Lehman Bros. v. Cox

Andrias, J.P., and Williams, J., dissent

in a memorandum by Andrias, J.E, as follows: After Lehman Brothers commenced an arbitration before the American Stock Exchange to collect a margin debt of $65,791.96 from respondent Cox, the parties stipulated that upon payment of $60,000 Lehman Brothers would “remit” 112,400 shares of Borealis stock to Cox. However, after Cox paid the $60,000 settlement, Lehman Brothers discovered that there were only 81,700 shares in his account, the remainder having previously been liquidated to cover certain margin calls. Cox then brought an action to enforce the stipulation and Lehman Brothers successfully counterclaimed for re*355scission of the stipulation on the basis of unilateral mistake. In affirming, we found no indication that Lehman Brothers lacked good faith, it simply appearing that the paralegal assigned to review the stipulation for factual error relied on the wrong account statement in coming up with the number of shares. Thus, we remanded the controversy to arbitration where Cox could pursue his claim that Lehman Brothers is not entitled to the interest it sought (see Cox v Lehman Bros., Inc., 15 AD3d 239, 240 [2005]).

Lehman Brothers then commenced an arbitration before NASD seeking $65,791.95 plus interest from December 10,1997, costs and attorneys fees. Cox answered and counterclaimed, alleging

“9. Respondent [Cox] has suffered damages as a result of Claimant’s [Lehman Brothers’s] failure to negotiate in good faith and made material misstatements resulting in damages to Respondent.

“10. Respondent has suffered damages as a result of Claimant’s unlawful possession of Respondent’s assets including but not limited to loss of interest on the assets, loss of investment opportunity, loss of capital and attorneys fees in excess of $100,000.”

Lehman Brothers moved before the arbitrators to dismiss the “material misstatement”, the “unlawful possession”, and the “failure to negotiate in good faith” counterclaims. Cox opposed, arguing that the issues of Lehman Brothers’s negligence in handling the settlement between the parties and its improper handling of his account were to be determined by the arbitrators. After due deliberation, the panel denied the motion and, after a hearing, awarded Lehman Brothers $122,000 in compensatory damages; directed Lehman Brothers to deliver all shares of Borealis held in any of Cox’s accounts, but in no event, less than 81,700 shares, including any and all dividends or stock splits, if any, since January 1, 1992; and awarded Cox $48,000 in compensatory damages.

Lehman Brothers then successfully sought a judgment pursuant to CPLR 7511 (b) (1) (iii) vacating the award to Cox on the ground that the arbitrators exceeded their authority. It argued, as it does on appeal, that the arbitrators “had no right or authority to go back and give an award of $48,000 on a stipulation which had been told to them was strictly out-of-bounds” by the courts. However, contrary to the IAS court’s finding in favor of Lehman Brothers, the issues raised in respondent’s counterclaims before the arbitrators did not necessarily arise out of the negotiation of the stipulation of settlement subsequently vacated by the courts on the ground of unilateral mistake.

*356In reviewing the counterclaims, it is not clear that the only basis for all the assertions therein is the stipulation. Notably, the counterclaims included a claim for the “unlawful possession” of Cox’s assets, the specifics of which might or might not pertain to the stipulation (the counterclaims are wholly devoid of facts). Further, the arbitration panel did not set forth any factual basis for its award on the counterclaims.

Neither a transcript of the arbitration proceedings nor, apparently, the tapes of those proceedings were before the IAS court when it rendered its decision. Thus, the court had no way of discerning the nature of the claims actually made by Cox at arbitration. While Lehman Brothers asserted that Cox’s counterclaims stemmed solely from the stipulation of settlement, there was no convincing evidence to that effect submitted in support of its petition. I also note that, although not raised by the parties, Lehman Brothers’s motion to dismiss the counterclaims before the arbitrators was not based on any claim that consideration of such counterclaims would be outside their authority. Thus, by proceeding to arbitration on these issues without court intervention, it would seem that Lehman Brothers waived its current argument (see CPLR 7503 [c]). In any event, given the heavy burden that Lehman Brothers faced when moving to vacate an arbitration award (see Scollar v Cece, 28 AD3d 317 [2006]), it cannot be said that its petition and supporting papers, which were wholly devoid of evidentiary support for its allegations, could serve as a basis for vacatur of the arbitrators’ award in favor of Cox. Indeed, the motion to dismiss the counterclaims and the responding papers illustrate a potential basis for the award independent of the stipulation.

Accordingly, inasmuch as Lehman Brothers has not met its burden, the order and judgment (one paper) should be reversed, the petition denied in all respects and respondent’s cross motion to confirm the arbitrators’ award granted.