Roney and Co. v. Kassab

• Decision Date: 14 December 1992
• Docket Number: No. 91-2223,91-2223
• Citation: 981 F.2d 894
• Parties: Fed. Sec. L. Rep. P 97,281, RICO Bus.Disp.Guide 8206 RONEY AND COMPANY, Petitioner-Appellant, v. Sam KASSAB; Akram Semaan, Respondents-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 894

981 F.2d 894

Fed. Sec. L. Rep. P 97,281, RICO Bus.Disp.Guide 8206

RONEY AND COMPANY, Petitioner-Appellant, v. Sam KASSAB; Akram Semaan, Respondents-Appellees.

No. 91-2223.

United States Court of Appeals Sixth Circuit.

Argued and Submitted Oct. 2, 1992.

Decided Dec. 14, 1992.

Raymond W. Henney (argued and briefed), Honigman, Miller, Schwartz & Cohn, Detroit, MI, for petitioner-appellant.

Jerald R. Lovell (briefed), Mount Clemens, MI, David K. Easlick, Jr., Grosse Pointe Farms, MI, for respondents-appellees.

Before: KEITH, JONES and BOGGS, Circuit Judges.

KEITH, Circuit Judge.

Appellant, Roney & Company, ("Roney" or the "Company"), appeals the district court's determination that the applicability of Rule 603 ¹ of the New York Stock Exchange ("NYSE") to the instant action should be decided by an arbitrator. Under Rule 603, an aggrieved party must commence arbitration proceedings within a six-year period from the disputed transaction. Roney commenced this action to enforce the arbitration provision of the customer agreement entered into by Sam Kassab and Akram Semaan (collectively "Appellees"), which provides that all disputes must be submitted to arbitration conducted under the provisions of the Constitution and Rules of the NYSE. ² For the reasons stated below, we VACATE the district court's ruling and REMAND the case for further proceedings consistent with this opinion.

I.

When the relationship began, David T. Marantette, III ("Marantette") acted as Appellees' account representative. In August of 1978, the Appellees opened a joint investment account with Roney and apparently maintained that account until Marantette voluntarily terminated his association with Roney on November 30, 1984.

In February of 1991, Appellees commenced an arbitration proceeding before the National Association of Securities Dealers, Inc. ("NASD"), asserting claims against Roney and Marantette under the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., and the Racketeer Influenced and Corrupt Organizations statute ("RICO"), 18 U.S.C. § 1961 et seq. Appellees allege that, during a period between 1980 and 1982, Marantette wrongfully purchased 22,000 shares of Metropolitan Savings stock, which resulted in a substantial loss for Appellees. The Appellees acknowledge that they were aware of the monetary loss shortly after the transaction. Appellees also allege that Marantette wrongfully purchased Bayly Corp. stock in 1985 utilizing their Roney account. Appellees claim that these two transactions were improper and that Roney's failure to inform them of Marantette's departure from the Company in 1984 and of his alleged improper conduct amounted to fraudulent concealment and a violation of RICO.

On June 25, 1991, Roney commenced this action seeking to enjoin Appellees from pursuing their claims before the NASD. Roney first argued that, under Rule 603 of the NYSE, Appellees' claim cannot be heard because it was not commenced within six years of the "occurrence or event giving rise to the act or dispute, claim or controversy." Appellees commenced this action in 1991, more than six years following Marantette's departure from Roney in 1984. Roney asserted that Marantette's departure severed the Company from any wrongful conduct on Marantette's part. Roney also argued that Appellees may not properly maintain their claims before the NASD because the parties' customer agreement provided that claims may only be raised before and under the rules of the NYSE. ³ Accordingly, Roney maintained that Appellees' claims must be dismissed.

In response, Appellees made various legal arguments regarding the interpretation of the customer agreement's arbitration provision and the application of NYSE Rule 603. Appellees, however, did not challenge the validity of the customer agreement or its arbitration provision. They also did not contest the fact that Marantette left Roney in 1984. They further acknowledged that they failed to commence any proceeding for redress within six years of Marantette's departure from Roney in 1984.

On September 24, 1991, the district court heard Roney's motion to enjoin the NASD proceedings. Following the presentation of arguments, the district court stated from the bench:

There's no question in this Court's mind that the August 1st, 1978 customer agreement provides that any, any controversy or dispute is to be submitted and conducted under provisions of the Constitution Rules of the Board of Governors of the New York Stock Exchange. Therefore, this Court feels that provision is enforceable.

Roney versus Goren, the Sixth Circuit case mentioned by [Roney's counsel], is applicable. And this Court feels that the petitioner is entitled to injunctive relief, in the sense that this Court will, will order that the matter be arbitrated by the New York Stock Exchange.

With respect to the matter of the statute of limitations, I agree with the respondent's [Appellees'] position there. I think that's a matter that should be taken up by the arbitrator and not by this Court with respect to the RICO or any other claims.

On September 25, 1991, the district court entered the following order:

For the reasons stated on the record following the September 24, 1991, hearing the Court ENJOINS Defendants from arbitrating its claims against Roney and Company before the National Association of Securities Dealers, Inc. ("NASD"). Thus, in enforcing the arbitration provision contained in the August 1, 1978 Customer Agreement, the Court concludes that Defendants [sic] forum is limited to arbitration before the New York Stock Exchange ("NYSE").

Regarding the applicability of Rule 603, the Court leaves this issue to the arbitrator. Accordingly the Complaint is DISMISSED.

From the second paragraph of this order, this timely appeal followed.

II.

Roney challenges on appeal the district court's failure "to rule that Appellees' claims against Appellant were not eligible for arbitration pursuant to the six (6) year eligibility period of the Rules of the New York Stock Exchange which is incorporated in the parties' arbitration agreement." This Circuit now adopts the position taken by our sister circuit which indicates that the district court should decide the Rule 603 arbitrability issue. See PaineWebber, Inc. v. Hartmann, 921 F.2d 507 (3d Cir.1990). See also, PaineWebber, Inc. v. Farnam, 870 F.2d 1286, 1292 (7th Cir.1989) (reaching a similar conclusion with regard to Section 15 of the NASD Code of Arbitration Procedure). Accordingly, we VACATE the second paragraph of the district court order and REMAND the case to the district court for proceedings consistent with this opinion.

A.

The Supreme Court noted in AT & T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986):

[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed to so submit.... This axiom recognizes the fact that arbitrators derive their authority to resolve disputes only because the parties have agreed in advance to submit such grievances to arbitration.

Id. at 648-49, 106 S.Ct. at 1418 (citations omitted). Thus, the duty to arbitrate derives from the contractual agreement of the parties. See Wiepking v. Prudential-Bache Securities, Inc., 940 F.2d 996, 998 (6th Cir.1991). This Circuit in Wiepking further observed:

[W]e have recognized that the FAA (Federal Arbitration Act) does not require parties to arbitrate when they have not agreed to do so, ... nor does it prevent parties who do agree to arbitrate from excluding certain claims from the scope of their arbitration agreement.... It simply requires courts to enforce privately negotiated agreements to arbitrate, like other contracts, in accordance with their terms.

Id. (quoting Volt Information Sciences, Inc. v. Board of Trustees of the Leland Stanford Junior Univ., 489 U.S. 468, 478, 109 S.Ct. 1248, 1255, 103 L.Ed.2d 488 (1989)) (emphasis added).

"Whether or not a (party) ... is bound to arbitrate, as well as what issues it must arbitrate, is a matter to be determined by the court, and a party cannot be forced to 'arbitrate the arbitrability issue' " Litton Financial Printing Division v. NLRB, --- U.S. ----, ----, 111 S.Ct. 2215, 2226, 115 L.Ed.2d 177 (1991). The AT & T Technologies Court is also instructive, stating:

[T]he question of arbitrability--whether a collective bargaining agreement creates a duty for the parties to arbitrate a particular grievance--is undeniably an issue for judicial determination. Unless the parties clearly and unmistakably provide otherwise, the question of whether the parties agree to arbitration is to be decided by the court, not the arbitrator.

AT & T Technologies, 475 U.S. at 649, 106 S.Ct. at 1418. Both Litton Financial and AT & T Technologies involved the arbitration of fair labor disputes. Nevertheless, the Third Circuit has applied, and we think appropriately, the reasoning of AT & T Technologies to arbitration provisions of customer agreements in the securities industry. See PaineWebber, Inc. v. Hartmann, 921 F.2d 507, 510-11 (3d Cir.1990).

Hartmann involved a petition by PaineWebber to enjoin the Hartmanns from pursuing their arbitration proceeding before the NYSE based on the six-year limitations period of Rule 603. Hartmann, 921 F.2d at 509-10. The arbitration proceeding was based on a transaction that had occurred in their brokerage account more than six years before the Hartmanns filed the arbitration proceeding. The district court enjoined any further proceedings on the part of the Hartmanns in light of the limitations period. Id. The Hartmanns appealed the district court's decision arguing that the court erred by interpreting Rule 603 as a substantive rather than a procedural bar to the claim. Id. at 510. This determination, the Hartmanns argued is better left to the arbitrator. Id.

The Third Circuit recognized that the Hartmanns' reading of ...