Prasad, M.D., Inc. v. Investors Associates, Inc., No. CIV. A. 99-2512 (JAG).

• Decision Date: 10 February 2000
• Docket Number: No. CIV. A. 99-2512 (JAG).
• Citation: 82 F.Supp.2d 365
• Parties: JEEREDDI A. PRASAD, M.D., INC., RETIREMENT PLAN TRUST PROFIT SHARING PLAN and Jeereddi A. Prasad, M.D., Petitioners, v. INVESTORS ASSOCIATES, INCORPORATED, Herman Epstein, and Lawrence Joseph Penna, Respondents.
• Court: U.S. District Court — District of New Jersey

82 F.Supp.2d 365

JEEREDDI A. PRASAD, M.D., INC., RETIREMENT PLAN TRUST PROFIT SHARING PLAN and Jeereddi A. Prasad, M.D., Petitioners, v. INVESTORS ASSOCIATES, INCORPORATED, Herman Epstein, and Lawrence Joseph Penna, Respondents.

No. CIV. A. 99-2512 (JAG).

United States District Court, D. New Jersey.

February 10, 2000.

James David Ferrucci, Arthur M. Nalbandian, Wolff & Samson, P.A., Roseland, NJ, Jeffrey L. Squires, Simon, Turnbull & Martin, Chartered, Washington, DC, for Petitioners.

Chad N. Cagan, Martin P. Schrama, Sonnenblick, Parker & Selvers, P.C., Freehold, NJ, for Respondents.

OPINION

GREENAWAY, District Judge.

This matter comes before the Court on the motion of Jeeredi A. Prasad, M.D., Inc., Retirement Plan Trust Profit Sharing Plan ("Prasad Retirement Trust") and Jeeredi A. Prasad, M.D. (collectively, "Petitioners") to confirm and enter judgment upon an arbitration award issued in their favor on November 24, 1998. Respondents Investors Associates, Incorporated ("IAI"), Herman Epstein, and Lawrence Joseph Penna have filed a cross-motion for an Order vacating the arbitration award. For the following reasons, Petitioners' motion is granted and Respondents' motion is denied.

FACTS

In or about 1996, Dr. Prasad, a California resident, opened several securities accounts with IAI, a securities brokerage firm, incorporated in New Jersey, with its principal place of business here. Dr. Prasad was a customer of IAI in both his individual capacity and as trustee of the Prasad Retirement Trust. During the relevant time, Respondent Epstein was President of IAI and Respondent Penna was the firm's Executive Vice-President. Both Epstein and Penna reside in New Jersey.

In opening the accounts, Dr. Prasad executed a "Client's Agreement" (the "agreement"). The agreement contained a choice-of-law clause, which provided for the contract to be governed by New York law. The agreement further provided that any controversy arising out of, or relating to, Petitioners' accounts would be submitted to binding arbitration before one of a number of self-regulatory organizations in the securities field. Under the agreement, any court of competent jurisdiction may enter judgment upon any award rendered by the arbitrators. See Affidavit of Lawrence R. Gelber, dated August 12, 1999 ("Gelber Aff."), Ex. A.

On or about November 26, 1997, Petitioners filed a demand for arbitration with the National Association of Securities Dealers ("NASD") in Los Angeles, alleging that Respondents had engaged in fraudulent and other wrongful activities in connection with the sale of securities to Petitioners.¹ The parties filed a Uniform Submission Agreement in which they agreed that the arbitration would be conducted under the Constitution, By-Laws, Rules, Regulations and/or Code of Arbitration Procedure of the NASD. See Affidavit of Jeffrey L. Squires, dated September 20, 1999 ("Squires Aff."), Ex. A.

The panel of arbitrators, Herbert Leslie Greenberg, Jeffrey E. Skogsbergh, and Susan Vernon Wood, held the arbitration hearing from August 11 through August 13, 1998. At that time, Wood served as Senior Corporations Counsel in the Securities Regulation Division of the California Department of Corporations. She had disclosed this fact in her Arbitration Disclosure provided to the parties in March 1998. See Squires Aff., Ex. D.² The parties did not lodge any objections to the panel members upon receiving the disclosures. Greenberg served as the panel's Chairman.

At the commencement of the hearing, Lawrence Gelber, Respondents' arbitration counsel, objected to both Greenberg's and Wood's presence on the arbitration panel. First, Gelber argued that Greenberg was biased. Earlier in the proceedings, Greenberg had sanctioned Respondents as a result of a discovery dispute. Gelber asserted that as a result of this ruling, Greenberg could not be impartial and was hostile to Respondents.

Gelber then expressed concern that Wood's presence on the panel would create the appearance of bias or partiality. In 1997, the California Department of Corporations had commenced an investigation of Respondents, which culminated in a consent decree. As a result, Respondents agreed to a revocation of their licenses to deal securities in that state. Gelber acknowledged that Wood's disclosure of her employer had "escaped [his] notice" and that he had waived any peremptory challenge by failing to challenge Wood earlier. See Squires Aff., Ex. I at 7, 10. He urged Wood to recuse herself because of the appearance of a conflict, though he stated that he believed "she has no actual conflict." See Squires Aff., Ex. I at 11.

After an off-the-record discussion among the panel members, both Greenberg and Wood declined to withdraw. See Squires Aff., Ex. I at 14.

On November 24, 1998, the arbitration panel entered an award in Petitioners' favor, awarding Dr. Prasad $84,108.00 in compensatory damages, and awarding the Prasad Retirement Trust $271,244.00 in compensatory damages. Each Respondent is jointly and severally liable for the entire award.³ The panel denied Petitioners' request for punitive damages and required each side to bear its own costs and fees. See Squires Aff., Ex. B.

In the three months that followed, Respondents did not seek to vacate the award. Petitioners timely commenced the present action to confirm the award on June 1, 1999. See 9 U.S.C. § 9.⁴ On August 13, 1999, nearly nine months after the award was issued and in response to Petitioners' application, Respondents filed the instant motion to vacate.

DISCUSSION

I. Timeliness

Petitioners argue that Respondents' request to vacate the arbitration award is untimely. They contend that the Federal Arbitration Act, 9 U.S.C. § 1 et seq. (1994) (the "FAA" or the "Act"), governs this proceeding.⁵ The FAA applies to arbitrations involving interstate commerce — such as the securities transactions involved here. See 9 U.S.C. § 1. The FAA imposes a three-month limitations period for challenging arbitration awards. See 9 U.S.C. § 12.

The arbitration panel issued the award on November 24, 1998. Respondents' motion to vacate was filed on August 13, 1999 — well beyond the FAA's three-month time period. If Respondents' motion is untimely, this Court may not consider Respondents' challenges to the validity of the award. Absent a statutory basis for vacating the award, the award is considered proper and the Court must grant petitioners' motion and confirm the arbitration award. See 9 U.S.C. § 9 (stating that upon proper application for confirmation order, the court must grant the order unless the award is vacated, modified, or corrected, in accordance with the FAA); see also Lander Co. v. MMP Invs., Inc., 107 F.3d 476, 478 (7th Cir.1997) ("Under the Act, if you fail to move to vacate an arbitration award you forfeit the right to oppose confirmation (enforcement) of the award if sought later by the other party."); Florasynth, Inc. v. Pickholz, 750 F.2d 171, 177 (2d Cir.1984) ("When the three month limitations period has run without vacation of the arbitration award, the successful party has a right to assume the award is valid and untainted, and to obtain its confirmation in a summary proceeding.").

The Act does not permit the assertion of challenges to an arbitration award in opposition to a motion to confirm the award after the three-month limitations period has expired. See Service Employees Int'l Union, Local No. 36 v. Office Ctr. Servs., Inc., 670 F.2d 404, 409 (3d Cir. 1982) (noting that federal law forbids assertion of defenses that could have been raised in motion to vacate in confirmation proceedings occurring more than three months after award's issuance); see also Florasynth, 750 F.2d at 175 (same); Cullen v. Paine, Webber, Jackson & Curtis, Inc., 863 F.2d 851, 854 (11th Cir.1989) (same). Thus, if the FAA applies, Respondents' challenges are untimely and Petitioners' motion must be granted.

Respondents assert, however, that by designating New York in the agreement's choice-of-law clause, the parties agreed that the time period for challenging the arbitration award is governed by New York law, not the FAA. Similar to the FAA, New York law limits motions to vacate arbitration awards to a 90-day period following the entry of the award. See N.Y. C.P.L.R. § 7511(a). But, in contrast to the FAA, New York's courts have interpreted the rule to permit a challenge to an arbitration award to be raised in opposition to a motion to confirm the award — even if no challenge was raised in the first 90 days. See Brentnall v. Nationwide Mut. Ins. Co., 194 A.D.2d 537, 598 N.Y.S.2d 315, 316 (1993). Consequently, Respondents argue, under New York law, their challenge to the validity of the arbitration award is timely since it was raised in opposition to Petitioners' motion to confirm.

The FAA was enacted to foster the public policy favoring arbitration and to give effect to parties' contractual agreements to arbitrate. In Volt Info. Sciences, Inc. v. Board of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989), the Supreme Court of the United States considered the policies behind the Act and held that it did not preempt state arbitration rules. There, the parties' arbitration agreement's choice-of-law clause designated California as the governing law, which the lower courts had construed to incorporate California's rules of arbitration. See id. at 472, 109 S.Ct. 1248. California permits an arbitration to be stayed pending resolution of related litigation. See id. at 471, 109 S.Ct. 1248. The Supreme Court held that, notwithstanding the FAA, the agreement to abide by those state rules was not inconsistent with federal policy.

There is no federal policy favoring arbitration under a certain set of procedural rules; the federal policy is simply to ensure the enforceability, according to their terms, of private agreements to arbitrate. Interpreting a choice-of-law clause to make applicable state...