United States District Court, S.D. New York
February 25, 2004.
HD Brous & Co., Inc. Petitioner -against- Roman M. Mrzyglocki, Respondent
The opinion of the court was delivered by: BARBARA JONES, District Judge
MEMORANDUM OPINION, ORDER, AND ORDER TO SHOW CAUSE
This is a petition to enjoin an arbitration currently pending before
the New York Stock Exchange ("NYSE"). For reasons set forth below the
petition is denied. The arbitration sought by Respondent will proceed
according to a schedule set by the arbitrators. Denial of the petition
intimates no view of the Court on Petitioner's proposed statute of
limitations defense, which may be presented to the arbitrators at
Petitioner's discretion. In addition to denying the petition, the Court
will direct an order to show cause to Petitioner's counsel under Federal
Rule of Civil Procedure 11(c)(1)(B).
According to the memoranda and supporting papers filed with this Court
by the parties in the above captioned action, Respondent, Roman
Mrzyglocki, was a client of HD Brous & Co., Inc., Petitioner, from
late 1996 until March of 1998. HD Brous is a financial services
organization and a New York Corporation. Mrzyglocki is a resident of New
Jersey. During the period of their business relationship, Respondent
alleges that he lost over $180,000 as a result of
transactions and investments made by and through Petitioner that
were at odds both with responsible business practices and with
Respondent's expectations and instructions.
As part of the business relationship entered into by Petitioner and
Respondent, Mrzyglocki signed a Margin Account Agreement (the
"Agreement"), which included an arbitration agreement. A copy of the
Agreement has been provided to the Court as Exhibit C, attached to the
sworn affidavit of Robert Brous, Chief Executive Officer of HD Brous. In
his affidavit Brous testifies that the Agreement was completed and signed
during the course of opening Respondent's account with HD Brous. Brous
Affidavit at 2. Brous further relies upon Exhibit C, asserting that it,
by a choice of law provision, binds the parties to apply Maryland law to
their disputes. Id. at 3. These assertions are repeated in the
petition filed by HD Brous in the State court.
On June 26, 2003 Respondent filed a Statement of Claim, in accordance
with the arbitration rules of the New York Stock Exchange ("NYSE"),
demanding arbitration of claims against Petitioner arising from HD
Brous's alleged mishandling of his account. In his Claim, Respondent
alleges that Petitioner and its agent, Timothy Mann, breached their
fiduciary duties to Respondent by engaging in a series of high-risk
transactions that resulted in the above-mentioned losses. Respondent
further alleges violations of National Association of Securities Dealers
("NASD") and NYSE rules and regulations, citing, inter alia,
alleged failures to inform Respondent about critical investment
transactions and failures to act on Respondent's directions.
On July 18, 2003 the NYSE served Petitioner with Respondent's Statement
of Claim. On October 3, 2003 HD Brous filed a petition before the Supreme
Court of New York, New York County, seeking to enjoin the arbitration
pursuant to Section 7502(b) of the New York Civil Practice Law and Rules,
asserting that Respondent's claims were time-barred. On that date
Justice Emily Jane Goodman issued an Order to Show Cause wherein
Respondent was directed to appear in New York Supreme Court on October
30, 2003. Justice Goodman declined to issue a Temporary Restraining Order
as part of the Order to Show Cause.*fn1
Respondent filed a Notice of Removal in this Court on October 23, 2003.
The matter was subsequently referred to me by normal administrative
procedures. With the Notice of Removal, Respondent filed his "Memorandum
of Law in Opposition to Petitioner's Application to Stay Arbitration"
(the "Response"). On November 20, 2003 Petitioner filed a timely Reply
(the "Reply"). The events recounted above have put HD Brous's
fully-briefed petition before this Court.
In the course of reviewing papers submitted by the parties the Court
became concerned with a series of shifts in Petitioner's positions on
critical issues of law and fact. Foremost of these was Petitioner's
reversal as to whether or not the arbitration agreement, presented to the
Court by Robert Brous himself, formed part of a binding contract between
the parties. To resolve this question, amongst others, the Court
scheduled an oral argument on the petition by an Order dated January 13,
2004 (the "January 13, 2004 Order").
That argument was commenced, as scheduled, on January 21, 2004. At the
end of the hearing the Court invited the parties to provide the Court
with written submissions detailing any additional cases or other sources
of law the Court should consider. Petitioner obliged in the form of a
letter dated January 28, 2004. Respondent, in conformance with the
directions of the Court, responded with his own letter on February 2,
2004. The Court has given full consideration to the
arguments of the parties and the relevant law. For reasons set
forth below it declines to issue the requested order enjoining
arbitration. This Court makes no comment on the merits of either
Petitioner's statute of limitations defense or Respondent's claims. In
their present posture, these issues are rightfully the concern of the
arbitrators, not this Court.
The weight of Petitioner's argument for a court imposed stay on the
arbitration pending before the NYSE is borne by the assertion that
Respondent's claims are time-barred. Petitioner points out that March
1998 marks the end of its business relationship with Respondent.
Therefore, Petitioner argues, Respondent's claim for arbitration, filed
in June of 2003, relies on events more than five years in the past.
Petitioner further claims, in its original petition, that this five-year
period exceeds the statutes of limitation on Respondent's claims under
both federal law and Maryland law.*fn2
Mrzyglocki responds, after having removed the petition to this Court,
with a series of conditional arguments, beginning with an assertion that
HD Brous can neither file a petition under N.Y. CPLR §§ 7502 and
7503 nor rely on New York case law because New York law does not govern
the dispute. Respondent contends that New Jersey law should apply in this
case and argues that his claim for arbitration is timely under the
six-year statute of limitations that governs his claims under New Jersey
common law. Next, Respondent argues that, "even if New
York law did apply, the issue of whether Mrzyglocki's claims are
time-barred is a question for the arbitrators, rather than the courts, to
decide" under the broad-form arbitration agreement signed by the parties.
Response at 5. Finally, Respondent argues that, even if New York law
applies and all issues relating to his claims were not destined for the
arbitrators by way of the arbitration agreement, HD Brous was untimely in
making its petition under N.Y. CPLR §§ 7502 and 7503.
In reply, Petitioner again contends that it may move for an injunction
in this Court pursuant to N.Y. CPLR § 7502. In support of this
contention counsel point out that the only basis for this Court to assert
jurisdiction over the subject-matter in this case is pursuant to
28 U.S.C. § 1332. Thus, counsel conclude, the Court is bound to receive
and consider the petition pursuant to N.Y. CPLR § 7502 because, in
diversity cases, "state substantive law must be applied." Reply at 1. In
their Reply counsel for Petitioner also, for the first time and after
having relied upon the Agreement in earlier submissions to the State
court, claim that HD Brous is not a signatory to the Agreement and is,
therefore, not bound by either the choice of law provisions in numbered
paragraph 17, Reply at 11, of the Agreement or the broad-form arbitration
agreement in numbered paragraph 19 of the Agreement, Reply at 7-8.
The Court finds that the terms of the Margin Account Agreement are
enforceable over Petitioner. Numbered paragraph 19 of the Agreement
contains a broad-form arbitration clause in which "[i]t is agreed" that
all disputes between Petitioner and Respondent will be resolved in
arbitration. This Court is bound to respect this agreement. It will,
therefore, decline to grant the petition. Without commenting on the
merits of Respondent's claims or Petitioner's proposed defenses, the
Court will leave the arbitrators to do their duties.
A. Petitioner is Bound by the Terms of the Margin Agreement
Petitioner, through the affidavit of Robert Brous and in its original
petition, presents the Agreement as a document forming part of its
business relationship with Respondent. In its petition, HD Brous relies
upon numbered paragraph 17 of the Agreement to argue that Maryland and
federal law should apply to Respondent's claims. In a radical change of
position, counsel for Petitioner assert in their Reply that Petitioner is
not bound by the terms of the Agreement because it is not a signatory.
Counsel repeated this claim at the oral argument and do so again in the
letter to their January 28 letter. Counsel's attempts to distance their
client from the Agreement are misleading and fruitless. The Agreement
serves as evidence that Petitioner agreed, along with Respondent, to
arbitrate all controversies between them. Petitioner has also claimed
benefits from the Agreement and is, on this basis, estopped from
disclaiming the arbitration clause.
1. The Margin Agreement Documents Terms Affecting Respondent's
Business Relationship with Petitioner
Petitioner is not a signatory to the Agreement. In their Reply, counsel
for Petitioner represent that the Agreement is signed "by a Maryland
clearing firm, Alex, Brown & Sons, Inc." Reply at 7. From these
facts, counsel would have this Court conclude that the Agreement is a
contract between Alex, Brown and Respondent in which Petitioner does not
participate, from which Petitioner does not benefit, and by which
Petitioner is not bound. Counsel are wrong on all scores.
To start, counsel's claim that Alex, Brown signed the Agreement is not
accurate. The agreement is, in fact, only signed by Respondent. Alex,
Brown & Sons ("Alex, Brown") is
named in the agreement and its corporate name and address appear at
the top of the document. There is, however, no signature line for Alex,
Brown, its representative, or any parties other than prospective clients.
Alex, Brown also does not appear in a first-person speaking role at any
point in the Agreement.
The document does not purport to speak for anyone other than
Respondent. There are three parties contemplated in the Agreement: the
signatory client (Respondent), Alex, Brown, and the client's "Financial
Services Organization." At the oral argument, counsel for Petitioner
admitted that HD Brous is the Financial Services Organization named in
the Agreement. Pursuant to paragraph 1 of the Agreement, all uses of the
first-person in the Agreement refer to Respondent. Most of the
substantive paragraphs in the Agreement find Respondent acting or
reporting in his own voice. By contrast, Alex, Brown and HD Brous are
silent in the Agreement. At no point in the document do Alex, Brown or HD
Brous speak or take action in the first-person.
In the first unnumbered paragraphs of the document, Respondent
acknowledges that he has been informed by HD Brous that Alex, Brown will
provide certain services to HD Brous relating to Respondent's account.
Respondent also agrees that he has been informed about and accepts
certain features of and limitations on his business relationship with
Alex, Brown and HD Brous. These features and limitations are documented
in the remaining eighteen numbered paragraphs, all of which have
Respondent acknowledging and agreeing to features and limitations on his
margin accounts with HD Brous that are, as per HD Brous's arrangements
with Alex, Brown, serviced by Alex, Brown.
According to the affidavit of Robert Brous, Respondent signed the
Agreement "in the course of opening his account." Brous Affidavit at 2.
It became clear at the oral argument that,
consistent with the normal business practices of HD Brous,
Petitioner presented the Agreement to Respondent along with a "new
account form" and "account transfer documents." The "new account form,"
Exhibit B attached to the affidavit of Robert Brous, consists of one page
and provides no details as to the features and limitations of the
business relationship between Petitioner and Respondent. The "account
transfer documents" perform the job suggested by their title, but provide
no details whatever as to the business relationship between Petitioner
and Respondent. The Agreement, presented to Respondent by Petitioner, is
the only document of substance offered by either party relating to the
business relationship formed between the parties when Respondent opened
his account with Petitioner.
The Agreement is not, as counsel for Petitioner want the Court to
believe, an agreement solely between and affecting Respondent and Alex,
Brown. The Agreement makes reference to Petitioner no fewer than twenty
times. That is so, notwithstanding the fact that HD Brous's name does not
appear in the Agreement. The Agreement's references are to the "Financial
Services Organization," and to the "correspondent." It is not disputed
that HD Brous is the subject of these references. As examples, in
numbered paragraph 2 Respondent agrees to delegate authority to
Petitioner; in numbered paragraphs 3, 11, and 13 Respondent describes how
Petitioner will be involved in the financing and handling of his
accounts; in numbered paragraph 4 Respondent agrees to make certain
disclosures to Petitioner; in numbered paragraph 14 Respondent sets forth
the procedure by which he can object to Petitioner's handling of his
funds and accounts; in numbered paragraph 19 Respondent recites an
agreement amongst the parties that any disputes between them will be sent
to arbitration pursuant to the Federal Arbitration Act.
These facts and the form of the Agreement itself make the absence of
Petitioner's signature on the document irrelevant. In its form and
content the Agreement demonstrates that Respondent has been informed of
and agrees to certain features and requirements of his account with HD
Brous. It documents Respondent's acceptance of terms on an offer
of services extended by Petitioner and Alex, Brown. According to the
Agreement, these terms and information relating to the respective duties
of the parties were provided to Respondent by Petitioner. The Agreement
itself was, according to Robert Brous, provided to Respondent by
Petitioner. The terms documented in the Agreement are Petitioner's terms
of service. The Agreement does no more or less than document that
Respondent, at the time he opened his account with Petitioner, understood
and accepted these terms. Pursuant to terms documented in the Agreement,
Petitioner began to perform services for Respondent and to claim benefits
from their business relationship. Petitioner is, therefore, bound to
abide by the terms of the Agreement.
The grammatical construction of the Agreement also provides strong
evidence that it documents an agreement between the parties as opposed to
creating one. Most paragraphs in the Agreement are animated by a
first-person present tense declarative such as "I acknowledge," "I
agree," and "I authorize." These paragraphs present a picture of duties,
conditions, and limitations being proposed to Respondent with Respondent
acting affirmatively to accept them. Consistent with the use of these
first-person declarations, the duties, acknowledgments, and agreements
found in these paragraphs are uniquely Respondent's.
The contrasting choice of the phrase "It is agreed" at the beginning of
paragraph 19 is, in this context, quite revealing. The use of the
third-person singular present tense indicative in combination with the
past participle clearly communicate the fact that the speaker, here
Respondent, is reporting rather than acting. Specifically, he is
reciting, from an objective point of view, an agreement between Alex,
Brown, HD Brous, and Respondent, "that all past, present, or future
controversies between myself, any persons having an interest in my
account, Alex, Brown, [HD Brous], or any of the employees or affiliates
of either . . . shall be submitted to arbitration pursuant to the
Federal Arbitration Act."
If Petitioner did not, as its counsel now claims, intend or want to be
bound by contract terms that it presented to Respondent for his
acceptance, then it could have taken action to avoid any commitment. It
could have disclaimed the contract terms set forth in Respondent's
acceptance. Having done so, Petitioner could have altered the Agreement
or negotiated a separate and superceding agreement. At the very least, a
representative of HD Brous, one of whom was present when Respondent
signed, could have manifested an unwillingness to be bound by the
arbitration clause in numbered paragraph 19 before accepting the signed
Agreement and commencing a business relationship with Respondent.
Petitioner did none of these things.
The title "Agreement" may be misleading to Petitioner, but the Court
suspects not. Petitioner presented to Respondent the terms set forth in
the Agreement. Petitioner was present when Respondent accepted these
terms. The terms accepted by Respondent document details pertaining to
the business relationship being formed between Petitioner and Respondent.
Respondent specifically names Petitioner as a beneficiary of his
acceptance of terms. Agreement at para. 2 ("I intend that my Financial
Service Organization be a beneficiary of this Agreement"). Petitioner,
through its officer Robert Brous, is also the first party to use the
Agreement as evidence of contract terms between itself and Respondent.
All of this suggests
that Petitioner knows that the Agreement accurately reports the
terms of its business relationship with Respondent. Petitioner certainly
relied upon this being the case in its petition.
Petitioner made an offer of financial services to Respondent.
Respondent accepted. Petitioner presented an Agreement to Respondent.
According to Respondent's reports in the Agreement, Petitioner provided
information and explanation pertinent to the contract terms described in
the Agreement. Respondent signed the Agreement. Petitioner accepted it
without alteration and without disclaiming Respondent's report, at
paragraph 19 of the Agreement, that he, Petitioner, and Alex, Brown had
agreed to arbitrate "all past, present, or future controversies" between
them. Petitioner has not produced any other document of substance that
purports to set additional or alternative terms for its contract
relationship with Respondent. After the Agreement was signed, Petitioner
accepted funds from Respondent and acted as his "Financial Services
Organization." On this basis the Court concludes that the terms
documented in the Agreement are binding upon Petitioner as part of its
contract relationship with Respondent.
2. Petitioner is Estopped from Disclaiming the Agreement to
Even if the Agreement were, as counsel for Petitioner now claim, a
contract between Respondent and Alex, Brown only, HD Brous is a named
beneficiary of the Agreement. Petitioner has also sought and accepted
significant benefits from the Agreement. Having knowingly accepted
benefits from the Agreement, Petitioner is estopped from disclaiming the
agreement to arbitrate found in paragraph 19 of the Agreement.
The obligation to arbitrate is created by contract. It follows that "a
party cannot be required to submit to arbitration any dispute which he
has not agreed so to submit." United Steelworkers of America v.
Warrior & Gulf Navigation Co., 363 U.S. 574, 582 (1960). `"It
not follow, however, that under the [Federal Arbitration] Act an
obligation to arbitrate attaches only to one who has personally signed
the written arbitration provision.'" Thomson-CSF, S.A. v. American
Arbitration Ass'n, 64 F.3d 773, 776 (2d Cir. 1995) (quoting
Fisser v. International Bank, 282 F.2d 231, 233 (2nd Cir.,
1960). To the contrary, it is well-established that "non-signatories to
an arbitration agreement may nevertheless be bound [to arbitrate]
according to ordinary principles of contract and agency." McAllister
Bros. v. A& S Transportation, 621 F.2d 519, 524 (2nd Cir. 1980)
(citations omitted); Delloitte Noraudit A/S v. Delloitte Haskins
& Sells, 9 F.3d at 1060, 1064 (2nd Cir. 1993). In
Thomson-CSF, S.A. v. American Arbitration Ass'n the Second
Circuit specified five principles in particular: (1) incorporation by
reference; (2) assumption; (3) agency; (4) veil-piercing/alter ego; and
(5) estoppel.". 64 F.3d 773, 776 (2d Cir. 1995). See also Smith/Enron
Cogeneration Ltd. P'ship v. Smith Cogeneration Int'l, Inc.,
198 F.3d 88, 97 (2nd Cir. 1999). Estoppel is the principle most relevant on the
"A party is estopped from denying its obligation to arbitrate when it
receives a `direct benefit' from a contract containing an arbitration
clause." American Bureau of Shipping v. Tencara Shipyard S.P.A.,
170 F.3d 349, 353 (2d Cir., 1999) (citing Thomson-CSF,
64 F.3d at 778-779); Deloitte Noraudit A/S, 9 F.3d at 1064;
Smith/Enron Cogeneration, 198 F.3d at 98. If Petitioner here was
an intended beneficiary of the Agreement, knew that it was an intended
beneficiary of the Agreement, and knowingly accepted benefits from the
Agreement then it cannot selectively repudiate the obligation to
arbitrate set forth in the Agreement. See Thomson-CSF, 64 F.3d
at 778, 779; Deloitte Noraudit, 9 F.3d at 1064.
In the January 21, 2004 hearing counsel for Plaintiff's claimed that HD
Brous is not a third-party beneficiary to the Agreement and did not, in
fact, receive any benefits from the Agreement. Both assertions are wrong.
At the January 21, 2004 hearing and again in the letter to the Court
counsel for Plaintiff's relied, misleadingly, on DuPont De Nemours
& Co. v. Rhone Poulenc, 269 F.3d 187 (3rd Cir., 2001) to argue
that Petitioner is not a beneficiary of the Agreement. Critical to the
Third Circuit's analysis in that case was the fact that DuPont was not a
named beneficiary to the contract. See DuPont, 269 F.3d at 196.
That is not the case here.
Petitioner is, in fact, a knowing and intended beneficiary of the
Agreement. In numbered paragraph 2 of the Agreement it is stated that "I
intend that my Financial Services Organization be a beneficiary of this
Agreement." As counsel for Petitioner admitted at oral argument,
Petitioner is the "Financial Services Organization" contemplated here and
throughout the Agreement. Given that Petitioner gave the Agreement to
Respondent, as it has to many other clients, Petitioner knew, or should
have known, that it was an intended beneficiary. At the least, counsel
for Petitioner could not properly claim, without caveat or limitation,
that it was not.
Counsel's claim that Petitioner has not received and accepted actual
benefits from the Agreement is also inaccurate. According to the
affidavit of Robert Brous, Respondent completed the Agreement in the
course of opening his account with Petitioner. Brous Affidavit at 2. In
addition to being a foundational document for their business
relationship, the Agreement sets forth, in general and specific terms,
how the relationship will function. The other documents provided by
Petitioner are, by comparison to the Agreement, mere bureaucratic
necessities. The Agreement is the document that does the most to
establish and define the working relationship Petitioner and Respondent
entered into. All of the benefits that accrued to Petitioner from this
relationship over the next twenty-seven months flow from the Agreement
and the authority granted by Respondent to Petitioners in the Agreement.
Though Petitioner is not a signatory to the Agreement, the fact that
the Agreement intentionally benefits Petitioner by establishing the terms
of its business relationship with Respondent is sufficient to bind
Petitioner to the terms of the Agreement. See MAG Portfolio Conslut
v. Merlin Biomed, 268 F.3d 58, 63 (2nd Cir. 2001) (interpreting
American Bureau of Shipping v. Tencara Shipyard S. P. A.,
170 F.3d 349 (2d Cir., 1999)). If a contract containing an arbitration clause
is entered into between parties with at least the partial purpose of
benefitting a third party and that party accepts those benefits, the
third party may not disclaim its duty to arbitrate under the agreement.
Tencara, 170 F.3d at 351. The Agreement clearly intends to
benefit Petitioner by establishing its business relationship with
Respondent. Knowing, as it did, about the Agreement and having claimed
the benefits of the relationship described in the Agreement, Petitioner
is estopped from disclaiming its duty to submit to arbitration under the
In addition to these general benefits Petitioner has also relied upon
the Agreement to claim benefits in the present litigation. In paragraph
10 of his Affidavit, Robert Brous, citing the Agreement, asserts that
Maryland and federal statues of limitation govern Respondent's
arbitration claims. On page 3 of the Answer and Motion for More Definite
Statement, Petitioner, referring to the Agreement, repeats this
assertion. On page 4 of its petition to the Supreme Court of the State of
New York, Petitioner makes the same assertion, again relying upon the
The Second Circuit confronted a similar situation in World Omni
Fin. Corp. v. ACE Capital Re Inc., 64 Fed. Appx. 809, 2003 U.S. App.
LEXIS 8441 (2nd Cir., May 2, 2003). There the plaintiff made damage
claims that were derived from a contract to which it is not a signatory.
When a defendant attempted to invoke the arbitration clause of that same
plaintiff disclaimed the contract. In their Summary Order, the
panel found that the plaintiff was estopped from making the argument that
it was not bound by the arbitration clause since, amongst other reasons,
it had attempted to derive direct benefits from the contract containing
the clause in the very same litigation. Counsel's maneuvering on behalf
of the Petitioner in the case at bar is directly analogous. Petitioner
laid claim to the Agreement when it sought to limit Respondent's choice
of substantive law. Having relied upon the Agreement for substantive
benefit in this litigation, Petitioner is estopped from disclaiming its
obligation to arbitrate under the Agreement. See Tencara 170
F.3d at 353; Thomson-CSF 64 F.3d at 778, 779.
In the January 28, 2004 letter to the Court, counsel for Petitioner
suggest that, while Petitioner may be bound by some terms of the
Agreement (presumably the choice of law clause), it is not necessarily
bound by the arbitration clause in paragraph 19 because "the court may
separately consider and parse various provisions of the contract."
January 28 Letter at 2. Completing the inference, counsel cite
Zimring v. Coinmach Corp., No. 00 Civ. 8111, 2000 WL 1855115
(S.D.N. Y., Dec. 19, 2000), where, counsel reports, a company
representative who "signed [a] portion of [the] agreement but did not
sign [the] arbitration clause is not bound to arbitrate."
This argument and the reliance on Zimring are bewildering, if
not frivolous. The facts presented to Judge McKenna in Zimring
were entirely different from those here. In that case the plaintiff took
affirmative steps to specifically limit his participation in the contract
to two particular provisions. Zimring at * 1. Judge McKenna
rightly concluded that, in those circumstances, the plaintiff intended
not to be bound by other provisions that he did not sign. In the
case at bar, while Petitioner did not sign the Agreement, it is
specifically named as a participant in and a beneficiary of the
arbitration agreement in numbered paragraph 19.
For the reasons stated above, Defendants' motion to dismiss is GRANTED
with respect to Plaintiff's' fraud and conversion claims and DENIED with
respect to Plaintiff's' breach of contract claim.
By separate Order, the Court has referred this case to Magistrate Judge
Fox for General Pretrial Supervision, including an initial pretrial
conference to set a schedule for discovery.
The Court is convinced that the form of the Agreement, the content of
the Agreement, and the circumstances under which it was signed prove that
Petitioner is a party to the contract described in the Agreement,
including the agreement to arbitrate. Even if the Agreement is read as a
two-party contract to which Petitioner is not a signatory, Petitioner is
an intended beneficiary of the Agreement. Petitioner knew that it was a
beneficiary; and Petitioner accepted benefits from the Agreement.
Furthermore, Petitioner has used the Agreement as a sword against
Respondent in the course of this litigation. Having knowingly accepted
and sought benefits under the Agreement, Petitioner may not disclaim its
duties under numbered paragraph 19, where it is identified as a party to
the agreement to arbitrate.
B. Petitioner's Statute of Limitations Defenses are for
Arbitrators to Decide
Having held that Petitioner is bound by the terms of the Agreement, the
Court will now consider the impact of the arbitration clause on the
present petition. To this end, it is appropriate and necessary to
consider the text of the arbitration clause. In its entirety, it reads:
It is agreed that all past, present, or future
controversies between myself, any persons having
an interest in my account, Alex, Brown, my
Financial Service Organization, or any of the
employees or affiliates of either, concerning any
transaction or the construction, performance, or
breach of this or any other agreement pertaining
to securities and other property, whether entered
into prior [sic], on or subsequent to the date
hereof, including but not limited to claims of
fraud in the inducement, shall be submitted to
arbitration pursuant to the Federal Arbitration
Act. Any arbitration under this Agreement shall be
conducted before the National Association of
Securities Dealers, Inc. ("NASD") or any other
securities industry self-regulatory organization
of which Alex, Brown or your correspondent is a
member, in accordance with the rules then
obtaining of such organization. The award of the
arbitrator(s), or a majority of them, shall be
final and judgment upon such award may be entered
in any court having jurisdiction. No person shall
bring a putative or
[EDITOR'S NOTE: THIS PAGE IS BLANK]
certified class action to arbitration, nor [sic]
seek to enforce any pre-dispute arbitration
agreement against any person who has initiated in
court a putative class action, or who is a member
of a putative class action until: (i) the class
certification is denied; or (ii) the class is
decertified; or (iii) the customer is excluded
from the class by the court. Such forbearance to
enforce an agreement to arbitrate shall not
constitute a waiver of any rights under this
Agreement except to the extent stated herein.
Under well-settled United States Supreme Court and Second Circuit case
law, the federal courts are generally obliged to refrain from interfering
with the authority assigned to arbitrators by parties to arbitration
agreements. See generally Howsam v. Dean Witter Reynolds, Inc.,
537 U.S. 79 (2002); EEOC v. Waffle House, 534 U.S. 279 (2002);
Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995);
Volt Information Sciences, Inc. v. Board of Trustees of Leland
Stanford Junior University, 489 U.S. 468 (1988); Moses H. Cone
Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1 (1983);
Shaw Group, Inc. v. Triplefine International Corp., 322 F.3d 115
(2nd Cir., 2003); Painewebber, Inc. v. Bybyk, 81 F.3d 1193 (2nd
Cir. 1996); Porta Systems Corp. v. Aponte, 00 Civ. 0087, 2000
U.S. Dist. LEXIS 20824 (S.D.N.Y., January 25, 2000).
When the parties to a dispute have entered into an arbitration
agreement, a court's only functions to ensure that there is an agreement
to arbitrate, that the agreement is enforceable, and that the issues
presented to the arbitrators are within the scope of the arbitration
agreement. See Howsam, 537 U.S. at 83; At& T
Technologies, Inc. v. Communications Workers, 475 U.S. 643, 649
(1986). The Court has held that the agreement to arbitrate found in
numbered paragraph 19 of the Agreement is binding on the parties to this
litigation. The only issue remaining for the Court to decide is, then,
whether or not Petitioner's proposed statute of limitations defense falls
within the scope of this agreement.
This is what courts have called a "question of arbitrability."
"[Questions] of arbitrability" are "issues for judicial determination
unless the parties clearly and unmistakably provide otherwise."
At& T Technologies, Inc. v. Communications Workers, 475 U.S.
at 649 (emphasis added). Parties may, then, "provide" that even threshold
issues of arbitrability are to be decided by arbitrators. In the Second
Circuit, issues relating to timeliness are treated as issues of
arbitrability. See Bybyk, 81 F.3d at 1199.
The agreement to arbitrate mentions no state law. To the contrary, it
specifically refers to the Federal Arbitration Act. Therefore, federal
law and precedent should guide this Court in reading and evaluating the
scope of the agreement. Supreme Court precedent provides that "`questions
of arbitrability must be addressed with a healthy regard for the federal
policy favoring arbitration'. . . . Any doubts concerning the scope of
arbitrable issues should be resolved in favor of arbitration."
Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.,
473 U.S. 614, 626 (1985) (quoting Moses H. Cone Memorial Hospital v.
Mercury Construction Corp., 460 U.S. 1, 24-25 (1983)). Here, there
is no doubt.
The arbitration clause is a classic example of a broad-form arbitration
agreement. Under the law of this Circuit, the scope of such agreements
includes issues relating to timeliness. See Bybyk, 81 F.3d at
1199-1200 ("The parties' broad grant of power to the arbitrators is
unqualified by any language carving out substantive eligibility issues
(with or without specific reference to timeliness) for resolution by the
courts. Paine Webber is thus unable to overcome the presumption
established in the first of the above-listed provisions that `any and all
controversies' are to be arbitrated. An objective reading of the
Agreement, therefore, leads us to conclude that the parties intended to
arbitrate issues of arbitrability."); Porta Systems, 2000 U.S.
Dist. LEXIS 20824 at *2-*4; Coleman & Co. v. Giaquinto, 00
Civ. 1632, 2000 U.S. Dist. LEXIS 16215 at *7
(Nov. 9, 2000). Since Petitioner is bound by the Agreement, it is
bound to arbitrate "all past, present, or future controversies" between
itself and Respondent, including its proposed statute of limitations
defenses. The petition is, therefore, denied.
C. N.Y. CPLR § 7502 Does Not Trump the Federal Arbitration
Act, Second Circuit Precedent, or United States Supreme Court Precedent
in this Case.
Counsel for Petitioner seeks to have this Court decide on the merits a
proposed statute of limitations defense. This remedy is sought based on
counsel's conclusion that this Court must act under N.Y. CPLR §
7502(b), which provides that a party to an arbitration may assert a
statute of limitations defense before "the court." This Court does not
Counsel for Petitioner reaches their conclusion because, as they note
in Petitioner's Reply, the sole basis for the subject matter jurisdiction
of this Court in the present case is 28 U.S.C. § 1332. Given this fact,
counsel conclude that the Court must apply N.Y. CPLR § 7502(b)
because, in diversity cases, "state substantive law must be applied."
Reply at 1.*fn3
It is a general rule that federal courts sitting in diversity apply
state substantive law. See Semtek v. Lockheed Martin,
531 U.S. 497 (2001); Gasperini v. Center for Humanities, 518 U.S. 415
(1996); Hanna v. Plumer, 380 U.S. 460 (1965); Guaranty Trust
Co. v. York, 326 U.S. 99 (1945); Erie v. Tompkins,
304 U.S. 64 (1938). However, the conclusion proposed by counsel for
Petitioner, that this general rule requires that this Court apply N.Y.
CPLR § 7502(b) in this case, relies on two premises that Petitioner
does not defend. The first is that the state law that should apply in
this diversity action is New York law. The second is that the N.Y. CPLR
§ 7502(b) is "substantive law" within the meaning of this designation
under Erie v. Tompkins and its progeny.*fn4 Counsel's
conclusion is wrong because both of these premises are false.
New York law would likely not be the appropriate source of substantive
law in this case. This Court has already held that the Margin Account
Agreement recites binding terms of contract between the parties. Numbered
paragraph 17 of the Agreement states, in an objective mode, that "the
rights of the parties [shall be] determined in accordance with the laws
of the State of Maryland and the United States, as amended, without
giving effect to the choice of law or conflict-of-laws provisions
thereof." Just as the parties have bargained to refer controversies
between them to arbitration, they have bargained to have these
controversies decided according to Maryland and federal law. Were it
called to rule on this issue here, this Court would be loth to deny the
parties the fruits of this bargain.*fn5 On this basis, the Court would
likely not impose New York law on the parties.*fn6
If the Court was to apply New York substantive law in this case, it
would not apply N.Y. CPLR § 7502(b). Citing Erie v.
Tompkins, among other authorities, counsel for Petitioner asserts
that, in this case, "state substantive law must be applied." Reply at 1.
Counsel assumes, without arguing, that New York Civil Procedure Law and
Rules Section 7502(b) is substantive rather than procedural. It is not.
"Federal courts sitting in diversity apply state substantive law and
federal procedural law." Gasperini, 518 U.S. at 427. The section
at issue here, 7502(b), is found in the New York Civil Procedure Rules
and Law. Of course, this title alone does not determine the true nature
of N.Y. CPLR 7502(b). N.Y. CPLR § 5501(c) has, for example, been
determined to provide some substantive rights that trump federal
procedural rules in diversity cases. See e.g. Gasperini, 518
U.S. at 427-430; Presley v. United States Postal Serv.,
317 F.3d 167, 173 (2nd Cir., 2003). Similarly, the Supreme Court has held that
state rules establishing when an action commences trump Federal Rule of
Civil Procedure 3 in diversity cases. See Walker v. Armco Steel
Corp., 446 U.S. 740, 750-752 (1980) (reaffirming Ragan v.
Merchants Transfer & Warehouse Co., 337 U.S. 530 (1949)). Here,
however, the designation of § 7502(b) as "Procedur[al]" is not merely
a matter of title, it is an accurate description.
Classification of a law as "substantive" or "procedural" is not always
a transparent task. Since Erie, however, the Supreme Court has
offered significant and helpful guidance to district courts embarking on
this analysis. Guaranty Trust Co. v. York established the
long-lived outcome-determinative test, which asks of a particular law:
"Does it significantly affect the result of a litigation for a federal
court to disregard a law of a State that would be controlling in an
action upon the same claim by the same parties in a State court?"
Guaranty Trust, 326 U.S. at 109. This is, it seems, the rule
invoked by counsel in Petitioner's Reply, where it is claimed that
"[s]ince the removal petition rests on diversity jurisdiction,
there is no reason for this Court to reach a different result than a
state court would in ruling on Brous' [sic] petition." Reply at 3. In
Hanna v. Plumer, the Court refined the Guaranty Trust
rule, pointing out that the outcome-determinative test was just one way
to assess "the twin aims of the Erie rule: discouragement of
forum-shopping and avoidance of inequitable administration of the laws."
Hanna, 380 U.S. at 468. See also Semtek, 531 U.S. at
504 (citing and applying the rule from Hanna).
In Hanna v. Plumer, the Supreme Court instructed federal
courts to ask "whether application of the [State's] rule would make so
important a difference to the character or result of the litigation that
failure to enforce it would unfairly discriminate against citizens of the
forum State, or whether application of the rule would have so important
an effect upon the fortunes of one or both of the litigants that failure
to enforce it would be likely to cause a plaintiff to choose the federal
court." Hanna, 380 U.S. at 468. In Hanna, the Court was
confronted with a situation in which one of two competing rules of
service would have ended the litigation before consideration of the case
on the merits. The other would have allowed the case to continue. The
choice between these two competing provisions would, on this basis, have
determined the outcome of the case. Moreover, it would have provided
obvious motivations for forum shopping.
The situation in this case is much different. N.Y. CPLR § 7502(b)
does not limit or expand the spectrum of possible defenses available to
Plaintiff. It does not establish special rules of review. It does not
affect burdens of proof. It does not shift or alter critical elements of
a statute of limitations defense. It only empowers New York courts to
consider petitions asserting that arbitration claims are time barred.
Assuming that there are right and wrong answers to the questions posed by
Petitioners proposed statute of limitations defense, the
outcome should not be different if a court considers the defense as
opposed to an arbitrator. On this basis, the Court is not convinced that
N.Y. CPLR § 7502(b) is, in any way, outcome determinative. Its only
effect is to allow courts to consider timeliness concerns rather than
leaving these issues to arbitrators.
It is also hard to believe that N.Y. CPLR § 7502 would sponsor
rampant forum shopping. Whether Petitioner's defenses are reviewed by a
court or a panel of arbitrators, the same legal standards will apply. The
same relevant facts will be presented. Either body would be asked to play
the same basic game of connecting the dots. See e.g. Zoll v. Ruder
Finn, Inc., Nos. 02 Civ. 3652 and 01 Civ. 1339, 2004 WL 42260 at *3
(S.D.N.Y., Jan. 7, 2004.). It is hard to believe that potential litigants
would spend time forum shopping solely in order to have these questions
of arbitrability decided by a court rather than by an arbitrator, or
Forum shopping concerns are particularly muted in cases involving N.Y.
CPLR § 7502 because parties have already, by definition, done their
shopping. As a general rule, parties can only be compelled to submit to
arbitration if they have already agreed to arbitrate controversies
between them. See United Steelworkers of America v. Warrior &
Gulf Navigation Co., 363 U.S. 574, 582 (1960). As discussed
infra, where parties have agreed to arbitrate, questions of
arbitrability, including statute of limitations defenses, are within the
purview of the courts unless the parties have already agreed to submit
them to arbitration. This is true in both the federal system and in the
New York courts. Where parties have agreed to send questions of
arbitrability to arbitration, however, New York courts and federal courts
agree that the bargain should be respected. See Mastrobuono v.
Shearson Lehman Hutton, Inc., 514 U.S. 63 (1995); Painewebber,
Inc. v. Bybyk, 81 F.3d 1193, 1199 (2nd Cir., 1996); Smith Barney
Shearson Inc. v.
Sacharow, 91 N.Y.2d 39 (N.Y., 1997). This is certainly
true here, where the Federal Arbitration Act is specified in the
arbitration clause. See Sacharow, 91 N.Y.2d at 47-49;
Prudential Securities v. Mandt, 205 A.D.2d 424, 424-425 (N.Y.
App. Div. 1st, 1994) ("the court committed reversible error in
determining that the Federal Arbitration Act did not preempt a New York
court's jurisdiction to determine the timeliness of the appellant's
Here the parties have elected to have all controversies between them
sent to arbitration under the Federal Arbitration Act. They could have
reached another bargain. See e.g. Coleman, 2000 U.S. Dist. LEXIS
16215 at *8-*9. They did not. Under federal law and New York law, courts
are required to respect the bargains of parties to arbitration
agreements. N.Y. CPLR § 7502(b) does not give New York state courts
exclusive right to determine the merit of statute of limitations defenses
in arbitration cases. It simply provides them with the power to do so as
a function of the more general rights of parties to have their disputes
settled by a court of law.
The broad-form arbitration agreement entered into by the parties
provides clear evidence of the parties' intention to have all
controversies between them arising from their business relationship
settled by an arbitrator rather than a judge. That is the bargain of
mutual consideration they have made. This Court will not upset it, as it
has been directed not to by the Second Circuit and the United States
Supreme Court. This Court holds that all controversies between these
parties, including Petitioner's proposed defenses, should and will go to
arbitration pursuant to the terms of their agreement to arbitrate.
III. THE POSSIBLE IMPOSITION OF SANCTIONS AGAINST COUNSEL
Rule 1 l(b), Fed.R.Civ.P., provides, in part, that by presenting to the
court a pleading, written motion, or other paper, an attorney is
certifying that "(2) the claims, defenses, and other legal contentions
therein are warranted by existing law or by a nonfrivolous argument for
the extension, modification, or reversal of existing law or the
establishment of new law . . ." If the court determines, "after
notice and a reasonable opportunity to respond," that Rule 1 l(b) has
been violated, the court may sanction an attorney. Rule 1 l(c). Sanctions
may be sought by a party on motion, Rule 1 l(c)(1)(A), or the court on
its own initiative "may enter an order describing the specific conduct
that appears to violate subdivision (b) and directing an attorney, law
firm or party to show cause why it has not violated subdivision (b) with
"Due process requires that courts provide notice and an opportunity to
be heard before imposing any kind of sanctions." Nuwesra v. Merrill
Lynch, Fenner & Smith, Inc., 174 F.3d 87, 92 (2d Cir. 1999)
(citations and internal quotation marks omitted). In the case at bar, the
Respondent has not made a motion for sanctions. But I am considering on
my own initiative whether Petitioner's attorneys should be sanctioned. In
this circumstance, this Court is required "to apprise [Petitioner's
counsel] of the specific conduct alleged to be sanctionable," and to give
counsel "a reasonable opportunity to respond." Id. at 92, 93.
The discussion in Part III of this Opinion is intended to apprise counsel
of the areas of the Court's concern. A reasonable
opportunity for counsel to respond will be provided in the Order to
Show Cause with which this Opinion concludes.*fn7
A. Maintenance of Contradictory Claims
At different times in papers filed with the Court and in oral arguments
made in support of these papers, counsel make contradictory claims. The
Court is particularly concerned by three reversals of convenience. First,
in the initial petition to the State court, counsel, relying on the
Affidavit of Robert Brous, assert that the terms of the Margin Account
Agreement are binding on the parties. In the Reply brief submitted to
this Court, counsel reverse this position, without reference to their
previous position. Second, and by extension, in the initial petition
counsel claim that Maryland and federal law should be applied to
Respondent's claims. In the Reply brief submitted to this Court, counsel,
again without reference to their previous position, assert that New York
law should rule.*fn8 Third, in the Reply brief itself counsel argue,
initially, that N.Y. CPLR § 7502(b) is "substantive law" under
Erie v. Tompkins and its progeny. Later in the
same brief, however, counsel contend, because they must, that N.Y.
CPLR § 7502(b) is merely procedural law.
None of these contradictory arguments is made in the alternative.*fn9
In fact, counsel do not, for obvious reasons, even point out the
contradictions. They certainly do not provide any explanation. Rather,
counsel exhibit a pattern of shifting their position at their
convenience. Without providing the Court with explanation for these
shifts, the contradictions give rise to an inference that at least one
half of each mutually exclusive pairing is a potential violation of
Rule 1 l(b)(2). Furthermore, counsel's maintenance of these contradictions of
convenience in papers submitted to the Court may, of itself, be
sanctionable under Rule 11.
Counsel's behavior in this regard is particularly troublesome since it
effectively denied Respondent an opportunity to respond. In the first two
cases, counsel took a position in the petition to the State court,
reversing themselves in the Reply after Respondent had filed his
Response. In the third, counsel maintained contradictory positions within
the same argument newly made in the Reply. In all three cases, counsel's
strategic timing denied Respondent of an opportunity both to respond to
arguments newly made in Reply and to point out counsel's irreverent
Moreover, counsel attempted, at the oral argument, to capitalize on
this "omission." There and then, counsel faulted Respondent for not
presenting reasons why Petitioner should be bound to the terms of the
Margin Account Agreement. Counsel repeats this charge in their January
28, 2004 letter to the Court. As the Court pointed out to counsel at the
oral argument, Respondent had no reason to make such arguments in his
Response. Robert Brous recognized the Agreement in his affidavit
submitted with the original petition. Furthermore, in the original
petition, counsel not only did not disclaim the terms of the Agreement,
they actively relied upon them. The timing of these reversals and
counsel's attempt to capitalize on them are subject to sanction under
While not all oral statements to a Court are sanctionable under
Rule 11, counsel's conduct at oral argument clearly enjoys a close enough
nexus to the underlying papers to bring it within the scope of Rule 11.
See O'Brien v. Alexander, 101 F.3d 1479 (2d. Cir., 1996).
Counsel's conduct in this regard is also subject to sanctions under
28 U.S.C. § 1927 as evidence of "dilatory tactics." See U.S. v.
International Brotherhood of Teamsters, 948 F.2d 1338, 1345
(2d Cir. 1991).
B. Misleading Use of Authority
In papers filed with the Court and in oral argument expanding upon and
supporting these papers, counsel for Petitioner have made inappropriate
and misleading use of authority.
First, on page 2 of the Reply and again at the oral argument counsel
cited Smith Barney v. Sacharow, 91 N.Y.2d 39, 47 (N.Y., 1997)
for the proposition that "a New York state court would enjoin the
arbitration under CPLR 7502." Reply at 2. Counsel repeated this use of
the January 28, 2004 letter to the Court, stating that "[i]t is
clear that a New York Court would have enjoined the arbitration pursuant
to CPLR § 7502." January 28 Letter at 3, citing Sacharow,
among other cases. In fact, the New York Court of Appeals' holding in
Sacharow is quite the opposite. The Court held that, under the
broad-form arbitration agreement entered into by the parties before them,
a proposed statute of limitations defense should be decided by
arbitrators. Smith Barney v. Sacharow, 91 N.Y.2d 39, 47 (N.Y.,
1997). The Court so held despite the fact that the parties had also
agreed to have their disputes resolved under New York law. Id.
Second, in the Reply, counsel cite Coleman & Co. v.
Giaquinto, 236 F. Supp.2d 288, 300 (S.D.N. Y., 2002) for the
general proposition that "Federal courts sitting in diversity have
applied CPLR 7502 in removed cases to enjoin arbitrations on state
statute of limitations grounds." Reply at 2. Counsel rely on this
citation for similar propositions throughout the Reply, at oral argument,
and in the January 28, 2004 letter. Judge Chin's actual and
particularized holding in the cited case is "that by expressly providing
for New York law to govern the arbitration itself, the parties intended
for the Court, rather than an arbitrator, to decide petitioners' statute
of limitations defense." Id. at 294.
In support of this holding, Judge Chin cites, but does not expand upon,
his earlier decision in the same case, reported at Coleman & Co.
v. Giaquinto, 00 Civ. 1632, 2000 U.S. Dist. LEXIS 16215 (Nov. 9,
2000). There, Judge Chin does follow N.Y. CPLR § 7502(b). His choice
to do so, however, turns on a choice of law provision in the body of the
arbitration clause before him that specifically incorporated New York
law. This, Judge Chin concludes, evidenced an intention by the parties to
have the court decide timeliness issues. Absent this effort, Judge
Chin points out, the broad-form agreement would have led him to
conclude that the parties intended to have timeliness issues and other
issues of arbitrability decided by an arbitrator.
In this earlier decision, Judge Chin also notes that a general choice
of law provision found elsewhere in the business agreement would not have
led him to conclude that New York law was part of the arbitration
agreement in particular. Judge Chin has since been vindicated in this
belief by Shaw Group, Inc., et al. v. Triplefine International
Corp., 322 F.3d 115, 123 (2d Cir., 2003) (citing and quoting with
approval the year 2000 holding in Coleman "that provision for
`agreement and its enforcement' to be governed by New York law did not
evidence parties' intent to be bound by New York arbitration law).
The agreement to arbitrate in the Margin Account Agreement makes no
mention of New York law. The general choice of law provision in numbered
paragraph 17 mentions only Maryland and federal law. The arbitration
clause mentions no other legal authority than the Federal Arbitration
Agreement. Despite counsel's representation to the contrary, then,
Coleman unambiguously supports Respondent in this case. By
citing the squib paragraph in the later Coleman decision,
counsel for Petitioner seems to attempt to mislead this Court as to the
nature and impact of Judge Chin's decision in Coleman.
Third, counsel for Petitioner cite the Second Circuit's decision in
SG Cowen Securities Corp. v. Messih, 224 F.3d 79 (2d Cir., 2000)
for the proposition that "[f]ederal courts sitting in diversity have
applied CPLR 7502 in removed cases to enjoin arbitrations on state
statute of limitations grounds.". Reply at 2. This case did not deal with
an arbitration agreement nor did it concern N.Y. CPLR § 7502(b). The
issue before the Second Circuit in SG Cowen was the
applicability of N.Y. CPLR § 7502(c), which contemplates the
provision of injunctive relief in
support of arbitration. The specific issues in SG Cowen
had to do with what considerations should guide decisions to grant
injunctive relief. While the proposition forwarded by counsel, that
courts in this District have applied N.Y. CPLR § 7502, is general
enough to find support in SG Cowen, reference to that case is
misleading in the context of counsel's argument in the Reply, which is
limited to N.Y. CPLR § 7502(b).
Fourth, in the Reply, at page 11, and at oral argument, counsel claim
that because Petitioner did not sign the Margin Account Agreement
Petitioner is not bound by its terms. In support of this argument,
counsel cite E.I. DuPont De Nemours v. Rhone Poulenc,
269 F.3d 187 (3rd Cir., 2001). As is evident, DuPont is a Third Circuit
case. While it might be persuasive authority before this Court, counsel
fails to cite significant contrary authority in this Circuit. See,
e.g., American Bureau of Shipping v. Tencara Shipyard S.P. A.,
170 F.3d 349, 353 (2d Cir. 1999); Smith/Enron Cogeneration Ltd. P'ship v.
Smith Cogeneration Int'l, Inc., 198 F.3d 88, 97 (2nd Cir., 1999);
Thomson-CSF, S.A. v. American Arbitration Ass'n, 64 F.3d 773 (2d
Cir. 1995); Delloitte Noraudit A/S v. Delloitte Hastens & Sells,
9 F.3d at 1060 (2nd Cir. 1993); McAllister Bros. v. A & S
Transportation, 621 F.2d 519, 524 (2nd Cir., 1980); Fisser v.
International Bank, 282 F.2d 231 (2nd Cir., 1960). Failures to cite
and address contrary authority are subject to Rule 11 sanction. See
Blissett v. Casey, 969 F. Supp. 118, 124 (N.D.N.Y., 1997);
Allstate Ins. Co. v. Administratia Asigurarilor, 163 F.R.D. 196
In addition to this omission, counsel distorted the holding in
DuPont at the oral argument and again on page 2 of the January
28, 2004 letter. In both of these instances, counsel cited
DuPont for the proposition that Petitioner is not bound by the
arbitration clause because it has not sought or asserted benefits derived
from the arbitration clause in particular. This is an
obvious misstatement of the law and of the holding in
DuPont. The doctrine of estoppel in the context of arbitration
agreements is designed to "prevent a non-signatory from embracing a
contract, and then turning its back on the portions of the contract, such
as an arbitration clause, that it finds distasteful." DuPont,
269 F.3d at 200 (citing Tencara, 170 F.3d at 353). Contrary to
counsel's representations, then, the key holding in DuPont is
that "a non-signatory should not be permitted to embrace a contract for
some purposes and then disclaim that same contract's unfavorable terms."
Amkor Technology v. Alcatel Business Systems, 278 F. Supp.2d 519,
521-522 (E.D.P.A., 2003) (citing DuPont, 269 F.3d at 200).
Fifth, in the January 28, 2004 letter, counsel cite Zimring v.
Coinmach Corp., No. 00 Civ. 8111, 2000 WL 1855115 (S.D.N.Y., Dec.
19, 2000) in support of the proposition that, while Petitioner may be
bound by some terms of the Agreement, it is not bound by the arbitration
clause in numbered paragraph 19 because "the court may separately
consider and parse various provisions of the contract." January 28 Letter
at 2. This use of Zimring is misleading. The facts in that case
were not at all similar to this case. There the plaintiff took
affirmative steps to limit his participation in the contract.
Zimring at * 1. Here, Petitioner took no such steps.
Furthermore, Petitioner, as Respondent's Financial Services Organization,
is specifically referenced in the arbitration agreement found in
paragraph 19 of the Margin Account Agreement.
These citations to authority are problematic because they might support
an inference that counsel attempted to mislead the Court.
C. Factual Misrepresentations
Arguing in support of their contention that Petitioner is not bound by
the terms of the Margin Account Agreement, counsel stated, at the oral
argument, that Petitioner was not a beneficiary of the Agreement. This is
not so. Not only is Petitioner, as the Financial Services Organization,
referred to numerous times in the Agreement, it is specifically named as
an intended beneficiary in numbered paragraph 2.
D. Maintaining a Frivolous Petition
While this Court has spilled considerable ink in setting forth the
reasons that it will deny the present petition, that ink need not have
been spent. Despite counsel for Petitioner's claims to the contrary, and
consistent with the analysis above, the facts and law are clear in this
case. Petitioner entered into a business relationship with Respondent. In
initiating this relationship, Petitioner presented Respondent with
certain terms. As is demonstrated by the Agreement, Respondent accepted
Robert Brous, in his affidavit, seemed to appreciate these facts.
Counsel, recently, conveniently, and without evidence or cause, have
sought to disclaim these terms. Counsel have also misrepresented and
abused key authorities. A proper evaluation of Petitioner's obligations
and the relevant case law in this Circuit leave no question that this
petition is without merit. What little hay it makes is due exclusively to
counsel's sanctionable activities. Respondent's Response made much of
this evident. Counsel should have abandoned the petition and allowed the
matter to go to arbitration. Instead, Counsel made matters worse and
worse for themselves
by their conduct in their Reply, at oral argument, and in the
January 28, 2004 letter to this Court.
For the foregoing reasons the Court makes the following ORDER:
1. The petition to stay or enjoin the arbitration pending before the
New York Stock Exchange is denied. The petition is dismissed, with
prejudice. The arbitration will proceed according to the rules and
procedures of the New York Stock Exchange.
2. Counsel for Petitioner who signed the papers in this case are
directed to file written submissions on or before March 31, 2004, showing
cause why they have not violated Rule 1 l(b)(2) as the result of the
filings and oral presentations described in Part III of this opinion.
3. Since a district court's sua sponte sanctioning of an
attorney does not authorize the court to award the opposing party its
attorney's fees, an award that can be made only by motion,
Nuwesra, 174 F.3d at 94-95, counsel for Petitioner need not
serve copies of its submissions on counsel for Respondent.
4. After considering the written submissions of Petitioner's counsel,
the Court will schedule a hearing at which counsel may make such further
submissions as they may be advised, and respond to such questions as may
occur to the Court.
It is SO ORDERED.