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 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 (D.N.J. 1993) ("Gruntal I"). By opinion and order, filed 5 January 1994, the parties's cross-motions for summary judgment were denied and the Preliminary Injunction was vacated.
See Gruntal & Co. v. Steinberg, 843 F. Supp. 1 (D.N.J. 1994) ("Gruntal II").
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. See 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 SJ Response, Ex. C; Rappaport PI Cert, P 6.
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 failure, and for good cause shown by Gruntal, the Arbitration Proceedings were enjoined pending outcome of the case on the merits. See Gruntal I, 837 F. Supp. at 94.
In November 1993, the parties cross-moved for summary judgment. The motions were denied because genuine issues of material fact existed as to whether Gruntal was bound to arbitrate with the Steinbergs in the Arbitration Proceedings. The Preliminary Injunction was vacated on the ground that the Steinbergs had produced facts which substantially controverted Gruntal's likelihood of success on the merits and Gruntal had failed to address these facts. See Gruntal II, 843 F. Supp. at 15. The Trial followed.
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 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.
The Asset Purchase Agreement
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.; see Asset Purchase Agreement, introduced by Gruntal as Exhibit P5. 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]." Asset Purchase Agreement, 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 "[did] not assume any liabilities or obligations of [Philips] of any kind or nature whatsoever, except those liabilities and obligations commencing as of [19 April 1988, 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).
Howard Silverman ("Silverman"), Gruntal's chairman and chief executive officer when the Asset Purchase Agreement was negotiated, testified at trial that Gruntal and Philips intended this limitation of liability to extend beyond tort liability to any obligations arising out of Philips' operations. Tr. at 17. Silverman explained: "This is a very litigious business and we certainly do not want any liabilities that we had no control over or we had no hands in creating." Id. Silverman testified Gruntal's intentions in this regard were made clear to Philips "from the first minute of our conversations [regarding the Asset Purchase Agreement] until the signing of the document." Id. at 18.
The Asset Purchase Agreement also provided for the "carrying and clearing of certain customer accounts." Asset Purchase Agreement, P 8(b). The provision states, in relevant part:
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] had 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. . . ." Id., P 14(b).
The Asset Purchase Agreement further provided, as a condition precedent to Gruntal's obligation to close, that Gruntal, Philips and Broadcort Capital Corp. ("Broadcort"), a company which performed clearance
functions for Philips, would enter into an letter agreement annexed to the Asset Purchase Agreement. Id., P 7(f).
The Asset Purchase Agreement is "governed by and construed in accordance with the laws of the State of New York applicable to contracts performed wholly within such state, except to the extent (if any) such laws may be superseded by Federal laws." Id., P 15(g).
On 19 April 1988, pursuant to the Asset Purchase Agreement, Gruntal, Broadcort and Philips entered into a letter agreement regarding continuation of Broadcort's clearance functions for Gruntal (the "Clearance Agreement"). Pursuant to the Clearance Agreement, Broadcort agreed to carry until 13 May 1988 those customer accounts which were transferred to Gruntal by Philips pursuant to the Asset Purchase Agreement. See Clearance Agreement, introduced by Gruntal as Exhibit P6, P 1. The Clearance Agreement further provided that, "effective solely with respect to trades executed after the Closing [Date]," Gruntal agreed to "accept all of the duties, liabilities and obligations" of Philips arising out of its clearance arrangement with Broadcort. Id., P 2.
As indicated, beginning in 1982, the Steinbergs maintained two separate securities trading accounts with Philips through its Fort Lee Office. Rappaport SJ Cert., P 2. These accounts were identified by the numbers 39818442 ("Account 18442") and 39822321 ("Account 22321") (collectively, the "Steinberg Accounts"). Tr. at 71, 92. The Steinberg Accounts were each secured and governed by a "Standard Option Agreement" between the Steinbergs and Philips (collectively, the "Philips Contracts"). The Philips Contracts provide that "all controversies arising out of . . . transactions [involving the Steinberg Accounts] shall be settled by arbitration within the City of New York before the New York Stock Exchange or the National Association of Securities Dealers." See Philips Contracts, submitted by Gruntal as Exhibits P1 and P2, P 9.
The Prior Arbitration Proceedings
The Arbitration Proceedings which are the subject of the instant action are not the first instance of arbitration between the Steinbergs and Gruntal. In or about December 1989, Gruntal was named as a defendant in an NASD arbitration proceeding originally filed by the Steinbergs against Philips, bearing the number 88-02248 (the "Prior Arbitration Proceedings"). Nathan Cert., Ex. B. In the Prior Arbitration Proceedings, the Steinbergs complained that Philips improperly failed to execute a sell order, damaging the Steinbergs in the amount of $ 4,875.00. Steinberg SJ Response, Ex. A.
Upon being served by the NASD with notice of the Prior Arbitration Proceedings, Gruntal informed the NASD that it was not a proper party to the proceedings because it was not party to an agreement to arbitrate with the Steinbergs. See Nathan Cert., PP 5, 7. Gruntal also informed the NASD that it assumed no liabilities of Philips which arose prior to the Closing Date. Id.
The NASD did not respond to Gruntal's objections and the prior Arbitration Proceedings went forward. The Prior Arbitration Proceedings were carried out in accordance with the rules for "Simplified Arbitration," provided in section 13 of the NASD Code of Arbitration Procedure.
Steinberg SJ Response, Ex. A at 1. As such, Gruntal "was not afforded the opportunity to present witnesses in support of its defense . . . [or] to present oral argument." Nathan Cert., P 8.
By Notice of Arbitration Award, dated 11 June 1990 (the "Prior Arbitration Award"), Gruntal was held liable to the Steinbergs, "as successor to Philips," in the amount of $ 4,875. Prior Arbitration Award, submitted by the Steinbergs as Exhibit D6, at 2. When the Steinbergs attempted to have the Prior Arbitration Award confirmed in Maryland state court, their complaint was dismissed for lack of jurisdiction. Nathan Cert., Ex. F. As ...