Rubenstein v. Advanced Equities, Inc.

• Decision Date: 10 February 2015
• Docket Number: 13 Civ. 1502 (PGG)
• Parties: ERIC RUBENSTEIN, AARON SEGAL, SCOTT CARDONE, and DAVID LANDSKOWSKY, Plaintiffs/Petitioners, v. ADVANCED EQUITIES, INC., BYRON CROWE, DWIGHT BADGER, and KEITH DAUBENSPECK, Defendants/Respondents.
• Court: U.S. District Court — Southern District of New York

ERIC RUBENSTEIN, AARON SEGAL, SCOTT CARDONE,and DAVID LANDSKOWSKY, Plaintiffs/Petitioners, v. ADVANCED EQUITIES, INC., BYRON CROWE, DWIGHT BADGER,and KEITH DAUBENSPECK, Defendants/Respondents.

13 Civ. 1502 (PGG)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

February 10, 2015

MEMORANDUMOPINION & ORDER

PAUL G. GARDEPHE, U.S.D.J.:

Petitioners Eric Rubenstein, Aaron Segal, Scott Cardone, and David Landskowsky are former employees of Respondent Advanced Equities, Inc. ("AEI"), a broker-dealer subject to the Financial Industry Regulatory Authority ("FINRA"). Respondents Byron Crowe, Dwight Badger, and Keith Daubenspeck are former officers and directors of Advanced Equities Financial Corporation ("AEFC"), the parent company of AEI.

The parties submitted to a FINRA arbitration panel a dispute arising out of Petitioners' employment agreements with AEI. (Roth Aff. (Dkt. No. 1) Ex. 3) The arbitrators found in favor of Respondents. (Id. Ex. 2) Petitioners then moved for an order vacating the arbitration award (Dkt. No. 1), while Respondents cross-moved for an order confirming the award. (Dkt. No. 8) This Court denied Petitioners' motion to vacate and granted Respondents' motion to confirm the arbitration award. (Dkt. No. 17)

This Court also granted Respondents "an award reflecting reasonable attorneys' fees and costs incurred in connection with the [cross-]motions." (Id. at 35) The parties weredirected to submit additional briefing addressing "[t]he appropriate amount of that award." (Id.) The parties have made supplemental submissions, and this Court will now rule on this issue.

BACKGROUND

I. THE CONTRACT DISPUTE

Headquartered in Chicago, AEI is a registered broker-dealer specializing in late-stage private equity financing. (Pet. Mot. to Vacate Br. (Dkt. No. 1) at 4; Resp. Mot. to Confirm Br. (Dkt. No. 10) at 4) In 2006, AEI opened a New York office and began recruiting brokers to join that office, including Tim Herrmann and Todd Harrigan.¹ (Pet. Mot. to Vacate Br. (Dkt. No. 1) at 4; Resp. Mot. to Confirm Br. (Dkt. No. 10) at 5) During the recruitment process, Herrmann and Harrigan met with AEI's President - Jeff Fisher - and with Respondents Daubenspeck and Badger. (Pet. Mot. to Vacate Br. (Dkt. No. 1) at 4-5) On November 16, 2006, Herrmann and Harrigan entered into employment agreements with AEI. (Id.; Resp. Mot. to Confirm Br. (Dkt. No. 10) at 5)

Herrmann and Harrigan spoke with Petitioners Rubenstein, Landskowsky, and Cardone about joining AEI's New York office. (Pet. Mot. to Vacate Br. (Dkt. No. 1) at 6, 10; Resp. Mot. to Confirm Br. (Dkt. No. 10) at 5) In January 2007, Rubenstein, Landskowsky, and Cardone began talking with Fisher about that possibility. (Pet. Mot. to Vacate Br. (Dkt. No. 1) at 10) Rubenstein also met with Respondents Daubenspeck, Badger, and Crowe in Chicago to discuss AEI's proposed terms of employment. (Id.) On March 30, 2007, Rubenstein, Landskowsky, and Cardone entered into employment agreements with AEIand joined its New York office. See Roth Aff. (Dkt. No. 1) Exs. 5, 6, 9.

In November 2006, Fisher recruited Petitioner Segal at a series of meetings, some of which took place at AEI's New York office. (Pet. Mot. to Vacate Br. (Dkt. No. 1) at 7) On January 8, 2007, Segal entered into an employment agreement with AEI and joined its New York office. See Roth Aff. (Dkt. No. 1) Ex. 8.

In their employment agreements, each Petitioner agreed to execute a promissory note, pursuant to which AEI would make a loan to Petitioners that would be forgiven over the first five years of their employment at AEI. See Roth Aff. (Dkt. No. 1) Exs. 5, 6, 8, 9. Rubenstein, Landskowsky, and Cardone's agreements provide that

[i]n the event that (i) Advanced Equities terminates [Petitioner's] employment or registration with Advanced Equities for Cause, as defined below or (ii) [Petitioner] voluntarily terminates his employment or registration with Advanced Equities, in either case, at any time prior to full and final satisfaction of [the] Note, the then outstanding balance (both principal and interest) under [the] Note shall immediately become due and payable without notice, protest, presentment or demand and no further forgiveness shall occur.

(Id. Exs. 5, 6, 9)

Segal's employment agreement likewise provides for a loan that would be forgiven over a five-year period. See id. Ex. 8. Segal's promissory note states that

[n]otwithstanding anything contained herein to the contrary, in the event that [Petitioner's] employment or registration with Advanced Equities is terminated for any reason whatsoever or no reason at all, by [Petitioner] or by Advanced Equities, in any case at any time prior to the full and final satisfaction of this Note . . . the then outstanding balance (both principal and interest) under this Note shall immediately become due and payable without notice, protest, presentment, or demand and no further forgiveness shall occur.

(Elisofon Decl. (Dkt. No. 9) Ex. 38) Each Petitioner's employment agreement states that the accompanying promissory note's "terms [are] incorporated" in the contract. (Roth Aff. (Dkt. No. 1) Exs. 5, 6, 8, 9) The promissory notes provide that Petitioners will be liable for "any and all of the holder's costs in connection with the enforcement and collection [of unpaid amountsdue], including without limitation any and all attorneys' fees." (Elisofon Decl. (Dkt. No. 9) Exs. 38-40)

II. THE ARBITRATION

On February 19, 2010, Petitioners - along with Herrmann and Harrigan - initiated a FINRA arbitration proceeding against the Respondents and AEFC, asserting claims for breach of contract, breach of FINRA rules, unjust enrichment, breach of the covenant of good faith and fair dealing, fraud, constructive discharge, constructive trust, conversion, violations of the New York Civil Rights Law, and unfair competition.² (Roth Aff. (Dkt. No. 1) Ex. 3)

Respondent AEI counterclaimed for breach of contract, breach of fiduciary duty, unfair competition, and misappropriation of trade secrets. (Roth Aff. (Dkt. No. 1) Ex. 2)

The arbitration proceedings took place in New York. Three arbitrators conducted twelve pre-hearing sessions and sixty hearing sessions that took place over thirty-two days. (Id. Ex. 2) The arbitrators heard testimony from twenty-two fact witnesses and three expert witnesses. (Id. Ex. 2 ¶ 3)

After Petitioners presented their case-in-chief, Respondents and AEFC moved to dismiss all claims. On April 19, 2012, the arbitrators granted the motion as to most ofPetitioners' claims, including as to all claims against the individual Respondents. (Roth Aff. (Dkt. No. 1) Ex. 37) Only Petitioners' claims for breach of contract related to compensation for AEFC stock options, and commissions and bonus compensation allegedly owed by AEI, survived the motion to dismiss. (Id.)

On December 6, 2012, after the close of all the evidence, the arbitrators denied Cardone, Landskowsky, Rubenstein, Harrigan, and Herrmann's claims in their entirety. (Roth Aff. (Dkt. No. 1) Ex. 2 at 3) The panel awarded Segal $18,000 in compensatory damages for an unpaid bonus but denied his remaining claims. (Id.)

The arbitrators awarded AEI compensatory damages against each of the Petitioners, reflecting unpaid balances on the promissory notes, together with pre-judgment interest and attorneys' fees "pursuant to the terms" of the promissory notes. (Id. at 3-4) The panel denied all of AEI's claims against Harrigan and Hermann for outstanding balances on their promissory notes, however, finding that

AEI had withheld funds from the Harrigan, Herrmann, and Segal loans for related tax payments at the time of the loans. Unlike the Segal employment contract which specifically states that Segal is liable for the entire loan balance outstanding regardless of funds withheld for tax payments, the Harrigan and Herrmann employment contracts are silent on the issue. Given that AEI had withheld funds at its sole discretion and it is highly unlikely that Harrigan and Herrmann can recover those funds, the Panel deems it fair to deduct funds withheld from the outstanding Harrigan and Herrmann loan balances, leaving no net balance due on their promissory notes. The Panel also deems it fair to enforce the clear terms of Segal ['s] employment contract. No funds were withheld for taxes from the Rubenstein, Landskowsky, or Cardone loans and accordingly it is not an issue on the net amount due on their promissory notes. All other AEI claims against Harrigan and Herrmann are denied.

(Id. at 4) The Panel denied all other requested relief. (Id.)

III. THE CROSS-MOTIONS TO VACATE AND TO CONFIRM THE AWARD

On February 4, 2013, Petitioners moved to vacate the arbitration award in New York state court. (Request for Judicial Intervention (Dkt. No. 1)) Petitioners asserted that the arbitrators (1) wrongfully excluded pertinent evidence during the proceedings; and (2) acted with manifest disregard for the law. (Pltf. Mot. to Vacate Br. (Dkt. No. 1) at 29-48) They argued that "[t]he result of the Panel's egregious misconduct was that the arbitration proceeding was fundamentally unfair so as to warrant vacatur of the Award in its entirety." (Id. at 28)

On March 6, 2013, Respondents filed a notice of removal. (Notice of Removal (Dkt. No. 1)) On May 3, 2013, Respondents cross-moved for confirmation of the arbitration award, and for post-award interest, attorneys' fees, and costs. (Dkt. No. 8)

On March 31, 2014, this Court denied Petitioners' motion to vacate and granted Respondents'motion to confirm. (Dkt. No. 17) Based on the "unambiguous language" of the promissory notes - which states that Petitioners are liable for "any and all of the holder's costs in connection with the enforcement and collection [of unpaid amounts], including without limitation any and all attorneys' fees" (Elisofon Decl. (Dkt. No. 9), Exs. 38-40) - this Court also granted Respondents "an award reflecting reasonable attorneys' fees and costs incurred in connection with the instant...