Liddle & Robinson Attorneys at Law New York City


Provisional Relief in Aid of Arbitration - By Jeffrey L. Liddle and Ethan A. Brecher

Wednesday, July 22, 1998

CPLR 7502(c), enacted in 1985 as part of New York’s arbitration statute, is a potent tool for securing provisional relief, maintaining the status quo and ensuring the effectiveness of an arbitration award pending the outcome of an arbitrable controversy. It allows a party to obtain a preliminary injunction or order of attachment in aid of arbitration, even before the arbitration starts, without having to establish the merits of the underlying claim, or meet the other stringent standards necessary in non-arbitrable disputes to obtain injunctions and attachments.1

A court may order provisional remedies in aid of arbitration under CPLR 7502(c) if a petitioner, with an arbitrable claim,2 establishes that any arbitration award made in its favor would be rendered ineffectual without such relief.3

The Appellate Division, First Department, has held repeatedly that a party seeking an attachment or injunction under CPLR 7502(c) does not have to prove the existence of sinister maneuvers or fraudulent conduct, as would be necessary under CPLR 6201 and 6301 to obtain provisional relief in a non-arbitrable controversy.4

In Drexel Burnham Lambert Inc. v. Ruebsamn, the court held that although CPLR Articles 62 and 63 are incorporated into CPLR 7502(c) for purposes of undertakings and the time for commencing an action, unlike those statutory provisions, provisional relief under CPLR 7502(c) should be granted if “the award to which the applicant may be entitled may be rendered ineffectual without such provisional relief.”5

CPLR 7502(c) is thus an invaluable aid in preserving assets, which might otherwise disappear before an arbitration even begins. In County NatWest Securities Corp. v. Jesup, Josephthal & Co. Inc. the first Department reversed the IAS court and held that an order of attachment was appropriate.6

County NatWest started an arbitration against Jesup Josephthal to recover $4,528,000 under a securities loan transaction. When County NatWest filed its special proceeding under 7502(c),7 Jesup Josephthal was liquidating and transferring assets, had ceased functioning as an on-going entity, and had resigned its seat on the New York Stock Exchange.8 These facts convinced the court that there was a “high probability that [the respondent] will be unable to meet any debts determined by the arbitrators to be owed to [petitioner].”9 The court thus concluded that County NatWest demonstrated

the possibility, if not the likelihood, that absent the attachment being requested, the ultimate arbitration award would be severely compromised, and, indeed, both the Supreme Court and respondents recognize this fact but have mistakenly attempted to apply a stricter standard. Consequently, the attachment should have been granted. 10

Some lower courts have been slow to acknowledge the ease with which a petitioner may obtain provisional relief under CPLR 7502(c), and have required the moving party to establish likelihood of success on the merits and irreparable harm as part of their application.11

In this regard, however, the first Department has been clear that the statute should be applied as written, and these factors should not be read into CPLR 7502(c). For example, in National Telecommunications Association Ltd. V. National Communications Association Inc.,12 the first Department affirmed an order pursuant to CPLR 7502(c) granting a preliminary injunction in aid of arbitration.

The court held that a petitioner does not have to demonstrate irreparable harm, a probability of success on the merits, and balancing of the equities in its favor to obtain an injunction, under CPLR 7502(c).13 Although these factors must normally be shown under Article 63 of the CPLR for an injunction, the court stated such a standard would be “inappropriate” for a request under CPLR 7502(c).14

Similarly, in In re Guarini, the first Department held:


The IAS court properly refused to consider the merits of petitioner’s admittedly arbitrable claims, as it would on a motion for a preliminary injunction under CPLR 7502(c), the only consideration in deciding whether to grant a preliminary injunction is whether “the award to which the applicant may be entitled may be rendered ineffectual without such provisional relief (citations omitted).15

Most Recently, the court in New York City Off-Track Betting Corp. v. New York Racing Association Inc. denied a party’s request for injunctive relief on aid of arbitration.16 The court reaffirmed its earlier precedents in defending the standard for obtaining an injunction under CPLR 7502(c).17

One Peculiar procedural quirk with respect to attachments is that a petitioner may have to prove likelihood of success on the merits, irreparable harm, grounds for the attachment and need for continuing the attachment in response to a motion to modify or vacate the attachment under CPLR 6223.18

FEDERAL LAW

While petitioners have invoked CPLR 7502(c) successfully on many occasions, it has not been immune to challenge.19 In Brenner v. Nomura Securities International,20 the first department held that the federal Securities Exchange Act of 1934 preempted CPLR 7502(c).

The petitioner in Brenner was the head government bond trader at Nomura. He was fired because he allegedly mismarked the value of securities he traded. Within a day or so after he was fired, Brenner filed a petition in New York Supreme Court for a preliminary injunction barring Nomura from filing his Uniform Termination Notice for Securities Industry Registration (form U-5) with the NASD or NYSE.

Within 30 days of the termination of a registered securities industry employee’s employment, securities firms are required by the NASD’s rules to file the form U-5 with the Central Registration Depository (CRD), maintained jointly by the NASD and the North American Securities Administrators Association. The CRD is an online registration data bank and application processing facility. Securities regulators and brokerage firms have computerized access to the CRD.

A brokerage firm must provide a reason on the form U-5 for why it fired an employee, and may also be required to answer affirmatively the question, among others, pre-printed on the form U-5, whether the employee is or was at the time of termination “under internal review for fraud or wrong taking of property, or violating investment-related statutes, regulations, rules or industry standards of conduct?”

A “yes” answer to this question requires the firm to provide a more detailed explanation on an accompanying form called a DRP-5. Securities firms review forms U-5 in connection with hiring prospective employees, and frequently make employment decisions based on the disclosures contained on the form U-5.

Brenner sought an injunction to enjoin Nomura from making any statement on his Form U-5 that might hinder his employment prospects, as he apparently disagreed that he had mismarked any securities. Such a disclosure, even if untrue, could nonetheless be ruinous to his career. Libel lawsuits on Form U-5 defamation claims, while often successful, do not prevent the dissemination of the allegation in the first place.21

Brenner thus petitioned the court for a preliminary injunction barring Nomura from filing his Form U-5 until an arbitration panel at the NASD could address his claims regarding his termination. The IAS court granted a preliminary injunction in aid of arbitration under CPLR 7502(c) barring Nomura, the NASD and NYSE from disseminating the contents of Brenner’s form U-5.22

The First Department vacated the preliminary injunction, holding the Securities Exchange Act of 1934 preempted CPLR 7502(c). The court based its decision on the fact that the Form U-5 is an investor protection mechanism promulgated by the NYSE and NASD under the authority delegated to these entities by the Securities & Exchange Commission for oversight and self-regulation under the Exchange Act. The court held that the IAS court’s preliminary injunction conflicted with (and was preempted by the Exchange Act) “by depriving other security firms of information concerning a potentially corrupt trader.”23


RECENT TRENDS

Motions for CPLR 7502(c) remedies have resulted in the use of “stand still” agreements. For example, in one case heard recently in New York County,24 the petitioners sought an order of attachment and preliminary injunction in aid of arbitration in connection with arbitrable compensation claims against an international brokerage firm, which shut down in late 1997.

The petitioners were concerned that their employer, the firm’s U.S. subsidiary, would transfer out of the U.S. and back to its parent the assets from which they hoped to satisfy their claims.

After filing a motion for provisional relief in aid of arbitration, in a stipulation “So Ordered” by the court, and in exchange for a withdrawal of the application, the brokerage firm agreed to maintain a pool of assets in the U.S. and provide the petitioners with ample notice of any planned transfers.

In Erickson v. Kidder Peabody, the court denied the petitioners’ request for relief under CPLR 7502(c). Kidder Peabody, however, which had sold most of its assets to PaineWebber, gave the petitioners (who had or planned on bringing arbitrations at the NASD or NYSE against Kidder Peabody in connection with their employment) assurances by affidavit that they would be notified should Kidder Peabody’s assets be projected to fall below $50 million. The court believed that this assurance was sufficient to allow petitioners to protect their interests in any ultimate arbitration award.25

In one of the more unusual uses of CPLR 7502(c), the court in Congregation Darech Amuno v. Blasof upheld a preliminary injunction barring congregants from entering a synagogue, pending arbitration before a Beth Din (a Jewish religious tribunal) to determine whether they should be expelled from the congregation due to their disruptive behavior.26

CONCLUSION

CPLR 7502(c) is indispensable for parties in need of urgent relief when an arbitration award to which they might become entitled is jeopardized by the potential dissipation of assets belonging to the defendant, or when the disruption of the status quo would render the arbitration proceeding meaningless.

This article is reprinted with permission from the July 22, 1998 issue of the New York Law Journal © 1998 NLP IP Company. Further duplication without permission is prohibited.


1 CPLR 7502(c) provides Provisional Remedies. The supreme court in which an arbitration is pending, or, if not yet commenced, in a county specified in subdivision (a), may entertain an application for an order of attachment or for a preliminary injunction in connection with an arbitrable controversy, but only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without such provisional relief. The provisions of article 62 and 63 of this chapter shall apply to the application, including those relating to undertakings and to the time of commencement of an action (arbitration shall be deemed an action for this purpose) if the application is made before commencement, except that the sole ground for the granting of the remedy shall be as stated above. The form of the application shall be provided in subdivision (a).

2 If the claim is not arbitrable, relief under CPLR 7502(c) is unavailable. In Re Bunzl, 224 AD2d 245, 637 NYS2d 703 (1st Dep’t 1996).

3 CPLR 7502(c) does not allow a court to fashion injunctive orders in aid of arbitration, including orders for expedited arbitration. Rather, CPLR 7502(c) is intended to ensure the effectiveness of an arbitration award. See CPLR 7502 (c), Alexander Practice Commentaries, C7502:8 (McKinney’s 1995); Salvino v. Merrill Lynch, Pierce, Fenner & Smith Inc., 85 NY2d 173, 623 NYS2d 790, 794, 647 NE2d 1298 (1995). Moreover it does not provide an independent basis to obtain an injunctive order to compel arbitration and stay litigation. Koob v. IDS Financial Services Inc., 213 AD2d 26, 629 NYS2d 426 (1st Dep’t 1995).

4 Habitations Limited Inc. v. BKL Realty Sales Corp., 160 AD2d 423, 554 NYS2d 117, 118 (1st Dep’t 1990) (reversing IAS Court, the Appellate Division held that an attachment in aid of arbitration was appropriate where the evidence demonstrated that respondents may not be able to satisfy arbitration award due to insufficiency of unencumbered assets); Drexel Burnham Lambert Inc. v. Reubsaimen, 139 AD2d 323, 531 NYS2d 547, 550 (1st Dep’t 1988), 1v. to app. denied, 73 NY2d 703, 537NYS2d 490,534 NE2d 328 (1998); County NatWest Securities Corp. USA v . Jesup, Josephthal & Co. Inc., 180 AD2d 468, 579 NYS2d 376, 377(1st Dep’t 1992); H.I.G. Capital Management v. Ligator, 233 AD2d 270, 650 NYS2d 124 (1st Dep’t 1996); 13 New York Civil Practice, Weinstein-Korn-Miller, ¶7502.20, p. 75-102. (1998) (“The sole ground upon which the relief may be sought and afforded under CPLR 7502(c)is that the applicant would be entitled to an arbitration award in a pending arbitration or arbitrable controversy, and that the efficiency of that award may be rendered nugatory by the threatened action, which provisional remedy will serve to prevent. Although the court will serve to prevent. Although the court will undoubtedly be required to evaluate the legal and factual issues in order to determine whether provisional relief is appropriate, the subdivision clearly is not intended to alter the basic arbitration process; rather, it is merely to afford an ancillary remedy that will prevent the arbitration process from being defeated. “)

5 531 NYSd at 550. The Court in Ruebsamen held that the possibility that an arbitration award may be rendered ineffectual in the absence of an order of attachment is sufficient under the statute to support provisional relief. Further, it is entirely irrelevant that CPLR 6201(3) and 6301 both expressly mandate some sort of affirmative act or “sinister maneuver” as a condition of either an order of attachment or a preliminary injunction and temporary restraining order, respectively since §7502(c) unequivocally states that the “sole ground” for granting an order of attachment with an arbitrable controversy is to be ascertained from within the parameters of the provision itself. Thus, CPLR 6201(3) and 6301 are simply inapplicable to the instant situation. Id.

6 579 NYS2d at 376-377.

7 Proceedings to obtain relief under CPLR 7502(c) are initiated by special proceedings governed by Article 4 of the CPLR. See CPLR 7502(a).

8 579 NYS2d at 376.

9 Id.

10 Id. at 377.

11 See e.g. Erickson, et al. v. Kidder Peabody & Co. Inc. 166 Misc2d 1, 630 NYS2d 861, 862 (N.Y. Sup. Ct. 1995) (“a party seeking provisional relief under CPLR 7502(c) must still establish, among other things, the existence of a valid cause of action and grounds for relief.”); Brenner v. Nomura Securities International, 228 AD2d 67, 652 NYS2d 249 (1st Dep’t 1996), Iv. to app. dismissed, 90 NYS2d 921, 664 NYS2d 257, 686 NE2d 1351(1997) (IAS Court required petitioner to establish traditional factors to obtain injunction rather than CPLR 7502(c) “rendered ineffectual” standard ). In another case in New York County in which Liddle & Robinson represented the corporate plaintiff, the IAS court required a company to prove that its proprietary computer software was a trade secret before issuing an injunction barring a former employee from using that software pending arbitration of a theft of trade secret claim.

12 189 AD2d 573, 592 NYS2d 591 (1st Dep’t 1993).

13 Id.

14 Id.; see also, County NatWest Securities Corp. U.S.A. v. Jesup Josephthal & Co. Inc.; Habitations Limited Inc. v. BKL Realty Sales Corp. ,supra.

15 233 AD2d 196, 650 NYS2d 4, Iv. to app. denied, 90 NY2d 802, 663 NE2d 335, 660 NYS2d 712 (1997).

16 1998 WL 251639, *2-3 (1st Dep’t, May 14, 1998).

17 The Off-Track Betting case also analyzed the petitioner’s request for a preliminary injunction under CPLR 6301. The court’s decision provides a useful contrast of how both standards are applied. The petitioner apparently made a motion for an injunction under both CPLR 7502(c) and CPLR 6301 because there was a question about whether the underlying dispute was arbitrable. The IAS court had not decided whether the dispute was arbitrable, and that issue was not on appeal.

18 See Ruebsamen, 531 NYS2d at 550. CPLR 6223 relates to methods for modifying or vacating attachments. Its application to CPLR 7502(c), however, is somewhat unclear. A party is entitled to make a motion under CPLR6223 to vacate or modify an order of attachment. CPLR 6223(b) requires the party seeking to maintain the order of attachment to establish the grounds for the attachment, the need for the levy, and probability of success on the merits. See 12 New York Civil Practice, Weinstein-Korn-Miller, ¶6223 (1998). CPLR 7502(c)’s “rendered ineffectual” standard would be neutered completely, however, if a defendant could seek immediately to vacate an order of attachment granted under CPLR 7502(c) by invoking the provisions of CPLR 6223. Further judicial explanation of this matter is thus necessary.

19 The following lists reported cases where relief under CPLR 7502(c) has been both granted and denied.

GRANTED: Wagner Acquisition Corp. v. Giove, 1998 WL 265733 (2nd Dep’t, May 26th, 1998); Chiavarelli v. State University of New York Health Science Center at Brooklyn, 671 NYS2d 279 (2nd Dep’t 1998); H.I.G. Capital Management v. Litigator, supra; In Re Guirini, supra; Congregation Darech Amuno v. Blasof, 226 AD 236, 640 NYS2d 564 (1st Dep’t 1996); Leake v. Merrill Lynch ,Pierce, Fenner & Smith, 213 AD2d 155, 623 NYS2d 220 (1st Dep’t 1995); National Telecommunications Association Inc, supra; In Russian-Brazilian Holdings Inc. 197 AD 391, 602 NYS2d 352 (1st Dep’t 1993); In Re New York State Housing Finance Agency Employees’ Association, 183 AD2d 435, 583 NYS2d 382 (1st Dep’t 1992); In Re Toal, 181 AD2d 581, 581 NYS2d 283 (1st Dep’t 1992); Iv. to app. denied, 80 NYS2d 758, 589 NYS2d 308, 602 NE2d 1124 (1992); County NatWest Securities Corp. U.S.A. v. Jesup, Josephthal & Co. Inc, supra; Habitations Limited, Inc. v. BKL Realty Sales Corp., supra; In Re Feeley, 154 AD2d 531, 546 NYS2d 154 (2nd Dep’t 1989); Suffolk County Patrolmen’s Benevolent Association Inc. v. County of Suffolk, 150 AD2d 361, 540 NYS2d 882 (2nd Dep’t 1989); Cove v. Rosenblatt, 148 AD2d 411, 538 NYS2d (2nd Dep’t 1989); In Re Denihan, 119 AD2d 144, 506 NYS2d 39 (1st Dep’t 1986); aff’d 69 NYS2d 725, 512 NYS2d 367, 504 NE2d 694 (1987).

DENIED: New York City Off-Track Betting Corp. v. New York Racing Association, supra; Brenner v. Nomura Securities International, supra; Erickson v. Kidder Peabody & Co. Inc., supra; Hill v. Reynolds, 187 AD2d 299, 589 NYS2d 461 (1st Dep’t 1992); Drexel Burnham Lambert v. Ruebsamen, supra; Miller v. Macri, 132 AD2d 691, 518 NYS2d 170 (2nd Dep’t 1987), app. denied, 70 NYS2d 610, 522 NYS2d 110, 516 NE2d 1223 (1987).

20 652 NYS2d 249.

21 Indeed, securities industry executives have received large awards in arbitration for defamation on their Forms U-5. See e.g.. Glennon v. Dean Witter Reynolds Inc., 83 F3d 132 (6th Cir. 1996) (upholding $1,478,250 Form U-5 defamation award); Baravati v. Josephthal, Lyon & Ross Inc., 28 F3d 704 (7th Cir. 1994) (upholding $180,000 Form U-5 defamation award); Eaton Vance Distributors v. Ulrich, 692 So2d 915 (2nd Dist. Ct. Fla 1997) (upholding $1,875,000 Form U-5 defamation award).

22 As noted, the IAS Court in Brenner applied the wrong test in determining whether the injunction should issue, by rejecting the “rendered ineffectual” standard mandatory by CPLR 7502(c) in favor of the traditional factors for preliminary injunctions. 652 NYS2d at 250.

23 652 NYS2d at 251.

24 In re Yamaichi International (America) Inc., N.Y. Sup. Ct. Index No. 123579/97.

25 630 NYS2d at 863.

26 640 NYS2d at 565. (“the award [expelling congregants from the synagogue] would have little meaning if, in the meantime, defendants’ continued misconduct drives away the synagogue’s other members or otherwise dooms its continued vitality.”).




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