Free Petition - District Court of California - California

Case 3:07-cv-02753-SC

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1331 of Title 28 of the United States Code. 2. Pursuant to Sections 10 and 12 of Title 9 of the United States Code, petitioner ROBERT J. KNIGHT ("KNIGHT') applies to the court for an order vacating an arbitration award rendered in favor of respondent MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., ("MERRILL LYNCH"), in the arbitration known as Robert J. Knight v Merrill Lynch, Pierce, Fenner & Smith, Inc., NASD arbitration number 0603430, and directing that judgment vacating the arbitration award be entered thereon. 3. Pursuant to Section 10 of Title 9 of the United States Code, venue for this petition is proper in this district in that the arbitration, which resulted in the award for which vacatur is sought, was venued to be conducted in this district, in the City and County of San Francisco, California. 4. At the time this action is commenced, petitioner Robert J. Knight was a resident of San Jose, California. 5. At the time this action is commenced, respondent MERRILL LYNCH was a corporation organized and existing under the laws of the State of Delaware, with its principal office in the State of New York. 6. The amount in controversy in this action exceeds $75,000.00, as the amount of damages sought in the underlying arbitration for which vacatur is sought is approximately $10,000,000.00. 7. The National Association of Securities Dealers, Inc. ("NASD") is a self-regulatory organization registered with the Securities and Exchange Commission ("Commission") as a national securities association pursuant to the Maloney Act of 1938 (15 U.S.C. §§ 78o-3 et seq.). The Exchange Act delegated government power to the NASD to enforce compliance by members of the industry with both the legal requirements laid down in the Exchange Act and ethical standards going beyond those requirements. See S.Rep. No. 94-75, at 23 (1975), reprinted in 1975 U.S.C.C.A.N. 179, 201. 8. The NASD Code of Arbitration Procedure ("Code") consists of rules
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which govern securities arbitration. Prior to becoming effective, each such rule is reviewed by the Commission, which in turn publishes notice of the proposed rule in the Federal Register and invites public comment on the proposed rule, pursuant to 15 U.S.C. 78s(b). The ultimate approval of a proposed NASD rule reflects the Commission's determination that the proposed rule is consistent with the purposes of the Exchange Act. Pursuant to the Exchange Act (15 U.S.C. section 78s(c)), the Commission also has the power to abrogate, add to, and delete from the rules of the NASD as the Commission deems necessary or appropriate to insure the fair administration of the NASD. The Commission's authority includes the power to mandate the adoption of any rules the Commission deems necessary to ensure that arbitration procedures adequately protect statutory rights. (Arbitrations conducted pursuant to the Commission's authority and oversight is referred to herein as "Exchange Act arbitration"). 9. At all times relevant to the events alleged in the Statement of Claim in the underlying Exchange Act arbitration, respondent MERRILL LYNCH was a brokerdealer member of the National Association of Securities Dealers, Inc. ("NASD") and was subject to the Commission's power pursuant to the Exchange Act. 10. At all times relevant to the events alleged in the Statement of Claim in the underlying Exchange Act arbitration, petitioner was an "associated person" and employee of respondent MERRILL LYNCH, and was registered and licensed as such with the NASD and was subject to the Commission's power pursuant to the Exchange Act. The Exchange Act Arbitration Proceeding 11. On July 20, 2006, petitioner commenced an arbitration proceeding with MERRILL LYNCH pursuant to the Code by filing a Statement of Claim, a Uniform Submission Agreement, fees and hearing session deposits required by the Code for commencing an Exchange Act arbitration with the NASD. The NASD accepted petitioner's statement of claim for arbitration, and assigned case number 06-03430 to it. 12. In his Statement of Claim, petitioner sought damages from respondent
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for breach of employment contract, among other things, in connection with his termination of employment with Merrill Lynch. Petitioner also named Patricia G. Williams and George Scott Ralston, solely in their capacities as employees of MERRILL LYNCH. 13. Pursuant to Code rules 10100 and 10201, respondent was obligated by the Commission to arbitrate disputes with associated persons, such as petitioner, at petitioner's demand, and to do so in accordance with the Code. 14. On or about July 6, 2006, in response to petitioner's statement of claim and demand for arbitration, respondent submitted an answer to the statement of claim. Respondent also executed and submitted a Uniform Submission Agreement, by which respondent agreed that petitioners' dispute would be resolved in accordance with the Code, as required by the Commission acting pursuant to the Exchange Act. 15. On or about October 25, 2006, respondent filed a self-styled "motion to dismiss" petitioner's arbitration and a motion to stay discovery. 16. On or about November 3, 2006, the NASD appointed Thomas D. Reese, Michael Garcia, and Linda H. Perry-Cabrera as arbitrators to hear and decide petitioner's arbitration claim. 17. During a telephone conference call between respondent's counsel, the arbitrators, and petitioner's counsel, the arbitrators instructed petitioner to submit a response to respondent's "motion to dismiss" on or before December 18, 2006. The arbitrators also set another telephone conference call for January 15, 2007, to discuss respondent's motions. 18. On December 18, 2006, petitioner submitted a written response to respondent's motion. A true and correct copy of the response is attached hereto as Exhibit A. 19. In his written response, petitioner clearly and unambiguously instructed the arbitrators that: 1) the Code expressly prohibits substantive motions to dismiss without an evidentiary hearing; 2) under the Code, petitioner was entitled to an
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Petition and Application to Vacate Arbitration Award

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evidentiary hearing, including presenting witness testimony and examining documents; 3) that the statute of limitations on which respondent relied (from the California Code of Civil Procedure) applied only to actions, which are statutorily defined to mean civil court proceedings, and hence did not apply to Exchange Act arbitrations; and 4) that the four year statute of limitations for actions founded upon an instrument in writing applies not only to the breach of an express obligation under a written contract, but also to breach of an implied promise arising out of the contract, pursuant to California Code of Civil Procedure § 337(1). 20. Pursuant to the Code, as reviewed and approved by the Commission pursuant to the Exchange Act, petitioner was entitled to a hearing to present testimony and evidence regarding his claim. Code Rule 10303 provides: (a) Any dispute, claim or controversy except as provided in Rule 10203 (Simplified Industry Arbitration) or Rule 10302 (Simplified Arbitration), shall require a hearing unless all parties waive such hearing in writing and request that the matter be resolved solely upon the pleadings and documentary evidence. (b) Notwithstanding a written waiver of a hearing by the parties, a majority of the arbitrators may call for and conduct a hearing. In addition, any arbitrator may request the submission of further evidence. 21. Discovery in Exchange Act arbitration is severely limited. Petitioner did not have the right to depose any witnesses. Petitioner did not have the right to compel production of documents from non-parties prior to the arbitration hearing. 22. The NASD instructs its arbitrators to follow a certain script when opening a hearing. Code rule 10326 also requires that hearing sessions be recorded on audiotape, which the NASD, acting pursuant to the authority granted to it by the Commission and the Exchange Act, considers to be an important function at a hearing. 23. The Code requires the parties to exchange witness lists and documents 20 days prior to the commencement of the hearing. In the arbitration which is the subject of this application, no party provided such an exchange.
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24. The Code requires a hearing to be held in every Exchange Act arbitration. However, no such hearing was held on petitioner's claim. Instead, the arbitrators were presented with only written and oral argument by the parties' counsel. The arbitrators did not permit any testimony from petitioner. 25. Following the telephone conference on January 16, 2007, the arbitrators issued an order on January 25, 2007, in which the arbitrators instructed petitioner to amend his statement of claim to include a specific cause of action for breach of written contract. On March 23, 2007, petitioner submitted his amended statement of claim, a true and correct copy of which is attached hereto as Exhibit B and which is incorporated herein by this reference. 26. On or about March 23, 2007, respondent submitted a supplemental brief in support of its motion to dismiss on statute of limitations grounds. On or about April 2, 2007, respondent submitted an answer to petitioner's amended claim. 27. On May 10, 2007, pursuant to the arbitrators' request, the arbitrators held a telephone conference call with counsel for respondent and counsel for petitioner. The arbitrators did not read the script identified in paragraph 22 hereinabove. No audio tape recording was made of the telephone conference call. No witnesses were sworn in. Petitioner was not permitted to present testimony. 28. On or about May 18, 2007, the NASD served the arbitrators' award on petitioner and respondent. The arbitrators dismissed all claims by petitioner. A true and correct copy of the arbitration award is attached hereto as Exhibit C and is incorporated herein by this reference. Grounds for Vacatur 29. The arbitrators' award should be vacated on any one of the following three grounds: (1) the arbitrators exceeded their authority; (2) the arbitrators manifestly disregarded federal law; and (3) the arbitrators manifestly disregarded state law. 30. By dismissing petitioner's claim, the NASD arbitrators exceeded their authority under the arbitration agreement and exceeded the authority granted to them by
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Petition and Application to Vacate Arbitration Award

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the Exchange Act and the Commission. The Code permits dismissals of an Exchange Act arbitration claim only in one of three situations: (1) where the proceeding is dismissed and the parties referred to their judicial remedies or another dispute resolution forum, without prejudice; (2) for willful and intentional material failure to comply with an order of the arbitrators if lesser sanctions have proven ineffective; or (3) at the joint request of all parties. Code rule 10305. None of those three situations were present in the underlying Exchange Act arbitration. 31. The award was not made in accordance with the terms and provisions of the Code as reviewed and approved by the Commission pursuant to the Exchange Act, and therefore was in excess of the arbitrators' authority. 32. As a further and alternate ground for vacating the arbitration award, the arbitrators manifestly disregarded federal law in that they were fully aware of the governing federal law as alleged in paragraph 30 hereinabove and refused to apply it, in reaching their decision. 33. As a further and alternate ground for vacating the arbitration award, the arbitrators manifestly disregarded federal law and state law in that they were fully aware that the statute of limitations found in the California Code of Civil Procedures applied only in civil actions in court, and not in Exchange Act arbitration. Despite so knowing, the arbitrators nonetheless applied the statute of limitations found in the California Code of Civil Procedure. 34. As a further and alternate ground for vacating the arbitration award, the arbitrators manifestly disregarded the law in that they were fully aware that that California law applies the four-year limitation period for an action on a written contract (found in California Code of Civil Procedure section 337(1)) to breaches of implied promises arising out of the contract. Despite so knowing, the arbitrators nonetheless ruled that section 337(1) did not apply to implicit provisions of petitioner's employment agreement with respondents. 35. The arbitrators were fully aware of the law as alleged in paragraphs 30,
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Petition and Application to Vacate Arbitration Award

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Law Offices of

Timothy A. Canning
_____________________________________________________________________ Telephone: (415) 382-7899 Facsimile: (415) 382-9421 Two Commercial Blvd., Suite 203 Website: www.tclaws.com Novato, CA 94949 Email: [email protected]

December 18, 2006

Via facsimile (original) and overnight (3 copies) Fax: 301-527-4766 Panel of Arbitrators c/o Derek Sorrells NASD Dispute Resolution 300 S. Grand Avenue, Suite 900 Los Angeles, CA 90071

cc: via facsimile (1 copy) and overnight (1 copy) Fax: (601) 408-9050 Michael Fortunato Patricia Bailey Tsipras Rubin, Fortunato, Harbison MCS Building, Suite 202 10 S. Leopard Rd Paoli, PA 19301

Re:

Robert Knight v Merrill Lynch, NASD Case No. 06-03430 Claimant's Opposition to Respondents' Motion to Dismiss

Dear Panel: Respondents' motion to dismiss should be denied, for the following reasons: (1) NASD rules do not permit arbitrators to decide a claim without a hearing, unless all parties agree to it; (2) the limitations periods on which respondents rely do not apply in contractual arbitration, but only in court actions; and (3) as respondents know, the essence of this claim derives from an obligation in writing (i.e., a written employment agreement); hence, the applicable time period is four years from the date of termination; and respondents agree that this action was filed within four years of the date of termination. Respondents have endeavored to keep the existence of the written employment agreement hidden from the panel, and from claimants' representatives. Respondents do not mention the written employment agreement in their answer, nor do they discuss it in connection with their motion to dismiss. Respondents refused to provide any documents or substantive responses to claimant; the reason why is now obvious ­ such discovery would defeat their motion to dismiss.
_____________________________________________________________________________________________
North Coast Office

1125 16th St., Suite 204 PO Box 4201, Arcata, CA 95518

Telephone:

(707) 825-1620

Fax:

(707) 760-3523

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December 18, 2006 Page 2 _________________________________ (1) NASD Rules Prohibit Dismissal Without Hearing NASD rules specifically prohibit arbitrators from deciding public customer arbitration cases based only on the pleadings and documentary evidence ­ which is exactly what respondents request here -- unless all parties agree to such a procedure. Claimant has not and does not agree to that procedure; hence NASD Rule 10303(a) specifically bars respondents' substantive motion. Rule 10303(a) prohibits this panel from deciding claimant's case solely on the pleadings and documentary evidence. To quote the rule verbatim: Any dispute, claim or controversy, except as provided by Rule 10203 (simplified industry arbitration) or Rule 10302 (Simplified arbitration) shall require a hearing unless the parties waive such hearing in writing and request that the matter be resolved solely on the pleadings and documentary evidence. NASD Code of Arbitration Rule 10303 (a) (emphasis added). Rule 10303 (a) is not ambiguous. Since only the "pleadings" have been presented to the panel, this panel cannot yet decide this claim. This panel would be acting in contravention of NASD arbitration rules if it were to grant respondents' motion to dismiss. Other rules in the NASD Code support claimant's right to a hearing. Rule 10305 only authorizes the panel to dismiss an action without prejudice, and thereby refer the parties to their judicial remedies ­ in other words, send this matter to court. That rule does not, however, permit a dismissal with prejudice by way of dispositive motion ­ which is what respondents now seek. Respondents have not requested that this matter be sent into court or to another arbitration forum. The Code of Arbitration Procedure simply does not allow dispositive motions of this sort to be determined by arbitrators without the benefit of a full and complete evidentiary hearing. It is only after discovery is completed and after testimony is taken that arbitrators have the facts necessary to make informed and fair decision(s) regarding respondents' culpability. The unfairness of an evidence-based dispositive motion in arbitration is that there are no rules or standards by which such motions should be resolved. Should the standard be that respondents have to prove that claimant has failed to state a claim upon which relief should be granted (the standard for demurrers in state court)? Or should the burden be on respondents to show that there are no triable issues of material fact? Or is the burden on claimant to prove his case now, by a preponderance of the evidence, without the benefit of any testimony? The NASD Code offers no guidance whatsoever on just what claimant needs to do to oppose such a dispositive motion, nor does it offer any guidance whatsoever on what standards the panel should apply in deciding it. California law also does not support respondents' motion to dismiss. There are only two published California case involving pre hearing motions in arbitration: Reed v. Mutual Service

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December 18, 2006 Page 3 _________________________________ Corp. (2003) 106 Cal.App.4th 1359. and Schlessinger v. Rosenfeld, Meyer & Susman (1995) 40 Cal.App.4th 1096. However, neither case authorizes substantive motions to dismiss in NASD arbitrations; and respondents have not cited one single California statutory or case law to support their claim that claimant is not entitled to a hearing here. In Reed, the court addressed an eligibility motion ­ i.e. whether an arbitration claim was eligible to be heard in NASD arbitration under the NASD's "six year rule". Here, in contrast, respondents do not contend that this case is ineligibile for arbitration ­ for clearly it is eligibile (i.e., filed within 6 years). Schlessinger also does not support respondents motion. First, that case involved a contractual arbitration conducted under AAA arbitration rules, a different set of rules than the NASD arbitration rules. Further, the parties in Schlessinger had an opportunity to take extensive discovery, including depositions. In fact, the parties in Schlessinger had agreed that California's Civil Discovery Act would apply in their arbitration, which includes interrogatories, request for admissions, and other forms of discovery that require sworn responses, and which can be used as evidence. Schlessinger, at 1101, fn 2. The Schlessinger court expressly limited its holding, stating: [W]e caution that our holding should not be taken as an endorsement of motions for summary judgment or summary adjudication in the arbitration context. . . . Finally, especially where the arbitration lacks an explicit procedure for dispositive motions, courts must ensure that the party opposing such a motion is afforded a fair opportunity to present its position. Schlessinger, 40 Cal.App.4th at 1111-12 (citations omitted, emphasis added). In contrast to the facts of Schlessinger, claimant here has not had a fair opportunity to present his position. Claimant has not had the opportunity to depose or cross-examine any witnesses under oath. Neither party has had the same type of discovery rights permitted under California's Discovery Act, and to which the parties in Schlessinger had access. In fact, here respondents have blocked claimant's efforts to obtain discovery, by refusing to produce any documents, and refusing to produce any information ­ including information surrounding the written employment agreement between the parties. And, in further contrast to the AAA rules construed in Schlessinger, the NASD Code of Arbitration Procedure has no explicit procedure for dispositive motions. The Schlessinger court broadly interpreted the arbitrators' obligation "to hear evidence" under the California Arbitration Act (Code Civ. Proc. § 1286.2), but then noted that the statute permits parties to adopt a different procedure. Schlessinger, 40 Cal.App.4th at 1106.

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Law Offices of Timothy A. Canning

December 18, 2006 Page 4 _________________________________ Here, the parties have adopted a different procedure: all parties agreed (when signing the Uniform Submission Agreement) that a hearing would be required (NASD Rule 10303), with the "hearing" consisting of: parties and their counsel present (NASD Rule 10317); pre hearing exchange of documents and witnesses (Rule 10321 (c)); sworn testimony (Rule 10327); and a verbatim transcript of the proceedings (NASD rule 10326). To put it simply, respondents want all the benefits of litigation, with none of the procedures that would ensure that each party obtained a fair hearing. 2) The Time Limitations Found in the Code of Civil Procedure Do Not Apply In Arbitrations Held in California In support of their motion, respondents rely solely on statute of limitations found in Part 2, Title 2 of the California Code of Civil Procedure. (Part 2, Title 2 encompasses sections 312 through 366.3; respondents rely on sections 335.1, 339, and 340 in their motion). Part 2, Title 2 applies only to civil actions; in fact, Part 2 is titled, "Of Civil Actions" and Title 2 is titled, "Of The Time of Commencing Civil Actions". Section 312 ­ which immediately precedes the statutes of limitations cited by respondents ­ is expressly limited in application to civil actions only. That section states: Civil actions, without exception, can only be commenced within the periods prescribed in this title, after the cause of action shall have accrued, unless where, in special cases, a different limitation is prescribed by statute. Code Civ. Proc. § 312 (emphasis added). This contractual arbitration is not a civil action, as that term is defined by statute. Section 22 of the Code of Civil Procedure defines an action as a proceeding in a court of justice by which one party prosecutes another for the declaration, enforcement, or protection of a right, the redress or prevention of a wrong, or the punishment of a public offense. Code Civ. Proc.§ 22 (emphasis added). Claimant does not contend that there are no time bars to arbitration claims. The six year eligibility rule (NASD rule 10304), as well as other time periods that are not limited to proceedings in a court of justice, may be applicable in particular cases. Further, the doctrine of laches (unreasonable delay in bringing a claim plus prejudice to the respondents as a result of the delay) may also be a time-bar to claims filed in arbitration. However, respondents have not raised those other potential time bars in their motion.

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December 18, 2006 Page 5 _________________________________ Instead, respondents rely solely on the statutes of limitations in the Code of Civil Procedure, which apply only to proceedings in a court of justice. 3) The Applicable Statutes of Limitation Has Not Run But even if the statute of limitations found in Part 2, Title 2 of the Code of Civil Procedure applied to this contractual arbitration, this action was still timely filed, for it is founded upon an instrument in writing ­ a written employment agreement. The applicable statute of limitation here is therefore four years. Respondents admit ­ as they must -- that this action was filed within four years of the date of the wrongful termination. Hence, this claim was timely filed. In making their motion, respondents conceal from this panel a crucial fact: the employment agreement between claimant and respondents was in writing. That fact is key ­ and fatal to respondents' motion ­ because California law provides a four-year time period for actions having its source in a written instrument. Here, there is a written employment agreement between respondents and claimant. California's Code of Civil Procedure section 337(1). provides for a 4-year period for bringing an "action upon any contract, obligation or liability founded upon an instrument in writing." (emphasis added). This four year period runs from the date of the alleged breach. The four-year limitation period for an action on a written contract (Code Civ. Proc. § 337(1)), applies not only to the breach of an express obligation under a written contract, but also to breach of an implied promise arising out of the contract. Amen v. Merced County Title Co. (1962) 58 Cal.2d 528, 532; Bruckman v. Parliament Escrow Corp. (1987) 190 Cal.App.3d 1051, 1058; and see 3 Witkin, Cal. Procedure, Actions (4th ed. 1997) §§ 475, 476 p 599 - 600. This same four year period also applies to claims of negligent performance of any obligation that arises out of this written instrument. See Bruckman v Parliament Escrow Corp., supra, 190 Cal.App.3d 1051, 1057-1058. Or, to put it another way, claimant's claim here is not a tort-based negligence (ie, an obligation imposed by law, such as the obligation to drive safely), but a contract-based negligence (ie, an obligation created by contract). Hence, claimant's claim for negligent performance of respondents' obligations founded upon an instrument in writing are also subject to a four-year time period. Respondents know, of course, that Merrill had a written employment agreement with claimant, as they have undoubtedly reviewed his entire employment file by this stage of the proceedings. Their motion dishonestly ignores the written agreement, and attempts to characterize the relationship between the parties as something other than it was, and the claim for something other than it is.

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