Opinion
01 Civ. 4824 (WHP) (KNF)
August 9, 2002
REPORT and RECOMMENDATION
TO THE HONORABLE WILLIAM H. PAULEY, III, UNITED STATES DISTRICT JUDGE
I. INTRODUCTION
In this action, brought by Bashar Sabbagh ("Sabbagh"), pro se, he seeks a trial de novo on claims previously presented to and adjudicated by an arbitration panel of NASD Dispute Resolution, Inc., arising out of the liquidation of a stock brokerage account that plaintiff maintained with defendant Charles Schwab Company, Inc. ("Schwab"). Under the terms and conditions of the agreement through which plaintiff established his brokerage account with the defendant, the parties' disputes were required to be resolved via arbitration, which would be final and binding on all parties.
The defendant has made a motion, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, that the complaint be dismissed for failure to state a claim upon which relief may be granted. The defendant has also requested that the court confirm the award issued by the above-noted arbitration panel, in accordance with the Federal Arbitration Act found at Title 9 of the United States Code, and New York's Civil Practice Law and Rules ("CPLR"). In addition, the defendant has moved, pursuant to Rule 11 of the Federal Rules of Civil Procedure, that the court sanction plaintiff for instituting this action without having either evidentiary or legal support for the allegations he has made. Plaintiff opposes the motions; they are analyzed below.
II. BACKGROUND
In September 1998, plaintiff opened a Schwab One Asset Management Account ("SOAMA"). The account had an automatic margin trading feature that allowed the account holder to use the account's assets as collateral for loans. A SOAMA account holder could elect not to have the automatic margin trading feature as part of the account by marking a designated box on the applicable account-opening documents.
In the instant case, plaintiff alleged that he informed Schwab that he did not wish to have the margin trading feature as a component of his SOAMA by marking the designated box on his account-opening documents. However, Schwab's records reflect that at the time Sabbagh opened his account, he did not mark the appropriate box on his account-opening documents to signal that he did not wish to have the margin trading feature as a component of his account.
At the arbitration proceeding, where plaintiff was represented by counsel, the defendant submitted the original and plaintiff submitted a copy of the pertinent account-opening documents. The copy submitted by Sabbagh reflects that he informed Schwab that he did not wish to have the margin trading feature applied to his account. However, when confronted with what he acknowledged were the original documents, Sabbagh conceded that the box on the original account-opening documents, that would have eliminated the margin trading feature from his account, was not marked. The discrepancy the parties identified in each other's version of plaintiff's account-opening documents, and discrepancies identified to the arbitration panel by the parties in other documents offered by them, in support of and in opposition to their respective positions at the arbitration proceeding, prompted each party to accuse the other of forging and fabricating documents.
In September and October 1998, Schwab notified Sabbagh that he had made purchases of securities through his SOAMA without having sufficient funds in the account to effect those transactions. Defendant advised plaintiff that his conduct violated, inter alia Federal Reserve Board lending rules. As a result, plaintiff was directed, in writing, to rectify the problem by depositing $62,466 into his account by October 14, 1998. Although plaintiff was advised by Schwab that it would make every attempt to "give [Sabbagh] until October 14, 1998" to make the requisite deposit into his account, Schwab reserved "the right at [its] discretion and without notification [to plaintiff] to liquidate [plaintiff's account] sooner."
Plaintiff contends that, to stave off liquidation, two deposits, one a check in the amount of $27,000, and the other a check in the amount of $35,400, were made to his account on October 6, 1998. However, the defendant's records indicate that the account received only one deposit, in the amount of $27,000. In support of his claim that two deposits were made, plaintiff presented two receipts to the arbitrators that he maintained were issued by Schwab when it accepted the deposits. Schwab claimed that the receipt for $35,400, produced at the arbitration proceeding by Sabbagh, was forged. In addition, Schwab presented evidence to the arbitrators that the balance in the bank account on which the $35,400 check was drawn was approximately $7,000 on the date the check was issued. Moreover, Schwab established that a letter, relied upon by plaintiff at the arbitration proceeding, and allegedly sent to him in 1999 by a customer relations manager at Sabbagh's bank, verifying that on October 8, 1998, his bank account balance exceeded $89,000, was fake.
In any event, on October 8, 1998, when the requisite additional funds had not been received from plaintiff, Schwab liquidated Sabbagh's account. Plaintiff contends that the October 8, 1998, liquidation of his account effected by the defendant involved securities valued at $2,947,764.92. Plaintiff requested that the arbitrators find that: (i) he opted out of the SOAMA margin feature when he opened his account; and (ii) the defendant acted improperly when it liquidated his account. In addition, Sabbagh asked the arbitrators to direct Schwab to repurchase all the securities that were liquidated and transfer them to his account.
At the conclusion of the arbitration proceeding, plaintiff's counsel informed the arbitrators that he believed they were very fair and that he was satisfied with them. However, he lamented the fact that, due to his adversaries' schedule, and that of one arbitrator, additional time could not be allotted for the proceeding. Plaintiff's counsel did not indicate to the arbitrators what additional evidence, if any, would have been presented by plaintiff if the proceeding had continued. Moreover, he did not indicate that the length of the proceeding rendered him unable to present any particular evidence in support of plaintiff's contentions. After considering the record generated during the arbitration proceeding and the post-proceeding submissions of the parties, on May 14, 2001, the arbitration panel made the following award:
1. [Sabbagh's] request for compensatory damages, arbitration fees, filing fees, and attorneys' fees is hereby denied.
2. [Schwab's] request for costs is hereby denied.
3. All other requests for relief are hereby denied.
After Sabbagh initiated this action, counsel to the defendant wrote to him and urged him to withdraw his complaint. Schwab's counsel explained to plaintiff, in detail, the obligation imposed on pro se litigants and attorneys by Fed.R.Civ.P. 11, as well as the potential consequences of running afoul of that Rule. Schwab's counsel also explained that Schwab viewed plaintiff's claims as meritless and, therefore, if Sabbagh continued to prosecute the action, Schwab would ask the court to impose monetary sanctions upon him. Undaunted by his adversary's entreaty, plaintiff determined not to withdraw his complaint.
III. DISCUSSION
Motion to Dismiss
A court may dismiss an action, pursuant to Fed.R.Civ.P. 12(b)(6) only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which will entitle him to relief." Cohen v. Koenig, 25 F.3d 1168, 1171-1172 (2d Cir. 1994) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99). In considering the motion, the court must take "as true the facts alleged in the complaint and draw all reasonable inferences in the plaintiff's favor." Jackson Nat'l Life Ins. v. Merrill Lynch Co., 32 F.3d 697, 699-700 (2d Cir. 1994). The court may consider all papers and exhibits appended to the complaint as well as any matters of which judicial notice may be taken. See Hirsch v. Arthur Andersen Co., 72 F.3d 1085, 1092 (2d Cir. 1995); Brass v. American Film Technologies, Inc., 987 F.2d 142, 150 (2d Cir. 1993). Additionally, when a plaintiff is proceeding pro se, courts are to construe the complaint liberally. See, e.g., Boddie v. Schnieder, 105 F.3d 857, 860 (2d Cir. 1997). "A complaint should not be dismissed simply because a plaintiff is unlikely to succeed on the merits." Baker v. Cuomo, 58 F.3d 814, 818 (2d Cir. 1995).
The parties have directed the Court to matters outside the pleadings, specifically the record generated at the arbitration proceeding. Rather than treat the instant motion as one for summary judgment, see Fed.R.Civ.P. 12(b), the Court has taken judicial notice of the arbitration record. See Fed.R.Evid. 201.
In his complaint, Sabbagh concedes that the "complaint which [he is] bringing forth" was heard and decided by a NASD Dispute Resolution, Inc. arbitration panel. However, plaintiff explains that he seeks to appeal from the determination reached by the arbitration panel. To accomplish that, plaintiff explains further, he seeks "a trial de novo" in this court. From the submission made by plaintiff, in opposition to the motions made by the defendant, it appears that plaintiff has relied upon 28 U.S.C. § 657 as the basis upon which he seeks to obtain a trial de novo of the matters previously presented to, and adjudicated by, an arbitration panel. Plaintiff's reliance upon 28 U.S.C. § 657 is misplaced.
28 U.S.C. § 657 (c)(1) provides that "[w]ithin 30 days after the filing of an arbitration award with a district court, under subsection (a) [of 28 U.S.C. § 657] any party may file a written demand for a trial de novo in the district court." 28 U.S.C. § 657 (a), in its most pertinent part, informs that "[a]n arbitration award made by an arbitrator under this chapter [chapter 44 of Title 28 of the United States Code], along with proof of service of such award on the other party by the prevailing party or by the plaintiff, shall be filed promptly after the arbitration hearing is concluded with the clerk of the district court that referred the case to arbitration." Chapter 44 of Title 28 of the United States Code permits district courts to establish and administer alternative dispute resolution programs in order to afford litigants innovative and efficient methods of resolving disputes and, thereby, reduce the backlog of cases awaiting adjudication in the district courts. The trial de novo permitted under 28 U.S.C. § 657 (c)(1), may be held only in those instances where an arbitration award has been made by an arbitrator associated with a court-affiliated arbitration program. Private agreements to arbitrate disputes, such as the agreement of the parties to the instant action, are governed by the Federal Arbitration Act and not by chapter 44 of Title 28 of the United States Code. See AlphaGraphics, Inc. v. Shapiro, 935 F. Supp. 1012, 1013-1014 (N.D. Ill. 1996).
Chapter 44 of Title 28 of the United States Code was amended by Congress in 1998. The amendments caused a renumbering of the statutory provisions. AlphaGraphics was decided before Congress amended the statute and, therefore, refers to the statutory provisions by their pre-1998 numbers.
The Court finds that it would not be appropriate to permit plaintiff to resurrect, in a judicial proceeding, the same claims that were previously adjudicated by an arbitration panel. First, as the Supreme Court has noted, when contracting parties agree to resolve their disputes through arbitration, they have not bargained for a court to find the facts with respect to their disputes. See United Paperworkers Int'l Union, AFL-CIO v. Misco, Inc., 484 U.S. 29, 45, 108 S.Ct. 364, 374 (1987). Here, the parties agreed to submit their disputes to arbitration and agreed that any resolution achieved through arbitration would be final and binding on all parties. No reason to disregard the arbitration provision of the parties' agreement exists and, thus, there is no proper role for the court to play in resolving the parties' disputes.
Furthermore, the doctrines of res judicata and collateral estoppel are applicable to cases like the case at bar. See Benjamin v. Traffic Executive Ass'n Eastern Railroads, 869 F.2d 107, 110-114 (2d Cir. 1989); Pennsylvania Eng'g Corp. v. Islip Resource Recovery Agency, 710 F. Supp. 456, 462 (E.D.N.Y. 1989); Siegel v. Daiwa Sec. Co., Ltd., 842 F. Supp. 1537, 1541 (S.D.N.Y. 1994); Trustees of the ALA-Lithographic Indus. Pension Plan v. Quality Color Graphics, Inc., No. 99 Civ. 11795, 2001 WL 274266, at *2 (S.D.N.Y. March 20, 2001). These doctrines prevent a party from re-litigating issues that could have been or actually have been, litigated and determined in a prior proceeding. Since plaintiff concedes in his complaint that the matters he has presented to the court have already been presented to and adjudicated by an arbitration panel, he may not re-litigate them in this court. Accordingly, dismissal of the complaint is warranted.
Confirmation of the Arbitrators' Award
"[T]he confirmation of an arbitration award is a summary proceeding that merely makes what is already a final arbitration award a judgment of the court." Florasynth, Inc. v. Pickholz, 750 F.2d 171, 176 (2d Cir. 1984). Absent a statutory basis for modifying, vacating or correcting an arbitration award, a district court is required to confirm the award under 9 U.S.C. § 9, if a timely application for confirmation has been made. See Ottley v. Schwartzberg, 819 F.2d 373, 376 (2d Cir. 1987). An application to confirm an arbitration award is timely if made by any party to the arbitration proceeding within one year after the arbitration award is made. See 9 U.S.C. § 9. Defendant's application to confirm the arbitrators' award was made timely.
The statutory bases for vacating an arbitration award are set forth at 9 U.S.C. § 10. They are: 1) where the award was procured by corruption, fraud, or undue means; 2) where there was evident partiality or corruption in the arbitrators, or either of them; 3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or 4) where the arbitrators exceeded their powers; or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.
A liberal reading of plaintiff's submission, (see McPherson v. Coombe, 174 F.3d 276, 280 [2d Cir. 1999]), in opposition to Schwab's application that the arbitration award be confirmed, leads the Court to conclude that plaintiff believes subdivisions one and three of 9 U.S.C. § 10 militate against confirming the arbitration award. Sabbagh alleges that Schwab presented perjured testimony and a forged document to the arbitration panel and thereby perpetrated a fraud upon the panel in order to obtain an award that was favorable to it. In addition, plaintiff contends that the arbitrators cut short the arbitration proceeding in order to accommodate the schedule of one of the arbitrators and the schedule of defendant's arbitration counsel. In support of the latter contention, plaintiff points to that portion of the arbitration proceeding record where his counsel indicated to the arbitrators that, although the arbitration proceeding was fair, he would have preferred to have had additional time allotted for the proceeding.
A. Fraud
Plaintiff's claim that Schwab presented perjured testimony and an altered document to the arbitration panel in order to secure an award favorable to it, provides no basis upon which the court could rely in vacating the instant arbitration award. During the arbitration proceeding, plaintiff attempted, through cross-examination, to persuade the arbitrators to discredit the testimony that he alleges was perjured because he claims it was contradicted by other record evidence presented by the defendant. In like manner, plaintiff also sought to have the arbitrators disregard the account-opening documents proffered by Schwab because he alleged the documents had been altered by the defendant. The arbitrators considered and rejected plaintiff's views concerning the evidence. That determination is reflected in the arbitration award they issued. Since it is left to the arbitrators to make factual findings, to weigh the evidence, to resolve evidentiary conflicts and to assess the credibility of witnesses who appeared before them see International Brotherhood of Electrical Workers v. Niagra Mohawk Power Corp., 143 F.3d 704, 725-726 (2d Cir. 1998); Campbell v. Cantor FitzGerald Co., 21 F. Supp.2d 341, 349 (S.D.N.Y. 1998), a court cannot usurp these arbitral functions in order to vacate an arbitration award.
As has been noted above, plaintiff is not entitled to a de novo review of the claims he presented to the arbitration panel. A court to whom an arbitration award is presented typically must defer to the decision reached by the arbitrators. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943, 115 S.Ct. 1920, 1924 (1995); United Paperworkers Int'l Union, AFL-CIO v. Misco, Inc., 484 U.S. at 36, 108 S.Ct. at 370. The Court defers to the determinations reached by the arbitrators respecting the credibility of the witnesses from whom they heard and the authenticity of the documents they received from the parties. Consequently, the Court finds that there is no basis upon which to conclude that the arbitration award was procured by fraud.
B. Arbitrator Misconduct
The record before the Court does not support a finding that the arbitrators' award should be vacated because the arbitrators engaged in misconduct when they decided not to allot more time for the arbitration proceeding. While it is clear from the arbitration proceeding record that plaintiff's counsel told the arbitrators that he wished that he had more time, he did not inform the arbitrators of the evidence, if any, he would have been presented to them if he had more time to do so. Similarly, plaintiff's submission in opposition to the instant motion failed to set forth the information, if any, that would have been presented to the arbitrators had the arbitration proceeding continued. Absent any showing by plaintiff that he was foreclosed from presenting any relevant information to the arbitration panel, the Court finds that the record before it is devoid of clear evidence of impropriety on the part of the arbitration panel in deciding not to postpone the termination of the arbitration proceeding. Clear evidence of impropriety would have to be presented by plaintiff to justify vacating the arbitrators' award. See Smiga v. Dean Witter Reynolds, Inc., 766 F.2d 698, 707-708 (2d Cir. 1985).
Since neither party has sought to modify, or correct the arbitration panel's award, as contemplated by 9 U.S.C. § 11, and plaintiff has not demonstrated that the arbitrators' award should be vacated, no statutory basis exists that would prevent the court from confirming the arbitrators' award.
Defendant also sought confirmation of the arbitrators' award under the applicable CPLR provisions. CPLR § 7510 directs a court to confirm an arbitration award upon the application of a party made within one year after its delivery to him, unless the award is vacated or modified upon a ground set forth in CPLR § 7511. CPLR § 7511 provides that an application to vacate or modify an arbitration award may be made within 90 days after its delivery. The grounds upon which an arbitration award may be modified or vacated under New York law are substantially similar to the grounds provided for in the Federal Arbitration Act. Accordingly, the analysis made in this writing would not be different if the Court applied the facts to the relevant provisions of the CPLR.
Rule 11 Sanctions
The main objective of Rule 11 sanctions is to deter baseless filings in the district court. See Cooter Gell v. Hartmarx Corp., 496 U.S. 384, 393, 110 S.Ct. 2447, 2454 (1990). "Under Fed.R.Civ.P. 11, sanctions may be imposed on a person who signs a pleading, motion, or other paper for an improper purpose such as to delay or needlessly increase the cost of litigation, or does so without a belief, formed after reasonable inquiry, that the position espoused is factually supportable and is warranted by existing law or by a non-frivolous argument for the extension, modification, or reversal of existing law." Caisse Nationale de Credit Agricole-CNCA, New York Branch v. Valcorp, Inc., 28 F.3d 259, 264 (2d Cir. 1994). A litigant's pro se status is no shield to Rule 11 sanctions. See Segarra v. Messina, 153 F.R.D. 22, 30 (N.D.N.Y. 1994). However, a court "may consider the special circumstances of litigants who are untutored in law," Maduakolam v. Columbia Univ., 866 F.2d 53, 56 (2d Cir. 1989), when considering whether imposing Rule 11 sanctions on a pro se litigant is warranted.
In the case at bar, plaintiff was notified by his adversary that his reliance on chapter 44 of Title 28 of the United States Code, as the basis upon which to seek a de novo review of the arbitration panel's award, was misplaced. Furthermore, having participated fully in the arbitration proceeding, Sabbagh knew that the documents, upon which he relied in attempting to convince the arbitrators that his contentions had merit, were shown, in many instances, to be forged documents. Notwithstanding these facts, Sabbagh attached many of those documents to the complaint that he signed and filed with the Clerk of Court to initiate this litigation. Having reviewed the record generated during the arbitration proceeding, and having considered the writing sent by defendant's counsel to plaintiff urging him to withdraw his complaint in order to avoid any potential exposure to Rule 11 sanctions, it is difficult to conclude that plaintiff maintained a belief, formed after reasonable inquiry, that a good faith factual or legal basis existed, for prosecuting the instant action. Although the Court is mindful of plaintiff's pro se status, his conduct in maintaining the action cannot be condoned; Rule 11 sanctions are justified.
Schwab has requested that the court require plaintiff to reimburse it for all costs it incurred in defending against the allegations made by plaintiff in the instant action. The Court finds that defendant's request is not reasonable. Regardless of the merits of the action initiated by plaintiff, it is likely that the defendant would have incurred costs in petitioning the court to confirm the arbitrators' award. There is no reason to require plaintiff to absorb the costs associated with that undertaking. However, it would be reasonable and appropriate to require plaintiff to reimburse Schwab for the costs, including reasonable attorney's fees, that it incurred in connection with making the Rule 11 motion for sanctions and the motion to dismiss the complaint. Imposing those costs on Sabbagh, as a sanction for his misconduct, would act as a general and specific deterrent to any future misbehavior of the type described above.
Although the defendant has submitted contemporaneous time records of its counsel that show the law firm personnel who assisted Schwab, the date, the hours expended and the nature of the work counsel performed on Schwab's behalf, it is not altogether clear from a review of those time records when Schwab's counsel devoted resources exclusively to the motions made pursuant to Fed.R.Civ.P. 11 and 12(b)(6). There are instances where the time records indicate that counsel performed multiple tasks for Schwab on the same date; some of those tasks may have been performed in furtherance of the motion to confirm the arbitrators' award as well as the motions to dismiss and for sanctions. To remedy this situation, Schwab should be given an opportunity to submit competent evidence of the costs it incurred solely in connection with the motions it made to dismiss the complaint and for Rule 11 sanctions. Once that information is received, the task of determining the monetary sanction that should be imposed upon Sabbagh will be simplified.
IV. RECOMMENDATION
For the reasons set forth above, the defendant's motion to dismiss the complaint should be granted; the defendant's motion to confirm the arbitrators' award should be granted; and the defendant's application, that the Rule 11 sanctions be imposed upon the plaintiff should be granted. To enable the court to fix the monetary sanction to be imposed on plaintiff, the defendant should be given a reasonable opportunity to supplement its previous submissions, by providing competent evidence that sets forth, with particularity, the costs, including the reasonable attorney's fees that Schwab incurred solely in connection with the motions it made to dismiss the complaint and for Rule 11 sanctions.
V. FILING OF OBJECTIONS TO THIS REPORT AND RECOMMENDATION
Pursuant to 28 U.S.C. § 636 (b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties shall have ten (10) days from service of this Report to file written objections. See also Fed.R.Civ.P. 6. Such objections, and any responses to objections, shall be filed with the Clerk of Court, with courtesy copies delivered to the chambers of the Honorable William H. Pauley, III, 500 Pearl Street, Room 2210, New York, New York, 10007, and to the chambers of the undersigned, 40 Foley Square, Room 540, New York, New York, 10007. Any requests for an extension of time for filing objections must be directed to Judge Pauley. FAILURE TO FILE OBJECTIONS WITHIN TEN (10) DAYS WILL RESULT IN A WAIVER OF OBJECTIONS AND WILL PRECLUDE APPELLATE REVIEW. See Thomas v. Am, 474 U.S. 140 (1985); IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1054 (2d Cir. 1993); Frank v. Johnson, 968 F.2d 298, 300 (2d Cir. 1992); Wesolek v. Canadair Ltd., 838 F.2d 55, 57-59 (2d Cir. 1988); McCarthy v. Manson, 714 F.2d 234, 237-38 (2d Cir. 1983).