Smith Barney, Inc. v. Sarver

• Decision Date: 28 February 1997
• Docket Number: No. 95-2285,95-2285
• Citation: 108 F.3d 92
• Parties: SMITH BARNEY, INCORPORATED, Plaintiff-Appellee, v. Roger SARVER; Concetta Sarver, Defendants-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 92

108 F.3d 92

SMITH BARNEY, INCORPORATED, Plaintiff-Appellee, v. Roger SARVER; Concetta Sarver, Defendants-Appellants.

No. 95-2285.

United States Court of Appeals, Sixth Circuit.

Argued Oct. 22, 1996.

Decided Feb. 28, 1997.

Thomas R. Cox (briefed), Clarence L. Pozza, Jr., Miller, Canfield, Paddock & Stone, Detroit, MI, for plaintiff-appellee.

Walter L. Baumgardner (briefed), Musilli, Baumgardner, Wagner & Parnell, St. Clair Shores, MI, for Roger Sarver and Concetta Sarver.

Before: MARTIN, Chief Judge; WELLFORD and MOORE, Circuit Judges.

WELLFORD, Circuit Judge.

Roger and Concetta Sarver filed a claim for arbitration against Smith Barney, Inc. ("Smith Barney") on September 24, 1994, alleging that the securities firm Shearson Lehman Hutton ("Shearson"), predecessor of Smith Barney, ¹ violated various securities acts, rules of the National Association of Securities Dealers ("NASD"), and its fiduciary duty under state common law.

The underlying dispute between the parties arose out of a purchase of $116,000 worth of TWA unsecured senior notes for the Sarvers' account on September 14, 1988. TWA eventually suffered severe financial difficulties, which significantly diminished the value of the unsecured notes. In light of this substantial decrease in value, the Sarvers contend that their broker misrepresented the inherent risk of the investment, which they claim was contrary to their clearly stated investment objectives. As a result, the Sarvers filed a claim for arbitration with the NASD seeking $70,000 in damages, plus interest and costs.

In response, Smith Barney filed a complaint in federal district court seeking injunctive relief barring arbitration on the grounds Smith Barney countered by filing its own cross-motion for summary judgment, arguing that the eligibility period under § 15 was a substantive limit that was not amenable to equitable tolling. Although the district court disagreed with Smith Barney's legal conclusion, it nevertheless granted summary judgment in its favor because the Sarvers had failed to even attempt to show that there was a genuine issue of material fact tending to demonstrate that Smith Barney had participated in any fraudulent concealment.

                that, notwithstanding the factual allegations, the claim was simply not timely filed within the six-year eligibility period required by § 15 of the NASD Code of Arbitration Procedure, which had been incorporated into the contract for arbitration between the parties. 2  The Sarvers acknowledge that the purchase of the unsecured notes occurred more than six years before their claim for arbitration was filed, but they nevertheless filed a motion for summary judgment arguing that the six-year bar should be equitably tolled because Smith Barney fraudulently concealed the allegedly improper conduct of its broker
                

Because of this failure even to put forth any evidence tending to prove their case, the Sarvers' argument on appeal is limited to the claim that the district court lacked the authority to hear and decide the issues in the first place. Specifically, plaintiffs make two arguments: first, that the court lacked subject matter jurisdiction over the dispute; and second, that even if jurisdiction existed, the arbitration contract effectively vested power in the arbitrators to determine eligibility questions, to the exclusion of the courts.

We find this case to be similar to City of Detroit Pension Fund v. Prudential Sec. Inc., 91 F.3d 26 (6th Cir.1996), which was published recently after the filing of briefs in this case. Based in part on that case, and for the other reasons indicated, we reject the Sarvers' arguments and AFFIRM the decision of the district court.

SUBJECT MATTER JURISDICTION

In its complaint, Smith Barney asserted that jurisdiction was predicated on the Federal Arbitration Act, 9 U.S.C. § 4, because absent an agreement for arbitration, there would be federal question jurisdiction under 28 U.S.C. § 1331 based on the federal securities laws. Our cases have made clear, however, that the Federal Arbitration Act does not supply an independent basis for federal jurisdiction, nor does the federal nature of the underlying claims that were submitted to arbitration. City of Detroit Pension Fund, 91 F.3d at 29; see also Ford v. Hamilton Inv., Inc., 29 F.3d 255, 257-59 (6th Cir.1994); In re Application of Prudential Sec. Inc., 795 F.Supp. 657, 658-59 (S.D.N.Y.1992). The rights asserted by Smith Barney in this case are based simply on an interpretation of the contract to arbitrate, as opposed to the actual merits of the underlying substantive claims. See City of Detroit Pension Fund, 91 F.3d at 29.

For whatever reason, however, the Sarvers did not challenge Smith Barney's jurisdictional allegation below, and the district court failed to analyze the issue or state the grounds for exercising jurisdiction. Nevertheless, "[f]ederal courts are courts of limited jurisdiction ... [and] no action of the parties can confer subject-matter jurisdiction upon a federal court." Insurance Corp. of Ireland, Ltd. et al. v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 701-02, 102 S.Ct. 2099, 2104, 72 L.Ed.2d 492 (1982); Universal Consol. Cos. v. Bank of China, 35 F.3d 243, 247 (6th Cir.1994) ("[I]t is hornbook law that parties may not waive into or consent to subject matter jurisdiction which a federal court does not properly have by operation of Constitution and Congress."). Accordingly, a defendant's "[f]ailure to object to subject matter jurisdiction before the district court does not preclude appellate review, and we must address [the] issue...." City of Detroit Pension Fund, 91 F.3d at 29 (citations omitted).

In view of the errors in Smith Barney's jurisdictional allegation, we might dismiss the case for want of jurisdiction. However, we may still take notice of another basis for jurisdiction. Id.; see also Lytle v. Freedom Int'l Carrier, S.A., 519 F.2d 129, 132-33 (6th Cir.1975). In City of Detroit Pension Fund, our court recognized diversity jurisdiction despite the fact that federal question jurisdiction was erroneously claimed. Specifically, we held that:

Assuming, arguendo, that there is no basis for federal question jurisdiction, and given the agreement by the parties that the elements of diversity jurisdiction are satisfied, the question becomes whether this court can uphold the district court's exercise of jurisdiction on a basis other than that recognized by the district court. Where there is a challenge on appeal to the subject matter jurisdiction of the district court, this court may take notice of other bases for jurisdiction.

...

Because the parties are of diverse citizenship and the requisite minimum amount is in controversy, the district court had jurisdiction under 28 U.S.C. § 1332.

91 F.3d at 29.

In this respect, the present case is virtually identical to City of Detroit Pension Fund. There appears to be no dispute that there exists both complete diversity of citizenship between this plaintiff and defendant and that there is a claim for more than $50,000 in damages. ³ Therefore, despite its erroneous assertion of federal question jurisdiction, and even though the complaint did not affirmatively allege diversity jurisdiction, Smith Barney did plead all of the required elements for diversity. Accordingly, we hold that federal diversity jurisdiction exists under 28 U.S.C. § 1332.

ARBITRABILITY OF § 15

The Sarvers alleged that Smith Barney violated the securities laws, the rules of the NASD, and also its fiduciary duties. These claims go to the merits of the underlying dispute, but they are not presently before this court. Our task is confined to ruling on Smith Barney's more limited request for a permanent injunction enjoining the Sarvers from pursuing their claim in arbitration at all. Obviously, that injunction petition ultimately involves determining whether the dispute is arbitrable under the requirements of § 15 of the NASD Code of Arbitration Procedure, which may be better described as addressing the eligibility of the Sarvers' claims for arbitration. This issue is also not before us because the Sarvers failed to produce any evidence that their claims were indeed eligible for arbitration due to Smith Barney's fraudulent concealment of its broker's alleged misconduct. Cf. City of Detroit Pension Fund, 91 F.3d at 30 ("We need not reach the issue of whether § 15 is subject to tolling on the basis of fraudulent concealment, because the Funds did not adequately plead fraudulent concealment before the district court."). Further, the Sarvers have not even chosen to address this issue. Instead, in their arguments before this court, the Sarvers have focused solely on the issue of who is properly charged with deciding the eligibility issue. Specifically, they argue that the district court should not have even considered whether their claims against Smith Barney were eligible for arbitration under § 15 because the issue was for the arbitration panel to decide. This question deals with the arbitrability of § 15.

As a general premise, the Supreme Court has made it very clear that since arbitration is a matter of contract, "a party cannot be required to submit to arbitration any dispute which he has not agreed to so submit." AT & T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 648, 106 S.Ct. 1415, 1418, 89 L.Ed.2d 648 (1986) (quoting United Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582, 80 S.Ct.

1347, 1353, 4 L.Ed.2d 1409 (1960) (Brennan, J., concurring)). Notwithstanding this general presumption, the parties are ultimately in control of their own affairs since, as noted above, arbitration is essentially a matter of contractual agreement, and parties may choose to submit questions of arbitrability to an arbitrator. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995). In light of the grave consequences that could potentially...