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GRUNTAL & CO. v. STEINBERG

January 5, 1994

GRUNTAL & CO., INC., Plaintiff,
v.
RONALD STEINBERG and CAROLYN STEINBERG, Defendants.



The opinion of the court was delivered by: ALFRED J. LECHNER, JR.

 LECHNER, District Judge

 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 and a permanent injunction against arbitration. Jurisdiction is alleged pursuant to the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq., and 28 U.S.C. §§ 1331 and 1332.

 By opinion and order, filed 12 October 1993, an application by Gruntal for a preliminary injunction against arbitration was granted (the "Preliminary Injunction"). See Gruntal & Co., Inc. v. Steinberg, 837 F. Supp. 85, 1993 WL 449259 (D.N.J. 12 Oct. 1993) ("Gruntal I"). Currently before the court are the motion of the Steinbergs for summary judgment dismissing the action and vacating the Preliminary Injunction, *fn1" and the cross-motion of Gruntal for summary judgment granting declaratory relief and a permanent injunction against arbitration. *fn2" For the reasons set forth below, the Steinbergs' motion is denied, but the Preliminary Injunction is vacated for cause shown; Gruntal's cross-motion is denied.

 Procedural History

 In or about April to May 1993, the Steinbergs initiated two separate arbitration proceedings (collectively, the "Arbitration Proceedings") against Gruntal before the National Association of Securities Dealers ("NASD"). The Arbitration Proceedings were assigned NASD Case Numbers 93-01699 and 93-01887. Complaint, Ex. B; Rappaport PI Cert., P 5.

 Gruntal subsequently moved before the NASD to dismiss the Arbitration Proceedings on the ground 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 PI Cert., P 6. By memorandum, dated 10 September 1993, the NASD declined to rule on Gruntal's motion to dismiss and referred the question of arbitrability to the arbitration panel. Steinberg Response, Ex. C.

 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 "Order to Show Cause"). The requested Order to Show Cause was entered on the same date.

 The Steinbergs failed to respond to the Order to Show Cause, either by appearance or by written submission. In light of this, and for good cause shown by Gruntal, the Arbitration Proceedings were enjoined pending outcome of the case on the merits. See Gruntal I, 1993 WL 449259. The instant motions followed.

 Facts

 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, 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 PI 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 until at least December 1988, the Steinbergs held a securities trading account through account executives Bob Semon and Todd Semon, who did business out of a securities brokerage office located in Fort Lee, New Jersey (the "Fort Lee Office"). *fn3" Steinberg Cert., P 1. Until about April 1988, Bob Semon and Todd Semon were employed by the securities brokerage firm of Philips, Appel & Walden ("Philips"), which until that time owned and operated the Fort Lee Office. Id.; Rappaport PI Cert., P 2. It appears that while the Steinbergs were customers of Philips, Philips was a member of the NASD. Steinberg Cert., P 1. During that period, Philips had numerous other branch offices. *fn4" Rappaport PI Cert., 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 transferred 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 transferred 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, acquired "no rights or interest in or to the name 'Philips, Appel & Walden.'" Id.

 Also by the Asset Purchase Agreement, Gruntal acquired "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).

 Pursuant to 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).

 The Asset Purchase Agreement also provided for the "carrying and clearing of certain customer accounts." Id., P 8(b). The provision states, in relevant part:

 
For a period of 90 days after the Closing Date, [Philips] will use its best efforts to cause the retail brokerage customers of those registered representatives at the [Fort Lee] Office who accept employment with [Gruntal] to transfer their accounts to [Gruntal] as of the Closing Date, and [Philips] and [Gruntal] shall cooperate to facilitate the transfer of such accounts to [Gruntal]. [Gruntal] shall have the right, to be exercised at any time or from time to time but not later than 5 business days after the conversion of customer accounts of the [Fort Lee] Office . . . , to reject any and all accounts of customers serviced at the [Fort Lee] Office which as of the Closing Date . . . (i) have an unsecured or partially secured debit balance, or (ii) are . . . not acceptable to [Gruntal], in its sole discretion. [Philips] shall arrange for the carrying and clearing of such rejected accounts, and shall remain responsible therefor. Anything herein contained to the contrary notwithstanding, . . . [Philips] shall retain all rights to any income earned and shall remain responsible for all costs incurred . . . as a result of trades executed or insurance policies sold on or prior to the Closing Date. . . .

 Id. (emphasis added).

 Under the Asset Purchase Agreement, Philips

 
constitutes and appoints [Gruntal] . . . as the true and lawful attorneys of [Philips], with full power of substitution, in its name, but on behalf of and for the benefit of [Gruntal] . . . for those customer accounts which are transferred to [Gruntal] and retained by [Gruntal] pursuant to Section 8 hereof. . . .

 Id., P 14(a). Moreover, effective as of the Closing date, [Gruntal] has the right to "receive and open all mail, packages and other communications addressed to [Philips] and relating to the retail brokerage business of the [Fort Lee] Office. . . ." *fn5" Id., P 14(b).

 As stated, prior to the Closing Date, the Steinbergs held a trading account with Philips through Bob Semon and Todd Semon (the "Philips Account"). Steinberg Cert., P 1; Rappaport PI Cert., P 2. It appears the number identifying the Philips Account is 39818442. Complaint, Ex. B. The Philips Account appears to have been created by "a contract, requiring arbitration of disputes, . . . between [the Steinbergs] and [Philips (the "Steinberg-Philips Contract")]." Steinberg Cert., P 2. It further appears that, at least as of 30 November 1990, the Steinbergs held a trading account with Gruntal through Bob Semon and Todd Semon *fn6" (the "Gruntal Account"). Steinberg Response, Ex. E, F. *fn7" It appears the number identifying the Gruntal Account is 39822321. Id.

 Neither party has alleged that a new contract was signed by the Steinbergs and Gruntal after the Closing Date in order to initiate the Gruntal Account. Moreover, neither party has alleged Gruntal rejected the Philips Account and the Steinberg-Philips Contract, as would have been its right under the Asset Purchase Agreement. *fn8" See Asset Purchase Agreement, P 8(b). Ronald Steinberg in fact certifies:

 
In April 1988, I learned that the name of the Fort Lee Office was changed only because a name change appeared on my monthly statement (from Philips et al. to Gruntal et al.).
 
Inasmuch as I was never requested to sign a new contract when the name changed, I assumed, In good faith, that the existing contract [relating to the Philips Account] remained continuously in force. . . .

 As stated, the Steinbergs initiated the Arbitration Proceedings by submitting two statements of claim to the NASD in April and May 1993. The first statement of claim, dated 20 April 1993 (the "20 April Statement of Claim") alleges certain improprieties and breaches of duty by Todd Semon and Bob Semon, as well as by Philips itself. Complaint, Ex.B. 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 ...


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