Summary
noting that a court may impose sanctions where "the party refusing arbitration acted without justification or did not have a reasonable chance to prevail"
Summary of this case from Hui v. Wok 88 Inc.Opinion
03 Civ. 8128 (BSJ)
December 31, 2003
Opinion and Order
On October 9, 2003, Plaintiff's sought to temporarily restrain Defendant Mohammad Al Nasser from prosecuting a pending arbitration against them. In an Order dated October 17, 2003, this Court denied Plaintiff's' motion with respect to Plaintiff Sands Brothers Co., Ltd. and ordered Sands Brothers Co., Ltd. to proceed with the pending arbitration. The arbitration was temporarily enjoined with respect to the other Plaintiff's. The Court set an expedited briefing schedule in order to give both parties an opportunity to brief the issue whether Defendant's pending arbitration against the remaining Plaintiff's should be allowed to proceed, and the parties consented to a stay pending the Court's decision. Having carefully reviewed and considered the submissions of both parties, the Court vacates the stay with respect to Martin Scott Sands, Steven Brett Sands, George Gleusner, Moshe Silver, and Glen McKelvey (collectively "the Individual Plaintiff's") and orders the Individual Plaintiff's to arbitration. The Court grants the Plaintiff's' request to enjoin the NASD arbitration with respect to Sands Brothers Asset Management, LLC, Sands Brothers Asset Management Ltd., and SB Venture Capital III, LLC (collectively "the Entity Plaintiff's").
In addition to their request for injunctive relief, Plaintiff's' papers include several requests for declaratory judgment going to the merits of the disputes between the parties. As an initial matter, although the issue of arbitrability is for the district court, "a court is not to rule on the potential merits of the underlying claims."ATT Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 649 (1986). Further, this Court ordered expedited briefing only with respect to the issue of arbitrability. None of Plaintiff's' other requests are properly raised at this time. Accordingly, the Court declines to reach any of Plaintiff's' requests for declaratory judgment.
The Court also grants, in part, Defendant's motion for an award of attorneys fees.
BACKGROUND
Defendant Al Nasser commenced an arbitration against the Plaintiff's before the NASD. Under the NASD Code of Arbitration:
Any dispute, claim, or controversy between a customer and a member and/or associated person arising in connection with the business of such member or in connection with the activities of such associated persons shall be arbitrated under this Code, as provided by any duly executed and enforceable written agreement or upon the demand of the customer.
NASD Code of Arbitration, Section 10301(a).
The NASD Bylaws define "person associated with a member" or "associated person of a member," in relevant part, as:
(1) a natural person who is registered or has applied for registration under the Rules of the Association; [and]
(2) a sole proprietor, partner, officer, director, or branch manager of a member, or other natural person occupying a similar status or performing similar functions, or a natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by a member, whether or not any such person is registered or exempt from registration with the NASD under these By-Laws or the Rules of the Association
Al Nasser's arbitration is predicated on claims against the Plaintiff's arising out of losses he sustained while he was a customer of Sands Brothers Co., Ltd (hereinafter, "Sands Brothers"), a brokerage firm. The Individual Plaintiff's are employees of Sands Brothers; the Entity Plaintiff's are affiliated with Sands Brothers and/or its directors. The two registered representatives who were primarily responsible for Al Nasser's brokerage account during the relevant time period are also parties to the NASD arbitration, but are not parties to this suit.
Sands Brothers is a member of NASD, and signed an agreement with Al Nasser in which it agreed to arbitrate all claims in front of the NASD. A. The Individual Plaintiff's
Under Section 10301 of the NASD Code of Arbitration, a customer may demand that any NASD member or an "associated person" submit "[a]ny dispute, claim, or controversy" to arbitration if the claim "aris [es] in connection with the business of such member or in connection with the activities of such associated persons." The Individual Plaintiff's in this action are members of the NASD, thus they are subject to arbitration under the NASD Code of Arbitration.
Plaintiff's neither assert nor argue that the Individual Plaintiff's are not members of the NASD. However, even if the Individual Plaintiff's are in fact not members of the NASD, the NASD Code of Arbitration requires members and "associated persons" of members to arbitrate disputes with customers. The NASD Bylaws define an "associated person" as an "officer, director, or branch manager of a member." The Individual Plaintiff's are all directors (except for Martin Sands and Steven Sands, who are Co-Chairmen and CEOs) of Sands Brothers. Sands Brothers is a member of the NASD, and the Individual Plaintiff's are clearly subject to arbitration as "associated persons." (Def. Ex. LL at 16-17).
Plaintiff's state that Sands Brothers Asset Management, LLC, Sands Brothers Asset Management Ltd., and SB Venture Capital III, LLC are not members of NASD and thus not subject to arbitration. (Pl. Mem. at 4). Presumably, if the Individual Plaintiff's were not members of the NASD, Plaintiff's papers would have said so.
Plaintiff's have argued, both in their papers and during a conference with the Court, that the Individual Plaintiff's may not be compelled to arbitrate the Defendant's claims against them because no express arbitration agreement exists between the Defendant and the Individual Plaintiff's. In arguing that the Individual Plaintiff's are not subject to arbitration, Plaintiff's rely upon the Second Circuit's decision in John Hancock Life Ins. Co. v. Wilson, 254 F.3d 48 (2d Cir. 2001). Specifically, Plaintiff's argue:
In their Reply Memorandum, Plaintiff's also argue that Plaintiff McKelvey should not be compelled to arbitrate because Defendant has asserted no allegations against him. (Reply at 13-14). It is well settled that an argument cannot be made for the first time in a reply brief. In re O G Carriers, 1995 U.S. Dist. LEXIS 8221 (S.D.N.Y. June 14, 1995) (citing Bendix Autolite Corp. v. Midwest Co. Enters. Inc., 486 U.S. 888, 895 (1988)). Moreover, Defendant's Statement of Claim, which was submitted with his NASD Petition for Arbitration, does in fact include allegations against Plaintiff McKelvey.
In Hancock, the Second Circuit firmly demanded that for a matter to be considered by the arbitrator there must exist an express arbitration agreement exist [sic] between parties. See John Hancock, at 53. Indeed, the Second Circuit demanded that there exist an express arbitration agreement between parties even if one is a member in the NASD. Id., at 55.
(Pl. Mem. at 6).
Plaintiff's grossly mischaracterize the Second Circuit's holding inJohn Hancock. The Second Circuit held that "John Hancock's membership in the NASD, without more, is not sufficient to show that the parties agreed to submit the question of arbitrability to the arbitrators, but that it is sufficient, without more, to bind John Hancock to arbitrate the Investors' claims." John Hancock, 254 F.3d at 53 (emphasis added). John Hancock, a member of the NASD, conceded that "it agreed by virtue of its membership in the NASD to arbitrate all disputes contemplated under" Section 10301 of the NASD Code of Arbitration. John Hancock, 254 F.3d at 58. The John Hancock Court then held that a customer may demand arbitration under Section 10301 if he or she is a customer of the member or a customer of the "associated person." Id. at 59-60.
Here, there is no dispute that Al Nasser was a customer of Sands Brothers, a member of NASD. All of the Individual Plaintiff's are "associated persons" of Sands Brothers. Therefore, Plaintiffs argument that Defendant must be enjoined from prosecuting his arbitration against the Individual Plaintiff's is frivolous.
Defendant has moved for an award of attorneys fees "for having to defend against this unreasonable and untimely action." (Def. Mem. at 21). Although there is no statutory authority for the award of attorneys fees in these circumstances, the Court has the legal authority to award such fees where "the party refusing arbitration acted without justification or did not have a reasonable chance to prevail." Newspaper Guild of New York v. New York Times Co., 95 Lab. Cas. (CCH) P13, 1981 U.S. Dist. LEXIS 15366, at *4-5 (S.D.N.Y. Oct. 29, 1981); see also Chauffeurs, Teamsters and Helpers, Local 765 v. Stroehmann Brothers Co., 625 F.2d 1092, 1094 (3d, Cir. 1980). Here, Plaintiff's have failed to make even a colorable argument explaining why Al Nasser could not require the Individual Plaintiff's to arbitrate, but instead decided to mischaracterize or ignore the law of the Circuit — a tactic that they could not have expected to "have a reasonable chance to prevail." Thus, Defendant is entitled to an award of attorneys fees, and he is directed to submit an affidavit itemizing costs and attorneys fees within ten days of the date of this Opinion and Order. B. The Entity Plaintiff's
Any objections to this itemization by Plaintiff's must be filed within ten days thereafter. The Court intends to award the Defendant 50% of attorneys fees to date, because Plaintiff's arguments in support of their motion to stay arbitration with respect to the Entity Plaintiff's were not frivolous.
After bringing their motion to temporarily enjoin Defendant, Plaintiff's filed a motion for leave to amend their Complaint and omit the Entity Plaintiff's on the basis that the NASD has already determined that these entities are not members of the NASD and are not bound to arbitrate in the underlying arbitration. (Reply Decl. Ex. A). Plaintiffs motion for leave to amend is denied. The Defendant has filed a cross-claim to compel arbitration, and he is entitled to have issues of arbitrability determined by the Court rather than by an arbitrator. See John Hancock, 254 F.3d at 53 ("Issues of. `arbitrability' are presumptively for the court to decide.") (citations omitted).
Having considered Defendant's cross-claim to compel arbitration, this Court denies the cross-claim and enjoins the Defendant from arbitrating his claims against the Entity Plaintiff's in the NASD arbitration.
The Court does not decide, at this time, whether Defendant may arbitrate his claims against the Entity Plaintiff's in other forums. For example, SB Venture Capital III, LLC has agreed to arbitrate all claims under the laws of the American Arbitration Association. (Pl. Mem. at 8).
Plaintiff's argue that the Entity Plaintiff's cannot be compelled to arbitrate as "associated persons" "because `as that term is now defined by the rules, it is limited to natural persons,' not entities." (Reply at 8) (quoting World Financial Group, Inc. v. Steele, 2002 WL 31045354, at *3 (S.D. Ind., Aug. 15, 2002)). In response, Defendant relies uponMcMahan Sec. Co. L.P. v. Forum Capital Mkts. L.P., 35 F.3d 82 (2d Cir. 1994), which held that:
[T]he "associated person" definition begins by stating that the term refers to "every sole proprietor, partner, officer, director, or branch manager of any member, or any natural person occupying a similar status or performing similar functions, or any natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by such member." If the term "partner" was confined to natural persons, the subsequent phrase "or any natural person occupying a similar status" would be redundant.Id. at 87 (citations omitted).
However, although the McMahan Court found that the NASD definition of "associated person" included corporate entities, the Second Circuit appears to have overruled the McMahan decision in Burns v. New York Life Ins. Co., 202 F.3d 616, 620 (2d Cir. 2000), finding that "Article I of the NASD By-Laws defines persons associated with a member' to exclude corporate entities." Therefore, Defendant cannot compel the Entity Plaintiff's to arbitrate as associated persons.
In addition, the NASD definition of "associated person" has changed since the Second Circuit issued its ruling in McMahan. An "associated person" is now defined as: "a sole proprietor, partner, officer, director, or branch manager of a member, or other natural person occupying a similar status or performing similar functions." This new definition leaves no ambiguity that the NASD intended to confine its definition of "associated persons," as it effectively adopts the language suggested by the McMahan Court to make that intention clear. See McMahan 35 F.3d at 87 ("If the term `partner' was confined to natural persons, the subsequent phrase `or any natural person occupying a similar status' would be redundant. Moreover, if the NASD intended that `partners' be so confined, it could have easily used the phrase "any other natural person' to make its meaning clear.").
Defendant also argues that the Entity Plaintiff's can be compelled to arbitrate as "certain others" under NASD Code §§ 1, 8, again relying upon McMahan Sec. Co. L.P. v. Forum Capital Mkts. L.P., 35 F.3d 82, 86 (2d Cir. 1994). However, the McMahan Court was applying an earlier version of the NASD's arbitration rules, which included claims involving "certain others" among the claims subject to mandatory arbitration. The current version does not include "certain others" as those who may insist on or must submit to mandatory arbitration. World Fin. Group Inc., v. Steele, 2002 U.S. Dist. LEXIS 17376, at *11-12 (S.D. Ind. Aug. 15, 2002). Therefore, the Entity Plaintiff's cannot be compelled to arbitrate as "certain others."
CONCLUSION
Having found that the Individual Plaintiff's are subject to arbitration, the stay with respect to those Plaintiff's is lifted, and Plaintiff's are ordered to pay 50% of the costs that Defendant incurred while litigating this matter. The Entity Plaintiff's are not subject to arbitration before the NASD, and Defendant is enjoined from prosecuting his NASD arbitration against those parties.
SO ORDERED.