Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-98-07082/USCOURTS-caDC-98-07082-0/pdf.json

Parties Involved:
Joseph E. Anderson
Appellee
Folger Nolan Fleming & Douglas, Inc.
Appellee
Matt Kasap
Appellant

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued January 8, 1999 Decided February 12, 1999

No. 98-7082

Matt Kasap,

Appellant

v.

Folger Nolan Fleming & Douglas, Inc., et al.,

Appellees

Appeal from the United States District Court

for the District of Columbia

(97cv02536)

John P. Connolly argued the cause for appellant. With

him on the briefs was Harold Richard Mayberry, Jr.

Thomas O. Barnett argued the cause for appellees. With

him on the brief was Mitchell F. Dolin.

Before: Silberman, Sentelle, and Randolph, Circuit

Judges.

Opinion for the Court filed by Circuit Judge Silberman.

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Silberman, Circuit Judge: Appellant seeks reversal of the

district court's decision dismissing his application to vacate an

arbitration decision for lack of subject matter jurisdiction.

We agree with the district court that it had no jurisdiction to

consider appellant's application and affirm the dismissal.

I.

Matt Kasap is an experienced investor who maintained a

nondiscretionary margin account with appellee Folger Nolan

Fleming & Douglas, Inc. Appellee Joseph E. Anderson, a

Folger Nolan employee, was the registered representative for

appellant's account. After Kasap lost what he estimated to

be nearly one half million dollars in the account during a

period of market decline in 1996, he filed a statement of claim

with the National Association of Securities Dealers pursuant

to his agreement with appellees to submit such a dispute to

arbitration. He contended that appellees falsely represented

the amount of his margin debit and account equity and failed

to make adequate disclosures regarding his margin account,

in violation of s 10(b) of the Securities Exchange Act of 1934

and the SEC's rules enforcing that section. Appellant

claimed further that appellees' conduct violated state securities law and NASD rules of fair practice, and constituted a

breach of contract, fraud, and deceit under state law.

An NASD arbitration panel held a two-day hearing at

which, inter alia, Kasap questioned appellee Anderson about

his substance abuse history during the period in which he

handled appellant's account. After the close of the hearing,

Kasap discovered evidence which he believed demonstrated

that Anderson perjured himself before the panel, and requested that the panel reopen the record to consider the new

evidence. The panel rejected the request, and later denied

all of appellant's claims on the merits. Appellant then filed in

the district court an application to vacate the arbitration

award in favor of appellees under s 10 of the Federal Arbitration Act, 9 U.S.C. s 10 (1994). He argued that Anderson's

alleged perjury enabled appellees to procure the award by

fraud and undue means, id. s 10(a)(1), and that the panel's

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decision not to reopen the record constituted misconduct, id.

s 10(a)(3). Appellees filed a motion to dismiss on the

grounds that the court lacked subject matter jurisdiction over

appellant's application.

The district court granted appellees' motion and dismissed

the case with prejudice. Relying on Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 25

n.32 (1983), and the Seventh Circuit's decision in Minor v.

Prudential Securities, Inc., 94 F.3d 1103 (7th Cir. 1996), the

district court held that it lacked subject matter jurisdiction

because the parties were not diverse, because the Federal

Arbitration Act does not itself create jurisdiction for the

federal courts, and because the federal securities claims involved in the underlying arbitration do not supply an independent jurisdictional basis. Appellant challenges the district

court's decision, arguing that the district court had subject

matter jurisdiction and that, even if it did not, the district

court erred insofar as it dismissed his application to vacate

with prejudice.

II.

The Federal Arbitration Act creates several federal causes

of action relating to arbitration agreements (to be initiated by

"petition" or "application"), including an action under s 4 to

compel arbitration, which provides,

A party aggrieved by the alleged failure, neglect, or

refusal of another to arbitrate under a written agreement

for arbitration may petition any United States district

court which, save for such agreement, would have jurisdiction under title 28, in a civil action or in admiralty of

the subject matter of a suit arising out of the controversy

between the parties, for an order directing that such

arbitration proceed in the manner provided for in such

agreement....

9 U.S.C. s 4 (1994), and an action under s 10 to vacate an

arbitrator's award, which provides,

(a) In any of the following cases the United States court

in and for the district wherein the award was made may

make an order vacating the award upon the application

of any party to the arbitration--

(1) Where the award was procured by corruption, fraud,

or undue means.

(2) Where there was evident partiality or corruption in

the arbitrators, or either of them.

(3) Where the arbitrators were guilty of misconduct in

refusing to postpone the hearing, upon sufficient cause

shown, or in refusing to hear evidence pertinent and

material to the controversy; or of any other misbehavior

by which the rights of any party have been prejudiced.

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(4) Where the arbitrators exceeded their powers, or so

imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not

made.

(5) Where an award is vacated and the time within which

the agreement required the award to be made has not

expired the court may, in its discretion, direct a rehearing by the arbitrators.

(b) The United States district court for the district

wherein an award was made that was issued pursuant to

section 580 of title 5 may make an order vacating the

award upon the application of a person, other than a

party to the arbitration, who is adversely affected or

aggrieved by the award, if the use of arbitration or the

award is clearly inconsistent with the factors set forth in

section 572 of title 5.

9 U.S.C. s 10 (1994). Notwithstanding the apparent federal

causes of action thus devised, the Supreme Court has interpreted the statute as not itself bestowing jurisdiction on the

federal district courts, nor permitting federal jurisdiction to

be invoked under 28 U.S.C. s 1331 (1994), the general statute

conferring on federal district courts jurisdiction over "all civil

actions arising under the ... laws ... of the United States."

Id.; see Southland Corp. v. Keating, 465 U.S. 1, 16 n.9 (1984)

(describing the Act as "creat[ing] federal substantive law

requiring the parties to honor arbitration agreements, [but]

... not creat[ing] any independent federal-question jurisdiction under 28 U.S.C. s 1331 (1976) or otherwise"); see also

Moses H. Cone, 460 U.S. at 25 n.32 (holding that, to assert a

cause of action under the Act, "[t]here must be diversity of

citizenship or some other independent basis for federal jurisdiction").

That construction of the statute is certainly, as has been

observed, "something of an anomaly," Moses H. Cone, 460

U.S. at 25 n.32; see also Southland, 465 U.S. at 30 n.19

(O'Connor, J., dissenting) (noting that it is "rare to find a

federal substantive right that cannot be enforced in federal

court under the jurisdictional grant of 28 U.S.C. s 1331");

Richard H. Fallon et al., Hart & Wechsler's The Federal

Courts and the Federal System 912 n.9 (4th ed. 1996)

(labeling Southland's footnote 9 "puzzling"). Ordinarily, a

plaintiff, relying squarely on a federal cause of action, would

easily satisfy s 1331's requirement that the claim "arise

under" federal law, see Merrell Dow Pharms., Inc. v. Thompson, 478 U.S. 804, 808 (1986), at least absent an overwhelming

predominance of state law issues incorporated by the federal

cause of action, see id. at 814 n.12. Still, the Supreme Court

has spoken and it is not for us to quarrel. But cf. AlliedBruce Terminix Cos. v. Dobson, 513 U.S. 265, 290-92 (1995)

(Thomas J., dissenting) (noting jurisdictional anomaly under

s 2 of the Act and attributing it to Southland's erroneous

conclusion that the Act creates substantive federal law binding on state courts); id. at 285 (Scalia, J., dissenting) (vowing

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no longer to dissent from judgments resting on Southland,

but "stand[ing] ready to join four other Justices in overruling

it").

It should be noted, however, that s 4--unlike s 10--includes language that specifically refers to what appears to be

a basis for federal question jurisdiction. A petition for an

order compelling arbitration may be brought in a "United

States district court which, save for [the arbitration] agreement, would have jurisdiction under title 28, in a civil action

or in admiralty[,] of the subject matter of a suit arising out of

the controversy between the parities ... ." That provision in

s 4--though conspicuously absent from s 10--is the key to

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appellant's argument. He does not claim that s 10, if it stood

alone, would confer federal question jurisdiction on federal

district courts to entertain an application to vacate an arbitration panel's award.1 Rather, it is his argument that s 4 does

so--at least where the underlying claim that is to be put to

arbitration could have been brought in federal court--and

that the two sections should be construed in pari materia.

The first difficulty with appellant's argument is that despite

s 4's language, it is not at all clear that even that wording

creates a basis for federal question jurisdiction. Admittedly,

the Supreme Court suggested as much, see Moses H. Cone,

460 U.S. at 24 n.32 ("Section 4 provides for an order compelling arbitration only when the federal district court would

have jurisdiction over a suit on the underlying dispute...."),

but the clear weight of authority rejects that proposition.

See, e.g., Westmoreland Capital Corp. v. Findlay, 100 F.3d

263, 267-68 (2d Cir. 1996); Smith Barney, Inc. v. Sarver, 108

F.3d 92, 94 (6th Cir. 1997); Prudential-Bache Sec., Inc. v.

Fitch, 966 F.2d 981, 988 (5th Cir. 1993); see also Minor, 94

F.3d at 1106 (citing cases). The strongest opinion rejecting it

focused on the common law origins to which the language of

s 4 likely was addressed, see Drexel Burnham Lambert, Inc.

v. Valenzuela Bock, 696 F. Supp. 957, 961-63 (S.D.N.Y. 1988)

(Leval, J.) (explaining that a claim for specific performance of

an arbitration agreement would not be enforced at common

law because such agreements were thought to "oust" a court

of its jurisdiction, and that the s 4 language was intended

__________

1 Other parties have argued that the Supreme Court's broad

language in Southland and Moses H. Cone should be confined to

s 4, and that federal question jurisdiction without any limitation is

conferred by s 10, which specifically refers to a United States

district court, see 9 U.S.C. s 10(a), (b). That argument has been

uniformly rejected. See, e.g., Baltin v. Alaron Trading Corp., 128

F.3d 1466, 1468-71 (11th Cir. 1997), cert. denied, 119 S. Ct. 105

(1998); Ford v. Hamilton Invs., Inc., 29 F.3d 255, 257 (6th Cir.

1994); Garrett v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 7

F.3d 882, 883-84 (9th Cir. 1993); Harry Hoffman Printing, Inc. v.

Graphic Communications, Int'l Union, Local 261, 912 F.2d 608, 611

(2d Cir. 1990).

only to reverse that practice), and on the incompatibility

between appellant's suggested interpretation and the wellpleaded complaint rule, see id. at 963-64. The only authority

supporting appellant's construction of s 4 is a Fourth Circuit

opinion which went on to hold that the underlying dispute did

not involve a federal claim, see Gibraltar, P.R., Inc. v. Otoki

Group, Inc., 104 F.3d 616, 618-19 (4th Cir. 1997), and two

district court opinions that are rather sketchy, see Dean

Witter Reynolds, Inc. v. Sanchez Espada, 959 F. Supp. 73, 76

(D. Puerto Rico 1997); Gouger v. Bear, Stearns & Co., 823

F. Supp. 282, 285 (E.D. Pa. 1993).

But assuming arguendo that appellant's reading of s 4 is

correct, we do not see how he can transport the unique

jurisdictional language of s 4 into s 10. Appellant claims we

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simply have to because otherwise there is no jurisdictional

coherence to the statute. How can it be thought that Congress intended that a federal court have jurisdiction to compel

arbitration of a claim under federal securities law but not

jurisdiction over the other provision of the same statute that

provides for the vacating of an award of the same claim?

Indeed, if we read s 10 as not permitting federal question

jurisdiction based on the underlying federal claims then a

plaintiff, as a practical matter, could bring this sort of action

in federal court only in diversity (or perhaps admiralty) cases,

which seems a strange result.2

We readily admit that appellant's argument is powerful.

Faced with the same argument, the Seventh Circuit in Minor

v. Prudential Securities, Inc., 94 F.3d 1103 (7th Cir. 1996),

heroically sought to explain the rationale for such a congres-

__________

2 That is because the ordinary method for establishing federal

question jurisdiction under 28 U.S.C. s 1331--demonstrating a

federal cause of action or a "substantial question of federal law"

necessary to the plaintiff's right to relief, Franchise Tax Bd. v.

Construction Laborers Vacation Trust, 463 U.S. 1, 27-28 (1983)--

would appear precluded by the Act's anomalous jurisdictional structure. As we saw, the Arbitration Act cause of action itself is

insufficient, and we do not see how (although we do not rule it out)

a s 10 claim could depend on a substantial question of federal law

distinct from the substantive law that s 10 creates.

sional choice. It contended that Congress had a more "central" interest in the enforcement of agreements to arbitrate

than in the review of arbitration decisions, see id. at 1107, and

that since a s 10 action to vacate an award because of fraud,

corruption, misconduct or an excess of the arbitrators' powers

would depend on state, not federal, law, it was no different

from an ordinary diversity suit, despite the underlying federal

claims, see id. at 1106. We see little evidence supporting the

former. And we do not agree with the Seventh Circuit as to

the latter. The Supreme Court has made clear that the Act

creates federal substantive law, see Moses H. Cone, 460 U.S.

at 25 n.32, and federal courts have interpreted the fraud

provision of s 10 as a provision of federal law. See, e.g.,

Bonar v. Dean Witter Reynolds, Inc., 835 F.2d 1378, 1383

(11th Cir. 1988) (discussing three part test, developed by

federal courts, for fraud under s 10); see also DVC-JPW

Investors v. Gershman, 5 F.3d 1172, 1174 (8th Cir. 1993)

(evaluating application to vacate alleging arbitrator misconduct under federal standard). Nevertheless, we agree with

the Seventh Circuit's conclusion that s 10 does not create

federal question jurisdiction, even when the underlying arbitration involves federal law, essentially because of the Supreme Court's general pronouncements concerning the limits

of federal district court jurisdiction over the Federal Arbitration Act. In sum, even if by focusing on the exact wording of

s 4, appellant can--in accordance with the Supreme Court's

suggestion--establish federal question jurisdiction over some

kinds of s 4 proceedings, the same words are not in s 10.

He who lives by the in haec verba form of analysis dies by it.

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We conclude by noting that the district court improperly

dismissed appellant's suit with prejudice. As appellees concede, dismissals for lack of jurisdiction are not decisions on

the merits and therefore have no res judicata effect on

subsequent attempts to bring suit in a court of competent

jurisdiction. See Fed R. Civ. P. 41(b); Charles Alan Wright

& Arthur R. Miller, 13A Federal Practice and Procedure

s 1350, at 225 (2d ed. 1990). Appellees attempt to salvage

this aspect of the district court's opinion by interpreting the

"with prejudice" dismissal to apply only to the jurisdictional

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issue decided by the court, thereby foreclosing only the refiling of the same application in federal court. But the

district court's order dismissed appellant's "case" with prejudice, not simply the "issue" of federal court jurisdiction. In

fact, under principles of issue preclusion, even a case dismissed without prejudice has preclusive effect on the jurisdictional issue litigated. See Dozier v. Ford Motor Co., 702 F.2d

1189, 1194 (D.C. Cir. 1983); Shaw v. Merritt-Chapman &

Scott Corp., 554 F.2d 786, 789 (6th Cir. 1977) ("[W]hile a

dismissal for lack of jurisdiction does not constitute an adjudication upon the merits, it does constitute a binding determination on the jurisdictional question, which is not subject to

collateral attack."); cf. Durfee v. Duke, 375 U.S. 106, 116

(1963) (holding that a court's decision that subject matter

jurisdiction is proper has issue preclusive effect). We therefore affirm the district court's decision, but modify its order

to state that the dismissal of appellant's case is without

prejudice.3

__________

3 Whether, as appellees suggest, this disposition will be of no help

to appellant since his s 10 application would be time-barred if

brought in state court is not for us to decide.

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