Opinion
02 Civ. 6593 (JSM), 02 Civ. 7914 (JSM), 02 Civ. 3740 (JSM), 02 Civ. 8364 (JSM).
July 14, 2003.
OPINION ORDER
Petitioners are a group of investors who maintained accounts at Congressional Securities, Inc. for whom Fiserv Securities, Inc. ("Fiserv") acted as clearing agent. Each of the Petitioners purchased shares of Interface Systems, Inc. ("Interface") on margin. When the stock of Interface fell dramatically, Fiserv issued margin calls to the Petitioners. When the margin calls were not honored, Fiserv commenced arbitration proceedings against the Petitioners and ultimately received an award against each of them which in total amounted to $10,445,124.78 plus attorneys fees and interest. Petitioners then commenced this action seeking to vacate the award. Presently before the Court are cross-motions to vacate and confirm the arbitration award.
Petitioners' principal claim is that the arbitrators improperly denied their request for a continuance on the morning of the scheduled hearing when new counsel appeared for them and told the panel that he needed time to prepare. They also contend that the arbitrators acted improperly when they permitted David H. Zimmer to act as their attorney at an earlier stage of the proceedings even though he was also a party to the proceeding and had been the broker for the other parties.
While the parties have cited both New York and federal authorities, this action is governed by the Federal Arbitration Act ("FAA"). As the Second Circuit ruled in Barbier v. Shearson Lehman Hutton, Inc., 948 F.2d 117, 120 (2d Cir. 1991): "The FAA applies when there is federal subject matter jurisdiction, i.e., diversity jurisdiction . . . and when the contract calling for arbitration `evidences a transaction involving interstate commerce.'" See also Ottawa Office Integration, Inc. v. FTF Business Systems, Inc., 132 F. Supp.2d 215, 220 (S.D.N.Y. 2001).
The standard for reviewing the actions of arbitrators in a case such as this was set forth by Judge Batts of this Court inBisnoff v. King, 154 F. Supp.2d 630, 636-37 (S.D.N.Y. 2001):
The FAA provides that an arbitration award may be vacated if: (1) the award was procured by corruption, fraud, or undue means; (2) the arbitrators exhibited "evident partiality" or "corruption"; (3) the arbitrators were guilty of misconduct; or (4) the arbitrators exceeded their power. See 9 U.S.C. § 10(a); Halligan v. Piper Jaffray, Inc., 148 F.3d 197, 202 n. 2 (2d Cir. 1998), cert. denied, 526 U.S. 1034, 119 S.Ct. 1286, 143 L.Ed.2d 378 (1999).
In the context relevant here, a court may vacate an award when "the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy . . ." 9 U.S.C. § 10(a)(3). "Misconduct typically arises where there is proof of either bad faith or gross error on the part of the arbitrator." Agarwal v. Agarwal, 775 F. Supp. 588, 589 (S.D.N.Y. 1991) (citing United Paperworkers Int'l v. Misco, Inc., 484 U.S. 29, 40, 108 S.Ct. 364, 98 L.Ed.2d 286 (1987)).
The expeditious resolution of disputes requires that arbitrators be provided with broad discretion and great deference in their determinations of procedural adjournment requests. See Alexander Julian, Inc. v. Mimco, Inc., No. 00 Civ. 4131(DC), 2001 WL 477010, at *2 (S.D.N.Y. May 4, 2001) (citing Tempo Shain, 120 F.3d at 19; Prozina Shipping Co. v. Elizabeth-Newark Shipping, Inc., No. 98 Civ. 5834, 1999 WL 705545, at *2-3 (S.D.N.Y. Sept. 10, 1999)). In evaluating an arbitrator's decision to deny a postponement, courts consider whether there existed a reasonable basis for the arbitrator's decision and whether the denial created a "fundamentally unfair" proceeding. See Ottawa Office Integration, Inc. v. FTF Bus. Sys., Inc., 132 F. Supp.2d 215, 220 (S.D.N.Y. 2001) (citing Tempo Shain Corp. v. Bertek, Inc., 120 F.3d 16 (2d Cir. 1997); Roche v. Local 32B-32J Service Employees Int'l Union, 755 F. Supp. 622, 625 (S.D.N.Y. 1991)).
Thus, if there exists "`a reasonable basis for the arbitrators' considered decision not to grant a postponement,' a court should be reluctant to interfere with the award." Ottawa, 132 F. Supp.2d at 220 (quoting Roche, 755 F. Supp. at 625). Stated another way, as long as there is at least "a barely colorable justification" for the arbitrators' decision not to grant an adjournment, the arbitration award should be enforced. Alexander Julian, 2001 WL 477010, at *2 (citing Landy Michaels Realty Corp. v. Local 32B-32J, Serv. Employees Int'l Union, 954 F.2d 794, 797 (2d Cir. 1992)) (additional citations omitted).
On the record before them, the arbitrators clearly acted reasonably in denying an application for a continuance made on the day of a hearing which had been scheduled more than seven months earlier. At the time the continuance was sought, the proceeding had been pending for over a year and a half and ten months earlier, Petitioners had been granted a delay to accommodate their counsel. In addition, six weeks before the hearing, in response to notice from Petitioners' counsel that he intended to seek a stay of the arbitration, the arbitrators had issued a notice that they intended to proceed with the arbitration on the day scheduled unless a court ordered a stay. At the time the application was made, the hearing was about to commence and Fiserv's counsel and two witnesses had come to New York from Colorado for the hearing.
It was also significant that the arbitration appeared to be a straight forward action to collect monies due on margin accounts and no argument was made that the monies were not due.
Counsel for Petitioners argued that the arbitrators should delay the proceeding until the resolution of an action pending in Michigan asserting fraud claims against Interface and one of its principal officers. However, it is unclear even to this date what information relevant to the call on Petitioners' margin accounts would be discovered in that action.
Petitioners try to avoid the fact that the record before the arbitrators fully supported the refusal to grant a continuance by arguing that they had been mislead as to the status of the arbitration by Mr. Zimmer. The first thing to be noted about this argument is that it is hard to fault the arbitrators for not being sympathetic to this argument when it was never mentioned to the arbitrators.
Counsel who sought the continuance stated that he represented all of the Respondents — Petitioners here — including Mr. Zimmer, and that he had been retained by Mr. Zimmer to represent the Respondents. While this same counsel now argues that Zimmer did not have authority to represent some of the Respondents, he never said that to the arbitrators.
Thus, there was nothing before the arbitrators to suggest that the application for a continuance was anything other than a last ditch effort to avoid a judgment for amounts legitimately due by bringing in new counsel. In these circumstances, the decision to refuse a continuance was entirely appropriate.
Nor does the fact that some of the Petitioners now claim that Mr. Zimmer had mislead them with respect to the status of the arbitration proceeding justify vacating the arbitration award. While the FAA provides that an award may be vacated if it has been procured "by corruption, fraud, or undue means," Fiserv did not procure the award by corruption, fraud or undue means. If Mr. Zimmer acted fraudulently or corruptly with respect to any of these Petitioners, their remedy is to be found in an action against him.
The record is clear that all of the Petitioners were aware of the pendency of the arbitration and the other related actions and that they had relied on Mr. Zimmer to retain counsel in those actions and to protect their interests. Some of the Respondents now claim that they believed that the firm of Ballon, Stoll, Bader Nadler was representing them in the arbitration and were unaware that Zimmer, a lawyer, had fired that firm and had undertaken the representation himself. While it is true that the Ballon firm did appear in the arbitration proceedings for the Petitioners, the Petitioners acknowledge, at a minimum, that Zimmer had been acting for them in selecting counsel and some of them admit that they believed that Zimmer was acting as co-counsel with the Ballon firm. It is also clear that none of the Respondents paid close attention to the arbitration and all of them relied on Zimmer to act as their agent with respect to the various proceedings related to their investment in Interface. Since Zimmer was acting as their agent, the fact that he failed to carry out those duties properly may give rise to an action against him but should not deprive Fiserv of an arbitration award it obtained fairly. See McCarthy v. Smith Barney Inc., 58 F. Supp.2d 288, 294 (S.D.N.Y. 1999) ("ineffective assistance of counsel is not among the specified grounds for vacating an award under the [Federal] Arbitration Act."); Borop v. Toluca Pacific Secs. Corp., No. 97 Civ. 4591, 1997 WL 790588 at *3 n. 8 (N.D. Ill. 1997).
Moreover, when Zimmer announced that he was replacing the Ballon firm, Fiserv's counsel raised the question of a possible conflict of interest with the arbitrators since Zimmer was a party. Not only did Zimmer assure the panel that he was a lawyer who was experienced in handling arbitration proceedings and was authorized to do so by his clients, but the arbitrators directed the NASD to send out letters to all the Respondents asking them to confirm that Zimmer represented them. Letters were then sent to all Respondents and a majority affirmatively responded that Zimmer represented them. None wrote back to deny that Zimmer had authority to represent them. In view of the substantial response confirming that Zimmer was authorized to represent the Respondents and the fact that there was no contrary response, there was nothing unreasonable in the panel accepting Zimmer's representation that he was authorized to appear for all of the Respondents.
Nor does the fact that one of the letters was mailed to a wrong address invalidate the reasonableness of the arbitrators' reliance on Zimmer's representation.
The record refutes the claim of the Respondents that they lacked adequate notice of the hearing. All of the Respondents contend that they were relying on the Ballon firm to protect their interests in the arbitration. Since that firm had notice of the May 20th hearing date, there was no requirement that the individual Respondents also had to be given notice of the date. It is well settled that when a party to a proceeding is represented by counsel, notice to that counsel is notice to the party. Link v. Wabash R. Co., 370 U.S. 626, 634, 82 S.Ct. 1386, 1390 (1962) (a litigant "is deemed bound by the acts of his lawyer-agent and is considered to have `notice of all facts, notice of which can be charged upon the attorney.'") (quotingSmith v. Aver, 101 U.S. 320, 326, 25 L.Ed. 955 (1879)). See also York Research Corp. v. Lanqarten, 927 F.2d 119, 122 (2d Cir. 1991)
Moreover, the record indicates that the Ballon firm gave actual notice of the hearing date to the Petitioners. After its application for an adjournment of the originally scheduled hearing date was granted, Mr. Jaffe, of that firm, wrote to the NASD on September 10, 2001 that he had consulted with his clients about their availability for a hearing and suggested several dates in April, 2002. Thereafter, Mr. Jaffe received a letter from the NASD advising him that the hearing would take place on May 20-24, 2003. On October 17, 2001, Mr. Jaffe sent a letter to the NASD relating to discovery issues in which he noted that the hearing was scheduled to begin in the third week in May. Both of these letters from Mr. Jaffe to the NASD reflect that copies were sent to the Respondents.
Thus, the Petitioners had both actual and constructive notice of the May 20th, 2003 hearing date. Their professed failure to take any action to inform themselves of the preparations for that hearing or the desirability of their attending the hearing speaks more to their lack of care about the proceeding than a defect in the proceeding itself.
One of the Petitioners, Martin Newman, claims that he is in a unique position because the letter sent by the NASD to him asking that he confirm that Mr. Zimmer represented him was mailed to the wrong address. However, despite his present protestations and attacks on Mr. Zimmer, there is no reason to believe that, had he received the letter, Newman would have denied that Zimmer represented him. The original memorandum of law supporting his petition contained the statement, "Zimmer induced Mr. Newman to allow Mr. Zimmer to represent the Respondents, including Mr. Newman, as either the attorney or as the `lead respondent.'" (Petitioner's Mem. of Law in Support of Vacating Arbitration Award at 4). In his petition, Newman swore that he had read the Memorandum and that "all the allegations therein . . . are truthful, accurate and I adopt them. . . ." In light of this sworn statement that he agreed to have Zimmer represent him in the arbitration proceeding, Newman's claim that he relied solely on the Ballon firm has a decidedly hollow ring and cannot be accepted. See Perma Research Dev. Co. v. Singer Co., 410 F.2d 572, 578 (2d Cir. 1969) ("If a party who has been examined at length on deposition could raise an issue of fact simply by submitting an affidavit contradicting his own prior testimony, this would greatly diminish the utility of summary judgment as a procedure for screening out sham issues of fact."); United States v. Dercacz, 530 F. Supp. 1348, 1351 (E.D.N.Y. 1982).
But even if one were to credit Newman's assertion that he never authorized Zimmer to represent him, that would not provide a reason to vacate the arbitration award. As noted above, the Ballon firm, on which Newman claims he relied, had notice of the May 20th hearing date and had provided notice of that date to Newman. Like the other Petitioners who had both actual and constructive notice of the hearing date, Newman cannot blame his failure to see that his interests were protected on the arbitration panel.
Petitioners' arguments that the arbitrators should have delayed the proceeding until this Court heard an application for an injunction to stay the arbitration and that there were procedural defects in the arbitration process are completely without merit. Since this Court denied an application to stay the arbitration, the arbitrators were free to make their own decision. Any failure of the arbitrators to follow the procedural rules with respect to discovery were waived because they were not presented to the arbitrators. York Research Corp. v. Lanqarten, supra.
For the foregoing reasons, the motion to confirm the arbitration award is granted and the motions to vacate the award are denied.