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BAO v. GRUNTAL & CO.

August 19, 1996

EDWARD E. BAO, Plaintiff,
v.
GRUNTAL & CO., INCORPORATED, Defendant.



The opinion of the court was delivered by: PARELL

 PARELL, District Judge

 This matter comes before the Court on (1) application of plaintiff Edward E. Bao ("Bao") for a preliminary injunction; and (2) motion of defendant Gruntal & Co., Inc. ("Gruntal") to dismiss or, in the alternative, to transfer this action to the United States District Court for the Southern District of New York. For the following reasons, defendant's motion to transfer is granted and plaintiff's application for a preliminary injunction is denied without prejudice to the right of plaintiff to renew said application in the transferee district.

 BACKGROUND

 Plaintiff, a New Jersey resident, commenced this diversity action on May 3, 1996, against defendant Gruntal, a Delaware corporation with its principal place of business in New York City. (Compl. PP 1, 2.) Gruntal is "a full-service brokerage firm" registered with the Securities Exchange Commission and is a member of several exchanges, including the New York Stock Exchange ("NYSE") and the American Stock Exchange ("AMEX"). (Compl. P 2.) From late 1983 until December of 1994, Bao was a Director and Executive Vice President for Operations and Administration of defendant Gruntal. (Id. P 1; Stipulation dated June 12, 1996 [hereinafter "6/12/96 Stipulation"], P 2.) By virtue of his employment with Gruntal, Bao was an associate member of the AMEX from May 24, 1989, until December 16, 1994. (Stipulation dated June 17, 1996 [hereinafter "6/17/96 Stipulation"], P 1.) Thereafter, Bao owned a seat on the AMEX from August 27, 1993, until April 12, 1995. (Id.) Additionally, Bao was a member of the NYSE from October 24, 1985, until June 29, 1995, as a result of his employment with first another company and then with Gruntal. (Id. P 2.)

 In order to become a member of both the NYSE and the AMEX, Bao agreed to abide by the rules and constitution of each Exchange. (See Attachment to 6/17/96 Stipulation; Affidavit of Michael A. Ungar [hereinafter "Ungar Aff."], Ex. 3.) Both the NYSE's and the AMEX's constitutions provide that disputes between members shall be submitted to arbitration. (6/12/96 Stipulation, Ex. B: NYSE Constitution art. XI, § 1; 6/12/96 Stipulation, Ex. D: AMEX Constitution art. VIII, § 1.) Further, NYSE Rule 603 and AMEX Rule 605(a) both provide that "no dispute, claim or controversy shall be eligible for submission to arbitration . . . where six (6) years shall have elapsed from the occurrence or event giving rise to the act or the dispute, claim or controversy." (6/12/96 Stipulation, Ex. F: NYSE Rule 603; 6/12/96 Stipulation, Ex. G: AMEX Rule 605(a).)

 In November 1994, Gruntal discovered an embezzlement from the company and commenced an internal investigation. (Ungar Aff. P 4.) In the course of that investigation, Gruntal terminated plaintiff. (Id.) The investigation revealed that Bao had negotiated relationships with his son, Juan Bao, and the children of the former Chief Executive Officer of Gruntal, Andrew and Mitchell Silverman; both of these relationships allegedly disadvantaged Gruntal. (Id. P 5.)

 By separate Statements of Claim dated December 28, 1995, Gruntal filed two arbitrations against plaintiff, one before the NYSE and one before the AMEX. (Affidavit of Greg A. Danilow dated June 6, 1996 [hereinafter "Danilow Aff."], P 6; Danilow Aff., Exs. A, B.) Subsequently, on May 8, 1996, Gruntal filed First Amended Statements of Claim as of right. (Danilow Aff. P 6; Exs. E, F.) Gruntal claims in both arbitrations that Bao committed fraud and breached his fiduciary duty to Gruntal. (See Ungar Aff. PP 8-14; Danilow Aff., Exs. E, F.) *fn1"

  Bao commenced this action on May 3, 1996, the date on which his answers were due in both the NYSE and AMEX arbitrations. Plaintiff requested that both arbitrations be stayed pending resolution of this federal action. (Danilow Aff., Ex. D.) The NYSE Senior Arbitration Counsel had informed the parties by letter dated April 25, 1996, that an arbitration hearing was scheduled for July 16 and 17, 1996, in New York, New York. *fn2" (Danilow Aff., Ex. I.) The AMEX responded to Bao's request for a stay by letter dated May 23, 1996, stating that "there are allegations raised in the Claim that fall within the six-year period" and therefore the AMEX hearing would proceed absent a final court-ordered stay. (Danilow Aff., Ex. H.) The parties were advised that they were free to raise the timeliness issue again with the arbitrators. Bao was instructed to file his answer in the AMEX arbitration within ten days of receipt of the letter or be in default. (Id.) By letter dated June 19, 1996, the NYSE likewise advised the parties that the Director of Arbitration "ruled that any of Claimant's claims over six years old at the time Gruntal & Company's statement of claim in this matter was filed will be ineligible for arbitration and will not be considered by the Arbitrators assigned to this case." (Letter from NYSE Senior Arbitration Counsel dated June 19, 1996.)

 In the instant action, plaintiff claims in essence that because Gruntal's claims against Bao arise from events that occurred more than six years before the arbitrations were commenced, those arbitrations as against him are barred by the six-year limitation on arbitration contained in the respective arbitration rules of each Exchange. Plaintiff seeks an injunction against Gruntal to prevent Gruntal from proceeding with arbitration of its claims against Bao "to the extent such claims are barred under the Arbitration Rules" of the AMEX and NYSE. *fn3" (Compl. at 6-7). Issue was joined with the filing of Gruntal's Answer on May 28, 1996, which included an affirmative defense that the issue of the timeliness of the claims in the AMEX and NYSE arbitrations should be decided by the arbitrators. (Answer at 4.)

 On June 7, 1996, the Court heard oral argument on Bao's application for an order temporarily restraining Gruntal from proceeding with the arbitrations before the NYSE and the AMEX. The Court denied the application and ordered Gruntal to show cause on June 18, 1996, why a preliminary injunction should not issue.

 In his initial brief in support of his application for a temporary restraining order, Bao argued that in the Third Circuit, the district court, and not the arbitrators, must decide whether claims are barred under the six-year rule. (Pl.'s Br. in Support of Application for Temporary Restraining Order [hereinafter "Pl.'s First Br."] at 2, 9-12 (citing PaineWebber Inc. v. Hartmann, 921 F.2d 507 (3d Cir. 1990); PaineWebber Inc. v. Hofmann, 984 F.2d 1372 (3d Cir. 1993).) Bao argued that it is indisputable in this case that certain of Gruntal's claims arose from occurrences and events that took place more than six years before the filing of the NYSE and AMEX arbitrations. (Id. at 12.)

 In opposition to Bao's application for a TRO, Gruntal argued that as a member of both the NYSE and the AMEX, Bao agreed to submit all disputes to arbitration. (Def.'s Br. in Opp'n to Pl.'s Application for a Temporary Restraining Order [hereinafter "Def.'s First Br."] at 5.) Gruntal maintained that NYSE Rule 621 and AMEX Rule 612(b) evidence a "clear and unmistakable" intent to submit issues of arbitrability to the arbitrators. (Id. at 6.) These Rules each provide that "the arbitrator(s) shall be empowered to interpret and determine the applicability of all provisions under this Code and to take appropriate action to obtain compliance with any ruling by the arbitrator(s)." (6/12/96 Stipulation, Ex. F: NYSE Rule 621; 6/12/96 Stipulation, Ex. G: AMEX Rule 612(b).)

 In a later submission invited by the Court, Gruntal reiterated that NYSE Rule 621 and AMEX Rule 612(b) "are a clear expression of the parties' intent to submit issues of timeliness under [the six-year rules] to the arbitrator." (Def.'s Br. in Opp'n to Pl.'s Application for a Prelim. Inj. [hereinafter "Def.'s Second Br."] at 11.) Defendant claimed that there is "clear and unmistakable" evidence of the parties' intent to have the arbitrator determine issues of arbitrability, thus meeting the standard enunciated by the Supreme Court in First Options of Chicago, Inc. v. Kaplan, 131 L. Ed. 2d 985, 115 S. Ct. 1920 (1995). As support for this contention, Gruntal directed the Court's attention to PaineWebber Inc. v. Bybyk, 81 F.3d 1193 (2d Cir. 1996), and FSC Securities Corp. v. Freel, 14 F.3d 1310 (8th Cir. 1994). (See Def.'s Second Br. at 12.) In each of those cases, the appellate court found that NASD § 35, which is identical to NYSE Rule 621 and AMEX Rule 612(b), is a clear and ...


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