Humphrey v. Prudential Securities Inc.
| Decision Date | 03 September 1993 |
| Docket Number | No. 93-1147,93-1147 |
| Citation | 4 F.3d 313 |
| Parties | , Fed. Sec. L. Rep. P 97,732 William T. HUMPHREY, Dr., Plaintiff-Appellee, v. PRUDENTIAL SECURITIES INCORPORATED; Prudential-Bache Properties, Incorporated; Richard W. Johnson, Defendants-Appellants, and Prudential Insurance Company of America, Defendant. |
| Court | U.S. Court of Appeals — Fourth Circuit |
Daniel Allen Gecker, Maloney, Yeatts & Barr, P.C., Richmond, VA, argued (John S. Barr, Steven S. Biss, Maloney, Yeatts & Barr, P.C., Richmond, VA, Patricia Roy, Asst. Gen. Counsel, Prudential Securities Inc., New York City, on the brief), for defendants-appellants.
John Stevens Norris, Jr., Anderson, Norris & Geroe, P.C., Virginia Beach, VA, argued (Charles W. Austin, Jr., Anderson, Norris & Geroe, P.C., on the brief), for plaintiff-appellee.
Before ERVIN, Chief Judge, and MURNAGHAN and WILKINSON, Circuit Judges.
William T. Humphrey filed a complaint against Prudential Securities Incorporated, Prudential-Bache Properties, Inc., and Richard W. Johnson, a Prudential agent, (collectively, the "Prudential Defendants"), alleging various violations of federal and state laws. Subsequently, Humphrey moved to compel arbitration and to stay his own federal action. The district court granted the motions, and the Prudential Defendants now appeal. 1993 WL 275213. Finding that we have no subject-matter jurisdiction to consider the merits of this appeal, we dismiss. 1
In 1984 Humphrey acquired a limited partnership interest in Lone Star Mall Associates, and in 1985 he acquired an interest in Clarion Hotel Associates, both through the Prudential Defendants. On October 4, 1990, Humphrey signed a Client's Agreement with the Prudential Defendants which provided that
all controversies which may arise between us concerning any transaction or the construction, performance or breach of this or any other agreement between us, whether entered into prior, on or subsequent to the date hereof, shall be determined by arbitration.
See Prudential-Bache Securities Client's Agreement p 14 (Oct. 4, 1990). The Client's Agreement also required all such controversies to "be settled by arbitration in accordance with the Rules then obtaining of either the NASD, 2 AMEX 3 or the Board of Governors of the New York Stock Exchange...." Id. p 15. On October 12, 1990, Humphrey executed another Client's Agreement with the Prudential Defendants that contained identical language. See Prudential-Bache Securities Client's Agreement p 14 (Oct. 12, 1990). The Client's Agreements are the subject of this litigation.
On February 28, 1992, Humphrey filed a demand for arbitration with the American Arbitration Association against the Prudential Defendants. Humphrey attached to his demand a complaint alleging fifteen separate counts against the Prudential Defendants based on federal and state law. On March 3, 1992, Humphrey filed a complaint in district court against the Prudential Defendants, asserting the same fifteen claims. Humphrey's complaint alleged various violations of the federal securities laws, the Racketeer Influenced and Corrupt Organizations Act ("RICO"), the Virginia Securities Act, and the New York Securities Act; breaches of the rules of the New York Stock Exchange and the National Association of Securities Dealers ("NASD"); and transgressions of the common law of Virginia, including fraud, negligence, unjust enrichment, breach of fiduciary duty, and breach of contract. Humphrey amended 4 the complaint and served it on the Prudential Defendants on July 2, 1992.
On July 21, 1992, the Prudential Defendants filed a motion under Rule 12(e) of the Federal Rules of Civil Procedure for a more definite statement, and a separate motion to dismiss Humphrey's amended complaint under Rules 9(b) and 12(b)(6) for failure to plead fraud with particularity, and for failure to state claims upon which relief could be granted. Humphrey then moved the district court to compel arbitration and to stay his civil action.
The district court heard oral argument on both sides' motions on September 15, 1992. At oral argument, the Prudential Defendants contended that Humphrey's claims could not be submitted to arbitration, citing the Client's Agreements and section 15 of the NASD rules. 5 The Prudential Defendants claimed that section 15 must govern the arbitrability of Humphrey's disputes based on the Client's Agreements' requirement that the parties arbitrate their disputes in accordance with the "Rules then obtaining of ... the NASD...." The Prudential Defendants further argued that section 15 barred Humphrey's claims because they each derived from securities transactions that took place more than six years ago. Casting section 15 as an eligibility requirement that must be met before a claim can be deemed arbitrable, the Prudential Defendants contended that the untimeliness of Humphrey's claims, in violation of section 15, prevented their referral to arbitration.
The district court rejected the Prudential Defendants' argument, viewing section 15 as a procedural time-bar, rather than as an eligibility requirement. Therefore, the court deferred construction and application of section 15 to the arbitrator. Humphrey v. Prudential Ins. Co., No. CA-92-178-2, slip op. at 10, 1993 WL 275213 (E.D.Va. Jan. 6, 1993) (citing County of Durham v. Richards & Assocs., Inc., 742 F.2d 811, 815 (4th Cir.1984)). The court then concluded that all of the claims were substantively arbitrable, and granted Humphrey's motion to compel arbitration. The district court directed the entire case to arbitration, and stayed further proceedings pending the outcome of the arbitration. The Prudential Defendants appeal from the order to compel and the stay.
We address but one issue: whether we have subject-matter jurisdiction to review on appeal the district court's order compelling arbitration and granting a stay of proceedings pending arbitration. The Federal Arbitration Act outlines when an appeal may be taken from a district court ruling involving arbitration:
(D) confirming or denying confirmation of an award or partial award, or
(E) modifying, correcting, or vacating an award;
(2) an interlocutory order granting, continuing, or modifying an injunction against an arbitration that is subject to this title; or
(3) a final decision with respect to an arbitration that is subject to this title.
(b) Except as otherwise provided in section 1292(b) of title 28, an appeal may not be taken from an interlocutory order--
(1) granting a stay of any action under section 3 of this title;
(2) directing arbitration to proceed under section 4 of this title;
(3) compelling arbitration under section 206 of this title; or (4) refusing to enjoin an arbitration that is subject to this title.
9 U.S.C. Sec. 16. 6
The practice commentary that follows section 16 explains the effect of this dichotomy between awards in favor of arbitration and those ruling against arbitration:
The question of whether a dispute is arbitrable can arise as an incident to a pending action or as an entirely independent proceeding. In the first situation, sometimes referred to as an "embedded" proceeding to denote that the arbitrability issue has been raised in some broader context--usually an ordinary plenary action on the underlying substantive dispute brought in disregard of the arbitration commitment--the proponents of arbitration have had their way in Sec. 16. The statute appears to cover all of the various possible "embedded" situations and allows an immediate appeal only from decisions against arbitration. It bars an immediate appeal when the decision is in favor of arbitration, thus letting the arbitration go forward unobstructed. Of course, the party aggrieved by the decision to let the arbitration go forward is not altogether barred from appellate review of the issue. He must merely await the outcome of the arbitration on the merits, and, if the award goes against him, raise the arbitrability point on an application to vacate or modify the award or in opposition to the other side's application to confirm the award.
Id. practice commentary.
We have previously explored the appealability dichotomy, both in the context of an embedded proceeding and in a case presenting, as its sole issue, arbitrability. In Jeske v. Brooks, 875 F.2d 71 (4th Cir.1989), we reviewed the appealability of a district court's order to compel arbitration and stay proceedings currently before it in an embedded action. The case arose out of a dispute between an investor and his former stockbroker and brokerage firm ("the defendants"). The investor filed suit against the defendants, alleging various violations of the federal securities laws, together with state-law claims based on theories of fraud, breach of contract, negligence, breach of fiduciary duty, and violations of the North Carolina Securities Act. Id. at 72. After the defendants filed a motion to compel arbitration as agreed to by the parties, the district court determined that the state-law claims were subject to arbitration, but that the federal issues were nonarbitrable. Therefore, the court compelled the state claims to arbitration, refused to compel the federal claims, and stayed any further proceedings based on those claims until completion of the arbitration of the state claims. Id. at 73-74. The investor appealed the order to compel arbitration of the state claims, and the defendants cross-appealed the order refusing to compel the federal claims. Id. at 73 & n. 4.
On appeal, we held that the Federal Arbitration Act
makes clear that we have jurisdiction to consider an appeal...
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