed in this cause

by defendant Tandy is and the same is hereby DENIED.

SIGNED and ENTERED this 10 day of September, 1975.

Saran T. Hucnes

United States District Judge

A4

2. Principal Opinion of the United States Court of

Appeals for the Fifth Circuit.

Harper SIBLEY, Jr., Plaintiff-Appellant,

Cross Appellee,

v.

TANDY CORPORATION et

al., Defendants,

No. 75-1243.

United States Court of Appeals,

Fifth Circuit.

Dec, 3, 1976.

Rehearing Denied Feb. 18, 1977.

Robert L. Blumenthal, Rod Phelan, Earl F. Hale, Jr., Dallas,

Tex., for plaintiff-appellant, cross appellee.

Warren W. Shipman, III, Donald H. Ray, Charles L. Stephens,

Cecil E. Munn, Sloan B. Blair, Fort Worth, Tex., for Tandy

Corp.

R. F. Snakard, Fort Worth, Tex., for Ft. Worth Nat'l Bank.

Appeals from the United States District Court for the North-

ern District of Texas.

Before GEWIN, GODBOLD and SIMPSON, Circuit Judges.

GODBOLD, Circuit Judge:

\o

This case originates from a corporate merger agreement con

taining a provision for arbitration of differences arising from

the agreement. Differences arose between the parties to. the

agreement, and one party sued asserting breach of contract

claims, federal and state securities law claims, and common law

fraud claims. We hold that the district court erred in refusing

to require arbitration of the contract claims and to stay the

securities and fraud claims pending arbitration.

The merger agreement was between Tandy Corporation and

P. J. Parker, Inc.. a holding company. Parker's primary asset

was ownership of Hickok Manufacturing Company. Hickok

and Parker were experiencing serious financial difheulties. The

management of Parker began negotiating with the Tandy man-

agement with the object of merging Parker into a specially-

formed Tandy subsidiary. After several months of intense

negotiations, Tandy and Parker entered into a written agree:

ment calling for a statutory merger between Parker and a newly

Parker shareholders were to be paid in Tandy stock, two

thirds upon surrender of the Parker shares and the remaining

third to be held by Fort Worth National Bank . escrow agent

pending verification of Parker's representation of its net

worth. Tandy was to obtain an audit by its accountants to con-

firm the Parker net worth. The audit and all other accounting

matters were to “be handled in accordance with generally

accepted accounting principles applied on a basis consistent

financial statements of Parker as of December 31, 1970." The

agreement provided for arbitration of all disputes arising from

the agreement.

A6

\ccording to the audit by Tandy’s accountadis, Parker's net

worth was substantially less than represented. The primary

reasons for the difference in figures were: (a) a write-down

of $331,492 in the value of Hickok’s inventory; (b) a charge

of $93,721 against Parker's net worth, incurred as a result of

Tandy’s cancellation of a computer software contract held by

Parker; (c) the inclusion of a liability of $486,016 for the

cost of a single premium life and medical insurance policy to

cover insurance benefits allegedly owed by Hickok to retired

employees; and (d) the inclusion of a liability of $65,000 for

Tandy ordered the bank to impound the escrowed stock.

Harper Sibley, the person designated in the agreement as

the representative of Parker shareholders, brought suit against

Tandy. (For convenience we refer to the plaintiff as “Parker.”)

The original complaint was in six counts, characterized by the

district court in this manner:

*** ». 542 *9°

Plaintiff's complaint may be analyzed as follows: (1)

Count IV alleges a violation of rule 10b-S of section 10b

of the Securities Act of 1934, 15 U.S.C. 78j(b)

(1970); (2) Counts I, Il, Il, V and VI allege claims

grounded in the contract of merger relating to defaults

on the part of defendants or reformation of the merger

agreement.’

By a timely motion Tandy moved to have the contract claims

submitted to arbitration and to have the federal securities law

judge recognized that under § 29 of the Act, 15 U.S.C. § 78ce

more accurately. there were four contract counts, one fed-

‘Perhaps,

eral and one state securities law count, and one common law fraudulent

misrepresentation count.

AJZ

(1970), Count [V was not subject to arbitration. Wilke v. Swan,

346 U.S. 427, 74 S01. 182, 98 Ld. 168 (1953). The court

declined, however, to sever the contract counts and to submit

them to arbitration, on the ground that they were so inter-

twined with the securities law claim that submitting them to

arbitration would violate § 78er. saving:

This is especially true when one considers that Counts I,

Il, 111, V and VI involve intricate questions of law and

findings of fact that when rendered, would likely resolve

the issues presented in Count IV.

Trial was held in October 1971 and consumed 14 days,

22 witnesses and more than 100 documentary exhibits. The jury

verdict consisted of answers to special interrogatories consisting

of 34 specific questions.’ The bulk of the interrogatories

related to matters of accounting, i. ¢.. the application of “gen-

erally accepted accounting procedures” and the interpretation

of corporate financial statements. with particular reference to

the four areas of primary controversy — valuation of inventory

and inclusion as liabilities of a charge for cancellation of a

computer software contract, life insurance premiums, and vaca-

tion pay. These were the areas from which arose the differences

in valuation of Parker's net worth as represented by it and as

reflected by Tandy’s audit. Several interrogatories related to

pre-agreement representations made by Tandy concerning

accounting principles and the treatment of the four specific

accounting items in particular controversy.

The court entered judgment awarding $463,853.93 damages

to Parker plus delivery of the escrowed shares. Parker appealed

on the issue of damages. Tandy cross-appealed on the issue of

"There was no general veriict

AB

liability and the refusal to submit to arbitration. We hold that

the court erred when it denied Tandy’s motion to submit the

contract claims to arbitration and refused to stay the securities

fraud claims pending the outcome of that arbitration. We,

therefore, reach neither the issue of Tandy’s liability nor the

issue of damages.

We find no merit in plaintiff's contention that Tandy waived

its right to arbitration. The burden on one seeking to prove

a waiver of arbitration is a heavy one. Ceneral Cuaranty

Ins. Co. v. New Orleans General Agency, Inc., 427 F.2d 924

(CAS, 1970) ; Hilti, Inc. v. Oldach, 392 F.2d 368 (CA1, 1968).

The plaintiff has failed to carry this burden. Tandy filed its

motion to stay the very day it filed its answer to Parker's com-

plaint, and it took no actions which could be viewed as being

inconsistent with its right of arbitration. Tandy did not waive

its right by failing to press an interlocutory appeal of the dis-

trict judge's denial of its motion to stay arbitration. General

Guaranty, supra.

The present case squarely raises the problem of what a court

should do where arbitrable claims are joined with claims not

subject to arbitration. On the one hand, Section Two of the

United States Arbitration Act, 9 U.S.C. § 2, makes arbitration

clauses in contracts involving commerce “valid, irrevocable and

enforceable.” Parker's contract claims against Tandy fall

*** ». 543 *** within the ambit of the arbitration clause of their

agreement, and are thus arbitrable. Their subject matter is

peculiarly adapted to arbitration. On the other hand, claims

under the Federal Securities Acts, such as Parker's 10b—5 claim,

are generally not subject to arbitration under a preexisting arbi-

AS

tration clause. Wilko r. Swan. supra; \euman v. Shearson.

Hammill & Co., Inc. 383 F.Supp. 265 (W.D.Tex. 1974)-

Here, the district judge ordered all issues tried on the

ground that the arbitrable issues were inextricably intertwined

with the federally cognizable 10b—5 issues. We agree with the

district judge that when it is impractical if not impossible to

separate out non-arbitable federal securities law claims from

arbitrable contract claims, a court should deny arbitration im

order to preserve its exclusive jurisdiction over the federal

securities act claims. Shapiro +. Jaslow, 320 F.Supp. 598

(S.D.N.Y.1970). However, in this case, the claims were not

“intertwined” in the legal sense. Instead we view the 10b-—5

claim as being “dependent” upon the contract claims. The dil-

ference is subtle yet significant. A comparison of the claims im

Shapiro v. Jaslow, supra, with Parker's claims illustrates the

difference. In Shapiro, one of the defendant~ alleged in a cross-

complaint that one of his codefendants committed acts giving

rise to rights under both the common law (arbitrable) and

under the federal securities law (non-arbitrable). The two

claims in Shapiro were not factually severable. An arbitrator

making a decision on the common law claims would have been

tow wy Ope Alberto-Culver Co., 417 U.S. 306,

: 24 270 (1974), which a colorable

argument that the doctrine of Wilko +. Swan, supra, not y to

actions brought under the 1934 Securities Exchange Act, we to

1905 Enchangs Act for cxtecigh any iferences which might ex, ond

1934 Act any di ich might exist,

epee afer itko is applicable to both the 1933 and

g., Moran v. Paine, Webber, Jackson.

z

r

;

tf

»s

Curtis, 389 F.2d 242, 245 ‘CA3. 1960): Colonial Realty Corp. v. Bache

& Co., 358 F.2d 178, 183 ». 5 + CA2, 1964); Starkman v. Seroussi, 377

F Supp. 518 (S.D.N.Y.1974).

A-10

impelled to review the same facts needed to establish the plain.

tiff’s securities law claim.*

Parker's suit against Tandy is a horse of a distinctly different

color. The original complaint, the amended complaint (filed a

year after arbitration was denied), the record of the trial, the

numerous special interrogatories submitted to the jury, and

the opinion of the court rendered in entering judgment on the

jury findings, reveal this to be essentially a dispute over corpo-

rate valuations centered around complex issues of accounting

and valuation. The securities law claim was the rather small tail

to a much larger dog.

An even more important consideration is seen when Parker's

claims made in the original complaint are arranged in the

sequence that logic commands. First is the “frontline” assertion,

contract it has performed (or perhaps is excused from further

its accountants did not properly value inventory, did not use

A-1l

proper accounting methods in valuing inventory. improperly

handled the three liability items (computer contract. life insur-

ance and vacation pay), and did not unqualifiedly *** p.544***

certify their audit. Tandy having breached, Parker asks that the

escrowed shares be delivered to it.

Parker's first fall-back claim is that the contract may be

ambiguous. If it is, then resort must be had to oral representa-

tions made by Tandy. This extrinsic matter will resolve ambi-

guities in Parker's favor, or will require reformation of the

contract because it does not exemplify the “true understand.

ing” between the parties. Under the contract, either construed

or reformed as Parker desires, Parker is entitled to win because

Tandy breached that contract.

Up te this point, Parker's claims are seen 2s pure claims on

the contract involving the terms of the merger agreement (as

written, or as construed or reformed) and the application of

those terms. If either of these positions by Parker were sus-

tained before an arbitrator the controversy would be entirely

or largely at an end except for the arbitrator's making adjust-

ments in the valuation figures if appropriate. Thereafter Parker

could hardly contend in a courtroom that Tandy’s representa-

tions had fraudulently induced it to enter into a written contract

which: (1) meant what Parker said it meant, that is, was con-

sistent with Parker's contentions, or (2) embodied in it the

oral representations made by Tandy and thereby set out the

correct understanding between the two parties. Tandy’s repre-

sentations are irrelevant with respect to (1) or are incorporated

into the contract under (2) as part of the “true agreement”

between Parker and Tandy.

Parker's second fall-back position is that its management

A-12

was fraudulently induced b “Se oral representations of Tandy

management to enter into a written contract which differed from

the previously-made oral representations. Here the securities

claim arises. The very existence of this claim is predicated upon

Parker’s first two positions being resolved against Parker.

Unquestionably, the facts are to some degree intertwined and

overlapping. But all of the policy reasons supporting arbitration

apply here where arbitration may establish that a securities

claim does not exist because the claimant’s own assertions with

respect to arbitrable issues are correct. The parties, by their

agreement, commitied the resolution of contractual disputes to

arbitration. Both the policy behind the United States Arbitration

Act and considerations of judicial economy required that

Parker’s contractual claims be submitted to arbitration and

that the federal securities law claims be stayed pending the

outcome of those proceedings. Cf Kavit v. A. L. Stamm & Co.,

491 F.2d 1176 (CA2, 1974); Black v. Econo-Car Int'l, Inc., 404

F.Supp. 600 (D.Mass.1974); Harman Electrical Construction

Co. v. Consolidated Engineering Co., 347 F Supp. 392 (D.Del.

1972).°

Plaintiff itself has ized that its securities law claim cannot

exist unless the contr d between it and Tandy is resolved

in the latter’s favor. In the plaintiff's original complaint its federal

securities law count is phrased as follows:

“Alternatively, if the Merger t is found unambiguous

cates Sp SND - - - GUY a device scheme or artifice to

raud.”

. y is a two-way street, i. e., there exist situations where

the arbitration should be stayed pending resolution of the securities law

claims. For a case illustrating a situation where the arbitrable claims

should be stayed see Frier Industries, Inc. v. Glickman, [1974-1975

Decisions] Fed.Sec.L.Rep. 194,845 (S.D.N.Y.1974). Moreover, if the

claims are factually and legally independent, the court may allow both

the arbitration proceedings and the trial of the securities law claims to

forward simultaneously. E. g., Macchiavelli v. Shearson, Hammill &

0., Inc., 384 F Supp. 21, 31 (E.D.Cal.1974). See also Sam Reisenfeld

& Son Import Co. v. 8. A. Eteco, 530 F.2d 679 (CAS, 1976).

A-13

We reverse and remand with directions that plaintiff's claims,

other than those alleging violations of federal and state secu-

rities laws, and common law fraud claims be submitted to

arbitration in accordance with the parties’ agreement, and that

resolution of the Texas and federal securities law claims and

common law fraud claims be stayed pending the outcome of

the arbitration proceedings.

REVERSED and REMANDED with directions.

A-14

3. Opinion of the United States Court of Appeals for the

Fifth Cireuit, Denying Rehearing.

Harper SIBLEY, Jr., Plaintiff-Appellant,

Cross Appellee,

v.

TANDY CORPORATION et

al., Defendants,

Tandy Corporation, Defendant-Appellee,

Cross Appellant.

No. 75-1243.

United States Court of Appeals,

Fifth Circuit.

Feb. 18, 1977.

Appeals from the United States District Court for the North-

ern District of Texas.

ON PETITION FOR REHEARING

Before GEWIN, GOLDBOLD and SIMPSON, Circuit Judges.

PER CURIAM:

The linchpin of Parker's petition for rehearing concerns |

this sentence in our opinion, 543 F.2d at 542: “By a timely |

motion Tandy moved to have the contract submitted to arbitra-

4-15

tion and to have the federal securities law claims stayed

pending arbitration.” Parker correctly points out that Tandy’s

motion did not ask for a stay of the nonarbitrable federal secu-

rities law claims pending arbitration but only the arbitrable

claims. This being so, Parker asserts that with respect to the

securities law claims the results of the trial should be per-

mitted to stand. Parker’s petition makes it necessary that we

state at greater length what occurred in the district court with

respect to pussible stays.

Parker responded to Tandy’s motion to stay with a brief

urging the district court to deny the motion and to hold that

the entire dispute must be tried in the court because all issues

were indistinguishable, inextricably intertwined and incapable

of severance. Alternatively, Parker asked that if a severance

was granted the court enter an order that arbitration should not

begin until after the securities law claims had been tried. Tandy

responded with a reply brief ' in which it requested that trial of

the securities law claims be stayed.

In short, the parties squarely put before the court the question

of what it should do: should it try all issues, or carve out the

arbitrable issues, and, if the latter, should it stay trial of the

securities claims until the arbitration was concluded, or stay

arbitration until the trial concluded, or stay neither and per-

mit both trial and arbitration to proceed. The court accepted

Parker’s primary argument. It ordered that all issues should

be tried before the court and declared that arbitration of any

issues was inappropriate and would violate the federal securities

law.

‘It pointed out various of the considerations noted in our opinion

which mandated that arbitration should be first in time.

A-16

This case is “essentially a dispute over corporate valua-

tions centered around complex issues of accounting and valua-

tion. The securities law claim was the rather small tail to a much

larger dog.” 543 F.2d at 543. As we explained in our opinion,

both the nature of the dispute and the claims made by Parker

cried out for arbitration’s being first in time. Parker, however,

successfully urged upon the court its primary position that

everything must be settled in court and that nothing could be

arbitrated. It not only prevented arbitration’s being first in time

but also secured a declaration that foreclosed the possibility

of arbitration and trial proceeding simultaneously. Having

persuaded the court to choose a course 180 degrees off the

. correct one, Parker has little force to his argument that he

should be permitted to enjoy the substantial benefits of a trial

that should not have been held. We have previously rejected

such an argument, General Guaranty Ins. Co. v. New Orleans

General Agency, Inc., 427 F.2d 924, 929 (C.A.5, 1970), and

we do so again. The argument is inconsistent with the policies

underlying the Arbitration Act. It is inconsistent with judicial

recognition of arbitration as a socially desirable instrumentality

for the settlement of disputes outside the courtrooms of be-

leaguered courts. In the long run, acceptance of it would ill

serve both the courts and those who voluntarily contract to

arbitrate their disputes.

The suggestion is made that our opinion cuts off Parker

from asserting after arbitration any securities law claims it

might have. We have not intended to suggest that. We did, and

do, suggest that in a practical sense arbitration first in time

might have disposed of this suit and, if not, might have limited

its scope and clarified it. And it still might.

The petition for rehearing is DENIED.