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Painewebber Inc. v. Hofmann

filed: February 3, 1993; As Corrected February 12, 1993.


On Appeal From The United States District Court For The Eastern District of Pennsylvania. (D.C. Civ. No. 92-00810).

Before: Becker, Hutchinson, and Alito, Circuit Judges..

Author: Becker


BECKER, Circuit Judge.

This action was instituted by PaineWebber Incorporated to stay and enjoin the arbitration of a customer's claims of fraud and mismanagement before the National Association of Securities Dealers, Inc. ("NASD"). Based on the incorporation of § 15 of the NASD Code of Arbitration Procedure ("NASD Code") into the arbitration clause of the "Client's Agreement," PaineWebber seeks declaratory and injunctive relief barring the arbitration of any claim that arose from an occurrence or event more than six years before the filing of arbitration. PaineWebber contends that because § 15 of the NASD Code is a substantive contractual limitation on what claims the parties have agreed to submit to arbitration, the question of arbitrability is strictly a matter for the court to decide. The defendant, PaineWebber's former client H. William Hofmann, responds that no portion of his claim in arbitration should be enjoined because the determination of what claims are barred by § 15 of the NASD Code is properly a question for the arbitrators. Hofmann also contends that, regardless of who determines arbitrability, all of his claims arose within the allowable six year period.

The district court granted summary judgment for Hofmann, notwithstanding that certain of Hofmann's claims indisputably arose from occurrences and events that took place more than six years before the filing of arbitration. The court appears to have concluded that at least some of Hofmann's claims arose within the six year period established by § 15 of the NASD Code and that it therefore could not say with positive assurance that the entire claim in arbitration was barred by § 15.

Relying on our opinion in PaineWebber Inc. v. Hartmann, 921 F.2d 507 (3d Cir. 1990), in which we addressed language identical to that found in § 15 of the NASD Code, we conclude that the court is the proper body to determine the scope of the arbitration agreement; that PaineWebber is entitled to a declaratory judgment and injunctive relief as to any claim arising out of an occurrence or event that occurred more than six years before the filing of arbitration; and that with regard to at least some of Hofmann's claims, it is indisputable that more than six years passed between the occurrences or events that gave rise to those claims and the filing of Hofmann's claims in arbitration. Accordingly, we will vacate the order granting summary judgment in favor of Hofmann.

While PaineWebber is entitled to summary judgment on some of Hofmann's claims, there are others on which arbitrability is less clear. More particularly, Hofmann has pled a number of claims, such as the allegation that within the six year period the broker advised Hofmann to hold securities purchased more than six years before the arbitration demand, that may or may not be within the scope of the arbitration agreement. PaineWebber responds that these are not independent claims but merely attempts to toll the six year period adopted by the parties as a substantive limit on the claims that will be eligible for arbitration. We cannot decide the arbitrability of the claims on the present record. Accordingly, we will remand to the district court with guidance on further proceedings to determine if these claims are within the scope of the arbitration agreement.


The relevant facts, most of which are undisputed, may be summarized as follows. In 1977, Hofmann, who had significant assets held mostly in federally-insured cash deposits and conservative stocks, was solicited by one of PaineWebber's Philadelphia brokers. Through this broker, Hofmann began investing in municipal bonds and conservative-to-moderate risk stocks. When the broker died in 1980, PaineWebber assigned Hofmann's account to another of its brokers, Henry J. Faragalli, Jr.

During the course of Faragalli's management of Hofmann's account, Hofmann's investments became more and more concentrated in the stock of a small California electronics company, EECO, Inc. Hofmann's purchase of the EECO stock began in November of 1982 and continued through December of 1987. EECO stock increased in value from 1982 to approximately the middle of 1987. During the months immediately preceding, during, and after the stock market crash of October 1987, however, much of that value was lost. In December of 1987, Faragalli's employment with PaineWebber was terminated.*fn1 Faragalli was subsequently hired as a broker by Shearson Lehman Brothers, Inc. Shortly thereafter, Hofmann's brokerage account was transferred to Shearson and assigned to Faragalli. While at Shearson, Hofmann continued to hold his existing shares of EECO stock and to purchase additional shares on margin. The value of the stock, however, continued to decline. Finally, on May 2, 1990, EECO filed for Chapter 11 bankruptcy protection, and the EECO stock held by Hofmann became (and remains) worthless.

On October 30, 1987, Hofmann executed a margin agreement (titled "Client's Agreement") with PaineWebber. Among the terms of the agreement was a provision requiring Hofmann to submit any disputes arising out of the brokerage relationship to one of a listed group of arbitration forums.*fn2 On October 11, 1991, Hofmann filed a Statement of Claim with the NASD, one of the forums listed in the arbitration agreement.

The Statement of Claim names Faragalli, PaineWebber, and Shearson as respondents and alleges, inter alia, that Faragalli was engaged in an ongoing scheme to support the price of EECO stock for his own benefit; that Faragalli abused the accounts of Hofmann and other customers in furtherance of that scheme; that he recommended that Hofmann purchase and hold unsuitably speculative securities (especially EECO stock); that Faragalli executed unauthorized transactions in Hofmann's account; that PaineWebber failed properly to supervise Faragalli; that PaineWebber wrongfully concealed Faragalli's wrongdoing from Hofmann; and that PaineWebber acted wrongfully in allowing Faragalli to cause Hofmann to become and to remain invested in a single, risky security.

Hofmann's arbitration claim also alleges that he (Hofmann) made at least 118 separate purchases of EECO stock. The majority of these purchases occurred before October 11, 1985; i.e., more than six years before the filing of his arbitration claim. Hofmann claims on appeal, however, that all his losses can be attributed to "occurrences or events" within six years of the demand for arbitration. In particular, Hofmann points to six types of alleged occurrences or events that he claims occurred within the six year period provided for in § 15 of the NASD Code: (1) certain purchases of EECO stock; (2) repeated, insistent, and wrongful advice by Faragalli to hold all EECO stock; (3) Faragalli's and PaineWebber's active concealment of and affirmative misstatements about the risk to Hofmann's account; (4) Hofmann's discovery in the summer of 1991 that his losses may have been caused by the wrongdoing of others; (5) the continuation of a unitary pattern of wrongdoing with respect to investments in EECO from 1982 through 1987; and (6) the continuation of a wrongful brokerage relation from 1982 through 1987.

In response to the arbitration filing, PaineWebber both denied the claims on the merits and requested that the NASD Director of Arbitration (the "Director") dismiss "any claims relating to purchases prior to September 1985." In the alternative, PaineWebber requested that the Director appoint an arbitration panel to consider its motion to dismiss under § 15 of the NASD Code. In memoranda dated January 27, and February 6, 1992, the NASD advised the parties that the Director had decided that the motion would be left to the arbitrators hearing the merits. The NASD also notified the parties that it would abide by any properly obtained stay of arbitration.

On February 7, 1992, PaineWebber commenced the present action for declaratory judgment, and a stay of, and an injunction against the arbitration of claims that arose from occurrences or events more than six years before the filing of arbitration. On March 17, 1992, Hofmann moved for summary judgment. On March 31, 1992, PaineWebber filed both a response to the motion and its own cross-motion for summary judgment. The following day, without giving Hofmann an opportunity to respond to PaineWebber's cross-motion and without oral argument, the district court granted Hofmann's summary judgment motion, setting forth only the following brief explanation:

I cannot say with positive assurance whether Section 15 of the NASD's Code bars the claim now in arbitration. Cf. PaineWebber Inc. v. Hartmann, 921 F.2d 507 (3d Cir. 1990).

PaineWebber Inc. v. Hofmann, No. 92-CV-0810 (E.D. Pa. Apr. 2, 1992).

This appeal followed, in which PaineWebber argues that § 15 of the NASD Code, as incorporated into the agreement between the parties, clearly creates a substantive limit on the claims that may be submitted to arbitration, in contrast to a procedural bar such as a statute of limitations. Relying on our opinion in PaineWebber Inc. v. Hartmann, 921 F.2d 507 (3d Cir. 1990), PaineWebber argues that it is therefore entitled to an order directing the district court to enter summary judgment in its favor and to grant a declaratory judgment and an injunction prohibiting the arbitration of any claims that arose from an occurrence or event more than six years before the filing of arbitration. Hofmann responds not only that PaineWebber is not entitled to declaratory and injunctive relief, but also that he is entitled to summary judgment because: (1) any remaining questions of arbitrability are for the arbitrators to decide; and in the alternative, (2) even if the court should decide the arbitrability of the remaining claims, it must find the claims arbitrable since all of them arose from events or occurrence less than six years before the arbitration filing.*fn3

The district court's jurisdiction was predicated on diversity of citizenship. 28 U.S.C. § 1331. Our jurisdiction is based on PaineWebber's timely notice of appeal from entry of final judgment. 28 U.S.C. § 1291. Our review of an order granting summary judgment is plenary. Clement v. Consolidated Rail Corp., 963 F.2d 599, 600 (3d Cir. 1992). Accordingly, we must examine the issues using the same test applied by the district court: whether there is a genuine issue as to any material fact and whether the movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). In conducting our analysis, we must view all facts and inferences in the light most favorable to the non-moving party, PaineWebber. Clement, 963 F.2d at 600.



An understanding of this case is aided by a brief sketch of the general principles underlying arbitration law. At base, "'arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.'" AT & T Technologies, Inc. v. Communications Workers of Am., 475 U.S. 643, 648, 106 S. Ct. 1415, 1418, 89 L. Ed. 2d 648 (1986) (quoting United Steel workers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582, 80 S. Ct. 1347, 1353, 4 L. Ed. 2d 1409 (1960)). Accordingly, "'whether or not [a party is] bound to arbitrate, as well as what issues it must arbitrate, is a matter to be determined by the Court on the basis of the contract ...

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