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MERRILL LYNCH, PIERCE, FENNER & SMITH INC. v. JANA

September 15, 1993

MERRILL LYNCH, PIERCE, FENNER & SMITH INC., a corporation, Plaintiff,
v.
EDWARD C. JANA and LUCILLE JANA, Defendants.



The opinion of the court was delivered by: JOHN A. NORDBERG

 Edward C. Jana and his elderly mother Lucille Jana made several investments through Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch"). The Janas invested in a series of limited partnerships that eventually resulted in substantial financial loss and a dispute with Merrill Lynch over who was to bear that loss. Pursuant to customer agreements with Merrill Lynch, the Janas sought to arbitrate the dispute before the National Association of Securities Dealers, Inc. ("NASD"). They filed a Statement of Claim and Demand for Arbitration with NASD on June 25, 1992. On February 26, 1993, Merrill Lynch filed this action seeking injunctive relief with respect to elements of the Janas' requested arbitration.

 Before the Court are two related motions. Merrill Lynch has filed a Motion for Injunctive Relief based upon their Complaint and the Janas have filed a Motion to Dismiss Complaint and to Compel Arbitration.

 FACTUAL AND PROCEDURAL BACKGROUND

 In 1983 and 1986 respectively, Lucille Jana and her son Edward C. Jana opened accounts with the Naperville, Illinois office of Merrill Lynch. In opening their accounts, the Janas signed similar customer agreements, each of which stated, in part: (1) that the agreements were governed by the laws of the State of New York and, (2) that any controversy between the contracting parties would be conducted pursuant to the provisions of either the Constitution and Rules of the Board of Governors of the New York Stock Exchange, Inc. (the "NYSE Rules") or the Code of Arbitration Procedure of the National Association of Securities Dealers, Inc. (the "NASD Code"), at the Janas' election.

 As a result of the dispute leading to this case, the Janas filed a Statement of Claim and Demand for Arbitration before NASD on June 25, 1992 and thereby decided that this controversy would be governed by the NASD Code. In their Statement of Claim, the Janas alleged that they had been fraudulently misled by their Merrill Lynch account executive, Mr. Paul E. Waigand, with respect to the nature of six limited partnership investments in which, at Waigand's direction, they invested. In their Statement of Claim the Janas sought to impose joint and several liability on Merrill Lynch and Waigand for losses resulting from the investments. Additionally, the Janas made a demand for an award of punitive damages.

 On July 23, 1992, Merrill Lynch filed suit in the Supreme Court of the State of New York, seeking an order barring arbitration of several of the Janas claims and of their request for punitive damages. On November 30, 1992, the Honorable Edith Miller dismissed Merrill Lynch's petition for lack of personal jurisdiction over the Janas. After Judge Miller's decision NASD ordered Merrill Lynch and Waigand to file Answers and Submission Agreements in the arbitration. Merrill Lynch filed this action on February 26, 1993 and, on May 27, 1993, this Court entered an agreed order staying the arbitration proceedings pending resolution of the issues now presented.

 ANALYSIS

 The parties agree that, pursuant to the original customer agreements signed by the Janas, this case is governed by the law of the State of New York to the extent that it is not preempted by the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq.1

 1. Eligibility

 With respect to the eligibility issue, Section 15 of the NASD Code is central to the resolution of both motions now before the Court. Section 15 says:

 
No dispute, claim, or controversy shall be eligible for submission to arbitration under this Code where six (6) years shall have elapsed from the occurrence or event giving rise to the act or dispute, claim or controversy. This Section shall not extend applicable statutes of limitations, nor shall it apply to any case which is directed to arbitration by a court of competent jurisdiction.

 It is apparent that the Janas' Statement of Claim, with respect to two of the Janas' limited partnership investments, was made more than six years after the date of investment. *fn2" In its Motion for Injunctive Relief Merrill Lynch contends that Section 15 of the NASD Code renders ineligible two of the Janas' claims for compensatory damages. In rebuttal, the Janas contend that any such issue should be decided by the NASD arbitration panel and not this Court. This argument is the crux of the Janas' Motion to Dismiss.

 In support of their Motion to Dismiss Merrill Lynch's Section 15 claims, the Janas assert that, under New York law, the application of the NASD Code, and thus Section 15, should be decided by the arbitrators, not the Court. Under the New York Court of Appeals case County of Rockland v. Primiano Const. Co., 51 N.Y.2d 1, 409 N.E.2d 951, 431 N.Y.S.2d 478 (N.Y. 1980), this argument depends on whether Section 15 is to be construed as a "condition precedent to arbitration" or as a "procedural stipulation."

 According to the New York Court of Appeals, on motions to stay or to compel arbitration there are three threshold questions to be resolved by the courts: (1) whether the parties made a valid agreement to arbitrate; (2) if made, whether such an agreement was complied with; and (3) if the agreement was made and complied with, whether a claim under the agreement ...


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