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MCCARTHY v. SMITH BARNEY INC.

July 29, 1999

BARBARA SAGAR MCCARTHY, TRUSTEE FOR THE BARBARA MCCARTHY TRUST, PETITIONER,
v.
SMITH BARNEY INC., VERGIL R. RORER, AND RAY SHOUSE, RESPONDENTS. SMITH BARNEY INC., PETITIONER, V. BARBARA SAGAR MCCARTHY, TRUSTEE FOR THE BARBARA MCCARTHY TRUST, RESPONDENTS.



The opinion of the court was delivered by: Sprizzo, District Judge.

MEMORANDUM OPINION AND ORDER

Pro se petitioner Barbara McCarthy ("McCarthy"), moves to vacate an arbitration award issued on April 14, 1995 ("Award") in favor of Smith Barney Inc. ("Smith Barney") and its employees, Vergil R. Rorer ("Rorer") and Ray Shouse ("Shouse"). Smith Barney and Rorer cross-move to dismiss McCarthy's petition for lack of subject matter jurisdiction and failure to state a claim on which relief can be granted. Smith Barney has also filed a cross-petition to confirm the Award. For the reasons that follow, McCarthy's petition is dismissed, and Smith Barney's cross-petition is granted.

BACKGROUND

The dispute between McCarthy and Smith Barney arises from certain investments made in 1982 and 1984 by Shouse, who was McCarthy's broker from May 1982 until January 1988.*fn1 McCarthy claims that Shouse disregarded her clearly articulated investment goals and financial needs by making unsuitable investments on her behalf. See Affidavit of Barbara S. McCarthy, dated February 9, 1996 ("McCarthy Aff."), Exhibit B, AAA Complaint ("AAA Complaint") at ¶ 40. Although Shouse allegedly assured McCarthy that the investments he made on her behalf would both increase her rate of return and protect her liquidity, beginning in June 1982, Shouse invested McCarthy's funds in high-risk limited partnerships. See id. at ¶ 13. McCarthy suffered substantial losses on these investments. See McCarthy Aff., Exhibit C, Analysis of Losses.

McCarthy began receiving statements from Smith Barney reflecting the value of her investments in June 1982. See AAA Complaint at ¶ 26. During the first few months, the statements were inaccurate. See id. Thereafter, the statements she received indicated a decline in the value of her assets. See id. at ¶ 34. Despite McCarthy's misgivings, Shouse recommended that McCarthy retain the investments. See id. Beginning at the end of 1984, and throughout the first quarter of 1985, Shouse repeatedly reassured McCarthy that her investments were performing as expected and that she should not sell them. See id. at ¶ 41. Thereafter, on or about January 29, 1988, Rorer replaced Shouse as McCarthy's broker. See id. at ¶ 49. Like Shouse, Rorer assured McCarthy that her investments were performing satisfactorily. See id. at ¶ 53. McCarthy claims that she first learned that her investments were performing poorly in 1990. See id. at ¶ 54.

On December 29, 1993, McCarthy commenced arbitration proceedings against Smith Barney, Rorer, and Shouse by filing a Demand for Arbitration and Complaint before the American Arbitration Association ("AAA"), in which she alleged violations of the Florida Securities and Investor Protection Act, breach of contract, fraud, and breach of fiduciary duty. See AAA Complaint. McCarthy based her demand for arbitration upon the Constitution of the American Stock Exchange ("AMEX"). See AAA Complaint at ¶ 1 (citing AMEX Constitution, Art. VIII, § 1). After filing her demand for arbitration, McCarthy brought in Florida state court a motion to compel arbitration before the AAA in Florida. See Notice of Petition to Confirm Arbitration Award, dated December 29, 1995 ("Petition to Confirm") at ¶ 7. Smith Barney moved to dismiss the motion to compel arbitration, and the Circuit Court of the Sixth Judicial District in Pinellas County, Florida, by Order dated May 17, 1994, granted Smith Barney's motion. See Notice of Motion to Dismiss the Petition to Vacate the Arbitration Award, dated December 29, 1995 ("Smith Barney Not. Mot.") at ¶ 11. The court found that McCarthy's demand for arbitration was subject to Rule 605(a) of the AMEX Arbitration Rules, which barred arbitration of any claim arising more than six years prior to the demand for arbitration. However, the court did not decide whether McCarthy's arbitration claims were time-barred under this provision. Rather, the court apparently held that the timeliness of McCarthy's claims should be decided in arbitration rather than by the court. The court further held that the proper venue for arbitration was New York, as opposed to Florida, and that Smith Barney had not refused to arbitrate McCarthy's claims in New York. Because Smith Barney had not refused to submit to arbitration, the Florida court dismissed McCarthy's petition. See id.

McCarthy proceeded to transfer the arbitration to New York, at which time Smith Barney and Rorer petitioned the New York State Supreme Court, New York County, to issue a permanent stay of the arbitration, arguing that McCarthy's claims were untimely under AMEX Rule 605(a) and were thus not arbitrable. See Smith Barney Not. Mot. at ¶¶ 12-13. On September 29, 1994, the New York court dismissed the petition on res judicata grounds, in reliance upon the Florida court's prior decision that the timeliness of McCarthy's claims under the AMEX arbitration rules should be decided in arbitration. See id. at ¶ 13.

On March 24, 27, and 28, 1995, the arbitration hearing was held at the New York City office of the AAA. See Award. At the beginning of the hearing, McCarthy withdrew her claims against Rorer and Shouse. See Smith Barney Not. Mot. at ¶ 15. The arbitrators applied Florida law, rather than AMEX Rule 605(a), to determine whether McCarthy's claims were time-barred. See Award. The arbitrators found that the relevant conduct giving rise to McCarthy's claims against Smith Barney occurred when Shouse invested McCarthy's funds in the limited partnerships in 1982 and 1984. See id. Inasmuch as the statute of limitations for McCarthy's claims under the Florida Securities Investor Protection Act is not more than five years from the date of the alleged violation, the arbitrators found that McCarthy's claims under this statute were time-barred. See id. In addition, the arbitrators found that the limitations period for McCarthy's Florida common law claims of breach of contract, common law fraud, and breach of fiduciary duty was at most four years from the date that McCarthy discovered the facts giving rise to her claims. See id. The arbitrators specifically found that McCarthy "was aware of such facts well before December 29, 1989," four years before she brought her demand for arbitration. See id. As a result, the arbitrators held that McCarthy's common law claims were also time-barred. See id. Because both McCarthy's statutory and common law claims were barred by the statute of limitations, the arbitrators dismissed her claims and required Smith Barney to pay only the administrative fees, expenses, and the costs of the arbitration. See id.

DISCUSSION

Subject Matter Jurisdiction

As an initial matter, this Court must address its jurisdiction to hear the parties' cross-petitions to vacate and to confirm the Award. It is well established that the United States Arbitration Act, 9 U.S.C. § 1 et seq. ("Arbitration Act"), does not itself afford the federal courts any basis for asserting subject matter jurisdiction. An independent basis for subject matter jurisdiction is thus required in order for a federal district court to have the power to entertain such a petition. See Harry Hoffman Printing, Inc. v. Graphic Communications, International Union, 912 F.2d 608, 610-611 (2d Cir. 1990). Here, the underlying dispute between McCarthy and Smith Barney affords no basis for federal question jurisdiction under 28 U.S.C. § 1331, as McCarthy alleges claims only under Florida law. In addition, since both McCarthy and Rorer are citizens of Florida, this Court lacks diversity jurisdiction over McCarthy's petition. See AAA Complaint at ¶ 2; Affidavit of Vergil R. Rorer, December 20, 1995 at ¶ 1; 28 U.S.C. § 1332; Strawbridge v. Curtiss, 3 Cranch 267, 7 U.S. 267, 2 L.Ed. 435 (1806). In the absence of either federal question or diversity jurisdiction, this Court must dismiss McCarthy's petition for lack of subject matter jurisdiction.

With respect to Smith Barney's cross-petition to confirm the Award, however, the Court may properly exercise diversity jurisdiction. In its petition, Smith Barney names neither Rorer nor Shouse as parties. Accordingly, there is diversity between Smith Barney, a Delaware corporation with its principal place of business in New York, and McCarthy, a citizen of Florida. See Affidavit of Susan E. Harkins ("Harkins Aff."), dated December 29, 1995, at ¶ 3; 28 U.S.C. § 1332. In addition, the amount in controversy clearly exceeds $50,000.*fn2 See AAA Complaint at ¶ 63.

Smith Barney's Petition to Confirm

Under section 9 of the Arbitration Act, this Court must grant an order confirming an arbitration award in the absence of one of the grounds enumerated in sections 10 and 11 for vacating or modifying the award. See 9 U.S.C. § 9. Hence, the power of this Court is limited to determining whether McCarthy asserts a viable basis for vacating the Award. See Saxis Steamship Co. v. Multifacs International Traders, Inc., 375 F.2d 577, 581 (2nd Cir. 1967). The ...


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