Westmoreland Capital Corp. v. Findlay

• Decision Date: 07 November 1996
• Docket Number: No. 973,D,973
• Citation: 100 F.3d 263
• Parties: WESTMORELAND CAPITAL CORPORATION, Joseph M. Jayson and Judith P. Jayson, Petitioners-Appellants, v. George D. FINDLAY and John F. Joyce, Respondents-Appellees. ocket 96-7257.
• Court: U.S. Court of Appeals — Second Circuit

Page 263

100 F.3d 263

65 USLW 2353

WESTMORELAND CAPITAL CORPORATION, Joseph M. Jayson and Judith P. Jayson, Petitioners-Appellants, v. George D. FINDLAY and John F. Joyce, Respondents-Appellees.

No. 973, Docket 96-7257.

United States Court of Appeals Second Circuit.

Argued Sept. 20, 1996.

Decided Nov. 7, 1996.

Robert J. Lane, Jr., Hodgson, Russ, Andrews, Woods & Goodyear, LLP, (Adam W. Perry, of counsel) Buffalo, NY, for Petitioners-Appellants.

Samuel H. Press, Portnow, Little & Cicchetti, P.C., Burlington, VT, for Respondents-Appellees.

Before MESKILL, WINTER and CABRANES, Circuit Judges.

JOSE A. CABRANES, Circuit Judge:

We are asked to decide whether a petition under the Federal Arbitration Act (the "FAA"), 9 U.S.C. § 1 et seq., seeking to stay arbitration of claims that arise, in part, under the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78a et seq., was properly dismissed by the United States District Court for the Western District of New York, for lack of subject matter jurisdiction. Because the FAA does not provide a basis for federal question jurisdiction under 28 U.S.C. § 1331, and because the petition does not allege an adequate independent basis for federal question or diversity jurisdiction, we hold that the district court properly dismissed appellants' petition to stay arbitration for lack of subject matter jurisdiction. Accordingly, we affirm the district court insofar as it dismissed the action for lack of a federal question.

I. BACKGROUND

Petitioner Westmoreland Capital Corporation ("Westmoreland") is a New York corporation engaged in financial planning and investment counseling with its principal place of business in Getzville, New York. Petitioners Joseph M. and Mary P. Jayson (jointly, the "Jaysons") are the owners and operators of Westmoreland. Respondents George D. Findlay and John F. Joyce are elderly, retired individuals who in 1988 allegedly engaged Terry King, an employee of Westmoreland, to provide financial planning and advice. King was reportedly employed as a registered representative and account manager at Westmoreland from January 1988 through the fall of 1991.

King allegedly met with both Findlay and Joyce, who were not acquainted with each other, separately, at the Westmoreland offices, and proposed similar investment plans to both. On King's advice, Findlay and Joyce each allegedly invested money in a limited partnership run by the Jaysons, and a start-up corporation for which King was a principal promoter, officer and shareholder. Findlay made investments in these enterprises at various times between November 1988 and May 1990, in a total principal amount of $212,000, including a $26,000 personal loan to King. Joyce also made investments at various times between November 1988 and May 1990, in a total principal amount of $154,747.50, including an investment of $20,247.50 in a corporation of which King was allegedly an officer and a shareholder.

The stock of the two corporations in which the respondents invested is said to be worthless, the limited partnership is apparently not liquid or marketable, and King has failed to repay the personal loan from Findlay. Findlay alleges that, as a result of King's actions, for which he claims Westmoreland and the Jaysons are responsible, he has lost his entire $212,000 investment. Joyce alleges that he has sustained losses of all but $2500 of his $152,747.50 investment.

Findlay and Joyce commenced a joint arbitration proceeding with the National Association of Securities Dealers, Inc. ("NASD") on September 27, 1994, alleging, inter alia, violations of the Exchange Act. Petitioners were served with a statement of claim notifying them of the NASD arbitration proceeding in February 1995. Petitioners answered the statement of claim on April 3, 1995. Petitioners filed their petition in the instant case on April 20, 1995, pursuant to § 4 of the FAA, seeking an order preliminarily and permanently enjoining the respondents from pursuing their NASD arbitration proceeding. Pursuant to 28 U.S.C. § 636(b)(1), all pre-trial matters in the case, including dispositive motions, were referred to Magistrate Judge Foschio.

Petitioners contend that all of the respondents' arbitration claims against petitioners Joseph M. and Mary P. Jayson (jointly, the "Jaysons") and some of the arbitration claims against petitioner Westmoreland are time-barred under the three-year statute of limitations enunciated by the Supreme Court in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991), with respect to claims brought under § 10(b) of the Exchange Act, 15 U.S.C. § 78j. ¹ They claim that the remaining arbitration claims against Westmoreland are time-barred by the NASD Code of Arbitration Procedure ("NASD Code") § 15, which bars the arbitration of claims arising six years or more prior to the commencement of arbitration proceedings. ² Respondents filed an answer and counterclaim petition to compel arbitration in which they denied the petitioners' claim that the district court had an independent basis for either diversity or federal question jurisdiction over the petitioners' claim.

However, rather than filing a simultaneous motion to dismiss the petitioners' claim for lack of subject matter jurisdiction, respondents filed a simultaneous motion to dismiss the petition under F ED. R. C IV. P. 12(b)(6), on the grounds that the FAA does not authorize the court to stay the arbitration, and that the court lacks jurisdiction to enjoin an arbitration proceeding on statute of limitations grounds under Rule 15 of the NASD Code. Subsequently, petitioners filed a cross-motion for summary judgment requesting an order barring respondents from pursuing any claims in arbitration against Joseph Jayson or Judith Jayson and a permanent injunction barring respondents from pursuing any arbitration proceedings against Westmoreland based on any claims arising under the Exchange Act or any claims based on acts that occurred more than six years before the respondents commenced their NASD arbitration proceeding.

On February 14, 1996, the district court issued a decision and order dismissing the petition and the counterclaim on two alternate grounds. The district court decided sua sponte to dismiss the petition and counterclaim on the ground that the court did not have subject matter jurisdiction to hear the petition. In the alternative, the court stated that "if the court were to have subject matter jurisdiction," it would rule in favor of respondents on their counterclaim and therefore would dismiss the case and compel arbitration, allowing the arbitrator to determine issues of timeliness. The petitioners appeal from both of these rulings. All of the transactions at issue in this action occurred in New York. Westmoreland is a New York corporation, and all of the individual parties claim to be New York residents, although Joyce was served in Virginia where he is now living with his daughter. In addition, while Findlay and Joyce each agreed to retain King, there is no evidence in the record of any executed, written agreements between the parties. While the district court stated in its order that there is no evidence of any agreement to arbitrate any controversies, the respondents claim in their answer that there is indeed a written agreement for arbitration between petitioners and respondents. In any event, the parties agree that they are obligated to arbitrate any disputes, other than the allegedly time-barred claims at issue here, under the NASD Code by virtue of the petitioners' membership in the NASD.

II. DISCUSSION

On appeal, the petitioners claim that (1) the district court erred in concluding that federal question jurisdiction was lacking, inasmuch as the petition arose under the FAA and the Exchange Act; and (2) the district court erred in concluding that the petition should be dismissed in any event because the question of the timeliness of an arbitration claim is to be decided by the arbitrator and not the courts.

Because we find that federal question jurisdiction is lacking, and because the petitioners advance no other basis for the exercise of subject matter jurisdiction, we conclude that the district court properly dismissed both the petition and the counterclaim. We therefore need not address whether the district court properly found that the question of the timeliness of an arbitration petition is for the arbitrator, and not the courts, to decide.

We review the district court's dismissal of the petition for lack of subject matter jurisdiction de novo. See Niagara Mohawk Power Corp. v. Tonawanda Band of Seneca Indians, 94 F.3d 747, 751 (2d Cir.1996); Malik v. Meissner, 82 F.3d 560, 562 (2d Cir.1996). The district court properly considered, sua sponte, the lack of subject matter jurisdiction over the petition. Although the respondents did not formally move to dismiss the petition for lack of subject matter jurisdiction below, this "does not act to confer [federal] jurisdiction ... since a challenge to subject matter jurisdiction cannot be waived and may be raised sua sponte " by the court. Alliance of Am. Insurers v. Cuomo, 854 F.2d 591, 605 (2d Cir.1988); F ED. R. C IV. P. 12(h); see also, e.g., United States v. Griffin, 303 U.S. 226, 229, 58 S.Ct. 601, 602-03, 82 L.Ed. 764 (1938); Louisville & Nashville R.R. Co. v. Mottley, 211 U.S. 149, 152, 29 S.Ct. 42, 43, 53 L.Ed. 126 (1908). When subject matter jurisdiction is lacking, dismissal is mandatory. Griffin, 303 U.S. at 229, 58 S.Ct. at 602-03; United Food & Commercial Workers Union, Local 919 v. Centermark Properties Meriden Square, Inc., 30 F.3d 298, 301 (2d Cir.1994).

The petitioners seek a stay of arbitration under FAA § 4. ³ In their petition, they state the jurisdictional basis for their claim as follows This Court has jurisdiction of this action pursuant to 9 U.S.C. § 4 and 28 U.S.C. § 1331, because the claims alleged in the...