Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca7-15-01846/USCOURTS-ca7-15-01846-0/pdf.json

Nature of Suit Code: 896
Nature of Suit: Other Statutes - Arbitration
Cause of Action: 

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In the

United States Court of Appeals

For the Seventh Circuit ____________________

No. 15-1846

MICHAEL MAGRUDER,

Plaintiff-Appellant,

v.

FIDELITY BROKERAGE SERVICES LLC,

Defendant-Appellee.

____________________

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 15 C 1188 — John Robert Blakey, Judge.

____________________

SUBMITTED OCTOBER 29, 2015 — DECIDED MARCH 17, 2016

____________________

Before WOOD, Chief Judge, and POSNER and EASTERBROOK, 

Circuit Judges.

EASTERBROOK, Circuit Judge. Michael Magruder bought 

940,000 shares of Bancorp International Group (Bancorp) 

through his account at Fidelity Brokerage Services. He paid 

$9,298 and some years later asked Fidelity to deliver a certificate showing his ownership of the shares. When Fidelity 

did not comply, Magruder initiated arbitration through the 

Financial Industry Regulatory Authority (FINRA). MagrudCase: 15-1846 Document: 17 Filed: 03/17/2016 Pages: 7
2 No. 15-1846

er and Fidelity chose simplified arbitration (see FINRA Rules 

12401, 12800). In a simplified arbitration, the arbitrator cannot award more than $50,000 in damages or order specific 

performance that would cost the losing party more than 

$50,000. Magruder had demanded a total of $28,000 in damages (actual plus punitive), so the dispute was amenable to 

the simplified procedure.

In March 2014 the arbitrator directed Fidelity to hand 

over a stock certificate or explain why it could not do so. Fidelity explained that in 2005 the Depository Trust & Clearing Corporation (DTCC), which is responsible for issuing 

paper certificates for Bancorp’s stock, had placed a “global 

lock” on that activity as a result of fraud reported by Bancorp, whose president asserted that fraudulent shares bearing identification number 106 had been flooding the market. 

In 2012 Bancorp offered to swap series 106 shares for new 

series 205 shares, but by then Bancorp had been delisted 

from stock exchanges and FINRA blocked the swaps. This 

left Fidelity unable to supply a certificate, for the series 106 

shares remained subject to DTCC’s global lock. In October 

2014 the arbitrator accepted this explanation and issued an 

award denying Magruder’s claim.

Magruder then filed this suit, asking the district court to 

enforce the arbitrator’s March 2014 award. Fidelity asked the 

court to enforce the October 2014 award. The district judge 

sided with Fidelity, and Magruder appealed. Neither side’s 

briefs in this court explain how the dispute comes within 

federal jurisdiction, so we directed the parties to file supplemental memoranda addressing that subject.

Fidelity contends that the district court had subjectmatter jurisdiction under 28 U.S.C. §1332, which covers diCase: 15-1846 Document: 17 Filed: 03/17/2016 Pages: 7
No. 15-1846 3

versity of citizenship. We will assume that the parties are of 

diverse citizenship—though Fidelity has not told us the citizenship of its members and instead treats itself as a corporation, which it isn’t. See Americold Realty Trust v. ConAgra 

Foods, Inc., No. 14–1382 (U.S. Mar. 7, 2016); Cosgrove v. Bartolotta, 150 F.3d 729 (7th Cir. 1998). Citizenship does not matter, because the stakes cannot exceed $50,000, and the minimum under §1332(a) is $75,000. They can’t exceed $50,000 

not simply because Magruder asked for less than $30,000 but 

also because the parties agreed to use FINRA’s simplified 

procedure, which sets a $50,000 cap.

Fidelity ignores these facts and instead tries to estimate 

the value of 940,000 shares of Bancorp’s stock. Yet Magruder 

already owns the stock, which cost him less than $10,000. 

This dispute is about a certificate, not ownership. What’s 

more, Fidelity does not try to explain how the fraud, DTCC’s 

refusal to issue certificates, and the end of market trading 

can have increased the value of Bancorp’s shares by a factor 

of eight or more. It does not identify any actual transactions 

that give series 106 shares such a value high enough to reach 

$75,000 for 940,000 shares. So no matter how the stakes of an 

arbitrated dispute should be calculated for the purpose of 

§1332, a subject on which the circuits do not agree, this dispute is worth less than the jurisdictional minimum.

Magruder relies on federal-question jurisdiction under 28 

U.S.C. §1331. The Federal Arbitration Act, 9 U.S.C. §§ 1–16, 

does not grant federal jurisdiction. See Vaden v. Discover 

Bank, 556 U.S. 49 (2009); Moses H. Cone Memorial Hospital v. 

Mercury Construction Corp., 460 U.S. 1, 25 n.32 (1983). But he 

contends that the claim presented to the arbitrator arose under 17 C.F.R. §240.15c3–3(l)(1), which he reads as establishCase: 15-1846 Document: 17 Filed: 03/17/2016 Pages: 7
4 No. 15-1846

ing every stock owner’s right to a certificate. Because his

claim arose under federal law, Magruder maintains, a federal court has subject-matter jurisdiction to confirm or set 

aside the award.

It is not clear to us that §240.15c3–3(l)(1) establishes a 

federal right. It says that “[n]othing stated in this section 

shall be construed as affecting the absolute right of a customer of a broker or dealer to receive in the course of normal 

business ... the physical delivery of certificates for ... [f]ullypaid securities to which he is entitled”. This declares that the 

section does not affect the customer’s right to receive certificates to which “he is entitled.” And when is a customer so 

entitled? That seems to be left to contracts between customer 

and broker, or to state corporate law.

Let us suppose, however, that §240.15c3–3(l)(1) creates a 

federal right, as opposed to disclaiming federal interference 

with rights resting on state law. Vaden holds that, when a 

claim proposed to be arbitrated arises under federal law, a 

federal court has subject-matter jurisdiction to rule on a petition to compel or forbid arbitration. Magruder supposes that 

this implies that, once the arbitration is over, a federal court 

also has subject-matter jurisdiction to confirm the award or 

set it aside. But that’s not what Vaden holds, nor is it a logical 

extension of Vaden’s holding.

Vaden dealt with a petition under 9 U.S.C. §4 to compel 

arbitration. Section 4 provides that a district court may do 

this if, “save for such [arbitration] agreement, [it] would 

have jurisdiction under title 28, in a civil action ... arising 

out of the controversy between the parties”. In other words, 

if the claim sought to be arbitrated arises under federal law 

(or §1332 applies), then per §4 the district court has subjectCase: 15-1846 Document: 17 Filed: 03/17/2016 Pages: 7
No. 15-1846 5

matter jurisdiction of a suit seeking an order to arbitrate. 

That’s what Vaden concluded.

Section 4 does not deal with requests to enforce or set 

aside an arbitrator’s decision. Section 9 deals with confirmation and §10 with vacatur. Neither §9 nor §10 has any language comparable to that on which the Supreme Court relied in Vaden. Long before Vaden we had reached the same 

conclusion about the effect of §4, and we also had held that a 

federal issue resolved by the arbitrator does not supply subject-matter jurisdiction for review or enforcement of the 

award. See Stone v. Doerge, 328 F.3d 343, 345 (7th Cir. 2003);

Minor v. Prudential Securities, Inc., 94 F.3d 1103 (7th Cir. 

1996). Other circuits agree with us. See, e.g., Carter v. Health 

Net of California, Inc., 374 F.3d 830, 836 (9th Cir. 2004); Greenberg v. Bear, Stearns & Co., 220 F.3d 22, 26–27 (2d Cir. 2000); 

Kasap v. Folger Nolan Fleming & Douglas, Inc., 166 F.3d 1243, 

1247 (D.C. Cir. 1999); Collins v. Blue Cross Blue Shield of Michigan, 103 F.3d 35 (6th Cir. 1996).

This conclusion harmonizes the law of arbitration with 

the law of contracts—appropriate because arbitration usually is a matter of contract, and the arbitrator usually serves as 

the parties’ mutual agent to resolve a dispute that the parties 

could have resolved themselves. Put FINRA and its rules 

aside for a moment and consider what would have happened if Magruder had sued Fidelity under the federal securities laws, contending that Fidelity had violated §240.15c3–

3(l)(1). Most litigation ends in settlement—which is to say, in 

a contract. If Magruder and Fidelity had reached a contractual solution but later disagreed about performance, could 

they return to federal court under the securities laws? The 

answer is no. Kokkonen v. Guardian Life Insurance Co., 511 U.S. 

Case: 15-1846 Document: 17 Filed: 03/17/2016 Pages: 7
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375 (1994), holds that, if parties settle litigation that arose 

under federal law, any contest about that settlement needs 

an independent jurisdictional basis—and as most contracts 

are governed by state law, this knocks out §1331 (unless perchance the district court entered the settlement as a judgment or reserved jurisdiction to enforce it). Our conclusion 

in Doerge and Minor that a federal question can suffice to order arbitration under §4, but not to enforce or set aside the 

decision under §9 or §10, parallels the distinction Kokkonen

draws between an original federal claim and a dispute about 

its contractual resolution.

One passage in Lefkovitz v. Wagner, 395 F.3d 773 (7th Cir. 

2005), could be read as inconsistent with Doerge and Minor. 

We remarked of one particular arbitration: “[T]here was neither complete diversity nor a federal question; and an arbitration award cannot be enforced in federal court unless the 

dispute giving rise to the award would have been within the 

court’s jurisdiction to resolve had the dispute given rise to a 

lawsuit rather than to an arbitration.” 395 F.3d at 781. This 

implies a belief that, if the arbitrator resolves a federal issue, 

then §1331 supplies jurisdiction over an action under §9 or 

§10. But Lefkovitz did not hold this; it stated that neither complete diversity nor a federal question existed. Lefkovitz did 

not discuss Doerge or Minor and had no reason to do so. 

Even when a federal court finds jurisdiction, as this passage 

in Lefkovitz did not, an unreasoned assertion of jurisdiction 

lacks precedential value. See, e.g., Steel Co. v. Citizens for a 

Better Environment, 523 U.S. 83, 90–92 (1998) (drive-by jurisdictional rulings may be ignored). The question addressed in

Doerge, Minor, and our decision today simply was not on the 

table in Lefkovitz, which does not modify circuit law.

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No. 15-1846 7

Neither §1331 nor §1332 authorizes resolution of the parties’ dispute about the arbitrator’s decision. The judgment of 

the district court is vacated, and the case is remanded with 

instructions to dismiss for lack of subject-matter jurisdiction.

Case: 15-1846 Document: 17 Filed: 03/17/2016 Pages: 7