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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1996
- **Citation:** 516 U.S. 1047

## Text

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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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386002_0721%3A1. Public record. Not legal advice.