Perpetual Securities, Inc. v. Tang

• Decision Date: 09 May 2002
• Docket Number: Docket No. 01-7901.
• Citation: 290 F.3d 132
• Parties: PERPETUAL SECURITIES, INC., Petitioner-Appellant, v. Julie TANG and Hua Yu Chen, Respondents-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

Page 132

290 F.3d 132

PERPETUAL SECURITIES, INC., Petitioner-Appellant, v. Julie TANG and Hua Yu Chen, Respondents-Appellees.

Docket No. 01-7901.

United States Court of Appeals, Second Circuit.

Argued March 26, 2002.

Decided May 9, 2002.

COPYRIGHT MATERIAL OMITTED

Kevin K. Tung, Flushing, NY, for Appellant.

Michael Schneider, New York City, for Appellees.

Before: OAKES, MESKILL and SACK, Circuit Judges.

MESKILL, Circuit Judge.

Petitioner-appellant Perpetual Securities, Inc. (Perpetual) appeals from a judgment and order of the United States District Court for the Southern District of New York, Owen, J., denying Perpetual's petition to vacate an arbitration award, granting respondents-appellees' petition for confirmation of the award, and granting Rule 11 sanctions against Perpetual in the form of attorney's fees and costs.

The district court determined that because Perpetual had not raised an independent ground of federal jurisdiction in its complaint, the court was without jurisdiction to vacate the arbitration award. After determining, however, that the Federal Arbitration Act conferred upon it jurisdiction to confirm an arbitration award, the district court confirmed the award in this case. Further, because Perpetual's arguments attempting to raise a federal question were clearly against Circuit precedent, the district court awarded Rule 11 sanctions in the form of reasonable attorney's fees and costs against Perpetual.

We hold that the district court correctly determined that it lacked jurisdiction to vacate the arbitration award, but that the district court erred in assuming jurisdiction to confirm the arbitration award. Further, we hold that the district court's award of Rule 11 sanctions in the form of attorney's fees against Perpetual was improper. Accordingly, we vacate the order of the district court and remand the case to be dismissed for lack of subject matter jurisdiction and so that the district court can reconsider the sanctions issue.

BACKGROUND

Respondents-appellees Julie Tang and Hua Yu Chen brought a claim before a National Association of Securities Dealers (NASD) arbitration panel against Perpetual for unauthorized trading in an account maintained by appellees at Perpetual. The claim was brought before the arbitration panel pursuant to the Margin and Option Agreements (Agreements) signed by appellees. The arbitration provision in the Margin Agreement, which is essentially identical to the provision in the Option Agreement, provides that "all controversies which may arise between us ... shall be determined by arbitration. Any arbitration under this agreement shall be conducted before the New York Stock Exchange, Inc. (`NYSE') or the National Association of Securities Dealers, Inc. (`NASD')." The Agreements further stated "[j]udgement upon the award of arbitrators may be entered in any court, state or federal, having jurisdiction."

The complaint before the arbitration panel alleged, inter alia, that Yue Chen, an employee of Perpetual, refused to stop trading on appellees' account despite appellees' request. NASD Regulation performed an investigation to determine whether disciplinary action should be taken against Yue Chen and determined that no action would be taken at that time. Perpetual then moved for a dismissal of the case before the arbitration panel, asserting res judicata and collateral estoppel claims. Perpetual argued that appellees' claims were based on the conduct of Yue Chen. Because NASD Regulation had determined that no disciplinary action would be taken against Yue Chen, Perpetual argued that NASD Regulation's decision should govern the case against Perpetual and Yue Chen before the arbitration panel. The panel rejected the argument and denied Perpetual's motion.

Following the hearing, Perpetual was ordered to pay $21,000 to appellees in compensatory damages, $5,000 to NASD Dispute Resolution in forum fees, $105 in administrative costs and $3,100 in member fees.

Perpetual initiated an action in the United States District Court for the Southern District of New York seeking to vacate the arbitration award. Appellees cross-moved for dismissal of Perpetual's petition, confirmation of the arbitration award and the imposition of sanctions pursuant to Fed. R.Civ.P. 11. The district court concluded that it lacked jurisdiction to vacate the arbitration award because Perpetual had failed to present an independent basis for subject matter jurisdiction. Perpetual Sec. v. Tang, 2001 WL 826121, at *1 (S.D.N.Y. July 20, 2001). The district court then concluded that it had jurisdiction to confirm the arbitration award and did so. The district court also awarded Rule 11 sanctions against Perpetual in the form of attorney's fees and costs. Id. This appeal followed.

DISCUSSION

We have jurisdiction to hear this appeal pursuant to 9 U.S.C. § 16(a)(1)(D) (an appeal may be taken from an order confirming or denying confirmation of an award). See United States v. Corrick, 298 U.S. 435, 440, 56 S.Ct. 829, 80 L.Ed. 1263 (1936) ("While the District Court lacked jurisdiction, we have jurisdiction on appeal, not of the merits but merely for the purpose of correcting the error of the lower court in entertaining the suit.").

I. Subject Matter Jurisdiction

Federal courts are courts of limited jurisdiction. Congress has, pursuant to its authority under Article III of the Constitution, granted to district courts jurisdiction to hear cases in which there is a federal question and cases based on the diversity of citizenship of the parties. U.S. Const. art. III, § 1 ("The judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish."); id. art. III, § 2 (delineating the limits of the "judicial Power"); 28 U.S.C. § 1331 (granting jurisdiction over "all civil actions arising under the Constitution, laws, or treaties of the United States"); id. § 1332 (granting jurisdiction "where the matter in controversy exceeds the sum or value of $75,000 ... and is between[, inter alia,] citizens of different States").

Individual "parties cannot confer subject matter jurisdiction where the Constitution and Congress have not. The absence of such jurisdiction is non-waivable; before deciding any case we are required to assure ourselves that the case is properly within our subject matter jurisdiction." Wynn v. AC Rochester, 273 F.3d 153, 157 (2d Cir.2001) (per curiam) (citing Bender v. Williamsport Area Sch. Dist., 475 U.S. 534, 541, 106 S.Ct. 1326, 89 L.Ed.2d 501 (1986)).

A.

Section 10 of the Federal Arbitration Act (FAA), 9 U.S.C. § 10, allowing federal district courts to vacate arbitration awards, does not confer upon federal district courts subject matter jurisdiction. United States v. Am. Soc. of Composers, Authors & Publishers, 32 F.3d 727, 731 (2d Cir.1994); Harry Hoffman Printing v. Graphic Communications, Int'l Union, Local 261, 912 F.2d 608, 611 (2d Cir.1990); see also Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25 n. 32, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983) ("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."). "There must be an independent basis of jurisdiction before a district court may entertain petitions under the Act." Harry Hoffman Printing, 912 F.2d at 611.

There is no allegation that there is diversity jurisdiction; although the parties appear to be diverse, the amount in controversy is less than the statutorily required $75,000. 28 U.S.C. § 1332. Therefore, for subject matter jurisdiction to exist here, the dispute must raise a federal question. Perpetual recognized this by pleading jurisdiction under 28 U.S.C. § 1331 in its complaint.

"Federal question jurisdiction exists where a well-pleaded complaint `establishes either that federal law creates the cause of action or that the plaintiff's right to relief necessarily depends on resolution of a substantial question of federal law.'" Greenberg v. Bear, Stearns & Co., 220 F.3d 22, 25 (2d. Cir.2000) (emphasis added) (quoting Franchise Tax Bd. v. Constr. Laborers Vacation Trust, 463 U.S. 1, 27-28, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983)). When deciding whether federal question jurisdiction exists, we must proceed prudently and make pragmatic distinctions between those allegations, if any, that raise substantial questions and those that do not. Id. at 26, 103 S.Ct. 2841 (citing Barbara v. New York Stock Exch., 99 F.3d 49, 54 (2d Cir.1996)). In so doing, we examine "the nature of the federal question raised in [each] claim to see if it is sufficiently substantial to warrant federal jurisdiction." Greenblatt v. Delta Plumbing & Heating Corp., 68 F.3d 561, 570 (2d Cir.1995).

Simply raising a federal issue in a complaint will not automatically confer federal question jurisdiction. Rather, we ask "whether the cause of action alleged is so patently without merit as to justify ... the court's dismissal for want of jurisdiction." Duke Power Co. v. Carolina Env. Study Group, 438 U.S. 59, 70, 98 S.Ct. 2620, 57 L.Ed.2d 595 (1978) (quotation marks omitted); accord Oneida Indian Nation v. County of Oneida, 414 U.S. 661, 666, 94 S.Ct. 772, 39 L.Ed.2d 73 (1974) (noting that federal jurisdiction existed because plaintiff's assertion that its claim was based in federal law was not "so insubstantial, implausible, foreclosed by prior decisions of [the Supreme] Court, or otherwise completely devoid of merit as not to involve a federal controversy within the jurisdiction of the District Court").

B.

The gravamen of Perpetual's claim before the district court was that its due process rights under the Fifth and Fourteenth Amendments were violated because NASD requires its members to submit to compulsory arbitration of all...