J.E. Liss & Company v. Levin, Harold A. ( 2000 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 99-1716
J.E. Liss & Company and Dennis Waisman,
Plaintiffs-Appellees,
v.
Harold A. Levin,
Defendant-Appellant.
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 98 C 385--J. P. Stadtmueller, Chief Judge.
Argued November 8, 1999--Decided January 10, 2000
Before Posner, Chief Judge, and Ripple and Diane P.
Wood, Circuit Judges.
Posner, Chief Judge. A brokerage firm that
belongs to the National Association of Securities
Dealers, and one of its brokers, brought this
suit under the Federal Arbitration Act to vacate
an arbitration award of $30,000 to Harold Levin,
a former customer. 9 U.S.C. sec. 10(a)(4). Levin
counterclaimed to confirm the award. sec. 9. The
district court sided with the plaintiffs on the
ground that the arbitrators had exceeded their
jurisdiction.
In 1990 Waisman had sold Levin an interest
(conceded to be a security) in a limited
partnership known as Vintech. The following year
Vintech sought protection from its creditors
under Chapter 11 of the Bankruptcy Code, but as
so often happens the proceeding was soon
converted to a Chapter 7 liquidation. In 1996, a
month or so after six years since the purchase of
the interest, Levin, pursuant to Rules 10101(c)
and 10301(a) of the NASD Uniform Code of
Arbitration Procedure (these rules can be found
in NASD Manual para.para. 10000 et seq. (CCH
1999)), filed a claim against Liss and Waisman
before a panel of arbitrators. Levin accused
Waisman and Liss of having violated the purchase
agreement, the rules of the NASD, and state and
federal law, including the SEC’s Rule 10b-5, in
recommending the purchase of the Vintech interest
and, after Vintech declared bankruptcy, in
assuring Levin that the company would emerge from
bankruptcy with its value intact.
Rule 10304 of the NASD Code provides that no
dispute "shall be eligible for submission to
arbitration under this Code where six (6) years
have elapsed from the occurrence or event giving
rise to the . . . dispute." Waisman and Liss
failed to plead in their answer to the statement
of claim that the claim was barred by this
provision, and Levin argues that by doing so they
waived it. Arbitrators are authorized to treat
the failure to plead a defense as a waiver; but
they don’t have to, see Rule 10314(b)(2)(B), and
they did not do so here. Instead they held that
since their award was based on conduct subsequent
to the 1990 sale--namely the assurance that
Vintech would emerge from bankruptcy with its
value intact--the dispute on which Levin’s claim
was based arose less than six years before the
filing of the claim, and so Rule 10304 was
inapplicable.
So there was no waiver, but Waisman and Liss
argue that, in any event, the six-year limitation
is nonwaivable because it defines the
arbitrators’ jurisdiction. In so arguing they
rely on Edward D. Jones & Co. v. Sorrells, 957
F.2d 509 (7th Cir. 1992), and similar decisions
in other circuits. E.g., Osler v. Ware, 114 F.3d
91, 92-93 (6th Cir. 1997); Merrill Lynch, Pierce,
Fenner & Smith, Inc. v. Cohen, 62 F.3d 381, 385
n. 4 (11th Cir. 1995); PaineWebber Inc. v.
Hofmann, 984 F.2d 1372, 1381 (3d Cir. 1993). Read
narrowly, these decisions hold only that Rule
10304 is the equivalent of a statute of repose
rather than a statute of limitations. So
interpreted the rule would exclude defenses to
the statute of limitations, such as equitable
tolling and equitable estoppel, the latter
including fraudulent concealment--the basis on
which the plaintiffs in Sorrells had asked to be
allowed to sue after the deadline had passed. 957
F.2d at 512-13. See, e.g., Cada v. Baxter
Healthcare Corp., 920 F.2d 446, 451 (7th Cir.
1990); Short v. Belleville Shoe Mfg. Co., 908
F.2d 1385, 1391 (7th Cir. 1990); Webb v. United
States, 66 F.3d 691, 701 (4th Cir. 1995); First
United Methodist Church v. United States Gypsum
Co., 882 F.2d 862, 865-66 (4th Cir. 1989).
Waisman and Liss argue, with support in language
in Sorrells and the other cases we’ve cited, that
the six-year limitation in Rule 10304 is
"jurisdictional" and so cannot be waived. At
first glance, the argument seems highly dubious.
A statute of repose and a statute of limitations
are ordinary defenses to liability, differing
from each other only in length, accrual, and
tolling rules. Securities laws typically specify
both a statute of limitations, which runs from
when the plaintiff should have discovered that he
had a claim, and a (longer) statute of repose,
which runs from some fixed date such as the date
on which the security was purchased. E.g., 15
U.S.C. sec.sec. 77m, 78i(e); Cal. Corp. Code sec.
25506. Both normally are waivable. E.g., Lawyers
Title Ins. Corp. v. Dearborn Title Corp., 118
F.3d 1157, 1166 (7th Cir. 1997); McMahon v. Eli
Lilly & Co., 774 F.2d 830, 837-38 (7th Cir.
1985); First Interstate Bank of Denver, N.A. v.
Central Bank & Trust Co., 937 P.2d 855, 861-62
(Colo. App. 1996). Statutory language specifying
an outside date for suing is sometimes, though
rarely, as we pointed out in Lawyers Title Ins.
Corp. v. Dearborn Title Corp., supra, 118 F.3d at
1166-67; see also Hubbard v. State, 920 P.2d 991
(Nev. 1996) (per curiam), taken to be a
legislative determination that the court or other
tribunal that enforces the statute has no
jurisdiction to adjudicate a claim that is
outside the limit, e.g., State v. Mason, 941 P.2d
437, 440 (Mont. 1997); Price v. Maxwell, 681 P.2d
384, 386 (Ariz. 1984), and a statute of repose is
more likely to be taken in that sense than a
statute of limitations. See, e.g., Cheswold
Volunteer Fire Co. v. Lambertson Construction
Co., 489 A.2d 413, 421 (Del. 1984). But the six-
year limitation in Rule 10304 was not imposed by
any legislature. It is the rule of a trade
association and if the members want to arbitrate
a dispute on terms different from those laid down
by the association there would seem to be no
"jurisdictional" bar to their doing so.
But this turns out to be wrong. By joining the
association a brokerage firm agrees to abide by
its rules, and the rules of this association
forbid members to opt out of the provisions
governing arbitration. "Any dispute . . .
eligible for submission . . . between a customer
and a member . . . shall be arbitrated under this
Code," that is, the NASD Code of Arbitration
Procedure. Rule 10301(a); and see "Clarification
of NASD Notice to Members 95-16," 1995 Notice to
Members 85, 1995 NASD Lexis 122 (Oct. 1995),
threatening members with disciplinary action for
attempting to contract out of the provisions of
the Code dealing with punitive damages and venue.
And Rule 3110(f)(4) of the NASD Conduct Rules
provides that no arbitration agreement "shall
include any condition which limits or contradicts
the rules of any self-regulatory organization,"
presumably including the NASD itself. NASD
Manual, supra, at 4893.
The history of and practice under the specific
provision at issue here, the six-year limitation,
confirm this understanding. See "Self-Regulatory
Organizations: Notice of Filing of Amended
Proposed Rule Change by National Association of
Securities Dealers," 59 Fed. Reg. 39373, 39374
(Aug. 2, 1994); and remarks of Deborah Masucci,
the NASD’s Director of Arbitration, in "New York
Stock Exchange Inc.: Symposium on Arbitration in
the Securities Industry," 63 Fordham L. Rev.
1501, 1544 (1995). Masucci explains that when
someone files a complaint with the NASD, the
association’s staff dismisses it if it is clearly
beyond the six-year limit, without giving the
parties a chance to decide whether to extend the
limit. See also Pamela Jeanne Turbow Rush,
"Securities Arbitration: The Six-Year Eligibility
Rule," 26 Stetson L. Rev. 329, 330 (1996). This
procedure was changed in the middle of the
present arbitration, but the new procedure has
the same filter only administered by the
arbitrators themselves rather than by the staff.
See "Self-Regulatory Organizations: Notice of
Filing of Proposed Rule Change by NASD
Regulation," 61 Fed. Reg. 68081 (Dec. 26, 1996).
Why the NASD should want to prevent its members
from waiving rules designed for their protection
is obscure, and recently the association has been
having second thoughts. It is proposing to amend
Rule 10304 to make the association’s Director of
Arbitration the sole judge of whether the six-
year deadline has expired and, more to the point,
to waive the deadline if the party against whom
the claim has been made fails to raise the issue
with the Director. "Self-Regulatory
Organizations: Notice of Filing of Proposed Rule
Change by the National Association of Securities
Dealers," 63 Fed. Reg. 588, 589 (Jan. 6, 1998).
But the proposal has not yet been adopted.
A separate question is whether the application
of Rule 10304 (we are speaking of course of the
current, not the proposed, rule) is for the
arbitrators or for the court. That is an issue
about who decides whether the six-year limit has
been exceeded, as distinct from whether the limit
can be waived. A majority of courts, including
ours, applying the principle that courts decide
issues of arbitrability unless the parties have
clearly indicated that the arbitrators are to
decide them, First Options of Chicago, Inc. v.
Kaplan, 514 U.S. 938, 944 (1995); AT&T
Technologies, Inc. v. Communications Workers of
America, 475 U.S. 643, 649 (1986), hold that
whether the six-year limit has been exceeded is
for the courts rather than the arbitrators to
decide. E.g., Miller v. Flume, 139 F.3d 1130,
1134 (7th Cir. 1998); Cogswell v. Merrill Lynch,
Pierce, Fenner & Smith Inc., 78 F.3d 474, 476-81
(10th Cir. 1996); Merrill Lynch, Pierce, Fenner &
Smith Inc. v. Cohen, supra, 62 F.3d at 383.
Also separate is whether the "jurisdictional"
character of Rule 10304 carries over to judicial
review; and the answer is that it does not. The
limitation imposed by the rule on the
consideration of stale claims is a limitation on
the power of the arbitrators, not on the power of
the courts. If a party challenging an arbitration
award in court failed to argue Rule 10304, the
issue of timeliness would be waived. See
Washington v. Indiana High School Athletic Ass’n,
181 F.3d 840, 846 n. 9 (7th Cir. 1999);
Huntzinger v. Hastings Mutual Ins. Co., 143 F.3d
302, 307 (7th Cir. 1998).
So the six-year bar is nonwaivable before the
arbitrators and its applicability is to be
determined by the court, but none of this helps
Waisman and Liss because we conclude that the bar
is inapplicable in the circumstances of this
case. Rule 10304 does not bar a claim that arises
within the six-year period merely because the
securities involved in the claim were bought more
than six years before the claim was filed. If the
only basis for the claim were Rule 10b-5, which
limits its protections to securities
transactions, Blue Chip Stamps v. Manor Drug
Stores, 421 U.S. 723 (1975), the plaintiff could
not win a case based on post-sale conduct, such
as a representation designed to prevent the
plaintiff from selling the security. But the
claim would fail on the merits, not because of
the six-year bar. If as in this case the
plaintiff bases his claim on conduct that took
place after he bought the security, the six-year
period begins to run as of the date of that
conduct, not the date of the purchase. Merrill
Lynch, Pierce, Fenner & Smith Inc. v. Cohen,
supra, 62 F.3d at 384-85; Osler v. Ware, supra,
114 F.3d at 93; PaineWebber Inc. v. Hofmann,
supra, 984 F.2d at 1379-1382. (The NASD’s
proposal that we mentioned earlier to amend Rule
10304 is explicit that the six-year period runs
from the date of the event giving rise to the
claim rather than from the date the securities
were purchased. "Self-Regulatory Organizations:
Notice of Filing of Proposed Rule Change by the
National Association of Securities Dealers,"
supra, 63 Fed. Reg. at 589, 593.) Otherwise if
Mr. Waisman, driven to distraction by Levin’s
incessant complaints about the dismal performance
of Vintech, had hit Levin over the head with a
mallet in year seven he would be immune from any
claim under the dispute-resolution provisions of
the NASD’s arbitration code. We can’t see the
sense in that.
It is true that Levin alleged fraud in the sale
of the Vintech security, as well as post-sale
fraud. But the arbitrators said they were basing
their award on the latter. The fact that the
post-sale fraud could be said to have arisen from
the sale fraud, in the sense that had Levin never
bought the interest in Vintech the defendants
would never have represented to him that Vintech
would emerge intact from bankruptcy, no more
brings the six-year limitation into play than the
fact that in our hypothetical case the incident
with the mallet would not have occurred had it
not been for the sale of the security more than
six years before the claim was filed. If a claim
accrues as soon as a necessary condition to its
existence arises, then Mr. Levin’s claim accrued
when Columbus discovered America, if not, indeed,
at the time of the Big Bang.
What is true is that if the only allegation
about the post-sale conduct had been that it had
lulled Levin into delaying the filing of a claim
based on the fraudulent inducement of the sale,
he would be arguing fraudulent concealment of the
wrong and we know from Sorrells that fraudulent
concealment would not extend the six-year
deadline for filing the claim. 957 F.2d at 512-
14. But that is not the allegation. The
allegation is of an independent fraud designed
not to lull Levin into not suing but rather to
dissuade him from selling his investment in
Vintech.
No defense to the suit to confirm the
arbitrators’ award other than Rule 10304 is
suggested and the judgment of the district court
is therefore reversed with directions to confirm
the award.
Reversed.