Michael Magruder v. Fidelity Brokerage Services
2016 U.S. App. LEXIS 4914
| 7th Cir. | 2016Background
- Magruder purchased 940,000 shares of Bancorp through a Fidelity account for about $9,298 and later requested a paper stock certificate.
- Fidelity could not deliver because the DTCC placed a "global lock" on Bancorp series 106 certificates after reported fraud; swaps and certificate issuance were blocked.
- Magruder initiated FINRA simplified arbitration (cap $50,000); arbitrator ordered Fidelity to produce a certificate or explain; Fidelity explained the DTCC lock.
- Arbitrator issued a March 2014 instruction and ultimately an October 2014 award denying Magruder’s claim.
- Magruder sued in district court to confirm the March award; Fidelity sought enforcement of the October award.
- District court sided with Fidelity; on appeal the Seventh Circuit raised and addressed subject-matter jurisdiction, concluding neither federal-question nor diversity jurisdiction supported the action.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether federal-question jurisdiction under 28 U.S.C. §1331 exists to confirm/vacate the FINRA award because the underlying claim rests on 17 C.F.R. §240.15c3–3(l)(1) | Magruder: §240.15c3–3(l)(1) creates a federal right to receive certificates, so the arbitrated claim "arose under" federal law and federal courts have jurisdiction to confirm or set aside the award | Fidelity: (implicit) dispute involves brokerage practice and ownership issues; federal question not necessary to adjudicate award enforcement; separate arguments focused on value for diversity | Held: No. Even if §240.15c3–3(l)(1) created a federal right, Vaden permits federal jurisdiction to compel arbitration under §4 but does not extend §1331 jurisdiction to actions to confirm (§9) or vacate (§10) arbitration awards; reviewing/ enforcing awards requires an independent jurisdictional basis. |
| Whether diversity jurisdiction under 28 U.S.C. §1332 supports confirmation because the subject matter exceeds the $75,000 threshold | Magruder: N/A (he sought <$30,000) | Fidelity: Argued the dispute’s stakes could be measured by value of 940,000 shares, implying amount in controversy exceeds $75,000 | Held: No. Parties agreed to FINRA simplified arbitration with $50,000 cap and Magruder’s claim sought far less; Fidelity’s valuation argument fails because the dispute concerns a certificate, not new ownership value, so amount in controversy does not meet §1332 minimum. |
| Whether an arbitrator’s resolution of a federal issue supplies federal jurisdiction to review the award | Magruder: An arbitrator deciding a federal statutory right means federal jurisdiction exists to enforce/vacate the award | Fidelity: Argued factual circumstances and arbitration limits negate federal jurisdictional need | Held: No. Circuit precedent (Doerge, Minor, etc.) holds that a federal issue decided in arbitration does not create federal jurisdiction to enforce or vacate the award. |
| Proper disposition of the district court judgment | Magruder: Requested enforcement of the March order; sought review | Fidelity: Sought enforcement of the October award | Held: The district court judgment is vacated and the case is remanded with instructions to dismiss for lack of subject-matter jurisdiction. |
Key Cases Cited
- Vaden v. Discover Bank, 556 U.S. 49 (holds §4 may confer federal jurisdiction to compel arbitration when the underlying claim arises under federal law)
- Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1 (arbitration law principles and role of FAA)
- Kokkonen v. Guardian Life Insurance Co., 511 U.S. 375 (settlement-related contract disputes require independent jurisdictional basis)
- Stone v. Doerge, 328 F.3d 343 (7th Cir.) (arbitrator’s federal issue does not supply jurisdiction to review award)
- Minor v. Prudential Securities, Inc., 94 F.3d 1103 (7th Cir.) (same principle regarding post-arbitration federal jurisdiction)
- Lefkovitz v. Wagner, 395 F.3d 773 (7th Cir.) (discussion of jurisdictional issues but not inconsistent with Doerge/Minor)
- Carter v. Health Net of California, Inc., 374 F.3d 830 (9th Cir.) (circuit agrees arbitrator’s federal ruling does not create jurisdiction to enforce award)
- Greenberg v. Bear, Stearns & Co., 220 F.3d 22 (2d Cir.) (same)
- Kasap v. Folger Nolan Fleming & Douglas, Inc., 166 F.3d 1243 (D.C. Cir.) (same)
- Collins v. Blue Cross Blue Shield of Michigan, 103 F.3d 35 (6th Cir.) (same)
- Steel Co. v. Citizens for a Better Environment, 523 U.S. 83 (doctrine on necessity of proper jurisdictional resolution)