Edward D. Jones & Co. v. Sorrells

• Decision Date: 23 March 1992
• Docket Number: No. 90-3202,90-3202
• Citation: 957 F.2d 509
• Parties: Fed. Sec. L. Rep. P 96,619 EDWARD D. JONES & COMPANY and Gary Aleff, Plaintiffs-Appellees, v. Duane SORRELLS, Mildred Sorrells and Curt Sorrells, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 509

957 F.2d 509

Fed. Sec. L. Rep. P 96,619

EDWARD D. JONES & COMPANY and Gary Aleff, Plaintiffs-Appellees, v. Duane SORRELLS, Mildred Sorrells and Curt Sorrells,

Defendants-Appellants.

No. 90-3202.

United States Court of Appeals, Seventh Circuit.

Argued May 15, 1991.

Decided March 23, 1992.

Bruce C. Oetter, (argued), Helen P. Gab, Bryan Cave, St. Louis, Mo., L. Andrew Brehm, James Adducci, Schuyler, Roche & Zwirner, Chicago, Ill., for plaintiffs-appellees.

Paul J. Sussman, (argued), Steven Samson, Sussman & Samson, Chicago, Ill., for defendants-appellants.

Before BAUER, Chief Judge, and COFFEY and FLAUM, Circuit Judges.

COFFEY, Circuit Judge.

This is an appeal of a district court order vacating in part a National Association of Securities Dealers, Inc. ("NASD") arbitration award. Because we agree with the district court's determination that Section 15 of the NASD Code of Arbitration Procedure makes the relevant claims ineligible for NASD arbitration, we affirm.

FACTUAL BACKGROUND

The essential facts are undisputed. Edward D. Jones & Co. ("Jones") is a St. Louis-based brokerage firm. Gary Aleff ("Aleff") is a stockbroker formerly employed by Jones. Duane and Mildred Sorrells are former customers of Jones'; Curt Sorrells is their son ("the Sorrells"). On August 29, 1988, the Sorrells filed a Statement of Claim with the NASD against Jones and Aleff seeking to recover alleged losses on investments made by the Sorrells through Jones. ¹ The Sorrells claimed losses on 12 separate investments, but only ten of those are relevant on this appeal. ²

The Sorrells' Statement of Claim alleged, inter alia, that Jones and Aleff fraudulently misrepresented material information as to the nature of the investments; that Jones failed to properly supervise Aleff (the broker who handled the disputed investments); and that, in their dealings with the Sorrells, Jones and Aleff violated federal securities laws, federal RICO statutes (18 U.S.C. §§ 1961 and 1962), the Rules of NASD, and the Rules of the New York Stock Exchange.

On October 27, 1988, Jones and Aleff filed their Statement of Answer with NASD, denying the claims asserted by the Sorrells. Jones and Aleff also moved to dismiss the Sorrells' claims arising from the McNeil, Petro-Lewis, and Consolidated Capital investments, arguing that those claims arose from investments made more than six years before the Sorrells filed their NASD action and thus were barred from NASD arbitration by Section 15 of the NASD Code.

Jones and Aleff were unsuccessful in their efforts to have the NASD arbitrators consider their Section 15 motion to dismiss prior to the formal hearing on the Sorrells' claims. At the hearing, held on July 20 & 21, 1989, in Chicago, Illinois, Jones and Aleff again argued, pursuant to Section 15 of the NASD Code, that the Sorrells' claims arising from ten of the disputed investments On August 17, 1989, the arbitrators entered an award for the Sorrells and against Jones and Aleff on the Sorrells' claims arising from the McNeil, Petro-Lewis and Consolidated Capital investments (see, supra, footnote 2). The award noted that Jones and Aleff had moved for dismissal based on Section 15, but contained no further discussion of the motion. Jones and Aleff responded by filing a petition in the district court seeking to vacate in part the August 17th award or, alternatively, requesting a remand to the NASD for a hearing on the Section 15 motion. On February 2, 1990, the district court remanded the case to offer the NASD arbitrators a chance to rule on the Section 15 motion to dismiss. The district court ordered the remand pursuant to its authority under the federal Arbitration Act to vacate arbitral awards where a "definite award upon the subject matter submitted was not made." 9 U.S.C. § 10(d). ⁴

                were ineligible for arbitration because of late filing. 3  Jones and Aleff were required to present their entire substantive defense to the claims they believed to be barred under Section 15.   During closing argument, Jones and Aleff reasserted their Section 15 motion to dismiss.   At this time, the arbitrators informed the parties that they had not received Jones' and Aleff's briefs from NASD in support of their Section 15 motion to dismiss
                

On June 4, 1990, the NASD responded to the district court's remand by releasing an "Award Clarification" to the parties signed by the arbitrators who had ordered the original award. The Clarification stated that the "motion to dismiss on the basis of the Statute of Limitations" had been "considered and denied" by the arbitrators "[a]t the time the award was entered". A few days later, the Sorrells filed a "Motion for Clarification" with the NASD asserting that the Award Clarification failed to comply with the district court's February 2, 1990 order in that it failed to set forth the arbitrators' reasoning in denying the Section 15 motion. The Sorrells requested that the arbitrators issue a second Award Clarification, this time making clear their reasoning. In their reply brief, the Sorrells explain that their "Motion for Clarification" was an "attempt to avoid any additional delay and expense" that would necessarily result from further judicial proceedings. Their attempt failed. Jones and Aleff moved in the district court to have the original arbitration award vacated in part or, in the alternative, remanded to a new panel of NASD arbitrators for a ruling on the Section 15 question. On September 11, 1990, the district court ordered the NASD arbitral award vacated as it pertained to the McNeil, Petro-Lewis, and Consolidated Capital investments, holding that Section 15 of the NASD Code made the claims arising from those investments ineligible for NASD arbitration because they were filed late. The Sorrells appeal the district court's order.

DISCUSSION

The central question presented by this appeal is whether the district court correctly ruled that the Sorrells' disputed claims against Jones and Aleff were rendered ineligible for arbitration by Section 15 of the NASD Code. Section 15 provides that:

"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 More than six years elapsed from the date the Sorrells made the last of the ten investments which gave rise to their claims against Jones and Aleff (August 18, 1982) (see, supra, footnote 2) to the date on which they submitted their claims for arbitration (August 29, 1988). Thus, the Sorrells' arbitration claims were not timely filed under Section 15.

is directed to arbitration by a court of competent jurisdiction."

The district court, in its September 11th, 1990 order, determined that Section 15 "is an eligibility requirement that must be met in order for a claim to be arbitrable before the NASD. It goes to the very power (i.e. subject matter jurisdiction) of the NASD. It is not a statute of limitations.... Thus, the arbitrators exceeded their authority by considering claims which could not properly be brought before the arbitrators." Although the September 11th district court order makes no explicit mention of the federal Arbitration Act, it is clear from a reading of the order that the court vacated the award pursuant to its authority under § 10(d) of the Act. That provision authorizes district courts to vacate arbitration awards "[w]here the arbitrators exceeded their powers...." 9 U.S.C. § 10(d).

The district court relied on our opinion in PaineWebber Incorporated v. Farnam, 870 F.2d 1286 (7th Cir.1989) in finding that the arbitrators had exceeded their authority. In PaineWebber we held that,

"... the NASD reads Section 15 of the NASD Code to be an eligibility requirement rather than a statute of limitations. Letter from John R. Wylie, NASD Staff Attorney, to Walter C. Greenough (August 5, 1988) ("In other words, the NASD will not process a claim that falls wholly outside the six year period"). Section 15 therefore serves as an absolute bar to claims submitted for arbitration more than six years after the event which gave rise to the dispute."

Id. at 1292. We decline to reconsider our explicit holding in PaineWebber that NASD Section 15 operates as an eligibility requirement which bars from arbitration claims submitted more than six years after the event which gave rise to them. Because more than six years elapsed from the date the Sorrells made the last of the ten investments which gave rise to their claims against Jones and Aleff to the date on which they submitted their claims for arbitration, the district court correctly ruled that Section 15 rendered these claims ineligible for arbitration.

The Sorrells' attempts to evade the precedential effect of PaineWebber by distinguishing it are unpersuasive. In PaineWebber, the plaintiff (like Jones, a securities brokerage firm) filed a motion for declaratory judgment in the district court alleging that certain arbitration claims brought by the defendants (like the Sorrells, customers of a securities brokerage firm) were ineligible for arbitration under Section 15 of the NASD Code. The securities firm moved for summary judgment on this issue. The customers moved for summary judgment on the ground that the Section 15 issue had been decided in a parallel state action. The district court agreed with the customers, and ruled that the "law of the case" doctrine required it to enter summary judgment for the customers on the securities firm's declaratory action. On appeal, we held that the district court was in error when it concluded that the state proceeding had resolved the Section 15 question. Moving to the merits of the issue, we held that Section 15 operated as an eligibility requirement, and not as a statute of limitations, and therefore barred claims not...