Dean Witter Reynolds v. Fleury , 138 F.3d 1339 ( 1998 )

[ PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 97-4801
________________________
D. C. Docket No. 95-8580-CV-DLG
DEAN WITTER REYNOLDS, INC.,
Plaintiff-Appellant,
versus
WAYNE FLEURY, BETTY FLEURY,
Defendants-Appellees.
________________________
Appeal from the United States District Court
for the Southern District of Florida
_________________________
(April 13, 1998)
Before COX and HULL, Circuit Judges, and FAY, Senior Circuit Judge.
COX, Circuit Judge:
Dean Witter Reynolds, Inc. appeals the district court’s grant of Wayne and
Betty Fleury’s motion to compel arbitration under the Federal Arbitration Act (9
U.S.C. § 1) of their claims against Dean Witter. We vacate the district court’s order
and remand with instructions to dismiss Dean Witter’s complaint and compel
arbitration before the NASD.
I. BACKGROUND
Wayne and Betty Fleury opened a securities account at Dean Witter in 1982.
Upon opening the accounts, the Fleurys signed a “Customer Agreement” containing
this arbitration clause:
Any controversy between you [Dean Witter] and the undersigned
[the Fleurys] arising out of or relating to this contract or the breach
thereof, shall be settled by arbitration, in accordance with the rules, then
obtaining, of either the Arbitration Committee of the Chamber of
Commerce of the State of New York, or the American Arbitration
Association, or the Board of Arbitration of the New York Stock
Exchange, as the undersigned may elect.
(R.1-15, Exhibit G at ¶ 16). The Fleurys also signed an “Account Agreement”
containing nearly identical language.
The Fleurys purchased three limited partnerships in their Dean Witter account
between 1982 and 1985. Unfortunately, the Fleurys became dissatisfied with these
investments, and in December 1994 commenced an arbitration proceeding against
Dean Witter before the National Association of Securities Dealers (NASD). The
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Fleurys alleged that Dean Witter was guilty of wrongdoing in connection with the
purchase of the partnerships and in the ongoing management of the Fleurys’ account.
The NASD was not one of the arbitration fora specified either in the Customer
Agreement or in the Account Agreement, but Dean Witter did not contest the choice
of forum. Instead, Dean Witter and the Fleurys signed a “Uniform Submission
Agreement” pursuant to the NASD Code of Arbitration Procedure (the “NASD
Code”) submitting the Fleurys’ claims to arbitration before the NASD. The
Submission Agreement provided in pertinent part:
The undersigned parties hereby submit the present matter in
controversy, as set forth in the attached statement of claim, answers,
cross claims and all related counterclaims and/or third-party claims
which may be asserted, to arbitration in accordance with the
Constitution, By-Laws, Rules, Regulations, and/or Code of Arbitration
Procedure of the sponsoring organization.
(R.1-15, Exhibit A at ¶ 1). In April 1995 Dean Witter filed an answer to the Fleurys’
claims with the NASD, alleging, among other things, that the claims were barred by
§ 15 of the NASD Code, which requires that a claimant file a claim within six years
of the occurrence giving rise to the claim.1 On July 15, 1995, the NASD Director of
1
The NASD Code was renumbered in 1996, and Section 15 was renumbered Section 10304.
For purposes of consistency, we will refer to the section at issue as Section 15. It states:
No dispute, claim, or controversy 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 act or dispute, claim or controversy. This Rule shall not
extend applicable statutes of limitations, nor shall it apply to any case which is
2
Arbitration ruled that the six-year period immediately preceding the filing of the claim
had begun on January 31, 1989. The Director therefore ruled that the Fleurys’ claims
regarding the purchase of the limited partnerships were time-barred, as the Fleurys
purchased the limited partnerships before the 1989 cutoff date. However, the Fleurys
had also alleged wrongdoing occurring after January 31, 1989; the Director ruled that
their claims as to those allegations could proceed to arbitration.
In August 1995, a month after the Director’s ruling, a panel of this court
decided Merrill Lynch, Pierce, Fenner & Smith v. Cohen, 62 F.3d 381 (11th Cir.
1995). In Cohen, a broker-dealer confronted with an arbitration claim by a client
sought to enjoin the arbitration on the ground that the client’s claims were barred by
§ 15 of the NASD Code. The district court decided in favor of the client, and entered
an order compelling arbitration. We reversed, ruling that the question of § 15
eligibility was in that case for the court, not the arbitrator, to decide.
Approximately six weeks after Cohen was issued, Dean Witter filed an action
in the Southern District of Florida. Dean Witter contended that all of the Fleurys’
claims were ineligible for arbitration under § 15, and that under Cohen the arbitrator
directed to arbitration by a court of competent jurisdiction.
NATIONAL ASSOC. OF SEC. DEALERS, CODE OF ARBITRATION PROCEDURE § 10304 (visited April 2,
1998) . The court regrets the need for the Internet citation;
although the NASD Code plays a central role in this case, surprisingly none of the parties submitted
the pertinent sections to be included in the record before us.
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should not have made the § 15 eligibility determination. Dean Witter requested that
the district court conduct an eligibility hearing under Cohen, issue a declaratory
judgment on the § 15 issues, and permanently enjoin the Fleurys from arbitrating their
claims before the NASD if the court found the claims ineligible under § 15. The
Fleurys responded by filing a motion for summary judgment. They characterized
Dean Witter’s § 15 argument as a refusal to recognize the NASD’s jurisdiction over
their claims, and contended that this refusal gave them the right to withdraw their
claims from the NASD and submit them to the American Arbitration Association
(AAA) under the original Customer Agreement. Not coincidentally, the AAA does
not have a provision comparable to § 15 setting time limits for eligibility.
The district court concluded that Dean Witter in effect contested the NASD’s
jurisdiction over the matter. As the Fleurys were willing to submit their claims to the
AAA, the court reasoned neither party would be prejudiced by compelling arbitration
before the AAA. The court therefore concluded that an order compelling arbitration
before the AAA would be an “appropriate” solution to the controversy. It dismissed
as moot the summary judgment motions of both parties and granted the Fleurys’
motion in the alternative to compel arbitration before the AAA. Dean Witter appeals
the district court’s ruling.
II. DISCUSSION
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Dean Witter argues that the Submission Agreement acted as a modification to
the original Customer and Account Agreements, extinguishing the Fleurys’ right to
seek arbitration before the AAA. The Submission Agreement, Dean Witter contends,
is a binding arbitration agreement between the parties, and the § 15 challenge in the
district court does not give the Fleurys the right to back out of the agreement. Dean
Witter also argues that under Cohen the district court, not the arbitrator, decides § 15
eligibility, and that the district court therefore erred in declining to determine the
eligibility of the Fleurys’ claims and in ordering the matter to arbitration before the
AAA.
The Fleurys counter, arguing that Dean Witter abandoned the Submission
Agreement by seeking injunctive relief in the district court. Thus, the Fleurys
contend, the Submission Agreement should be rescinded and the parties returned to
the status quo ante, i.e., the original Customer Agreement. The Fleurys also
distinguish Cohen, noting that in Cohen the brokerage firm applied for an injunction
immediately after the claim was submitted to arbitration, whereas in this case Dean
Witter signed a submission agreement and even asked the arbitrator to adjudicate its
§ 15 defense before turning to the courts.
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A. Was the Submission Agreement Abandoned?
The district court concluded that “[t]he parties clearly agreed in their Account
Agreements to submit all claims to arbitration before the AAA.” (R.1-21 at 5-6).
While this is true, it ignores the fact that the parties later signed a valid and binding
Submission Agreement. In the Submission Agreement, the parties agreed to submit
their claims to the NASD, thereby modifying the earlier Account and Customer
agreements. See Piggly Wiggly Operators’ Whse., Inc. v. Piggly Wiggly Operators’
Whse. Indep. Truck Drivers’ Union Local No. 1, 611 F.2d 580, 584 (5th Cir. 1980)
(“Arbitration is a matter of contract, . . . but the initial contract to arbitrate may be
modified by the submission agreement or grievance.” (citations omitted)). Under the
Federal Arbitration Act, the Submission Agreement, being an “agreement in writing
to submit to arbitration an existing controversy,” is “valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity for the revocation of
any contract.” 9 U.S.C. § 2 (1994).
The Fleurys argue that Dean Witter abandoned the Submission Agreement. The
question of what constitutes abandonment of an arbitration agreement is a question of
fact. See Burton-Dixie Corp. v. Timothy McCarthy Const., Inc., 436 F.2d 405, 407-08
(5th Cir. 1971). The district court made no explicit finding as to whether the contract
was abandoned, stating only that “[Dean Witter] does not recognize the NASD’s
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jurisdiction over the matter.” (R.1-21 at 6). To the extent that this statement may be
said to embody a finding of fact that the Submission Agreement was abandoned, it is
clearly erroneous. “The abandonment of a contract may be effected by the acts of one
of the parties thereto where [1] the acts of that party are inconsistent with the existence
of the contract and [2] are acquiesced in by the other party.” McMullen v. McMullen,
185 So. 2d 191, 193 (Fla. Dist. Ct. App. 1966). Evidence of neither of these elements
is present in the record before us. First, Dean Witter’s action in the district court is
not inconsistent with the existence of the Submission Agreement. Dean Witter’s
complaint only contests the NASD’s jurisdiction over the § 15 issues, not the entire
dispute. Dean Witter’s suit thus asks the district court to conduct a hearing on the §
15 eligibility of the Fleurys’ claims and enter a judgment pursuant to its findings
following that hearing. Had the district court conducted a hearing and found the
Fleurys’ claims eligible under § 15, it would not have gone on to adjudicate the
merits; presumably the parties would have proceeded to arbitrate the merits of the
Fleurys’ claims before the NASD. Second, even if Dean Witter’s action for injunctive
relief were somehow so fundamentally inconsistent with the Submission Agreement
as to constitute abandonment of it, we can find no actions by the Fleurys that could
be construed as acquiescence. Indeed, the Fleurys opposed Dean Witter’s action in
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the district court. The Submission Agreement is valid, and the district court erred in
ordering the claims to be arbitrated before the AAA.
B. Did the District Court Err in Failing to Hold a § 15 Eligibility Hearing?
Dean Witter directs our attention to Cohen, which it argues compels the
conclusion that the district court should have held a hearing on the § 15 eligibility of
the Fleurys’ claims. In Cohen, we held that § 15 of the NASD Code is not a
procedural statute of limitations, but a substantive eligibility requirement, determining
the arbitrability of a given claim. Under the Supreme Court’s decision in First
Options of Chicago, Inc. v. Kaplan,2 courts, not arbitrators, should decide questions
of arbitrability unless there is “clear and unmistakable evidence” that the parties
intended to submit such questions to an arbitrator. We could find no such evidence
in Cohen, and remanded the case to the district court with instructions that it conduct
a hearing on the § 15 eligibility of the claims in that case.
Dean Witter argues that the record does not contain sufficient evidence of intent
to submit the § 15 issues to the NASD, and that the arbitrator’s ruling on the § 15
issues represents “[u]nilateral and unsolicited action by the NASD.” Appellant’s
Reply Brief at 4. This is a disingenuous reading of the record, which is replete with
evidence that Dean Witter intended the NASD to resolve the § 15 issues. When the
2
514 U.S. 938, 943, 115 S. Ct. 1920, 1924 (1995).
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Fleurys filed their grievance with the NASD, Dean Witter’s immediate reaction was
to file a responsive pleading with the NASD. In that pleading Dean Witter not only
argued the § 15 issues to some extent but also indicated that it would submit further
argument on that point as soon as the Fleurys would provide more specific factual
allegations regarding their claims. (R.1-15, Exhibit B at 2-3).3 In a letter dated April
24, 1995, the NASD directed the Fleurys to respond to “the Section 15 issue raised by
Dean Witter,” indicating that the responses “will be forwarded to the Director of
Arbitration for decision.” (R.1-15, Exhibit D). Dean Witter received a copy of this
letter, yet did not object to the NASD’s jurisdiction to decide the § 15 issues. Instead,
seemingly dissatisfied with the vague factual allegations underlying the Fleurys’
claims, Dean Witter contacted the Fleurys’ counsel and negotiated an agreement by
which the Fleurys would amend their Statement of Claim to include greater factual
detail and Dean Witter would raise its § 15 issues before the arbitrator at a later date.
Indeed, Dean Witter notified the NASD of this arrangement in a letter dated May 19,
1995. (R.1-15, Exhibit F at 2). However, the NASD’s Director of Arbitration
evidently felt that she had sufficient information before her, and ruled on the § 15
issues, notifying the parties in a memo dated July 7, 1995. (R.1-15, Exhibit E). Dean
3
By comparison, in Cohen the brokerage firm’s first reaction upon receiving a grievance was
to immediately request an injunction from the district court. Cohen, 62 F.3d at 382. Dean Witter
did not file its action in district court until September 1995, nine months after the Fleurys filed their
grievance with the NASD.
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Witter points out that in a subsequent letter it complained to the Director that her § 15
ruling was “premature.” (R.1-15, Exhibit F at 1). This could be taken as a protest to
the NASD’s jurisdiction, were it not for the very next sentence of the letter, in which
Dean Witter informed the Director that “[Dean Witter] fully wish[es] to argue the
Section 15 issue once an Amended Statement of Claim has been filed by the [Fleurys]
as agreed.” (R.1-15, Exhibit F at 1) (emphasis added). Dean Witter’s conduct
throughout the arbitration provides “clear and unmistakable evidence” that it intended
to submit the § 15 issues to the NASD, any belated protests to the contrary
notwithstanding.4 Under Cohen the NASD therefore had jurisdiction to resolve the
§ 15 issues, and Dean Witter’s suit must be dismissed.
4
Cf. Piggly Wiggly, 611 F.2d at 584 (“In this case, neither party questioned the arbitrability
either of the dispute stated in the grievance or of the issues set forth in it; the entire grievance was
presented to the arbitrator with reservation. It was only after he had decided the . . . issue adversely
to the employer that it sought to raise the question of his jurisdiction. . . . Whether in technical legal
terms the surrender of the possible argument that a certain dispute is not covered by the promise to
arbitrate should be considered a waiver is not of present moment. On whatever basis it rests, waiver,
estoppel or new contract, the result is that the grievance submitted to the arbiter defines his authority
without regard to whether the parties had a prior legal obligation to submit the dispute.”)
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III. CONCLUSION
For the reasons stated above, we VACATE the district court’s order compelling
arbitration before the AAA, and REMAND this case with instructions that the district
court dismiss Dean Witter’s complaint and issue an order compelling arbitration
before the NASD.
VACATED AND REMANDED WITH INSTRUCTIONS.
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