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PETRIE v. PACIFIC STOCK EXCH.

October 24, 1997

PHILLIP H. PETRIE and JUDITH E. PETRIE, Plaintiffs,
v.
THE PACIFIC STOCK EXCHANGE, INC. and DOES 1 through 10, inclusive, Defendant.



The opinion of the court was delivered by: PATEL

 Plaintiffs Phillip H. and Judith E. Petrie ("Petries") originally filed this action in San Francisco County Superior Court based on various breach of contract claims against defendant Pacific Stock Exchange ("Exchange"). *fn1" Pursuant to 28 U.S.C. sections 1441 and 1446, the Exchange filed a notice of removal, premised solely on federal question jurisdiction, 28 U.S.C. § 1441(b). In its notice of removal, the Exchange asserted that federal question jurisdiction existed under section 27 of the Securities Exchange Act ("Act"), 15 U.S.C. § 78aa, because the Petries' claims arose out of violations of various provisions of the Act, 15 U.S.C. § 78 et seq. *fn2" The Exchange now files a motion to dismiss the Petries' suit for failure to state a claim, or in the alternative, for judgment on the pleadings pursuant to Federal Rules of Civil Procedure 12(b)(6) and 12(c). The Petries, however, contend that this court does not have subject matter jurisdiction over this action and that the action must be remanded to state court.

 Because the court finds that it cannot exercise federal question jurisdiction over this action, it does not reach the issue of whether the Petries failed to state a claim or whether it is possible to grant judgment on the pleadings.

 BACKGROUND

 This case provides a factual twist to the run-of-the-mill cases in which a party seeks to compel another to arbitrate disputes arising between them as agreed upon by contract. Here, the Petries do not request the court to compel another party to enter arbitral proceedings; rather, they ask the court to compel the Exchange -- the arbitral forum -- to proceed with the arbitration they initiated against the arbitration respondents according to their interpretation of the Exchange's arbitral rules.

 The underlying dispute in this litigation concerns several investments made by the Petries in four investment accounts on the advice of their investment advisor, Robert Luebkeman, and SunAmerica Securities, Inc. ("SunAmerica"). *fn3" The Petries claim they suffered significant losses as a result of their reliance on Mr. Luebkeman's "valueless" investment advice. Pl. Opp. at 2. In response, the Petries initiated an arbitration proceeding against both SunAmerica and Luebkeman (collectively, the "arbitration respondents") in the Exchange's arbitration forum. *fn4"

 The Petries filed a Uniform Submission Agreement ("USA") with the Exchange on August 8, 1994, regarding their claims against SunAmerica and Luebkeman. In November 1994, SunAmerica filed its answer to the Petries' claims and in December 1994 filed a USA with the Exchange. Luebkeman also filed an answer to the complaint in December 1994, and in January 1995, filed a USA with the Exchange. The Exchange's USAs demonstrate a party's desire to submit their claims to arbitration in accordance with the rules of the Exchange as well as to abide by any order or award rendered in the arbitration.

 In November 1994, SunAmerica filed with the arbitral panel a motion to dismiss -- to which Luebkeman later joined -- and requested a prehearing conference. On January 1995, the Petries filed a response to SunAmerica's motion to dismiss. In May 1995, the Exchange notified the parties that the Petries' arbitration claim would be heard on September 26, 27, and 28, 1995, and later selected three arbitrators to hear the claim. The Exchange also named Alfred Knoll as the chairman of the arbitration panel.

 Prior to the pre-hearing conference, SunAmerica filed a complaint for declaratory and injunctive relief in federal court, SunAmerica v. Petrie, Civ. No. 95-1656 IEG (S.D.Cal.), seeking to halt the arbitration. SunAmerica also sought a continuance of the arbitration in order to allow the court to decide the issue of arbitrability. However, SunAmerica later dismissed its complaint.

 The parties agreed to participate in a pre-hearing conference before Chairman Knoll on September 7, 1995, to discuss the arbitration respondents' motion to dismiss. At the pre-hearing conference, eventually held on March 25, 1996, Chairman Knoll issued an order staying the arbitration proceeding pending a judicial determination of whether the Petries' claim against the arbitration respondents was arbitrable. In its order, the Chairman found that the arbitration respondents' answer and motion to dismiss constituted a refusal to arbitrate and that the arbitration panel did not have jurisdiction to arbitrate the claim.

 The Petries filed suit against the Exchange in San Francisco Superior Court on February 7, 1997, seeking specific performance of the Exchange's alleged contractual agreement to provide arbitration services. The Petries also sought to compel the Exchange to appoint what they termed a "neutral arbitrator" under California law. In their complaint, the Petries made two references to the Securities and Exchange Commission ("SEC") and its relation to the Exchange. First, the Petries alleged that the "[the Exchange] is a securities exchange, regulated by the Securities and Exchange Commission." Def. Notice of Removal, Exh. B P 2. Second, they alleged that "[the Exchange] has adopted rules and regulations governing its administration of arbitration proceedings." Id., at P 10. They further alleged that "said rules and regulations have been approved by the United States Securities and Exchange Commission." Id. The Petries, however, made no explicit reference to the Act.

 The Exchange subsequently filed a notice of removal to federal court on March 17, 1997, on federal question jurisdiction grounds pursuant to 28 U.S.C. section 1441. In its removal action, the Exchange asserted that the Petries alleged that the Exchange failed to follow its own rules and regulations promulgated under the Act, 15 U.S.C. sections 78 et seq. It also claimed that under 15 U.S.C. section 78aa jurisdiction for claims based on the Act lie exclusively in federal court. The Exchange answered the Petries' complaint on March 27, 1997, and later filed this motion to dismiss.

 LEGAL STANDARD

 A defendant must file a notice of removal in the federal district courts within thirty days after the receipt by the defendant of a copy of the plaintiff's initial pleading. 28 U.S.C. § 1446(b). Once a defendant has filed the notice of removal, a plaintiff objecting to the removal "on the basis of any defect in removal procedure" may, within thirty days, file a motion asking the district court to I remand the case to state court. 28 U.S.C. § 1447(c). The 30-day limit does not apply to jurisdictional defects. 28 U.S.C. section 1447(c) states that "if at any time before final judgment it appears that the district court lacks subject matter jurisdiction, the case shall be remanded." Id. The removal statute is strictly construed, and the court must reject federal ...


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