Oppenheimer & Co., Inc. v. Neidhardt
| Decision Date | 11 May 1995 |
| Docket Number | No. 821,D,821 |
| Court | U.S. Court of Appeals — Second Circuit |
| Parties | Fed. Sec. L. Rep. P 98,720 OPPENHEIMER & CO., INC., Plaintiff-Appellant, v. Ferdinand A. NEIDHARDT, and Erich Hoepfer, Defendants-Appellees, Stephen Rothchild DeSimone, Defendant. ocket 94-7589. |
Robert M. Abrahams, New York City (Hollis A. Bart, Lisa K. Buckser, Schulte Roth & Zabel, of counsel), for plaintiff-appellant.
Lawrence F. Ruggiero, New York City, for defendants-appellees.
Before: MAHONEY, LEVAL, and CALABRESI, Circuit Judges.
This is an action brought by Oppenheimer & Co., Inc. ("Oppenheimer"), a broker and dealer in securities, seeking to stay an arbitration brought against it by alleged customers. Oppenheimer appeals from the orders of the United States District Court for the Southern District of New York, Sonia Sotomayor, Judge. The district court's order of December 30, 1993, denied Oppenheimer's motion to remand the proceeding to the New York state court, where it had been initiated. The order of May 4 and judgment of May 11, 1994, denied Oppenheimer's motion to stay the arbitration and granted claimants' cross motion to compel Oppenheimer to arbitrate. We affirm.
On or about April 22, 1993, Oppenheimer was served by the National Association of Securities Dealers ("NASD") with an arbitration claim made by Ferdinand A. Neidhardt and Erich Hoepfer (the "Claimants"). The claim asserted in essence that Stephen DeSimone, a Vice President of Oppenheimer, travelled to Germany to solicit investments through Oppenheimer; that in response, Neidhardt and Hoepfer, German nationals, arranged with DeSimone to place substantial funds exceeding $3 million with Oppenheimer for investment [Hoepfer was acting as Neidhardt's trustee]; that DeSimone undertook to establish an account at Oppenheimer for Claimants' funds, which would be under their sole control, but that, pursuant to a fraudulent plan, DeSimone instead placed Claimants' funds into an account designated Euro-American Funding, Inc. ("EAF"), sub account No. I, under the control of Gerard Biemer and Frederich Herrling, who were fraudulent confederates of DeSimone; that, by various frauds and unauthorized transactions and diversions, DeSimone lost and/or stole the funds invested in the account and that Oppenheimer failed to return the funds to Claimants when demand was made.
Oppenheimer thereupon instituted this action in the Supreme Court of the State of New York seeking to stay the arbitration before the NASD. Oppenheimer contended that it had no obligation to arbitrate with the Claimants because they were not "customers" of Oppenheimer, and thus could not avail themselves of Sec. 12(a) of the NASD Code of Arbitration Procedures ("NASD Code"), which requires Oppenheimer, as a member, to arbitrate any dispute with a "customer." (Oppenheimer's Verified Petition to Stay Arbitration, dated May 17, 1993).
Claimants removed the action to the United States District Court for the Southern District of New York on the basis of diversity of citizenship. Oppenheimer then moved in the district court to remand the action to the Supreme Court of the State of New York.
The motion was premised on various grounds, including that, because the Claimants instituted the demand for arbitration, they should be considered plaintiffs rather than defendants in the New York State court proceeding and, therefore, ineligible to remove under 28 U.S.C. Sec. 1441(a). The district court, by order dated December 30, 1993, rejected Oppenheimer's theory and denied its motion for remand.
Oppenheimer then moved in the district court for a stay. The Claimants cross-moved to compel arbitration. On a schedule set by the district court, the parties made numerous submissions disputing the issue whether Claimants were customers of Oppenheimer and thus entitled under Sec. 12(a) of the NASD Code to arbitrate against Oppenheimer.
The district court denied Oppenheimer's motion for a stay and granted the Claimants' motion to compel arbitration. The court then entered judgment in favor of the Claimants.
Oppenheimer brought this appeal challenging both the denial of its motion to remand to state court and the rejection of its position as to its obligation to arbitrate the claim. As alternative grounds, Oppenheimer contends that the district court should not have found the Claimants to be "customers" without first conducting a trial on that issue.
Oppenheimer claims that the district court erred in permitting Neidhardt and Hoepfer to remove the stay proceeding to federal court. Removal was based on 28 U.S.C. Sec. 1441(a), which provides that "any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or the defendants, to the district court...." (emphasis added).
Citing International Tin Council v. Amalgamet, Inc., 645 F.Supp. 879 (S.D.N.Y.1986), Oppenheimer argues that, although it instituted the state court proceeding against Claimants, they were not defendants entitled to remove within the meaning of Sec. 1441(a). The argument is based on the theory that because the Claimants' demand for arbitration was the "mainspring" of the dispute, the Claimants were functionally the plaintiffs and Oppenheimer was the defendant. Accordingly, the argument proceeds, the plaintiff-Claimants could not remove under Sec. 1441(a).
This argument is based on a misreading of Justice Holmes' opinion in Mason City & Fort Dodge R.R. Co. v. Boynton, 204 U.S. 570, 27 S.Ct. 321, 51 L.Ed. 629 (1907). That case involved a condemnation valuation under the laws of Iowa. Iowa's statute provided for valuation of the condemned land by a commission appointed by the sheriff, with the condemning corporation (in that case a railroad) or the landowner each having the right to appeal to the appropriate court of the state, which would then determine the value de novo. The Iowa statute went on to provide that in such a valuation appeal, regardless which party brought the appeal, "[t]he landowner shall be plaintiff and the corporation defendant." 204 U.S. at 571, 27 S.Ct. at 321. In the particular case, the landowner was aggrieved by the commission's valuation and appealed to the appropriate state court. As the landowner was a citizen of Missouri and the railroad of Iowa, the landowner-plaintiff claimed diversity and removed to the federal court, without opposition, and there won a more favorable valuation. The circuit court then certified to the Supreme Court the question, "Was the landowner a defendant within the meaning of the removal statute, when the suit was removed into the [federal] circuit court?" 204 U.S. at 574, 27 S.Ct. at 322. The Supreme Court answered the question, "Yes." The Supreme Court explained that 204 U.S. at 580, 27 S.Ct. at 324. It followed that the landowner was "a defendant within the meaning of the removal statute," 204 U.S. at 574, 27 S.Ct. at 322, and authorized to remove the case from state to federal court.
The flaw in the reasoning of Oppenheimer (and of International Tin ) is the inference that, because the landowner was authorized as a constructive defendant, to remove, the railroad would not also have been authorized to remove. This inference was expressly dispelled in the Supreme Court opinion. Justice Holmes cited two cases 204 U.S. at 578-79, 27 S.Ct. at 323. Then, discussing the question whether granting the right of removal to the landowner, as defendant, implied that such right could not also belong to the railroad, as the Iowa court in Myers had held it might, Justice Holmes wrote, "It is not necessary, in order to decide that the present removal [by the landowner] was right, to say that the state decision [confirming the railroad's right to remove in identical circumstances] was wrong." 204 U.S. at 579, 27 S.Ct. at 323. In other words, Mason City establishes that, in some circumstances, the party identified as defendant, by reference either to state law definitions or to which party initiated the court proceeding, may not be the only one entitled to remove. In the unusual circumstance posed by that case, either side might be considered defendant and thus entitled to remove.
In recognition of the fact that, in the initial choice of forum, only plaintiffs have the opportunity to select the federal court, the statute conferring the right to remove on defendants is designed to allow defendants the same opportunity. In this manner, both sides have been offered the opportunity to select the federal court in cases within its original jurisdiction. To construe the removal statute as Oppenheimer suggests would deprive defendants, in some cases, of any opportunity to choose the federal court. Here, for example, it was Oppenheimer that initiated litigation by its petition to stay arbitration. It chose to do so in state court. It might have chosen federal court if it wished. The Claimants were involuntarily summoned into the jurisdiction of the state court; if they nonetheless are to be deemed plaintiffs within the meaning of the removal statute, these foreign litigants have no chance to avail themselves of the protection of diversity jurisdiction. This construction would defeat the statutory purpose of giving each side the opportunity to require that a case within the original jurisdiction of the federal courts be tried there.
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