PaineWebber Inc. v. Bybyk

• Citation: 81 F.3d 1193
• Decision Date: 19 April 1996
• Docket Number: No. 370,D,370
• Parties: , 60 A.L.R.5th 923 PAINEWEBBER INCORPORATED, Petitioner-Appellant, v. Michael J. BYBYK and Joyce O. Bybyk, Respondents-Appellees. ocket 94-9246.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 1193

81 F.3d 1193

64 USLW 2688, 60 A.L.R.5th 923

PAINEWEBBER INCORPORATED, Petitioner-Appellant, v. Michael J. BYBYK and Joyce O. Bybyk, Respondents-Appellees.

No. 370, Docket 94-9246.

United States Court of Appeals Second Circuit.

Argued Oct. 31, 1995.

Decided April 19, 1996.

Appeal from a final judgment of the United States District Court for the Southern District of New York (Duffy, J.), dismissing an action for a permanent stay of arbitration.

Bonnie Steingart, Fried, Frank, Harris, Shriver & Jacobson, New York City (Brad S. Maistrow, Meyers & Maistrow, New York City, on the brief), for Petitioner-Appellant PaineWebber Incorporated.

John E. Lawlor, Garden City, NY, for Respondents-Appellees Michael J. Bybyk and Joyce O. Bybyk.

Lawrence E. Fenster, Orrick, Herrington & Sutcliffe, New York City, for Securities Industry Association as Amicus Curiae.

Stuart C. Goldberg, Deutsch & Lipner, Garden City, NY, for Public Investors Arbitration Bar Association as Amicus Curiae.

Before: VAN GRAAFEILAND, JACOBS and PARKER, Circuit Judges.

JACOBS, Circuit Judge:

In 1987, respondents-appellees Joyce and Michael Bybyk opened an investment account with petitioner-appellant PaineWebber Incorporated. On March 14, 1990, the parties executed a client agreement which contained an arbitration clause. That clause (which had retrospective as well as prospective effect) provided for the arbitration of "any and all controversies which may arise" concerning the account. The client agreement further provided that all claims were to be arbitrated in accordance with the "rules of the organization convening the panel."

On September 24, 1993, the Bybyks filed a statement of claim with the National Association of Securities Dealers (the "NASD") alleging, among other things, PaineWebber's failure to supervise their account and breach of fiduciary duty. PaineWebber then commenced an action in New York Supreme Court to stay permanently arbitration of the particular claims that arose out of investments made prior to September 24, 1987, on the ground that those claims were time-barred by a six-year limitations provision of The United States District Court for the Southern District of New York, (Duffy, J.) granted the Bybyks' motion to dismiss the complaint on the ground that the arbitration agreement reserved for arbitration the issue of whether a claim is arbitrable. On appeal, PaineWebber invokes the principle that the court--not an arbitrator--must determine whether a claim is arbitrable in accordance with the provisions of an arbitration agreement. We conclude, however, that the arbitration agreement evinces the parties' intent to submit issues of arbitrability to the arbitrators. The effect that any timeliness requirement has on the Bybyks' claims must therefore be determined by the arbitrator rather than the court. Accordingly, we affirm the district court's dismissal of the complaint.

the NASD Code. PaineWebber also sought to enjoin the Bybyks from proceeding with the arbitration pending before the NASD and from seeking attorneys' fees or punitive damages. The Bybyks subsequently removed the suit to federal court.

BACKGROUND

A. Events Giving Rise To This Appeal.

In July, 1987, the Bybyks opened an investment account with PaineWebber. On March 14, 1990, in connection with that account, the Bybyks executed a client agreement (the "Agreement") which recites in relevant part as follows:

Arbitration is final and binding on the parties.

The parties are waiving their right to seek remedies in court, including the right to jury trial.

....

I agree, and by carrying an account for me PaineWebber agrees, that any and all controversies which may arise between me and PaineWebber concerning any account, transaction, dispute or the construction, performance, or breach of this or any other agreement, whether entered into prior, on or subsequent to the date hereof, shall be determined by arbitration. Any arbitration under this agreement shall be held under and pursuant to and be governed by the Federal Arbitration Act, and shall be conducted before an arbitration panel convened by the New York Stock Exchange, Inc., or the National Association of Securities Dealers, Inc. I may also select any other national securities exchange's arbitration forum upon which PaineWebber is legally required to arbitrate the controversies with me, including, where applicable, the Municipal Securities Rule Making Board. Such arbitration shall be governed by the rules of the organization convening the panel.... The award of the arbitrators, or of the majority of them, shall be final, and judgment upon the award rendered may be entered in any court of competent jurisdiction.

The Agreement also contains a choice of law provision which provides that "[t]his agreement and its enforcement shall be construed and governed by the laws of the State of New York." PaineWebber drafted the Agreement.

On July 16, 1993, the Bybyks filed a uniform submission agreement with the NASD to initiate arbitration with PaineWebber. On September 24, 1993, the Bybyks filed a statement of claim with the NASD against PaineWebber. The statement of claim alleges, among other things, that PaineWebber recommended and executed unsuitable transactions, failed to supervise the account, and breached its fiduciary duty to the Bybyks.

PaineWebber promptly commenced a special proceeding in New York Supreme Court pursuant to N.Y.Civ.Prac. L. & R. 7502 and 7503 (McKinney 1980 & Supp.1996), seeking a permanent stay of arbitration with respect to those claims arising from investments made six years prior to September 24, 1993, the date the Bybyks filed their statement of claim. PaineWebber alleged that section 15 of the NASD Code rendered those claims untimely. Section 15 states as follows:

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 limitation, nor shall it apply to National Association of Securities Dealers, Inc., Code of Arbitration Procedure, NASD Manual p 3715 (1994). PaineWebber also sought to enjoin arbitration of any claims for punitive damages or attorneys' fees. The Bybyks removed this proceeding to federal district court and filed a motion to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) on the ground that the Agreement expressly reserved all questions of arbitrability for arbitration, including issues of timeliness.

any case which is directed to arbitration by a court of competent jurisdiction.

In a pithy Endorsement Order dated October 20, 1994, Judge Duffy ruled as follows:

Plaintiff seeks to forestall any arbitration by contending that the NASD statute of limitations precludes recovery. This obviously is a question for the arbitrators. See 9 U.S.C. § 2; see also Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987).

The motion to dismiss is granted.

B. The Parties' Contentions on Appeal.

On appeal, PaineWebber argues that the court--not the arbitrator--decides whether a claim falls within the period of limitations set forth at section 15 of the NASD Code. PaineWebber starts from the well-established premise that the courts determine the scope of the arbitration agreement--what issues may and may not be arbitrated. According to PaineWebber, the court in so doing must respect the parties' choice that issues of construction and interpretation are controlled by New York law, including authority under New York law (and consistent with the law of several circuits) that section 15 of the NASD Code is a substantive eligibility requirement that the court must determine is satisfied before directing a claim to arbitration. See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. DeChaine, 194 A.D.2d 472, 600 N.Y.S.2d 459 (1st Dep't), appeal denied, 82 N.Y.2d 657, 604 N.Y.S.2d 556, 624 N.E.2d 694 (1993); PaineWebber, Inc. v. Hartmann, 921 F.2d 507, 513-14 (3rd. Cir.1990) (holding that the NASD Code's eligibility requirement is a substantive limit on claims that may be arbitrated). Furthermore, under New York law, attorneys' fees may not be awarded in arbitration unless the arbitration agreement expressly affords such relief. N.Y.Civ.Prac. L. & R. 7513 (McKinney 1980).

The Bybyks argue that the Agreement evinces the parties' "clear and unmistakable" intent to arbitrate issues of arbitrability, see First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, ----, 115 S.Ct. 1920, 1924, 131 L.Ed.2d 985 (1995), and that the district court therefore properly allowed the arbitrators to decide whether section 15 of the Code bars those claims alleged to be untimely. Furthermore, the Bybyks argue that under Conticommodity Servs. Inc. v. Philipp & Lion, 613 F.2d 1222, 1225 (2d Cir.1980), the validity of a time-bar defense such as section 15 is an issue for arbitration. With respect to PaineWebber's argument that New York law bars recovery of attorneys' fees, the Bybyks, relying on Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, ----, 115 S.Ct. 1212, 1217, 131 L.Ed.2d 76 (1995), argue that their substantive right under the Federal Arbitration Act to enforce the arbitration provision is unaffected by the Agreement's choice of New York law. Because the parties' intent to refer all issues to arbitration must be respected, the Bybyks contend that the district court correctly dismissed PaineWebber's action to stay arbitration.

DISCUSSION

This Court reviews de novo a district court's grant of a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). Citibank, N.A. v. K-H Corp., 968 F.2d 1489, 1494 (2d Cir.1992). When an appeal comes before this Court on a motion to dismiss, we accept as true the factual allegations of the complaint. Square D Co. v. Niagara Frontier Tariff Bureau, Inc., 476...