Kasap v. Folger Nolan Fleming & Douglas, Inc.

• Decision Date: 12 February 1999
• Docket Number: No. 98-7082,98-7082
• Citation: 166 F.3d 1243
• Parties: Matt KASAP, Appellant, v. FOLGER NOLAN FLEMING & DOUGLAS, INC., et al., Appellees.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1243

166 F.3d 1243

334 U.S.App.D.C. 280

Matt KASAP, Appellant, v. FOLGER NOLAN FLEMING & DOUGLAS, INC., et al., Appellees.

No. 98-7082.

United States Court of Appeals,

District of Columbia Circuit.

Argued Jan. 8, 1999.

Decided Feb. 12, 1999.

John P. Connolly argued the cause for appellant. With him on the briefs was Harold Richard Mayberry, Jr.

Thomas O. Barnett argued the cause for appellees. With him on the brief was Mitchell F. Dolin.

Before: SILBERMAN, SENTELLE, and RANDOLPH, Circuit Judges.

Opinion for the Court filed by Circuit Judge SILBERMAN.

SILBERMAN, Circuit Judge:

Appellant seeks reversal of the district court's decision dismissing his application to vacate an arbitration decision for lack of subject matter jurisdiction. We agree with the district court that it had no jurisdiction to consider appellant's application and affirm the dismissal.

I.

Matt Kasap is an experienced investor who maintained a nondiscretionary margin account with appellee Folger Nolan Fleming & Douglas, Inc. Appellee Joseph E. Anderson, a Folger Nolan employee, was the registered representative for appellant's account. After Kasap lost what he estimated to be nearly one half million dollars in the account during a period of market decline in 1996, he filed a statement of claim with the National Association of Securities Dealers pursuant to his agreement with appellees to submit such a dispute to arbitration. He contended that appellees falsely represented the amount of his margin debit and account equity and failed to make adequate disclosures regarding his margin account, in violation of § 10(b) of the Securities Exchange Act of 1934 and the SEC's rules enforcing that section. Appellant claimed further that appellees' conduct violated state securities law and NASD rules of fair practice, and constituted a breach of contract, fraud, and deceit under state law.

An NASD arbitration panel held a two-day hearing at which, inter alia, Kasap questioned appellee Anderson about his substance abuse history during the period in which he handled appellant's account. After the close of the hearing, Kasap discovered evidence which he believed demonstrated that Anderson perjured himself before the panel, and requested that the panel reopen the record to consider the new evidence. The panel rejected the request, and later denied all of appellant's claims on the merits. Appellant then filed in the district court an application to vacate the arbitration award in favor of appellees under § 10 of the Federal Arbitration Act, 9 U.S.C. § 10 (1994). He argued that Anderson's alleged perjury enabled appellees to procure the award by fraud and undue means, id. § 10(a)(1), and that the panel's decision not to reopen the record constituted misconduct, id. § 10(a)(3). Appellees filed a motion to dismiss on the grounds that the court lacked subject matter jurisdiction over appellant's application.

The district court granted appellees' motion and dismissed the case with prejudice. Relying on Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 25 n. 32, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983), and the Seventh Circuit's decision in Minor v. Prudential Securities, Inc., 94 F.3d 1103 (7th Cir.1996), the district court held that it lacked subject matter jurisdiction because the parties were not diverse, because the Federal Arbitration Act does not itself create jurisdiction for the federal courts, and because the federal securities claims involved in the underlying arbitration do not supply an independent jurisdictional basis. Appellant challenges the district court's decision, arguing that the district court had subject matter jurisdiction and that, even if it did not, the district court erred insofar as it dismissed his application to vacate with prejudice.

II.

The Federal Arbitration Act creates several federal causes of action relating to arbitration agreements (to be initiated by "petition" or "application"), including an action under § 4 to compel arbitration, which provides,

A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement....

9 U.S.C. § 4 (1994), and an action under § 10 to vacate an arbitrator's award, which provides,

(a) In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration--

(1) Where the award was procured by corruption, fraud, or undue means.

(2) Where there was evident partiality or corruption in the arbitrators, or either of them.

(3) Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced.

(4) Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

(5) Where an award is vacated and the time within which the agreement required the award to be made has not expired the court may, in its discretion, direct a rehearing by the arbitrators.

(b) The United States district court for the district wherein an award was made that was issued pursuant to section 580 of title 5 may make an order vacating the award upon the application of a person, other than a party to the arbitration, who is adversely affected or aggrieved by the award, if the use of arbitration or the award is clearly inconsistent with the factors set forth in section 572 of title 5.

9 U.S.C. § 10 (1994). Notwithstanding the apparent federal causes of action thus devised, the Supreme Court has interpreted the statute as not itself bestowing jurisdiction on the federal district courts, nor permitting federal jurisdiction to be invoked under 28 U.S.C. § 1331 (1994), the general statute conferring on federal district courts jurisdiction over "all civil actions arising under the laws ... of the United States." Id.; see Southland Corp. v. Keating, 465 U.S. 1, 16 n. 9, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984) (describing the Act as "creat[ing] federal substantive law requiring the parties to honor arbitration agreements, [but] ... not creat[ing] any independent federal-question jurisdiction under 28 U.S.C. § 1331 (1976) or otherwise"); see also Moses H. Cone, 460 U.S. at 25 n. 32, 103 S.Ct. 927 (holding that, to assert a cause of action under the Act, "[t]here must be diversity of citizenship or some other independent basis for federal jurisdiction").

That construction of the statute is certainly, as has been observed, "something of an anomaly," Moses H. Cone, 460 U.S. at 25 n. 32, 103 S.Ct. 927; see also Southland, 465 U.S. at 30 n. 19, 104 S.Ct. 852 (O'Connor, J., dissenting) (noting that it is "rare to find a federal substantive right that cannot be enforced in federal court under the jurisdictional grant of 28 U.S.C. § 1331"); RICHARD H. FALLON ET AL., HART & WECHSLER'S THE FEDERAL COURTS AND THE FEDERAL SYSTEM 912 n.9 (4th ed.1996) (labeling Southland's footnote 9 "puzzling"). Ordinarily, a plaintiff, relying squarely on a federal cause of action, would easily satisfy § 1331's requirement that the claim "arise under" federal law, see Merrell Dow Pharm., Inc. v. Thompson, 478 U.S. 804, 808, 106 S.Ct. 3229, 92 L.Ed.2d 650 (1986), at least absent an overwhelming predominance of state law issues incorporated by the federal cause of action, see id. at 814 n. 12, 106 S.Ct. 3229. Still, the Supreme Court has spoken and it is not for us to quarrel. But cf. Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 290-92, 115 S.Ct. 834, 130 L.Ed.2d 753 (1995) (Thomas J., dissenting) (noting jurisdictional anomaly under § 2 of the Act and attributing it to Southland's erroneous conclusion that the Act creates substantive federal law binding on state courts); id. at 285, 115 S.Ct. 834 (Scalia, J., dissenting) (vowing no longer to dissent from judgments resting on Southland, but "stand[ing] ready to join four other Justices in overruling it").

It should be noted, however, that § 4--unlike § 10--includes language that specifically refers to what appears to be a basis for federal question jurisdiction. A petition for an order compelling arbitration may be brought in a "United States district court which, save for [the arbitration] agreement, would have jurisdiction under title 28, in a civil action or in admiralty[,] of the subject matter of a suit arising out of the controversy between the parities ... ." That provision in § 4--though conspicuously absent from § 10--is the key to appellant's argument. He does not claim that § 10, if it stood alone, would confer federal question jurisdiction on federal district courts to entertain an application to vacate an arbitration panel's award. ¹ Rather, it is his argument that § 4 does so--at least where the underlying claim that is to be put to arbitration could have been brought in federal court--and that the two sections should be construed in pari materia.

The first difficulty with appellant's argument is that despite § 4's language, it is not at all clear that even that wording creates a basis for federal question jurisdiction. Admittedly, the Supreme Court suggested as much, see Moses H. Cone, 460 U.S. at 24 n. 32, 103 S.Ct. 927 ("Section 4 provides for an order compelling arbitration only when the federal district court would have jurisdiction over a suit on the underlying dispute...."), but the clear weight of authority rejects that proposition. See,...