Kramer v. Smith Barney

United States Court of Appeals,
Fifth Circuit.
No. 95-10441.
Quentin T. KRAMER, M.D., Individually and as Trustee for Various
Pension Plans, Quentin T. Kramer, M.D., PA Defined Benefit Pension
Plan and Quentin T. Kramer, M.D., PA, Money Purchase Pension
Plan/Profit Sharing Plan, Plaintiffs-Appellants,
v.
SMITH BARNEY, formerly known as Shearson Lehman Brothers Inc.,
and Larry F. Robb, Defendants-Appellees.
April 23, 1996.
Appeal from the United States District Court for the Northern
District of Texas.
Before HIGGINBOTHAM and DUHÉ, Circuit Judges, and SCHWARZER,
District Judge*.
SCHWARZER, District Judge:
Dr. Quentin T. Kramer brought this action in Texas state
court, alleging state law claims for fraud, negligence, securities
violations, and breach of contract arising out of purchases of
partnership interests from defendants Smith Barney, Inc. and Larry
F. Robb. Defendants removed the action to the district court which
then granted their motion to dismiss the action under Fed.R.Civ.P.
12(b)(6) as untimely. Kramer appealed. We have jurisdiction under
28 U.S.C. § 1291 and remand with directions.
FACTS
Kramer brought this action as an individual and as trustee of
two pension plans for the benefit of himself and his employees.
*
District Judge of the Northern District of California,
sitting by designation.
1
Smith Barney is a licensed broker and Robb was its branch manager
as well as a licensed broker and financial consultant. Through
Robb, Kramer opened three accounts with Smith Barney: an IRA
account in his individual capacity, a defined benefit pension plan
account, and a money purchase pension plan/profit sharing plan
account. He was the trustee of the latter two plans and, along
with his employees, a beneficiary. From 1984 through 1989, Kramer
purchased from Robb interests in limited partnerships for these
accounts. He alleges that he relied on Robb for advice in making
those purchases, and that a fiduciary relationship existed between
them. He charges that Robb sold him unsuitable investments, made
misrepresentations, failed to disclose the true risks, and
concealed losses in these accounts which he alleges total one
million dollars. On appeal from the granting of a Rule 12(b)(6)
motion, we accept the allegations of the complaint as true. Carney
v. Resolution Trust Corp., 19 F.3d 950, 954 (5th Cir.1994).
When Kramer opened the accounts with Smith Barney, he signed
the standard customer agreement which provided that:
[A]ny controversy arising out of or relating to my accounts,
to transactions with you for me, or to this agreement or the
breach thereof, shall be settled by arbitration in accordance
with the rules then in effect, of the National Association of
Securities Dealers, Inc., or the Board of Directors of the New
York Stock Exchange, Inc. and/or the American Stock Exchange,
Inc. as I may elect.
Rule 605 of the American Stock Exchange (AMEX) states:
No dispute, claim or controversy shall be eligible for
submission to arbitration in any instance where six (6) years
shall have elapsed from the occurrence or event giving rise to
the act or the dispute, claim or controversy.
Kramer initiated an arbitration proceeding under the customer
2
agreement in July 1993, within two years after he discovered the
true value of his investments but more than six years after he
purchased most of them. Smith Barney filed a motion in New York
state court to stay arbitration of the claims that were based on
purchases made more than six years before the arbitration
commenced. The court granted the motion and stayed arbitration of
those claims. The Appellate Division of the New York Supreme Court
affirmed. Kramer then abandoned the arbitration and filed the
instant action in the Texas state court with respect to all of the
purchases.
SUBJECT MATTER JURISDICTION
Although neither the District Court nor the parties addressed
the question of subject matter jurisdiction, we are obliged to do
so. Ziegler v. Champion Mortgage Co., 913 F.2d 228, 229 (5th
Cir.1990).
Under the well-pleaded complaint rule, a case does not "arise
under" federal law and is not removable if the complaint asserts
only state law causes of action. Franchise Tax Board v.
Construction Laborers Vacation Trust, 463 U.S. 1, 10, 103 S. Ct.
2841, 2846-47, 77 L. Ed. 2d 420 (1983). Nor will an anticipated
federal defense, including a defense of preemption, support
removal. Caterpillar Inc. v. Williams, 482 U.S. 386, 393, 107
S. Ct. 2425, 2430, 96 L. Ed. 2d 318 (1987). Under the complete
preemption doctrine, however, "Congress may so completely pre-empt
a particular area that any civil complaint raising this select
group of claims is necessarily federal in character." Metropolitan
3
Life Ins. Co. v. Taylor, 481 U.S. 58, 63-64, 107 S. Ct. 1542, 1546,
95 L. Ed. 2d 55 (1987). Consequently, a statute's preemptive force
may "convert[ ] an ordinary state common law complaint into one
stating a federal claim for purposes of the well-pleaded complaint
rule." Id. at 65, 107 S.Ct. at 1547. Smith Barney removed this
case by invoking federal jurisdiction under the Employee Retirement
Income Security Act of 1974 (ERISA), 29 U.S.C. §§ 1109 (1982),
1132(a)(2)-(3) (1988), 1144(a) (1982); Taylor, 481 U.S. at 67, 107
S.Ct. at 1548.1 We must determine whether the action is preempted
by ERISA and, if so, whether ERISA displaces the state law causes
of action asserted.
Kramer filed this action on his own behalf and on behalf of
the Kramer Defined Benefit Pension Plan and the Kramer Money
Purchase Pension Plan/Profit Sharing Plan. These plans, as
"employee benefit plans" within the meaning of ERISA, are covered
by ERISA. See 29 U.S.C. §§ 1002(2)(A), 1002(3), 1003 (1982).
Section 514(a) states that "the provisions of [ERISA] ... shall
supersede any and all State laws insofar as they may now or
hereafter relate to any employee benefit plan." 29 U.S.C. §
1144(a). "[T]he preemption provision is "deliberately expansive'
and "designed to "establish pension plan regulation as exclusively
a federal concern[.]" ' ... [A] law relates to an ERISA plan "if
it has a connection with or reference to such a plan.' " Anderson
1
If the claims relating to the ERISA accounts were
removable, Kramer's other claims relating to purchases for his
personal account were removable as supplemental claims under 28
U.S.C. § 1367 (1994).
4
v. Electronic Data Sys. Corp., 11 F.3d 1311, 1313 (5th Cir.1994)
(quoting Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 139, 111
S. Ct. 478, 483, 112 L. Ed. 2d 474 (1990)), cert. denied, --- U.S. ---
-, 115 S. Ct. 55, 130 L. Ed. 2d 14 (1994). Kramer's state law claims
alleging that defendants violated their fiduciary duties to the
plans and the beneficiaries relate to ERISA plans and are therefore
preempted under section 514(a). See McClendon, 498 U.S. at 140,
111 S.Ct. at 483-84 (1990) (Texas common law wrongful discharge
cause of action preempted by ERISA).
Having concluded that Kramer's state law claims are preempted,
we must next consider whether ERISA displaces those claims under
the complete preemption doctrine. This appears to be a question of
first impression. Taylor involved the issue of whether ERISA
section 502(a)(1)(B) preempted and displaced plaintiff's state law
claims to recover benefits under an ERISA plan. See 481 U.S. at
63-66, 107 S.Ct. at 1546-48; 29 U.S.C. § 1132(a)(1)(B). Thus
Taylor does not necessarily resolve the specific issue before us
which involves section 502(a)(2) instead of section 502(a)(1). We
confronted a closely analogous situation, however, in Anderson, 11
F.3d at 1315. Anderson claimed that he had been discharged for
reporting ERISA violations and failing to commit others. We
concluded that Anderson's claims fell within ERISA section 510.
Id. at 1314. Section 510 makes it unlawful to discharge a person
"for the purpose of interfering with the attainment of any right
... under the plan [or ERISA] ... [or] because he has given
information ... relating to [ERISA,]" and makes the provisions of
5
section 502 "applicable in the enforcement of this section." 29
U.S.C. § 1140 (1982). Reasoning that Taylor "held that causes of
action within the scope of the civil enforcement provisions of
ERISA § 502(a) are subject to the complete preemption doctrine[,]"
we held Anderson's action to be removable. Anderson, 11 F.3d at
1315. That reasoning is equally applicable here. Section 409 of
ERISA imposes duties and liabilities on fiduciaries of ERISA plans:
Any person who is a fiduciary with respect to a plan who
breaches any of the responsibilities, obligations, or duties
imposed upon fiduciaries by this subchapter shall be
personally liable to make good to such plan any losses to the
plan resulting from each such breach....
29 U.S.C. § 1109(a).2 ERISA further requires fiduciaries to
discharge their duties "solely in the interest of the participants
and beneficiaries[,]" using "care, skill, prudence, and diligence."
29 U.S.C. § 1104(a)(1) (1982). And section 502(a)(2) of ERISA
provides for civil enforcement by authorizing a "participant,
beneficiary or fiduciary" to bring a civil action "for appropriate
relief under section 1109." 29 U.S.C. § 1132(a)(2). We therefore
conclude that because Kramer's state law claims fall within the
enforcement provisions of section 502, they are completely
preempted and the action was properly removed to the district
court.
2
The existence of a fiduciary relationship under ERISA, on
the merits, is a mixed question of law and fact. See Reich v.
Lancaster, 55 F.3d 1034, 1044-45 (5th Cir.1995); 29 U.S.C. §
1002(21) (1982). But since defendants removed on the basis of
ERISA preemption founded on the complaint's allegations which
included allegations of fiduciary breaches relating to ERISA
plans, they are bound by those allegations for purposes of
subject matter jurisdiction.
6
ARBITRABILITY OF KRAMER'S CLAIMS
The district court dismissed the action with prejudice on the
ground that Kramer could not pursue in court the claims that had
been made ineligible for arbitration under Rule 605 by reason of
their age. In doing so, the court relied on Calabria v. Merrill
Lynch, Pierce, Fenner & Smith, Inc., 855 F. Supp. 172
(N.D.Tex.1994), which held that claims made ineligible for
arbitration under a customer agreement were not litigable in
federal court. Id. at 176. We review the dismissal of a complaint
under Rule 12(b)(6) de novo. Blackburn v. City of Marshall, 42
F.3d 925, 931 (5th Cir.1995). We must consider the ERISA claims
separately from the personal state law claims.
A. The ERISA claims.
The arbitration clause of the customer agreement is subject
to the Federal Arbitration Act ("Arbitration Act") as "[a] written
provision in ... a contract evidencing a transaction involving
commerce to settle by arbitration a controversy thereafter arising
out of such contract." 9 U.S.C. § 2 (1982). The Arbitration Act
makes the clause enforceable. Id. §§ 2, 3 (1982). At the same
time, ERISA vests exclusive jurisdiction of civil actions under
ERISA in the district courts. 29 U.S.C. § 1132(e)(1) (1988). We
must determine whether ERISA's enforcement provision preempts the
Arbitration Act.
In Shearson/American Express, Inc. v. McMahon, 482 U.S. 220,
238, 107 S. Ct. 2332, 2343-44, 96 L. Ed. 2d 185 (1987), the Supreme
Court held that an arbitration clause was enforceable under the
7
Arbitration Act with respect to claims under section 10 of the
Securities Exchange Act of 1934 ("Exchange Act"), even though the
Exchange Act gives district courts exclusive jurisdiction over
actions brought under the Act.3 The Court held arbitration
agreements to be enforceable with respect to statutory claims in
the absence of evidence of "congressional intent to exclude ...
[those] claims from the dictates of the Arbitration Act." Id. at
238, 107 S.Ct. at 2343-44; see also Rodriguez de Quijas v.
Shearson/American Express, Inc., 490 U.S. 477, 109 S. Ct. 1917, 104
L. Ed. 2d 526 (1989) (enforcing agreement to arbitrate claims under
the Securities Act of 1933); Mitsubishi Motors Corp. v. Soler
Chrysler-Plymouth, Inc., 473 U.S. 614, 625, 105 S. Ct. 3346, 3353,
87 L. Ed. 2d 444 (1985) (enforcing agreement to arbitrate antitrust
claims: "[W]e find no warrant in the Arbitration Act for implying
in every contract within its ken a presumption against arbitration
of statutory claims."). Although this circuit has not confronted
the issue, the three circuits to have done so have held that
Congress did not intend to prohibit arbitration of statutory ERISA
claims, and that arbitration is appropriate "[s]o long as the
prospective litigant effectively may vindicate his or her statutory
cause of action in the arbitral forum." Pritzker v. Merrill Lynch,
Pierce, Fenner & Smith, 7 F.3d 1110, 1119 (3rd Cir.1993) (citation
omitted) (relying on McMahon and Rodriguez, court held arbitration
3
Much of the opinion in McMahon is devoted to a discussion
of Section 29(a) of the Act which declares void "[a]ny condition,
stipulation, or provision binding any person to waive compliance
with any provision of [the Act]". 15 U.S.C. § 78cc(a). ERISA
contains no comparable provision.
8
agreement binding with respect to claims of fiduciary breaches
under ERISA); see also Bird v. Shearson Lehman/American Exp.,
Inc., 926 F.2d 116 (2nd Cir.1991) (same), cert. denied, 501 U.S.
1251, 111 S. Ct. 2891, 115 L. Ed. 2d 1056 (1991); Arnulfo P. Sulit,
Inc. v. Dean Witter Reynolds, 847 F.2d 475 (8th Cir.1988) (same).
We agree that Congress did not intend to exempt statutory
ERISA claims from the dictates of the Arbitration Act.
Accordingly, we hold that the customer agreement mandates
arbitration of Kramer's ERISA claims.
We now reach the question whether AMEX Rule 605 applies to
the arbitration of those claims. That rule, incorporated by
reference into the customer agreement, renders ineligible for
arbitration claims where "six (6) years shall have elapsed from the
occurrence or event giving rise to the act or the dispute, claim or
controversy." The New York court ruled most of Kramer's claims
ineligible under this rule.
ERISA contains its own statute of limitations. It bars
claims:
[A]fter the earlier of—
(1) six years after (A) the date of the last action which
constituted a part of the breach or violation, or ... (2)
three years after the earliest date (A) on which the
plaintiff had actual knowledge of the breach or violation
...;
except that in the case of fraud or concealment, such
action may be commenced not later than six years after the
date of discovery of such breach or violation.
29 U.S.C. § 1113 (Supp. V 1987 & Supp. I 1989). Thus ERISA permits
tolling of the statute of limitations in cases of fraud or
9
concealment. Under section 410, "any provision in an agreement or
instrument which purports to relieve a fiduciary from
responsibility or liability for any responsibility, obligation, or
duty under [ERISA] shall be void as against public policy." 29
U.S.C. § 1110(a) (1982). To the extent the AMEX rule renders
ineligible for arbitration ERISA claims more than six years old
which could otherwise be enforced on proof of fraud or concealment,
it "relieve[s] a fiduciary from ... liability." Id. In holding
that an arbitration agreement may be enforced with respect to ERISA
fiduciary claims, the court in Sulit reasoned:
Under this statutory structure, an agreement to waive the
judicial forum allowed for in section 1132(e) in favor of
arbitration does not carry with it the waiver of any
substantive duties or liabilities, and thus, no fiduciary has
been impermissibly relieved of any "responsibility,
obligation, or duty" imposed by [ERISA].
847 F.2d at 478 (citations omitted); see also Soler, 473 U.S. at
628, 105 S.Ct. at 3354 ("By agreeing to arbitrate a statutory
claim, a party does not forgo the substantive rights afforded by
the statute...."); de Coninck v. Provident Life and Ins. Co., 747
F. Supp. 627, 633 (D.Kan.1990) (applying ERISA limitations period
despite shorter limitations period in parties' insurance contract);
compare Calabria, 855 F. Supp. at 175 (AMEX rule binding where no
ERISA claim involved). Because application of Rule 605 to render
Kramer's ERISA claims ineligible for arbitration would impair his
substantive rights, we hold it void with respect to those claims.
Since the district court's ruling dismissing the action was
premised on the ineligibility of Kramer's claims under the AMEX
rule, it must be set aside to permit arbitration of the ERISA
10
claims.4 While we recognize that neither party raised the ERISA
issues in the district court, since subject matter jurisdiction is
founded on ERISA, those issues cannot be avoided. Because ERISA
permits tolling of its statute of limitations for fraud or
concealment, we need not address Kramer's arguments why tolling
should be permitted under the customer agreement with respect to
the ERISA claims.
We reject defendants' contention that those claims are barred
by collateral estoppel on the basis of the New York court's ruling.
The courts of the United States give the judicial proceedings of a
state court "the same full faith and credit ... as they have by law
or usage in the courts of such State." 28 U.S.C. § 1738. The
district courts have exclusive jurisdiction under section 502(e)(1)
of actions to enforce fiduciary obligations under ERISA. See
Retail Shoe Health Comm. v. Reminick, 62 N.Y.2d 173, 476 N.Y.S.2d
276, 464 N.E.2d 974 (1984), cert. denied, 471 U.S. 1022, 105 S. Ct.
2034, 85 L. Ed. 2d 316 (1985). The New York court therefore lacked
subject matter jurisdiction, and under New York law, "[a] judgment
... issued without subject matter jurisdiction is void." Editorial
Photocolor Archives, Inc. v. Granger Collection, 61 N.Y.2d 517, 474
N.Y.S.2d 964, 967, 463 N.E.2d 365, 368 (1984); see also Marrese v.
American Academy of Ortho. Surgeons, 470 U.S. 373, 382, 105 S. Ct.
1327, 1333, 84 L. Ed. 2d 274 (1985) ("If state preclusion law
includes this requirement of prior jurisdictional competency, which
4
We leave it to the arbitrator to decide whether application
of the ERISA statute of limitations bars any of Kramer's claims.
11
is generally true, a state judgment will not have claim preclusive
effect on a cause of action within the exclusive jurisdiction of
the federal courts.").
B. Kramer's personal claims.
Kramer's non-ERISA claims, over which the court has
supplementary jurisdiction, are subject to the arbitration clause
and AMEX Rule 605. Those claims that arose out of transactions
that occurred more than six years before the arbitration are
ineligible. Kramer is collaterally estopped by the New York
judgment to contend that the claims are arbitrable because of
fraudulent concealment.5 The New York court held specifically that
"[t]hese [AMEX] rules are substantive eligibility requirements, not
statutes of limitations, and may not be tolled. The arbitration
therefore may not proceed insofar as it concerns partnership
interests purchased six years or more prior to the commencement of
the original arbitration." Shearson Lehman Bros., Inc. and Larry
F. Robb v. Quentin T. Kramer, No. 101339/93, 5 (N.Y.Sup.Ct. Nov.
16, 1993). We are bound to give full faith and credit to this
final decision of a state court. Raju v. Rhodes, 7 F.3d 1210, 1214
(5th Cir.1993) ("[O]nce a court of competent jurisdiction decides
an issue of fact or law necessary to its judgment, the same parties
to that judgment cannot relitigate that issue in a different
action.").
5
Because the parties did not raise the issue, we do not
decide whether Kramer's failure to exhaust the arbitration
proceeding he commenced results in an abandonment of arbitrable
claims.
12
Kramer contends, however, that he is entitled to litigate in
court claims ineligible for arbitration. This too appears to be an
issue of first impression in the courts of appeals, though several
district courts have ruled on it. Arbitration is a creature of
contract and the scope of the parties' obligation to arbitrate must
be determined by reference to the terms of the agreement.
Commercial Metals Co. v. Balfour, Guthrie, and Co., 577 F.2d 264,
266 (5th Cir.1978). The customer agreement provides that "[u]nless
unenforceable due to federal or state law, any controversy arising
out of or relating to [transactions between the parties] ... shall
be settled by arbitration." The intention underlying the agreement
quite plainly is to require the submission of all claims to
arbitration, subject only to the express exemption for claims not
arbitrable under federal or state law. It would be bizarre to
interpret the agreement to exempt stale claims from arbitration.
We hold the customer agreement to bar litigation of the claims that
are ineligible for arbitration.
CONCLUSION
We REMAND to the district court with directions to enter
judgment directing the parties to submit the ERISA claims to
arbitration and dismissing with prejudice all remaining claims.
13