Opinion
105335/06.
Decided July 18, 2006.
This proceeding was commenced by Notice of Motion, dated April 17, 2006, by Petitioner Dr. Frank Michael Lobacz ("Lobacz"), pursuant to Civil Practice Law and Rules ("CPLR") § 7511, against Respondent A.G. Edwards Sons, Inc. ("Edwards") to vacate an arbitration award (the "Award") rendered in favor of Edwards on January 12, 2006, awarding Edwards damages of $450,000 and dismissing Lobacz' counterclaims, on the grounds that Lobacz' rights "were prejudged by the action of the arbitrators in failing to properly exercise their power and/or so imperfectly execute it so that a final and definite award was not made and that the arbitrators failed to follow the procedures of Article 75 of the CPLR." Edwards has requested that this Court deny such petition and, as provided for by CPLR § 7511(e), confirm the Award.
The dispute arose out of a brokerage account maintained by Lobacz with Edwards, a securities broker, pursuant to a written brokerage agreement which provided for the arbitration of disputes. At issue in the dispute were claims by Edwards for a deficiency in Lobacz' margin account and a counter claim by Lobacz for damages for the alleged failure of Edwards to execute trade instructions in Lobacz' accounts.
The claims and counterclaims of the parties were submitted to arbitration before the National Association of Security Dealers ("NASD") Dispute Resolution pursuant to written a submission agreement which Lobacz signed on March 21, 2005, as contemplated by his brokerage agreement. Following a three day hearing on January 4 through 6, 2005, the arbitrators (the "Panel") issued the Award.
Under CPLR § 7511(b)(1) this Court must vacate an arbitration award if it finds that the rights of a party to the arbitration's "were prejudiced by . . .
(iii) An arbitrator . . . making the award exceeded his power or so imperfectly executed it that a final and definite award upon the subject matter submitted was not made; or
(iv) failure to follow the procedure of this article, unless the party applying to vacate the award continued with the arbitration with notice of the defect and without objection."
Although he does not expressly track this statutory language, it is clear that Lobacz bases his petition on these provisions. The Court must therefore consider such provisions and their meaning, as written by the Legislature, and not as written by Lobacz in his petition.
The Court is not unaware that the arbitration which was the subject of this proceeding as it involved an NASD arbitration arising out of a securities brokerage account with a registered security broker is also subject to the Federal Arbitration Action ( 9 USCA § 1 et sq). ("FAA"). The Court will address issues relating to the FAA below.
Lobacz first confuses "prejudgment" with "prejudice," the term used in CPLR § 7511(b)(1). The statutory term merely relates to whether a petitioner had been adversely affected by one of the four listed situations, set forth in sub-paragraphs (I) through (iv) of such paragraph, so as to have standing to attack the award, in distinction to creating an additional ground for vacation. While misconduct is a ground for vacation under § 7511(b)(1)(I), the quantum of misconduct necessary for a Court to vacate an award is "corruption, fraud or misconduct," which Lobacz' petition does not allege or show.
Other than the arbitrators' "misconduct" of deciding against him.
The term "exceeding his power" in § 7511(b)(1)(iii) relates to cases where the arbitrator decides a matter not submitted or renders an award not authorized by the agreement to arbitrate. Here, right or wrong, the Award was clearly within the arbitrator's mandate to rule on the validity and amounts of the claims and counterclaims submitted by the parties, which they did; the Panel rendered the Award within the maximum amounts claimed by the parties.
The clause "or so imperfectly executed it that a final and definitive award upon the subject matter submitted was not made" relates to cases where the arbitrator omitted to consider a claim or otherwise rendered an Award in such form that the Court could not determine what had been awarded so as to enforce such Award. Here, the Award was in a liquidated amount of $450,000, and was in favor of Edwards as compensatory damages with all other relief sought by either party being denied. This is a definitive award within the meaning of the statutory language, covering all bases, even though obviously not of Lobacz' liking.
Lobacz' final basis for his challenge of the Award is made under CPLR § 7511(b)(iv) where the Court may grant relief for the "failure to follow the procedure of this article." Lobacz, however, omits the remainder of § 7511(b)(iv) which precludes relief where the party seeking to vacate the award "continued with the arbitration with notice of the defect and without objection." As Lobacz did continue with the arbitration through its conclusion, he may prevail under CPLR § 7511(b)(iv) only if the arbitrators actually failed to follow the procedures of Article 75, and either Lobacz had no notice of their failure to do so or failed to raise timely objection thereto.
It is therefore necessary for this Court to address Lobacz' claims of violation of the procedures of CPLR Article 75.
Lobacz' papers are not overly helpful in this context. At best they spell out his objection to the admission by the Arbitrator into evidence of testimony and documents submitted at a prior arbitration proceeding between Lobacz and his former securities broker where claims similar to those at issue at the arbitration were made and rejected. McLaughlin, Practice Commentary to CPLR § 7511, notes that subsection (b)(1)(iv) "refers basically to the procedures set forth in CPLR § 7506, and "should be construed to include Improper manner of the selection of arbitrators.'" The only provision of CPLR § 7506 relevant to "evidence" is § 7506) which provides:
"The parties are entitled to be heard, to present evidence and to cross-examine witnesses."
Vacation under § 7511(b)(iv) is thus only proper where the arbitrators fail to accord a party these basic due process rights. Accordingly, while evidentiary rulings are procedural issues, they are not "procedures under CPLR Article 75", which is silent as to such matters. Here, Lobacz complains not of any restriction on his own evidentiary presentation to the Panel or upon the hearing of his own arguments by them but of his objection to the Panel listening to and considering matters submitted by Edwards, i.e. facts surrounding Lobacz' prior litigation. Thus, Lobacz may not be heard to complain under this section of any violation of his basic due process rights.
"Incorrect" evidentiary rulings by an arbitrator are, absent other factors, not a basis for the vacation of an arbitration award.
The extent of the right to cross examine witnesses under CPLR § 7506) presents a more subtle issue, although hardly discussed by either party. Because in arbitration, absent an agreement by the parties to the contrary since the usual rules of evidence are inapplicable CPLR § 7506(c) cannot be deemed to preclude hearsay testimony or evidence; hearsay is and has always been clearly permissible in arbitration proceedings absent a direct or indirect agreement of the parties to preclude it. As there was no such agreement here, CPLR § 7506(c) must therefore only mean that no witness may give direct oral testimony in an arbitration proceeding unless the party against whom it has been received has reasonable opportunity in the same proceeding to cross examine such witness. The record in this case shows no breach of this rule.
Merrill Lynch Pierce Fenser Smith, Inc. v. Benjamin, 1 AD3d 39 (1st Dept. 2003).
Of course, when hearsay testimony is received, it is up to the arbitrators to determine the weight of such testimony.
Not only are these rules generally applicable to arbitration, the rules which expressly governed this arbitration, specifically provided that "the arbitrators shall determine the materiality and relevance of any evidence proffered and shall not be bound by the rules governing the administrability of evidence." NASD Manual Rule 10323. By signing the submission to arbitration, Lobacz agreed to such rules and cannot now challenge them. Similarly his challenge that somehow he was deprived of rights because no express ruling was made on his objection to the receipt of evidence of his prior arbitration claims is equally unavailing. Arbitration need not follow the formalities of a civil trial and arbitrations are not held to the procedural niceties of the CPLR. In any event, at the end of the arbitration, Lobacz, by not raising again such objection, cannot now challenge them.
Although, Lobacz in his motions set forth his grounds for relief in terms paraphrasing grounds in CPLR § 7511, he also in his papers argues, somewhat generically, the support of the FAA for his position and for the relief he seeks. The FAA clearly applies to the arbitration proceeding here by reason of it having arisen out of a brokerage agreement and an NASD arbitration, and this clearly "involving commerce." However, the standards by which this Court must review an award under state or federal law differ in few ways. While the Federal and State laws differ on whether "manifest disregard of law" is a grounds for review, Lobacz does not assert such ground.
In addition to the State statutory grounds paraphrased by Lobacz in his petition, he also asserts that the award was irrational. Both State law and Federal cases discuss such a ground as an appropriate reason to vacate an arbitration award, in addition to the listed statutory reasons. While regularly listed by Courts as a ground for vacation, Courts have, however, not defined irrationality and certainly, here, there are clearly rational possibilities as to how the panel reached its decision. The dearth of court decisions on its meaning, as distinct from its existence as a possible basis for the vacation of an award, is strong evidence of the high burden needed for such ground of objection to be successful. Lobacz certainly has not met this burden. As this Court noted in Bank of America Securities v. Knight, claiming irrationality in order to vacate an arbitration is often "the last of the losing litigator's long litany of laments." Lobacz' claim of irrationality here falls into this category.
Accordingly, Lobacz' request for relief is denied and Edwards' request to confirm the Award is granted. The Award is hereby confirmed. Settle Order.
This is the Decision and Order of the Court.