Smith v. Currency Trading ( 1999 )

F I L E D
United States Court of Appeals
Tenth Circuit
UNITED STATES COURT OF APPEALS
AUG 3 1999
FOR THE TENTH CIRCUIT
PATRICK FISHER
Clerk
FRANK M. SMITH,
Petitioner-Appellant,
v. No. 98-1311
(D.C. No. 98-B-577)
CURRENCY TRADING (D. Colo.)
INTERNATIONAL INC.,
MARIE FINE and JOHN DOE,
Respondents-Appellees.
ORDER AND JUDGMENT *
Before ANDERSON and KELLY , Circuit Judges, and BROWN , ** Senior
District Judge.
After examining the briefs and appellate record, this panel has determined
unanimously that oral argument would not materially assist the determination of
*
This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. The court
generally disfavors the citation of orders and judgments; nevertheless, an order
and judgment may be cited under the terms and conditions of 10th Cir. R. 36.3.
**
Honorable Wesley E. Brown, Senior District Judge, United States District
Court for the District of Kansas, sitting by designation.
this appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case is
therefore ordered submitted without oral argument.
Frank M. Smith appeals from the district court’s order vacating an
arbitration award in his favor. Mr. Smith commenced an NASD arbitration
proceeding in 1996 by filing a statement of claim against defendants in which
he alleged fraud in connection with currency option investments and sought
compensation for his financial losses. Defendants objected to the arbitration,
contending that they had no agreement with Mr. Smith to arbitrate. In the face of
this objection, the NASD Arbitration Department proceeded to arbitrate the
dispute, resulting in a substantial monetary award to Mr. Smith. Defendants did
not participate in the proceedings except to register objections to NASD
arbitration jurisdiction.
Mr. Smith then filed a motion in district court seeking confirmation of the
arbitration award. Defendants filed a cross motion to vacate the award. After
a hearing, the court denied Mr. Smith’s motion and granted defendants’ motion,
vacating the arbitration award. Our jurisdiction to hear this appeal arises from
28 U.S.C. § 1291. We review the district court’s decision under traditional
standards, accepting findings of fact unless they are clearly erroneous and
reviewing legal questions de novo. See First Options of Chicago, Inc. v. Kaplan ,
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514 U.S. 938, 947-48 (1995); P&P Indus., Inc. v. Sutter Corp. , No. 98-6358, 1999
WL 339699, at *9 (10th Cir. May 28, 1999).
The district court ruled in defendants’ favor because it concluded that, in
the face of the challenge to the existence of an agreement to arbitrate, a judicial
determination about the arbitrability of Mr. Smith’s complaints should have been
made before those matters were submitted to arbitration. See Appellant’s App.,
doc. 7 at 2. Under Section 4 of the Federal Arbitration Act, any party “aggrieved
by the alleged failure, neglect, or refusal of another to arbitrate under a written
agreement” may petition the court for an order directing arbitration. 9 U.S.C. § 4.
On appeal, Mr. Smith contends that the district court’s ruling vacating the
arbitration award in this case renders § 4 procedures mandatory rather than
permissive.
We disagree with this characterization of the district court’s ruling. The
case upon which Mr. Smith relies to maintain that FAA § 4 procedures are
permissive, not mandatory, is distinguishable from the facts here. In Standard
Magnesium Corp. v. Fuchs , 251 F.2d 455, 458 (10th Cir. 1957), this court held
that parties need not resort to § 4 procedures in those instances where arbitration
can proceed without a court order. As an example of circumstances where a court
order would be needed, we noted a party’s refusal to appoint an arbitrator where
the arbitration agreement provided that each party shall select one. See id. at 458.
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This example illustrates that the ruling in Standard Magnesium does not extend to
instances where a party disputes the underlying arbitrability of a claim.
Further, in light of more recent Supreme Court authority, it is clear that
Mr. Smith should not have proceeded to arbitration where a clear dispute about
the applicability of NASD arbitration jurisdiction was presented. Because the
NASD arbitration proceeded in the face of defendants’ jurisdictional challenge,
the arbitrators must have decided that the dispute was arbitrable despite their
objections. In First Options of Chicago, Inc. v. Kaplan , a case with similar facts
to those presented here, the Supreme Court held that the question of arbitrability
“was subject to independent review by the courts.” 514 U.S. at 947. “Courts
should not assume that the parties agreed to arbitrate arbitrability unless there is
clear and unmistakable evidence that they did so.” Id. at 944 (quotation omitted).
Mr. Smith acknowledges this authority, but argues that a court need not
decide the arbitrability question before the arbitration commences. He asserts
that, by not participating in the arbitration, defendants were taking a chance
that a court might later disagree with their position. He urges that allowing
post-arbitration review of the arbitrability question while leaving an arbitration
decision in place discourages specious challenges to arbitration jurisdiction and
encourages expeditious and inexpensive resolution of disputes. See Appellant’s
Br. at 12. This argument ignores an important reason behind resolving the
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arbitrability question first: the principle “that a party can be forced to arbitrate
only those issues it specifically has agreed to submit to arbitration.” See First
Options , 514 U.S. at 945. Arbitration is a matter of contract, and therefore
deciding who is to resolve the parties’ dispute is a critical decision. See id.
at 942, 943. Even the laudable goals of discouraging baseless claims and the
efficient resolution of disputes cannot support an interpretation of the law that
essentially compels a party to arbitrate before the matter of arbitrability is decided
or risk default. Therefore we agree with the district court that the
NASD arbitration panel exceeded its authority by proceeding before a judicial
determination of arbitrability.
In light of our agreement with the district court’s decision, we also agree
with defendants that the issue whether there existed an enforceable agreement to
arbitrate is not properly before us. The judgment of the United States District
Court for the District of Colorado is AFFIRMED.
Entered for the Court
Stephen H. Anderson
Circuit Judge
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