federal jurisdiction was provided by the Federal Arbitration Act and the subject matter of the arbitration, which arose under the Securities Exchange Act of 1934. Valenzuela Bock, supra, at 959. Granting the motion to remand the action to state court, the court found that the FAA did not confer jurisdiction, as despite a literal reading of the FAA which would appear to allow any action relating to any arbitration to which the FAA applies to be brought as an original proceeding in the federal courts, numerous courts had consistently held that the sections of the FAA referring to "United States court" did not confer federal subject matter jurisdiction. Valenzuela Bock, supra, at 960-61 (citing cases). Further, the court concluded that if the FAA was construed to provide for a federal forum whenever the underlying dispute involved a federal question, it would be seen as overturning the well-established rule that federal question jurisdiction under 28 U.S.C. § 1331 must be determined on the face of a "well-pleaded" complaint. Id., at 963.
Later, in Application of Prudential Securities, Inc., 795 F. Supp. 657 (S.D.N.Y. 1992), in which a securities brokerage firm had filed a petition to stay an NASD arbitration, the court remanded the action to state court, holding that the securities brokerage firm's right to stay the arbitration under the NASD contract and the FAA was "not one of the federally created rights that gives rise to federal question jurisdiction," and that the petitioner's right to relief in state court did not necessarily depend on the resolution of the underlying federal claims asserted by the petitioners as grounds for arbitration. In re Prudential Securities, Inc., supra, at 661-662. See also Merrill Lynch, Pierce, Fenner & Smith v. Shaddock, 822 F. Supp. 125, 132 (S.D.N.Y. 1993) (noting that for the FAA to be enforceable in federal court, there must be an independent basis for subject matter jurisdiction such as diversity as well as a showing of interstate commerce).
In this case, as noted, Petitioners have asserted that federal question jurisdiction exists on the basis that all or some of the claims alleged in the underlying petition arise under the Securities Exchange Act of 1934. However, federal question jurisdiction cannot be found by looking beyond the petition to the underlying claims that are the subject of the arbitration. Application of Prudential Securities, Inc., supra. Indeed, Respondents argue that they have not raised claims under the Securities Exchange Act of 1934, and that they seek to hold Petitioners liable under the state common law theory of respondeat superior. Although Respondents' NASD arbitration claim does at one point refer to the Jaysons as controlling persons, Exhibit A to Petition filed April 20, 1995 at p. 5, the claim also casts the Jaysons in vicarious liability based upon an asserted obligation to "supervise and monitor" King as their employee and registered representative. Id., at p.6. Thus, to allow Petitioners, who are respondents in the arbitration proceeding, to inject Exchange Act theories into these proceedings via a petition seeking relief from arbitration under the FAA, thereby conferring subject matter jurisdiction on this court, would permit Petitioners to accomplish indirectly what they could not achieve directly - creating federal question jurisdiction through the mechanism of a carefully drawn responsive pleading, contrary to established law. See Valenzuela Bock, supra, at 964 (stating that "issues of federal law that are injected into a suit by the answer rather than the complaint do not satisfy the requirements of federal question jurisdiction) (citing Louisville & Nashville Railroad v. Mottley, 211 U.S. 149, 53 L. Ed. 126, 29 S. Ct. 42 (1908). See also, e.g., Reed v. Cohen, 876 F. Supp. 25, 29 (E.D.N.Y. 1995) (defendant's assertion that plaintiff's state claim arose under federal securities law was properly characterized as either a counterclaim or a defense and could not serve as a predicate for removal; court also noted that federal securities laws do not preempt state securities laws that incidentally affect interstate commerce). Further, as noted, Respondents' claim for arbitration does not create jurisdiction in this court to adjudicate claims arising under the Exchange Act of 1934. It asserts liability against Petitioners under the NASD Code of Arbitration, and any award will be determined by an arbitrator based upon an evaluation of the evidence presented by Respondents in that proceeding pursuant to the NASD Rules.
Accordingly, the court finds that no independent basis of federal jurisdiction has been raised, and, as such, the court, lacking subject matter jurisdiction over the petition, must dismiss the action.
Even if the court did have subject matter jurisdiction, the court would nevertheless find that this action should be dismissed and that arbitration should be compelled.
The FAA authorizes a district court to stay litigation which may relate to a claim of arbitration, however it does not speak as to whether a court has authority to stay an arbitration. 9 U.S.C. § 3. Nonetheless, "this silence does not mean district courts have no such power." L. F. Rothschild & Co., Inc. v. Katz, 702 F. Supp. 464, 467 (S.D.N.Y. 1988). In fact, federal courts have clearly stated that, in the appropriate circumstances, an order to stay arbitration is within the power of the district court. Kelly v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 985 F.2d 1067, 1068-69 (11th Cir. 1993) (holding that the district court had the authority to enjoin arbitration); Tai Ping Insurance Co. v. M/V Warschau, 731 F.2d 1141, 1144 (5th Cir. 1984) (same); L. F. Rothschild & Co., supra, at 468 (enjoining parties from proceeding with arbitration); Jab Industries, Inc. v. Silex S.P.A., 601 F. Supp. 971, 979 (S.D.N.Y. 1985) (holding that the district court had the authority to enjoin arbitration). See also, e.g., Davis v. Skarnulis, 827 F. Supp. 1305, 1307 (E.D. Mich. 1993) (court enjoined parties from proceeding with NASD arbitration pending jurisdictional determinations). Thus, this court finds that, as in the appropriate circumstances, a federal district court has the authority to stay an arbitration proceeding, Respondents' motion to dismiss could not be granted on this basis.
However, the NASD Code provides for arbitration of "any dispute, claim or controversy arising out of or in connection with the business of any member. . .." NASD Code of Arbitration Procedure, part 1, § 1, NASD Manual (CCH) p. 3701 (1986). Section 15 of the NASD Code of Arbitration provides that:
No dispute, claim, or controversy shall be eligible for submission to arbitration under this Code where six (6) years have elapsed from the occurrence or event giving rise to the act or dispute, claim or controversy. This section shall not extend applicable statutes of limitations, nor shall it apply to any case which is directed to arbitration by a court of competent jurisdiction.
NASD Code of Arbitration Procedure, part 3, § 15, NASD Manual (CCH) p. 3715 (1986).
The Second Circuit has not yet considered whether Section 15 of the NASD Code of Arbitration which provides that no dispute is "eligible" for arbitration where six years have elapsed from the occurrence or event giving rise to the dispute is a substantive jurisdictional requirement. However, the Third, Sixth, and Seventh circuits have held that the term "eligible" in Rule 15 means that stale disputes are absolutely barred from arbitration. PaineWebber v. Hofmann, 984 F.2d 1372, 1379 (3d Cir. 1993); Roney & Co. v. Kassab, 981 F.2d 894, 897-900 (6th Cir. 1992); PaineWebber, Inc. v. Farnam, 870 F.2d 1286, 1292 (7th Cir. 1989); Dean Witter Reynolds v. McCoy, 853 F. Supp. 1023, 1030 (E.D. Tenn. 1994). The court in PaineWebber, Inc. v. Richardson, 1995 U.S. Dist. LEXIS 5317, 1995 WL 236722 (S.D.N.Y. 1995) went so far as to state that "every federal Court of Appeals to have considered the issue has so determined [that Section 15 is a substantive jurisdictional requirement]," however, that broad statement was disputed by the District Court of Massachusetts. See PaineWebber, Inc. v. Landay, 903 F. Supp. 193, 203 (D. Mass. 1995).
In the Second Circuit, it has been held that procedural questions, such as the effects upon arbitrability or the merits of a claim in arbitration, of statutes of limitations, unless expressly excluded from arbitrability, should be left to the arbitrators once it has been established that the subject matter of the dispute is arbitrable. See, e.g., Shearson Lehman Hutton v. Wagoner, 944 F.2d 114, 121 (2d Cir. 1991); Conticommodity Services v. Philipp & Lion, 613 F.2d 1222, 1226 (2d Cir. 1980). In Merrill Lynch, Pierce, Fenner & Smith v. Shaddock, supra, the court held that any limitations defense, whether stemming from an arbitration agreement, arbitration association rule or state statute rendered applicable by the arbitration agreement, was an issue to be addressed by the arbitrators. Shaddock, supra, at 131-32. The court expressly stated that the proposition set forth in the decisions in the Third, Sixth, and Seventh Circuits, that arbitrability and timeliness issues are for the courts, not arbitrators, to decide, ran "directly counter to the rule in [the Second] Circuit requiring timeliness issues to be submitted to arbitration." Shaddock, supra, at 136 n.13. The Shaddock court noted, however, that the "eligibility" issue under Section 15 of the NASD, which could bar the arbitration as untimely was not raised by the respondents.
In PaineWebber, Inc. v. Richardson, supra, cited by Petitioners, the court distinguished the holdings in Wagoner and Shaddock, which found that timeliness issues should be submitted to arbitration, on the basis that those cases involved state statute of limitations, rather than the six year limitation period set forth in NASD Section 15. Further, the Richardson court cited a recent joint decision by the New York Court of Appeals resolving two pending appeals, Smith Barney, Harris Upham & Co. v. Luckie and Merrill Lynch, Pierce, Fenner & Smith v. Manhard, 85 N.Y.2d 193, 647 N.E.2d 1308, 1313, 623 N.Y.S.2d 800 (N.Y. 1995), which found that where the parties to a brokerage contract had inserted a New York choice of law provision, even pure limitations issues were to be decided by the courts rather than by arbitrators. Richardson, supra, at *2. The New York Court of Appeals further stated that they were "not persuaded by the Wagoner Court's analysis." Luckie, supra, at 1315. In conclusion, the Richardson court determined that, as the action was based on diversity, it was "constrained to apply the ruling in Luckie/Manhard." Richardson, supra, at 2.
This court finds that the Richardson case, even if correct in its holding that the applicability of state arbitration law is a substantive question, a matter not entirely free of doubt, see Shaddock, supra, at 131-32, is readily distinguishable from the instant case. First, this action is not based on diversity. Second, there is no evidence in this case that there was an agreement between Petitioners and Respondents where the parties designated that New York law should govern any disputes between the parties. In Goldberg v. Parker, 634 N.Y.S.2d 81 (App. Div. 1st Dep't. 1995), decided after Luckie/Manhard, the court held that, "in the absence of an agreement between the broker and the customer wherein the parties designate New York law to govern the agreement and its enforcement, the matter of timeliness of claims under NASD § 15 of the Code of Arbitration is for the arbitrator to decide, not the court." Parker, supra, at 81.
Under federal law, there is a strong presumption in favor of arbitrability. Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25, 74 L. Ed. 2d 765, 103 S. Ct. 927 (1983). Any doubts as to the arbitrability of particular issues must be resolved in favor of arbitration. Moses H. Cone Memorial Hosp., supra, at 24-25; Wagoner, supra, at 121. In this case, Petitioners do not contend that Respondents' underlying claims in their request for arbitration are not subject to arbitration under the NASD arbitration rules, rather, they request that the court determine the threshold question of "eligibility" for arbitration based upon NASD Rule 15 purporting to bar from arbitration any claims more than six years old. The court finds that, in the Second Circuit, issues of timeliness have been held to be an issue for the arbitrators. Wagoner, supra, at 121. The court further determines that Luckie/Manhard, the New York Court of Appeals holding that distinguishes Wagoner, and directs that timeliness issues be resolved by the court, is not applicable to this case as there has been no agreement submitted to the court which indicates that New York law is to govern this action.
Accordingly, if the court were to have subject matter jurisdiction, the court would find that the arbitration of the petition submitted to the NASD by Respondents should go forward, with any timeliness issues affecting eligibility for arbitration to be resolved by the arbitrator.
Based on the foregoing, the court finds that this action should be dismissed for lack of subject matter jurisdiction.
LESLIE G. FOSCHIO
UNITED STATES MAGISTRATE JUDGE
DATED: February 14th, 1996
Buffalo, New York