Klein v. Drexel Burnham Lambert, Inc.

• Decision Date: 18 April 1990
• Docket Number: Civ. A. No. 89-3816.
• Citation: 737 F. Supp. 319
• Parties: Norma KLEIN, Nancy B. Winig, Alan Klein, Ann Weisman, Beverly Schottenstein and Randee Schottenstein v. DREXEL BURNHAM LAMBERT, INC., Robert J. Becker, R. Michael Laub and Michael Klein.
• Court: U.S. District Court — Eastern District of Pennsylvania

737 F. Supp. 319

Norma KLEIN, Nancy B. Winig, Alan Klein, Ann Weisman, Beverly Schottenstein and Randee Schottenstein v. DREXEL BURNHAM LAMBERT, INC., Robert J. Becker, R. Michael Laub and Michael Klein.

Civ. A. No. 89-3816.

United States District Court, E.D. Pennsylvania.

April 18, 1990.

Stuart H. Savett, Barbara A. Podell, Katharine M. Ryan, Kohn, Savett, Klein & Graf, Philadelphia, Pa., for plaintiffs.

Jerome J. Shestack, Christine C. Levin, Schnader, Harrison, Segal & Lewis, Philadelphia, Pa., John R. Vaughn, Gary A. Paranzino, Cahill Gordon & Reindel, New York City, for defendants.

MEMORANDUM AND ORDER

DuBOIS, District Judge.

Presently before the Court is plaintiffs' motion for a preliminary and permanent injunction to enjoin defendants, Drexel Burnham Lambert, Inc. ("Drexel"), Robert J. Becker, and R. Michael Laub¹, from objecting to consolidation of plaintiffs' claims before the American Arbitration Association, or, in the alternative, for an order requiring defendants to waive the arbitration provision in plaintiffs' Customer Agreements with Drexel. Also before the Court is defendants' motion to dismiss plaintiffs' complaint for lack of subject matter jurisdiction and for failure to state a claim upon which relief can be granted. The Court heard oral argument on the motions on September 20, 1989. For the reasons set forth below, the Court will grant defendants' motion to dismiss plaintiffs' complaint for lack of subject matter jurisdiction and will deny plaintiffs' motion for injunctive and other relief.

I

The facts of the case, as they appear in the complaint, may be summarized as follows: plaintiffs are six individuals who had brokerage accounts at Drexel. The individual defendants, Laub, Becker, and Klein, handled the plaintiffs' accounts as registered representatives and employees of Drexel. Plaintiffs allege that defendants knowingly caused excessive trading to occur in plaintiffs' accounts and invested in "highly risky and speculative investments" without plaintiffs' consent. As a result of defendants' conduct, plaintiffs allege individual losses ranging from approximately $70,000 to approximately $3,000,000. The losses reflect the total of plaintiffs' trading losses, margin interest, and commissions paid.

Each plaintiff opened a separate trading account with Drexel and each plaintiff signed a separate Customer's Agreement with Drexel agreeing to submit all disputes to arbitration. On October 14, 1988, plaintiffs filed a timely claim with the American Arbitration Association ("AAA") requesting a consolidation of plaintiffs' claims in one arbitration proceeding. In the AAA submission, plaintiffs asserted claims for violations of SEC Rule 10b-5 and 15 U.S.C. § 78j(b), for a violation of RICO, 18 U.S.C. § 1961 et seq., for fraud and intentional misrepresentation, and for breach of fiduciary duty.

In a letter to the AAA dated November 15, 1988, defendants Drexel, Becker, and Laub objected to plaintiffs' request for consolidation of their claims in one arbitration proceeding. Thereafter, counsel for both parties exchanged a series of letters with the AAA concerning consolidation of plaintiffs' claims. In a letter dated January 19, 1988, the AAA informed the parties that it was rejecting plaintiffs' request for consolidation, stating that "this matter must be severed into separate arbitrations for each Claimant named in the Demand," and directing counsel for plaintiffs to "file separate claims for each Claimant".² Plaintiffs allege that the AAA, subsequent to its letter of January 19, 1988, agreed to consolidate plaintiffs' claims in one arbitration proceeding if no party to the arbitration objected to consolidation. See Complaint ¶ 21.

II

A threshold issue which the Court must address is whether the Court has subject matter jurisdiction over plaintiffs' Complaint. Plaintiffs argue that the Court has jurisdiction by virtue of the federal character of plaintiffs' underlying arbitration claims. Defendants argue that plaintiffs' underlying arbitration claims are not before the Court and plaintiffs' Complaint does not establish a basis of federal jurisdiction.³

It is a "fundamental precept" that federal courts are "courts of limited jurisdiction." See, e.g. Owen Equipment and Erection Co. v. Kroger, 437 U.S. 365, 374, 98 S.Ct. 2396, 2403, 57 L.Ed.2d 274 (1978). Generally, a federal court may not entertain a complaint unless it has jurisdiction under one of the following three bases: (1) diversity jurisdiction under 28 U.S.C. § 1332; (2) jurisdiction under a specific statutory grant, such as admiralty matters under 28 U.S.C. § 1333; or (3) jurisdiction based on a "federal question" under 28 U.S.C. § 1331.

Here, plaintiffs do not have diversity of citizenship⁴ and plaintiffs' claims are not subsumed under a specific statutory grant of jurisdiction.⁵ Thus, plaintiffs' basis for federal jurisdiction, if it exists, must be "federal question" jurisdiction under § 1331. To establish "federal question" jurisdiction, an action must "arise under" federal law and present a "substantial question" of federal law.⁶

Notwithstanding the fact that plaintiffs' cause of action "arises under" the Federal Arbitration Act (the "FAA")⁷, the FAA does not confer federal question jurisdiction. The Supreme Court describes the FAA as "something of an anomaly in the field of federal-court jurisdiction." Moses H. Cone Memorial Hospital v. Mecury Construction Corp., 460 U.S. 1, 26 n. 32, 103 S.Ct. 927, 942 n. 32, 74 L.Ed.2d 765 (1983). Although the FAA establishes federal substantive law requiring parties to honor arbitration agreements, the FAA does not create independent federal question jurisdiction. See Southland Corp. v. Keating, 465 U.S. 1, 15 n. 9, 104 S.Ct. 852, 861 n. 9, 79 L.Ed.2d 1 (1984).⁸

Here, plaintiffs argue that § 4 of the FAA, under which plaintiffs seek relief⁹, provides for federal jurisdiction where the Court would have jurisdiction over the underlying arbitration claims. Defendants argue that § 4 of the FAA does not confer federal jurisdiction and that federal jurisdiction exists only when the Court has jurisdiction over the arbitration dispute before it.¹⁰

The decision in Drexel Burnham Lambert, Inc. v. Valenzuela Bock, 696 F.Supp. 957 (S.D.N.Y.1988) is directly on point. In Valenzuela Bock, the district court specifically rejected the same argument raised by plaintiffs that federal jurisdiction may be established under § 4 of the FAA based on the federal character of the underlying arbitration claims. The Court rejects plaintiffs' argument and adopts the reasoning in Valenzuela Bock as to the meaning of § 4 of the FAA.

The facts of Valenzuela Bock closely parallel the facts of our case. In Valenzuela Bock, seven separate petitioners filed a request for a consolidated arbitration alleging violations of the federal securities law and RICO. The AAA originally agreed to consolidate petitioners' arbitration claims and defendant, Drexel, filed an action in the New York State Court seeking severance of the consolidated arbitrations under § 4 of the FAA. Petitioners attempted to remove the state court action to federal court on the basis of federal question jurisdiction, since, as here, diversity jurisdiction was lacking. Id at 959.

In Valenzuela Bock, the district court remanded petitioners' action to state court on the ground that the federal court lacked subject matter jurisdiction. First, the court rejected the proposition that there was federal question jurisdiction for a claim arising under the FAA, citing Moses Cone and Southland. Id. at 959-60. The court then addressed the question whether petitioners had an independent basis of federal question jurisdiction. There, as here, petitioners argued that federal jurisdiction lies where the action underlying the arbitration involves rights created by federal law. Id. at 960. The court rejected petitioners' arguments, after carefully examining the over-all structure and legislative history of the FAA, concluding that an independent basis of federal jurisdiction over the arbitration dispute was required. Id. at 960-963¹¹.

Although plaintiffs in this case concede that the decision in Valenzuela Bock is directly contrary to their position, plaintiffs argue that Valenzuela Bock is not in accord with the Supreme Court's decision in Moses Cone. In making that argument, plaintiffs rely on the following passage from Moses Cone: "Section 4 provides for an order compelling arbitration only when the federal district court would have jurisdiction over a suit on the underlying dispute;...." Moses Cone, 460 U.S. at 26 n. 32, 103 S.Ct. at 942 n. 32. Plaintiffs equate "underlying dispute" with the underlying arbitration claims and argue that Moses Cone supports their position that § 4 of the FAA confers jurisdiction in this case. Defendants argue that the reference in Moses Cone to "underlying dispute" refers to the arbitration dispute on the issue of consolidation before the Court.¹² Furthermore, defendants argue that the references in Moses Cone to § 4 of the FAA must be read in their entirety as follows:

"The Arbitration Act is something of an anomaly in the field of federal-court jurisdiction. It creates a body of federal substantive law establishing and regulating the duty to honor an agreement to arbitrate, yet it does not create any independent federal question jurisdiction under 28 U.S.C. § 1331 (1976 ed. Supp. V) or otherwise. Section 4 provides for an order compelling arbitration only when the federal district court would have jurisdiction over a suit on the underlying dispute; hence there must be diversity of citizenship or some other independent basis for federal jurisdiction before the order can issue (citations omitted). Section 3 likewise limits the federal courts to the extent that a federal court cannot stay a suit pending before it unless there is such a suit in existence. Nevertheless, although enforcement of the Act is left in large part

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