Kramer v. Smith Barney

United States Court of Appeals,

Fifth Circuit.

No. 95-10441.

Quentin T. KRAMER, M.D., Individually and as Trustee for Various
Pension Plans, Quentin T. Kramer, M.D., PA Defined Benefit Pension
Plan and Quentin T. Kramer, M.D., PA, Money Purchase Pension
Plan/Profit Sharing Plan, Plaintiffs-Appellants,

v.

SMITH BARNEY, formerly known as Shearson Lehman Brothers Inc.,
and Larry F. Robb, Defendants-Appellees.

April 23, 1996.

Appeal from the United States District Court for the Northern
District of Texas.

Before HIGGINBOTHAM and DUHÉ, Circuit Judges, and SCHWARZER,
District Judge*.

SCHWARZER, District Judge:

Dr. Quentin T. Kramer brought this action in Texas state

court, alleging state law claims for fraud, negligence, securities

violations, and breach of contract arising out of purchases of

partnership interests from defendants Smith Barney, Inc. and Larry

F. Robb. Defendants removed the action to the district court which

then granted their motion to dismiss the action under Fed.R.Civ.P.

12(b)(6) as untimely. Kramer appealed. We have jurisdiction under

28 U.S.C. § 1291 and remand with directions.

FACTS

Kramer brought this action as an individual and as trustee of

two pension plans for the benefit of himself and his employees.

*
District Judge of the Northern District of California,
sitting by designation.

1
Smith Barney is a licensed broker and Robb was its branch manager

as well as a licensed broker and financial consultant. Through

Robb, Kramer opened three accounts with Smith Barney: an IRA

account in his individual capacity, a defined benefit pension plan

account, and a money purchase pension plan/profit sharing plan

account. He was the trustee of the latter two plans and, along

with his employees, a beneficiary. From 1984 through 1989, Kramer

purchased from Robb interests in limited partnerships for these

accounts. He alleges that he relied on Robb for advice in making

those purchases, and that a fiduciary relationship existed between

them. He charges that Robb sold him unsuitable investments, made

misrepresentations, failed to disclose the true risks, and

concealed losses in these accounts which he alleges total one

million dollars. On appeal from the granting of a Rule 12(b)(6)

motion, we accept the allegations of the complaint as true. Carney

v. Resolution Trust Corp., 19 F.3d 950, 954 (5th Cir.1994).

When Kramer opened the accounts with Smith Barney, he signed

the standard customer agreement which provided that:

[A]ny controversy arising out of or relating to my accounts,
to transactions with you for me, or to this agreement or the
breach thereof, shall be settled by arbitration in accordance
with the rules then in effect, of the National Association of
Securities Dealers, Inc., or the Board of Directors of the New
York Stock Exchange, Inc. and/or the American Stock Exchange,
Inc. as I may elect.

Rule 605 of the American Stock Exchange (AMEX) states:

No dispute, claim or controversy shall be eligible for
submission to arbitration in any instance where six (6) years
shall have elapsed from the occurrence or event giving rise to
the act or the dispute, claim or controversy.

Kramer initiated an arbitration proceeding under the customer

2
agreement in July 1993, within two years after he discovered the

true value of his investments but more than six years after he

purchased most of them. Smith Barney filed a motion in New York

state court to stay arbitration of the claims that were based on

purchases made more than six years before the arbitration

commenced. The court granted the motion and stayed arbitration of

those claims. The Appellate Division of the New York Supreme Court

affirmed. Kramer then abandoned the arbitration and filed the

instant action in the Texas state court with respect to all of the

purchases.

SUBJECT MATTER JURISDICTION

Although neither the District Court nor the parties addressed

the question of subject matter jurisdiction, we are obliged to do

so. Ziegler v. Champion Mortgage Co., 913 F.2d 228, 229 (5th

Cir.1990).

Under the well-pleaded complaint rule, a case does not "arise

under" federal law and is not removable if the complaint asserts

only state law causes of action. Franchise Tax Board v.

Construction Laborers Vacation Trust, 463 U.S. 1, 10, 103 S.Ct.

2841, 2846-47, 77 L.Ed.2d 420 (1983). Nor will an anticipated

federal defense, including a defense of preemption, support

removal. Caterpillar Inc. v. Williams, 482 U.S. 386, 393, 107

S.Ct. 2425, 2430, 96 L.Ed.2d 318 (1987). Under the complete

preemption doctrine, however, "Congress may so completely pre-empt

a particular area that any civil complaint raising this select

group of claims is necessarily federal in character." Metropolitan

3
Life Ins. Co. v. Taylor, 481 U.S. 58, 63-64, 107 S.Ct. 1542, 1546,

95 L.Ed.2d 55 (1987). Consequently, a statute's preemptive force

may "convert[ ] an ordinary state common law complaint into one

stating a federal claim for purposes of the well-pleaded complaint

rule." Id. at 65, 107 S.Ct. at 1547. Smith Barney removed this

case by invoking federal jurisdiction under the Employee Retirement

Income Security Act of 1974 (ERISA), 29 U.S.C. §§ 1109 (1982),

1132(a)(2)-(3) (1988), 1144(a) (1982); Taylor, 481 U.S. at 67, 107

S.Ct. at 1548.1 We must determine whether the action is preempted

by ERISA and, if so, whether ERISA displaces the state law causes

of action asserted.

Kramer filed this action on his own behalf and on behalf of

the Kramer Defined Benefit Pension Plan and the Kramer Money

Purchase Pension Plan/Profit Sharing Plan. These plans, as

"employee benefit plans" within the meaning of ERISA, are covered

by ERISA. See 29 U.S.C. §§ 1002(2)(A), 1002(3), 1003 (1982).

Section 514(a) states that "the provisions of [ERISA] ... shall

supersede any and all State laws insofar as they may now or

hereafter relate to any employee benefit plan." 29 U.S.C. §

1144(a). "[T]he preemption provision is "deliberately expansive'

and "designed to "establish pension plan regulation as exclusively

a federal concern[.]" ' ... [A] law relates to an ERISA plan "if

it has a connection with or reference to such a plan.' " Anderson

1
If the claims relating to the ERISA accounts were
removable, Kramer's other claims relating to purchases for his
personal account were removable as supplemental claims under 28
U.S.C. § 1367 (1994).

4
v. Electronic Data Sys. Corp., 11 F.3d 1311, 1313 (5th Cir.1994)

(quoting Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 139, 111

S.Ct. 478, 483, 112 L.Ed.2d 474 (1990)), cert. denied, --- U.S. ---

-, 115 S.Ct. 55, 130 L.Ed.2d 14 (1994). Kramer's state law claims

alleging that defendants violated their fiduciary duties to the

plans and the beneficiaries relate to ERISA plans and are therefore

preempted under section 514(a). See McClendon, 498 U.S. at 140,

111 S.Ct. at 483-84 (1990) (Texas common law wrongful discharge

cause of action preempted by ERISA).

Having concluded that Kramer's state law claims are preempted,

we must next consider whether ERISA displaces those claims under

the complete preemption doctrine. This appears to be a question of

first impression. Taylor involved the issue of whether ERISA

section 502(a)(1)(B) preempted and displaced plaintiff's state law

claims to recover benefits under an ERISA plan. See 481 U.S. at

63-66, 107 S.Ct. at 1546-48; 29 U.S.C. § 1132(a)(1)(B). Thus

Taylor does not necessarily resolve the specific issue before us

which involves section 502(a)(2) instead of section 502(a)(1). We

confronted a closely analogous situation, however, in Anderson, 11

F.3d at 1315. Anderson claimed that he had been discharged for

reporting ERISA violations and failing to commit others. We

concluded that Anderson's claims fell within ERISA section 510.

Id. at 1314. Section 510 makes it unlawful to discharge a person

"for the purpose of interfering with the attainment of any right

... under the plan [or ERISA] ... [or] because he has given

information ... relating to [ERISA,]" and makes the provisions of

5
section 502 "applicable in the enforcement of this section." 29

U.S.C. § 1140 (1982). Reasoning that Taylor "held that causes of

action within the scope of the civil enforcement provisions of

ERISA § 502(a) are subject to the complete preemption doctrine[,]"

we held Anderson's action to be removable. Anderson, 11 F.3d at

1315. That reasoning is equally applicable here. Section 409 of

ERISA imposes duties and liabilities on fiduciaries of ERISA plans:

Any person who is a fiduciary with respect to a plan who
breaches any of the responsibilities, obligations, or duties
imposed upon fiduciaries by this subchapter shall be
personally liable to make good to such plan any losses to the
plan resulting from each such breach....

29 U.S.C. § 1109(a).2 ERISA further requires fiduciaries to

discharge their duties "solely in the interest of the participants

and beneficiaries[,]" using "care, skill, prudence, and diligence."

29 U.S.C. § 1104(a)(1) (1982). And section 502(a)(2) of ERISA

provides for civil enforcement by authorizing a "participant,

beneficiary or fiduciary" to bring a civil action "for appropriate

relief under section 1109." 29 U.S.C. § 1132(a)(2). We therefore

conclude that because Kramer's state law claims fall within the

enforcement provisions of section 502, they are completely

preempted and the action was properly removed to the district

court.

2
The existence of a fiduciary relationship under ERISA, on
the merits, is a mixed question of law and fact. See Reich v.
Lancaster, 55 F.3d 1034, 1044-45 (5th Cir.1995); 29 U.S.C. §
1002(21) (1982). But since defendants removed on the basis of
ERISA preemption founded on the complaint's allegations which
included allegations of fiduciary breaches relating to ERISA
plans, they are bound by those allegations for purposes of
subject matter jurisdiction.

6
 ARBITRABILITY OF KRAMER'S CLAIMS

The district court dismissed the action with prejudice on the

ground that Kramer could not pursue in court the claims that had

been made ineligible for arbitration under Rule 605 by reason of

their age. In doing so, the court relied on Calabria v. Merrill

Lynch, Pierce, Fenner & Smith, Inc., 855 F.Supp. 172

(N.D.Tex.1994), which held that claims made ineligible for

arbitration under a customer agreement were not litigable in

federal court. Id. at 176. We review the dismissal of a complaint

under Rule 12(b)(6) de novo. Blackburn v. City of Marshall, 42

F.3d 925, 931 (5th Cir.1995). We must consider the ERISA claims

separately from the personal state law claims.

A. The ERISA claims.

The arbitration clause of the customer agreement is subject

to the Federal Arbitration Act ("Arbitration Act") as "[a] written

provision in ... a contract evidencing a transaction involving

commerce to settle by arbitration a controversy thereafter arising

out of such contract." 9 U.S.C. § 2 (1982). The Arbitration Act

makes the clause enforceable. Id. §§ 2, 3 (1982). At the same

time, ERISA vests exclusive jurisdiction of civil actions under

ERISA in the district courts. 29 U.S.C. § 1132(e)(1) (1988). We

must determine whether ERISA's enforcement provision preempts the

Arbitration Act.

In Shearson/American Express, Inc. v. McMahon, 482 U.S. 220,

238, 107 S.Ct. 2332, 2343-44, 96 L.Ed.2d 185 (1987), the Supreme

Court held that an arbitration clause was enforceable under the

7
Arbitration Act with respect to claims under section 10 of the

Securities Exchange Act of 1934 ("Exchange Act"), even though the

Exchange Act gives district courts exclusive jurisdiction over

actions brought under the Act.3 The Court held arbitration

agreements to be enforceable with respect to statutory claims in

the absence of evidence of "congressional intent to exclude ...

[those] claims from the dictates of the Arbitration Act." Id. at

238, 107 S.Ct. at 2343-44; see also Rodriguez de Quijas v.

Shearson/American Express, Inc., 490 U.S. 477, 109 S.Ct. 1917, 104

L.Ed.2d 526 (1989) (enforcing agreement to arbitrate claims under

the Securities Act of 1933); Mitsubishi Motors Corp. v. Soler

Chrysler-Plymouth, Inc., 473 U.S. 614, 625, 105 S.Ct. 3346, 3353,

87 L.Ed.2d 444 (1985) (enforcing agreement to arbitrate antitrust

claims: "[W]e find no warrant in the Arbitration Act for implying

in every contract within its ken a presumption against arbitration

of statutory claims."). Although this circuit has not confronted

the issue, the three circuits to have done so have held that

Congress did not intend to prohibit arbitration of statutory ERISA

claims, and that arbitration is appropriate "[s]o long as the

prospective litigant effectively may vindicate his or her statutory

cause of action in the arbitral forum." Pritzker v. Merrill Lynch,

Pierce, Fenner & Smith, 7 F.3d 1110, 1119 (3rd Cir.1993) (citation

omitted) (relying on McMahon and Rodriguez, court held arbitration

3
Much of the opinion in McMahon is devoted to a discussion
of Section 29(a) of the Act which declares void "[a]ny condition,
stipulation, or provision binding any person to waive compliance
with any provision of [the Act]". 15 U.S.C. § 78cc(a). ERISA
contains no comparable provision.

8
agreement binding with respect to claims of fiduciary breaches

under ERISA); see also Bird v. Shearson Lehman/American Exp.,

Inc., 926 F.2d 116 (2nd Cir.1991) (same), cert. denied, 501 U.S.

1251, 111 S.Ct. 2891, 115 L.Ed.2d 1056 (1991); Arnulfo P. Sulit,

Inc. v. Dean Witter Reynolds, 847 F.2d 475 (8th Cir.1988) (same).

We agree that Congress did not intend to exempt statutory

ERISA claims from the dictates of the Arbitration Act.

Accordingly, we hold that the customer agreement mandates

arbitration of Kramer's ERISA claims.

We now reach the question whether AMEX Rule 605 applies to

the arbitration of those claims. That rule, incorporated by

reference into the customer agreement, renders ineligible for

arbitration claims where "six (6) years shall have elapsed from the

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

controversy." The New York court ruled most of Kramer's claims

ineligible under this rule.

ERISA contains its own statute of limitations. It bars

claims:

[A]fter the earlier of—

(1) six years after (A) the date of the last action which
constituted a part of the breach or violation, or ... (2)
three years after the earliest date (A) on which the
plaintiff had actual knowledge of the breach or violation
...;

except that in the case of fraud or concealment, such
action may be commenced not later than six years after the
date of discovery of such breach or violation.

29 U.S.C. § 1113 (Supp. V 1987 & Supp. I 1989). Thus ERISA permits

tolling of the statute of limitations in cases of fraud or

9
concealment. Under section 410, "any provision in an agreement or

instrument which purports to relieve a fiduciary from

responsibility or liability for any responsibility, obligation, or

duty under [ERISA] shall be void as against public policy." 29

U.S.C. § 1110(a) (1982). To the extent the AMEX rule renders

ineligible for arbitration ERISA claims more than six years old

which could otherwise be enforced on proof of fraud or concealment,

it "relieve[s] a fiduciary from ... liability." Id. In holding

that an arbitration agreement may be enforced with respect to ERISA

fiduciary claims, the court in Sulit reasoned:

Under this statutory structure, an agreement to waive the
judicial forum allowed for in section 1132(e) in favor of
arbitration does not carry with it the waiver of any
substantive duties or liabilities, and thus, no fiduciary has
been impermissibly relieved of any "responsibility,
obligation, or duty" imposed by [ERISA].

847 F.2d at 478 (citations omitted); see also Soler, 473 U.S. at

628, 105 S.Ct. at 3354 ("By agreeing to arbitrate a statutory

claim, a party does not forgo the substantive rights afforded by

the statute...."); de Coninck v. Provident Life and Ins. Co., 747

F.Supp. 627, 633 (D.Kan.1990) (applying ERISA limitations period

despite shorter limitations period in parties' insurance contract);

compare Calabria, 855 F.Supp. at 175 (AMEX rule binding where no

ERISA claim involved). Because application of Rule 605 to render

Kramer's ERISA claims ineligible for arbitration would impair his

substantive rights, we hold it void with respect to those claims.

Since the district court's ruling dismissing the action was

premised on the ineligibility of Kramer's claims under the AMEX

rule, it must be set aside to permit arbitration of the ERISA

10
claims.4 While we recognize that neither party raised the ERISA

issues in the district court, since subject matter jurisdiction is

founded on ERISA, those issues cannot be avoided. Because ERISA

permits tolling of its statute of limitations for fraud or

concealment, we need not address Kramer's arguments why tolling

should be permitted under the customer agreement with respect to

the ERISA claims.

We reject defendants' contention that those claims are barred

by collateral estoppel on the basis of the New York court's ruling.

The courts of the United States give the judicial proceedings of a

state court "the same full faith and credit ... as they have by law

or usage in the courts of such State." 28 U.S.C. § 1738. The

district courts have exclusive jurisdiction under section 502(e)(1)

of actions to enforce fiduciary obligations under ERISA. See

Retail Shoe Health Comm. v. Reminick, 62 N.Y.2d 173, 476 N.Y.S.2d

276, 464 N.E.2d 974 (1984), cert. denied, 471 U.S. 1022, 105 S.Ct.

2034, 85 L.Ed.2d 316 (1985). The New York court therefore lacked

subject matter jurisdiction, and under New York law, "[a] judgment

... issued without subject matter jurisdiction is void." Editorial

Photocolor Archives, Inc. v. Granger Collection, 61 N.Y.2d 517, 474

N.Y.S.2d 964, 967, 463 N.E.2d 365, 368 (1984); see also Marrese v.

American Academy of Ortho. Surgeons, 470 U.S. 373, 382, 105 S.Ct.

1327, 1333, 84 L.Ed.2d 274 (1985) ("If state preclusion law

includes this requirement of prior jurisdictional competency, which

4
We leave it to the arbitrator to decide whether application
of the ERISA statute of limitations bars any of Kramer's claims.

11
is generally true, a state judgment will not have claim preclusive

effect on a cause of action within the exclusive jurisdiction of

the federal courts.").

B. Kramer's personal claims.

Kramer's non-ERISA claims, over which the court has

supplementary jurisdiction, are subject to the arbitration clause

and AMEX Rule 605. Those claims that arose out of transactions

that occurred more than six years before the arbitration are

ineligible. Kramer is collaterally estopped by the New York

judgment to contend that the claims are arbitrable because of

fraudulent concealment.5 The New York court held specifically that

"[t]hese [AMEX] rules are substantive eligibility requirements, not

statutes of limitations, and may not be tolled. The arbitration

therefore may not proceed insofar as it concerns partnership

interests purchased six years or more prior to the commencement of

the original arbitration." Shearson Lehman Bros., Inc. and Larry

F. Robb v. Quentin T. Kramer, No. 101339/93, 5 (N.Y.Sup.Ct. Nov.

16, 1993). We are bound to give full faith and credit to this

final decision of a state court. Raju v. Rhodes, 7 F.3d 1210, 1214

(5th Cir.1993) ("[O]nce a court of competent jurisdiction decides

an issue of fact or law necessary to its judgment, the same parties

to that judgment cannot relitigate that issue in a different

action.").

5
Because the parties did not raise the issue, we do not
decide whether Kramer's failure to exhaust the arbitration
proceeding he commenced results in an abandonment of arbitrable
claims.

12
 Kramer contends, however, that he is entitled to litigate in

court claims ineligible for arbitration. This too appears to be an

issue of first impression in the courts of appeals, though several

district courts have ruled on it. Arbitration is a creature of

contract and the scope of the parties' obligation to arbitrate must

be determined by reference to the terms of the agreement.

Commercial Metals Co. v. Balfour, Guthrie, and Co., 577 F.2d 264,

266 (5th Cir.1978). The customer agreement provides that "[u]nless

unenforceable due to federal or state law, any controversy arising

out of or relating to [transactions between the parties] ... shall

be settled by arbitration." The intention underlying the agreement

quite plainly is to require the submission of all claims to

arbitration, subject only to the express exemption for claims not

arbitrable under federal or state law. It would be bizarre to

interpret the agreement to exempt stale claims from arbitration.

We hold the customer agreement to bar litigation of the claims that

are ineligible for arbitration.

CONCLUSION

We REMAND to the district court with directions to enter

judgment directing the parties to submit the ERISA claims to

arbitration and dismissing with prejudice all remaining claims.

13