Potential Exposure From Non-Plead Claims – First Department Decision Highlights The Broad Powers Of Arbitrators
July, 2010
New York's Appellate Division for the First Judicial Department recently upheld an arbitrator’s award of joint and several liability, even though the plaintiff failed to plead same as a theory of recovery. See Frankel v. Sardis, 2010 NY Slip Op. 5280 (1st Dep’t 2010).
In 1999, Plaintiffs, which comprised of individual investors and a related holding corporation, invested approximately $19 million with Sofia Frankel (“Frankel”), a technology-oriented trader then working for Goldman Sachs. Id. at *2. Frankel was employed by Goldman Sachs until 2000, when she left the brokerage firm to join Lehman Brothers. Id. Plaintiffs followed Frankel to the new firm and continued their relationship with the investment advisor. Id.
Plaintiffs alleged that Frankel engaged in fraudulent churning of their accounts while at both Goldman Sachs and Lehman Brothers. Id. Churning, a term of art in the securities industry, refers to the excessive buying and selling of securities for the purpose of generating commissions without regard to the client’s investment objectives. Id.; Moran v. Kidder Peabody & Co., 609 F.Supp. 661, 666 (S.D.N.Y. 1985). Plaintiffs claimed that Frankel’s churning activities caused them to lose about $9.6 million. Frankel, *2.
In May, 2004, Plaintiffs commenced an arbitration proceeding before NASD, the predecessor of the current arbitration panel, FINRA, against Frankel for her direct involvement in the alleged fraud, and against Goldman Sachs and Lehman Brothers, seeking to hold the brokerage firms vicariously liable. Frankel, *3. Plaintiffs’ Damage Clause in their Statement of Claim (the arbitration equivalent to a complaint) sought various categories of monetary damages against Goldman Sachs and Frankel, jointly and severally, and separately sought monetary damages against Lehman Brothers. However, the Statement of Claim did not include any language or claim concerning joint and several liability as between Frankel and Lehman Brothers. Id.
After a lengthy review (consisting of 37 hearings), the arbitration panel found Goldman Sachs and Frankel jointly and severally liable for $1 million in compensatory damages, and found Lehman Brothers and Frankel jointly and severally liable for $2.5 million in compensatory damages. Id. at *3. Thereafter, Frankel initiated a lawsuit in the Supreme Court of New York County in an attempt to overturn the panel’s award of her joint and several liability with Lehman Brothers on the grounds that Plaintiffs sought no such relief. Id.
Plaintiffs opposed Frankel’s petition and cross-moved to confirm the award, arguing that Frankel’s wrongful acts while employed at Lehman Brothers were delineated in their Statement of Claim and explored at length during the arbitration hearings. Id. The essence of Plaintiffs’ argument was that based upon the hearings and pleading allegations, Frankel and Lehman Brothers were ostensibly on notice of the possibility of being held joint and severally liable. Frankel argued that the fact remained that Plaintiffs’ Statement of Claim simply did not plead a claim for joint and several liability.
Historically, courts have been reluctant to disturb the decision of arbitrators in order to avoid devaluing this method of resolution of controversies and to promote the conservation of scarce judicial resources. Id. at *3; see Matter of Goldfinger v. Lisker, 68 N.Y.2d 225 (1986). A fundamental principal of arbitration law is that the scope of judicial review is extremely limited. See Matter of Silverman, 61 N.Y.2d 299 (1984). An arbitration award will not be overturned unless “it is violative of a strong public policy, or is totally irrational, or exceeds a specifically enumerated limitation on [the panel’s] power.” Id. at 308. Because arbitration is a creature of contract, the question of whether a panel exceeded its authority focuses on whether the arbitrator had the power, based on the arbitration agreement and the parties’ submissions, to reach a certain issue, not whether the arbitrators correctly decided the issue. See DiRussa v. Dean Witter Reynolds Inc., 121 F.3d 818 (2d Cir. 1997). Unless the arbitrator had absolutely no justification for his decision, the courts will afford substantial deference and will not overturn the decision. See Matter of Roffler v. Spear, Leeds & Kellogg, 13 A.D.3d 308 (1st Dep’t 2004).
Both the New York Supreme Court and the Appellate Division upheld the arbitrator’s award; thereby settling the issue as to whether the scope of an arbitrator’s powers includes claims which were not plead and damages which were not sought. In so holding, the Appellate Division reasoned that the language of arbitration demands is not subject to the strict standards of construction of formal court pleadings. Frankel, *4. Specifically, the Court noted that “if the allegations underlying the claims touch matters covered by the parties’ . . . agreements, then those claims must be arbitrated, whatever the legal labels attached to them.” Id., quoting Kurt Orban Co. v. Angeles Metal Sys., 573 F2d 739 (2d Cir. 1978). In conclusion, the Court noted that to hold otherwise would unnecessarily elevate form over substance, and would serve to preclude an otherwise meritorious award merely because the damages clause failed to spell out a claim for joint and several liability. Id. at *5.
Learning Point:
Courts will normally uphold an arbitrator’s decision, unless it violates strong public policy or is irrational.
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