99 F.3d 49 (2nd Cir. 1996), 631, Barbara v. New York Stock Exchange, Inc.

Docket Nº:631, Docket 95-7471.
Citation:99 F.3d 49
Party Name:Philip BARBARA, Plaintiff-Appellant, v. NEW YORK STOCK EXCHANGE, INC., Defendant-Appellee.
Case Date:October 17, 1996
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

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99 F.3d 49 (2nd Cir. 1996)

Philip BARBARA, Plaintiff-Appellant,


NEW YORK STOCK EXCHANGE, INC., Defendant-Appellee.

No. 631, Docket 95-7471.

United States Court of Appeals, Second Circuit

October 17, 1996

Argued Dec. 20, 1995.

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Edward Basaman, Asbury Park, New Jersey, for Plaintiff-Appellant.

Russell E. Brooks, New York City (Gila E. Fortinsky, Milbank, Tweed, Hadley & McCloy, New York City, of counsel), for Defendant-Appellee.

Before: KEARSE, MAHONEY, and PARKER, Circuit Judges.

MAHONEY, Circuit Judge:

Plaintiff-appellant Philip Barbara appeals from a judgment entered April 6, 1995 in the United States District Court for the Eastern District of New York, Allyne R. Ross, Judge, that dismissed his complaint against defendant-appellee the New York Stock Exchange (the "Exchange" or the "NYSE") for failure to exhaust administrative remedies, and denied as moot Barbara's motion for leave to file an amended complaint. Because Barbara was required to exhaust his administrative remedies before seeking declaratory or injunctive relief in a judicial forum, and because the Exchange is entitled to immunity from suits for damages that arise out of its conduct of disciplinary proceedings, we affirm the judgment of the district court.


On this appeal from a dismissal for failure to state a claim, we accept as true the factual allegations set forth in Barbara's complaint and proposed amended complaint. See Villager Pond, Inc. v. Town of Darien, 56 F.3d 375, 377 (2d Cir.1995), cert. denied, --- U.S. ----, 117 S.Ct. 50, 136 L.Ed.2d 14 (1996).

The Exchange is a nonprofit New York corporation registered with the Securities and Exchange Commission (the "SEC") as a national securities exchange pursuant to section 6 of the Securities Exchange Act of 1934, as amended (the "Act" or the "Exchange Act"), 15 U.S.C. § 78f. As an association of securities dealers, the Exchange authorizes its members to effectuate securities transactions on its auction market, known as the Exchange floor. Under the Act, the Exchange is a "self-regulatory organization," see 15 U.S.C. § 78c(a)(26), which means that it has a duty to promulgate and enforce rules governing the conduct of its members, see id. §§ 78f(b), 78s(g); see also Silver v. New York Stock Exch., 373 U.S. 341, 352-53, 83 S.Ct. 1246, 1254-55, 10 L.Ed.2d 389 (1963) (discussing duty of self-regulation). These rules are subject to SEC approval. See 15 U.S.C. § 78s(b). In accordance with the statutory scheme, the Exchange conducts disciplinary proceedings when a member, or a person associated with a member, is suspected of violating federal securities laws or internal Exchange rules or regulations. See Id. § 78f(d). The Act requires that these disciplinary proceedings be conducted in compliance both with the Act and with the Exchange's rules and regulations. See Id. § 78s(g)(1). Notice of any final disciplinary sanction imposed by the Exchange must be provided to the SEC, see id. § 78s(d)(1), and the imposition of a sanction is subject to review by the SEC on its own motion or at the instance of an aggrieved party, see id. § 78s(d)(2).

From 1975 until 1991, Barbara was employed as a floor clerk by various members of the Exchange, and was thus permitted access to the floor of the Exchange. In August 1990, the Exchange's Division of Enforcement (the "Division") began an investigation into alleged misconduct by Barbara and one of his employers, Mabon, Nugent Securities ("Mabon"). In November 1990, prior to the completion of the investigation, Mabon terminated Barbara's employment, although Barbara continued to work part-time for Joacinth Lombardo, Inc., an organization which

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operated out of Mabon's booth on the Exchange floor.

Barbara was given notice of disciplinary charges against him on or about December 21, 1990. As a result of the charges being filed, the Division barred Barbara from the floor of the Exchange pending the outcome of an acceptability hearing before the Exchange's Acceptability Committee (the "Committee") pursuant to NYSE Rules 35 and 308. 1 The Committee held a hearing on January 21, 1991. On March 6, 1991, without rendering an opinion as to the merits of the charges, the Committee ruled that Barbara's case should have been heard by an Exchange hearing panel in accordance with NYSE Rule 476. 2

Following the Committee's decision, Barbara petitioned the Exchange's Board of Directors (the "Board") for a stay of the Division's floor ban, which the Board granted on March 26, 1991. On June 6, 1991, the Board reversed all charges brought against Barbara, finding, inter alia, that Barbara had been denied adequate access to discovery materials. Notwithstanding the Board's stay and ruling, however, the Division continued to bar Barbara from the Exchange floor. Barbara thereafter abandoned his career in the securities industry.

Barbara commenced the present suit against the Exchange in New York Supreme Court, Richmond County on February 18, 1994. Barbara alleged in his complaint that agents and officers of the Division had wrongfully barred him from the Exchange floor, thereby damaging Barbara's reputation and causing him to lose employment opportunities with two Exchange members, and ultimately to leave the securities industry. Barbara alleged various causes of action under New York law, including tortious interference with contractual relationships, tortious interference with prospective economic advantage, negligent supervision by the Exchange of the Division, and breach of a covenant of fair dealing within an implied contract. He sought $10 million in consequential and compensatory damages and $25 million in punitive damages.

After filing a timely notice of removal to the United States District Court for the

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Eastern District of New York pursuant to 28 U.S.C. §§ 1441(b) and 1442(a)(1), the Exchange moved in the district court to dismiss Barbara's complaint on the alternative grounds that (1) the district court lacked subject matter jurisdiction, and (2) Barbara had failed to state a claim upon which relief could be granted. Barbara opposed the motion to dismiss and cross-moved pursuant to Rule 15(a) of the Federal Rules of Civil Procedure for leave to file an amended complaint. 3 Barbara's proposed amended complaint reiterated his original causes of action and added claims of denials of due process in contravention of the Fifth Amendment and a violation of 42 U.S.C. § 1983, as well as applications for declaratory and injunctive relief barring further prosecution against him by the Exchange, and for attorney fees pursuant to 42 U.S.C. § 1988. The district court granted the Exchange's motion to dismiss on the basis that Barbara had failed to exhaust his administrative remedies, and denied as moot Barbara's motion for leave to amend his complaint. See Barbara v. New York Stock Exch., No. 94-CV-1088 (ARR), 1995 WL 221487, at * 7 (E.D.N.Y. Mar.30, 1995).

This appeal followed.


  1. Removal Jurisdiction.

    We begin by considering whether this case was properly removed to federal court. Although neither party raises this issue on appeal, we are under an obligation to do so sua sponte. See Mignogna v. Sair Aviation, Inc., 937 F.2d 37, 40 (2d Cir.1991). Because the district court erred in exercising removal jurisdiction over this action, we explain in some detail why the claims set forth in Barbara's complaint could not have been brought in federal court, and why the present posture of the case nevertheless permits us to exercise jurisdiction over this appeal.

    As previously noted, the Exchange premised its removal of this case to federal court upon 28 U.S.C. §§ 1441(b) and 1442(a)(1). We accordingly begin by addressing section 1441(b), which provides:

    Any civil action of which the district courts have original jurisdiction founded on a claim or right arising under the Constitution, treaties or laws of the United States shall be removable without regard to the citizenship or residence of the parties. Any other such action shall be removable only if none of the parties in interest properly joined and served as defendants is a citizen of the State in which such action is brought.

    The general rule established by section 1441(b) is that a state court defendant may remove a case to federal court pursuant to section 1441(b) only if the plaintiff's claims could originally have been brought there. Because there is no diversity of citizenship between Barbara and the Exchange, removal pursuant to section 1441(b) had to be premised upon federal question jurisdiction under 28 U.S.C. § 1331 and/or section 27 of the Exchange Act, 15 U.S.C. § 78aa. We address these jurisdictional provisions in turn.

    Section 1331 invests "[t]he district court[s] ... [with] original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States." Each of the five "counts" in Barbara's state court complaint, however, purported to state a claim under the common law of New York. Thus, the most obvious basis for section 1331 "arising under" jurisdiction--a federal claim--was absent from Barbara's complaint. See American Well Works Co. v. Layne & Bowler Co., 241 U.S. 257, 260, 36 S.Ct. 585, 586, 60 L.Ed. 987 (1916) ("A suit arises under the law that creates the cause of action."). Furthermore, the fact that the Exchange's principal defenses to Barbara's action--immunity from suit and failure to exhaust administrative remedies--are issues of federal law, see infra, does not suffice to establish federal jurisdiction under section 1331. See Franchise Tax Bd. v. Construction Laborers Vacation Trust, 463 U.S. 1, 12, 103 S.Ct.

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    2841, 2848, 77 L.Ed.2d 420 (1983) (" 'By unimpeachable authority, a suit...

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