Petition for Writ of Certiorari — Cromwell v. Securities Service Network, Inc.

Sule

98°697 6! 301%

OFFICE OF THE CLERF

No.

IN THE

SUPREME COURT OF THE UNITED STATES

October Term, 1995

RONALD E. CROMWELL and

VICTORINE L. CROMWELL,

Petitioners,

v.

SECURITY SERVICES NETWORK, INC.,

STEVEN L. COFFEY and ASSET PLANNING

CORPORATION,

Respondents.

Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Sixth Circuit

PETITION FOR A WRIT OF CERTIORARI

Stephen G. Anderson

Baker, Donelson,

Bearman & Caldwell

900 Gay Street, S.W., Suite 2200

P. O. Box 1792

Knoxville, Tennessee 37901

(423) 549-7000

October 30, 1995

t—

.

IT.

Questions Presented

Is the parties’ adoption of the NASD Code of

Arbitration, ?rocedure a "clear and unmistakable"

expression of their intent to have the question of

arbitrability decided by the arbitrators and not

the courts?

Where a claim to enjoin an arbitration is filed in

federal district courts and where venue is proper

under the federal venue statute only in a judicial

district in which a substantial part of the events

or Omissions giving rise to the "claim" occurred, is

the "claim" referred to by the statute the claim

for injunctive relief or the claim in the underlying

arbitration proceeding?

TABLE OF CONTENTS

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TABLE OF CASES

Page

Dean Witter Reynolds, Inc. v.

McCoy, 995 F.2d 649 (6th Cir. 1993) ......... 4,5

Edward D. Jones & Co. v. Sorrells,

oe ee oy Le Te. + ar 5,7

FSC Securities Corp. v. Freel,

ee SS, BOD oc ee te eee ee 5,6

First Options of Chicago, Inc. v.

ee Th.) ee 4,5

Merrill Lynch, Pierce Fenner & Smith,

Inc. v. Cohen, 62 F.3d 381

a ie a ere bw o.e bow 8c 8 7

ill

Opinions Below

The opinions below are unreported. The Court of

Appeals opinion is Security Services Network, Steven L.

Coffey & Asset Planning Corporation v. Ronald E. Cromwell

and Victorine L. Cromwell, No. 94-5778 (Sixth Circuit,

August 1, 1995). It is reproduced in the Appendix

("App.") at App. 1 to 9. The district court opinion is

Security Services Network, Steven L. Coffey and Asset

Planning Corporation v. Ronald E. Cromwell and Victorine

L. Cromwell, No. 3-93-CV-507 (E.D. Tenn., May 17,

1994). It is reproduced at App. 10 to 14.

Jurisdiction

The judgment of the Court of Appeals was

entered on August 1, 1995. The jurisdiction of this Court

is invoked under 28 U.S.C. § 1254(1)(1988).

Statutory Provisions Invoked

Issue II involves subsection (a)(2) of the federal

venue statute, 28 U.S.C. $ 1391, as it pertains to cases in

which jurisdiction is founded upon diversity of citizenship.

Subsection (b)(2) of the statute may be involved if

jurisdiction was also properly founded upon the existence

of a federal question, as the district court held it was.

The text of these statutory provisions is as follows:

§ 1391. Venue generally

(a) A civil action wherein jurisdiction is

founded only on diversity of citizenship may,

except as otherwise provided by law, be

brought only in (1) a judicial district where

any defendant resides, if all defendants

reside in the same State, (2) a judicial

district in which a substantial part of the

events or omissions giving rise to the claim

occurred, or a substantial part of property

that is the subject of the action is situated,

or (3) a judicial district in which the

defendants are subject to personal

jurisdiction at the time the action is

commenced, if there is no district in which

the action may otherwise be brought.

(b) A civil action wherein jurisdiction is

not founded solely on diversity of citizenship

may, except as otherwise provided by law,

be brought only in (1) a judicial district

where any defendant resides, if all

defendants reside in the same State, (2) a

judicial district in which a substantial part of

the events or omissions giving rise to the

claim occurred, or a substantial part of

property that is the subject of the action is

situated, or (3) a judicial district in which

any defendant may be found, if there is no

district in which the action may otherwise

be brought.

STATEMENT OF THE CASE

Petitioners, Ronald E. Cromwell and Victorine L.

Cromwell (the "Cromwells") began purchasing investments

from Steven L. Coffey ("Coffey") in the early 1980s while

he was a broker with Asset Planning Corporation ("Asset

Planning"). The Cromwells kept their account with Coffey

after he left Asset Planning and formed his own company,

Security Service Network, Inc. ("SSN").

At all relevant times, Coffey, now deceased, was a

resident of Tennessee. App. 16. SSN and Asset Planning

are Tennessee corporations with their principal places of

business in Tennessee. App. 16. The Cromwells were

residents of Tennessee when they met Coffey, App. 9, but

they had moved to Arizona by the time this dispute arose.

App. 16, 17.

On June 12, 1993, the Cromwells filed an

arbitration demand with the National Association of

Security Dealers, Inc. ("NASD") pursuant to the NASD

Code of Arbitration Procedure ("NASD Code"). App. 3.

The arbitration demand was mailed from Arizona, where

the Cromwells resided, to NASD offices in New York

City. App. 9. The Cromwells’ arbitration demand

asserted claims based upon Coffey’s behavior in

recommending the investments. App. 8.

On August 27, 1993, respondents filed this action

in the United States District Court for the Eastern District

of Tennessee. They sought an injunction staying the

arbitration proceeding and a declaratory judgment that the

Cromwells’ claims were not eligible for arbitration. App.

4, 15. Respondents relied upon Section 15 of the NASD

Code which provides:

No dispute, claim or controversy shall be

eligible for submission to arbitration under

this Code where six (6) years have elapsed

from the occurrence or event giving rise to

the act or dispute, claim or controversy.

App. 5.

The Cromwells moved to have the case dismissed

for improper venue. App. 4. The motion was denied. Id.

The Cromwells then answered and moved for summary

judgment. The district court denied the Cromwells’

motion and granted the cross-motions of the respondents.

Relying upon Dean Witter Reynolds, Inc. v. McCoy, 995

F.2d 649 (6th Cir. 1993), the district court held that the

arbitrability of claims was an issue properly to be decided

by a court and, having crossed that bridge, the district

court went on to hold that the Cromwells’ claims were,

with one exception, not eligible for arbitration because

they were time-barred by Section 15 of the NASD Code.

App. 13.

The Cromwells filed a timely appeal. After briefs

had been filed, and less than two weeks before oral

argument, this Court’s decision was announced in First

Options of Chicago, Inc. v. Kaplan, 115 S.Ct. 1920 (1995).

That decision drew into question the continued authority

of Dean Witter Reynolds, Inc., which had reached the

conclusion, without engaging in a case-specific analysis of

what the parties intended as required by this Court’s

precedents, that arbitrability was an issue for the courts to

decide.

Rather than apply the Dean Witter Reynolds, Inc.

precedent (or overrule it as urged by the Cromwells), the

Sixth Circuit engaged in the analysis of the parties’ intent

required by this Court’s opinion in First Options of

Chicago, Inc. The Court looked specifically at Section 35

of the NASD Code, which had been interpreted by the

Eighth Circuit in FSC Securities Corp. v. Freel, 14 F.3d

1310 (8th Cir. 1994), to be clear and unmistakable

evidence of the parties’ intent that arbitrators decide the

issue of arbitrability. Section 35 of the NASD Code

provides as follows:

The arbitrators shall be empowered to

interpret and determine the applicability of

all provisions under this Code which

interpretation shall be final and binding

upon the parties.

Rejecting the Eighth Circuit’s interpretation of the very

same language, and following instead the Seventh Circuit’s

decision in Edward D. Jones & Co. v. Sorrells, 957 F.2d 509

(7th Cir. 1992), the Court concluded that the parties’

adoption of this provision did not constitute "clear and

unmistakable evidence” that the parties had agreed to

arbitrate the issue of arbitrability. App. 6.

Having decided again that the issue of arbitrability

was for the courts to decide and not the arbitrators, the

Court of Appeals reviewed and affirmed on the merits the

district court’s decision that the Cromwells’ claims were

not arbitrable. The Court of Appeals also affirmed the

district court’s determination that venue was proper in the

eastern district of Tennessee.

Reasons for Granting the Writ

This petition for writ of certiorari should be

granted under Supreme Court Rule 10.1(a). The courts

of appeal have reached conflicting decisions on an issue of

substantial importance to investors and brokerage firms

across the country: Does the NASD Code embody clear

and unmistakable evidence of an agreement by those who

have subscribed to it that the issue of arbitrability is to be

decided by the arbitrators? The Eighth Circuit says it

does. The Seventh Circuit, the Eleventh Circuit, and now

the Sixth Circuit say it does not.

In FSC Securities Corp v. Freel, 14 F.3d 1310, 1312

(8th Cir. 1994), the Eighth Circuit unequivocally held that

Section 35 of the NASD Code reflects a clear and

unmistakable agreement by the parties to submit the issue

of arbitrability to the arbitrators. The Court held, in part:

[T]he parties expressly agreed to have their

dispute governed by the NASD Code of

Arbitration Procedure. This means they

adopted the entire NASD Code, including

Section 35. Unlike the Seventh Circuit, we

hold that the parties’ adoption of this

provision is a “clear and unmistakable"

expression of their intent to leave the

question of arbitrability to the arbitrators.

In no uncertain terms, section 35 commits

interpretation of all provisions of the NASD

Code to the arbitrators. Reading the

NASD Code--effectively an agreement

between the parties--as a whole, we see no

reason not to apply section 35 to the

arbitrators’ decision regarding the

application of section 15.

14 F.3d at 1312-1313.

The Seventh Circuit reached exactly the opposite

conclusion in Edward D. Jones & Co. v. Sorrells, 957 F.2d

509 (7th Cir. 1992). Addressing ‘1e very same Section 35

of the NASD Code, that court said it did not "believe this

is a clear and unmistakable expression of the parties’

intent to have arbitrators, and not the court, determine

which disputes the parties have agreed to submit to

arbitration". 957 F. 2d at 514, n. 6.

In this case, the Sixth Circuit had to choose

between the opposing conclusions of the Seventh and

Eighth Circuits. App. 6. It chose to follow the Seventh

Circuit. So, too, has the Eleventh Circuit. Merrill Lynch,

Pierce Fenner & Smith, Inc. v. Cohen, 62 F.3d 381 (11th

Cir. 1995).

The question of whether the NASD Code "clearly

and unmistakably” commits the issue of arbitrability to the

arbitrators is one that potentially affects thousands of

investors. It has been adequately ventilated in the courts

of appeal, which have reached differing conclusions. The

current state of affairs is an open invitation to forum

shopping that is only made worse by uncertainty over

where venue is proper in actions brought to stay

arbitration. Petitioners urge the Court to exercise its

discretion, to resolve the conflict among the courts of

appeal, and to impose consistency upon the manner in

which federal courts construe a Code that is intended to

apply uniformly to brokerage contracts across the land.

Conclusion

For these reasons, a writ of certiorari should issue

to review the decision of the United States Court of

Appeals for the Sixth Circuit.

Respectfully submitted,

Stephen G. Anderson

Baker, Donelson, Bearman

& Caldwell

900 Gay Street, S.W.

Suite 2200

P. O. Box 1792

Knoxville, TN 37901

(423) 549-7000

APPENDIX

ilies ions

APPENDIX

UNITED STATES COURT OF APPEALS

SIXTH CIRCUIT

No. 94-5778

SECURITIES SERVICE NETWORK, INC.,

STEVEN L. COFFEY, and

ASSET PLANNING CORPORATION,

Plaintiffs-Appellees,

Vv.

RONALD E. CROMWELL and

VICTORINE L. CROMWELL,

Defendants-Appellants.

Argued June 8, 1995

Decided August 1, 1995

Before MARTIN, Circuit Judge, and SILER, Circuit

Judge, and JOINER, District Judge for the Eastern

District of Michigan, sitting by designation.

la

OPINION

PER CURIAM. Ronald E. Cromwell and

Victorine L. Cromwell appeal the district court’s grant of

summary judgment in favor of Securities Service Network,

Inc., and its president Steven L. Coffey. They claim that

the district court erred in ruling that their demand for

arbitration was time-barred and in denying their motion to |

dismiss for improper venue. For the following reasons, we

affirm the judgment of the district court.

I

The Cromwells first met Coffey in 1981. At the

time, Coffey was a registered securities representative with

Asset Planning Corporation, a NASD-registered

corporation that operated as a broker/dealer. In 1983,

Coffey left Asset Planning to form the NASD-registered

Southern Financial Consultants, Inc., which changed its

name to Security Service Network, Inc., in 1989.

Shortly after meeting Coffey, both Ronald and

Victorine Cromwell obtained real estate licenses and

became real estate brokers. They also became regular

investors in various Coffey-related partnerships and

limited partnerships: from September 1981 through 1987,

the Cromwells made twenty-two investments at Coffey’s

behest. From late 1981 through February 1983, the

Cromwells maintained a brokerage account with Asset

Planning Corporation, and Coffey was their account

representative. They made eight of their twenty-two

investments during that period. In 1983, however,

Victorine Cromwell became a licensed and registered

securities representative with Southern Financial

2a

Consultants, Inc., and began selling investments. She

served as the Cromwells’ account representative for the

remaining fourteen investments, presumably receiving a

commission and conducting a suitability review with

respect to each one.

Coffey served as the general partner in four

ventures in which the Cromwells invested: the Hardin

Mill Partnership, the Cusick Partnership, Kingston-Watt,

Ltd., and Kingston-Watt, II, Ltd. They also invested in

Bridgewater Associates, Ltd., a partnership of which

Coffey served as president. All told, they invested roughly

$264,000 in those ventures. In so investing, the Cromwells

presumably relied upon Coffey’s expertise, his seeming

good faith, and his representations regarding the nature,

quality, and risk of those investments.

Suspicious of Coffey’s advice, the Cromwells began

withholding their contributions from the Coffey-managed

ventures in 1991. In his capacity as general partner,

Coffey responded by threatening legal action in November

1992. In January 1993, the Cromwells relinquished their

interests in the Hardin Mill Partnership, the Cusick

Partnership, Kingston-Watt, Ltd., and Kingston-Watt, II,

Ltd., to Coffey, in exchange for a release from future

liability.

II

On June 12, 1993, the Cromwells filed a Statement

of Claim and Demand for Arbitration with NASD, naming

Coffey, Security Services Network, Inc., and Asset

Planning Corporation as respondents. They sought

damages for state and federal law violations arising from

their purchase of twenty-two “unsuitable and speculative

3a

instruments". They claimed that they could not have

detected Coffey’s misrepresentations until 1991.

In response, Coffey, Security Services Network,

Inc., and Asset Planning Corporation filed this suit,

seeking a ruling that their claims were not eligible for

arbitration pursuant to Section 15 of NASD’s Code of

Arbitration Procedure, as they were barred by the six-year

statute of limitations. The Cromwells moved to dismiss

for lack of subject matter jurisdiction and improper venue.

The district court denied their motion on

November 15, ruling that it had subject matter jurisdiction

and that venue in the Eastern District of Tennessee was

proper. The Cromwells then filed an answer to the

complaint as well as a counterclaim, seeking to compel

arbitration under the Federal Arbitration Act, 9 U.S.C. §

1 et seq. On December 3, the district court granted Asset

Planning Corporation’s unopposed motion for summary

judgment, later clarifying that its order did not pertain to

Coffey or Security Services Network, Inc.

The remaining parties then filed cross motions for

summary judgment. In a May 17, 1994, order, the district

court partially granted the motion of Coffey and Security

Services Network, Inc., enjoining the Cromwells’ claims for

arbitration regarding each investment, save claims

concerning the Cusick Partnership. In so ruling, the court

distinguished their Cusick Partnership investment from

their other investments on the grounds that it was made

within six years of their arbitration demand. This timely

appeal followed. Although the Cromwells’ notice of

appeal only designates an appeal of the May 17, 1994,

order granting summary judgment, they also address the

4a

ES Es ims Feet gt

November 15, 1993, order regarding venue in their brief

without objection.

Il

A. The Timeliness of the Cromwell’s Demand for

Arbitration

Summary judgment is appropriate when "there is

no genuine issue as to any material fact and .. . the

moving party is entitled to a judgment as a matter of law."

Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 US.

317, 322-23 (1986). This Court reviews a district court’s

grant of summary judgment de novo. Brooks v. American

Broadcasting Cos., Inc., 932 F.2d 495, 500 (6th Cir. 1991).

Moreover, in reviewing a summary judgment motion, we

view the evidence in the light most favorable to the

nonmoving party. Anderson v. Liberty Lobby, Inc., 477

U.S. 242, 255 (1986); Boyd v. Ford Motor Co., 948 F.2d

283, 285 (6th Cir. 1991), cert. denied, 112 S.Ct. 1481

(1992).

Section 15 of the NASD Code of Arbitration

Procedure provides: "No dispute, claim, or controversy

shall be eligible for submission to arbitration under this

Code where six (6) years have elapsed from the

occurrence or event giving rise to the act or dispute, claim,

or controversy." After the parties filed their respective

briefs in this case, First Options of Chicago, Inc., v. Kaplan,

115 S. Ct. 1920 (1995), was decided, instructing courts how

to resolve a disagreement between parties to an

arbitration agreement, concerning the arbitrability of an

underlying dispute. Specifically, the Supreme Court

outlined "how a court should decide whether the parties

have agreed to submit the arbitrability issue to

Sa

arbitration,” Jd. at 1924, advising courts to apply state law

contract principles. /d. (citations omitted). Importantly,

however, the Court also cautioned that "[cJourts should

not assume that the parties agreed to arbitrate the issue

of arbitrability unless there is ’clear and unmistakable

evidence’ that they did so." Jd. (quoting AT & T

Technologies, Inc. v. Communications Workers of America,

475 US. 643, 649 (1986).

On the record before us, the Cromwells cannot

show that Coffey and Security Services Network, Inc.,

clearly and unmistakably agreed to submit the question of

arbitrability to arbitration. As the Cromwells emphasized

at oral argument, Section 35 of the NASD Code of

Arbitration Procedure states that "[t]he arbitrators shall be

empowered to interpret and determine the applicability of

all provisions under this Code which interpretation shall

be final and binding upon the parties." However, we do

not believe that this provision alone constitutes the

requisite "clear and unmistakable evidence" that the

parties intended and agreed to arbitrate the issue of

arbitrability. Edward D. Jones & Co. v. Sorrells, 957 F.2d

509, 514, n. 7 (7th Cir. 1992)(citing AT & T Technologies,

475 U.S. at 649); contra FSC Securities Corp. v. Freel, 14

F.3d 1310, 1312 (8th Cir. 1994). Because the parties did

not clearly agree to submit the arbitrability question to

arbitration, that issue was appropriately subject to

independent judicial review. See Kaplan, 115 S. Ct. at

1925-26. Accordingly, the district was the proper forum to

assess the timeliness of the Cromwells’ arbitration demand

under Section 15.

In essence, the Cromwells argue that a genuine

issue of material fact exists as to their failure to timely file

their Statement of Claims with the NASD. On appeal,

6a

they divide their claims into two groups: those regarding

the five Coffey-managed limited partnerships in which

they had a stake and those pertaining to the "unsuitability"

of their investments. They argue that Coffey’s status as

the general partner in the limited partnerships renders

their claims timely regarding those investments, because

Coffey exercised continuing control over them. They

assert that Coffey’s actions as general partner are actions

about which they are entitled to complain. While that

may be true, the Cromwells have changed their argument

on appeal. In their original arbitration demand, they

focused upon Coffey’s behavior in recommending the

investments. Now, however, they seek to contest Coffey’s

behavior throughout his tenure as generai partner. To

properly assess the Cromwells’ claims, this Court need

only apply Section 15 to the unsuitability and concealment

allegations stated in the Cromwell’s original arbitration

demand.

Accordingly, we must determine the meaning of

"occurrence or event giving rise to the act or dispute,

claim or controversy" in the context of the Cromwells’

original claims. As part of their effort to recast those

claims, the Cromwells now assert that tiie relevant

“occurrence or event" was Coffey’s repeated act of causing

them to make additional note payments. However, the

record reveals that the Cromwells actually challenged

Coffey’s investment recommendations only, their present

claims notwithstanding. The district court was correct in

observing:

The only event or occurrence which could

give rise to arbitration and which also falls

within the six-year eligibility requirement is

the fact that on November 12, 1987, the

Ta

Cromwells signed a note in favor of Cusick

Partnership. All subsequent contacts

between Coffey and the Cromwells related

to payments on their previous investment

decisions.

During the applicable six-year period, the Cromwells

made no new investment decisions, save one; their other

expenditures were merely payments on _ previous

investment decisions.

With regard to their unsuitability claims, the

Cromwells argue that because the claims arising out of

their last investment, the Cusick Partnership, were timely

filed, all of their claims should be deemed timely filed.

Nesbit v. McNeil, 896 F.2d 380, 384-85 (9th Cir.

1990)(holding, in the context of a churning case, that the

statute of limitations did not begin to run until the final

account transaction occurred, given the "unified" nature of

the churning offense). This is not a churning case,

however. See Craighead v. E.F. Hutton & Co., Inc., 899

F.2d 485, 494 (6th Cir. 1990)(recognizing that churning

and unsuitability claims are distinct); see also Sorrells, 957

F.2d at 510 n.2 (recognizing that the fact that a claimant

has some timely filed claims does not render timely all of

that claimant’s potential claims). In the alternative, the

Cromwell’s urge us to adopt a "date of discovery" rule.

In their original Statement of Claim and Demand

for Arbitration, the Cromwells also claimed that Coffey

fraudulently concealed the unsuitability of the investments

from them. As we determined in Dean Witter Reynolds,

Inc. v. McCoy, 995 F.2d 649, 651 (6th Cir. 1993), if there

is adequate proof of fraudulent concealment, the

defendants’ claims more than six-years-old may still be

8a

—————

pursued in arbitration. However, the district court

observed that the Cromwells failed to present any

evidence “of the kind of fraud or fraudulent concealment

which would take this case outside the six-year bar." A

review of the record indicates that this observation was

correct.

B. Venue in the Eastern District of Tennessee

The Cromwells also claim that venue in the Eastern

District of Tennessee was improper. The parties agree

that venue is appropriate in "a judicial district in which a

substantial part of the events or omissions giving rise to

the claim occurred." 28 U.S.C. §§ 1391(a)(2) and (b)(2).

According to the Cromwells, however, the relevant event

was the filing of the Cromwell’s Statement of Claim and

Demand for Arbitration, which was mailed from Arizona

to New York. Coffey contends that the relevant events

are the facts underlying the Cromwells’ investment

decisions. As Coffey points out, the parties were first

introduced in Knoxville, where they both resided at the

time. In addition, all of investments were effected through

the services of Tennessee corporations, with principal

places of business in Knoxville. Moreover, any fraudulent

concealment would have occurred in Knoxville. Thus, the

district court was correct in determining that venue was

proper in the Eastern District of Tennessee.

For the foregoing reasons, the judgment of the

district court is AFFIRMED.

9a

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF TENNESSEE

AT KNOXVILLE

C.A. No. 3:93-CV-507

SECURITIES SERVICE NETWORK, INC.,

STEVEN L. COFFEY, and ASSET PLANNING

CORPORATION,

Plaintiffs,

_

RONALD E. CROMWELL and

VICTORINE CROMWELL,

Defendants.

ORDER

[Filed May 17, 1994]

This is an action to enjoin an arbitration

proceeding filed by Ronald E. and Victorine L. Cromwell

with the National Association of Securities Dealers, Inc.

(NASD) on July 1, 1993. The remaining plaintiffs,

Securities Service Network, Inc. and Steven L. Coffey,

would have this Court issue a declaratory judgment that

the controversy which the Cromwells are seeking to

arbitrate is barred by the NASD regulations. The case is

now before the Court on cross-motions for summary

judgment.

The plaintiffs contend that the arbitration should

be enjoined because none of the Cromwell’s claims are

eligible for arbitration pursuant to the six-year eligibility

requirement set forth in Section 15 of the NASD Code of

Arbitration Procedure.’ Mr. Coffey claims, by affidavit,

that each of the investments on which the Cromwell’s

arbitration claims are based was made before or in April

of 1987, more than six years before arbitration was

instituted.

The six-year time-bar in Section 15 is an eligibility

requirement that "serves as an absolute bar to claims

submitted for arbitration more than six years after the

event which gave rise to the dispute." Paine Webber, Inc.

v. Farnam, 870 F.2d 1286, 1292 (7th Cir. 1989). See also

Dean Witter Reynolds, Inc. v. McCoy, 995 F.2d 649 (6th

Cir. 1993)(interpreting the word "eligible" in Section 15 as

absolutely barring stale claims).

According to the plaintiffs, the triggering

occurrence or event for the running of the six-year period

in Section 15 is the date of purchase of the relevant

security. They point out that the Cromwells purchased

each of the investments at issue between September of

1981 and April of 1987, and did not attempt to take their

claims to arbitration until July of 1993. They also contend

that installment payments made pursuant to promissory

notes executed at the time the Cromwells made certain of

the investments do not remove the time bar. Because

1Section 15 provides,

No dispute, claim or controversy shall be eligible for submission to

arbitration under this code where six (6) years have elapsed from the

occurrence or event giving rise to the act or dispute, claim or

controversy.

lla

payments made pursuant to promissory notes require no

new investment decisions, they are not considered

"investments" for purposes of the six-year bar imposed by

Section 15. See Pommer v. Medtest Corp., 961 F.2d 620,

625-26 (7th Cir. 1992).

The Cromwells contend that the defendants drew

them into unsuitable investments from which they could

not withdraw. Many of these investment were limited

partnerships in which defendant Coffey, as the general

partner, could control the cash flow to the limited partners

and, with it, the obligation of the partners (such as the

Cromwells) to make further contributions. The Cromwells

contend that their dispute with the plaintiffs is arbitrable

if it (1) relates to their account and (2) arises out of an

occurrence or event that happened within the six years

preceding the filing of their arbitration demand in July of

1993. While they tacitly concede that all but one of the

initial investment decisions were made outside the

limitations period, they take the position that

representations Mr. Coffey made within the six years

preceding their arbitration demand were "occurrences"

giving rise to an arbitrable controversy. They contend that

the NASD does not draw arbitrary distinctions based upon

the date of the initial investment but rather looks to

whether a claim "falls wholly outside the six year period.”

Paine Webber, Inc., supra, at 1292.

The Court has examined the letters from Mr.

Coffey and the other documents attached to the

Cromwells’ affidavit. The only event or occurrence which

could give rise to arbitration and which also falls within

the six-year eligibility requirement is the fact that on

November 12, 1987, the Cromwells signed a note in favor

of the Cusick Partnership. All subsequent contacts

12a

between Mr. Coffey and the Cromwells related to

payments on their previous investment decisions. Nothing

in the other documents shows evidence of the kind of

fraud or fraudulent concealment which would take this

case Outside the six-year bar.

The Court is satisfied that all of the Cromwells’

claims are time-barred under the NASD rules with the

possible exception of the decision to sign the Cusick

Partnership note. Mr. Coffey states, by affidavit of March

1, 1994, that the last investment the Cromwells made was

in April of 1987. The Cromwells do not exactly refute

this. In their affidavit of April 2, 1994, they name the five

limited partnerships in which they invested in reliance on

Mr. Coffey’s advice; they name the Cusick Partnership as

one of these; and then they state, "A copy of our note to

the Cusick Partnership dated November 12, 1987, is

attached as Exhibit A to this affidavit." The note is

indeed so attached. The Cromwells do not explain why

the note was signed in November if the investment

decision was actually made in April as the plaintiffs allege.

The Cromwell’s brief contains similarly careful wording.

In the "facts" section, it says,

On November 12, 1987, the Cromwells

executed a note in the amount of $38,281.00

payable to the Cusick Partnership in ten

annual installments. This note represented

the Cromwells’ investment in the Cusick

Partnership, a Tennessee limited

partnership whose general partner was

Coffey.

Later, the brief says,

The documents attached to the Cromwells’

affidavit shows an assumption of a new

obligation regarding the Cusick Partnership

in November of 1987 when they signed a

note for $38,281.

Working with the skimpy information available to

it, the Court infers that the original decision to invest in

the Cusick Partnership was made more than six years

before the case was submitted to arbitration. However,

the apparent assumption of a new obligation to the Cusick

Partnership is an event occurring within the six year

eligibility requirement which brings that partnership into

the range of issues eligible for arbitration under the

NASD Rules.

Accordingly, the plaintiffs’ requested declaratory

and injunctive relief is hereby GRANTED in PART. The

Court FINDS all of the Cromwells’ claims ineligible for

arbitration except those related to the Cusick Partnership;

the Cromwells are ENJOINED from attempting to

arbitrate any of their claims except those related to the

Cusick Partnership; and this action is DISMISSED.

ENTER:

THOMAS G. HULL

UNITED STATES DISTRICT JUDGE

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IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF TENNESSEE

AT KNOXVILLE

C.A. No. 3:93-CV-507

SECURITIES SERVICE NETWORK, INC.,

STEVEN L. COFFEY, and ASSET PLANNING

CORPORATION,

Plaintiffs,

Vv.

RONALD E. CROMWELL and

VICTORINE CROMWELL,

Defendants.

ORDER

[Filed November 15, 1993]

Plaintiffs, Securities Service Network, Inc., Steven

L. Coffey and Asset Planning Corporation bring this

action to enjoin an arbitration proceeding filed by Ronald

E. and Victorine L. Cromwell before the National

Association of Securities Dealers (NASD), Inc. They

would also have this Court issue a declaratory judgment

that the controversy which the Cromwells are seeking to

litigate in the arbitration procedure is barred by NASD

regulations and relevant statutes of limitations. The case

is now before the Court on the Cromwells’ motion to

dismiss. [Doc. 7].

The Cromwells first contend that this Court lacks

subject matter jurisdiction. They point out that the

original complaint was predicated on federal question

jurisdiction (because the Cromwells’ arbitration action

alleges a civil RICO violation) but that the only question

before this Court is one of contract law. Anticipating that

the plaintiffs might simply amend their complaint to

invoke this Court’s diversity jurisdiction, the Cromwells

argue, in the alternative, that venue is not proper in this

district. They contend that this action should have been

brought in Arizona, where they reside and where the

arbitration has been sought.

The plaintiffs have, indeed, amended their original

pleadings to invoke diversity jurisdiction. Plaintiff Coffey

is a citizen and resident of Knoxville, Tennessee.

Securities Service Network, Inc. and Asset Planning

Corporation are both Tennessee corporations with their

principal places of business in Knoxville, Tennessee. The

Cromwells are residents and citizens of Phoenix, Arizona,

and the amount in controversy exceeds this Court’s

jurisdictional minimum. They now contend that this Court

has jurisdiction both because of the diversity of citizenship

of the parties and because the underlying RICO claim

involves a federal question.

DOES THIS COURT HAVE JURISDICTION

OVER THIS CAUSE?

The Cromwells are correct that, in considering

whether or not this Court has jurisdiction, the Court must

not look to the underlying RICO issue submitted for

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arbitration but to questions presented to this Court for

resolution. The questions here involve both a state law

contract question - 4.e., whether or not, pursuant to NASD

regulations, the arbitration is time-barred and a federal

question involving the statute of limitations for a RICO

claim. It would appear, therefore, that this Court has

jurisdiction on both grounds.

IS VENUE APPROPRIATE IN THIS DISTRICT?

Certainly the underlying RICO claim could have

been brought in this Court. According to the plaintiffs, all

of the investments at issue in the underlying lawsuit were

effected through the services of Asset Planning

Corporation or Southern Financial Consultants, Inc. in

Knoxville, Tennessee. However, the arbitration demand

was made in Arizona, by Arizona residents. And, while

the Tennessee parties have a right to have a federal court

determine the arbitrability of the Cromwell’s claim, see

Dean Witter Reynolds, Inc. v. McCoy, 995 F.2d 649 (6th

Cir. 1993), it is by no means clear that they have a right

to such determination in this Court. However, in this

case, the Cromwells’ claims will clearly be barred from

arbitration unless they succeed in showing fraudulent

concealment. And, under the teachings of Dean Witter

Reynolds, supra, the district court which determines the

arbitrability question must also consider the fraudulent

concealment question prior to arbitration. The fraudulent

concealment, if it happened at all, would have happened

in this district. Accordingly, litigation of this question

here, rather than in Arizona, does not seem inappropriate.

Accordingly, the Cromwells’ motion to dismiss is

hereby DENIED. This Court will endeavor to determine

the issue of eligibility for arbitration and the fraudulent

concealment question.

In light of the foregoing, the parties are hereby

ENJOINED from proceeding with their arbitration action

before the National Association of Securities Dealers, Inc.,

pending a determination of the issues before this Court.

Plaintiffs are hereby ORDERED to execute and file

a security bond in favor of the Cromwells to cover any

costs and damages that they may incur if the Court should

ultimately find that they were wrongfully enjoined or

restrained from proceeding with their arbitration. If the

parties cannot agree on the amount of the bond, each

should offer the Court some evidence upon which a bond

amount could be established.

ENTER:

THOMAS G. HULL

UNITED STATES DISTRICT JUDGE

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