Eligibility of Old Claims – Who Decides?



      • While nearly every brokerage firm customer has an arbitration agreement with his brokerage firm to arbitrate his disputes, a significant issue of law has arisen in recent years regarding a certain category of claims – those which “arise” more than 6 years before the filing date of the arbitration claim.

All legal claims have a statute of limitations – that is, a specific time period in which such a claim must be brought, or else the claim is deemed waived. Statute of limitations vary from state to state, but by way of example, in New York, a claim for fraud must be brought within six years of the fraudulent event, or two years from the discovery of the fraud, whichever is longer.

While a discussion of statute of limitations issues could consume an entire book, it is sufficient for the purposes of this article to note that by state law, a claim that is “older’ than six years old can still be litigated, and a New York state fraud claim is just such an example.

Section 15 and Eligibility

      • Aside from the legal statute of limitations, parties to securities arbitrations have another time issue to deal with, time limits set by the various securities arbitration forums which govern what disputes will be accepted.

Most arbitration forums have their own procedural requirements for the commencement of an arbitration. For example, the National Association of Securities Dealers, Inc., has a rule that it will not take any claim that is more than 6 years old. [1] This rule does not mean that the customer cannot bring the claim somewhere else, just that he cannot bring his claim as an arbitration before the NASD. This rule is designed to prevent the arbitration proceeding from becoming bogged down in issues that are too old, or too stale to be effectively arbitrated.


The Controversy

      • In recent years, an issue has arisen in the courts, and in the arbitration forums, as to who decides whether a claim is eligible for arbitration under arbitration code provisions such as the NASD’s Section 15 – the arbitrators or the courts. Narrowly defined, the issue boils down to whether the Section 15, and similar provisions, are part of the arbitration procedure, and thus an issue for the arbitrators to decide, or whether the provision is a jurisdictional prerequisite, which bars the submission of the dispute, in any way, to the arbitrators, thus making the issue one for the courts to decide.

The issue is an important one, for a decision on eligibility determines whether the parties are going to court, or to arbitration, on a claim that arose more than 6 years before the initial submission.

The legal analysis of the question is, unfortunately, not clear, and the federal courts which have addressed the eligibility issue are split. The Third, Sixth, Seventh and Eleventh Circuit Courts of Appeal (the federal appellate courts) have held that Section 15 is a jurisdictional prerequisite, and an issue for the courts to decide. See, PaineWebber Inc. v. Hofmann, 984 F.2d 1372, 1374 (3d Cir. 1993); Dean Witter Reynolds, Inc. v. McCoy, 995 F.2d 649, 651 (6th Cir. 1993) (“time-barred claims are not ‘eligible’ for arbitration, and therefore the courts must decide as a threshold matter whether time remains for claimants to bring their actions”); Edward D. Jones & Co., Inc. v. Sorrells, 957 F.2d 509, 512 (7th Cir. 1992) (“Section 15 operates as an eligibility requirement which bars from arbitration claims submitted more than six years after the event which gave rise to them.”); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cohen , ___ F.3d ____ (August 30, 1995),(“§15 is a substantive eligibility requirement and [we] join the Circuits that have determined that the court decides whether claims are timely under that section of the NASD Code”).

On the other side of the coin, the Fifth Circuit has held that the provision is a procedural requirement to arbitration, and thus an issue for the arbitrators. The Fifth Circuit, in Smith Barney Shearson, Inc. v. Boone, 47 F.3d 750, 754 (1995) specifically stated that Section 15 is “part of the procedural requirements to arbitration and, as such, [it is] the decision of the arbitrator.”

On April 19, 1996, the Second Circuit entered the fray in PaineWebber Incorporated vs. Bybyk, ___ F.3d _____ (2d Cir. 1996). In Bybyk, customers commenced an arbitration proceeding against their broker, for claims which arose more than 6 years before the filing. PaineWebber moved, in court, to stay the arbitration, on the grounds that the case was beyond the six-year arbitration limit. The lower court ruled that the arbitrators must decide eligibility, and dismissed PaineWebber’s suit, directing the parties back to arbitration.

The Second Circuit had previously held that “any limitations defense – whether stemming from the arbitration agreement, arbitration association rule, or state statute – is an issue to be addressed by the arbitrators”, Shearson Lehman Hutton , Inc. v. Wagoner, 944 F.2d 114, 121 (1991) (emphasis in the original). In Bybyk the Second Circuit held that the arbitration agreement between PaineWebber and its customer “evinces the parties’ intent to submit issues of arbitrability to the arbitrators. The effect that any timeliness requirement has on the Bybyks’ claims must, therefore, be determined by the arbitrator rather than the court.”

The issue is not merely an academic excerise, for the arbitration process is an important dispute resolution mechanism. The availability, or unavailabity of an arbitration forum for the resolution of a dispute, may affect whether a claimant can afford to obtain redress. For example, a consideration on smaller cases is the legal fees and associated costs of pursuing an action. A court proceeding, nearly by definition, is more expensive to pursue, since there is full discovery in such proceedings, and the cost of discovery alone, can run into the tens of thousands of dollars. The same proceeding, in an arbitration, where discovery is limited to the exchange of documents, those costs are totally avoided, making it economically feasible to bring smaller cases to arbitration.

Additionally, in some jurisdictions, most notably New York, punitive damages are not permitted in arbitration. Further, there a concept that some cases are better heard by arbitrators, some by jurors.

Whatever the particular details are of a particular case, the cases that are arguably over six years old often wind up embroiled in this dispute, with one party, either the customer or the broker-dealer, depending on the particulars of the case, wanting to be in court, and the other wanting to be in arbitration.

Brokerage firms want the court to decide the issue, customers want the arbitrators to do so. In a later article, we will examine the reasons behind those decisions, but for now, pick your court carefully.



      • Section 15 of the NASD Code of Arbitration Procedure provides:

Time Limitation on Submission:

Section 15. 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. This section shall not extend applicable statutes of limitations, nor shall it apply to any case which is directed to arbitration by a court of competent jurisdiction.

Last Updated: September 10, 1996

Keywords: arbitration, stock broker fraud nasd securities nyse aaa Quantcast

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Securities Attorney at Sallah Astarita & Cox | 212-509-6544 | mja@sallahlaw.com | Website | + posts

Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.