Three Million Dollar Default Arbitration Award Allowed to Stand

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.

Petitioner commenced an Article 75 proceeding to confirm the default award. Respondent cross-moved for its vacatur. Respondent argued that contrary to FINRA and the arbitrator’s determinations, she did not receive the FINRA mailings. She argued that her due process was violated and confirming the award would be fundamentally unfair.

Respondent claimed that she did not receive any of the mailings and was not on notice of the arbitration because she was in California during the relevant time period and only learned of the proceedings after she returned, when she received the Article 75 petition. She stated that the mail to her Sag Harbor home was held at the post office while the mail to her New York City address was delivered to her unmonitored mailbox which she had not looked through when she received the petition. She argued that because petitioner knew her email address she should have been notified by email.

While recognizing that an arbitration award can be vacated where due process was lacking, the court held that due process does not require actual receipt of notice by the respondent. So long as the means for notifying respondent were “reasonably calculated” to “apprise interested parties of the pendency of the action and to afford them the opportunity to present their objections” due process was not violated. And this approach did not mean that the notice had be done so as to eliminate all risk that the notice would not reach its intended destination. Even where certified mail was returned as unclaimed (but regular mail was not) would not alone defeat due process.

In this case, seeing how the numerous regular mailings by FINRA were not returned, and the respondent did not properly update her address with FINRA especially while aware of FINRA’s investigation which resulted in her permanent bar from the investment industry, so that respondent should have been aware of the likelihood that a subsequent arbitration would be commenced, all militated against the respondent and vacatur of the arbitration award. Additionally, respondent returned from California to New York 40 days before an award was issued, at a time that FINRA’s rules permitted her to file an answer, yet she did nothing.

In addition to respondent’s carelessness, the court made it rather clear that it did not believe respondent’s excuses of why and how she defaulted. The court stated that it believed that respondent had avoided and ignored FINRA’s mailings to her. The court allowed the default award to stand.

Matter of New Brunswick Theological Seminary v. Van Dyke

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