by Barry Goldman
This article is the second in a series. The first is here.
Justice delayed is justice denied. Everyone agrees. Lawsuits should be brought in a timely manner. If too much time goes by before a case is adjudicated, witnesses become unavailable, memories fade, evidence is lost, and it becomes harder to reconstruct events. Also, if there is no timeliness requirement, the threat of a lawsuit hangs over the parties indefinitely, and it prevents them from moving on with their lives. Therefore, many systems have a rule.
The Rule in place at the Financial Industry Regulatory Authority (FINRA), where I have arbitrated for many years, is 12206. It says this:
(a) Time Limitation on Submission of Claims
No claim shall be eligible for submission to arbitration under the Code where six years have elapsed from the occurrence or event giving rise to the claim.
So far so good. It’s a simple, clear, reasonable, bright line rule. Or so it appears. Let’s see how it works in practice.
Suppose the following: Old Mr. Murphy dies. Mrs. Murphy has never been involved in any decisions having to do with the family finances. She had her hands full managing the household and raising the kids. Now suddenly, without any background, training, education or experience, she finds herself responsible for a substantial sum of money. Though a friend of a friend she is introduced to Jones the Stockbroker.
Jones is an engaging young fellow, and he appears to Mrs. Murphy to be very knowledgeable with regard to stocks and bonds and mutual funds and variable annuities and real estate investment trusts and similar things. He is associated with a large and well-known brokerage firm.
Mrs. Murphy explains her situation, and young Jones appears to understand perfectly. He’s such a nice young man.
You see where this is going. Jones tells Mrs. Murphy that, as luck would have it, he happens to have access to a very special investment deal that is ideally suited to people in her situation. He carefully researched the deal, he explains, and he was so impressed he recommended it to his own mother, and she is now an enthusiastic participant. He explains that, for complicated technical reasons, Mrs. Murphy’s investment will not appear on her regular monthly statement from the large and well-known brokerage firm with which he is affiliated. Instead, it will appear on a special statement his staff prepares especially for clients like his mother and Mrs. Murphy. Oh, and in order to get an extra special insider price on the special deal, he tells her to make her check out not to the well-known brokerage firm, but to Jones himself.
Mrs. Murphy does as she is instructed, and sends all her money to Jones.
In return, Jones sends Mrs. Murphy specially prepared account statements showing a lovely increase in her portfolio value every quarter for, you guessed it, six years.
After six years, the authorities catch up with Jones and send him to prison for securities fraud. The money, of course, is gone. Mrs. Murphy finds a lawyer and files a complaint against the firm. The firm, of course, says it had no idea Jones was doing any of this. It says Jones was “selling away.” It says it has strict rules against selling away, and all brokers who work for the firm are carefully trained that selling away is prohibited, and they must sign a disclosure document every year swearing they are not doing it. They say they “did not know and in the exercise of reasonable diligence could not have known” Jones was selling away.
Fine. The arbitration panel will have to make that determination. But before we reach that question, the firm files a Motion to Dismiss under Rule 12206. The motion says the dispute is not eligible for arbitration at all because it is outside the six-year eligibility period.
Is it? That depends on whether it’s the purchase of the security or the discovery of the fraud that constitutes the “occurrence or event” that gave rise to the claim. If the purchase is the occurrence or event, as many courts have found, and six years have elapsed since the purchase, then the matter is not eligible for arbitration.
But, Mrs. Murphy says, she had no idea there was a problem until the broker went to prison. She didn’t know and in the exercise of reasonable diligence could not have known there was anything wrong with the investment. And she was prevented from finding out because the broker sent her fabricated account statements showing fictional balances. There has been “fraudulent concealment.”
So, does the six-year eligibility clock keep running during the period of fraudulent concealment? That depends on whether Rule 12206 is intended to serve as a statute of limitations or a statute of repose. Statutes of limitations are subject to “equitable tolling.” That is, the timeliness clock stops running during any period of fraudulent concealment. But there is no equitable tolling under statutes of repose.
So which is it? This is not a settled question. And the answer seems to recede as we approach.
What is important here is the distance between the legal argument about the tolling of statutes of repose and the human experience of the little old lady who was cheated out of her life savings. The argument presented by the lawyers has literally nothing to do with the experience of the human beings involved. Instead, the dispute has been translated into legal concepts that are “cognizable” by the law and “justiciable” within the system. This is an essential feature of the “rule of law.” The problem is that it violates what should be an essential feature of dispute resolution: Fight about what you’re fighting about.
In the modern legal system we don’t fight about what we’re fighting about. In FINRA arbitrations we fight about whether Rule 12206 was intended to serve as a statute of repose or a statute of limitations. In labor arbitration we fight about the meaning of Article XIV, Section 6, Paragraph C(5)(e) in the Collective Bargaining Agreement.
No one actually cares about Rule 12206 or Paragraph C(5)(e). What we care about is poor Mrs. Murphy or miserable old Mr. Smith. We argue about the meaning of 12206 and C(5)(e) because they are proxies. The legal culture is premised on the idea that a neutral decision maker can apply the rules objectively. Murphy and Smith are messy; 12206 and C(5)(e) are neat.
Sorry, but this is delusional.
There’s an old story about a dairy farmer who hires a scientist to design a more efficient milking operation. The scientist works on the problem for a long time and comes up with the optimal solution. The only problem, he says, is it only works for spherical cows in a vacuum.
The idea that the law exists and the facts exist and the job of an arbitrator (or a judge) is to apply the law to the facts and produce an objective result is a fairy tale. It has no more relevance to the real world than spherical cows in a vacuum have to a dairy farm.
When a client walks into a lawyer’s office and tells a story, the story will be about human beings, right and wrong. The lawyer’s job is to translate that story into something cognizable and justiciable within the legal system. This requires carefully squeezing out both the human beings and the right and wrong in favor of this other mysterious thing that only lawyers understand.
A friend of mine specializes in the area of unfair labor practices. He often complains about the amount of time he has to spend explaining to prospective clients that just because something is unfair and it is a labor practice doesn’t mean it is an unfair labor practice. “Unfair labor practice,” you see, is a term of art. “Term of art” is itself a term of art. The law is full of them. Arguably, it consists of nothing else. As Tina Turner didn’t quite sing, “What’s Justice got to do with it?”
I have proposed an experiment to my lawyer friends. Pick a random sample of six files on your desk. Carefully redact the particular facts and the information that would identify the parties, and extract just the legal argument from each file. For each one you’ll get something like whether or not statutes of repose are subject to equitable tolling or the difference between the language of Article XIV, Section 6, Paragraph C(5)(e) and Paragraph C(5)(f).
Do this for all six cases. Then show the results to the six clients involved and ask if they can pick out their own case. Not surprisingly, none of my friends has agreed to do this. They tend to be resistant to my experiments. But I hope my point is clear. I am willing to bet that once a case goes through the process of translation into cognizable and justiciable language, it becomes unrecognizable to the people involved. How can that be right?
The system we are pleased to call “the rule of law” is based on a fundamental mistake. Laws and rules cannot capture human reality. If the goal is to resolve human disputes, we need to communicate with human beings in human language. If we don’t do that, we get what one wag called, “the rule of lawyers, not of men.”