UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF NEW YORK
March 16, 1979
Lea MAIDMAN, Plaintiff,
Joseph H. O'BRIEN II and Evans & Co., Incorporated, Defendants
The opinion of the court was delivered by: HAIGHT
Memorandum Opinion and Order
By Memorandum and Order of this Court dated November 16, 1976 (the Opinion), this action was stayed pursuant to section 3 of the Federal Arbitration Act (the Act), 9 U.S.C. § 3, and assigned to this Court's suspense docket, pending the resolution via arbitration of plaintiff's securities law claim against the corporate defendant Evans & Company, Incorporated (Evans). Familiarity with that Opinion is assumed for the purposes of this discussion. That arbitration was conducted on May 23rd and May 27th, 1977, before a panel of five arbitrators under the auspices of the New York Stock Exchange, Incorporated. The panel rendered a decision on June 7, 1977 dismissing Ms. Maidman's claim.
Evans has now renewed its pre-arbitration motions pursuant to Fed.R.Civ.P. 12: 1) to dismiss the securities law claim in count three as to it on the basis of the arbitrators' decision; and 2) to dismiss the libel claim in count two, as a) beyond this Court's jurisdiction, and/or b) barred by the applicable statute of limitations. The individual defendant O'Brien has similarly moved to dismiss count three, as it stands against him, on the basis of the collateral estoppel effect of the arbitration and to dismiss the libel claim in count one due to the lack of jurisdiction over its subject matter. The plaintiff has opposed all these applications, objected to the arbitrators' decision, and moved for leave to amend her complaint to add the New York Stock Exchange as a defendant. For the reasons which follow, the defendants' motions to dismiss are hereby granted, plaintiff's motion is denied and this action ordered discontinued in its entirety.
A. Evans' Motion to Dismiss Count Three on the Basis of the Arbitrators' Decision.
Preliminarily, it should be noted that although Evans has not sought to have the arbitration decision confirmed pursuant to 9 U.S.C. § 9, there is authority for treating such motions to dismiss as implicitly seeking that confirmation
and when a party objects to an arbitration decision on the merits, the possible untimeliness of the confirmation application has been viewed as waived.
Consequently, the discussion will proceed with a review of the arbitration under the standards for confirming or vacating such a decision.
The arbitration hearing on Ms. Maidman's claim against Evans consumed just over six (6) hours on two afternoons and resulted in a transcript of 269 pages. In their decision the arbitrators gave no reasons for dismissing the claim, but they had no obligation to do so,
and the courts in such situations as this are instructed that "(i)f a ground for the arbitrator's decision can be inferred from the facts of the case, the award should be confirmed."
Moreover, although the failure to rule in accordance with the provisions of the securities laws would be grounds for vacating the decision, that failure must "be made clearly to appear."
Thus, unless there is "manifest disregard" of the applicable law,
or the decision evinces an otherwise "grievously flawed character,"
the decision should be upheld even though there might exist an underlying misinterpretation of the law.
Consequently, in reviewing arbitration the courts do not attempt to analyze the reasoning employed therein, but, absent "manifest disregard" of the law, they uphold the award unless the challenging party demonstrates one of the infirmities listed in section 10 of the Act.
Plaintiff has, in her papers, alleged both a flagrant disregard for the law in dismissing the claim and also many of the grounds contained in section 10 of the Act.
A careful review of the transcript of the arbitration hearing, however, reveals none of these flaws. First, with regard to the alleged error in the decision itself, the crux of plaintiff's claim was O'Brien's "unauthorized" transactions with her securities, but as the arbitrators recognized there was a significant difference of opinion between O'Brien and Maidman as to the circumstances surrounding O'Brien's authority. If O'Brien's testimony was credited, the transactions were authorized within the meaning of the securities laws, rendering both Evans and O'Brien non-liable. No further analysis of the decision need be undertaken.
Secondly, regarding the grounds for vacating the decision, as listed in section 10, there is not the slightest hint of any such infirmities.
Accordingly, the defendant Evans would be entitled to confirmation of the decision and is hereby granted its motion to dismiss count three of the complaint, as such count stands as to it.
B. Evans' Motion to Dismiss Count Two.
Count two seeks damages from Evans due to the alleged defamation Ms. Maidman suffered as a result of Evans' "publication"
on February 23, 1973 of an allegedly libelous statement authored by O'Brien. This claim was asserted for the first time against Evans in the amended complaint which was sworn to on June 18, 1976 and served on Evans' counsel's office July 16, 1976.
Evans submits such a claim is barred by the one-year statute of limitations prescribed in N.Y.C.P.L.R. § 215.
Evans is correct. Under such circumstances the action was not "commenced" against Evans within one year after publication. Kern v. Hettinger, 303 F.2d 333 (2d Cir. 1962). Accordingly the second count is hereby ordered dismissed.
O'Brien's Motion to Dismiss Count Three on the Basis of the Collateral Estoppel Effect of the Arbitrators' Decision.
It is well settled that the related doctrines of Res judicata and collateral estoppel are properly applied to arbitration decisions.
The defensive use of the collateral estoppel effect of arbitration, as sought herein by O'Brien, has been sanctioned in this circuit for some time. In Ritchie v. Landau, 475 F.2d 151 (2d Cir. 1973), an individual successfully raised the defense of collateral estoppel to a claim which had been dismissed by the decision in a prior arbitration against the corporation, the individual's employer. The Court, applying New York State principles of collateral estoppel in a diversity action,
observed per Judge Waterman:
"(W)e have held that one not a named party to an arbitration proceeding can successfully rely in defense of a court action upon the collateral estoppel doctrine when the party suing him had been given a full opportunity to litigate the issue in a prior arbitration proceeding. Goldstein v. Doft, 236 F. Supp. 730 (SDNY 1964), aff'd 353 F.2d 484 (2 Cir. 1965), cert. denied, 383 U.S. 960, 86 S. Ct. 1226, 16 L. Ed. 2d 302 (1966); see Israel v. Wood Dolson Co., 1 N.Y.2d 116, 151 N.Y.S.2d 1, 134 N.E.2d 97 (1956). Although plaintiff attempts to distinguish Goldstein v. Doft, supra, on the ground that plaintiff Goldstein "lost' in the arbitration proceedings, while plaintiff Ritchie "won,' this attempted distinction is clearly without merit. The critical fact in both cases is that the plaintiffs were given one opportunity to litigate their claims for compensation before the arbitrators; and one opportunity is all they are entitled to have." 475 F.2d at 155-56 (footnote and citation omitted).
The Goldstein case has been cited with approval by the Supreme Court for the principle that collateral estoppel should apply in appropriate circumstances "to prevent relitigation of factual disputes resolved by an arbitrator."
As in the Ritchie case, this defense can be raised in an action which began before arbitration, and warrant dismissal after the arbitration is completed.
The claims at issue here, being securities law claims, are governed by federal law and thus the federal courts must apply their own rules governing collateral estoppel.
Yet, despite the exclusive jurisdiction over such claims in federal courts, determination of necessary factual issues elsewhere can be given collateral estoppel here.
To the extent that there may remain any significant distinction between collateral estoppel's application under "general federal law" versus New York State law, this Court views such differences as immaterial to our situation.
Accordingly, the following discussion will focus on two prerequisites to invocation of the collateral estoppel defense, which must be established here: first, " "an identity of issue which has necessarily been decided in the prior action and is decisive of the present action, and, second, . . . a full and fair opportunity to contest the decision now said to be controlling.' "
With regard to the identity of the issue necessarily decided in the arbitration and decisive of the present claim, we must begin our analysis by resolving what issues were submitted to the arbitrators. The submission, pursuant to the agreement of Ms. Maidman and Evans, included all claims against the latter arising out of the alleged securities law violations. Opinion at 5. These were the claims charged in count three of the complaint, which essentially accuses O'Brien of improper trading in Ms. Maidman's securities and Evans' vicarious liability therefor. Opinion at 8. The only "culpable" conduct mentioned in count three which was not that of O'Brien himself was either Evans' officers approving O'Brien's dealings
or failing to take the necessary corrective measures when Ms. Maidman complained.
O'Brien is not charged with any conduct, and resultant liability, in count three which is not also charged against Evans, which Ms. Maidman averred was "responsible for all his (O'Brien's) actions."
After reviewing all the pleadings and submissions presented in the instant record and the transcript of the arbitration hearing it is clear that whatever charges in count three are not attributable to O'Brien were asserted to prove Evans' liability under a theory of "respondeat superior," or speak to misconduct unrelated to O'Brien's acts. There was never any suggestion that action on behalf of Evans could excuse Evans of any aspect of O'Brien's alleged misconduct or provide Evans with an affirmative defense thereto. Consistent with this understanding was Evans' position throughout the arbitration to defend O'Brien's acts on the merits, and not submit proof on factual issues other than O'Brien's action. Thus both Evans and O'Brien stood charged with liability for the same acts those of Mr. O'Brien.
For Evans to be held non-liable it was a necessary ingredient of such a holding that O'Brien's acts, independent of action by Evans' other employees, did not constitute violations of the securities laws. Thus to dismiss the claims against Evans the arbitrators necessarily determined that O'Brien's acts, as if he were a party before them, warranted no relief to Ms. Maidman and should have been dismissed also.
This was clearly set forth in this Court's prior Opinion in the instant case, which recognized the securities law claim against Evans as "arising from alleged improper trading of Maidman securities by O'Brien while in the scope of his employment with Evans." Opinion at 4. As was observed:
"Although not explicitly stated the gist of the Maidman claim against Evans is based on a theory of "respondeat superior', in that O'Brien was acting within the scope of his employment during his transactions with Maidman. As a practical matter the liability of Evans for the acts of O'Brien will be a paramount issue facing the arbitrators. Since the alleged liability of Evans for the acts of O'Brien is vicarious in nature, the arbitrators must make the threshold determination of whether the actions of O'Brien vis-a-vis Maidman were improper in the first instance. In making such findings the arbitrators will be reviewing the same facts which Maidman relies on in support of her claim in this Court against O'Brien individually." Opinion at 8.
The transcript of the arbitration hearing clearly indicates this orientation was shared by both the adversaries and the arbitrators the primary issue was the validity of O'Brien's transactions.
To the extent other matters were raised they were irrelevant to this issue and thus irrelevant to this discussion.
Accordingly I find the issue of the validity of O'Brien's transactions under the securities laws to have been necessarily resolved in the arbitration decision and to be controlling of any liability of O'Brien under count three of the complaint.
The last requirement, that there be a "full and fair opportunity to contest the decision now said to be controlling" warrants little further discussion. At the arbitration hearing Ms. Maidman suffered absolutely no constraints in the submission of documentary proof, the testimony of herself and other witnesses, cross-examination of Mr. O'Brien and her own argument. As was noted Supra, even Ms. Maidman considered the arbitrators patient, fair and knowledgeable in the field. Additionally, a reading of the transcript makes it obvious to this Court that the arbitrators recognized the controlling issues of fact.
The sole aspect of the arbitration proceeding which sheds the slightest shadow of doubt as to its "fairness"
is Ms. Maidman's Pro se status. However, the procedural history of this action erases any notion of such unfairness. Ms. Maidman requested, and received in March 1974, an adjournment of the arbitration proceedings so that she might retain counsel, Opinion at 2, but she never succeeded in this endeavor in the three years thereafter, and the arbitration went ahead. Although Ms. Maidman on several occasions voiced her desire that counsel be appointed for her in this proceeding, as in the arbitration, ultimately she has had to make her case alone. Under these circumstances I must accept the fact of her continued Pro se status as a reality of the case which does not infect an otherwise entirely fair proceeding.
I conclude she had a full and fair opportunity to contest the facts O'Brien posits she is now estopped from relitigating.
Having determined that the requirements for the invocation of collateral estoppel are present in this claim, O'Brien's motion to dismiss count three of the complaint is hereby granted.
O'Brien's Motion to Dismiss Count One
With the above dismissals of the securities law claims, and the acknowledged absence of any remaining federal claims or diversity of citizenship, O'Brien moves to dismiss count one for lack of this Court's jurisdiction over that sole remaining claim. It was only asserted to be within this Court's jurisdiction as "pendent" to the securities claims.
The landmark Supreme Court case on pendent jurisdiction is United Mine Workers v. Gibbs, 383 U.S. 715, 86 S. Ct. 1130, 16 L. Ed. 2d 218 (1966) where Justice Brennan, writing for the Court, opined:
"That power (to adjudicate state-law claims) need not be exercised in every case in which it is found to exist. It has consistently been recognized that pendent jurisdiction is a doctrine of discretion, not of plaintiff's right. Its justification lies in considerations of judicial economy, convenience and fairness to litigants; if these are not present a federal court should hesitate to exercise jurisdiction over state claims, even though bound to apply state law to them, Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188. Needless decisions of state law should be avoided both as a matter of comity and to promote justice between the parties, by procuring for them a surer-footed reading of applicable law. Certainly, if the federal claims are dismissed before trial, even though not insubstantial in a jurisdictional sense, the state claims should be dismissed as well." 383 U.S. at 726, 86 S. Ct. at 1139 (footnotes omitted).
In addition to the strongly-worded suggestion in Gibbs that in this situation a district court "should" in its discretion decline to exercise jurisdiction over surviving state-law claims, it is this Court's understanding that Ms. Maidman would be permitted six (6) months from the date of this Memorandum Opinion and Order in which to file this claim, contained in count one, in state court.
Accordingly, O'Brien's motion to dismiss count one is hereby granted and the claim is dismissed without prejudice. All of the dismissals ordered Supra are without costs.
With regard to O'Brien's counterclaim, for the reasons stated above in respect to count one of the complaint, this counterclaim is also dismissed without prejudice and without costs. This would also appear to be the action sought by O'Brien's counsel.
In view of the decisions reached Supra, the parties' requests to remove this action from the suspense docket and restore it to the active calendar are moot.
The Clerk of the Court is hereby directed to enter a judgment dismissing the complaint, as follows:
(1) dismissing count one of the complaint as to defendant O'Brien, without prejudice and without costs;
(2) dismissing count two of the complaint as to defendant Evans, with prejudice and without costs;
(3) dismissing count three of the complaint as to both defendants, with prejudice and without costs.