Smith Barney, Harris Upham & Co., Inc. v. Luckie

Decision Date21 February 1995
Citation623 N.Y.S.2d 800,647 N.E.2d 1308,85 N.Y.2d 193
Parties, 647 N.E.2d 1308, 1996 A.M.C. 1213, 63 USLW 2531, Fed. Sec. L. Rep. P 98,785 In the Matter of SMITH BARNEY, HARRIS UPHAM & CO., INC., Appellant, v. Charlie LUCKIE, Jr., et al., Respondents, and Doris Kahn, Respondent. In the Matter of MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., et al., Appellants, v. Margaret B. MANHARD, Respondent.
CourtNew York Court of Appeals Court of Appeals

Orrick, Herrington & Sutcliffe, New York City (Lawrence E. Fenster and Francis S. Chlapowski, of counsel), and Paul K. Barenholtz, New York City, for appellant in the first above-entitled proceeding.

Deutsch & Lipner, Garden City (Seth Lipner, of counsel), for Doris Kahn, respondent in the first above-entitled proceeding.

Orrick, Herrington & Sutcliffe, New York City (Lawrence E. Fenster and Francis S. Chlapowski, of counsel), for appellants in the second above-entitled proceeding.

Michael Goergen, Washington, DC, of the District of Columbia Bar, admitted pro hac vice, Deutsch & Lipner, Garden City, and Sims, Walker & Stienfeld (John R. Sims, Jr., and Steve Larson-Jackson, Washington, DC, of the District of Columbia Bar, admitted pro hac vice, of counsel), for respondent in the second above-entitled proceeding.

OPINION OF THE COURT

TITONE, Judge.

These two appeals arise from controversies concerning separate securities transactions undertaken by two securities brokers on behalf of two unrelated investors. The common issue presented is whether the Appellate Division in each case properly held that the timeliness of claims sought to be arbitrated pursuant to an agreement governed by the Federal Arbitration Act (FAA) is a question reserved to the arbitrators, notwithstanding the facts that each arbitration agreement contained a New York choice of law provision, and that, under New York law, Statute of Limitations questions are properly resolved by the courts (see, CPLR 7502[b]. In light of the United States Supreme Court's decision in Volt Information Sciences v. Leland Stanford Jr. Univ., 489 U.S. 468, 109 S.Ct. 1248, 103 L.Ed.2d 488, we conclude that a determination by the court on the Statute of Limitations question offends neither the language of the FAA nor its underlying policies where the parties have mutually agreed that New York law shall govern the dispute. Accordingly, we reverse in each case and remit to the Appellate Division for a determination on the previously unaddressed Statute of Limitations questions.

I Smith Barney

In 1989, respondent Doris Kahn commenced arbitration against petitioner Smith Barney, Harris Upham & Co., 1 a national securities broker-dealer having its principal executive offices in New York, alleging Federal and State claims of fraudulent and unsuitable sale of certain securities. Kahn, a Florida resident, made her Smith Barney investments exclusively through petitioner's Florida offices, and terminated her account with petitioner in or about August 1984.

The governing customer agreement between Smith Barney and Kahn refers to and incorporates a Securities Account Agreement, which in turn contains an arbitration clause. The parties' arbitration clause provides that "[a]ny controversy between Smith Barney and [Kahn] arising out of or relating to this contract or the breach thereof shall be settled by arbitration" and specifies the available arbitration fora. The arbitration clause is directly followed in the Securities Account Agreement by a New York choice of law provision, which states that "[t]his agreement and its enforcement shall be governed by the laws of the State of New York."

The parties subsequently engaged in extensive State and Federal litigation to determine both the appropriate forum for arbitrating their dispute (see, Luckie v. Smith Barney, Harris Upham & Co., 766 F.Supp. 1116 [M.D.Fla.1991], affd. 11th Cir., 999 F.2d 509) and whether the arbitration is barred by the Statute of Limitations. In 1989, by special proceeding, petitioner Smith Barney sought an order in New York Supreme Court staying the arbitration before the National Association of Securities Dealers (NASD) 2 pursuant to CPLR 7503 and moved to dismiss Kahn's claims pursuant to CPLR 7502(b) on the ground, among others, that they were time-barred. Supreme Court granted a temporary stay of arbitration pending determination of the petition. The court ultimately denied the petition for a stay, ruling that Kahn's claims were governed by New York's six-year Statute of Limitations for fraud, and were timely filed. The Appellate Division affirmed the denial of the stay of arbitration on different grounds. The Court ruled that the Statute of Limitations question is one to be resolved by the arbitrators rather than the courts. Relying on the fact that "[t]he parties' intention to resolve all disputes by arbitration [was] clear," the Court reasoned that "dismissal of respondent's claims pursuant to CPLR 7502(b) would defeat the policies of the Federal Arbitration Act." (198 A.D.2d 87, 605 N.Y.S.2d 838.) Thus, the Court concluded that "the arbitrators should decide the Statute of Limitations issue, including whether New York or Florida law applies" (id., at 87, 605 N.Y.S.2d 838). This Court granted Smith Barney's motion for leave to appeal, but denied its motion for a stay of arbitration pending resolution of this appeal.

Merrill Lynch

In August 1992, respondent Margaret B. Manhard filed a claim in arbitration before the NASD in New York against petitioners Merrill Lynch, Pierce, Fenner & Smith, Inc., a national securities broker-dealer having its principal place of business in New York, and John R. DaCamara, a Merrill Lynch employee. Manhard alleged various Federal and State claims against petitioners arising out of certain investments made by Merrill Lynch on her behalf.

Arbitration was commenced in accordance with the terms of a customer agreement Manhard executed with Merrill Lynch. As in Smith Barney, the agreement provided that any controversy arising from the contract shall be settled by arbitration, and included a choice of law provision stating that "[t]his agreement and its enforcement shall be governed by the laws of the State of New York."

On October 1, 1992, petitioners commenced this special proceeding in Supreme Court to permanently stay arbitration pursuant to CPLR 7502 and 7503(b). Supreme Court granted petitioners a temporary stay of the arbitration pending a hearing on the petition. The petition contained allegations that all of Manhard's claims were either ineligible for submission to arbitration under NASD Code of Arbitration Procedure § 15--which precludes arbitration of claims based on transactions occurring more than six years prior to commencement of the arbitration--or were time-barred by applicable Federal or State Statutes of Limitations. Petitioners also argued that New York's borrowing statute--CPLR 202 3--required that the shorter of either New York's or Virginia's Statutes of Limitation applied. Thereafter, Manhard's counsel conceded that all claims based upon transactions in her account that occurred more than six years prior to commencement of the arbitration were ineligible for arbitration, but maintained that the timeliness of her remaining claims was an issue reserved for the arbitrators. Manhard additionally argued that the New York borrowing statute was not an available bar to her claims because they "accrued" not in Virginia, the place of economic injury, but in New York, where the claim for arbitration was filed.

Supreme Court granted the petition and permanently stayed the arbitration. The Court ruled that pursuant to New York law, the Court was the proper forum to decide whether the claims were time-barred from arbitration. The Court then determined that New York's borrowing statute applied, found that Manhard's claims accrued in Virginia--the place of her economic loss--and held that the remaining claims were all time-barred.

The Appellate Division affirmed so much of Supreme Court's order holding that claims based on transactions occurring more than six years prior to the filing were ineligible for arbitration pursuant to NASD rules and should be permanently stayed. However, the Court reversed on the Statute of Limitations issue, holding that because the parties made clear their intent to resolve all disputes by arbitration, "the policy of the Federal Arbitration Act requires that the applicability of a statute of limitations be decided by the arbitrators." (201 A.D.2d 347, 607 N.Y.S.2d 640.) We granted Merrill Lynch's motion for leave to appeal, and granted its motion for a temporary stay of the Appellate Division order pending resolution of the appeal.

II

The Federal Arbitration Act (9 U.S.C. §§ 1-16) specifies that a written provision to arbitrate any controversy arising out of a "contract evidencing a transaction involving commerce" is valid and enforceable (see, 9 U.S.C. § 2). 4 The Act was designed to terminate "the judiciary's longstanding refusal to enforce agreements to arbitrate" (Dean Witter Reynolds v. Byrd, 470 U.S. 213, 219-220, 105 S.Ct. 1238, 1242, 84 L.Ed.2d 158). In enacting the FAA, Congress established a Federal policy favoring arbitration agreements, which is to be advanced by rigorous judicial enforcement of arbitration agreements (Shearson/American Express v. McMahon, 482 U.S. 220, 107 S.Ct. 2332, 96 L.Ed.2d 185) and by resolution of any "ambiguities as to the scope of the arbitration clause itself * * * in favor of arbitration" (Volt Information Sciences v. Leland Stanford Jr. Univ., 489 U.S. 468, 476, 109 S.Ct. 1248, 1254, supra; Moses H. Cone Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765).

Notwithstanding the Federal policy favoring liberal enforcement of agreements to arbitrate, the FAA should not be construed to "confer a right to compel arbitration of any dispute at any time; it confers only the right to obtain an order directing that 'arbitration...

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