Grumhaus, Andrew S. v. Comerica Securities

In the
United States Court of Appeals
For the Seventh Circuit
No. 99-4238
Andrew S. Grumhaus and
Leslie Grumhaus-Davidson,
Plaintiffs-Appellees,
v.
Comerica Securities, Inc., as successor-in-interest
to Comerica Financial Services Inc.,
Defendant-Appellant.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 99 C 1776--James B. Moran, Judge.
Argued May 30, 2000--Decided August 3, 2000
Before Posner, Coffey and Kanne, Circuit Judges.
Kanne, Circuit Judge. A year after Andrew S.
Grumhaus and Leslie Grumhaus Davidson ("the
Grumhaus children") sued Comerica Securities in
state court and nearly six months after the case
was dismissed, they demanded a chance to
arbitrate the dispute. Comerica resisted
arbitration on the ground that the contractual
right to arbitrate had been waived. The Grumhaus
children moved to compel arbitration, and the
district court ruled that the Grumhaus children
had not waived arbitration and entered an order
to compel. We find that no special circumstances
absolve the Grumhaus children from the effect of
their waiver of the right to arbitrate, and we
vacate the district court’s order.
I. History
Peter Dean Grumhaus, Sr., the Grumhaus
children’s father, had borrowed heavily from
LaSalle Bank on his own behalf and for several
businesses he either owned or controlled. After
some financial setbacks, Grumhaus found himself
strapped for cash to pay off the loans. The
Grumhaus children owned large blocks of stock in
Dean Foods, a company that the family had
controlled for many years, and Grumhaus decided
to use this stock to pay back LaSalle Bank. To do
so, Grumhaus needed to establish accounts with a
securities trading firm and liquidate the Dean
Foods stock that was in his children’s names. The
Grumhaus children signed the papers establishing
the brokerage accounts, and LaSalle presented
those papers to Comerica, a securities firm
affiliated with LaSalle. The children never
agreed to sell their stock, and Grumhaus
apparently forged his children’s signatures on
the loan applications pledging the stock as
collateral and on the orders to sell the stock.
The stock was sold in 1994 and the proceeds used
to pay off the LaSalle loans. Two years later,
after Grumhaus died, his children discovered
their stock had been sold.
In October 1997, the Grumhaus children sued
Comerica, LaSalle and another brokerage firm in
Illinois state court. That complaint stated
several claims "collectively against the
defendants" revolving around the unauthorized
sale of the children’s stock by Comerica to pay
off the LaSalle loans. The complaint sought
damages equal to the present value of the stock
and the establishment of a constructive trust for
the proceeds of the sale. LaSalle moved to
dismiss the case, and on March 17, 1998, the
state court dismissed the complaint against all
defendants, with leave to refile. In its order,
the court stated that "[n]othing contained herein
shall waive any party’s right (i) to argue that
an alleged contractual arbitration clause compels
litigation of this case in another tribunal, or
(ii) to argue that any such arbitration clause is
either inapplicable or unenforceable." Two months
later, the Grumhaus children refiled their
complaint against LaSalle, but voluntarily
dismissed without prejudice their claims against
Comerica. In their voluntary dismissal, the
Grumhaus children expressed an intent to
arbitrate the dispute with the brokerage firms.
Six months later, the Grumhaus children filed a
demand for arbitration with the National
Association of Securities Dealers. That demand
alleged that Comerica had wrongfully sold the
Dean Foods stock, relying on forged documents
supplied by LaSalle, to pay off the LaSalle
loans. For damages, the Grumhaus children sought
the value of the stock. Comerica refused to enter
arbitration.
The federal district court held that the
parties had an enforceable arbitration agreement
and that the Grumhaus children had not waived
that right by litigating in state court. The
district court recognized the presumption that a
party waives a right to arbitrate by choosing a
judicial forum instead of arbitration, but held
that the presumption was outweighed by several
factors. Among them, the court found that the
issues in arbitration were different than those
in the state complaint, Comerica had not been
prejudiced by the judicial proceeding and that
the "skeletal nature" of the proceeding and the
court’s order had not indicated an intent to
waive arbitration.
II. Analysis
We first address whether this Court has
jurisdiction to decide this appeal. We find that
we do. Under the law of this Circuit, an order to
compel arbitration cannot be appealed if it is
part of a larger suit still before the district
court, or "embedded" among multiple issues. See
Iowa Grain Co. v. Brown, 171 F.3d 504, 508 (7th
Cir. 1999); Napleton v. General Motors Corp., 138
F.3d 1209, 1212 (7th Cir. 1998). This Court may
hear an appeal from an order in an "independent"
proceeding, or one in which the motion to compel
arbitration is the "sole issue before the
district court." Iowa Grain, 171 F.3d at 508. The
Grumhaus children contend that their motion is
embedded, and therefore the order compelling
arbitration cannot be appealed.
The Grumhauses initially filed an independent
complaint in the district court to compel
arbitration of their dispute. After briefing and
while awaiting the court’s decision, they filed
an amended complaint adding substantive claims
against Comerica in an attempt to transform their
arbitration action into an embedded action. All
along, they admitted they wanted those
substantive claims, which were the same as the
claims to be submitted to arbitration, to be
arbitrated, not decided by the court. In fact,
they asked the court to stay litigation of the
amended complaints and not require Comerica to
answer it because the court’s disposition of the
arbitration claim would completely dispose of the
substantive claims. The Federal Arbitration Act
prohibits only appeals from interlocutory orders
to proceed with arbitration, not from final
orders. See 9 U.S.C. sec. 16(b)(2). The district
court in this case entered a final judgment that
indicated "cause dismissed" and ordered the
parties to arbitration. No further issues remain
for the district court to answer, and so it is
clear that the Grumhaus’s arbitration motion was
the sole issue before the court. Therefore, the
court’s order constitutes a final order from
which appeal can be taken.
We next decide whether the Grumhaus children
waived their right to arbitrate the dispute with
Comerica. We review a district court’s finding of
waiver for clear error, but review de novo any
conclusions of law. See Iowa Grain, 171 F.3d at
509. A contractual right to arbitrate may be
waived, either expressly or implicitly. See
Cabinetree of Wisconsin, Inc. v. Kraftmaid
Cabinetry, Inc., 50 F.3d 388, 390 (7th Cir.
1995); St. Mary’s Med. Ctr. of Evansville, Inc.
v. Disco Aluminum Products Co., 969 F.2d 585, 587
(7th Cir. 1992). In fact, we have held that a
court must presume that a party implicitly waived
its right to arbitrate when it chooses a judicial
forum for the resolution of a dispute. See
Cabinetree, 50 F.3d at 390. Once a party selects
a forum, the courts have an interest in enforcing
that choice and not allowing parties to change
course midstream. See id. The central question is
whether the party against whom the waiver is to
be found intended its selection and not whether
either party would be prejudiced by the forum
change. See id. In the case of an implied waiver,
we must determine whether "based on all the
circumstances, the [party against whom the waiver
is to be enforced] has acted inconsistently with
the right to arbitrate." St. Mary’s, 969 F.2d at
588; see also Iowa Grain, 171 F.3d at 510
(holding that courts must look at totality of the
circumstances to find waiver).
In Cabinetree, the plaintiff filed a breach of
contract suit in state court, and the defendant
chose to remove the case to federal court, which
had jurisdiction under diversity of citizenship.
After six months of pretrial proceedings and
discovery, the defendant moved to stay the court
action pending arbitration. The district court
denied the motion, and the defendant appealed. We
held that the election to proceed in a
nonarbitral forum acted as a presumptive waiver
of the right to arbitrate and that a party need
not show that it would be prejudiced if
arbitration were compelled. 50 F.3d at 390.
Similarly, in St. Mary’s, the plaintiff had
filed an amended complaint for breach of warranty
in federal district court in July 1990. 969 F.2d
at 586-87. The defendant waited about five months
and then moved for dismissal of the complaint as
time barred and, in the alternative, as
insufficient as a matter of law. Several more
months passed without mention of arbitration, and
after the district court finally denied the
motion to dismiss, the defendant for the first
time moved for a stay pending arbitration. The
district court found that the defendant had
waived arbitration for three reasons: delay,
participation in discovery and filing a motion to
dismiss. We upheld the district court, finding
that the defendant’s participation in several
months of litigation was inconsistent with an
intent to exercise an arbitration right. Id. at
590-91. "Submitting a case to the district court
for decision is not consistent with a desire to
arbitrate. A party may not normally submit a
claim for resolution in one forum and then, when
it is disappointed with the result in that forum,
seek another forum." Id. at 589. Furthermore, we
held that "a court may find waiver even if [the
decision to forgo arbitration] did not prejudice
the non-defaulting party." Id. at 590.
Here, the plaintiffs filed suit against Comerica
in October 1997 and litigated their claims for
several months. In March 1998, the state court
dismissed the complaint. Understandably
disappointed with that result, the Grumhaus
children decided that they wanted to arbitrate.
Still they waited several more months, until more
than year after filing the initial action, to
demand arbitration formally. The plaintiffs were
aware of their right to arbitrate, as it was
included in the documents they signed
establishing their brokerage accounts, but chose
instead to litigate. Just as in St. Mary’s and
Cabinetree, this knowing selection of one forum
over another and willing participation in the
ensuing litigation was plainly inconsistent with
a desire to arbitrate.
The Grumhaus children attempt to distinguish St.
Mary’s on the ground that, unlike the defendants
in St. Mary’s, they "never submitted their state
court action for judgment." This is not even
technically correct. Filing a complaint in
district court most certainly constitutes a
request for judgment, as the words "prays for
entry of judgment" as used repeatedly by the
Grumhaus children would tend to indicate.
Although it is true that in St. Mary’s the
defaulting party submitted a motion to dismiss
while here the non-defaulting party (Comerica)
submitted the motion, that distinction relates
solely to the different roles of the parties as
plaintiff or defendant. In St. Mary’s, the issue
was whether the defendants had submitted the case
for resolution in a judicial forum, a fact
indicated by filing a motion to dismiss, while
here the issue is whether the plaintiffs had.
Unlike a defendant, a plaintiff expresses his
intent to submit to a judicial forum by filing a
complaint, as the Grumhaus children did. Had
Comerica failed to respond at all to the suit, we
have no doubt the Grumhaus children would have
thought themselves entitled to a default judgment
against Comerica. The Grumhaus children having
filed a complaint in district court may not now
say they did not submit the case for judgment.
The Grumhaus children also contend that waiver
cannot be inferred because their state court
action against Comerica involved different causes
of action than those at issue in their request to
arbitrate. In Gingiss International, Inc. v.
Bormet, 58 F.3d 328, 332 (7th Cir. 1995), we held
that a decision to litigate state law breach of
contract claims did not evince an intent to waive
arbitration of federal Lanham Act claims because
the two claims "involved different issues." See
also Doctor’s Associates, Inc. v. Distajo, 107
F.3d 126, 133 (2d Cir. 1997) ("[O]nly prior
litigation of the same legal and factual issues
as those the party now wants to arbitrate results
in waiver of the right to arbitrate."). Doctor’s
Associates involved claims by franchisees that
the franchisor had waived its right to arbitrate
disputes under the franchise agreement by
litigating eviction proceedings under leases
between the franchisor and franchisees. Id. The
franchisor sought to enforce rights to payments,
royalties and so forth under the franchise
agreements through arbitration as allowed by the
agreements, but also sought to enforce rights
created by the leases through eviction
proceedings. The Second Circuit, citing Gingiss,
58 F.3d at 330-32, rejected a simple fact-based
analysis of whether the defaulting party had
waived its right to arbitrate, but looked instead
to whether the parties had "litigate[d]
substantial issues going to the merits of the
franchisees’ current claims." Doctor’s
Associates, 107 F.3d at 133. The court found the
issues sufficiently distinct to avoid a finding
of waiver because, among other things, the claims
in the eviction proceedings, unlike those in the
franchise agreement disputes, were nonarbitrable.
Id.; see also Gilmore v. Shearson/American
Express, Inc., 811 F.2d 108, 114 (2d Cir. 1987)
(holding that complaint did not "alter the scope
or theory" of the claims to which one party had
already explicitly waived arbitration, and
therefore the waiver applied to the claims raised
in the complaint).
We agree that different claims may arise from a
common factual basis, and that in one claim, a
party may wish to waive arbitration while
preserving that right in the other. However, as
we said in Gingiss, when the same issues are
presented, a party may not escape the effect of
its waiver by minimally restyling the claim and
presenting it for arbitration. The Grumhaus
children contend that because they brought
"different causes of action" in their request to
arbitrate, they have successfully brought
different issues. In this view, any distinction
between the legal elements required to plead one
cause and those required for a second would allow
the plaintiff to escape the effect of a waiver.
The federal courts long ago ceased using the
arcane and overly technical system of code
pleading and causes of action in favor of a more
substance oriented system that focuses on the
merits of issues raised in court filings. See,
e.g., Bartholet v. Reishauer A.G. (Zurich), 953
F.2d 1073, 1078 (7th Cir. 1992) (explaining
purposes behind shift from fact to notice
pleading). Our choice of the word "issue" in
Gingiss reflects this continuing determination to
focus on the substantive merits of various
claims, rather than on the purely technical
aspects.
The Grumhaus children contend that the causes
of action brought in the state court--conversion,
unjust enrichment, constructive trust and
constructive fraud--are different from those in
the arbitration claim--negligence, breach of
duty, violations of state and federal securities
laws. However, it is all one dispute, stemming
entirely from Comerica’s action in liquidating
the Dean Foods stock belonging to the Grumhauses,
and the issue-- whether Comerica wrongfully
liquidated the stocks--is the same. The choices
of remedies are the same in both actions, and a
favorable resolution of one would have precluded
as a double recovery relief in the other. Thus,
the case is distinguishable from Gingiss and
Doctor’s Associates, in which the rights and
remedies underlying the different claims were
distinct. When the Grumhaus children chose to
file suit against Comerica over the wrongful
liquidation of their assets, they waived their
right to have an arbitrator resolve that dispute.
We have held that even when the presumption
applies, other factors may absolve the defaulting
party of its effect. See Cabinetree, 50 F.3d at
390-91. We outlined some of those special
circumstances in Cabinetree, 50 F.3d at 391, but
none applies here. The plaintiffs had no special
concern about a statute of limitations or doubts
about whether their claims were arbitrable, nor
did the litigation take such unexpected turns to
make it obvious that the Grumhaus children should
be relieved from their waiver. Prejudice and
delay also may be factors in relieving one party
from its waiver, see id., but these factors are
not compelling here. Comerica was not unduly
prejudiced by the Grumhaus children’s delay in
seeking arbitration, but the Grumhaus children
did not do all they reasonably should have been
expected to do to make the "earliest feasible
determination" of which forum to elect. Id. It
took more than a year after they initiated a
court suit to formally demand arbitration. Until
then, Comerica could not be sure, despite some
suggestions in May 1998, that the plaintiffs
would seek arbitration. This lack of diligence by
the Grumhaus children counsels against absolving
them of their waiver.
III. Conclusion
The Grumhaus children chose to litigate their
dispute against Comerica and thereby waived their
contractual right to arbitrate. Under the law of
this Circuit, they must now live with that
choice. The district court erred in finding that
the plaintiffs had not waived arbitration, and we
hereby Vacate the order compelling arbitration.