Articles Posted in Arbitration

Suffolk County Commercial Division Justice Elizabeth Emerson refused to vacate a FINRA arbitration decision which awarded the petitioner $3,229,097, plus interest, after respondent defaulted in the underlying arbitration.

The facts, briefly, are as follows. Respondent was petitioner’s investment advisor and broker. After withdrawing her participation in a FINRA investigation, respondent was permanently barred from the securities industry. Nonetheless, pursuant to her prior agreement with FINRA, respondent was obligated to arbitrate any customer complaints. In connection with that obligation, all FINRA members must provide FINRA with current addresses for service of process.

Petitioner commenced an arbitration proceeding against respondent. Commencement papers were sent to petitioner at her New York City and Sag Harbor addresses. A subsequent mailing to her New York City address informed respondent that she was the sole remaining respondent in the arbitration. A third mailing warned respondent that her time to participate was expiring. None of the mail was returned to FINRA. A final mailing, sent certified, to respondent’s New York City address was returned as unclaimed. After the arbitrator conducted a hearing without the respondent’s participation, a default award was entered.

A broker was hired to find a tenant for a residential apartment in Manhattan. The parties agreed that the broker would receive a six percent commission if the tenant purchased the apartment within six of months after the lease expired, or any extension thereof. The broker found a tenant, and a lease was executed on July 15, 2012, with an expiration of July 14, 2013. With a verbal agreement, the tenants remained until July 10, 2014, when they purchased the apartment for $3.05 million. The owner refused to pay the six percent commission. The parties went to arbitration, where the arbitrator found against the broker.

The broker filed a petition to vacate the award, arguing that the arbitrator’s decision in denying the commission was based on the immaterial allegation that the broker lacked an active role in the sale, and violated public policy. The owner argued that (i) the agreement was signed with the owner’s wife, (ii) the broker did not procure the buyer as the tenants reached out to the owner directly, and (iii) the sale took place a year after the lease expired.

After outlining the limited grounds for overturning an arbitration award, and discussing the basis for this arbitrator’s award—that the owner’s wife signed the brokerage agreement without focusing on the sales commission and without the consent of the husband—the court vacated the award as being irrational and violative of a strong public policy. The court refused to find that the wife’s failure to focus on the commission as a valid reason to ignore the parties’ executed agreement. The court noted that the arbitrator did not base his decision on the wife’s alleged inability to bind her husband or any defect in the agreement. (The court did not address the outcome of this case had the wife’s authority been challenged.) The arbitrator’s emphasis on what the owner’s wife understood could not be a basis for a decision.

Contact Information