Westmoreland Capital Corp. v. Findlay

• Decision Date: 14 February 1996
• Docket Number: No. 95-CV-308A.,95-CV-308A.
• Citation: 916 F. Supp. 242
• Parties: WESTMORELAND CAPITAL CORPORATION, Joseph M. Jayson, and Judith P. Jayson, Petitioners, v. George D. FINDLAY, and John F. Joyce, Respondents.
• Court: U.S. District Court — Western District of New York

916 F. Supp. 242

WESTMORELAND CAPITAL CORPORATION, Joseph M. Jayson, and Judith P. Jayson, Petitioners, v. George D. FINDLAY, and John F. Joyce, Respondents.

No. 95-CV-308A.

United States District Court, W.D. New York.

February 14, 1996.

Hodgson, Russ, Andrews, Woods & Goodyear, Robert J. Lane, Jr., Buffalo, NY, (Adam W. Perry, of counsel), for Petitioners.

Portnow, Little & Cicchetti, P.C., Burlington, VT (Samuel H. Press, of counsel¹), for Respondents.

DECISION AND ORDER

FOSCHIO, United States Magistrate Judge.

JURISDICTION

The parties to this matter executed a consent to proceed before the undersigned on the pending motions to dismiss the complaint on February 13, 1996. The matter is presently before the court on Respondents' motion to dismiss the petition, dated July 27, 1995, and Petitioners' cross-motion for summary judgment, dated November 1, 1995.

BACKGROUND

Petitioner, Westmoreland Capital Corporation ("Westmoreland"), is a New York corporation with a principal business of financial planning and investment counselling. Petitioners Joseph M. Jayson and Judith P. Jayson are the principals of Westmoreland. Respondents, George D. Findlay and John F. Joyce are individuals who sought investment advice from Westmoreland, and acted on such advice. Petitioners, who filed their petition on April 20, 1995, have filed this petition, pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq., seeking an order preliminarily and permanently enjoining an arbitration proceeding before the National Association of Securities Dealers, Inc. ("NASD") in which Respondents are charging Petitioners with various instances of securities fraud as allegedly committed by Westmoreland's employee, Terry King. Respondents filed their answer on July 28, 1995, interposing a counterclaim, based upon an agreement for arbitration between Petitioners and Respondents, seeking an order to compel arbitration.

On July 28, 1995, simultaneously with the filing of their answer, Respondents filed a motion to dismiss the petition on the grounds that the Federal Arbitration Act does not authorize the court to stay the arbitration, and that the court lacks jurisdiction to enjoin an arbitration on statute of limitations grounds under Rule 15 of the Code of Arbitration Procedure of the NASD.

On November 1, 1995, Petitioners filed a cross-motion for summary judgment seeking a permanent injunction barring Respondents from pursuing any claims in arbitration against Joseph Jayson or Judith Jayson, a permanent injunction barring Respondents from pursuing any arbitration proceedings on their claims based on applicable statute of limitations grounds, dismissal of Respondents' counterclaim, and denial of Respondents' motion to dismiss.

FACTS

Respondents, George D. Findlay and John F. Joyce, are retired individuals who engaged Terry King, an employee of Westmoreland, to provide financial planning and advice.² King was employed as a registered representative and account manager at Westmoreland from January, 1988 through the fall of 1991. King held a NASD Series 6 license. Westmoreland is a financial planning firm, one of several financial and investment companies owned and operated by Petitioners Joseph Jayson and Judith Jayson. Westmoreland's office, aside from its main business, also maintained other Jayson ventures, including Realmark Properties, which promoted real estate limited partnerships, U.S. Capital Corporation, and U.S. Development Corporation.

Findlay first sought advice from King in the summer of 1988. His liquid assets in September, 1988, held in the form of cash savings, mutual funds, and some common stocks which he had inherited from his father and sister, valued at approximately $272,000. Joyce also sought advice form King in the summer of 1988. His liquid assets in September, 1988 were comprised of eleven common stocks, a mutual fund, and a U.S. Treasury bond, valued at approximately $230,000.

King met with both Findlay and Joyce, whom are not acquainted with each other, separately, at the Westmoreland offices, and proposed similar investment plans to both. As a result of the proposed plans, both Findlay and Joyce liquidated assets and purchased shares in the Oppenheimer Equity Income Fund, and also purchased units of the Jaysons' "Realmark Property Investors Limited Partnership VI," projected to earn tax free income of 5%; Findlay investing $80,000 and Joyce investing $35,000. Findlay and Joyce also transferred funds, in the form of loans, to two start-up corporations promoted by King, the Triad Manufacturing Group ("Triad") and the "Pharmgard Company" in return for 12% interest.

Between November, 1988 and May, 1990, Findlay transferred $96,000 to Triad, along with an additional $26,000 in personal loans to King. Joyce transferred $99,500 to Triad between November, 1988 and November, 1990. On King's advice, the loans were converted to common shares of Triad stock, in association with a private placement offering of Triad stock in September, 1989. Joyce also invested on King's advice, in April of 1990, $20,247.50 into a corporation entitled "M.J. Grass Screw Machine Products Co., Inc." of which King was an officer and shareholder.

King filed a voluntary bankruptcy petition under Chapter 7 on behalf of Triad in September, 1992. M.J. Grass is now allegedly defunct and its stock is worthless. Realmark VI is not liquid, and is also alleged to be unmarketable.

Findlay alleges that, as a result of King's actions, for which Westmoreland and the Jaysons are responsible, he has sustained losses of $212,000 of his principal balance. Joyce similarly alleges that he has sustained losses of $152,247.50 of his principal balance of his investments because of King's actions.

Findlay and Joyce commenced an arbitration proceeding with the NASD on September 27, 1994. Petitioners were served with a Statement of Claim notifying them of the NASD arbitration proceeding in February, 1995. Petitioners answered the Statement of Claim on April 3, 1995, and filed the petition in this action seeking to enjoin the arbitration proceeding on April 20, 1995.

All of the transactions at issue in this action occurred in Buffalo, New York. Westmoreland is a New York corporation, and all of the individual parties are represented to be New York residents, although Joyce was served in Virginia where he is living with his daughter.

Finally, while Findlay and Joyce agreed to retain King, there is no evidence of any executed agreements between the parties, including any agreement to arbitrate any controversies.

DISCUSSION

On a motion to dismiss pursuant to Fed. R.Civ.P. 12(b), the court looks to the four corners of the complaint and is required to accept plaintiff's allegations as true and to construe those allegations in the light most favorable to the plaintiff. See Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974); Dacey v. New York County Lawyers' Association, 423 F.2d 188, 191 (2d Cir.1969), cert. denied, 398 U.S. 929, 90 S.Ct. 1819, 26 L.Ed.2d 92 (1970). The complaint will be dismissed only if "it appears beyond doubt" that the plaintiff can prove no set of facts which would entitle him to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957); Goldman v. Belden, 754 F.2d 1059, 1065 (2d Cir.1985). The court is required to read the complaint with great generosity on a motion to dismiss. See Yoder v. Orthomolecular Nutrition Institute, 751 F.2d 555 (2d Cir. 1985).

Respondents contend that the complaint should be dismissed as the Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1-16, does not authorize the court to stay an arbitration, and that the court lacks jurisdiction to enjoin the arbitration on the ground that the arbitration is barred by an applicable statute of limitations or is not timely under Rule 15 of the NASD Code of Arbitration Procedure. Petitioners argue that the court has the power to stay the arbitration, and that Respondents assertion as to the court's authority to enjoin an arbitration under the FAA is incorrect. Further, Petitioners contend that the court may enjoin arbitration proceedings barred by the NASD on the basis that arbitration claims must be commenced within six years from the date of the event giving rise to the dispute, and the one-year/three-year statute of limitations period applicable to the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. See Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 363-64, 111 S.Ct. 2773, 2782-83, 115 L.Ed.2d 321 (1991).

Prior to reaching the merits of the parties' arguments, however, the court finds that it is necessary to determine whether this court has subject matter jurisdiction over this action. In their answer, Respondents asserted that the court did not have subject matter jurisdiction over this action based on either diversity, 28 U.S.C. § 1332, or federal question jurisdiction, 28 U.S.C. § 1331. Respondents then moved, nonetheless, to dismiss this action under Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted, rather than Fed.R.Civ.P. 12(b)(1) for lack of subject matter jurisdiction. The failure of the parties to contest the district court's authority to hear a case "does not act to confer federal jurisdiction ... since a challenge to subject matter jurisdiction cannot be waived and may be raised sua sponte" by the court. Alliance of Am. Insurers v. Cuomo, 854 F.2d 591, 605 (2d Cir. 1988). When jurisdiction is lacking, dismissal is mandatory. Manway Construction Co. v. Housing Authority of Hartford, 711 F.2d 501, 503 (2d Cir.1983).

The FAA does not provide a basis of federal jurisdiction. Southland Corp. v. Keating, 465 U.S. 1, 15 n. 9, 104 S.Ct. 852, 861 n. 9, 79 L.Ed.2d 1 (1984); Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 25 n. 32, 103 S.Ct. 927, 942 n. 32, 74 L.Ed.2d 765 (1983). Before a district court may...