Summary
noting in the slightly different context of considering an arbitration rule on composing an NASD panel, that "courts should be wary about disregarding NASD Rules and should accord deference to the NASD's interpretation of its Rules"
Summary of this case from AXA DISTRIBUTORS, LLC v. BULLARDOpinion
02-CV-0196E(Sr)
December 17, 2002
MEMORANDUM ORDER
This decision may be cited in whole or in any part.
Respondents ("Investors") commenced an NASD arbitration against Petitioner ("NPC ") concerning their failed investments in a payphone sale-leaseback transaction. October 24, 2001 was the deadline for both sides to submit their list of proposed arbitrators to the NASD. The Investors timely submitted their list, but NPC failed to send their list to the NASD due to a clerical error — i.e., NPC's attorneys faxed the list to themselves. Consequently, the NASD selected an arbitration panel from the Investor's list ("Achatz Panel") according to NASD procedure outlined in NASD Rule 10308. Upon discovering the error a month later, NPC sought relief from the NASD in order to select a new arbitration panel composed from the lists of both parties ("New Panel"). The NASD denied NPC's repeated requests. NPC subsequently filed this action in the Southern District of New York and moved before Judge Hellerstein to compel arbitration before a New Panel pursuant to 9 U.S.C. § 4. Judge Hellerstein dissolved the Achatz Panel and further held that "all arbitration proceedings before such panel are stayed." Nat'l Planning Corp. v. Achatz, No. 02-527, at *1 (S.D.N.Y. Feb. 27, 2002). Furthermore, Judge Hellerstein noted that he lacked the power to compel an arbitration in this District and therefore transferred this action to this District. Id. Judge Hellerstein's Order, however, did not address NPC's Petition to Compel Arbitration before a Lawfully Constituted Panel, which was filed January 23, 2002. Accordingly, before this Court is NPC's petition to compel arbitration as well as the Investors' motion to compel arbitration. For the reasons discussed below, both parties' motions will be granted in part and denied in part.
The National Association of Securities Dealers has a subsidiary — National Association of Securities Dealers Dispute Resolution, Inc. — that administers dispute resolution services, including arbitrations, for disputes involving NASD members. NASD and NASD-DR, Inc. will be collectively referred to as "NASD."
The NASD provides the parties with a list of potential arbitrators (the "Arbitrator List"). NASD Rule 10308(c)(1) permits each party to rank preferences and strike objectionable arbitrators with respect to the Arbitrator List. NASD Rule 10308(c)(2) requires parties to "return" such rankings/objections to the NASD "not later than 20 days" after the parties received the Arbitrator List. NASD Rule 10308(c)(2) further provides that any party that does not timely return their rankings/objections will be treated as "having retained all the arbitrators on the list or lists and as having no preferences." The NASD selects an arbitration panel based on the parties' preferences and objections.
Section 4 provides in relevant part that, "[a] party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction * * * for an order directing that such arbitration proceed in a manner provided for in such agreement."
This unpublished decision incorporates by reference the hearing held February 26, 2002 and summarizes Judge Hellerstein's ruling from the bench that same day. The Transcript for the February 26, 2002 hearing will be referred to as "Tr."
On April 9, 2002 the Investors filed a "motion to compel an NASD arbitration" before the Achatz Panel pursuant to NASD Rule 10308(c)(2), which outlines the 20-day period allowed for striking potential arbitrators. NPC objects on the ground that, inter alia, Judge Hellerstein's Order should remain undisturbed. The matter was submitted May 17, 2002.
Notably, both parties agree that an arbitration should be held in this District, and it is therefore somewhat of a misnomer to say that either party is seeking to compel arbitration. Tr. at 15. Rather, the parties dispute which arbitration panel should hear the case.
In opposing the Investors' motion, NPC contends that this Court is bound by Judge Hellerstein's Order. This Court does not agree. Indeed, this Court has the authority and discretion to modify such an interlocutory ruling. See In re United States, 733 F.2d 10, 13 (2d Cir. 1984) ("It is well established that the interlocutory orders and rulings made pre-trial by a district judge are subject to modification by the district judge at any time prior to final judgment, and may be modified to the same extent if the case is reassigned to another judge.") (emphasis added). Also this Court is not prohibited from modifying Judge Hellerstein's Order by the "law of the case" doctrine, which "is a discretionary rule of practice and generally does not limit a court's power to reconsider an issue." In re PCH Assoc., 949 F.2d 585, 592 (2d Cir. 1991). Finally, inasmuch as Judge Hellerstein's ruling was interlocutory in nature, NPS's arguments concerning the preclusive doctrines of issue and/or claim preclusion are inapplicable. See Flaherty v. Lang, 199 F.3d 607, 612-613 (2d Cir. 1999).
See also Green Tree Fin. Corp. — Alabama v. Randolph, 531 U.S. 79, 86 (2000) (noting that "the term `final decision' has a well-developed and longstanding meaning. It is a decision that `ends the litigation on the merits and leaves nothing more for the court to do but execute the judgment.'") (citing cases quoting Catlin v. United States, 324 U.S. 229, 233 (1945)); New Pacific Overseas Group (U.S.A.) Inc. v. Excal 252 F.3d 667, 668 (2d Cir. 2001) (same). Accordingly, Judge Hellerstein's ruling was not a "final decision."
See also Harris v. Key Bank Nat'l. Ass'n, 193 F. Supp.2d 707, 711 (W.D.N.Y. 2002) (noting that the "only limitation placed upon the exercise of the court's discretion in this regard is that prejudice not ensue to the party arguing for application of the [law of the case] doctrine. In this context, `prejudice' does not mean simply the adverse effect of the ruling itself, but instead `refers to a lack of sufficiency of notice' or a lack of sufficient `opportunity to prepare armed with the knowledge that [the prior ruling is not deemed controlling].'"); Arons v. Lalime, 3 F. Supp.2d 328, 330 (W.D.N.Y. 1998) (citing In re United States and noting the circumstances under which courts generally modify a ruling, including "the need to correct a clear error of law").
This Court has finds without merit NPC's other arguments in support of its assertion that the Investor's motion is foreclosed by Judge Hellerstein's Order.
Turning to the merits of the parties' arguments, the Investors' motion to compel is just the flip side of NPC's motion to compel — viz., the parties agree that there will be an arbitration but the question, however, is the composition of the NASD panel. For the following reasons, this Court finds that the arbitration should proceed before the Achatz panel.
NPC relies on a line of cases including Lobo Co. Inc. v. Plymouth Navigation Co. of Monrovia (In re Lobo Co.), 187 F. Supp. 859, 860 (S.D.N.Y. 1960). This line of cases, however, is distinguishable. Indeed, unlike this case, the Lobo cases did not involve an NASD arbitration. Accordingly, the Lobo cases did not involve the selection of arbitrators by a neutral third party. Although the Achatz Panel was weighted in favor of the Investors' preferred arbitrators, this was a result of NPC's failure to timely "return" the arbitrator list to the NASD in accordance with NASD Rule 10308(c)(2) — to which NPC had agreed. Cf. Universal Reins. Corp. v. Allstate Ins. Co., 16 F.3d 125, 128 (7th Cir. 1993) (holding that arbitration agreement that required nomination of arbitrators within thirty days had to be strictly enforced under section 5 of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq.), reh'g denied en banc (1994). Applicable to the facts of this case, Universal Reins. Corp. noted that the parties
See In re Lobo, at 860 (holding that a one-day delay in appointing an arbitrator was immaterial to the arbitration agreement and excusing such delay because the efficacy of the arbitration process would otherwise be undermined if a perception of unfairness resulted in subsequent litigation); Texas Eastern Transmission Corp. v. Barnard, 285 F.2d 536, 539 (6th Cir. 1960); New Eng. Reins. Corp. v. Tennessee Ins. Co., 780 F. Supp. 73, 77 (D.Mass. 1991); Compania Portorafti Commerciale, S.A. v. Kaiser Int'l Corp., 616 F. Supp. 236, 238 (S.D.N.Y. 1985); In re Utility Oil Corp., 10 F. Supp. 678, 681 (S.D.N.Y. 1934). These cases will be collectively referred to as "the Lobo cases." These cases "hold that minimal delays in appointing an arbitrator do not deprive the defaulting party of its right of appointment unless the contract makes time of the essence." Compania Portorafti, at 238. Moreover, the "simple recitation of the time within which the appointment must be made is not sufficient, under these cases, to achieve that characterization." Ibid.
See Submission Agreement, at 1; Aff. of Mark H. Alcott dated Jan. 22, 2002, at ¶ 6 Ex. B. Moreover, NPC has also agreed to arbitrate under NASD Rules by reason of its membership in NASD. See Kidder, Peabody Co., Inc. v. Zinsmeyer Trusts, 41 F.3d 861, 863 (2d Cir. 1994) (noting that NASD members are "bound by the NASD Code [and that] Section 12 of the NASD Code requires members to submit to arbitration at the request and option of its customers.").
agreed to a mutually binding procedure that would eliminate needless skirmishes and delays in the selection of arbitrators. To substitute our notion of fairness in place of the explicit terms of their agreement would deprive them of the benefit of their bargain just as surely as if we refused to enforce their decision to arbitrate. Indeed, by permitting parties to evade the arbitration procedures to which they have consented, we lure them to the very expenditures of time and money in the courtroom that the Arbitration Act and their own agreement were intended to avoid. Universal Reins. Corp., at 129.
Likewise here. Moreover, section 5 of the FAA requires this Court to enforce the NASD Rules because they were agreed to by the parties. 9 U.S.C. § 5 ("If in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed * * *.") (emphasis added). Accordingly, unlike the Lobo cases, which are predicated on the existence of unfairness that undermines the arbitration process, the Achatz Panel was fairly selected and was properly composed under the NASD's Rules.
See footnote 11.
Cf. Universal Reins. Corp., at 129 (conceding "that strict enforcement of this provision may sap Universal's faith in the impartiality of the panel" and noting that the court was tempted "to relieve Universal of the consequences of its oversight [because its] delay in naming an arbitrator was brief and inadvertent, and it caused no ostensible prejudice to Allstate," but nonetheless concluding that "the parties themselves have dictated the outcome in this situation, and absent compelling circumstances, it is not our province to rewrite their agreement."). Likewise, despite the possibility of piecemeal litigation, this Court is constrained by section 5 of the FAA to enforce the NASD Rules that have been contractually adopted by the parties. 9 U.S.C. § 5; cf. Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 221 (1985) (noting that "the relevant federal law requires piecemeal resolution when necessary to give effect to an arbitration agreement * * *.'") (citation omitted).
Although courts have discretion to overlook a relatively minor delay in one party's selection of arbitrators, courts should be wary about disregarding NASD Rules and should accord deference to the NASD's interpretation of its Rules. Indeed, the parties have agreed to arbitrate under the NASD Rules. Consequently, judicial disregard of the NASD's interpretation of its own Rules would inject uncertainty into the arbitration process and increase the prospects of time-consuming litigation — which are some of the evils arbitration is designed to avoid. Accordingly, this Court deems it appropriate that the NASD-selected arbitration panel — the Achatz Panel — should be empaneled forthwith.
Cf. York Research Corp. v. Landgarten, 927 F.2d 119 (2d Cir. 1991) ("weight must be given to the fact that the AAA interpreted its Commercial Rules to permit the arbitration panel to hear the case. The parties agreed that the AAA should administer the arbitration process and apply its Commercial Arbitration Rules. Given the parties' designation of the AAA as the supervisory authority regarding the resolution of disputes under the agreement, the AAA's view of the meaning of its rules is of considerable significance.") (emphasis added).
Although the "NASD rules are not `law'" — Max Marx Color Chem. Co. Employees' Profit Sharing Plan v. Barnes, 37 F. Supp.2d 248, 253 (S.D.N.Y. 1999) — they nonetheless must be followed where — as here — the parties agreed to be bound by such. Cf. Universal Reins. Corp., at 129 ("In this case the agreement is crystal clear, specifying a particular course for the appointment of a second arbitrator when one of the parties fails to make its selection within thirty days. This provision does not command less deference simply because it concerns a procedural rather than a substantive aspect of the parties' decision to arbitrate. On the contrary, the Arbitration Act states in no uncertain terms that contractual provisions for the appointment of an arbitrator `shall be followed.'") (quoting 9 U.S.C. § 5).
See Brawer v. Options Clearing Corp., 807 F.2d 297, 303 (2d Cir. 1986) (noting that "after-the-fact litigation would be a `most imperfect device' with which to evaluate [self-regulating organization's] decisions.").
See Southland Corp. v. Keating, 465 U.S. 1, 7 (1984) ("Contracts to arbitrate are not to be avoided by allowing one party to ignore the contract and resort to the courts. Such a course could lead to prolonged litigation, one of the very risks the parties, by contracting for arbitration, sought to eliminate.").
More importantly, section 10(a)(2) of the FAA, as interpreted by the Second Circuit Court of Appeals, prohibits this Court from allowing NPC to attack the partiality of the Achatz Panel until after an arbitration award has issued. See Aviall, Inc. v. Ryder System, Inc., 110 F.3d 892, 894 (2d Cir. 1997) ("it is well established that a district court cannot entertain an attack upon the qualifications or partiality of arbitrators until after the conclusion of the arbitration and the rendition of an award") (quoting Michaels v. Mariforum Shipping, S.A., 624 F.2d 411, 414 n. 4 (2d Cir. 1980)). In attempting to have an arbitration before a New Panel, the NPC is improperly attempting to seek the pre-award removal of the Achatz Panel on grounds of partiality. See Nat'l Union Fire Ins. Co. v. Holt Cargo Sys., 2000 WL 328802, at *2 (S.D.N.Y. 2000) (citing Aviall for the proposition that the FAA does not permit pre-award removal of an arbitrator). This satellite litigation has consumed nearly one year and has thus largely dissipated the benefits of arbitration as a speedier less expensive alternative to litigation.
Indeed, in Aviall, the parties provided by contract that KPMG Peat Marwick ("KPMG") would arbitrate any dispute concerning a Distribution Agreement. Aviall, at 893-894. When the contract was executed, KPMG was the outside auditor for both parties, but was not the plaintiff's outside auditor at the time of the dispute. Id. at 894. Consequently, plaintiff brought suit seeking to remove KPMG as arbitrator because it was allegedly partial to the defendant on the grounds that (1) KPMG was defendant's outside auditor, and (2) KPMG had assisted the defendant in preparing for the arbitration. Id. at 894-895. Nonetheless, the Second Circuit Court of Appeals held that KPMG could not be removed as arbitrator until after an arbitration award. Id. at 895-897. The court noted that — although section 10(a)(2) of the FAA permits a court to vacate an award where there is "evident partiality" — the FAA "does not provide for pre-award removal of an arbitrator" and that "an agreement to arbitrate before a particular arbitrator may not be disturbed, unless the agreement is subject to attack under general contract principles." Id. at 895. Likewise here. NPC cannot seek to remove the Achatz Panel before an arbitration award is rendered. Indeed, like Aviall, NPC was aware of NASD Rule 10308 and the consequences of failing to "return" its arbitrator list to the NASD within the requisite time frame. See Id. at 896 (noting that plaintiff knew that the Distribution Agreement provided for arbitration before KPMG and that it could "hardly object to the Distribution Agreement being enforced according to its terms.").
See NPC's Mem. of Law in Opposition to Respondent's Mot. to Compel Arbitration, at 7 (noting that Judge Hellerstein addressed "whether the [Achatz] panel * * * should be dissolved and replaced by a fair panel.") (emphasis added); see also id. at 16-18, 22-24 (suggesting that the Achatz Panel is not impartial).
Accordingly, it is hereby ORDERED that petitioner's and respondents' motions to compel are granted in part and denied in part, that NPC's Petition is granted to the extent that it seeks an order compelling arbitration but is denied in all other respects, that the parties shall submit to arbitration before the Achatz Panel — as previously empaneled by the NASD — unless the NASD selects a different panel within twenty days of this Order, that the Order of Judge Hellerstein dated February 26, 2002 is vacated to the extent that it is inconsistent with this Order and that the Clerk of this Court shall close this action.