Drexel Burnham Lambert Inc. v. Ruebsamen

• Decision Date: 21 July 1988
• Citation: Drexel Burnham Lambert Inc. v. Ruebsamen, 531 N.Y.S.2d 547, 139 A.D.2d 323 (N.Y. App. Div. 1988)
• Parties: DREXEL BURNHAM LAMBERT INCORPORATED, Petitioner-Appellant, v. Heinz RUEBSAMEN, Jr. and Werner Ruebsamen, Respondents-Respondents.
• Court: New York Supreme Court — Appellate Division

Page 547

531 N.Y.S.2d 547

139 A.D.2d 323

DREXEL BURNHAM LAMBERT INCORPORATED, Petitioner-Appellant, v. Heinz RUEBSAMEN, Jr. and Werner Ruebsamen, Respondents-Respondents.

Supreme Court, Appellate Division First Department.

July 21, 1988.

Jeffrey L. Liddle, of counsel (Paul T. Shoemaker, with him on the brief; Liddle, O'Connor, Finkelstein & Robinson, New York City, attorneys), for petitioner-appellant.

David J. Eiseman, of counsel (Barry S. Gold, with him on the brief; Golenbock, Eiseman, Assor, Bell & Perlmutter, New York City, attorneys), for respondents-respondents.

I. Scott Bieler and Joan Bianco, of counsel (A. Robert Pietrzak and Brown & Wood, New York City, attorneys) for Securities Industry Ass'n, Inc. and Futures Industry Ass'n, as amici curiae.

Before KUPFERMAN, J.P., and CARRO, MILONAS, ELLERIN and WALLACH, JJ.

MILONAS, Justice.

This is a special proceeding pursuant to CPLR 7502(c) in which petitioner-appellant Drexel Burnham Lambert Incorporated seeks an order of attachment prior to arbitration. It is petitioner's contention that the attachment is required to provide security for a claim by Drexel against respondents Heinz Ruebsamen, Jr. and Werner Ruebsamen in a pending arbitration proceeding. Although the parties agree that the dispute between them will be resolved in arbitration, the locale of the arbitration is not entirely settled. The American Arbitration Association initially decided upon New York as the appropriate forum, but respondents, who insist that the hearing should take place in West Germany, requested reconsideration, and the AAA has now determined that Frankfurt, West Germany is the appropriate site for the hearing. The purpose of the prospective arbitration is an attempt by Drexel to recover a liquidated debit balance of approximately $230,000 in a securities account maintained by respondents with Drexel from early 1983 through most of 1987.

The Ruebsamens are citizens of West Germany and opened an account to engage in options transactions with petitioner's office in Brussels, Belgium. Drexel asserts that the Brussels location is merely a sales office, that the trading was actually carried out in the United States, that the securities were kept in New York and that account statements and other account documents were prepared in New York. The account agreeme was signed in West Germany, and respondents were authorized thereby to purchase on margin. The relationship between the parties was mutually profitable for some four years, and several small margin calls were promptly satisfied. Then, on Friday, October 15, 1987, the last business day before the precipitous 500 plus drop in the Dow Jones Industrial average on October 19th, a Drexel representative in Brussels made a $300,000 margin call, and the funds were duly transferred into the account on October 19th although Drexel may not have received the money until October 20th. After the stock market declined on October 19th, causing severe damage to respondents' account, another margin call was placed, this time in the amount of $304,000. While the parties sharply disagree with respect to the telephone conversation between Drexel's broker and respondents' father, who managed the account, the margin call was not expeditiously met, and Drexel liquidated the account. (Petitioner claims that respondents' father stated that the call could not and would not be met whereas respondents charge that they were given a mere two and one-half hours, occurring during lunchtime when many German banks are normally closed, to accomplish the transfer.) A debit balance of about $230,000 ensued. It is respondents' contention that because the heaviest selling was done on October 20th, when the market was at its bottom and prior to a subsequent upturn, Drexel is responsible for the debit balance in the account.

Petitioner commenced this proceeding on November 16, 1987 by procuring an ex parte restraining order attaching $250,000 of respondents' assets in a separate and unrelated brokerage account on condition that Drexel post an undertaking in the sum of $12,500. According to petitioner's supporting papers, "[i]nasmuch as Drexel has a valid claim against the Ruebsamens for $230,433.28 and inasmuch as the Ruebsamens apparently are non-residents who have recently suffered substantial losses, it is respectfully submitted that the award to which Drexel is entitled in the arbitration proceeding may be rendered ineffectual unless an order of attachment is granted." Petitioner also alleged that there was an "urgent necessity to obtain security for the award that may be recovered in the arbitration proceeding." Respondents then cross-moved to vacate the temporary restraining order on the ground that there was an insufficient basis for attachment under CPLR 7502(c) in that Drexel could not show that any future award would be ineffectual without an attachment, that there was no likelihood of success on the merits and that the court lacked personal jurisdiction over respondents.

Respondents' version of the circumstances surrounding the liquidation of their account was thereafter challenged by petitioner, which asserted an additional basis for the attachment--that West German law precludes enforcement of debts arising out of options and margin trading by non-registered merchants such as respondents herein. It was, thus, argued that the Ruebsamens' substantial property and assets in West Germany will not serve to protect Drexel in connection with any arbitration award which the latter might obtain. In that regard, while respondents claim that petitioner has known or should have known about this facet of West German law for some time, they do not dispute that the operation of West German law would bar recovery by petitioner in West Germany. Respondents also urge that by choosing to engage in a highly lucrative trading relationship with them, Drexel assumed the risk attendant thereon and should not now be permitted to circumvent the consequences of its decision to do business with citizens of West Germany. Moreover, respondents point out, they themselves have taken no action to undermine any forthcoming arbitration award, such as removing from this jurisdiction their remaining assets in New York.

In denying the petition and dismissing the proceeding, the Supreme Court, 138 Misc.2d 884, 525 N.Y.S.2d 184, held that the grounds available for attachments in aid of arbitration are limited to the situation described in section 6201(3) of the CPLR, which provides that "the defendant, with intent to defraud his creditors or frustrate the enforcement of a judgment that might be rendered in plaintiff's favor, has assigned, disposed of, encumbered or secreted property, or removed it from the state or is about to do any of these acts ... ." Therefore, the court found, the provisional remedy of attachment could be granted only if the prospective arbitration award might become ineffectual because of some act threatened or performed by respondents. The court observed that "[i]n the case at bar, neither the ground advanced in the petition nor the possible impact of German law amounts to action that respondents are taking to render the arbitration award ineffectual." The court then proceeded to discern an additional reason for denying the discretionary remedy of attachment. In the view of the court:

The doctrine of unclean hands should be as much relevant to the provisional remedy of attachment as it is to the preliminary injunction ... .

If the German law is in fact what petitioner claims it to be, barring West German non-merchants from trading in options and futures, the application for this attachment, in effect, is an effort to circumvent that law. Indeed, the petitioner, who in its Brussels office accepted this account from respondents, knowing they were West German nationals and residents of Nuremberg, is deemed to have known of the West German prohibition. Therefore, petitioner took a risk, after years of profitable transactions, that a time would come that it could not collect a debit balance against respondents in the courts of their own country.

Although the court thereafter amended its decision to correct its misconstruction of Drexel's explanation of the content of West German law to "barring enforcement of judgments or awards arising from debit balances from trading in options and futures by West German nonmerchants", it did not alter its conclusion concerning the inequity of relieving Drexel from the consequences of the risk which it had assumed.

Pursuant to CPLR 7502(c):

The Supreme Court in the county in which an arbitration is pending, or, if not yet commenced, in a county specified in subdivision (a), may entertain an application for an order of attachment or for a preliminary injunction in connection with an arbitrable controversy, but only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without such provisional relief. The provisions of articles 62 and 63 of this chapter shall apply to the application, including those relating to undertakings and to the time for commencement of an action (arbitration shall be deemed an action for this purpose) if the application is made before commencement, except that the sole ground for the granting of the remedy shall be as stated above.

A plain reading of this provision indicates that, contrary to the interpretation given thereto by the Supreme Court, the language of the statute neither limits an order of attachment in aid of arbitration to the narrow circumstances set forth in CPLR 6201(3) nor requires that the petitioner demonstrate any affirmative conduct on the part of respondent(s). Indeed, although Articles 62 and 63 of the CPLR, wherein they relate to such matters as undertakings and to the time for commencement of an action, are specifically deemed to apply to an application pursuant to CPLR 7502(c), the foregoing section explicitly declares that...