PaineWebber Inc. v. Faragalli

Citation61 F.3d 1063
Decision Date04 August 1995
Docket NumberNo. 94-1896,94-1896
PartiesPAINEWEBBER INCORPORATED; Sheldon Chaiken; Lee H. Lovejoy; Anthony Presogna; Kevin Collins v. Henry J. FARAGALLI, Jr., Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Thomas T. Loder (argued), Christopher P. Stief, Rubin & Associates, Paoli, PA, for appellant.

John M. Linsenmeyer (argued), Morgan, Lewis & Bockius, New York City, Elizabeth H. Fay, Morgan, Lewis & Bockius, Philadelphia, PA, for appellees.

Before: HUTCHINSON, ROTH and GARTH, Circuit Judges.

OPINION OF THE COURT

GARTH, Circuit Judge:

Henry J. Faragalli, Jr. ("Faragalli") appeals from an order of the district court which granted the petition of appellees PaineWebber Incorporated, Sheldon Chaiken, Lee H. Lovejoy, Anthony Presogna and Kevin Collins (collectively, "PaineWebber") to compel arbitration. The principal questions on appeal are two: first, whether PaineWebber's cause of action to compel arbitration under Sec. 4 of the Federal Arbitration Act accrued when Faragalli filed a "Writ of Summons" in the Pennsylvania Court of Common Pleas in 1988 and was thus time-barred when PaineWebber filed its 1994 petition? Second, whether PaineWebber waived its right to compel arbitration by engaging in protracted settlement negotiations with Faragalli and by moving to have Faragalli's state court action dismissed for non pros? The district court ruled against Faragalli on both issues and granted PaineWebber's petition to compel. We affirm.

I.

In 1981, Faragalli, a stockbroker and registered representative of what was then Paine, Webber, Jackson & Curtis, signed a "Uniform Application for Securities and Commodities Industry Representative and/or Agent," thereby committing himself to abide by the rules of the New York Stock Exchange ("NYSE"). NYSE Rule 347 provides as follows:

Any controversy between a registered representative and any member or member organization arising out of the employment or termination of employment by such registered representative by and with such member or member organization shall be settled by arbitration....

App. 758a.

PaineWebber terminated Faragalli's employment sometime in December of 1987. On or about November 16, 1988, Faragalli filed a Writ of Summons in the Philadelphia Court of Common Pleas. The Writ of Summons named PaineWebber 1 and stated that "[y]ou are notified that the Plaintiff, Henry J. Faragalli, Jr., has commenced an action against you." App. 14a. The Writ gave no information regarding the nature of Faragalli's claims. Under Pennsylvania law PaineWebber was under no obligation to respond to the Writ, and Faragalli was under no obligation to file an initial pleading unless requested to do so by PaineWebber. Pa.R.Civ.P. 1037.

Shortly after filing the Writ of Summons Faragalli sent PaineWebber's lawyers an unfiled "draft complaint" alleging state law causes of action for breach of contract, defamation, conversion, interference with contractual relations, invasion of privacy, and unjust enrichment. Settlement negotiations ensued, and, as far as we can tell from the record, no complaint was filed by Faragalli in the next five years nor was any other substantive action taken in state court during that time. On November 23, 1993, Faragalli's state court action was automatically dismissed for lack of activity under Pennsylvania's "day backward" docket clearing program.

On April 14, 1994, the Court of Common Pleas granted Faragalli's motion to have his action reinstated but ordered Faragalli to file a complaint within 20 days.

On May 2, 1994, Faragalli filed a complaint claiming that PaineWebber had withheld commissions and other compensation and had committed assorted torts in the process of informing Faragalli's clients that he was no longer employed by PaineWebber. Three days later PaineWebber moved to have Faragalli's action dismissed for non pros. This motion was denied without explanation by order of June 17, 1994. App. 407.

On May 23, 1994, some six and one half years after Faragalli's discharge, five and one half years after Faragalli filed the Writ of Summons and 21 days after Faragalli finally filed his complaint, PaineWebber entered a preliminary objection in state court on the ground that the claims stated in Faragalli's complaint were subject to arbitration. In his June 10, 1994 reply to PaineWebber's objection Faragalli expressly denied for the first time that his claims were subject to arbitration. App. 433.

No discovery or briefing on the merits ever occurred in state court.

Within two months after asserting in state court that Faragalli's claims had to be arbitrated, on July 15, 1994, PaineWebber filed a petition in the Eastern District of Pennsylvania to compel arbitration. Faragalli objected based on timeliness and waiver. By memorandum and order dated August 15, 1994, 1994 WL 440233, the district court ruled that PaineWebber's petition was timely. The court reasoned that "the mere filing of the writ of summons, without the filing of a complaint, was insufficient as a matter of law to constitute a rejection of arbitration." Dist.Ct.Op. at 5. The court also concluded that PaineWebber had not waived its right to arbitrate; held that all of Faragalli's claims were within the scope of the arbitration clause; directed the Court of Common Pleas to stay Faragalli's state court action; and entered an order compelling arbitration.

II.

Faragalli's first argument is that the applicable four-year statute of limitations on PaineWebber's action to compel arbitration began to run the week of November 16, 1988, when Faragalli filed the Writ of Summons and delivered a draft complaint to PaineWebber. Because PaineWebber did not petition the court to compel arbitration until July 15, 1994, some five and a half years later, Faragalli maintains that PaineWebber has been barred by the statute for roughly a year and a half. PaineWebber argues that the statute was triggered no earlier than May 2, 1994, when Faragalli actually filed his complaint in state court.

The relevant facts are not in dispute, and our review over this issue is plenary. See Adams v. Trustees of the New Jersey Brewery Employees' Pension Trust Fund, 29 F.3d 863, 869 (3d Cir.1994); Sheet Metal Workers, Local 19 v. 2300 Group, Inc., 949 F.2d 1274, 1278 (3d Cir.1991). As our discussion will reveal, we hold that an action to compel arbitration under the Federal Arbitration Act accrues only when the respondent unequivocally refuses to arbitrate, either by failing to comply with an arbitration demand or by otherwise unambiguously manifesting an intention not to arbitrate the subject matter of the dispute.

The district court held that the mere filing of the writ of summons, without the filing of a complaint, was insufficient as a matter of law to constitute a rejection of arbitration. Dist.Ct.Op. 5. We agree. Filing a Pennsylvania Writ of Summons cannot constitute an unequivocal refusal to arbitrate because the Writ is silent as to the subject matter of the dispute. Nor does providing an adversary with a draft complaint which has not been filed in court constitute an unequivocal refusal to arbitrate because it does not rule out a willingness to arbitrate. Moreover, even if we were to consider the two documents together, that combination cannot manifest a refusal to arbitrate.

Our review of the record discloses that the only events which could have constituted a rejection of arbitration occurred either on May 2, 1994, when Faragalli filed his complaint in state court, or on June 10, 1994, when Faragalli for the first time expressly denied that his claims were subject to arbitration. In either event, as we discuss infra, PaineWebber was not barred by the statute of limitations.

III.

Section 4 of the Federal Arbitration Act, 9 U.S.C. Secs. 1 et seq. (the "FAA"), provides as follows:

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 ... for an order directing that such arbitration proceed in the manner provided for in such agreement.... The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement.... If the making of the arbitration agreement or the failure, neglect, or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereof....

9 U.S.C. Sec. 4 (1988).

Because Faragalli claims that PaineWebber's petition was untimely, we must decide which statute of limitations applies under the FAA, and the date on which the statute started running.

The FAA is "something of an anomaly in the field of federal court jurisdiction," Moses H. Cone Memorial Hosp. v. Mercury Const. Corp., 460 U.S. 1, 25 n. 32, 103 S.Ct. 927, 942 n. 32, 74 L.Ed.2d 765 (1983), in that it gives federal courts the authority to compel arbitration, but does not in itself confer independent federal question jurisdiction. Id. Thus, the district court must have an independent jurisdictional basis before it can entertain a petition to compel arbitration under Sec. 4. National Iranian Oil Co. v. Mapco Int'l, Inc., 983 F.2d 485, 493 (3d Cir.1992).

Here, jurisdiction is premised on diversity of citizenship. In diversity actions to compel arbitration, timeliness of the petition is determined by reference to the applicable state law statute of limitations. National Iranian, 983 F.2d at 492-93. The parties agree that Pennsylvania law applies to this case. Because this action is based on a contractual arbitration clause, Pennsylvania's four-year statute of limitations for contract actions applies. 42 Pa.C.S. Sec. 5525 (1994). 2 While a state statute of limitations may be "borrowed" for a federal claim,...

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