The opinion of the court was delivered by: LECHNER
This is an action by plaintiff Gruntal & Co., Inc. ("Gruntal") against defendants Ronald Steinberg and Carolyn Steinberg (the "Steinbergs"), for declaratory judgment as to Gruntal's obligation to arbitrate. Jurisdiction is alleged pursuant to the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq., and 28 U.S.C. §§ 1331 and 1332.
Currently before the court is the issue, raised by Order to Show Cause entered 29 September 1993 (the "Order to Show Cause"), of whether the court should grant Gruntal a preliminary injunction enjoining arbitration in this matter pending disposition of the case on the merits.
See Order to Show Cause at 2. For the reasons set forth below, Gruntal's application for a preliminary injunction against arbitration is granted.
Gruntal is, and has at all relevant times been, a corporation organized and existing under the laws of Delaware, with its principal place of business in New York County, New York. Complaint, filed 29 September 1993 ("Complaint"), P 1. Gruntal is a securities broker-dealer and a member of the National Association of Securities Dealers ("NASD"). Rappaport Cert., P 2. Gruntal maintains a branch office in Fort Lee, New Jersey. Complaint, P 2.
The Steinbergs are individuals residing in Baltimore County, Maryland. It is alleged the Steinbergs are "citizens of the State of Maryland." Id., P 3.
From November 1982 through March 1988, the Steinbergs held a trading account with the securities brokerage firm of Philips, Appel & Walden, Inc. ("Philips") through Philips' office located in Fort Lee, New Jersey (the "Fort Lee Office"). Rappaport Cert., P 2. During that period, Philips had numerous other branch offices.
Id., P 3.
On or about 18 April 1988, Gruntal entered into an agreement (the "Asset Purchase Agreement") with Philips by which Gruntal "agreed to purchase certain specified assets of Philips' [Fort Lee Office]." Id.; Complaint, Ex. A. The Asset Purchase Agreement transfers to Gruntal "all right, title and interest of [Philips] in and to the furniture, leasehold improvements, equipment, machinery, supplies and other assets owned by [Philips] which are presently located or used at the [Fort Lee Office]." Complaint, Ex. A, P 1(a).
The Asset Purchase Agreement also transfers to Gruntal the "goodwill, other intangible assets and written information and operating data possessed by [Philips] relating to the retail brokerage business presently conducted by [Philips] at the [Fort Lee] Office. . . ." Id., P 1(b) Gruntal, however, acquires "no rights or interest in or to the name 'Philips, Appel & Walden.'" Id.
Also by the Asset Purchase Agreement, Gruntal acquires "any and all security and other deposits with respect to the lease for the [Fort Lee] Office, . . . and all other assets and properties of every kind and description and wherever located, relating to the conduct of the retail brokerage business at the [Fort Lee] Office." Id., P 1(c).
Under the Asset Purchase Agreement, Gruntal "shall not assume any liabilities or obligations of [Philips] of any kind or nature whatsoever, except those liabilities and obligations commencing as of [19 April 1993, the closing date of the Asset Purchase Agreement (the "Closing Date")] under the lease [for the Fort Lee Office]." Id., P 2. Philips remains responsible for "all obligations, claims, demands, causes of action, proceedings, losses, damages, expenses, liabilities, fines, penalties, deficiencies and costs . . . existing on the Closing Date or arising as a result of or in connection with the business or activities of [Philips] at the [Fort Lee] Office prior to the Closing Date." Id.
Gruntal, on the other hand, is liable only for claims "insofar as such claim arises out of or relates to (i) the conduct of [Gruntal's] business or operations at the [Fort Lee] Office after the Closing Date, or (ii) the inaccuracy of any representation or the breach of any warranty, covenant or agreement of [Gruntal] contained in [the Asset Purchase Agreement]." Id., P 11(b).
In or about April to May 1993, the Steinbergs initiated two separate arbitration proceedings (collectively, the "Arbitration Proceedings") against Gruntal before the NASD. The Steinbergs commenced the Arbitration Proceedings, which have been assigned NASD Case Numbers 93-01699 and 93-01887, by submitting two statements of claim to the NASD Director of Arbitration.
Complaint, Ex. B; Rappaport Cert., P 5. Both these statements of claim relate to the Steinbergs' account with Philips. Complaint, Ex. B.
The first statement of claim, dated 20 April 1993 (the "20 April Statement of Claim") alleges certain improprieties and breaches of duty by Philips brokers Todd Semon and Bob Semon, as well as by Philips itself. Id. According to the 20 April Statement of Claim, the alleged breaches of duty occurred between 21 October 1987 and approximately the end of November 1987. Id. At that time, both Bob Semon and Todd Semon were employed by Philips. Id. The 20 April Statement of Claim alleges that, as of its writing, Todd Semon worked for Gruntal. Id. The 20 April Statement of Claim requests damages totalling $ 44,486.00. Id.
The second statement of claim, dated 7 May 1993 (the "7 May Statement of Claim"), alleges certain improprieties and breaches of duty by Bob Semon. Id. These breaches were alleged to have occurred between 18 October 1987 and 15 February 1988. Id. At that time, Bob Semon was employed by Philips. Id. The 7 May Statement of Claim alleges that, as of its writing, both Bob Semon and Todd Semon were employed by Gruntal. Id. The 7 May Statement of Claim requests damages totalling $ 17,300.00. Id.
Both the 20 April Statement of Claim and the 7 May Statement of Claim allege that "preliminary" copies thereof were "personally delivered to Michael Pulver, the local attorney for Gruntal." Id. According to the 20 April Statement of Claim and the 7 May Statement of Claim, Gruntal did not respond to these communications. Id.
Gruntal, however, states that it made clear to both the Steinbergs and the NASD "that Gruntal never entered into any contract or agreement of any nature with the [Steinbergs] to arbitrate any dispute before the NASD, or indeed before any other arbitration forum." Rappaport Cert., P 6. Gruntal states it presented the Asset Purchase Agreement to both the Steinbergs and the NASD, and requested that the arbitration claims be dismissed. Id.
According to Gruntal, the Steinbergs persisted in their prosecution of the Arbitration Proceedings against Gruntal. Id. The NASD declined to rule on Gruntal's request for dismissal, and referred the question of arbitrability to the arbitration panel. Id. Gruntal received notice to this effect on 15 September 1993. Id. Gruntal states the NASD has "formally advised all parties that it will be scheduling hearing dates by [5 October 1993]." Moving Brief at 10.
Gruntal filed this action on 29 September 1993. The Complaint seeks "a declaratory judgment declaring that Gruntal has no obligation to [the Steinbergs] to arbitrate the claims raised by the [Steinbergs] in the Arbitration Proceedings." Complaint, P 21. The Complaint further seeks a preliminary and permanent injunction enjoining the Steinbergs from "pursuing their claims in the Arbitration Proceedings." Id., P 26.
Also on 29 September 1993, Gruntal made application for an order to show cause why a preliminary injunction should not issue, enjoining the Steinbergs from pursuing the Arbitration Proceedings against Gruntal pending the outcome of this case on the merits. The court entered the requested Order to Show Cause on the same date.
In examining requests for preliminary injunctions, federal standards are applied. Instant Air Freight Co. v. C.F. Air Freight, Inc., 882 F.2d 797, 799 (3d Cir. 1989); System Operations, Inc. v. Scientific Games Dev. Corp., 555 F.2d 1131, 1141 (3d Cir. 1977). As the Third Circuit has stated, even where "the right upon which [a] cause of action is based is state created, Rule 65(a) of the Federal Rules of Civil Procedure contemplates a federal standard as governing requests addressed to federal courts for preliminary injunctions." Instant Air, 882 F.2d at 799 (quoting System Operations, 555 F.2d at 1141).
The Circuit has established that, to prevail on its application for a preliminary injunction, the moving party must show:
(1) the probability of irreparable injury to the moving party in the absence of relief; (2) the [absence of] a possibility of harm to the non-moving party if relief were granted; (3) the likelihood of success on the merits; and ...