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Arista Marketing Associates Inc. v. Peer Group Inc.

December 09, 1998

ARISTA MARKETING ASSOCIATES, INC. AND PHILIP J. CURCURA, PLAINTIFFS-RESPONDENTS,
v.
THE PEER GROUP, INC. AND BARRY FRY, DEFENDANTS-APPELLANTS. THE PEER GROUP, INC. AND BARRY J. FRY, PLAINTIFFS-APPELLANTS,
v.
ARISTA MARKETING ASSOCIATES, INC. AND PHILIP J. CURCURA, DEFENDANTS-RESPONDENTS, AND KENNETH ARLEIN, STEPHEN KNOX, AND AMERICAN ARBITRATION ASSOCIATION, DEFENDANTS. *FN1



Before Judges Wallace, Newman and Fall.

The opinion of the court was delivered by: Fall, J.s.c. (temporarily assigned)

[9]    Argued: November 12, 1998

On appeal from the Superior Court of New Jersey, Chancery Division, Union County.

In these separate commercial arbitration appeals, consolidated for opinion purposes, we examine the court's authority for the pre-arbitration removal of a party-appointed arbitrator, designated pursuant to the tripartite arbitration procedures set forth in the corporate dissolution agreement of the parties. We also consider whether the pre-arbitration disqualification of a party-appointed arbitrator based on "evident partiality" requires appointment of an entirely new arbitration panel. In the first action, the motion Judge removed a party-appointed arbitrator, pre-arbitration, based on a finding of "evident partiality." In the second action, under the terms of the arbitration clause in the parties' agreement, the motion Judge determined the pre-arbitration disqualification of a party-appointed arbitrator based on "evident partiality" was not cause for disqualification of the remaining arbitrators, and de novo commencement of the arbitrator appointment process. We affirm both decisions.

I.

The facts and procedural history are complex and require significant Discussion. Philip J. Curcura and Barry J. Fry were each 50% owners of both Arista Marketing Associates, Inc. (Old Arista) and Oakwood Consulting, Inc. (Oakwood). These corporations were engaged in the business of providing promotional and marketing services to the health care industry.

Curcura and Fry began to have disagreements concerning the operation of these businesses in 1993. After considerable negotiations, in November 1994, Curcura and Fry entered into a number of agreements designed to terminate their joint ownership. Under the terms of a Workout Agreement dated November 24, 1994, Fry transferred his 50% interest in Oakwood to Curcura, who changed Oakwood's name to Arista Marketing Associates, Inc. (New Arista); and Curcura transferred his 50% interest in Old Arista to Fry, who changed Old Arista's name to The Peer Group, Inc. (Peer). Fry agreed to pay Curcura $250,000 for Curcura's interest in Old Arista (now Peer), and Curcura agreed to pay Fry $1,000 for Fry's interest in Oakwood (now New Arista).

In further consideration for these ownership transfers, Fry and Curcura agreed to a division of clients; equipment ownership; assumption of lease obligations; various non-solicitation covenants; indemnification provisions; and various other matters relating to these ownership transfers. In addition to the foregoing, Article 7.1 of the Workout Agreement, titled "Arbitration" provides:

Except with respect to any proceeding brought under ARTICLE SIX hereof, any controversy, claim, or dispute between the parties, directly or indirectly, concerning this Agreement or the breach hereof, or the subject matter hereof, including questions concerning the scope and applicability of this arbitration clause, shall be finally settled by arbitration in Union County, New Jersey pursuant to the rules then applying of the American Arbitration Association. The arbitrators shall consist of one representative selected by Fry, one representative selected by Curcura and one representative selected by the first two arbitrators. The parties agree to expedite the arbitration proceeding in every way, so that the arbitration proceeding shall be commenced within thirty (30) days after request therefore is made, and shall continue thereafter, without interruption, and that the decision of the arbitrators shall be handed down within thirty (30) days after the hearings in the arbitration proceedings are closed. The arbitrators shall have the right and authority to assess the cost of the arbitration proceedings and to determine how their decision or determination as to each issue or matter in dispute may be implemented or enforced. The decision in writing of any two of the arbitrators shall be binding and conclusive on all of the parties to this Agreement. Should either Curcura or Fry fail to appoint an arbitrator as required by this ARTICLE SEVEN within thirty (30) days after receiving written notice from the other party to do so, the arbitrator appointed by the other party shall act for all of the parties and his decision in writing shall be binding and conclusive on all of the parties to this Workout Agreement. Any decision or award of the arbitrators shall be final and conclusive on the parties to this Agreement; judgment upon such decision or award may be entered in any competent Federal or state court located in the United States of America; and the application may be made to such court for confirmation of such decision or award for any order of enforcement and for any other legal remedies that may be necessary to effectuate such decision or award.

This arbitration clause is applicable to all disputes arising between Fry and Curcura under the Workout Agreement, except to proceedings brought under Article Six, relating to any alleged violations of the non-solicitation covenants. The parties also entered into a Consulting Agreement on November 29, 1994, whereby New Arista agreed to provide specified consulting services to Peer for compensation set forth therein.

After the ownership transfers, Fry contended Curcura wrongfully appropriated assets valued at several hundred thousand dollars and that Curcura failed to pay his share of continuing expenses. Fry then set-off the amounts of these alleged misappropriations and non-payments from amounts Fry owed Curcura under the Workout Agreement and Consulting Agreement. Curcura denied Fry's allegations and objected to the set-offs. Unable to resolve these disputes, Curcura invoked the arbitration clause to resolve the controversies, filing a demand for arbitration on February 29, 1996. The amounts at issue exceed $1 million.

Pursuant to the arbitration procedures set forth in Article 7.1 of the Workout Agreement, on March 15, 1996 Fry selected Todd Sahner, an attorney, as his designated arbitrator. On April 3, 1996 Curcura selected Stephen Knox, an attorney, as his designated arbitrator. Sahner and Knox then selected Kenneth Arlein, an accountant, as the neutral arbitrator.

Todd Sahner is an attorney with the firm of Hannoch Weisman. After his appointment, and pursuant to rules of the American Arbitration Association (AAA), Sahner disclosed that he and his firm were previously retained by Fry to commence a corporate dissolution proceeding of Old Arista against Curcura in the event the negotiations between Fry and Curcura to transfer and allocate their respective ownership interests in those corporations failed. While the negotiations leading to, and performance of, the Workout Agreement and Consulting Agreement were performed by other attorneys in his firm, Sahner did spend eight hours meeting with Fry and reviewing and editing pleadings and preparing a certification for use in a proposed corporate dissolution action. The November 28, 1994 agreements reached by Fry and Curcura eliminated any need for the corporate dissolution action. Sahner's firm continued to represent Fry until December 1994.

On May 23, 1996 the AAA forwarded Curcura the notice of appointment completed by Sahner, wherein Sahner disclosed the prior representation. Curcura objected to Sahner's participation in the arbitration proceeding through the June 3, 1996 letter of his attorney to the AAA. Through counsel, each party advanced their positions on the objection to Sahner to the AAA. The AAA responded to this objection, by its letter dated June 27, 1996, providing, in relevant part:

Please be advised that inasmuch as Mr. Sahner is not designated as the "neutral" Arbitrator in this matter, the Association cannot assert a determination pursuant to Section 19 of the Commercial Arbitration Rules of the American Arbitration Association.

The AAA then scheduled the initial arbitration hearings for November 18, 1996. Curcura's objection to Sahner serving as an arbitrator was raised again at the November 18, 1996 arbitration hearing. Curcura contended the arbitrators had jurisdiction to decide the disqualification issue. The arbitrators determined they had no authority to rule on Sahner's status and denied Curcura's request to adjourn the arbitration proceedings, after Fry stipulated he would not allege any prejudice or contend the court had no jurisdiction to consider the disqualification issue solely based on the fact the arbitration hearings had commenced. The arbitration hearing proceeded, and continued through November 20, 1996.

On November 21, 1996, Curcura and New Arista filed a verified complaint with the Chancery Division seeking disqualification of Sahner from the arbitration proceedings on the basis of "evident partiality," relying on N.J.S.A. 2A:24-8(b) and Barcon Associates v. Tri-County Asphalt Corp., 160 N.J. Super. 559 (Law Div. 1978), aff'd, 172 N.J. Super. 186 (App. Div. 1980), aff'd, 86 N.J. 179 (1981). An order was entered by Judge Kentz on November 21, 1996, directing Fry and Peer to show cause on January 22, 1997 why the relief in the complaint should not be granted. The order restrained the parties from continuing the arbitration hearing, pending further order.

The January 22, 1997 return date was carried to January 29, 1997. Judge Kentz continued the temporary restraints, converting them into a preliminary injunction, ultimately executing an order to that effect on May 27, 1997. The matter was transferred to Judge Boyle, who conducted a case management conference on June 26, 1997, ordered limited discovery, and set the matter down for a hearing. Both parties moved for summary judgment.

After hearing oral argument on September 12, 1997, Judge Boyle ruled Sahner was disqualified, finding his prior representation of Fry in the corporate dispute with Curcura constituted "evident partiality" under Barcon. On September 15, 1997, Judge Boyle read into the record an opinion detailing his findings and reasons for that ruling. Further, he directed the arbitration to proceed expeditiously in accordance with the arbitration clause in Article 7.1 and the Commercial Arbitration Rules of the AAA. Fry and Peer filed this appeal on October 20, 1997, and on November 10, 1997, Judge Boyle denied their application for a stay of the arbitration proceedings pending appeal. We denied the application for a stay on January 16, 1998.

Through counsel's letter to the AAA dated October 24, 1997, Fry and Peer selected James T. Kelly as their party-appointed arbitrator, under protest. Fry and Peer also objected to Knox and Arlein continuing as arbitrators, contending that since Kelly was not part of the original arbitration proceeding, the arbitrator selection process in Article 7.1 of the Workout Agreement should start from the beginning; that Curcura should select a new party-arbitrator, and then Kelly and that arbitrator should select a new neutral arbitrator; and that the arbitration hearings should start anew. The AAA considered the position of both parties and, by letter dated December 24, 1997 ruled, in relevant part:

After careful consideration of the Parties' contentions, the Association hereby rules as follows:

Mr. Kenneth Arlein is hereby reaffirmed as the neutral Arbitrator in this matter.

The Parties are requested to return the Calendar Forms enclosed with the letter from the undersigned dated December 10, 1997 by no later than December 31, 1997 so that a preliminary hearing and/or telephone conference may be scheduled.

On February 11, 1998 Fry and Peer presented a verified complaint for filing and order to show cause for consideration, naming Curcura, New Arista, Arlein, Knox and the AAA as defendants, seeking an order restraining the arbitration; disqualifying Knox and Arlein on the basis of "evident partiality"; and requiring the arbitrator appointment process proceed de novo under Article 7.1 of the Workout Agreement. The complaint and order to show cause were considered at a hearing conducted by Judge Boyle on February 18, 1998. Fry and Peer contended that arbitration must commence de novo in the event of the death or involuntary withdrawal of an arbitrator before a decision is rendered. They alleged continuation of Knox and Arlein prejudices them, as Kelly did not participate in the selection of ...


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