January 8, 2013
MORGAN STANLEY & CO., INC., CHRISTINE A. EDWARDS, PAUL G. THOMAS, DAVID W. HELENIAK, GARY LYNCH, AND DONALD G. KEMPF, JR., PLAINTIFFS-RESPONDENTS,
DAN A. DRUZ, DEFENDANT-APPELLANT.
DAN A. DRUZ, PLAINTIFF-APPELLANT,
MORGAN STANLEY, INC., AND RICHARD HAYES, DEFENDANTS-RESPONDENTS.
On appeal from the Superior Court of New Jersey, Law Division, Monmouth County, Docket Nos. L-6065-09 and L-3100-09.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued telephonically October 22, 2012
Before Judges Yannotti, Harris and Hoffman.
After successfully pursuing a claim for damages against his former employer in an arbitration proceeding (Druz I), appellant Dan A. Druz unsuccessfully pursued claims against his former employer and several of its employees in a second arbitration proceeding (Druz II). When he did not prevail in Druz II, Druz petitioned the Law Division to vacate the award while contemporaneously filing a third arbitration demand (Druz III) alleging the same conspiracy, but with different co-conspirators, and claiming that the Druz II award had been procured by fraud. Upon the filing of Druz III, the respondents named in that proceeding filed a separate action in the Law Division seeking a declaration that Druz III presents a nonarbitrable dispute and an injunction that would preclude Druz from pursuing Druz III or filing any further proceedings relating to Druz II.
On August 13, 2010, the Law Division decided all pending applications and entered final orders in both cases. In the first case, the court denied Druz's application to vacate the award in Druz II and granted the cross-application to confirm the award. In the second case, the court determined that Druz III presented a non-arbitrable dispute, which should be dismissed, and further enjoined Druz from pursuing Druz III or filing any further proceedings essentially to appeal the award in Druz II. Druz appeals from the final order in each case. We have consolidated the appeals for purposes of this opinion, and, finding no merit in either appeal, we affirm.
Druz, an attorney, was employed by Dean Witter Reynolds, Inc. (Dean Witter), predecessor of respondent Morgan Stanley and Company, Inc. (Morgan Stanley), at its office in Princeton from 1982 to 1987. After Druz left Dean Witter, one of his former clients, the New Jersey School Board Association Insurance Group (Insurance Group), sued Druz and Dean Witter, alleging nearly one million dollars in losses from improper trading. As a result of a New York Stock Exchange (NYSE) investigation, Druz was prohibited from associating with any member firm for eight years. A State grand jury also indicted Druz on multiple charges, which he resolved through successful completion of the pretrial intervention (PTI) program, N.J.S.A. 2C:43-12.
Within the same month of his admission into the PTI program in March 1995, Druz filed his first arbitration demand, Druz I, with the NYSE against Dean Witter and a number of its employees, including his former supervisor, Richard Hayes, alleging a conspiracy to frame him for the transactions that lead to his investigation, discipline, and indictment.
The United States District Court for the District of New Jersey stayed the arbitration pending the completion of the criminal case against Druz (admission into the PTI program did not result in the dismissal of the charges against Druz until he completed three years of supervisory treatment). Druz essentially repeated the same claims in a second arbitration demand (Druz II) filed in 1999. The District Court enjoined that arbitration, as well, finding it was time-barred. Druz successfully appealed both rulings.*fn1
Druz filed an amended demand in Druz I on May 13, 2005, for $106 million in compensatory and punitive damages. When Druz was unable to effectuate service on Hayes, he voluntarily dismissed him from the arbitration, without prejudice, but proceeded against the remaining parties. On April 4, 2007, an arbitration panel awarded Druz $551,450*fn2 against Morgan Stanley, without elaboration, but dismissed "in all respects" all claims against the individual respondents.
Druz then filed an amended demand in Druz II in November 2007, naming only Morgan Stanley and Hayes, reiterating the same allegations, and demanding greater than $40 million in damages. The only significant difference between Druz I and Druz II was that Hayes was a respondent in the second proceeding, but not the first. Following a hearing held over the course of forty half-day sessions, a three-person Financial Industry Regulatory Authority (FINRA)*fn3 arbitration panel issued an award on February 23, 2009 dismissing all of Druz's claims in their entirety, also without elaboration. On June 25, 2009, Druz filed a complaint in the Law Division against Morgan Stanley and Hayes, demanding that the arbitration award in Druz II be vacated because the arbitrators refused to consider material evidence and the award was otherwise procured by corruption, fraud, or other undue means. Respondents filed an answer and moved to confirm the award.
When Druz made a discovery request for a copy of an unofficial transcript of the Druz II proceedings prepared by respondents' court reporter, respondents filed a motion for a protective order, claiming work product, and Druz filed a cross-motion to compel production. The court ultimately concluded that the transcript was privileged as attorney work product and that appellant, who already had a copy of the official audio record, had failed to demonstrate that he was "unable, without undue hardship, to obtain the substantial equivalent of the materials sought."
On September 16, 2009, Druz filed a third arbitration demand, Druz III, with FINRA, alleging the same conspiracy claims dismissed by prior arbitration panels, but naming a different set of co-conspirators (former and current members of Morgan Stanley's legal department), along with Morgan Stanley itself.
On December 10, 2009, respondents filed a declaratory judgment action in the Law Division seeking a declaration that Druz III presents a non-arbitrable dispute and demanding that Druz be enjoined from prosecuting Druz III or initiating any similar arbitration on the grounds that it would be tantamount to an appeal of Druz II. On December 24, 2009, Judge Daniel M. Waldman issued a temporary restraining order staying the proceedings in Druz III, concluding that respondents had met the legal requirements for injunctive relief in accordance with Crowe v. De Gioia, 90 N.J. 126, 132-34 (1982).
On August 13, 2010, Judge Waldman decided both actions in favor of the respondents. In the vacatur action, the court confirmed the Druz II award, considering and rejecting each of appellant's arguments for vacatur, including the argument that the Druz II award was procured by fraud.
In the summary proceeding relating to Druz III, the court entered an order (1) declaring that Druz III presented a nonarbitrable dispute and that any other arbitration seeking to vacate and re-arbitrate the Druz II award would present a nonarbitrable dispute; (2) enjoining Druz from pursuing Druz III and from otherwise seeking to vacate and re-arbitrate the Druz II award; and (3) permanently staying Druz III. The judge provided the following explanation for his ruling:
Druz III is merely Druz's attempt to challenge the loss in Druz II and re-arbitrate the Druz II decision on the grounds that same was procured by fraud.
Such an allegation does not arise out of Druz's employment with Morgan Stanley.
Thus, the Druz III arbitration falls outside the scope of the arbitration agreement. . . . [Druz's] claims in Druz III, that Morgan Stanley and several of its employees committed acts of fraud during the course of the Druz II FINRA arbitration, thereby causing Druz to lose that arbitration, are allegations that were more appropriately made in the vacatur action . . . , not in a third arbitration. This court will not permit Druz to circumvent the vacatur process by having a third FINRA panel re-arbitrate the Druz II award.
We affirm the final orders in each case substantially for the reasons stated in Judge Waldman's comprehensive and cogent written opinions. We add the following comments.
As an initial matter, we note that "orders compelling or denying arbitration are deemed final and appealable as of right as of the date entered." GMAC v. Pittella, 205 N.J. 572, 587 (2011). Our review of such an order is plenary. EPIX Holdings Corp. v. Marsh & McLennan Companies, Inc., 410 N.J. Super. 453, 472 (App. Div. 2009) (citing Harris v. Green Tree Fin. Corp., 183 F.3d 173, 176 (3d Cir. 1999)).
An arbitration award is presumed valid, and the party seeking to vacate it bears the burden of establishing otherwise. Del Piano v. Merrill Lynch, Pierce, Fenner & Smith Inc., 372 N.J. Super. 503, 510 (App. Div. 2004), certif. granted, 183 N.J. 218, appeal dismissed, 195 N.J. 512 (2005). If that burden is not met, the court must confirm the award absent a pending application to modify or correct it. N.J.S.A. 2A:23B-23(d). "[T]he scope of review of an arbitration award is narrow. Otherwise, the purpose of the arbitration contract . . . would be severely undermined." Fawzy v. Fawzy, 199 N.J. 456, 470 (2009). A court's decision whether to vacate an award is a legal determination subject to de novo review on appeal. Del Piano, supra, 372 N.J. Super. at 507.
Agreements to arbitrate disputes involving interstate commerce, except for those otherwise revocable in law or equity, are enforceable under the Federal Arbitration Act (FAA), 9 U.S.C.A. §§ 1-16. Young v. Prudential Ins. Co. of Am., Inc., 297 N.J. Super. 605, 615-21 (App. Div.), certif. denied, 149 N.J. 408 (1997). Moreover, "[t]he substantive protection of the FAA applies irrespective of whether arbitrability is raised in federal or state court." Martindale v. Sandvik, Inc., 173 N.J. 76, 84 (2002). State law may apply to issues of arbitrability only insofar as it addresses the validity or enforceability of contracts generally. Id. at 85-86.
New Jersey has a long-standing policy to favor arbitration as a speedy and efficient approach to dispute resolution. Garfinkel v. Morristown Obstetrics & Gynecology Assocs., P.A., 168 N.J. 124, 131 (2001). The revised New Jersey Arbitration Act, N.J.S.A. 2A:23B-1 to -32, codifies this policy favoring arbitration. Because of the favored status afforded to arbitration, "[a]n agreement to arbitrate should be read liberally in favor of arbitration." Marchak v. Claridge Commons, Inc., 134 N.J. 275, 282 (1993). Therefore, "'courts operate under a presumption of arbitrability in the sense that an order to arbitrate the particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.'" Griffin v. Burlington Volkswagen, Inc., 411 N.J. Super. 515, 518 (2010) (quoting EPIX Holdings Corp., supra, 410 N.J. Super. at 471).
An arbitrator's authority to resolve a dispute derives solely from the parties' agreement to submit that dispute to arbitration. AT&T Techs. v. Communs. Workers of Am., 475 U.S. 643, 648-49, 106 S. Ct. 1415, 1418, 89 L. Ed. 2d 648, 655 (1986). Consequently, "a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." United Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582, 80 S. Ct. 1347, 1353, 4 L. Ed. 2d 1409, 1417 (1960). The threshold determination of whether a dispute is arbitrable is generally one for judicial resolution, Howsam v. Dean Witter Reynolds, 537 U.S. 79, 83, 123 S. Ct. 588, 592, 154 L. Ed. 2d 491, 497 (2002), although public policy favors arbitrability, and "[d]oubts should be resolved in favor of coverage[.]" Warrior & Gulf, supra, 363 U.S. at 582-583, 80 S. Ct. at 1353, 4 L. Ed. 2d at 1418. A trial court's determination in that respect is subject to de novo review on appeal. Bank Julius Baer & Co., Ltd. v. Waxfield Ltd., 424 F.3d 278, 281 (2d Cir. 2005).
The purpose of arbitration is the "effective, expedient, and fair resolution of disputes," and the scope of judicial review of an award is therefore narrow. Fawzy, supra, 199 N.J. at 470. Pursuant to the New Jersey Arbitration Act, which appellant invokes, a court may vacate an award only where (1) the award was procured by corruption, fraud, or other undue means;
(2) the court finds evident partiality by an arbitrator; corruption by an arbitrator; or misconduct by an arbitrator prejudicing the rights of a party to the arbitration proceeding;
(3) an arbitrator refused to postpone the hearing upon showing of sufficient cause for postponement, refused to consider evidence material to the controversy, or otherwise conducted the hearing contrary to section 15 of this act, so as to substantially prejudice the rights of a party to the arbitration proceeding;
(4) an arbitrator exceeded the arbitrator's powers;
(5) there was no agreement to arbitrate, unless the person participated in the arbitration proceeding without raising the objection pursuant to subsection c. of section 15 of this act not later than the beginning of the arbitration hearing; or
(6) the arbitration was conducted without proper notice of the initiation of an arbitration as required in section 9 of this act so as to substantially prejudice the rights of a party to the arbitration proceeding. [N.J.S.A. 2A:23B-23(a).]
The FAA permits vacation of an award only on similarly narrow grounds. 9 U.S.C.A. § 10(a).
On an application challenging the arbitrability of a dispute, the court may enjoin the arbitration on proof of the applicant's legal right and need for that relief in light of a balancing of the equities. See Rinaldo v. RLR Inv., LLC, 387 N.J. Super. 387, 397 (App. Div. 2006). The injunction must be "necessary to prevent a continuing, irreparable injury," and "must be no more extensive than is reasonably required to protect the interest of the party in whose favor it is granted." Verna v. The Links at Valleybrook Neighborhood Ass'n, Inc., 371 N.J. Super. 77, 89 (App. Div. 2004). The authority to issue injunctive relief rests within the trial court's sound discretion. Horizon Health Ctr. v. Felicissimo, 135 N.J. 126, 137 (1994).
The doctrine of res judicata prohibits a party from relitigating any matter substantially the same as one it has already fairly litigated to a judgment on the merits. Culver v. Ins. Co. of N. Am., 115 N.J. 451, 460 (1989). The entire controversy doctrine generally requires that all claims arising from the same series of transactions be brought in one action, Brennan v. Orban, 145 N.J. 282, 290 (1996), and, consequently, that all co-conspirators be named when alleging a conspiracy. Mystic Isle Dev. Corp. v. Perskie & Nehmad, 142 N.J. 310, 334 (1994) (O'Hern, J., concurring). Our courts have held that such issues are threshold arbitrability matters for resolution by a court in the first instance. Raritan Plaza I Assocs., L.P. v. Cushman & Wakefield, 273 N.J. Super. 64, 70-71 (App. Div. 1994).
We first address appellant's claim that the court erred in denying him discovery of an unofficial transcript of the arbitration proceedings, which had been prepared by respondents' court reporter, for introduction in his vacatur action and in granting respondents a protective order for the same document.
Druz does not challenge respondents' claim that the transcript constituted work product. Nor does he dispute that he has a copy of the official record of the arbitration, an audio recording, and that respondents alone hired the court reporter to prepare an unofficial transcript of the proceedings without any contribution from him. He argues only that the rules permit him discovery of the transcript without requiring any showing of need or undue hardship, that he has nevertheless made such a showing, and that, in any event, respondents waived the privilege when they utilized parts of the transcript to the arbitration panel in following their closing arguments.
A party may obtain discovery of privileged work product material "upon a showing that the party seeking discovery has substantial need of the materials in the preparation of the case and is unable without undue hardship to obtain the substantial equivalent of the materials by other means." R. 4:10-2(c). Discovery matters are generally left to the trial court's sound discretion. Wilson v. Amerada Hess Corp., 168 N.J. 236, 253-54 (2001).
Judge Waldman determined that the arbitration transcript constituted privileged work product, because respondents paid for daily transcriptions as an unofficial record of the proceedings to prepare their defense for each subsequent hearing, and thus had it prepared "in anticipation of litigation[.]" Although respondents disclosed limited portions of the transcript to the arbitration panel to assist in following their closing arguments, they did not thereby waive that privilege with respect to the entire transcript by limited disclosure.
Moreover, while application of the privilege did not in itself foreclose discoverability of the transcript, appellant had failed to demonstrate that he would be unable, without undue hardship, to obtain substantially equivalent information by other means, reasoning that appellant already possessed a copy of the official record, could listen to it to prepare his case, and could have it transcribed himself for use in the Law Division. Although the cost of having the record transcribed would be significant, appellant had filed the vacatur action and could fairly be expected to assume that cost, rather than shifting it to respondents. We fail to discern any mistaken exercise of discretion in the judge's ruling on this issue.
Druz argues that the arbitration panel in Druz II refused to hear certain evidence material to his claims either by refusing to admit that evidence during the proceedings or by limiting the scope of his discovery, thereby rendering the award subject to vacatur pursuant to N.J.S.A. 2A:23B-23(a)(3). Specifically, he asserts that the arbitrators denied him a full opportunity to cross-examine the prosecutor who brought his indictment as to her relationship with George Delahanty, the assistant manager who Druz alleged forged his signature on two documents that lead to his indictment. Druz argues, without elaboration, that the panel's refusal to allow him discovery of his own criminal file, as well as personal contact information for the prosecutor's father and brother, hindered his preparation for cross-examination of the prosecutor and precluded him from establishing that Delahanty was "lifelong friends" with the prosecutor and members of her family.
Druz also asserts, again without elaboration, that the arbitration panel did not permit him to explore the relationship between Hayes and the executive director of the Insurance Group, precluding him from submitting any evidence of Hayes' hiring of the Insurance Group executive director's son. Druz further claims the panel wrongfully denied him discovery of Hayes' personal financial information, which he claimed would have been relevant to the issue of punitive damages. Moreover, Druz cites the panel's admission of only a portion of the transcript from the prior NYSE arbitration proceeding (Druz I), rather than the entire transcript, and its refusal to admit his former secretary's affidavit to impeach Delahanty's credibility.
We find no merit in Druz's argument that the arbitration award should have been vacated because the panel allegedly refused to "consider" evidence material to the controversy so as to substantially prejudice his rights. N.J.S.A. 2A:23B-23(a)(3). The Legislature's use of the term "consider" in N.J.S.A. 2A:23B-23(a)(3), was not intended to broaden the scope of review of an arbitrator's decision from that applicable to the earlier version of the statute, N.J.S.A. 2A:24-8, which referred to an arbitrator's refusal to "hear" evidence. In particular, it was not an invitation to trial courts to second-guess the panel's evidentiary rulings.
With respect to appellant's cross-examination of the prosecutor, the judge noted that Druz had not requested production of the criminal file until after the close of discovery. Further, the panel had provided him with an opportunity to present testimony from the witness who he claimed had advised him of the improper relationship. Druz cites no authority that the panel's discovery decisions might have contravened. Nor has he provided any explanation as to how his criminal file would have helped him more adequately prepare for the prosecutor's cross-examination or substantiate his claim that Delahanty's fraudulent statements inappropriately influenced her decision to seek an indictment from a grand jury.
As for the alleged impropriety surrounding the hiring of the Insurance Group executive director's son, the court concluded that Druz had failed to demonstrate that the specific piece of evidence he sought to admit, a 2009 "BrokerCheck" report, was even material, let alone that the panel's refusal to admit it was unreasonable. The judge further determined that the panel had adequate justification for refusing to admit portions of the previous NYSE arbitration and appellant's former secretary's affidavit, because plaintiff had failed to demonstrate that any of those witnesses were unavailable to testify at the FINRA proceeding. The court concluded that the panel's decision not to compel Hayes to provide his financial information was likewise sound, because it had merely reserved the matter for the end of the hearing, when it would be clearer whether the information sought would still be material to the dispute.*fn4
Like the trial court, we are unconvinced that the arbitration panel refused to consider evidence material to the controversy so as to substantially prejudice appellant's rights. We are similarly unconvinced by appellant's argument that the arbitration panel ignored overwhelming evidence of the claims of fraud that appellant asserted in Druz II, including false testimony from Hayes and another witness. It was the panel's prerogative to evaluate the credibility of witnesses testifying before it, and to weigh the evidence in reaching a final award. See Tretina v. Fitzpatrick & Assocs., 135 N.J. 349, 358 (1994) (explaining the limited judicial review permitted of an arbitration award). It is not the court's function to second-guess the panel, but to evaluate, on an application from an aggrieved party, merely whether any of the narrow grounds specified by statute justify vacatur of the award. Ibid. The court appropriately concluded that appellant did not meet his burden of substantiating any of those grounds here.
Finally, appellant argues that the court erred in enjoining Druz III on grounds of non-arbitrability, and should instead have ordered respondents to proceed with the arbitration. The trial court concluded that the dispute in Druz III was not arbitrable as a challenge to a prior final arbitration award on grounds of fraud. We find the court's reasoning sound.
The parties do not dispute that their arbitration agreement, contained in the Form U-4 that appellant executed when he began his employment with Dean Witter, invokes the FINRA Code of Arbitration Procedure for Industry Disputes (FINRA Code), which provides that,
[e]xcept as otherwise provided in the Code, a dispute must be arbitrated under the Code if the dispute arises out of the business activities of a member or an associated person and is between or among:
Members and Associated Persons; or Associated Persons. [FINRA Code § 13200(a).]
Appellant argues that his claims in Druz III are arbitrable pursuant to that agreement, because all parties are undisputedly FINRA members and associated persons, and his claims allege the same sort of post-employment conduct which has been deemed arbitrable in federal precedent, particularly Fleck v. E.F. Hutton, 891 F.2d 1047, 1052-53 (2d Cir. 1989). Druz acknowledges that, aside from alleging fraudulent conduct during the prior arbitrations, his claims allege the same conspiracy as those in prior arbitrations. However, he contends that, because he names different parties in the new arbitration, his claims remain arbitrable, subject only to a determination of any res judicata issues which themselves must be reserved for arbitration. He asserts that, in any event, respondents waived any right to judicially challenge the dispute in Druz III as non-arbitrable, because they submitted the very same arbitrability issue in Druz II to the arbitration panel in that proceeding rather than disputing it in court.
Respondents characterize all of appellant's claims in Druz III as an attempt to challenge the prior arbitration award on grounds of fraud. The judge agreed with that characterization, concluding that "the crux" of respondents' application was not a res judicata defense, but the contention that Druz sought to challenge a final arbitration award with another arbitration demand. The court determined that such a dispute did not arise from appellant's employment with Morgan Stanley and so "f[ell] outside the scope of the arbitration agreement[.]" The court reasoned that, if the agreement could be read to permit appellant to attempt to vacate and re-arbitrate an award on grounds of fraud, it would "ensure that a new arbitration would be filed each and every time [he] was dissatisfied by the previous arbitration award." The more appropriate vehicle for those claims was the vacatur action that he had separately filed. Moreover, respondents had not waived their right to challenge Druz III as non-arbitrable by failing to bring a challenge to the arbitrability of Druz II before the court, because Druz II did not present the same arbitrability issue as Druz III. In Druz II, appellant brought his claims against a party he had voluntarily dismissed without prejudice from the earlier proceeding, whereas, in Druz III, he named entirely new parties.
The judge further concluded that, were it to permit appellant to pursue Druz III, "there would be no finality to this matter." Druz could not explain why he had failed to earlier name the parties in Druz III, and nothing would prevent him from repeating his conspiracy claims ad infinitum by simply naming new parties. In that light, the judge determined that to require respondents to arbitrate Druz III would cause them irreparable injury and would be contrary to fairness and equity. Consequently, he granted respondents' application for injunctive relief, and denied appellant's cross-application, as well, concluding that Druz could not demonstrate a likelihood of success on the merits or that he would suffer any irreparable harm. The contrary result, he noted, would contravene the public policy favoring the finality of arbitration.
The arbitration awards themselves, consistent with well-established public policy and the FINRA rules that give substance to the parties' arbitration agreement, specify that they constitute a "full and final resolution" of all claims submitted. The court appropriately concluded that to hold appellant's claims arbitrable would irreparably destroy the finality of that resolution and that his claims therefore fall outside the scope of the parties' arbitration agreement.
To the extent that we have not specifically addressed any remaining contentions advanced by appellant, it is because they are without sufficient merit to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E).