Hirsch v. Amper Financial Services, A-9 September Term 2012; Supreme Court; opinion by LaVecchia, J.; decided August 7, 2013. On certification to the Appellate Division. [Sat below: Judges Parrillo and Hoffman in the Appellate Division; Judge Cleary in the Law Division.] DDS No. 11-1-0919 [31 pp.]
Plaintiffs Michael Hirsch, Robyn Hirsch and Hirsch, LLP, used EisnerAmper Financial Services as their accountant. It referred them to Marc Scudillo, who was employed as a financial adviser by Amper Financial Services for investment planning. Scudillo also served as a representative for Securities America Inc. (SAI), a separate corporation that served as a broker-dealer handling securities transactions.
Plaintiffs hired Scudillo and, on his recommendation, signed two applications to purchase securitized notes from Medical Provider Financial Corporation for $300,000 and $250,000. Scudillo signed each of these agreements as the registered representative and principal of SAI. Each application incorporated an arbitration agreement specifying that arbitration was to be handled by the Financial Industry Regulatory Authority.
Subsequently, investigations by both the U.S. Securities and Exchange Commission and Massachusetts indicated that the Med Cap notes were being operated as a Ponzi scheme.
Plaintiffs, who lost their entire investment, instituted arbitration proceedings with FINRA against SAI and Scudillo, asserting claims for, inter alia, breach of contract, breach of fiduciary duties, and violations of federal and state securities laws. They also filed a complaint in the Law Division against AFS and EisnerAmper alleging, inter alia, breach of contract, violations of the New Jersey Consumer Fraud Act and the New Jersey Uniform Securities Law, and negligent misrepresentation.
AFS and EisnerAmper filed a third-party complaint against SAI. SAI filed a motion to compel arbitration and stay proceedings pending arbitration. AFS and EisnerAmper joined in the motion; plaintiffs opposed it.
The trial court granted SAI's motion. The Appellate Division affirmed, citing the policy favoring arbitration, broadly interpreting the arbitration clause in light of this policy, and, relying on EPIX Holdings Corp. v. Marsh & McLennan Cos., Inc., 410 N.J. Super. 453 (App. Div. 2009), applying equitable estoppel.
Plaintiffs argue that, inter alia, because the arbitration clause here only applied to disputes arising between plaintiffs and SAI, the arbitration should exclude AFS and EisnerAmper. They also contend that the Appellate Division erred in applying equitable estoppel to compel arbitration.
Held: Although traditional principles of contract may in certain cases warrant compelling arbitration absent an arbitration clause, the intertwinement of the parties and claims in a dispute, by themselves, is insufficient to warrant application of equitable estoppel to compel arbitration. Here, because the record does not support that AFS or EisnerAmper detrimentally relied on plaintiffs' conduct, application of equitable estoppel was unwarranted.
Both the Federal Arbitration Act, 9 U.S.C.A. §§ 1 to 16, and the New Jersey Arbitration Act, N.J.S.A. 2A:23B-1 to -32, create a strong preference to enforce arbitration agreements, but the preference is not limitless. A court must first apply state contract-law principles to determine whether a valid agreement to arbitrate exists, underscoring the fundamental principle that a party must agree to submit to arbitration. Then, a court must evaluate whether the claims at issue fall within the arbitration clause's scope.
The U.S. Supreme Court has recognized that, in assessing whether parties can be compelled to arbitrate, courts can use principles of contract law even in the absence of an express arbitration clause.
EPIX Holdings held that a nonsignatory to an arbitration agreement, which was the parent corporation of the defendant-signatory, may compel the other signatory to arbitrate because the claims and parties were substantially interconnected and the claims fell within the scope of the arbitration clause.
In contrast, Angrisani v. Financial Technology Ventures, L.P., 402 N.J. Super. 138 (App. Div. 2008), rejected defendant's claim that plaintiff was equitably estopped from refusing to arbitrate because the claims were intertwined, reasoning that plaintiff had not engaged in conduct that could support a finding of equitable estoppel. It distinguished several federal cases that applied equitable estoppel to compel arbitration, finding that they generally involved situations where a party to a contract containing an arbitration clause sought to bring an action against a nonsignatory to the contract that was closely aligned to a contracting party, such as a parent or successor corporation.
The court says the panel's decision below reflects an emerging "intertwinement" theory, described as an extension of equitable estoppel, which it then addresses.
It says that New Jersey courts properly have recognized that arbitration may be compelled by a nonsignatory to a contract against a signatory on the basis of agency principles. Equitable estoppel may be used to compel arbitration but its use is limited. Intertwinement cannot be used as a theory for compelling arbitration when its application is untethered to a written arbitration clause and detrimental reliance. To the extent that EPIX Holdings suggests that estoppel can be applied solely because the parties and claims are intertwined, it extends equitable estoppel beyond its proper scope.
The court says that while the decision to compel arbitration in EPIX Holdings was appropriate given the agency relationship between the parent and subsidiary, the panel erred in concluding that the intertwinement of claims and parties, by itself, was sufficient to give a nonsignatory corporation standing to compel arbitration. The appropriate analysis would have focused on the agency relationship between the parent and subsidiary in relation to their intertwinement with the claims and the contract language.
Further, equitable estoppel does not apply absent proof of detrimental reliance.
Here, the only applicable arbitration clause is the one in the contract between plaintiffs and SAI. It makes no mention of other parties aside from Scudillo, who served as SAI's representative. Thus, there is no express contractual arbitration obligation with respect to AFS or EisnerAmper. They had no standing to compel arbitration under an agency relationship since Scudillo signed the contract containing the arbitration clause as an agent of SAI, not as an agent of AFS or EisnerAmper. SAI shares no corporate ownership with AFS or EisnerAmper.
Though plaintiffs' claims against SAI, AFS and EisnerAmper all arose out of the same alleged Ponzi scheme, and each of the parties had some form of relationship with each other, that intertwinement of claims and parties, by itself, is insufficient to warrant application of equitable estoppel. Neither AFS nor EisnerAmper expected to arbitrate their disputes in detrimental reliance on plaintiffs' conduct.
SAI's motion to compel arbitration should have been denied.
Chief Justice Rabner, Justices Albin, Hoens and Patterson, and Judges Rodriguez and Cuff, both temporarily assigned, join in Justice LaVecchia's opinion.
For appellants — Joel N. Kreizman (Scarinci & Hollenbeck). For respondent — Denis C. Dice, of the Pa. bar (Marshall, Dennehey, Warner, Coleman & Goggin; Joel M. Wertman on the brief). For Amper Financial Services and EisnerAmper — Craig S. Hilliard (Stark & Stark).