EDUARDO C. ROBRENO, J.
SEPTEMBER 28, 1995
This is an action by plaintiffs John Hancock Distributors, Inc., and John Hancock Mutual Life Insurance Company ("John Hancock") to permanently enjoin an arbitration demanded by defendants Michelle and Nicole Saponaro ("Saponaros"), under the National Association of Security Dealers Code of Arbitration Procedure ("NASD Code"), on the basis that the six claims asserted by the Saponaros in the arbitration proceeding are barred by the limitations period contained in NASD Code § 15.
On September 24, 1995, the Court held a hearing on plaintiffs' request. For the reasons set forth below, the Saponaros are enjoined from submitting claims number one and number six to arbitration. The Court concludes that the balance of the claims are arbitrable.
Preliminarily, the Court must confirm the existence of jurisdiction and determine the applicable law. Under the federal Arbitration Act, parties may submit to arbitration disputes over transactions involving interstate commerce. 9 U.S.C. §§ 1-2 (1970). Moreover, under the federal Arbitration Act, a party aggrieved by the refusal of another party to an arbitration agreement
to arbitrate may seek an order from the district court directing that such arbitration proceed in the manner provided in the agreement. 9 U.S.C. § 4 (1970). Conversely, "a reluctant party [to an agreement to arbitrate] has a right to a judicial determination of his obligation to arbitrate," Painewebber v. Hartmann, 921 F.2d 507, 515 (3d Cir. 1990), before it is compelled to participate in an arbitration proceeding. Painewebber v. Hofmann, 984 F.2d 1372, 1382 (affirming district court's order pursuant to § 4 of the federal Arbitration Act enjoining arbitration of a claim which was barred by NASD Code § 15).
Yet, an action to enjoin an arbitration proceeding, like its counterpart action to compel arbitration, must be predicated upon a jurisdictional basis that is independent of the federal Arbitration Act. The Supreme Court has noted that the "Arbitration Act is something of an anomaly in the field of federal-court jurisdiction. It creates a body of federal substantive law establishing and regulating the duty to honor an agreement to arbitrate, yet it does not create any independent federal-question jurisdiction . . . ." Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25 n. 32, 103 S. Ct. 927, 942 n. 32, 74 L. Ed. 2d 765 (1983); see also Nat'l Iranian Oil Co. v. Mapco Int'l, Inc., 983 F.2d 485, 493 (3rd Cir. 1992) (finding that the federal Arbitration Act does not confer federal-question jurisdiction).
In this case, since it is undisputed that there is diversity of citizenship between the parties and the amount in controversy exceeds $ 50,000, the Court has jurisdiction to hear this action. See 23 U.S.C. § 1332 (1993). Furthermore, since it is also undisputed that the underlying transaction involves interstate commerce, the federal Arbitration Act, and the case law that has evolved thereunder, shall supply the rule of decision. Moses H. Cone, 460 U.S. at 24, 103 S. Ct. at 941; see also Merrill Lynch, Pierce, Fenner & Smith v. Masland, 878 F. Supp. 710, 712 (M.D. Pa. 1995) (finding that district court was proper forum for determining whether a claim is arbitrable and applying federal substantive law of arbitrability).
The Third Circuit has established a two-step procedure for determining whether claims submitted to arbitration under the NASD Code by a customer against a securities broker are time-barred. See Hofmann, 984 F.2d 1372 at 1381 (involving six-year limitations period under NASD Code § 15); see also Hartmann, 921 F.2d at 509 (involving six-year limitations period under New York Stock Exchange Department of Arbitration Rule 603). First, the Court must "determine whether the parties intended to submit disputes over the operative occurrence or event, and/or when it occurred," to an arbitrator or to the court. Hofmann, 984 F.2d at 1382. Second, assuming that the parties have agreed to submit the issue to the court, the court must determine whether the claims are arbitrable. Id. The inquiry is a factual one which envisions "the introduction of extrinsic evidence [at a hearing], if necessary, to determine which of these specific claims are and which are not arbitrable." Id., at 1380.
Neither John Hancock nor the Saponaros contend that they had intended to submit to the arbitrator the issue of whether the claims are time-barred by NASD Code § 15. Therefore, the only issue before the Court is whether the dispute is time-barred. Hartmann, 921 F.2d at 511.
John Hancock argues that the Saponaros' claims are without substantive merit. The Third Circuit has instructed, however, that the merits of the underlying dispute must not impact the Court's judgment on arbitrability. "Whether [claims are] 'arguable' or not, indeed even if it appears to the court to be frivolous, the merits of an arbitrable claim is [sic] for the arbitrators to decide." Hofmann, 984 F.2d at 1381, 1383 (citing AT & T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 650, 106 S. Ct. 1415, 1419, 89 L. Ed. 2d 648 (1986)); cf. Hartmann 921 F.2d at 513 ("Genuine interpretive disputes should be resolved in favor of arbitrability. We simply hold that a compelling case for nonarbitrability should not be trumped by a flicker of interpretative doubt.") Therefore, John Hancock's contention that the Saponaros' claims lack substantive merit is irrelevant in this proceeding.
Next, John Hancock contends that the Saponaros' claims are merely an attempt to assert tolling or discovery arguments in order to evade the six-year limitations period. John Hancock argues that, while the specific incidents alleged by the Saponaros may have occurred within the six-year limitations period, all the claims relate to securities which were originally purchased by the Saponaros outside the six-year limitations period.
Claims based on purchases of securities which occurred beyond the six-year limitations period are clearly not arbitrable. Conversely, claims based on purchases within the six-year period are. Between these two types of claims exists a category of arbitrable claims which relate to securities purchased by the customer outside the six-year period, but which actually constitute "events" or "occurrences" within the six-year period. For example, a broker's advice to a customer within the six-year period to "hold all stock" purchased outside the limitations period, a brokerage firm's active concealment within the six-year period of the wrongdoing of its brokers which occurred outside that period, and the continuation into the six-year period, of a long-term wrongful brokerage-customer relationship begun outside the limitations period may be deemed "events" or "occurrences" that took place within the six-year period, even if the events relate to securities which were initially purchased outside the limitations period. Hofmann, 984 F.2d at 1380.
In determining the arbitrability of such claims, the Third Circuit has directed district courts to apply the following rule:
The court should, as a benchmark, generally accept a party's statement as to what constitutes a cause of action and permit the arbitration of that claim as long as the asserted cause of action is not clearly a mere tolling or discovery argument. However, when the stated cause of action is patently nothing more than an attempt to toll the six year period, the court must enjoin the arbitration of that claim.
984 F.2d at 1381. The operative presumption is one of arbitrability, and any "doubts should be resolved in favor of coverage [under the arbitration agreement]." AT & T Technologies, 475 U.S. at 650, 106 S. Ct. at 1419; see Hofmann, 984 F.2d at 1381. Only when a claim clearly constitutes no more than a tolling or discovery argument may a court enjoin its arbitration. Hofmann, at 1382.
The burden of proving that each transaction, occurrence, or event falls within the six-year period is on the Saponaros. Hofmann, 984 F.2d 1372 at 1383. Moreover, the Saponaros must "list each specific claim or theory of recovery [they] plan to assert in arbitration." Id., at 1380.
At the hearing, the Saponaros asserted six claims which they contend arose within the limitations period set forth in NASD Code § 15.
The claims revolve around the conduct of Paul G. Schenk, a John Hancock employee and the Saponaros' securities broker, as follows:
1) Schenk's failure to monitor adequately the performance of the Saponaros' investments for their benefit;