Court Opinion

ID: 770021
Source: CourtListenerOpinion
Date Created: 2012-04-18 10:29:02+00
Date Added: 2024-06-11T17:55:47.377431
License: Public Domain

223 F.3d 648 (7th Cir. 2000)
Andrew S. Grumhaus and  Leslie Grumhaus-Davidson, Plaintiffs-Appellees,v.Comerica Securities, Inc., as successor-in-interest  to Comerica Financial Services Inc., Defendant-Appellant.
No. 99-4238
In the  United States Court of Appeals  For the Seventh Circuit
Argued May 30, 2000
Decided August 3, 2000

Appeal from the United States District Court  for the Northern District of Illinois, Eastern Division.  No. 99 C 1776--James B. Moran, Judge.
Before Posner, Coffey and Kanne, Circuit Judges.
Kanne, Circuit Judge.

1
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

2
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.

3
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.

4
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.

5
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

6
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.

7
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.

8
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).

9
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.

10
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

11
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.

12
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.

13
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.

14
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).

15
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.

16
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.

17
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

18
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.