Cheng v David Learner Assoc., Inc.

[*1] Cheng v David Learner Assoc., Inc. 2012 NY Slip Op 51035(U) Decided on June 6, 2012 Supreme Court, Kings County Velasquez, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on June 6, 2012
Supreme Court, Kings County

David C. Cheng and Amy K. Cheng, Plaintiff,

against

David Learner Associates, Inc. and KYLE CORGAN, Defendants.



24375/11



Vincent S. Wong, Esq for plaintiff

39 East Broadway, Suite 304

New York, New York 10002

(212) 349-6099

Alonso, Andalkar, Toto, Facher & Mac Avoy, P.C.

920 Broadway, 16th Floor

New York, New York 10010

(2120 598-5900

Richard Velasquez, J.

After oral argument and a review of the submissions herein, the Court finds as follows:

BACKGROUND

Plaintiffs David and Amy Cheng entered into an agreement to open an investment account with Defendant David Lerner Associates ("DLA") and Kyle Corgan, wherein they agreed to purchase five thousand shares of Apple REIT Seven, Inc. ("Apple REIT Seven"). Plaintiffs also executed a subscription agreement. The Client Agreement and Subscription Agreement shall hereinafter be collectively [*2]referred to as the "Agreements."

Plaintiffs brought this action against defendant DLA and the individual broker for Plaintiff's account, Kyle Corgan, alleging that the arbitration clauses are void and unenforceable because the contract was signed as a result of intentional coercion, fraud, misrepresentations and duress. Defendant DLA demanded Plaintiffs dismiss this action and submit to arbitration with the Financial Industry Regulatory Authority "FINRA" (the regulatory successor to NASD). Plaintiffs replied rejecting DLA's demand. Defendant DLA now moves to compel arbitration.

Discussion

In their motion to compel arbitration, Defendants David Lerner Associates, Inc. et al asks the court to stay Plaintiffs David and Amy Cheng's action before this court pending completion of the arbitration. Under New York Civil Practice, CPLR §7503(a), "a party aggrieved by the failure of another to arbitrate may apply for an order compelling arbitration." Defendant DLA demanded Plaintiff submit to arbitration with FINRA, to which Plaintiff refused. DLA's motion before the court to compel arbitration is therefore proper.

To determine whether to grant the motion and direct the parties to arbitrate, the court must decide whether there is a substantial question as to whether a valid agreement was made (CPLR 7503(a)).

There is a clear judicial policy in favor of arbitration. The Appellate Division, Second Department has held that arbitration is considered "an effective and expeditious means of resolving disputes between willing parties desirous of avoiding the expense and delay frequently attendant to the judicial process." Maross Const., Inc. v. Cent. New York Reg'l Transp. Auth., 66 NY2d 341, 345, 488 N.E.2d 67 (1985) (internal citations omitted). To establish this policy, Congress enacted the Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1-16. Section two places arbitration agreements on equal footing with all other contracts, "A written provision in...a contract...to settle by arbitration a controversy thereafter arising out of such contract...shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." Arbitration agreements, however, are not absolute, and may be challenged as invalid and unenforceable.

According to the Supreme Court, challenges to the validity of arbitration agreements "upon such grounds as exist at law or in equity for the revocation of any contract" can be divided into two types: (1) a challenge to the specific agreement to arbitrate and (2) a challenge to the contract as a whole. Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 444, (2006). Plaintiffs David and Amy Cheng have [*3]raised both challenges, both of which are discussed in turn.

Is the Arbitration Agreement Itself Valid?

Plaintiffs allege that no valid and enforceable arbitration agreement was entered into with defendants due to fraudulent inducement to contract. To determine whether an arbitration agreement is valid and enforceable, this court looks to the plain language of the clause at issue. When the language of the arbitration clause is broad enough to encompass the claims of fraudulent inducement, the Second Department has held that a motion to compel arbitration should be granted. Cologne Reinsurance Co. of Am. v. S. Underwriters, Inc., 218 AD2d 680, 681, 630 N.Y.S.2d 548, 549 (1995). The agreements in this case contain identical pre-dispute arbitration clauses, which state in relevant part:

The customer (plaintiffs) agrees to settle by arbitration any controversy between him/her and the broker concerning this agreement, his/her account(s), or account transactions, or in any way arising from his/her relationship with broker whether entered into prior, on, or subsequent to this date. Such arbitration will be conducted before and according to the arbitration rules of the National Association of Securities Dealers, inc (NASD) or any other self-regulatory organization of which broker is a member (emphasis added).

A plain reading of this language, particularly the provisions that apply it to "any controversy...concerning this agreement, his/her account(s), account transactions" satisfies the broad language requirement. This language is not only sufficiently similar, but even expands upon the language used in Cologne. The Cologne provisions read, "any dispute arising out of or related to the interpretation of this agreement" will be handled through arbitration. Id. The agreements here broaden this to also include disputes "in any way arising from his/her relationship with broker." Thus, these agreements contemplate the arbitration of all disputes arising out of plaintiff's relationship with DLA. They expressly empower the defendants to seek arbitration for any dispute arising out of this relationship, and this includes the claims for fraudulent inducement. Accordingly, the arbitration clauses are valid and enforceable. The analysis, however, does not end here. The court examines next whether the contract as a whole is rendered invalid because it was fraudulently induced.

Is the Contract as a Whole Invalid Because of Fraudulent Inducement?

Plaintiffs argue that because the entire contract was induced through fraud as [*4]part of defendant's scheme to take advantage of them, there exists no valid agreement between the parties on which to compel arbitration. Plaintiffs, citing Matter of Exercycle Corp, further claims that the court must enjoin arbitration "where fraud or duress, practiced against one of the parties, renders the [arbitration] agreement voidable." 9 NY2d 329, 334, 174 N.E.2d 463, 465 (1961). Additionally, plaintiffs allege that they had no choice in negotiating terms or provisions of the contract, and that "the contracts are form contracts with no modifications or changes of any sort". (¶ 30). Plaintiff's claim that because the contracts at issue are form contracts, "a court should give the provision and the circumstances surrounding its inclusion in the contract great scrutiny" Matter of Weinrott 32 NY2d 190, 344 N.Y.S. 848 (NY 1973).

However, subsequent case law, including a United States Supreme Court decision directly on point, has expressly determined a claim of fraud in the inducement to enter into a contract containing an arbitration clause is to be resolved by arbitrators, and not the courts. Prima Paint Corp v Flood & Conklin Mfg. Co., 388 U.S 395, 403-404 (1967). Further, the case on which Plaintiff's rely, Weinrott, is distinguishable from this case because it stands for the proposition that as a "general rule" under a broad arbitration provision, the claim of fraud in the inducement should be determined by the arbitrators. 190 at 199. As stated above, this court has already found the arbitration clauses in the agreements at issue to be broad. Therefore it follows that the fraudulent inducement claims should be decided by an arbitrator.

Plaintiff correctly notes that New York statute CPLR 7503 states that the court must decide whether there is a substantial question as to whether a valid agreement was made. Nevertheless, the New York Court of Appeals noted in Weinrott that adopting a policy in favor of arbitration is "consistent with the policy adopted by the Federal courts, and is significant since the Federal arbitration statute is almost identical to, and is derived from [New York's] arbitration statute." Id at 198. Moreover, in 2006 the Supreme Court held in Buckeye Check Cashing, Inc. V Cardegna that "even in the context of state-law claims brought in state court, the FAA created a body of federal substantive law which applies in both state and federal courts and state law cannot bar enforcement." 546 U.S. 440, 1209 (2006)(internal citations omitted). While plaintiff has not raised the issue of whether state or federal law applies in this case, it is important to note that this court must rule on this issue in accordance with the U.S. Supreme Court.

It is also worth noting that plaintiffs by their own admission state, "it was the entire contract that was induced through fraud, not just a particular provision" (¶ 28). The Supreme Court treats challenges to the contract as a whole differently than challenges to the arbitration clause itself. Because plaintiff's primary challenge is not [*5]to arbitration clause itself, the arbitrator must consider the issue of the contract's validity as a whole in the first place. Buckeye, 546 at 444-445. Therefore, as delineated in the aforementioned cases, an arbitrator must determine the claim of fraud in the inducement of the contract. Accordingly, this court holds that defendant's motion to compel arbitration be and is hereby granted.[FN1]

ENTER:

________________________________________

RICHARD VELASQUEZ, J.S.C. Footnotes

Footnote 1:

This court does not view this decision as a decision in favor of defendant's substantive case. Plaintiffs should be encouraged, as is this court, by recent disciplinary actions taken by the Financial Industry Regulatory Authority, FINRA, against Defendant David Lerner Associates. This is not the first time DLA has faced such charges, and in fact, DLA has a long history of fines and disciplinary actions from the regulatory authority. Further, it appears that FINRA is aware of the potential machinations surrounding the sale of various Apple RIET investments in particular by DLA. In October 2011, FINRA issued an investor alert about non-traded REIT investments, calling attention to the inconsistent dividends, illiquidity and inaccurate valuations associated with the products. As recent as May of 2011, FINRA found that David Lerner Associates sold $300 million worth of Apple real estate investment trusts to unsophisticated investors without considering whether they were suitable to clients. See, http://www.investorprotection.com/blog/category/stockbroker-investigation/david-lerner/. In light of these facts, this court remains confident that arbitration is the proper venue in which to decide these issues.