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<xTITLE>NY Trial Court Objecting to FINRA Jurisdiction but Participating in Arbitration Not Enough to Vacate Award</xTITLE>

NY Trial Court Objecting to FINRA Jurisdiction but Participating in Arbitration Not Enough to Vacate Award

by George Friedman
December 2020 George Friedman

This article first appeared on the Securities Arbitration Alert (SAA) Blog, here.

A financial adviser who noted his continued objections to FINRA Dispute Resolution Services’ (“DRS”) jurisdiction but otherwise participated in the arbitration cannot later challenge the Award under New York’s arbitration statute.

Fava v. Morgan Stanley Smith Barney, Inc., 2020 N.Y. Slip Op. 33358(U) (Sup. Ct., NY Cty. Oct. 9, 2020), was a promissory note dispute featuring two FINRA DRS Awards. First the facts. Financial adviser Fava was employed by Morgan Stanley through October 2011. Thereafter, the parties became embroiled in a dispute over repayment of the promissory note Fava had signed. The matter proceeded to FINRA arbitration resulting in a $450,000 Award in the firm’s favor (see Morgan Stanley Smith Barney, LLC v. Fava, FINRA ID 12-00057 (Newark, NJ May 15, 2013). The parties settled two months later, with Fava agreeing to pay the note balance over three years. The settlement agreement had a forum selection clause providing: “the state and federal courts of the State of New York shall decide any cause or controversy arising from this Agreement …, and the Parties hereby consent to submit to the jurisdiction of the New York courts for this purpose” (ellipse in original).

The Second Arbitration

When Fava stopped making payments, Morgan Stanley commenced a second arbitration at DRS. This prompted Fava to object to FINRA -- but not in court -- that arbitration at its forum was not appropriate under the forum selection clause. FINRA denied the Motion without explanation, and: “Fava participated fully in the arbitration after that, engaging in discovery and even moving to disqualify counsel, while consistently maintaining his objection to the arbitration throughout the proceedings.” The Panel eventually issued another Award in Morgan Stanley’s favor (see Morgan Stanley Smith Barney, LLC v. Fava, FINRA ID 18-04184 (Newark, NJ Apr. 21, 2020)), and Fava moved to vacate.

Award Upheld: Authority Not Exceeded

The Court rejects Fava’s contention that FINRA (and by implication the Arbitrators) exceeded their authority by proceeding with the arbitration in the face of the forum selection clause. Why? Says Justice Barry R. Ostrager: “Although CPLR § 7511(b)(1) allows a party who participated in the arbitration to move to vacate the award on the ground that the arbitrators ‘exceeded their authority,’ Fava’s claim here really is that no valid agreement to arbitrate exists.... [T]he unambiguous language in CPLR § 7511(b)(2)(ii), [] provides for vacatur of an arbitration award where ‘a valid agreement to arbitrate was not made’ but only in the case of a ‘party who neither participated in the arbitration nor was served with a notice of intention to arbitrate.’ The record here establishes that Fava participated in the arbitration to the fullest extent, despite his objection to FINRA’s jurisdiction.” The Court also noted that Fava could have sought a court-ordered stay of arbitration, but did not do so: “Having charted his course, Fava cannot now argue that FINRA exceeded its authority by proceeding with the hearing when no valid arbitration agreement existed.”

Award Upheld: No “Manifest Disregard”

Justice Ostrager also held that “manifest disregard” was not present here: “[T]he criteria for manifest disregard have not been met. Because, among other things, the arbitrators did not state their reasoning, the Court cannot find that (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case.”

Summing Up

“In any event, Fava’s argument still boils down to the claim that FINRA proceeded when no agreement to arbitrate existed, and CPLR § 7511(b)(2)(ii) bars that argument where, as here, Fava participated in the arbitration while an award may be attacked as ‘exceeding authority.’”

(ed: *The New York State Supreme Court is a court of original jurisdiction. **Those who don’t like explained Awards under “the less said, the better” doctrine are probably latching on the Court’s “Because, among other things, the arbitrators did not state their reasoning …” language. ***The FINRA arbitration forum had different names at various stages in the lifecycle of this matter. We used DRS throughout as a matter of simplicity.)



George H. Friedman is the publisher and Editor-in-Chief of the Securities Arbitration Alert, a weekly online publication covering the latest developments in financial services arbitration and mediation. He is also the principal of George H. Friedman Consulting, LLC, providing expert advice on arbitration and mediation in general and the FINRA dispute resolution forum in particular.

He is former Executive Vice President - Dispute Resolution of the Financial Industry Regulatory Authority (“FINRA”), a position he held through January 2013. He held the same title at NASD, which consolidated with NYSE Member Regulation to form FINRA in 2007. In this capacity, he was in overall charge of FINRA's dispute resolution program, carried out by the company's four regional offices and 72 hearing locations in the United States and abroad, 200 employees, and an annual budget of $50 million. He also served as Secretary of the Securities Industry Conference on Arbitration. He has been referred to by the U.S. Court of Appeals—4th Circuit as a “leading arbitration expert.” He is a member of the American Arbitration Association's National Roster of Neutrals.

Mr. Friedman is an Adjunct Professor of Law at Fordham Law School, where he has taught a course on alternative dispute resolution since 1996. He is Chairman of the Board of Directors of Arbitration Resolution Services, Inc. of Coral Springs, Florida. Arbitration Resolution Services is an innovative online arbitration services company facilitating an affordable alternative to costly courtroom litigation and in-person arbitration for resolving Business-to-Business, Business-to-Individual, and Vehicle and Property Damage disputes. ARS is unique in that its entire process can be completed online through the company website.

In his extensive dispute resolution career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He joined NASD in 1998 as Senior Vice President of NASD's Dispute Resolution Division, and was named Executive Vice President in 2002.

Mr. Friedman received a B.A. in Political Science from Queens College, and a Juris Doctor from Rutgers Law School - Newark, where he was an editor of the Law Review. He is admitted to the New York and New Jersey Bars and the United States Supreme Court, and is a Certified Regulatory and Compliance Professional. Mr. Friedman is a member of the Securities Experts Roundtable, and of several bar associations. He is past chair of the Committee on Alternative Dispute Resolution of the New York County Lawyers Association. He is a member of the Banking Advisory Committee of Bergen (NJ) Community College.

Mr. Friedman has lectured extensively on the subject of alternative dispute resolution, and has the distinction of being one of the architects of the American Arbitration Association’s Due Process Fairness Protocols for both employment arbitration and health care dispute resolution, and assisted in creating the Consumer Due Process Protocol. He has published often, with articles appearing in the Securities Arbitration Commentator, the ABA's Dispute Resolution Magazine, the New York Law Journal, the Rutgers Law Review, and the National Law Journal. He has blogs at Arbitration Resolution Services, Inc., the Securities Arbitration Commentator, and the World Future Society, among others.

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