UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS, EASTERN DIVISION
August 15, 1994
PACIFIC BROKERAGE SERVICES, INC., Plaintiff,
NATIONAL FINANCIAL SERVICES CORPORATION, Defendant.
The opinion of the court was delivered by: MARVIN E. ASPEN
MEMORANDUM OPINION AND ORDER
MARVIN E. ASPEN, District Judge:
Plaintiff Pacific Brokerage Services, Inc. brings this declaratory judgment action against defendant National Financial Service Corporation (NFSC), seeking a declaration that NFSC is time-barred from proceeding with its arbitration claim against Pacific. Presently before the court is NFSC's motion to stay or dismiss Pacific's claim and compel arbitration. For the reasons set forth below, we grant NFSC's motion and dismiss this action pending arbitration.
Both Pacific and NFSC are registered securities broker-dealers and members of the National Association of Securities Dealers (NASD). On August 27, 1987, NFSC, acting on behalf of Chase Manhattan Bank, purchased 3,000 shares of Philippine Long Distance Company (PLD) stock from Pacific for $ 96,000.
The share certificates were delivered on September 3, 1987. According to NFSC, the purchase entitled Chase to various rights accruing on the stock, including stock splits and dividends, after the date of purchase. On October 12, 1993, NFSC filed a Statement of Claim with the NASD, asserting that the broker-dealers who had sold NFSC the PLD stock had failed to transfer certain splits and dividends that were declared following the sales.
NFSC sought arbitration of its claim pursuant to NASD regulations.
In response to NFSC's claim, Pacific filed the present action, seeking a declaratory judgment that NFSC is precluded from arbitrating its claim. Specifically, Pacific maintains that NFSC's arbitration claim is barred by Section 15 of the NASD Code of Arbitration Procedures, which provides:
No dispute, claim or controversy shall be eligible for submission to arbitration under this code where six years shall have elapsed from the occurrence or event giving rise to the act or the dispute, claim, or controversy.
NFSC subsequently filed the present motion to stay or dismiss Pacific's action and compel arbitration.
The only issue presented by the present motion is whether an "occurrence or event" for the purposes of Section 15 of the NASD Code of Arbitration Procedures is measured by the date of the investment, or by some other date.
Pacific maintains that "'the occurrence or event giving rise to the . . . claim' (emphasis added) was NFSC's purchase of the PLD shares from Pacific on August 27, 1987." Plaintiff's Memorandum in Opposition to Defendant's Motion at 4 (emphasis added). In support, Pacific cites a number of cases which, at least facially, bolster Pacific's claim. For example, in Edward D. Jones & Co. v. Sorrells, 957 F.2d 509 (7th Cir. 1992), the Seventh Circuit used the date on which the defendants made their investments as the starting date for Section 15's six year period, and concluded that the claims were ineligible for arbitration. Relying on Sorrells, this court's colleague, Judge Nordberg, recently concluded that "the Seventh Circuit implicitly held that, for the purpose of NASD Code Section 15, an 'event or occurrence' is the date of investment." Merrill Lynch, Pierce, Fenner & Smith Inc. v. Jana, 835 F. Supp. 406, 411 (N.D. Ill. 1993) (citing Sorrells, 957 F.2d at 512)). See also Dean Witter Reynolds Inc. v. McCoy, 853 F. Supp. 1023, 1994 WL 247041, at *8 (E.D. Tenn. 1994) (same) (citing Sorrells, 957 F.2d at 512; Jana, 835 F. Supp. at 411)). Pacific asserts that the broad language of the above cases is controlling. We disagree.
The applicability of the "rule" stated by Sorrells and its progeny is clearly limited by the context in which it has been applied. In each of the above cases, and, indeed, in the remainder of the cases cited by Pacific, the investor challenged the suitability of the investment. For example, in Jana, the investors asserted that the broker-dealer's account executive fraudulently misled them as to the nature of the investments he recommended. Jana, 835 F. Supp. at 408. Likewise, in Sorrells, the investors claimed that the broker-dealers "misrepresented material information as to the nature of the investments." Sorrells, 957 F.2d at 510. In McCoy, the investors alleged that the broker-dealer's agent breached his fiduciary duty to them by selecting investments which maximized transaction fees and commissions, to the investors' detriment, and by investing in high risk ventures, contrary to the investors' "primary objectives of safety of principal, steady income and liquidity." McCoy, 853 F. Supp. 1023, 1994 WL 247041, at *2. See also Smith Barney, Harris Upham & Co. v. St. Pierre, 1993 U.S. Dist. LEXIS 18649, No. 92 C 5735, 1994 WL 11600, at *2 (N.D. Ill. Jan. 4, 1994) (misrepresenting nature of investments); Castellano v. Prudential-Bache Securities, Inc., 1990 U.S. Dist. LEXIS 7352, No. 90 Civ. 1287 (WCC), 1990 WL 87575, at *1 (S.D.N.Y. June 19, 1990) (misrepresenting deductibility of investment). In short, in all of these cases, the "investments were not suitable on the dates the [investments] were initially purchased." McCoy, 1994 WL 247041, at *6. As a result, the date of "the occurrence or event giving rise to the . . . claim" was clearly the date of the investment.
Here, however, the transaction itself was entirely proper. NFSC does not allege that Pacific violated its obligations to NFSC at the time of the sale of the PLD stock. Indeed, NFSC could not have filed a claim at the time of the sale, because both parties had satisfied their obligations to that point; NFSC had paid $ 96,000, and Pacific had delivered the share certificates. This was not the case in Sorrells, Jana, or the other cases cited above. In those cases, the investor had a claim at the moment the broker-dealer made the unsuitable investment. Here, Pacific's allegedly wrongful acts occurred only after the transaction was settled; absent a crystal ball, NFSC could not have known that Pacific would subsequently breach its obligations to NFSC. Because no "occurrence or event giving rise to . . . [a] claim" took place at the time of the sale of the PLD stock, we conclude that August 27, 1987 is not the relevant starting date for Section 15's six year time period.
There remain two obvious possibilities for the relevant "occurrence or event:" the date that PLD declared each split or dividend, or the date that NFSC made its demand on Pacific for the splits and dividends. Although NFSC urges the latter, we need not resolve this issue. It is undisputed that all of the splits and dividends, as well as NFSC's demand on Pacific, occurred after October 12, 1987, and therefore within Section 15's six year period. Thus, under either scenario, NFSC is entitled to arbitration of its claims.
For the reasons set forth above, we grant defendant's motion to dismiss this action, and direct the parties to proceed with the arbitration before the NASD. It is so ordered.
MARVIN E. ASPEN
United States District Judge