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Court Rules FAA Allows It to Dismiss Claims Before They Reach the Arbitrators: Joseph Gunnar & Co., LLC vs. Rice
Posted on Categories Court Decisions, Securities ArbitrationTags ,

By Sarah G. Anderson

Under New York Law, threshold issues concerning timeliness of a party’s demand for arbitration are for the court to decide (CPLR 7502(b) and 7503(b)); however, under the FAA, resolution of a statute of limitations defense is presumptively reserved to the arbitrator, not a court, unless the parties explicitly agree to leave that issue to the courts, as when the arbitration agreement provides that it will be enforced in accordance with New York law.

Joseph Gunnar & Co., LLC vs. Rice, No. 651259/2014 (N.Y. Sup., NY Cty., 2/13/15).

Incorporating New York Law

Petitioner (“Gunnar”) seeks to stay the pending arbitration between itself and its customer, Rice, and to dismiss Rice’s causes of action for fraud, breach of fiduciary duty, churning, negligence and violations of NY’s General Business Law (“GBL”) §349 as time barred. The Customer Agreement between Gunnar and Rice involves the sale of securities, which bears on interstate commerce, and its arbitration clause is therefore subject to the FAA. However, in keeping with an FAA policy to enforce private agreements, an exception to the FAA’s general rule reserving questions of timeliness to the arbitrator exists where parties explicitly agree to leave the issue of timeliness to the court. Here, the Customer Agreement explicitly states that it “and its enforcement” are governed by New York law, and therefore adopts as binding New York’s rule that threshold statute of limitations questions are for the courts.


“Churning” occurs when a securities dealer abuses his customer’s confidence in order to earn commissions by inducing excessive transactions in the customer’s account. In New York, the limitations period for a churning claim runs from the date the investor is put on notice of the potential claim by receipt of trade confirmations or monthly statements detailing the allegedly excessive and unauthorized trading in their account, rather than from the date of the last trade. In certain circumstances, however, a given confirmation slip or monthly statement may be sufficient to bar a plaintiff from complaining about specific purchases, yet insufficient to put her on inquiry notice that the rate of trading activity is excessive in light of the dollar value of the account and the client’s investment objectives. A finding of churning can only be based on a hindsight analysis of the entire history of a broker’s management of the account and his pattern of trading in comparison to the needs and desires of an investor. Rice’s claims of churning survive Gunnar’s motion to dismiss because there are questions of accrual and as to whether the alleged misconduct constitutes a “unified offense.”

Claims Dismissed

GBL §349 prohibits deceptive acts or practices in the conduct of any business, trade or commerce in the furnishing of any service in New York. These claims are subject to the three-year statute of limitations set forth in CPLR §214(2). A private cause of action under GBL §349 accrues when a plaintiff is injured by a violation of that statute. The date of discovery rule is not applicable and cannot extend that limitations period. Rice’s injury first occurred in October 2008, which is more than three years before she filed a statement of claim and this claim is thus untimely.

Other Claims

Rice’s remaining claims survive. Her breach of fiduciary duty claims depend on the substantive remedy sought and, where equitable in nature, the six-year limitations period under CPLR §213(1) applies, while claims for breach of fiduciary duty seeking only monetary damages fall within the three-year limitations period of CPLR §214(4). A cause of action based on allegations of actual fraud is subject to a six-year limitations period. Rice’s breach of fiduciary duty claim is timely brought and her breach of contract claims have a six-year limitations period under CPLR §213(8) that arise from breaches that took place in 2007 and/or 2008. Rice’s claims brought under GBL §349 are dismissed, but her other claims may proceed to arbitration.

(S. Anderson)

(SLC Ref. No. 2015-10-03)

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