Smith Barney Shearson Inc. v. Sacharow

• Decision Date: 31 May 1990
• Citation: 666 N.Y.S.2d 990,91 N.Y.2d 39,689 N.E.2d 884
• Parties: , 689 N.E.2d 884, 1997 N.Y. Slip Op. 10,230 In the Matter of SMITH BARNEY SHEARSON INC. et al., Appellants, v. Jeffrey S. SACHAROW et al., Respondents. In the Matter of SMITH BARNEY, INC., Appellant, v. Vivian HAUSE, as Trustee, et al., Under the Hause Revocable Trust Dated
• Court: New York Court of Appeals Court of Appeals

Page 990

666 N.Y.S.2d 990

91 N.Y.2d 39, 689 N.E.2d 884, 1997

N.Y. Slip Op. 10,230

In the Matter of SMITH BARNEY SHEARSON INC. et al., Appellants, v. Jeffrey S. SACHAROW et al., Respondents.

In the Matter of SMITH BARNEY, INC., Appellant, v. Vivian HAUSE, as Trustee, et al., Under the Hause Revocable

Trust Dated May 31, 1990, et al., Respondents.

Court of Appeals of New York.

Dec. 4, 1997.

Brobeck, Phleger & Harrison, L.L.P., New York City (Lawrence E. Fenster and Francis S. Chlapowski, of counsel), Susan E. Harkins and William Hohauser, for appellants in the first and second above-entitled proceedings.

Zuckerman, Spaeder, Goldstein, Taylor & Kolker, L.L.P., New York City (Christopher M. Wilson and Edward J.M. Little, of counsel), for respondents in the first above-entitled proceeding.

Deutsch & Lipner, Garden City (Seth E. Lipner, of counsel), for respondents in the second above-entitled proceeding.

OPINION OF THE COURT

BELLACOSA, Judge.

These two issue-related proceedings concern arbitrability of disputes arising out of respective securities transactions executed by petitioner Smith Barney on behalf of two of its customer investors. Section 15 of the NASD Code of Arbitration Procedure provides that claims of over six years' duration are ineligible for arbitration. In this common procedural setting, that provision evokes two questions: first, arbitrability of the ineligibility time bar and, then, the appropriate forum for the determination of that threshold issue--arbitration or court.

I.

Smith Barney, Inc. (and its broker Edward Greenhill in the Sacharow case only) turned to a court under CPLR article 75 to try to stay the Sacharow demand for arbitration. It proceeded likewise and alone against the Hause arbitration demand. Smith Barney now appeals in each proceeding, pursuant to leave granted by this Court, from two Appellate Division orders directing the arbitrations to go forward in plenary fashion. We now affirm.

Sacharow

The brothers Sacharow are the executors of the estate of their father, a deceased physician. In 1994, they filed a statement of claim with the National Association of Securities Dealers (NASD) seeking arbitration concerning investments made by Smith Barney through one of its brokers, Edward Greenhill. The Sacharows contended that, as a result of their father's medical condition, he was unable to monitor his brokerage account. They alleged that Greenhill made risky and speculative investments, resulting in a substantial depletion of their father's investment account. Their demand for damages and attorney's fees was based on fraud, negligence, and breach of contract.

The customer agreement between Dr. Sacharow and Smith Barney contained two relevant clauses: (1) "[a]ny controversy * * * shall be settled by arbitration" in accordance with the rules of the NASD Code; and (2) the agreement "shall be governed by the laws of the State of New York without giving effect to [its] choice of law or conflict of laws provisions."

Smith Barney and Greenhill moved to block the arbitration on the ground that the claims were ineligible, since the subject transactions were executed six years prior to the filing of the statement of claim. They added that eligibility for arbitration is an arbitrability question, whose determination is reserved solely to the courts.

Supreme Court initially granted the stay, relying on Matter of Smith Barney, Harris Upham & Co. v. Luckie, 85 N.Y.2d 193, 623 N.Y.S.2d 800, 647 N.E.2d 1308, cert. denied sub nom. Manhard v. Merrill Lynch, Pierce Fenner & Smith, 516 U.S. 811, 116 S.Ct. 59, 133 L.Ed.2d 23. The Sacharows were granted reconsideration upon bringing Mastrobuono v. Shearson Lehman Hutton, 514 U.S. 52, 115 S.Ct. 1212, 131 L.Ed.2d 76 to the trial court's attention. The nisi prius court then (1) denied Smith Barney's application; (2) directed the parties to proceed to arbitration; and (3) dismissed the petition.

The Appellate Division affirmed, stating:

"Initially, we note that rules such as section 15 of the NASD's Code of Arbitration Procedure, which both parties agreed to, are not simply procedural limitations on the timeliness of a claim but limitations on the power of the arbitrator to entertain such claims. Section 15 and other like rules are eligibility requirements, not Statutes of Limitation. Absent an agreement by the parties to the contrary, an issue raised pursuant to such sections must be determined by the courts since eligibility is a question of substantive arbitrability. This is true regardless of whether the arbitration agreement contains a New York choice of law provision" (238 A.D.2d 155, 156, 656 N.Y.S.2d 203, 204 [citations omitted] [emphasis in original] ).

The Appellate Division added that Mastrobuono did not overrule or limit the Court of Appeals decision in Luckie because "[i]n Mastrobuono, the United States Supreme Court simply interpreted the specific language of an 'ambiguous' choice of law clause with respect to the issue of the availability of punitive damages in arbitration under general rules of contract construction" (238 A.D.2d, at 156, 656 N.Y.S.2d, at 204-205). Then, interrelating First Options of Chicago v. Kaplan, 514 U.S. 938, 115 S.Ct. 1920, 131 L.Ed.2d 985, the Appellate Division concluded that the language of the Sacharow arbitration provision "clearly and unambiguously indicates that the parties agreed to arbitrate all disputes, including eligibility" (238 A.D.2d, at 158, 656 N.Y.S.2d, at 205 [emphasis in original] ).

Hause

Here, the elderly, retired customer authorized a Smith Barney representative to invest a substantial portion of her assets into a single, highly speculative, limited partnership. This occurred in 1986 and 1987, and the authorization was based on Smith Barney's advice. The customer suffered substantial losses and then filed a claim and an arbitration demand with the NASD alleging misrepresentation, among other things. The customer agreement contained the same relevant provisions as in Sacharow.

Smith Barney again turned to the court to block the arbitration. Supreme Court granted the stay motion, reasoning that the claims were ineligible under NASD Code § 15. The Appellate Division in this instance reversed and denied the stay (238 A.D.2d 104, 655 N.Y.S.2d 489). The Court noted that while section 15 of the NASD Code is an eligibility provision that would ordinarily constitute a question of arbitrability to be decided by the courts, here the "clear and unmistakable evidence [is] that the parties intended that it would be decided by the arbitrator" and the entire matter should be kept out of the courts (238 A.D.2d, at 106, 655 N.Y.S.2d, at 491). The Court concluded that the plain language of this arbitration clause "clearly extends to the question of whether certain transactions are covered by the scope of the agreement" (238 A.D.2d, at 106, 655 N.Y.S.2d, at 491). Finally, the Court found that the language in the arbitration clause "overrides any implication that could be drawn from a simple New York choice of law clause that the parties intended that the courts would decide section 15 eligibility" (238 A.D.2d, at ----, 655 N.Y.S.2d, at 492).

II.

The threshold question for us to decide is whether the eligibility feature of section 15 of the NASD Code is a condition precedent to arbitration and, thus, whether it constitutes a question of arbitrability. Smith Barney argues that the plain language of this provision absolutely precludes six-year and older claims from arbitration. It views the six-year time- period as a condition precedent to arbitration. The customers' position is that the section 15 six-year "eligibility" provision is a procedural limitation properly within the arbitrators' contractually agreed-to range of authority (see, PaineWebber Inc. v. Elahi, 87 F.3d 589, 601 [1st Cir.1996] ).

Section 15 of the NASD Code provides that "[n]o dispute, claim, or controversy shall be eligible for submission to arbitration under this Code where six (6) years shall have elapsed from the occurrence or event giving rise to the act or dispute, claim or controversy" (emphasis added). This language limits the subject of, entitlement to and range of arbitrable matters. Thus, it may not be viewed simply as a procedural Statute of Limitations.

Several lower State courts have agreed that section 15 of the NASD Code is a substantive eligibility requirement, rather than just a Statute of Limitations, a "mere" proceduralism (see, Merrill Lynch, Pierce, Fenner & Smith v. Ohnuma, 218 A.D.2d 572, 573, 630 N.Y.S.2d 724; Matter of Merrill Lynch, Pierce, Fenner & Smith [Manhard], 201 A.D.2d 347, 607 N.Y.S.2d 640, rev'd in part on other grounds 85 N.Y.2d 193, 623 N.Y.S.2d 800, 647 N.E.2d 1308, cert. denied 516 U.S. 811, 116 S.Ct. 59, 133 L.Ed.2d 23; Merrill Lynch, Pierce, Fenner & Smith v. DeChaine, 194 A.D.2d 472, 600 N.Y.S.2d 459; Matter of Prudential Bache Sec. v. Archard, 179 A.D.2d 652, 653, 579 N.Y.S.2d 890; but see, Matter of Prudential Sec. [Purello], 206 A.D.2d 713, 714, 614 N.Y.S.2d 638). Numerous Federal courts have also reached the same result (see, Smith Barney v. Sarver, 108 F.3d 92, 96 [6th Cir.1997]; Cogswell v. Merrill Lynch, Pierce, Fenner & Smith, 78 F.3d 474, 481 [10th Cir.1996]; Merrill Lynch, Pierce, Fenner & Smith v. Cohen, 62 F.3d 381, 383-384 [11th Cir.1995]; PaineWebber Inc. v. Hofmann, 984 F.2d 1372, 1379 [3d Cir.1993]; Edward D. Jones & Co. v. Sorrells, 957 F.2d 509, 512-513 [7th Cir.1992]; see also, PaineWebber Inc. v. Hartmann, 921 F.2d 507, 513 [3d Cir.1990]; but see, Smith Barney Shearson v. Boone, 47 F.3d 750, 753 [5th Cir.1995] ).

We are persuaded that the plain language of the NASD eligibility rule presents a question of arbitrability. That proviso, thus, creates a substantive feature that may affect the right and obligation to arbitrate.

III.

Turning to the next step of our analysis, we note the well-settled proposition that the question of arbitrability is an issue...