Cogswell v. Merrill Lynch, Pierce, Fenner & Smith Inc., 94-1482

• Citation: 78 F.3d 474
• Decision Date: 23 February 1996
• Docket Number: No. 94-1482,94-1482
• Parties: , Fed. Sec. L. Rep. P 99,057 Ann F. COGSWELL, f/k/a Ann F. Stanton, Plaintiff-Appellee, v. MERRILL LYNCH, PIERCE, FENNER & SMITH INC.; Ben D. Trevor, Defendants-Appellants.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 474

78 F.3d 474

64 USLW 2580, Fed. Sec. L. Rep. P 99,057

Ann F. COGSWELL, f/k/a Ann F. Stanton, Plaintiff-Appellee, v. MERRILL LYNCH, PIERCE, FENNER & SMITH INC.; Ben D. Trevor,

Defendants-Appellants.

No. 94-1482.

United States Court of Appeals, Tenth Circuit.

Feb. 23, 1996.

On Appeal from the United States District Court for the District of Colorado; Jim R. Carrigan, Judge.

Kenneth D. Willis, Denver, Colorado, for Plaintiff-Appellee.

Andrew M. Low (Lisa S. Kahn and Anthony F. Medeiros with him on the briefs) of Davis, Graham & Stubbs, Denver, Colorado, for Defendants-Appellants.

Before BALDOCK, SETH and BRORBY, Circuit Judges.

BRORBY, Circuit Judge.

Defendants Merrill, Lynch, Pierce, Fenner & Smith, Inc., and Ben D. Trevor (collectively "Merrill Lynch") appeal from an order granting plaintiff Ann F. Cogswell's application for an order compelling arbitration and denying their motion for a permanent stay of arbitration. We exercise jurisdiction pursuant to 28 U.S.C. § 1291 and reverse. ¹

I

Ms. Cogswell opened a Cash Management Account at Merrill Lynch in December 1984. When she did so, Ms. Cogswell signed a preprinted agreement stating she "agree[d] that any controversy arising out of [her] business or this Agreement shall be submitted to arbitration conducted according to the rules and procedures of the New York Stock Exchange, Inc. ("NYSE") or of the National Association of Securities Dealers, Inc. ("NASD") as I may elect" and that the "Agreement shall be ... construed in accordance with the laws of the State of New York."

Ms. Cogswell later purchased interests in three limited partnerships. The last of these three transactions occurred on February 23, 1987. The fair market value of the limited partnerships declined significantly over the next several years. In August 1993, Ms. Cogswell filed an arbitration proceeding against Merrill Lynch and her account executive, Mr. Trevor, before the National Association of Securities Dealers, Inc. ("NASD"). Ms. Cogswell's filing included a "Uniform Submission Agreement" acknowledging the proceeding was to be governed by the "Constitution, By-Laws, Rules, Regulations and/or Code of Arbitration ... of the [NASD]." Ms. Cogswell's primary allegation was the limited partnership interests "were unsuitable in light of [her] financial situation and investment objectives." Specifically, she alleged the limited partnership interests

were of high risk and would not be liquid for many years into the future. The investments were tax shelters and Trevor knew, or should have known, that [she] did not need tax shelters. Trevor earned substantial commissions by purchasing these investments for [her] account, substantially in excess of the amount he would have earned if he had purchased suitable securities for her account.

Merrill Lynch then petitioned the New York Supreme Court for New York County for an order permanently staying arbitration. Merrill Lynch contended among other things that the dispute was ineligible for arbitration under § 15 of the NASD Code of Arbitration Procedure, which provides:

No dispute, claim or controversy shall be eligible for submission to arbitration under this Code where six (6) years have elapsed from the occurrence or event giving rise to the act or dispute, claim or controversy. This section shall not extend applicable statutes of limitations, nor shall it apply to any case which is directed to arbitration by a court of competent jurisdiction.

The court ordered Ms. Cogswell to show cause why Merrill Lynch's petition should not be granted. Merrill Lynch's attorney appeared at the show cause hearing, but Ms. Cogswell and her attorney did not. The court granted Merrill Lynch's petition both because Ms. Cogswell failed to respond to the show cause order and because her action was time-barred under § 15 of the NASD Code.

While Merrill Lynch's action was pending in New York, Ms. Cogswell filed an application for an order compelling arbitration in the United States District Court for the District of Colorado. The district court stayed the proceedings pending the outcome of the New York action. After the New York Supreme Court issued its decision, Merrill Lynch moved for an order permanently staying arbitration, on the grounds the New York decision was res judicata and the district court was required to give it full faith and credit. The district court denied Merrill Lynch's motion for a permanent stay and ordered the parties to proceed with arbitration. It relied on the Eighth Circuit Court's opinion in FSC Sec. Corp. v. Freel, 14 F.3d 1310 (8th Cir.1994), for the proposition only arbitrators, and not the courts, have jurisdiction to determine whether § 15 of the NASD Code bars an arbitration claim. Thus, it concluded the New York judgment was void for lack of jurisdiction over the subject matter, and was therefore neither res judicata nor entitled to full faith and credit. ² This appeal followed.

II

In its opening brief, Merrill Lynch contended the district court erred when it held the New York judgment was void for lack of jurisdiction over the subject matter. In the alternative, Merrill Lynch contended even if the New York judgment was void, the district court had jurisdiction to determine in the first instance whether Ms. Cogswell's claim was time-barred by § 15 of the NASD Code, that it should have concluded it was time-barred, and that it therefore should have denied her application for an order compelling arbitration. Shortly after it filed its opening brief, Merrill Lynch submitted a notice of supplemental authority drawing our attention to three recent New York decisions, Merrill Lynch & Co. v. Mathes, 212 A.D.2d 456, 622 N.Y.S.2d 952 (1995), Merrill Lynch, Pierce, Fenner & Smith, Inc. v. McLeod, 208 A.D.2d 81, 622 N.Y.S.2d 954 (1995), and Painewebber Inc. v. McAdams, 212 A.D.2d 464, 623 N.Y.S.2d 198 (1995). Merrill Lynch concedes these decisions make it clear the New York Supreme Court lacked personal jurisdiction over Ms. Cogswell and that the New York judgment was void, albeit for a different reason than that relied on by the district court. Accordingly, Merrill Lynch has abandoned its first contention and asks us to address only its alternative contention: that the district court had jurisdiction to determine whether Ms. Cogswell's claim was barred by § 15 of the NASD Code, that it should have concluded it was barred, and that it therefore should have denied her application for an order compelling arbitration. "Because it is based on contract interpretation, arbitrability is a legal question ... we review de novo." O'Connor v. R.F. Lafferty & Co., 965 F.2d 893, 901 (10th Cir.1992).

We have never considered whether the district courts have jurisdiction to determine whether an arbitration claim is barred under the time limit contained in § 15 of the NASD Code. The courts in other jurisdictions are sharply divided. A majority, including the Third, Sixth, Seventh, and Eleventh Circuits, holds courts are to determine whether an action is time-barred under § 15 of the NASD Code. ³ The Seventh Circuit's decisions in Smith Barney Inc. v. Schell, 53 F.3d 807 (7th Cir.1995), Edward D. Jones & Co. v. Sorrells, 957 F.2d 509 (7th Cir.1992), and PaineWebber Inc. v. Farnam, 870 F.2d 1286 (7th Cir.1989), are typical majority decisions. In these cases, the Seventh Circuit held § 15 of the NASD Code is not a statute of limitations in the ordinary sense, but that it defines the arbitrator's subject matter jurisdiction. Farnam, 870 F.2d at 1292; Sorrells, 957 F.2d at 512-13. As such, § 15 is "an absolute bar to claims submitted for arbitration more than six years after the event which gave rise to the dispute." Farnam, 870 F.2d at 1292. Because § 15 defines what claims are cognizable in an arbitration proceeding, a district court faced with an application for an order compelling arbitration before the NASD must determine whether § 15 bars the arbitrators from exercising jurisdiction.

The Seventh Circuit reached this conclusion for three basic reasons. First, it relied on language of § 15, which states that "[n]o dispute, claim or controversy shall be eligible for submission to arbitration under this Code in any instance where six (6) years shall have elapsed from the occurrence or event giving rise to the act or the dispute, claim or controversy." (Emphasis added.) It read the words "eligible for submission" as meaning cognizable or within the jurisdiction of the arbitrator. Sorrells, 957 F.2d at 513. Second, the Seventh Circuit held the NASD itself considers § 15 to be a jurisdictional bar. Farnam, 870 F.2d at 1292. It cited a letter from John R. Wylie, NASD Staff Attorney, to Walter C. Greenough, dated August 5, 1988, stating "In other words, the NASD will not process a claim that falls wholly outside the six year period." Id. Third, the Seventh Circuit rejected the contention NASD Code § 35 required the arbitrators, rather than the courts, to decide whether a claim is time-barred under § 15. Sorrells, 957 F.2d at 514 & n. 6. Section 35 provides "arbitrators shall be empowered to interpret and determine the applicability of all provisions under this Code." According to the Seventh Circuit, § 35 is not a "clear and unmistakable" expression of the parties' intent to give the arbitrators the power to decide whether § 15 bars it from exercising jurisdiction. Sorrells, 957 F.2d at 514 & n. 6 (citing AT & T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 649, 106 S.Ct. 1415, 1418-19, 89 L.Ed.2d 648 (1986)) ("Unless the parties clearly and unmistakably provide otherwise, the question of whether the parties agreed to arbitrate is to be decided by the court, not the arbitrator").

A substantial minority, typified by the Fifth and Eighth Circuits, hold only arbitrators, and not courts, can decide the issue. ⁴ In FSC Securities Corp. v. Freel, 14 F.3d 1310, 1312-13 (8th Cir.1994), the Eighth Circuit relied exclusively on §...