1109580 ONTARIO, INC. v. BEAR, STEARNS CO., INC., (S.D.N.Y. 2003)


02 Civ. 7690 (RWS)United States District Court, S.D. New York.
February 20, 2003

STUART L. MELNICK, ESQ., STUART L. MELNICK, LLC, New York, NY, Attorneys for Plaintiffs.


ROBERT W. SWEET, United States District Judge.

Defendants Bear Stearns Co., Inc. (“BSC”), Bear Stearns Securities Corp. (“BSSC”), Richard Harriton (“Harriton”), Alan C. Greenberg (“Greenberg”) and Marshall J. Levinson (“Levinson”) (collectively “Bear Stearns”) have moved pursuant to Rule 12(b), Fed.R.Civ.P., to dismiss the amended complaint of plaintiffs 1109589 Ontario, Inc. (“Ontario”) and Colwyn Rich (“Rich”) (collectively the “Plaintiffs”). For the reasons set forth below, the motion is granted.

The Parties
Ontario, a Canadian corporation, became a customer of A.R. Baron
Co., Inc. (“Baron”) which had an agreement with BSSC to act as the clearing broker for Baron. Rich, a resident of Puslinch, Ontario, was the principal of Ontario and as such entered into a customer agreement with BSSC on February 28, 1996 (the “Agreement”), requiring arbitration before the National Association of Securities Dealers (“NASD”) of all disputes. Baron ceased doing business in July 1996.

BSC and BSSC are Delaware corporations with their principal place of business in the City of New York. Harriton was president of BSSC, Greenberg chairman of the board of BSC and Levinson was head of the audit department of BSC.

Prior Proceedings
Ontario commenced an arbitration proceeding against Bear Stearns under the Agreement on February 18, 1997 (the “Arbitration”). That proceeding and other similar proceedings were stayed on August 17, 1998 at the request of the District Attorney of the County of New York as a result of an indictment filed against Baron and its officers arising out of its boiler room operations. Certain of the Baron officers pled guilty to the charges brought against them.

The Securities and Exchange Commission (“SEC”) initiated a proceeding against BSSC arising out of the relationship with Baron which resulted in a consent order of August 5, 1999 making findings of fact and imposing sanctions and a cease and desist order.

Discovery in the Arbitration took place during the stay and proceedings before the Arbitration Panel commenced on January 10, 2002. Two Bear Stearns’ employees called by Ontario have testified over a period of ten days. A third former employee was scheduled, felt ill, and was excused. Ontario has also sought to schedule the appearance of Harriton without success. A death in the family of counsel for Bear Stearns resulted in the postponement of certain proceedings. Ontario did not appear at a scheduled hearing on September 25, 2002.

Upon learning of the action, the Arbitration Panel suspended the Arbitration. This action was filed on September 25, 2002. Bear Stearns moved to dismiss, and on October 23, accepted an amended complaint (the “Amended Complaint”). The Amended Complaint alleged that Bear Stearns has breached the Agreement (Count I), its covenant of good faith and fair dealing (Count II), seeks a declaratory judgment that Bear Stearns has refused to arbitrate and Ontario is no longer bound to arbitration (Count III), that the Agreement be rescinded (Count IV), an injunction barring further arbitration based on the bias of the Panel and the Chairman’ s refusal to recuse himself (Count V), a declaratory judgment against Bear Stearns based on collateral estoppel (Count VI), and finally alleges prima facie tort (Count VII). Ontario and Rich have not sought any preliminary relief.

The instant motion was heard and marked fully submitted on December 11, 2002.

The Facts
The facts underlying the Arbitration are, of course, not established by the present record. Ontario maintains it was defrauded by Andrew Bressman, the principal of Baron, assisted by BSSC, in connection with a Secured Demand Note Collateral Agreement as a consequence of which it suffered a $20 million loss. The role of Rich and a former associate are at issue according to Bear Stearns.

The record does establish that the Arbitration prior to September 25, 2002 was hotly litigated and contentious to the extent, according to Rich, that it caused him several hundreds of thousands of dollars in legal fees, a heart attack, and damages as a result of false accusations.

According to Bear Stearns, some twenty motions have been made in the Arbitration, some forty orders entered involving discovery and scheduling, and extensive correspondence has been filed.

The Rule 12(b)(6) Standard
Rule 12(b)(6) of the Federal Rules of Civil Procedures provides, in relevant part, that a claim must be dismissed if “it appears that plaintiff can prove no set of facts that would entitle him to relief.”See Fed.R.Civ.P. Rule 12(b)(6); Ross v. Bolton, 904 F.2d 819, 823 (2d Cir. 1990). When considering a motion to dismiss, a court must “accept the material facts alleged in the complaint as true, and construe all reasonable inferences in plaintiff’s favor.” Hernandez v. Coughlin, 18 F.3d 133, 136 (2d Cir.), cert. denied, 513 U.S. 836, 115 S.Ct. 117
(1994); Grandon v. Merrill Lynch Co., 147 F.3d 184, 188 (2d Cir. 1998). Dismissal is “appropriate only if `it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'” Harris v. City of New York, 186 F.3d 243, 250 (2d Cir. 1999) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)

The Causes of Action Alleged Are Covered by the Arbitration Clause

The arbitration clause at issue here provided that,

[y]ou agree, and by maintaining an account for you Bear Stearns agrees, that controversies arising between you and Bear Stearns . . . whether arising prior to, on or subsequent to the date hereof, shall be determined by arbitration.

See Customer Agreement ¶ 21.

Collins Aikman Products Co. v. Building Systems, Inc., 58 F.3d 16, 20 (2d Cir. 1995) addresses the issue of fraud and rescission claims in the context of such a clause:

We have stated that a court should decide at the outset whether “the arbitration agreement [is] broad or narrow.” Prudential Lines, Inc. v. Exxon Corp., 704 F.2d 59, 63 (2d Cir. 1983). If broad, then there is a presumption that the claims are arbitrable. See id. at 64. The clause in this case, submitting to arbitration “[any] claim or controversy arising out of or relating to the [e] agreement,” is the paradigm of a broad clause. See Threlkeld Co., Inc. v Metallgesellshaft Ltd., 923 F.2d 245, 251 (2d Cir. 1991). Thus, under Prudential Lines, these claims are presumptively arbitrable.

Agreements to arbitrate, including those contained within a customer agreement between a customer and a securities firm, are preferred and routinely and consistently upheld. Merrill Lynch, Pierce, FennerSmith, Inc. v. Georgiadis, 903 F.2d 109, 111-12 (2d Cir. 1990), citingRodriguez de Ounas v. Shearson/American Express Inc., 490 U.S. 477, 109 S.Ct. 1917, 104 L.Ed.2d 526 (1989). They are to be broadly construed and “[a] n order to arbitrate should not be denied unless the arbitration clause is not susceptible of a reasonable interpretation covering the asserted dispute . . .” Hardy v. Walsh Manning Securities LLC, 2002 U.S. Dist. LEXIS 16589 *45 (S.D.N.Y. 2002)

Claims for breach of contract and the duties of good faith and fair dealing have been held to be arbitrable. See Design Strategy Corporationv. Nghiem, 14 F. Supp.2d 298, 302 (S.D.N.Y. 1998); Lurzer GMBH v. American Showcase, Inc., 77 F. Supp.2d 370, 375 (S.D.N.Y. 1997); an Sharp Electronics Corp. v. Branded Products, Inc., 604 F. Supp. 239, 243
(S.D.N.Y. 1984). The identical analysis applies to tort claims. See, Insurance Company of North America v. ABB Power Generation, Inc., 925 F. Supp. 1053, 1062 (S.D.N.Y. 1996) and Norcom Electronic Corp. v.CIM USA, Inc., 104 F. Supp.2d 198, 204 (S.D.N.Y. 2000)

Similar rulings have been issued involving claims of defamation, see,e.g, Popper v. Monroe, 673 F. Supp. 1228, 1230 (S.D.N.Y. 1987). The claim alleging collateral estoppel is equally subject to arbitration. Lopez v.Parke Rose, 138 A.D.2d 575, 576 (2d Dept. 1998) (“As a rule, once it has been determined that the claim sought to be arbitrated is properly before the arbitrator . . . any further inquiry is foreclosed and all remaining issues, including the res judicata effect of a prior award and the collateral estoppel effect of the issues decided therein are within the exclusive province of the arbitrator to resolve”)

Simply stated, the agreement of parties in the Agreement was to submit controversies to arbitration. No grounds for rescission of that agreement have been alleged.

What has been alleged are improprieties committed by Bear Stearns in the course of the Arbitration amounting to a failure to arbitrate and to a breach of its duties, all of which are controversies properly before the arbitrators. Unfavorable rulings do not provide an escape from the Arbitration which Ontario initiated.

of course, pursuant to 9 U.S.C. § 10, Ontario may move to vacate an arbitration award in a United States District Court on the grounds that (1) the award was procured by corruption, fraud or undue means; (2) the arbitrators were evidently partial or corrupt; (3) the arbitrators were guilty of misconduct in refusing to postpone a hearing or in refusing to hear evidence or other misbehaviors that prejudiced the rights of a party; or (4) the arbitrators exceeded their power, almost all of which grounds Ontario has alleged in this action.

The only case cited by Ontario of a rescission of an arbitration agreement is Hooters of America, Inc. v. Phillips, 173 F.3d 933 (4th Cir. 1999) where a district court decision denying enforcement on grounds that the arbitration agreement was unconscionable and void as against public policy and was affirmed. The arbitration rules were characterized as “so one-sided that their only possible purpose is to undermine the neutrality of the proceeding.” Hooters, 173 F.3d. at 938. No such attack has been launched here against the NASD process.

It may be that at the conclusion of the arbitration process Ontario can establish such conduct that might constitute a breach of the arbitration process, but Ontario is obligated by contract to complete the process.

No Cause of Action for Prima Facie Tort Has Been Properly Alleged

Bear Stearns has challenged the seventh cause of action for prima facie tort for failure to allege special damages, citing Howard v. Block,90 A.D.2d 455, 454 N.Y.S.2d 718 (1st Dept. 1982) and Ginsberg v.Ginsberg, 84 A.D.2d 573, 574, 443 N.Y.S.2d 439 (2d Dept. 1981)

A party must “allege and prove actual or special damages in order to recover.” Board of Ed. of Farmingdale Union Free Sch. Dist. v. Farmingdale Classroom Teachers’ Assoc., Inc., 38 N.Y.2d 397, 405, 380 N.Y.S.2d 685, 343 N.E.2d 278 (1975). Special damages are “burdens imposed on [a party] beyond the ordinary burden of defending a law suit.” Engel v. CBS, Inc., 145 F.3d 499, 503 (2d Cir. 1998)

Jacgues v. DiMarzio, 216 F. Supp.2d 139, 142 (E.D.N.Y. 2002)

Rich maintains that the Amended Complaint satisfies this requirement by the allegation in paragraph 78 of “extreme physical, emotional, psychological and economic harm” suffered by Rich as a result of Bear Stearns’ use of otherwise lawful means “to manipulate and abuse the arbitral process.” (Amended Complaint, ¶ 77).

The controlling authority is Curiano v. Suozzi, 63 N.Y.2d 113 (1984):

We need not base our decision upon technical pleading grounds, however, for New York courts have consistently refused to allow retalitory lawsuits based on prima facie tort predicated on the malicious institution of a prior civil action (see Drago v. Buonagurio, 46 N.Y.2d 778, revg 61 A.D.2d 282, supra; Howard v. Block, supra; Ginsberg v. Ginsberg, supra; Scully v. Genesee Milk Producers’ Coop., 78 A.D.2d 982, app dsmd 52 N.Y.2d 969; Belsky v. Lowenthal, 62 A.D.2d 319, affd 47 N.Y.2d 820; Knapp Engraving Co. v. Keystone Photo Engraving Corp., 1 A.D.2d 170).
Plaintiffs instituted the present action in obvious retaliation for defendants’ libel suit. As a matter of policy, it would be unwise to allow it to continue for it would constitute a serious misuse of the cause of action for prima facie tort and could lead to inconsistent results, confusion of issues, and a waste of judicial resources. Prima facie tort is designed to provide a remedy for intentional and malicious actions that cause harm and for which no traditional tort provides a remedy. In this action, however, the gravamen of plaintiffs’ second cause of action is. one sounding in malicious prosecution, the malicious institution of judicial proceedings without probable cause for doing so which finally ends in failure (see Burt v. Smith, 181 N.Y. 1, app dsmd 203 U.S. 129; PJI 3:50).

* * *

To permit plaintiffs’ action to continue under these circumstances would create a situation where litigation could conceivably continue ad infinitum with each party claiming that the opponent’s previous action was malicious and meritless.

Curiano, 63 N.Y.2d at 118-119.

If the Arbitration is completed and Ontario is successful, an action for malicious prosecution (or in this instance, malicious defense) might well be sustainable, assuming without deciding that the special damage requirement is met. Under Curiano prima facie tort is not available as a remedy to Rich at this time.

The motion of Ontario is granted, and the Amended Complaint dismissed. While it is difficult to conceive how Ontario and Rich can formulate a viable pleading under the concepts advanced to date, leave is granted to move to file a second amended complaint within twenty (20) days.

It is so ordered.