The Ohio Company and Andrew J. Wilhelm v. Douglas D. And Isabelle J. Nemecek

Citations: 98 F.3d 234; 1996 U.S. App. LEXIS 27074; 1996 WL 590822Docket: 95-2182

Court: Court of Appeals for the Sixth Circuit; October 16, 1996; Federal Appellate Court

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Petitioners, The Ohio Company (TOC) and Andrew J. Wilhelm, sought a declaratory judgment under the Federal Arbitration Act to enjoin arbitration claims filed by respondents Douglas D. and Isabelle J. Nemecek before the New York Stock Exchange (NYSE). The district court denied their petition, leading to this appeal where petitioners argued that the court erred in two respects: (1) holding that the six-year eligibility period for arbitration claims under NYSE Rule 603 is subject to tolling, and (2) finding that the Nemeceks adequately pleaded fraudulent concealment to toll this period. The appellate court reversed the district court's decision, concluding that Rule 603 is not subject to tolling.

The Nemeceks had an investment account with TOC, where Wilhelm was their account executive. Following substantial losses from limited partnership investments made between April 1986 and March 1988, they initiated arbitration against TOC and Wilhelm, claiming the investments were unsuitable and alleging various forms of misconduct including breach of contract and fraud. In response, TOC and Wilhelm petitioned for a declaratory judgment, arguing the Nemeceks' arbitration claim was time-barred under Rule 603, which states that no dispute shall be eligible for arbitration if six years have elapsed from the event giving rise to the claim. This rule does not extend statutes of limitations or apply to cases directed to arbitration by a court.

The Nemeceks argued that the six-year eligibility period for their claims was tolled due to the petitioners' fraudulent concealment, which they asserted was discovered long after their initial investments. However, the district court dismissed their arbitration proceedings, finding that the Nemeceks did not plead fraudulent concealment with the requisite specificity under Rule 9(b) of the Federal Rules of Civil Procedure. Subsequently, the Nemeceks sought and were granted permission to amend their arbitration claim. After reviewing the amended claim, the court found that the Nemeceks had adequately pleaded fraudulent concealment, allowing them to proceed with arbitration. The court ruled that the eligibility period under Rule 603 is subject to tolling and that claimants only need to plead sufficient facts of fraudulent concealment for claims outside the six-year limit to be eligible for arbitration. Petitioners appealed, arguing the district court incorrectly determined that the arbitrator must decide on the tolling of Rule 603. This appeal raised the novel question of whether Rule 603 is subject to tolling, a matter not previously addressed in this circuit, where similar provisions have been ruled non-tollable by at least two other circuits. The court noted that Rule 603 and the NASD Code's Section 15 are identical in both text and application, referencing prior cases that affirmed this determination. The appeal also referenced previous rulings where claims were deemed ineligible for arbitration due to being outside the statutory time frame, clarifying that the eligibility requirement is not subject to equitable tolling.

The Sorrells court emphasized that the NASD Code's Section 18 is the sole provision that allows the lifting of the six-year bar on arbitration submissions, stating that this limitation does not apply when a dispute is brought before a competent court. The court noted that Section 15 also reflects this provision, indicating that the time limitation is tolled only when a court directs a claim to arbitration. However, since the Sorrells did not submit their claims to a court but to NASD arbitration, the Seventh Circuit ruled that no exception to the jurisdictional bar under Section 15 applied.

In PaineWebber, Inc. v. Hofmann, the Third Circuit ruled that Section 15 serves as an eligibility requirement rather than a statute of limitations, instructing that claims attempting to merely toll the six-year period must be enjoined from arbitration. Earlier, in PaineWebber, Inc. v. Hartmann, the Third Circuit clarified that courts must ensure that parties have agreed to arbitrate before compelling arbitration, highlighting that agreements can limit the scope and temporal aspects of arbitration. The Hartmann court categorized Rule 603 as a substantive limit, distinguishing it from a statute of limitations.

While the circuit has not ruled on whether NYSE Rule 603 is subject to tolling, it has established that the applicability of Rule 603's time limitation is a judicial question, not one for the arbitrator. This principle was reinforced in Roney and Co. v. Kassab and Dean Witter Reynolds, Inc. v. McCoy, where it was determined that courts must first assess whether there is still time under Section 15 of the NASD Code for claimants to initiate arbitration proceedings.

The Nemeceks argue that the six-year eligibility period under NYSE Rule 603 should begin only upon discovery of their injury. However, the court concludes that Rule 603 serves as a substantive temporal limitation on contracts and is not subject to equitable tolling, aligning with the Hartmann decision. Allowing tolling would contradict the intent of the parties’ arbitration agreement and the overarching purpose of the Federal Arbitration Act, which aims to enforce contractual agreements. 

The court notes that the six-year period under Rule 603 is more favorable compared to similar time limits in state and federal securities laws, which typically range from two to three years from either discovery or violation. This comparison illustrates that Rule 603 is intended to prevent stale claims without the application of tolling principles. 

Confusion exists among lower courts regarding the tolling of the six-year period, stemming from prior decisions such as McCoy I and Roney, where interpretations varied. Some courts, like in Davis, suggested that fraudulent concealment could toll the period, while others like in McCoy II held that the question remained unaddressed. In Roney, although fraudulent concealment was discussed, it was ultimately determined irrelevant to the application of Rule 603.

In McCoy I, the court addressed whether Section 15 involved arbitrability, concluding that it did and interpreting "eligible" to strictly prohibit stale disputes from arbitration. While remanding for district court determination on claim eligibility, the court indicated that fraudulent concealment could allow claims to proceed despite Section 15's restrictions. The district court in Davis interpreted this as treating the six-year eligibility period as a statute of repose, suggesting that fraudulent concealment could toll this period. Conversely, Judge Edgar in the McCoy remand noted that the Sixth Circuit had not definitively classified Section 15 as a statute of limitations subject to equitable tolling, asserting that the court's previous statements did not equate to a finding of tolling eligibility. Ultimately, the district court ruled that Section 15 was not subject to tolling, barring the investors' claims. On appeal, the court affirmed this ruling, citing a lack of evidence for fraudulent concealment and leaving the tolling question open. The court agreed with Judge Edgar's interpretation and clarified that it was not bound by earlier dicta, ultimately concluding that Rule 603 is an eligibility provision not subject to tolling, and thus, the merits of fraudulent concealment claims need not be addressed. The decision was reversed and remanded for further proceedings consistent with this interpretation.