Fox v. Faust , 239 F. App'x 715 ( 2007 )

Opinions of the United
2007 Decisions States Court of Appeals
for the Third Circuit
5-18-2007
Fox v. Faust
Precedential or Non-Precedential: Non-Precedential
Docket No. 05-1998
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"Fox v. Faust" (2007). 2007 Decisions. Paper 1091.
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NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 05-1998
THOMAS FOX,
Appellant
v.
EUGENE B. FAUST;
MARLENE A. FAUST
Appeal from the United States District Court
for the Western District of Pennsylvania
(D.C. Civil No. 04-cv-00935)
District Judge: Honorable Thomas M. Hardiman
Submitted Under Third Circuit LAR 34.1(a)
March 30, 2007
Before: RENDELL, BARRY and CHAGARES, Circuit Judges.
(Filed: May 18, 2007)
OPINION OF THE COURT
RENDELL, Circuit Judge.
Thomas Fox, a securities broker, moved to vacate an arbitration award entered
against him for violations of the Securities Exchange Act of 1934 and state consumer
protection laws. The District Court confirmed the arbitration award, and Fox appealed.
We do not reach the merits of Fox’s appeal because we find that the District Court did not
have jurisdiction to consider his motion to vacate the award. Accordingly, we will vacate
the District Court’s judgment, and remand with directions to enter an order dismissing the
case for lack of jurisdiction.
I.
In November 1995, Eugene and Marlene Faust entered into an agreement with
Gruntal & Co. (“Gruntal”) to open a brokerage account. The agreement provided that any
disputes with Gruntal, its officers, directors, agents and/or employees were to be settled
by arbitration pursuant to the Federal Arbitration Act and New York law. Thomas Fox
was a Gruntal employee and the Fausts’ broker.
In February 2001, the Fausts filed a statement of claim with the National
Association of Securities Dealers (“NASD”) against Fox and two other parties.1 The
Fausts asserted the following claims against Fox related to the purchase and sale of
various stocks: churning; breach of contract; breach of fiduciary duty; conversion; fraud;
misrepresentation; negligence; non-disclosures; failure to supervise; suitability; and
violations of New York and Pennsylvania consumer protection laws. On March 29, 2004,
the arbitration panel entered an award against Fox in the amount of $110,000 in
compensatory damages, pre- and post-judgment interest, $330,000 in punitive damages,
$90,000 in attorneys’ fees, and $375 as reimbursement for the NASD claim filing fee.
1
The arbitration against these two parties was subsequently stayed.
2
Fox filed a motion in the District Court to vacate the arbitration award. Fox
alleged that the arbitration panel was improperly and illegally constituted, the panel
improperly denied his request for a continuance, and the chairman of the panel was biased
against him, all in violation of the Federal Arbitration Act (“FAA”). Fox also alleged that
the amount of damages awarded was not supported by the evidence. The District Court
denied Fox’s motion and confirmed the arbitration award.
II.
We will not address the merits of Fox’s appeal because we conclude that the
District Court did not have jurisdiction over Fox’s motion to vacate. See Mitchell v.
Maurer, 293 U.S. 237, 244 (1934) (“An appellate federal court must satisfy itself not only
of its own jurisdiction, but also of that of the lower courts in a cause under review.”). It is
undisputed that there is no diversity of citizenship between the parties. Furthermore, the
FAA does not create federal question jurisdiction. Moses H. Cone Mem’l Hosp. v.
Mercury Constr. Corp., 460 U.S. 1, 25 n.32 (1983). Fox, however, contends that the case
arises under federal law because some of the Fausts’ claims in the underlying arbitration
arise under the Securities Exchange Act of 1934. He contends that because the Fausts
could have sued him in federal court if they had not been compelled to arbitrate their
claims, the District Court had jurisdiction over Fox’s action to vacate an award based on
these claims.
To determine whether an action presents a question of federal law, we follow the
well-pleaded complaint rule. See Virgin Islands Hous. Auth. v. Coastal Gen. Constr.
3
Servs. Corp., 27 F.3d 911, 915 (3d Cir. 1994). Under this rule, when a party files a
motion to vacate an arbitration award, “not only must federal jurisdiction exist aside from
the Arbitration Act, but the independent basis must appear on the face of the complaint.”
Id.
In Coastal General, we determined that we did not have jurisdiction over the
action to vacate the arbitration award because the complaint failed to raise a federal
question on its face. Id. Here, the action challenges the arbitrators’ selection and
conduct, and does not state any claims arising under federal law. We conclude that there
is no basis for federal jurisdiction on the face of Fox’s motion to vacate the arbitration
award. As the Court of Appeals for the Second Circuit found in Westmoreland Capital
Corp. v. Findlay, 100 F.3d 263 (2d Cir. 1996), “the nature of the underlying dispute (here,
a claim by the respondents under the Exchange Act), is not part of a ‘well-pleaded
complaint’ asking the court to stay arbitration.” Id. at 269. In Westmoreland, the
petitioner argued that there was federal question jurisdiction over his petition to stay the
arbitration under § 4 of the FAA because the arbitrated claims arose, in part, under the
Securities Exchange Act. Id. at 265. The court affirmed the dismissal of the petition.2
2
Other courts of appeals have disagreed with Westmoreland and found that a federal
court possesses subject matter jurisdiction over a motion under § 4 of the FAA when the
controversy underlying the arbitration agreement presents a federal question. See
Discover Bank v. Vaden, 396 F.3d 366, 369 (4th Cir. 2005); Tamiami Partners, Ltd. v.
Miccosukee Tribe, 177 F.3d 1212, 1233 n.11 (11th Cir. 1999). There is agreement,
however, that a suit to vacate an arbitration award under § 10 of the FAA, like Fox’s
action, does not raise a federal question merely because the underlying arbitration
involves a federal question. See Cmty. State Bank v. Strong, _ F.3d _, 2007 WL 1225343,
4
Similarly here, Fox’s motion to vacate the arbitration award does not, on its face,
raise a federal question. Fox has alleged only violations of the FAA, which we have held
to be insufficient to establish federal question jurisdiction.3 See Coastal Gen., 27 F.3d at
916. Thus, the District Court did not have jurisdiction over this action.
III.
Accordingly, for the reasons set forth above, we will vacate the District Court’s
judgment and remand with directions to enter an order dismissing the case for lack of
jurisdiction.
at *21 (11th Cir. Apr. 27, 2007) (Marcus, J., concurring); Luong v. Circuit City Stores,
Inc., 368 F.3d 1109, 1111 (9th Cir. 2004); Greenberg v. Bear, Stearns & Co., 220 F.3d
22, 26 (2d Cir. 2000); Kasap v. Folger Nolan Fleming & Douglas, Inc., 166 F.3d 1243,
1247 (D.C. Cir. 1999); Minor v. Prudential Sec., Inc., 94 F.3d 1103, 1105-07 (7th Cir.
1996). In Coastal General, we noted that, “[e]ven if it were permissible to look beyond
the complaint to the substance of the arbitrated dispute,” there was no federal question
raised in the underlying arbitration. 27 F.3d at 915-16. We take this to mean that it is
impermissible to look at the underlying action.
3
Fox also argues that federal question jurisdiction exists where “the petitioner
complains principally and in good faith that the award was rendered in manifest disregard
of federal law.” Appellant’s Letter Br. 5 (citing Greenberg, 220 F.3d at 27). This theory
is inapplicable in this case because Fox alleges only defects in the arbitration process.
See Greenberg, 220 F.3d at 27 (flaws in arbitration process itself do not constitute
manifest disregard of federal law).
5