Gruntal & Co., Inc. v. Steinberg

• Decision Date: 10 June 1994
• Docket Number: Civ. A. No. 93-4323 (AJL).
• Citation: 854 F. Supp. 324
• Court: U.S. District Court — District of New Jersey
• Parties: GRUNTAL & CO., INC., Plaintiffs, v. Ronald STEINBERG and Carolyn Steinberg, Defendants.

854 F. Supp. 324

GRUNTAL & CO., INC., Plaintiffs, v. Ronald STEINBERG and Carolyn Steinberg, Defendants.

Civ. A. No. 93-4323 (AJL).

United States District Court, D. New Jersey.

June 10, 1994.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Robert J. Kipnees, Greenbaum, Rowe, Smith, Ravin & Davis, Woodbridge, NJ, for plaintiffs.

Ronald Steinberg, Carolyn Steinberg, pro se.

OPINION

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").¹ 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.² See Gruntal & Co. v. Steinberg, 843 F.Supp. 1 (D.N.J.1994) ("Gruntal II").

On 2 May 1994, a bench trial (the "Trial") was held to determine whether Gruntal was entitled to permanent injunctive and declaratory relief against arbitration. For the reasons stated below, Gruntal's application for declaratory relief and a permanent injunction against arbitration is granted.³

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. See Complaint, Ex. B; Rappaport PI Cert., ¶ 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., ¶ 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, ¶ 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, ¶ 21. The Complaint further seeks a preliminary and permanent injunction enjoining the Steinbergs from "pursuing their claims in the Arbitration Proceedings." Id., ¶ 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 crossmoved 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.⁴

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"), ¶ 1. Gruntal is a securities broker-dealer and a member of the NASD. Rappaport PI Cert., ¶ 2. Gruntal maintains a branch office in Fort Lee, New Jersey. Complaint, ¶ 2.

The Steinbergs are individuals residing in Baltimore County, Maryland. It is alleged the Steinbergs are "citizens of the State of Maryland." Id., ¶ 3.

From November 1982 through March 1988, the Steinbergs held two trading accounts with the securities brokerage firm of Philips, Appel & Walden ("Philips") through Philips' office located in Fort Lee, New Jersey (the "Fort Lee Office"). Rapport PI Cert., ¶ 2. During that period, Philips had numerous other branch offices.⁵Id., ¶ 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, ¶ 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., ¶ 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., ¶ 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., ¶ 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., ¶ 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, ¶ 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., ¶ 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., ¶ 14(b).

The Asset Purchase Agreement further...