Michael Magruder v. Fidelity Brokerage Services , 818 F.3d 285 ( 2016 )

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In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 15-‐‑1846
MICHAEL MAGRUDER,
Plaintiff-‐‑Appellant,
v.
FIDELITY BROKERAGE SERVICES LLC,
Defendant-‐‑Appellee.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 15 C 1188 — John Robert Blakey, Judge.
____________________
SUBMITTED OCTOBER 29, 2015 — DECIDED MARCH 17, 2016
____________________
Before WOOD, Chief Judge, and POSNER and EASTERBROOK,
Circuit Judges.
EASTERBROOK, Circuit Judge. Michael Magruder bought
940,000 shares of Bancorp International Group (Bancorp)
through his account at Fidelity Brokerage Services. He paid
$9,298 and some years later asked Fidelity to deliver a certif-‐‑
icate showing his ownership of the shares. When Fidelity
did not comply, Magruder initiated arbitration through the
Financial Industry Regulatory Authority (FINRA). Magrud-‐‑
2 No. 15-‐‑1846
er and Fidelity chose simplified arbitration (see FINRA Rules
12401, 12800). In a simplified arbitration, the arbitrator can-‐‑
not award more than $50,000 in damages or order specific
performance that would cost the losing party more than
$50,000. Magruder had demanded a total of $28,000 in dam-‐‑
ages (actual plus punitive), so the dispute was amenable to
the simplified procedure.
In March 2014 the arbitrator directed Fidelity to hand
over a stock certificate or explain why it could not do so. Fi-‐‑
delity explained that in 2005 the Depository Trust & Clear-‐‑
ing Corporation (DTCC), which is responsible for issuing
paper certificates for Bancorp’s stock, had placed a “global
lock” on that activity as a result of fraud reported by Ban-‐‑
corp, whose president asserted that fraudulent shares bear-‐‑
ing identification number 106 had been flooding the market.
In 2012 Bancorp offered to swap series 106 shares for new
series 205 shares, but by then Bancorp had been delisted
from stock exchanges and FINRA blocked the swaps. This
left Fidelity unable to supply a certificate, for the series 106
shares remained subject to DTCC’s global lock. In October
2014 the arbitrator accepted this explanation and issued an
award denying Magruder’s claim.
Magruder then filed this suit, asking the district court to
enforce the arbitrator’s March 2014 award. Fidelity asked the
court to enforce the October 2014 award. The district judge
sided with Fidelity, and Magruder appealed. Neither side’s
briefs in this court explain how the dispute comes within
federal jurisdiction, so we directed the parties to file sup-‐‑
plemental memoranda addressing that subject.
Fidelity contends that the district court had subject-‐‑
matter jurisdiction under 28 U.S.C. §1332, which covers di-‐‑
No. 15-‐‑1846 3
versity of citizenship. We will assume that the parties are of
diverse citizenship—though Fidelity has not told us the citi-‐‑
zenship of its members and instead treats itself as a corpora-‐‑
tion, which it isn’t. See Americold Realty Trust v. ConAgra
Foods, Inc., No. 14–1382 (U.S. Mar. 7, 2016); Cosgrove v. Bar-‐‑
tolotta, 150 F.3d 729 (7th Cir. 1998). Citizenship does not mat-‐‑
ter, because the stakes cannot exceed $50,000, and the mini-‐‑
mum under §1332(a) is $75,000. They can’t exceed $50,000
not simply because Magruder asked for less than $30,000 but
also because the parties agreed to use FINRA’s simplified
procedure, which sets a $50,000 cap.
Fidelity ignores these facts and instead tries to estimate
the value of 940,000 shares of Bancorp’s stock. Yet Magruder
already owns the stock, which cost him less than $10,000.
This dispute is about a certificate, not ownership. What’s
more, Fidelity does not try to explain how the fraud, DTCC’s
refusal to issue certificates, and the end of market trading
can have increased the value of Bancorp’s shares by a factor
of eight or more. It does not identify any actual transactions
that give series 106 shares such a value high enough to reach
$75,000 for 940,000 shares. So no matter how the stakes of an
arbitrated dispute should be calculated for the purpose of
§1332, a subject on which the circuits do not agree, this dis-‐‑
pute is worth less than the jurisdictional minimum.
Magruder relies on federal-‐‑question jurisdiction under 28
U.S.C. §1331. The Federal Arbitration Act, 9 U.S.C. §§ 1–16,
does not grant federal jurisdiction. See Vaden v. Discover
Bank, 556 U.S. 49 (2009); Moses H. Cone Memorial Hospital v.
Mercury Construction Corp., 460 U.S. 1, 25 n.32 (1983). But he
contends that the claim presented to the arbitrator arose un-‐‑
der 17 C.F.R. §240.15c3–3(l)(1), which he reads as establish-‐‑
4 No. 15-‐‑1846
ing every stock owner’s right to a certificate. Because his
claim arose under federal law, Magruder maintains, a feder-‐‑
al court has subject-‐‑matter jurisdiction to confirm or set
aside the award.
It is not clear to us that §240.15c3–3(l)(1) establishes a
federal right. It says that “[n]othing stated in this section
shall be construed as affecting the absolute right of a cus-‐‑
tomer of a broker or dealer to receive in the course of normal
business … the physical delivery of certificates for … [f]ully-‐‑
paid securities to which he is entitled”. This declares that the
section does not affect the customer’s right to receive certifi-‐‑
cates to which “he is entitled.” And when is a customer so
entitled? That seems to be left to contracts between customer
and broker, or to state corporate law.
Let us suppose, however, that §240.15c3–3(l)(1) creates a
federal right, as opposed to disclaiming federal interference
with rights resting on state law. Vaden holds that, when a
claim proposed to be arbitrated arises under federal law, a
federal court has subject-‐‑matter jurisdiction to rule on a peti-‐‑
tion to compel or forbid arbitration. Magruder supposes that
this implies that, once the arbitration is over, a federal court
also has subject-‐‑matter jurisdiction to confirm the award or
set it aside. But that’s not what Vaden holds, nor is it a logical
extension of Vaden’s holding.
Vaden dealt with a petition under 9 U.S.C. §4 to compel
arbitration. Section 4 provides that a district court may do
this if, “save for such [arbitration] agreement, [it] would
have jurisdiction under title 28, in a civil action … arising
out of the controversy between the parties”. In other words,
if the claim sought to be arbitrated arises under federal law
(or §1332 applies), then per §4 the district court has subject-‐‑
No. 15-‐‑1846 5
matter jurisdiction of a suit seeking an order to arbitrate.
That’s what Vaden concluded.
Section 4 does not deal with requests to enforce or set
aside an arbitrator’s decision. Section 9 deals with confirma-‐‑
tion and §10 with vacatur. Neither §9 nor §10 has any lan-‐‑
guage comparable to that on which the Supreme Court re-‐‑
lied in Vaden. Long before Vaden we had reached the same
conclusion about the effect of §4, and we also had held that a
federal issue resolved by the arbitrator does not supply sub-‐‑
ject-‐‑matter jurisdiction for review or enforcement of the
award. See Stone v. Doerge, 328 F.3d 343, 345 (7th Cir. 2003);
Minor v. Prudential Securities, Inc., 94 F.3d 1103 (7th Cir.
1996). Other circuits agree with us. See, e.g., Carter v. Health
Net of California, Inc., 374 F.3d 830, 836 (9th Cir. 2004); Green-‐‑
berg v. Bear, Stearns & Co., 220 F.3d 22, 26–27 (2d Cir. 2000);
Kasap v. Folger Nolan Fleming & Douglas, Inc., 166 F.3d 1243,
1247 (D.C. Cir. 1999); Collins v. Blue Cross Blue Shield of Mich-‐‑
igan, 103 F.3d 35 (6th Cir. 1996).
This conclusion harmonizes the law of arbitration with
the law of contracts—appropriate because arbitration usual-‐‑
ly is a matter of contract, and the arbitrator usually serves as
the parties’ mutual agent to resolve a dispute that the parties
could have resolved themselves. Put FINRA and its rules
aside for a moment and consider what would have hap-‐‑
pened if Magruder had sued Fidelity under the federal secu-‐‑
rities laws, contending that Fidelity had violated §240.15c3–
3(l)(1). Most litigation ends in settlement—which is to say, in
a contract. If Magruder and Fidelity had reached a contrac-‐‑
tual solution but later disagreed about performance, could
they return to federal court under the securities laws? The
answer is no. Kokkonen v. Guardian Life Insurance Co., 511 U.S.
6 No. 15-‐‑1846
375 (1994), holds that, if parties settle litigation that arose
under federal law, any contest about that settlement needs
an independent jurisdictional basis—and as most contracts
are governed by state law, this knocks out §1331 (unless per-‐‑
chance the district court entered the settlement as a judg-‐‑
ment or reserved jurisdiction to enforce it). Our conclusion
in Doerge and Minor that a federal question can suffice to or-‐‑
der arbitration under §4, but not to enforce or set aside the
decision under §9 or §10, parallels the distinction Kokkonen
draws between an original federal claim and a dispute about
its contractual resolution.
One passage in Lefkovitz v. Wagner, 395 F.3d 773 (7th Cir.
2005), could be read as inconsistent with Doerge and Minor.
We remarked of one particular arbitration: “[T]here was nei-‐‑
ther complete diversity nor a federal question; and an arbi-‐‑
tration award cannot be enforced in federal court unless the
dispute giving rise to the award would have been within the
court’s jurisdiction to resolve had the dispute given rise to a
lawsuit rather than to an arbitration.” 395 F.3d at 781. This
implies a belief that, if the arbitrator resolves a federal issue,
then §1331 supplies jurisdiction over an action under §9 or
§10. But Lefkovitz did not hold this; it stated that neither com-‐‑
plete diversity nor a federal question existed. Lefkovitz did
not discuss Doerge or Minor and had no reason to do so.
Even when a federal court finds jurisdiction, as this passage
in Lefkovitz did not, an unreasoned assertion of jurisdiction
lacks precedential value. See, e.g., Steel Co. v. Citizens for a
Better Environment, 523 U.S. 83, 90–92 (1998) (drive-‐‑by juris-‐‑
dictional rulings may be ignored). The question addressed in
Doerge, Minor, and our decision today simply was not on the
table in Lefkovitz, which does not modify circuit law.
No. 15-‐‑1846 7
Neither §1331 nor §1332 authorizes resolution of the par-‐‑
ties’ dispute about the arbitrator’s decision. The judgment of
the district court is vacated, and the case is remanded with
instructions to dismiss for lack of subject-‐‑matter jurisdiction.