Dean Witter Reynolds, Inc v. Dan A. Druz

*Judge Becker’s term as Chief Judge ended on May 4, 2003.
**The Honorable James C. Hill, United States Circuit Judge for the Eleventh Circuit
Court of Appeals, sitting by designation.
NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________________
NO. 01-3890
DEAN WITTER REYNOLDS, INC.
v.
DAN A. DRUZ,
Appellant
_________________________
On Appeal From the United States District Court
For the District of New Jersey
(D.C. No. 00-cv-2564)
District Judge: Honorable Anne E. Thompson
Argued: November 5, 2002
Before: BECKER, Chief Judge,* McKEE and HILL,**
Circuit Judges.
Filed August 4, 2003
DAN A. DRUZ (Argued)
291 E. Main St.
Suite 1000
Manasquan, N.J. 08736
Appellant, pro se
Edward S. Nathan (Argued)

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Stern Greenberg & Kilcullen
75 Livingston Ave.
Roseland, N.J. 07068
Counsel for Appellee
__________________________
OPINION OF THE COURT
___________________________
BECKER, Circuit Judge.
Defendant Dan Druz has appealed from the District Court’s grant of summary judgment
in favor of plaintiff Dean Witter in its action to enjoin Druz’s claim for arbitration before the
National Association of Securities Dealers Regulation (“NASDR”). Druz raises a number of
contentions on appeal, some of which are without merit. However, because we find that the
District Court improperly ruled on the question whether Druz’s claims are time-barred by
National Association of Securities Dealers (“NASD”) Code of Arbitration Procedure § 10304
(1984), a matter which is for the arbitrator, and also impermissibly evaluated the merits of Druz’s
underlying malicious prosecution claim in concluding that it was not arbitrable, we vacate the
judgment of the District Court and remand so that the District Court may refer the matter to
arbitration.
I.
This case has a long and complicated history. Druz was an executive for Dean Witter and
Branch Manager of the company’s Princeton office from 1982-87, where he oversaw several
large accounts. In 1987, he left Dean Witter for a job at the securities firm now called Citibank
Salomon. After his departure, Dean Witter became involved in a number of disputes with clients

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1Druz asserted 12 claims against Dean Witter, all of which he argues were based on
actions engaged in during the period 1992-95. These claims were (1) violations of 42
USC § 1985(2); (2) violations of 18 USC §1964 (c) (“RICO”); (3) causing a wrongful
prosecution against Druz in New Jersey; (4) unlawful common law conspiracy; (5)
wrongful interference with Druz’s prospective economic advantage; (6) negligence; (7)
negligent infliction of emotional distress; (8) fraud; (9) unfair trade practices; (10) breach
of fiduciary and contractual duties, and duties of fair dealing; (11) prima facie tort; and
(12) attorney malpractice.
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whose accounts Druz had managed. One of these disputes led to some highly publicized
litigation, in which the New Jersey School Boards Association Insurance Group brought
suit against Dean Witter and Druz (the “School Boards” litigation).
Druz faced several actions as a result of the School Boards case. The New Jersey
Division of Consumer Affairs, Bureau of Securities began an investigation and in January 1992,
it made a criminal referral to the N.J. Division of Criminal Justice. A New Jersey grand jury then
returned an indictment against Druz. The criminal case alleged that Druz had transferred losses
from one client’s securities account into the School Boards account. The case came to an end
when Druz petitioned for Pre-Trial Intervention (“PTI”), which was granted, and which he
completed in 1998. In addition to this criminal action, Druz was also investigated by the New
York Stock Exchange (“NYSE”). In May 1993, the NYSE censured Druz and barred him from
membership for eight years, a decision that was affirmed by the NYSE’s Board of Directors.
These decisions were later affirmed by the SEC and by this Court. Druz v. SEC, 103 F. 3d 112
(3rd Cir. 1996).
In April 1995, while Druz’s criminal investigation was still ongoing, he filed an
arbitration demand against Dean Witter with the NYSE.1 Dean Witter sued in the District Court
for the District of New Jersey for an injunction against the matter going forward at the NYSE.

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The District Court held that the arbitration on the malicious prosecution claims could not go
forward until the New Jersey criminal case was resolved. The Court also permanently enjoined
Druz from arbitrating any claims that arose from conduct that had occurred more than 6 years
previous to his filing the arbitration claim. No appeal was filed.
In 1999, Druz filed a demand for arbitration with NASDR, the arbitration arm of the
NASD. Dean Witter sought to have these proceedings enjoined as well. The District Court
denied this motion, holding that it had not retained jurisdiction over the matter, which it had
disposed of in 1995, because the underlying litigation had long since closed. In addition, the
Court ruled that its 1995 order enjoining the NYSE arbitration had no bearing on the NASD
arbitration.
Dean Witter filed a second suit in the District of New Jersey to enjoin the NASD
arbitration. The District Court held that because the claim for arbitration was filed on Feb. 23,
1999, the NASD’s six-year time-bar rule would only allow for arbitration of claims springing
from conduct on or after Feb. 23 1993. The Court believed that Druz wanted to arbitrate matters
concerning his criminal prosecution and ruled that all matters concerning Druz’s employment at
Dean Witter, spanning the years 1982-87, were time-barred. The Court concluded that “any
surviving allegations . . . ultimately sound in malicious prosecution,” and noted fatal problems
with Druz’s malicious prosecution claim. First, the criminal action was not instituted by Dean
Witter, even if it brought the matter to the attention of the authorities. Second, the prosecution
did not seem to end in Druz’s favor, because he entered into a PTI agreement. Because the Court
found no merit in Druz’s malicious prosecution claim and determined that all of Druz’s other
claims were time-barred, it enjoined Druz’s arbitration before the NASD. Druz then moved for

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re-argument, which the District Court denied because Druz did not provide the court “with
matters of fact or law that were put forth to the Court but not considered.” In addition, the Court
held that Druz’s motion sought to present new arguments, which is impermissible under local
rule 7.1(g). Druz then filed an Amended Motion for Re-argument, which was time-barred
because it was filed more than 10 days after the entry of the order on the original motion. This
appeal followed.
II.
Druz raises a number of issues on appeal. He begins by arguing that the District Court
lacked jurisdiction to make its decision and that the case was heard in the wrong venue. Druz
then submits that if the District Court did have jurisdiction and was the proper venue, the parties
had a valid agreement to arbitrate and that the question whether his claims are time-barred by the
NASD’s six-year limit on arbitration is for the arbitrator, not the District Court, to decide. In
addition, Druz contends that the District Court impermissibly considered the merits of his
underlying claims when it ruled that one such claim sounds in malicious prosecution and that
Druz would not be able to prove the elements of that cause of action. In sum, Druz asserts that
he is entitled to arbitration as per his agreement with Dean Witter.
Dean Witter counters that because Druz did not raise his jurisdictional, joinder, and venue
arguments before the District Court granted the motion for summary judgment, he may not raise
them on appeal. Dean Witter also asserts that “virtually all, if not all, of Druz’s allegations” are
time-barred by the NASD’s six-year eligibility requirement, and that if any of Druz’s allegations

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survive the time-bar, these claims may not be arbitrated because they relate to privileged
testimony by Dean Witter employees. In addition, Dean Witter urges that any surviving claims
sound in malicious prosecution, a cause of action on which Druz cannot prevail. Finally, Dean
Witter argues that the statutes of limitations have run on all of Druz’s claims.
We exercise plenary review over the District Court’s grant of summary judgment,
Chisolm v. McManimon, 275 F.3d 315, 321 (3rd Cir. 2001), over the question whether the
District Court had jurisdiction to hear this case, Okereke v. United States, 307 F.3d 117,
119-20 (3rd Cir. 2002), and over the District Court's determination whether a party's
joinder is necessary under Rule 19(a). Koppers Co. v. Aetna Casualty, 158 F. 3d 170, 174
(3rd Cir. 1998). We have jurisdiction under 28 U.S.C. § 1291.
A.
We begin with the threshold question whether the District Court had jurisdiction to hear
this case. First, we must consider Dean Witter’s argument that we cannot address this question
because it was raised for the first time in Druz’s motion for reconsideration, rather than during
the summary judgment proceeding. It is a general rule that this court will not hear issues for the
first time on appeal. Singleton v. Wulff, 428 U.S. 106, 120 (1976); Krysztoforski v. Chater, 55 F.
3d 857, 860-61 (3rd Cir. 1995). There is an exception to this general rule, however, for
jurisdictional issues.
Druz points out, correctly, that the Federal Arbitration Act, 9 U.S.C. § 1 et seq., does not

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create independent federal question jurisdiction. As the Supreme Court held in Moses H. Cone
Memorial Hospital v. Mercury Const. Corp.,460 U.S. 1, 25 n.32 (1983), “Section 4 [of the Act]
provides for an order compelling arbitration only when the federal district court would have
jurisdiction over a suit on the underlying dispute; hence, there must be diversity of citizenship or
some other independent basis for federal jurisdiction . . . .” Considering the current parties to
this case, Dean Witter, a Delaware corporation with its principal place of business in New York
and Druz, a resident of New Jersey, there is diversity jurisdiction. Druz argues, however, that a
number of indispensable parties were not joined to the proceedings. He asserts that because
these individuals are residents of New Jersey, the District Court would not have had diversity
jurisdiction had they been joined. These individuals are current and former Dean Witter
employees who Druz claims were involved in the fraud and deception that led to him being
blamed for Dean Witter’s troubles in the late 1980s. Druz named these individuals in the
underlying arbitration and argues that they are indispensable parties to this litigation.
We look to Federal Rule of Civil Procedure Rule 19 in order to evaluate Druz’s
argument. Subdivision (a) requires that an individual be joined as a party if “(1) in the person’s
absence complete relief cannot be accorded among those already parties, or (2) the person claims
an interest relating to the subject of the action and is so situated that the disposition of the action
in the person’s absence may (i) as a practical matter impair or impede the person’s ability to
protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of
incurring double, multiple, or otherwise inconsistent obligations by reason of the claimed
interest.” Subsection (a)(1) does not apply here: there is no reason that complete relief cannot be
accorded Druz or Dean Witter in the absence of these other individuals. Subsection (a)(2)(ii)

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2Druz also argues that the case was heard in the wrong venue and that because the
underlying arbitration is to take place in New York, the proper venue is the Southern
District of New York. Because Druz raised this issue for the first time after the Summary
Judgment hearing, however, he waived it. See 15 Charles Alan Wright & Arthur R. Miller,
Federal Practice and Procedure §3826 at 257 (2d ed. 1995). We note that had Druz raised this
issue at the proper juncture, he would likely have prevailed on this point, for it appears
that this case should have been heard in the Southern District of New York, the district
where the arbitration is to take place. See Bao v. Gruntal, 942 F. Supp. 978 (D.N.J.
1996).
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also does not apply: neither Druz nor Dean Witter would be subject to multiple or inconsistent
obligations because of the absence of these parties. The only subsection that might conceivably
apply is (a)(2)(i), but, if Dean Witter wins, these other individuals’ ability to protect their
interests will not be impaired. If Druz wins then it is likely that he would win in a separate action
on the same facts against these other individuals, but, even if Druz wins, nothing in this litigation
will necessarily impair these other individuals’ ability to protect their interests. As a result, these
individuals need not be joined and diversity jurisdiction is preserved.2
B.
We turn to the question of whether the District Court properly enjoined the arbitration. In
granting summary judgment, the Court reasoned that most of Druz’s claims are time-barred by
NASD § 10304 and that any that are not sound in malicious prosecution, a claim upon which
Druz cannot prevail. We first consider the time-bar issue.
Dean Witter argues that arbitrability of Druz’s claim under the time-bar provision of
NASD §10304 was a question for the District Court and that the Court properly decided that

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3NASD §10304 states that “No dispute, claim, or controversy shall be eligible for submission
to arbitration under this Code where six (6) years have elapsed from the occurrence of the event
giving rise to the act or dispute, claim or controversy.”
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question.3 Dean Witter submits that “virtually all, if not all” of Druz’s allegations stem from
events that occurred more than six years before he filed for arbitration, and that therefore his
claims are not arbitrable. This argument is foreclosed, however, by the Supreme Court’s
decision in Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002), in which the Court held
that questions of arbitrability under the time-bar provision of NASD §10304 are for the
arbitrator, not the District Court, to decide. Howsam was decided after the District Court
proceedings in this case came to a conclusion, and it requires us to reverse the District Court’s
determination that the bulk of Druz’s claims was time-barred under NASD §10304.
We next turn our attention to the District Court’s determination that any remaining claims
sound in malicious prosecution, a cause of action upon which Druz could not prevail. Druz
argues that it was impermissible for the District Court to consider the merits of his underlying
arbitration claim in its decision on Dean Witter’s motion for summary judgment. We agree. In
PaineWebber v. Hofmann we held that “[i]n resolving the arbitrability of particular claims . . . ‘a
court is not to rule on the potential merits of the underlying claims,’ no matter how frivolous the
claims may appear to the court.” 984 F.2d 1372, 1377 (3d Cir. 1993) (quoting AT&T
Technologies v. Communications Workers of America, 475 U.S. 643, 649 (1986)). The court’s
role, according to Hofmann, is simply to determine whether the dispute is arbitrable, not which
party would win in the arbitration itself. Hofmann, 984 F.2d. at 1377. In other words, a court
can only enjoin the arbitration if “‘the matter at issue clearly falls outside of the substantive scope

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4Dean Witter also argues that even if some of Druz’s claims are not barred by NASD §
10304, they are barred by their own statutes of limitation. The issue of whether these
individual claims are barred by their statutes of limitation, however, goes to the merits of
Druz’s claims and is for the arbitrator, not the courts to decide. Dean Witter also argues
that it is cloaked in both absolute and qualified litigation privileges as a result of its
employees’ cooperation with the grand jury investigation. This argument is unavailing
both because it goes to the merits of Druz’s claims and therefore is not properly before us,
and because we see no case law (and Dean Witter has pointed to none) which stands for
the proposition that privileges that might protect Dean Witter’s employees extend to Dean
Witter itself.
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of the [arbitration] agreement.’” Id. (quoting PaineWebber v. Hartmann, 921 F.2d at 511).
The District Court’s analysis of the malicious prosecution claim was therefore not a proper
ground for granting summary judgment against Druz.4
III.
Because the District Court erred in addressing the question whether the bulk of Druz’s
claims for arbitration was barred under NASD § 10304 and in evaluating the merits of Druz’s
remaining underlying claims, we will vacate the judgment of the District Court and remand so
that the District Court may refer the matter to arbitration. Costs taxed against Appellee.

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TO THE CLERK:
Please file the foregoing Opinion.
BY THE COURT:
/s/ Judge Edward R. Becker
Circuit Judge

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