Uddo, Application of

• Decision Date: 18 June 1964
• Parties: Application of Frank J. UDDO, Petitioner-Respondent, and Frank G. Taormina, Respondent-Appellant. In the Matter of the Application of Frank J. UDDO, Petitioner-Respondent, and Eugene Taormina, Applicant-Appellant.
• Court: New York Supreme Court — Appellate Division

Page 645

250 N.Y.S.2d 645

21 A.D.2d 402

Application of Frank J. UDDO, Petitioner-Respondent, and Frank G. Taormina, Respondent-Appellant In the Matter of the Application of Frank J. UDDO Petitioner-Respondent, and Eugene Taormina Applicant-Appellant.

Supreme Court, Appellate Division, First Department.

June 18, 1964.

Thomas C. Mason, New York City, of counsel (H. Richard Schumacher, New York City, with him on the brief, Cahill, Gordon, Reindel & Ohl, New York City, attorneys), for appellants.

Hyman R. Friedman, New York City, of counsel (Friedman & Friedman, New York City, attorneys), for petitioner-respondent.

Before BREITEL, J. P., and VALENTE, STEVENS, EAGER and STEUER, JJ.

STEUER, Justice.

The parties to this dispute are stockholders and directors of nine affiliated corporations. The corporations, each in a distinct phase, are engaged in the food processing business on a large scale. The business was originally in the hands of an individual, the progenitor of the Uddo family. He took in as a partner his son-in-law, the respondent Frank G. Taormina. Subsequently, the three Uddo sons and five relatives of Taormina became partners. In 1958 the business was incorporated, nine corporations being formed. Each corporation had two classes of stock: the A stock, held by the Uddos; and the B stock, held by the Taorminas. Each class of stock elected five directors to the corporate boards. An eleventh director was A. E. Krackov, the attorney for all of these people. After some months Mr. Krackov severed his connection with the families and an agreement was entered into between all the stockholders as to the method for the conduct of the affairs of the corporations. The number of directors was reduced to ten, elected as before. It was provided that if the board of directors was unable to take effective action on any issue, the matter should be resolved by Frank J. Uddo and Frank G. Taormina jointly. These latter were the executive officers of the corporations and, in a sense, the heads of the respective families. In the event these two were unable to agree, each was to designate an outside person. If their choice fell on the same person, he should resolve the difference. If they made designations of different persons, those two should decide. And if they were unable to reach a conclusion, they should designate a third person whose decision would be final.

In 1963 the managing officers were not in entire accord as to proposals for a public offering of stock. In addition, there were differences between various members as to several minor matters of management particularly concerning employment of relatives. In this situation the petitioner herein, Frank Uddo, demanded of respondent, Frank Taormina, that they arbitrate some eight issues. Instead, Taormina called a special meeting of each of the boards of directors. Proper notice was given. The meetings were attended by all of the Taormina directors and one of the Uddo directors, namely, Salvador Uddo. All of the eight matters were considered by the boards, and all were unanimously resolved; whereupon Frank Uddo instituted this proceeding demanding arbitration.

Special Term granted the motion to compel arbitration on the ground that the agreement, indisputably made, provided for arbitration in the event that the board of directors was unable to take effective action. Special Term decided that whether effective action was taken is a matter for the arbitrators to decide. The validity of this ruling depends on the meaning of the words 'effective action.' Ordinarily this would mean resolution by the board of the question before it. And it is quite obvious from the undisputed history of the corporate organizations that this is what is meant. Prior to the making of the agreement the boards consisted of equal numbers of representatives of each of the two families, with an independent extra director. This arrangement for a built-in umpire insured against action being frustrated by tie votes. When the umpire disappeared from the scene, a tie vote became a contingency which had to be provided against. The arbitration provision was designed in order to meet that situation and only became binding if the situation, or one allied to it, such as a failure to obtain a quorum, arose. It may be noted that this interpretation is advanced by the petitioner who concedes that the original provision for an umpire and the succeeding one for arbitration are to obviate the situation arising from a deadlock caused by the directors voting along strict family lines.

It is argued that even if this be the fact, and the claim of an arbitrable question entirely specious, that question is nevertheless for the arbitrators and not for the court. Support for this contention is based on CPLR § 7501, directing that the 'court shall not consider whether the claim with respect to which arbitration is sought is tenable, or otherwise pass upon the merits of the dispute.' This revokes the prior existing rule that the court could refuse to order arbitration of a claim which was patently frivolous (Matter of International Assn. of Machinists, Dist. No. 15, Local No. 402 v. Cutler-Hammer, Inc., 297 N.Y. 519, 74 N.E.2d 464). But this rule applied to matters which under the terms of the arbitration agreement were arbitrable (Alpert v. Admiration Knitwear Co., 304 N.Y. 1, 105 N.E.2d 561). It does not affect the axiomatic proposition that one can only be compelled to arbitrate when one has agreed to do so, nor its necessary concomitant that whether one has so agreed is a question for the court. Confusion may arise from the holdings interpreting broad clauses in agreements which provide as arbitrable any question that may arise under or in connection with the making, meaning or performance of the particular contract. Under such clauses any question beyond the physical execution of the contract would by its terms be one for the arbitrators (Matter of Lipman, 289 N.Y. 76, 43 N.E.2d 817, 142 A.L.R. 1088). But this does not affect the basic rule that what the parties agreed to and whether they agreed is for the court. It merely means that where they have agreed to arbitrate everything there is nothing for the court to decide beyond that they have so agreed. It would follow that a mere claim, no matter how frivolous, is sufficient to invoke the process.

The agreement to arbitrate in this family-corporate complex as distinct from being all embracing is very limited. It is confined to issues before the board of directors. It does not apply to any dispute that may arise between the family members or even such of them as are stockholders. And it may be observed that when the original demand was made there were no issues before any of the boards of these corporations. Apart from this consideration, it only applies where the board is 'unable' to take effective action. There is no showing of any such inability. Actually, the board did take action and there is no question that a majority voted upon and resolved all of the questions upon which arbitration is sought. Far from showing inability, the exact contrary is shown. To put the situation into its legal framework, the petitioner has not shown any issue which is arbitrable under the agreement. The contention he raises is quite different, namely, whether the condition under which an agreement to arbitrate depends has come to pass. Under the restricted agreement to arbitrate, this issue is not arbitrable. It being for the court, no impediment exists for a determination that it is specious.

In order for the petitioner to sustain his position he must, and he does, ignore the action actually taken by the boards. There is no claim that the meetings were illegal. In fact, protest in this regard is very odd indeed. It is pointed out that this meeting was conducted formally, in strict accord with corporate practice, whereas usually meetings were conducted informally. Also, it is claimed that some of the matters considered were not really in dispute, but that the board merely passed resolutions which had been agreed upon. Further, it is asserted that four of the Uddo directors found it difficult to attend and an...