Crawford v. Merrill Lynch, Pierce, Fenner & Smith, Inc.

• Decision Date: 23 October 1974
• Court: New York Court of Appeals Court of Appeals
• Parties: , 319 N.E.2d 408 James CRAWFORD, Respondent, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., et al., Appellants.

Page 140

361 N.Y.S.2d 140

35 N.Y.2d 291, 319 N.E.2d 408

James CRAWFORD, Respondent, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., et al., Appellants.

Court of Appeals of New York.

Oct. 23, 1974.

William L. Allen, Jr., Syracuse, for appellants.

Robert E. Moses, Syracuse, for respondent.

Andrew J. Connick and Lana Borsook, New York City, for the New York Stock Exchange, Inc., amicus curiae.

WACHTLER, Judge.

For several years James Crawford was employed as a registered representative by Merrill Lynch, Pierce, Fenner & Smith, Inc. (hereinafter 'Merrill Lynch'). In October of 1970, having left the firm, he brought an action in the Supreme Court, Onondaga County, to recover commissions allegedly earned by him during the period of his employment. The action was commenced by service of a summons and complaint on David R. Pierson, the manager of the Merrill Lynch office located at Syracuse.

On October 29, 1970 the defendants moved to dismiss the action and compel arbitration before the New York Stock Exchange (hereinafter 'the Exchange') which, it was claimed, was required by the terms of the 'plaintiff's employment contract, signed by him on or about July 16, 1967.'

While this motion was pending the plaintiff served Merrill Lynch with a 'Notice of Intention to Arbitrate and Demand for Arbitration' in which he stated: 'Named claimant, James A. Crawford Jr., a Party to an agreement dated on or about July 16, 1967, which agreement provides: 'That any controversy . . . shall be settled by arbitration' and, furthermore, by reason of David R. Pierson's affidavit dated October 30, 1970, in which he states that he believes that the 'exclusive remedy is arbitration;' and per the request of the respondents, the claimant hereby demands arbitration thereunder.' The notice also recited the nature of the dispute the relief sought and 'notified' the defendants that unless they moved to stay arbitration within 10 days they would be 'barred from putting in issue the making of the contract of arbitration, or the submission thereof or the failure to comply therewith.' The defendants were further notified 'that copies of our arbitration Agreement and of this Demand are being filed with the American Arbitration Association at its Syracuse Regional Office, with the request that it commence the administration of the arbitration.' This motion was sent by certified mail to the president of Merrill Lynch in New York City where it was received on November 25, 1970.

Two days later the plaintiff submitted his papers in opposition to the defendants' motion to compel arbitration before the Exchange, claiming that the arbitration agreement of July 16, 1967 was not enforceable because (1) it had never been signed by the defendants, (2) it terminated when the plaintiff left the employ of Merrill Lynch, (3) it did not require the plaintiff to arbitrate before the Exchange, and (4) the parties' original expectation that arbitration before the Exchange would be expeditious could no longer be realized because of a current backlog of cases pending before that forum.

On December 8, 1970 the Supreme Court granted defendants' motion to dismiss the complaint and compel arbitration before the Exchange. The following day the defendants moved to vacate arbitration before the American Arbitration Association since the agreement, it was argued, called for arbitration before the Exchange. The plaintiff opposed the motion on the ground that the defendants' failure to move to stay arbitration within 10 days barred them from claiming that the agreement designated a different arbitration forum. In February, 1971 the Supreme Court granted the motion and vacated arbitration before the American Arbitration Association.

By a bare majority the Appellate Division reversed and denied both motions primarily on the ground that the defendants, having failed to move to stay arbitration within 10 days after receipt of the plaintiff's notice, were in accordance with CPLR 7503 (subd. (c)) 'thereafter * * * precluded from objecting that a valid agreement was not made or has not been complied with'. (41 A.D.2d 112, 341 N.Y.S.2d 673.)

We agree that the notice satisfied the technical requirements of the statute 'specifying (as it did) the agreement pursuant to which arbitration is sought and the name and address of the party serving the notice * * * and stating that unless the party served applies to stay the arbitration within ten days after such service he shall thereafter be precluded from objecting that a valid agreement was not made or has not been complied with' (CPLR 7503, subd. (c)). And, according to the statute, service 'by * * * certified mail, return receipt requested' was sufficient.

But we cannot overlook the fact that the notice, demanding arbitration before the American Arbitration Association, also contained misleading statements suggesting that the plaintiff was merely joining in the defendants' motion to compel arbitration before the Exchange. Nor can we disregard the peculiar fact that the notice was not served on the defendants in Syracuse, as the summons had been, but was sent instead to their headquarters in New York City, thus virtually depriving the defendants of a fair opportunity to respond within the short 10-day period then allowed by the statute. ^* Other courts encountering this practice have condemned it in terms equally applicable here: 'If this service is effective to bar contest to the arbitration, (a party who) did a nationwide business could be served anywhere, with the practical certainty that it be precluded from opposing arbitration. Such practice should not be countenanced, on the principle that service not designed to give notice cannot be grounds for a default'. (Matter of Empire Mut. Ins. Co. (Levy), 35 A.D.2d 916, 316 N.Y.S.2d 24; see, also, Matter of Allstate Ins. Co. (Kelly), 35 A.D.2d 778, 315 N.Y.S.2d 281.) For both of these reasons the notice was a nullity (cf. Schafran & Finkel v. Lowenstein & Sons, 280 N.Y. 164, 19 N.E.2d 1005).

We turn then to the question as to whether the defendants were entitled to an order compelling arbitration before the Exchange. By statute they have the right to compel arbitration (CPLR 7503, subd. (a)) 'Where there is no substantial question whether a valid agreement was made or complied with, and the claim sought to be arbitrated is not barred by limitation under subdivision (b) of section 7502'. The plaintiff continues the argument made below that there is no enforceable agreement to submit the controversy to arbitration before the Exchange at the insistence of either party. In considering this issue we must bear in mind that 'A written agreement to submit any controversy thereafter arising or any existing controversy to arbitration is enforceable' (CPLR 7501).

In support of the motion to compel arbitration the defendants relied on a provision of the 'employment contract'--now conceded to be plaintiff's application to the New York Stock Exchange seeking registered representative status--which states: 'I agree that any controversy between me and any member or member organization or affiliate or subsidiary thereof arising out of my employment or the termination of my employment shall be settled by arbitration at the instance of any such party in accordance with the arbitration procedure prescribed in the Constitution and rules then obtaining of the New York Stock Exchange.'

In opposition to the motion the plaintiff, who has never been a member of the Exchange, cited section 6 of article VIII of the New York Stock Exchange constitution: 'Non-Member Controversies. Any controversy between a non-member and a member or allied member or member firm, or member corporation, arising out of the business of such member * * * shall, at the instance of such non-member, be submitted for arbitration as provided herein below.'

This was the extent of the proof submitted to the trial court and appearing on the record at the Appellate Division when this case was originally argued there. The Appellate Division majority proceeded to interpret the terms of the application and the constitution, reaching the conclusion that the plaintiff, as a nonmember, had the right to seek arbitration before the Exchange but could not be compelled to do so. The dissenters took the position that any question concerning the interpretation of the arbitration agreement should be resolved by the arbitrators, but argued that if the court was privileged to decide the question the cited provisions should be read to bind the plaintiff to arbitrate the controversy before the Exchange.

However when the case was argued before our court, the defendants submitted copies of two rules of the Exchange, which eliminate the troublesome issues dividing the Appellate Division and conclusively resolve any doubt as to whether the plaintiff agreed to submit to arbitration before the Exchange any controversy arising out of his employment. Thus we have been informed that Exchange rule 347(b) states: 'Any controversy between a registered representative and any member or member organization arising out of the employment or termination of employment of such registered representative by and with such member or...