Michael E. Hirsch v. Amper Financial Services, LLC (070751) , 215 N.J. 174 ( 2013 )

SYLLABUS
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the
convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the
interest of brevity, portions of any opinion may not have been summarized.)
Michael E. Hirsch v. Amper Financial Services, LLC (A-9-12) (070751)
Argued May 13, 2013 -- Decided August 7, 2013
LaVECCHIA, J., writing for a unanimous Court.
The issue in this appeal is whether it was proper to compel arbitration between a non-signatory and a
signatory to a contract containing an arbitration clause on the basis that the parties and claims were sufficiently
intertwined to warrant application of equitable estoppel.
This action involves claims by plaintiffs Michael Hirsch, Robyn Hirsch, and Hirsch, LLP, that they lost
money invested in securities that were part of a “Ponzi” scheme. In 2002, plaintiffs’ accountant, EisnerAmper LLP,
referred them to Marc Scudillo, a financial advisor employed by Amper Financial Services, LLC (AFS), 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 invested in a
portfolio with a conservative investment strategy. Their relationship was not formalized by a written contract. Later,
on Scudillo’s recommendation, plaintiffs purchase securitized notes from Medical Provider Financial Corporation
(Med Cap) totaling $550,000. Plaintiffs signed two applications with SAI for the purchase of the Med Cap notes.
Scudillo signed each of these agreements as the “registered representative” of SAI. Each SAI application contained
an arbitration clause requiring disputes to be arbitrated by the Financial Industry Regulatory Authority (FINRA).
In 2008, one of the notes defaulted. Scudillo assured plaintiffs that the Med Cap investments were still safe.
In 2009, the United States Securities and Exchange Commission launched an investigation and charged Med Cap
senior officers with securities fraud. Plaintiffs eventually lost their investment in the Med Cap notes and filed two
separate actions. First, they instituted FINRA arbitration proceedings against SAI and Scudillo, alleging breach of
contract, fraud, breach of fiduciary duties, negligence, violations of federal and state securities laws, and conspiracy.
Second, plaintiffs filed a complaint in the Law Division against EisnerAmper and AFS, alleging breach of contract,
violations of the New Jersey Consumer Fraud Act, breach of fiduciary duties, negligent supervision,
misrepresentation, violations of the New Jersey Uniform Securities Law, and malpractice.
In the Law Division action, AFS and EisnerAmper denied plaintiffs’ allegations and filed a third-party
complaint against SAI for indemnification and contribution. SAI moved to compel arbitration, arguing that (1) the
language of the arbitration clause is sufficiently broad to cover the disputes with AFS and EisnerAmper; (2) AFS is
a party to the arbitration clause because Scudillo, who served as a representative for both SAI and AFS, signed the
arbitration agreement; (3) AFS and EisnerAmper are subject to the arbitration agreement under agency principles;
and (4) AFS and EisnerAmper are subject to the arbitration agreement under the doctrine of equitable estoppel. AFS
and EisnerAmper joined in SAI’s motion. The trial court granted the motion, finding that plaintiffs were attempting
to circumvent the policy favoring arbitration by not naming SAI as a defendant in the Law Division action.
The Appellate Division affirmed for different reasons. Relying on EPIX Holdings Corp. v. Marsh &
McLennan Cos., Inc., 410 N.J. Super. 453 (App. Div. 2009), the panel concluded that the “complex and intertwined
relationship” between the parties provides “sufficient basis to invoke estoppel” to compel arbitration. The Court
granted plaintiffs’ petition for certification. 212 N.J. 288 (2012).
HELD: Although traditional contract principles may in certain cases warrant compelling arbitration absent an
arbitration clause, the intertwinement of the parties and claims in a dispute, viewed in isolation, is insufficient to
warrant application of equitable estoppel to compel arbitration.
1. The strong preference to enforce arbitration agreements is not without limits. The preliminary question is whether,
under state contract-law principles, there is a valid agreement to arbitrate. This arbitrability analysis underscores the
fundamental principle that a party must agree to submit to arbitration. In the absence of an express arbitration clause,
courts can compel parties to arbitrate by applying principles of contract law, such as equitable estoppel. (pp. 13-16)
2. In EPIX Holdings, the appellate panel held that a non-signatory to an arbitration agreement, which was the parent
company of a signatory, may compel the other signatory to arbitrate because the claims and parties were
“substantially connected” and the claims fell within the scope of the arbitration clause. Another case, Angrisani v.
Financial Technology Ventures, L.P., 402 N.J. Super. 138 (App. Div. 2008), involved claims against Nexxar Group,
Inc., with whom the plaintiff had an employment contract containing an arbitration clause, and claims against
Financial Technology Ventures, L.P. (FTV), from whom the plaintiff had purchased Nexxar stock pursuant to an
agreement that did not include an arbitration clause. The panel concluded that the plaintiff could not be compelled to
arbitrate his claims against FTV because he did not engage in any conduct that could support a finding of equitable
estoppel. The panel noted that other cases applying equitable estoppel to compel arbitration generally involved
claims against a non-signatory to the contract that was closely aligned to a contracting party, such as a parent or
successor corporation. In this appeal, the panel’s decision further reflects an emerging “intertwinement” theory--
described as an extension of equitable estoppel--that the Court now addresses and limits. (pp. 17-21)
3. Courts properly have recognized that arbitration may be compelled by a non-signatory on the basis of agency
principles. That said, use of equitable estoppel as a basis to compel arbitration has limited applicability. Application
of estoppel to compel arbitration based solely on the connection between the parties and claims overlooks that the
parties are giving up their right to sue in court when they agree to use arbitration to resolve their disputes. The
decision to compel arbitration in EPIX Holdings was appropriate given the agency relationship between the parent
and subsidiary corporations in the litigation, not because of a theory of intertwinement. Equitable estoppel is
invoked in the interests of justice and fairness. It does not apply absent proof that a party detrimentally relied on
another party’s conduct. (pp. 21-24)
4. In this case, the only arbitration clause is in the contract between plaintiffs and SAI. The clause mentions no other
parties aside from Scudillo, who served as SAI’s representative when executing the agreement. There is no express
arbitration obligation with respect to AFS or EisnerAmper. Also, AFS and EisnerAmper did not have standing to
compel arbitration under an agency relationship. Scudillo signed the contract 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 defendants all arose out of the same alleged Ponzi scheme and the parties had some form of relationship with
each other, that intertwinement of claims and parties alone is insufficient to warrant application of equitable
estoppel. There is no evidence in the record that AFS or EisnerAmper expected to arbitrate their disputes in
detrimental reliance on plaintiffs’ conduct. The motion to compel arbitration should have been denied. (pp. 24-28)
The judgment of the Appellate Division is REVERSED, and the matter is REMANDED to the Law
Division for further proceedings.
CHIEF JUSTICE RABNER; JUSTICES ALBIN, HOENS, and PATTERSON; and JUDGES
RODRÍGUEZ and CUFF (both temporarily assigned) join in JUSTICE LaVECCHIA’s opinion.
2
SUPREME COURT OF NEW JERSEY
A-9 September Term 2012
070751
MICHAEL E. HIRSCH, ROBYN J.
HIRSCH, and HIRSCH, LLP,
Plaintiffs-Appellants,
v.
AMPER FINANCIAL SERVICES,
LLC, and EISNERAMPER, LLP
(f/k/a AMPER, POLITIZNER &
MATTIA, LLP),
Defendants/Third-Party
Plaintiffs-Respondents,
v.
SECURITIES AMERICA, INC.,
Third-Party Defendant-
Respondent.
Argued May 13, 2013 – Decided August 7, 2013
On certification to the Superior Court,
Appellate Division.
Joel N. Kreizman argued the cause for
appellants (Scarinci & Hollenbeck,
attorneys).
Denis C. Dice, a member of the Pennsylvania
bar, argued the cause for respondent
(Marshall, Dennehey, Warner, Coleman &
Goggin, attorneys; Joel M. Wertman, on the
brief).
Craig S. Hilliard on behalf of respondents
Amper Financial Services, LLC and
EisnerAmper, LLP join in the brief by
respondent Securities America, Inc. (Stark &
Stark, attorneys).
JUSTICE LaVECCHIA delivered the opinion of the Court.
Commercial arbitration has developed as a popular method of
dispute resolution for complex business relationships. Parties
to a contract can customize an arbitration to handle particular
types of business transactions, including adopting their own
procedural rules, selecting the substantive law applicable to
the dispute, and appointing arbitrators with specialized
expertise. Additionally, parties can take solace in knowing
that the arbitral award likely will be confirmed and enforced in
light of the deference for arbitration’s finality. For those
reasons, arbitration can be a cost-effective and speedy method
of resolving litigation.
However, because parties must waive their right to pursue
claims in state or federal court, there ordinarily must be an
agreement to arbitrate. Typically, parties reach an agreement
by including an arbitration clause in a contract, which provides
evidence to a court that the parties agreed to arbitrate
disputes. A court then can determine whether a particular claim
falls within the scope of the arbitration clause.
In this case, the trial court granted a motion to compel
arbitration between a non-signatory and a signatory to a
contract containing an arbitration clause. Even though the
2
signatory had not expressly agreed to arbitrate any disputes
with the non-signatory, the court found that the parties and
claims were sufficiently intertwined to warrant application of
equitable estoppel. The Appellate Division affirmed.
We now reverse and hold that the trial court should have
denied the motion to compel arbitration. Commercial arbitration
is a creature of contract. 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, viewed in isolation, is insufficient to
warrant application of equitable estoppel.
Equitable estoppel should be used sparingly to compel
arbitration. It is a theory “designed to prevent injustice by
not permitting a party to repudiate a course of action on which
another party has relied to his detriment.” Knorr v. Smeal, 178
N.J. 169, 178 (2003). Equitable estoppel is more properly
viewed as a shield to prevent injustice rather than a sword to
compel arbitration.
I.
A.
Michael Hirsch, Robyn Hirsch, and Hirsch, LLP (collectively
plaintiffs) lost a significant sum of money invested in
3
securities that allegedly were part of a “Ponzi” scheme.1
Plaintiffs filed suit against various parties involved in the
purchase of the securities: Securities America, Inc. (SAI),
Marc Scudillo, Amper Financial Services, LLC (AFS), and
EisnerAmper, LLP.
Scudillo was employed as a financial advisor by AFS, a
financial services firm associated with EisnerAmper, an
accounting firm.2 EisnerAmper often referred clients to AFS for
wealth planning services. Scudillo, who maintained brokerage
licenses, was responsible for advising clients on issues such as
asset allocation, retirement planning, and insurance.
Meanwhile, Scudillo also served as a representative for
SAI, a separate corporation that served as a broker-dealer
handling securities transactions. According to plaintiffs,
Scudillo was compensated by SAI as a salesperson for promoting
certain financial products.
In the middle of 2002, EisnerAmper referred plaintiffs, who
had been using EisnerAmper as their accountant, to Scudillo and
1
A “Ponzi” scheme is “a classic, pyramid-style investment
fraud,” in which “no investment is ever made.” In re
Application of Matthews, 94 N.J. 59, 64 (1983). Rather, “the
promised returns for the first set of investors are paid from
the proceeds garnered from a second set of investors. The
second set of investors is then paid off with the funds
deposited by a third set of investors, and so on.” Ibid.2
Scudillo was the managing partner and fifty percent owner of
AFS. The other fifty percent ownership interest in AFS was held
by EisnerAmper.
4
AFS for investment planning. Plaintiffs hired Scudillo and
agreed to invest approximately $3.4 million in an initial
portfolio. Plaintiffs agreed to a conservative investment
strategy, which Scudillo described in several documents dated
November 2002 as “[w]ealth building through a prudent and
conservative allocation of investments” and “[w]illing to
sacrifice a higher return for principal stability.”
Scudillo’s compensation was calculated as a percentage of
plaintiffs’ total asset value under his management. As part of
the arrangement, Scudillo met with plaintiffs several times per
year to discuss any changes in investment strategies. However,
plaintiffs’ relationship with Scudillo was never formalized by a
written contract.
In 2004, Scudillo recommended that plaintiffs purchase
securitized notes in the amount of $550,000. On Scudillo’s
recommendation, plaintiffs purchased two notes from Medical
Provider Financial Corporation (Med Cap): $300,000 in a Class
‘A’ Note on July 13, 2004; and $250,000 in a Class ‘A’ Note on
April 10, 2006. Plaintiffs reinvested -- again on Scudillo’s
advice -- the principal from these two investments into another
two Med Cap notes: $300,000 in a Class ‘A’ Note on July 11,
2007; and $250,000 in a Class ‘B’ Note on May 6, 2008.
Notably, plaintiffs signed two applications with SAI for
the purchase of the Med Cap notes: one on June 29, 2004, in the
5
name of Hirsch, LLP, and the other on June 7, 2006, in the names
of Michael and Robyn Hirsch. Scudillo signed each of these
agreements as the “registered representative” and the
“principal” of SAI. Each of the SAI applications incorporated
an arbitration clause:
This agreement contains a predispute
arbitration clause. By signing an
arbitration agreement the parties agree as
follows:
A) All parties to this agreement are giving
up the right to sue each other in court,
including the right to a trial by jury,
except as provided by the rules of the
arbitration forum in which a claim is
filed.
B) Arbitration awards are generally final
and binding, a party’s ability to have a
court reverse or modify an arbitration
award is very limited.
C) The ability of the parties to obtain
documents, witness statements and other
discovery is generally more limited in
arbitration than in court proceedings.
D) The arbitrators do not have to explain
the reason(s) for their award.
E) The panel of arbitrators will typically
include a minority of arbitrators who
were or are affiliated with the
securities industry.
F) The rules of some arbitration forums may
impose time limits for bringing a claim
in arbitration. In some cases, a claim
that is ineligible for arbitration may
be brought in court.
6
G) The rules of the arbitration forum in
which the claim is filed, and any
amendments thereto, shall be
incorporated into this agreement.
All controversies that may arise between us
(including, but not limited to controversies
concerning any account, order or
transaction, or the continuation,
performance, interpretation or breach of
this or any other agreement between us,
whether entered into or arising before, on
or after the date this account is opened)
shall be determined by arbitration in
accordance with the rules then prevailing of
the New York Stock Exchange, Inc., or the
[National Association of Securities Dealers
(NASD)] as I may designate. If I do not
notify you in writing of my designation
within five (5) days after I receive from
you a written demand for arbitration, then I
authorize you to make such designation on my
behalf. I understand that judgment upon any
arbitration award may be entered in any
court of competent jurisdiction.
Based on that contractual language, arbitration was to be
handled by the Financial Industry Regulatory Authority (FINRA),3
3
In many ways, FINRA arbitration procedures are similar to those
used in other institutional arbitrations, such as the American
Arbitration Association. The claimant initiates the proceedings
by filing a statement of claim, the respondent files an answer,
and the parties together appoint three arbitrators. FINRA Code
of Arbitration Procedure for Customer Disputes §§ 12302-12303,
12400-12403 [hereinafter FINRA Code]. Prehearing conferences
are scheduled to resolve preliminary issues, and discovery
proceeds according to the Codes of Arbitration Procedure. Id.
§§ 12500-12501, 12505-12514. At the conclusion of discovery, a
hearing is held to allow the parties to present evidence and
arguments in support of their claims. Id. § 12600. After the
hearing, the arbitrators consider the issues and render an
award. Id. § 12904.
An award rendered at the conclusion of FINRA arbitration is
subject to limited review in court. The Federal Arbitration Act
7
an organization “created through the consolidation of NASD and
the member regulation, enforcement and arbitration operations of
the New York Stock Exchange” in July 2007. FINRA, NASD and NYSE
Member Regulation Combine to Form the Financial Industry
Regulatory Authority - FINRA, available at
http://www.finra.org/Newsroom/NewsReleases/2007/p036329 (last
visited July 25, 2013).
B.
In 2008, the Class ‘A’ Med Cap Note for $300,000 defaulted.
According to plaintiffs, Scudillo reassured them that the
investment was still safe, and, at all relevant times,
maintained that the Med Cap notes were low-risk securities
consistent with plaintiffs’ investment goals.
The following year, plaintiffs’ investments in the Med Cap
notes suffered additional setbacks. The United States
Securities and Exchange Commission (SEC) launched an
investigation into Med Cap and placed all interest payments on
hold. In July 2009, the SEC charged Med Cap senior officers
with securities fraud and placed the corporation in
receivership. Then, in January 2010, the Commonwealth of
Massachusetts launched its own investigation into Med Cap and
provides that a court only may vacate an award in limited
circumstances. 9 U.S.C.A. § 10. If the award is not ultimately
vacated, the court can confirm or modify the award. 9 U.S.C.A.
§§ 9, 11.
8
reached similar conclusions. Taken together, these
investigations indicated that the Med Cap notes were being
operated as a Ponzi scheme.
Plaintiffs eventually lost the entirety of their investment
in the Med Cap notes and filed two separate actions in October
and November 2010. First, plaintiffs instituted arbitration
proceedings with FINRA against SAI and Scudillo in October 2010.
Plaintiffs alleged breach of contract, fraud, breach of
fiduciary duties, negligence, gross negligence, unjust
enrichment, violations of federal and state securities laws, and
conspiracy. Second, plaintiffs filed a complaint in the Law
Division, including a demand for trial by jury, against AFS and
EisnerAmper in November 2010. Plaintiffs alleged breach of
contract, violations of the New Jersey Consumer Fraud Act,
breach of fiduciary duties, negligent supervision, negligent
misrepresentation, violations of the New Jersey Uniform
Securities Law, and professional malpractice.
In January 2011, AFS and EisnerAmper filed an answer
denying the entirety of the allegations, and they filed a third-
party complaint against SAI. In their third-party complaint,
AFS and EisnerAmper sought indemnification and contribution,
arguing that should they be found liable to plaintiffs, SAI was
a joint tortfeasor.
9
Several months later, SAI filed in the Law Division a
Motion to Compel Arbitration and Stay Proceedings Pending
Arbitration. In its motion, SAI argued that (1) the language of
the arbitration clause is sufficiently broad to cover the
disputes with AFS and EisnerAmper; (2) AFS is a party to the
arbitration clause because Scudillo, who served as a
representative for SAI and AFS, signed the arbitration
agreement; (3) AFS and EisnerAmper are subject to the
arbitration agreement under agency principles; and (4) AFS and
EisnerAmper are subject to the arbitration agreement under the
doctrine of equitable estoppel. AFS and EisnerAmper joined in
SAI’s Motion to Compel Arbitration, and plaintiffs opposed the
motion.
After hearing oral argument on the motion, the trial court
granted SAI’s motion. The court relied on Alfano v. BDO
Seidman, LLP, 393 N.J. Super. 560 (App. Div. 2007), in
concluding that plaintiffs were “attempting to circumvent the
policy favoring arbitration” by failing to name SAI as a
defendant in the civil action filed in the Law Division.
The Appellate Division affirmed the trial court’s judgment
but relied on a different rationale. First, the panel
acknowledged this state’s “long-standing policy favoring
arbitration as a speedy and efficient approach to dispute
resolution,” as well as the Federal Arbitration Act’s preference
10
to resolve contractual ambiguities in favor of arbitration.
Second, the panel broadly interpreted the arbitration clause in
light of the preference for arbitration. Third, the panel
applied equitable estoppel -- predominantly using the analysis
from EPIX Holdings Corp. v. Marsh & McLennan Cos., Inc., 410
N.J. Super. 453, 463-68 (App. Div. 2009) -- to conclude that
compelling arbitration was the appropriate course of action. In
its view, “[t]he complex and intertwined relationship between
and among plaintiffs, Scudillo, EisnerAmper and AFS is an
‘integral’ one which provides ‘sufficient basis to invoke
estoppel,’” (quoting id. at 466).
We granted plaintiffs’ petition for certification. Hirsch
v. Amper Fin. Servs., LLC, 212 N.J. 288 (2012).
II.
Plaintiffs argue that the Appellate Division erred in
affirming the order compelling arbitration. They maintain that
arbitration can only be compelled when parties agree to
arbitrate their disputes by inserting an arbitration clause into
a contract. Because the arbitration clause here only applied to
disputes arising between plaintiffs and SAI, the arbitration
should exclude AFS and EisnerAmper.
Plaintiffs contend that the Appellate Division’s
application of equitable estoppel to compel arbitration should
be rejected because such a decision negates the contractual
11
requirement for arbitration. Alternatively, even should
equitable estoppel be appropriate, plaintiffs argue that its
application here contravenes language found in the arbitration
clause.
Further, plaintiffs call on this Court to establish the
parameters of the theory of intertwinement applied by the
Appellate Division. Finally, plaintiffs argue that the
appropriate forum, if all the claims must indeed be resolved
together, is the Law Division rather than FINRA because the bulk
of their claims primarily arise out of interactions and dealings
with AFS and EisnerAmper, not with SAI.
In response, SAI argues that the Appellate Division
properly applied the well-recognized doctrine of equitable
estoppel to compel arbitration. SAI contends that the plain
language of the arbitration clause is sufficiently broad to
encompass the claims against AFS and EisnerAmper. In its view,
all of the claims arose out of the transactions contemplated by
the contract between plaintiffs and SAI. Specifically, the
claims focus on the purchase of the Med Cap notes, which were
the focus of the contract.
Moreover, SAI cites the strong presumption in favor of
arbitration in both state and federal courts. For that reason,
SAI contends that the Superior Court is not the appropriate
12
forum for resolving the claims; instead, the claims should be
resolved through the FINRA arbitration.
AFS and EisnerAmper adopted SAI’s arguments without
submitting additional briefs.
III.
A.
Orders compelling arbitration are deemed final for purposes
of appeal. R. 2:2-3(a); GMAC v. Pittella, 205 N.J. 572, 587
(2011). We review those legal determinations de novo. See
Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366,
378 (1995) (“A trial court’s interpretation of the law and the
legal consequences that flow from established facts are not
entitled to any special deference.”). In reviewing such orders,
we are mindful of the strong preference to enforce arbitration
agreements, both at the state and federal level. See Hojnowski
v. Vans Skate Park, 187 N.J. 323, 341-42 (2006) (noting federal
and state preference for enforcing arbitration agreements);
Garfinkel v. Morristown Obstetrics & Gynecology Assocs., P.A.,
168 N.J. 124, 131 (2001) (recognizing “arbitration as a favored
method of resolving disputes”).
The Federal Arbitration Act (FAA), 9 U.S.C.A. §§ 1 to 16,
was enacted “to abrogate the then-existing common law rule
disfavoring arbitration agreements ‘and to place arbitration
agreements upon the same footing as other contracts.’”
13
Martindale v. Sandvick, Inc., 173 N.J. 76, 84 (2002) (quoting
Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24, 111 S.
Ct. 1647, 1651, 114 L. Ed. 2d 26, 36 (1991)). Section 2 of the
FAA provides:
A written provision in any . . . contract
evidencing a transaction involving commerce
to settle by arbitration a controversy
thereafter arising out of such contract or
transaction, or the refusal to perform the
whole or any part thereof, or an agreement
in writing to submit to arbitration an
existing controversy arising out of such a
contract, transaction, or refusal, shall be
valid, irrevocable, and enforceable, save
upon such grounds as exist at law or in
equity for the revocation of any contract.
[9 U.S.C.A. § 2.]
The New Jersey Arbitration Act (Arbitration Act), N.J.S.A.
2A:23B-1 to -32, is similar in nature to the FAA. The
Arbitration Act, in part, provides “[a]n agreement contained in
a record to submit to arbitration any existing or subsequent
controversy arising between the parties to the agreement is
valid, enforceable, and irrevocable except upon a ground that
exists at law or in equity for the revocation of a contract.”
N.J.S.A. 2A:23B-6(a).
However, the preference for arbitration “is not without
limits.” Garfinkel, supra, 168 N.J. at 132. A court must first
apply “state contract-law principles . . . [to determine]
whether a valid agreement to arbitrate exists.” Hojnowski,
14
supra, 187 N.J. at 342. This preliminary question, commonly
referred to as arbitrability, underscores the fundamental
principle that a party must agree to submit to arbitration.
Garfinkel, supra, 168 N.J. at 132 (“The point is to assure that
the parties know that in electing arbitration as the exclusive
remedy, they are waiving their time-honored right to sue.”
(internal quotation marks omitted)); Guidotti v. Legal Helpers
Debt Resolution, L.L.C., 716 F.3d 764, ___ (3d Cir. 2013) (slip
op. at 13) (explaining that “a judicial mandate to arbitrate
must be predicated upon the parties’ consent” (citation
omitted)). Notably, the arbitrability analysis is expressly
included in the Arbitration Act. See N.J.S.A. 2A:23B-6(b) (“The
court shall decide whether an agreement to arbitrate exists . .
. .”).
We have explained that “‘a state cannot subject an
arbitration agreement to more burdensome requirements than those
governing the formation of other contracts.’” Hojnowski, supra,
187 N.J. at 342 (quoting Leodori v. CIGNA Corp., 175 N.J. 293,
302, cert. denied, 540 U.S. 938, 124 S. Ct. 74, 157 L. Ed. 2d
250 (2003)). In evaluating the existence of an agreement to
arbitrate, a court “consider[s] the contractual terms, the
surrounding circumstances, and the purpose of the contract.”
Marchak v. Claridge Commons, Inc., 134 N.J. 275, 282 (1993)
(citation omitted).
15
After finding the existence of an arbitration clause, a
court then must evaluate whether the particular claims at issue
fall within the clause’s scope. A court must look to the
language of the arbitration clause to establish its boundaries.
See Garfinkel, supra, 168 N.J. at 132. Importantly, “a court
may not rewrite a contract to broaden the scope of arbitration.”
Ibid. (internal quotation marks omitted).
B.
At issue in this appeal is the application of equitable
estoppel to compel arbitration. The United States Supreme Court
has recognized that, in the context of arbitration,
“‘traditional principles’ of state law allow a contract to be
enforced by or against nonparties to the contract through
‘assumption, piercing the corporate veil, alter ego,
incorporation by reference, third party beneficiary theories,
waiver and estoppel.’” Arthur Andersen LLP v. Carlisle, 556
U.S. 624, 631, 129 S. Ct. 1896, 1902, 173 L. Ed. 2d 832, 840
(2009) (emphasis added) (quoting 21 Williston on Contracts §
57:19, at 183 (4th ed. 2001)). In other words, 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. See ibid.
As previously explained by this Court,
[e]quitable estoppel has been defined as
16
the effect of the voluntary
conduct of a party whereby he is
absolutely precluded, both at law
and in equity, from asserting
rights which might perhaps have
otherwise existed . . . as against
another person, who has in good
faith relied upon such conduct,
and has been led thereby to change
his position for the worse . . . .
The doctrine is designed to prevent a
party’s disavowal of previous conduct if
such repudiation would not be responsive to
the demands of justice and good conscience.
[Heuer v. Heuer, 152 N.J. 226, 237 (1998)
(internal quotation marks and citations
omitted).]
Equitable estoppel “is invoked in the interests of justice,
morality and common fairness.” Knorr, supra, 178 N.J. at 178(internal quotation marks omitted); see also Summer Cottagers’
Assoc. of Cape May v. City of Cape May, 19 N.J. 493, 503-04
(1955) (noting that doctrine prevents party “from taking a
course of action that would work injustice and wrong to one who
with good reason and in good faith has relied upon such conduct”
(citations omitted)).
To establish equitable estoppel, parties must prove that an
opposing party “engaged in conduct, either intentionally or
under circumstances that induced reliance, and that [they] acted
or changed their position to their detriment.” Knorr, supra,
178 N.J. at 178 (citation omitted). In other words, equitable
17
estoppel, unlike waiver, requires detrimental reliance. Ibid.With that in mind, two Appellate Division decisions warrant our
review.
In EPIX Holdings, supra, the Appellate Division recognized
that “a non-signatory to an arbitration agreement may compel a
signatory to arbitrate.” 410 N.J. Super. at 463. EPIX Holdings
Corp., a professional employer organization, entered into a
workers’ compensation insurance agreement with National Union
Fire Insurance Company (National Union), a subsidiary of
American International Group, Inc. (AIG). Id. at 459-60. The
Payment Agreement between EPIX and National Union “expressly set
forth in detail the terms and conditions of EPIX’s payment
obligation.” Id. at 460. “The Payment Agreement also contained
an arbitration clause” which provided that disputes other than
payment issues “must be submitted to arbitration.” Id. at 460-
61. EPIX ultimately filed suit against National Union, AIG, and
several other related companies. Id. at 461. The claims arose
out of “an alleged elaborate conspiracy . . . to manipulate the
market for insurance.” Ibid. (internal quotation marks
omitted). AIG, in response, moved to compel arbitration, but
the trial court denied the motion because AIG was not a party to
the Payment Agreement containing the arbitration clause even
though its subsidiary was a signatory. Id. at 462.
18
The Appellate Division reversed, reasoning that (1) “AIG
ha[d] standing as a non-signatory to compel arbitration” because
the claims and parties were “substantially interconnected,” id.
at 467-68, and (2) EPIX’s claims fell within the scope of the
arbitration clause, id. at 475. The panel noted that “the
principle of equitable estoppel has been invoked, under
appropriate circumstances, to force an objecting signatory to
arbitrate the same claims against a non-signatory as alleged
against the other party to the contract.” Id. at 465-66.
“[E]ven where the inextricable connectivity was not considered
itself dispositive of the issue, the combination of the
requisite nexus of the claim to the contract together with the
integral relationship between the non-signatory and the other
contracting party [has been] recognized as a sufficient basis to
invoke estoppel.” Id. at 466 (emphasis removed).
The conclusion in EPIX Holdings stands in contrast to the
result of an earlier decision in Angrisani v. Financial
Technology Ventures, L.P., 402 N.J. Super. 138 (App. Div. 2008).
There, the plaintiff, Frank Angrisani, entered into two
contracts: an employment contract with Nexxar Group, Inc.
(Nexxar)4 and a stock purchase agreement with Financial
Technology Ventures, L.P. (FT Ventures) to purchase shares in
4
The plaintiff actually entered into a contract with Nexxar’s
predecessor; however, that distinction is not relevant for
purposes of this discussion. See id. at 143-44.
19
Nexxar. Id. at 143-44. The employment contract with Nexxar
included an arbitration clause that required the plaintiff and
Nexxar to “arbitrate any and all controversies, claims or
disputes arising out of” the contract or employment relationship
before the American Arbitration Association. Id. at 149.
However, the stock purchase agreement with FT Ventures did not
contain an agreement to arbitrate disputes. Id. at 145.
Angrisani filed claims against Nexxar and FT Ventures after
his agreements with the two companies took a turn for the worse.
Id. at 145-46. Angrisani asserted multiple claims against FT
Ventures and Nexxar. Id. at 146. In response, Nexxar and FT
Ventures jointly filed a motion to compel arbitration. Ibid.
The trial court granted the motion, ibid., but the Appellate
Division reversed in part, id. at 147. The panel concluded
that, although Angrisani’s “claims against Nexxar [fell] within
the arbitration provision of his employment agreement,” the
“claims against FT Ventures [were] not covered by the
arbitration provision.” Ibid. In other words, Angrisani could
“not be compelled to arbitrate those claims [against FT
Ventures] because the stock purchase agreement . . . [did] not
provide for arbitration.” Ibid.
The Appellate Division specifically rejected FT Ventures’s
argument that Angrisani was “equitably estopped from refusing to
arbitrate those claims because they [were] intertwined with and
20
dependent upon the employment agreement.” Id. at 153 (internal
quotation marks omitted). The panel reasoned that Angrisani
“did not engage in any course of conduct that could support a
finding of equitable estoppel.” Ibid. The panel also
distinguished several federal cases that applied equitable
estoppel to compel arbitration, finding that “those cases
generally involve[d] situations where a party to a contract
containing an arbitration clause [sought] to bring an action . .
. against a non-signatory to the contract that [was] closely
aligned to a contracting party, such as a parent or successor
corporation.” Id. at 154.
These two Appellate Division decisions are not in
synchronicity in their rationales concerning the application of
equitable estoppel to compel arbitration. The panel’s decision
in this appeal further reflects an emerging “intertwinement”
theory -- described as an extension of equitable estoppel --
that has never been addressed by this Court. We now address
that doctrine and limit its application.
IV.
A.
At the outset, it must be acknowledged that, as a matter of
New Jersey law, courts properly have recognized that arbitration
may be compelled by a non-signatory against a signatory to a
contract on the basis of agency principles. See, e.g., Alfano,
21
supra, 393 N.J. Super. at 569-70 (compelling arbitration after
finding agency relationship existed between non-signatory and
signatory to contract). That said, although equitable estoppel
may be used in certain circumstances as a basis to compel
arbitration, its use has limited applicability. Application of
estoppel to compel arbitration, when the rationale rests solely
on the connection between the parties and claims, overlooks our
case law emphasizing that parties are giving up their right to
sue in court when they agree to use the alternative dispute
resolution technique of arbitration. See Garfinkel, supra, 168
N.J. at 132.
Stated simply, we reject intertwinement as a theory for
compelling arbitration when its application is untethered to any
written arbitration clause between the parties, evidence of
detrimental reliance, or at a minimum an oral agreement to
submit to arbitration. As explained earlier, equitable estoppel
“is invoked in the interests of justice, morality and common
fairness.” Knorr, supra, 178 N.J. at 178 (internal quotation
marks omitted). Estoppel cannot be applied solely because the
parties and claims are intertwined, and, to the extent that EPIX
Holdings suggests otherwise in its rationale, it extends
equitable estoppel beyond its proper scope.
We have not yet had the occasion to review the underlying
rationale used in EPIX Holdings to compel arbitration. The
22
decision to compel arbitration in EPIX Holdings was appropriate
given the agency relationship between the parent and subsidiary
insurance corporations in the litigation. See 410 N.J. Super.
at 458-59. However, we reject that panel’s reliance on a theory
of intertwinement under the guise of equitable estoppel. The
Appellate Division was mistaken in concluding that the
intertwinement of claims and parties in the litigation -- in and
of itself -- was sufficient to give a non-signatory corporation
standing to compel arbitration. See id. at 467-68. The
appropriate analysis would have focused on the agency
relationship between the parent and subsidiary corporations in
relation to their intertwinement with the plaintiff’s claims and
the relevant contractual language.
Further, the doctrine of equitable estoppel does not apply
absent proof that a party detrimentally rely on another party’s
conduct. See Knorr, supra, 178 N.J. at 178. Reliance is
critical when a party seeks to compel arbitration using that
doctrine. It underlies the rationale for applying equitable
estoppel in the first place, namely, “[t]he doctrine is designed
to prevent a party’s disavowal of previous conduct if such
repudiation would not be responsive to the demands of justice
and good conscience.” Heuer, supra, 152 N.J. at 237 (internal
quotation marks omitted); see also Angrisani, supra, 402 N.J.
Super. at 153 (holding that doctrine of equitable estoppel was
23
inapplicable to compel arbitration because doctrine operates to
“prevent injustice by not permitting a party to repudiate a
course of action on which another party has relied to his
detriment” (internal quotation marks omitted)).
B.
Turning to this appeal, we note initially that many of the
claims in plaintiffs’ complaint -- including those rooted in
negligence and breach of contract -- implicate the right to a
jury trial. See Jersey Cent. Power & Light Co. v. Melcar Util.
Co., 212 N.J. 576, 593-94 (2013) (reiterating constitutional
right to jury trial for “common-law cause of action in
negligence”); Wood v. N.J. Mfrs. Ins. Co., 206 N.J. 562, 578
(2011) (emphasizing that “breach of contract claim was at common
law and remains today an action triable to a jury”). That
recognition informs our analysis given the importance of
ensuring that a party has actually waived its right to initiate
a claim in court in favor of submitting to binding arbitration.
See Garfinkel, supra, 168 N.J. at 132 (noting “[i]n the absence
of a consensual understanding, neither party is entitled to
force the other to arbitrate their dispute” (alteration in
original and internal quotation marks omitted)). Nevertheless,
we must review the relevant contractual relationships to
determine whether plaintiffs agreed to arbitrate with AFS and
EisnerAmper.
24
No party disputes that the only applicable arbitration
clause is the one contained in the contract between plaintiffs
and SAI, which provides in relevant part:
All controversies that may arise between us
(including, but not limited to controversies
concerning any account, order or
transaction, or the continuation,
performance, interpretation or breach of
this or any other agreement between us,
whether entered into or arising before, on
or after the date this account is opened)
shall be determined by arbitration in
according with the rules then prevailing of
the New York Stock Exchange, Inc., or the
NASD as I may designate.
Importantly, this arbitration clause makes no mention of other
parties aside from Scudillo, who served as SAI’s representative
when executing the agreement containing the arbitration clause.
Though the language in the arbitration clause is sufficiently
broad to cover any and all disputes related to the business
transactions between plaintiffs and SAI, it does not embrace any
express inclusion of claims involving other parties. See
Garfinkel, supra, 168 N.J. at 132. Thus, we conclude that there
is no express contractual arbitration obligation with respect to
the other defendants, AFS or EisnerAmper.
Moreover, we disagree with SAI’s argument that AFS or
EisnerAmper had standing to compel arbitration under an agency
relationship. Although Scudillo did sign the contract
containing the arbitration clause, he did so as an agent of SAI,
25
not as an agent of AFS or EisnerAmper. SAI shares no corporate
ownership with AFS or EisnerAmper. And, notably, AFS and
EisnerAmper conceded before the Law Division that they “are
separate and distinct corporate entities.” As a result, in this
case, an agency relationship cannot serve as the basis for
compelling arbitration. Contra Alfano, supra, 393 N.J. Super.
at 569-70 (finding agency relationship between signatory and
non-signatory); EPIX Holdings, supra, 410 N.J. Super. at 458-59(explaining relationship between defendants as parent and
subsidiary corporations).
Though plaintiffs’ claims against SAI, AFS, and EisnerAmper
all arose out of the same alleged Ponzi scheme involving the Med
Cap notes, 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. We see no evidence in the record that AFS or
EisnerAmper expected to arbitrate their disputes in detrimental
reliance on plaintiffs’ conduct. See Heuer, supra, 152 N.J. at
237. We also find nothing in the record to suggest that AFS or
EisnerAmper knew about the arbitration clause in plaintiffs’
agreement with SAI, let alone expected to reap the benefits that
accompany arbitration, prior to SAI raising it as an issue in
the Law Division. The responsive pleadings filed by AFS and
EisnerAmper made no request for arbitration, nor did they even
26
mention the existence of an arbitration clause. See Angrisani,
supra, 402 N.J. Super. at 153-54.
Finally, although we are sensitive to the preference for
resolving ambiguities in arbitration clauses in favor of
compelling arbitration, see Hojnowski, supra, 187 N.J. at 341-
42, that preference only applies when an agreement exists
between the parties to arbitrate their disputes. In other
words, absent express contractual language signaling an
agreement to arbitrate, a court has little to interpret in favor
of compelling arbitration. See Garfinkel, supra, 168 N.J. at
132. Instead, when parties have not expressly agreed to
arbitrate their disputes -- as is the case here between
plaintiffs, AFS, and EisnerAmper -- careful scrutiny is
necessary to determine whether arbitration is nonetheless
appropriate.
To conclude, because the record here does not support that
AFS or EisnerAmper detrimentally relied on plaintiffs’ conduct,
application of equitable estoppel was unwarranted. Plaintiffs
never sought to arbitrate their disputes with AFS or
EisnerAmper, and compelling them to do so would result in an
injustice contrary to the doctrine’s intent. SAI’s motion to
compel arbitration should have been denied.5
5
On remand, the Law Division has a number of procedural tools at
its disposal to manage the proceedings, including staying the
27
V.
For the reasons expressed above, we reverse the Appellate
Division’s judgment affirming the order compelling arbitration,
and we remand for additional proceedings.
CHIEF JUSTICE RABNER; JUSTICES ALBIN, HOENS, and PATTERSON;
and JUDGES RODRÍGUEZ and CUFF (both temporarily assigned) join
in JUSTICE LaVECCHIA’s opinion.
litigation during the pendency of the FINRA arbitration. See
N.J.S.A. 2A:23B-7(e). Additionally, if any claim is severable
from the claims proceeding to arbitration between plaintiffs and
SAI, the Law Division may limit the stay to certain claims. See
N.J.S.A. 2A:23B-9(f), (g); GMAC, supra, 205 N.J. at 583 n.7
(explaining trial court “may limit the stay to the arbitrable
claim if the claims are severable”).
28
SUPREME COURT OF NEW JERSEY
NO. A-9 SEPTEMBER TERM 2012
ON CERTIFICATION TO Appellate Division, Superior Court
MICHAEL E. HIRSCH, ROBYN J.
HIRSCH, and HIRSCH, LLP,
Plaintiffs-Appellants,
v.
AMPER FINANCIAL SERVICES,
LLC, and EISNERAMPER, LLP
(f/k/a AMPER, POLITIZNER &
MATTIA, LLP),
Defendants/Third-Party
Plaintiffs-Respondents,
v.
SECURITIES AMERICA, INC.,
Third-Party Defendant-Respondent.
DECIDED August 7, 2013
Chief Justice Rabner PRESIDING
OPINION BY Justice LaVecchia
CONCURRING/DISSENTING OPINIONS BY
DISSENTING OPINION BY
REVERSE AND
CHECKLIST
REMAND
CHIEF JUSTICE RABNER X
JUSTICE LaVECCHIA X
JUSTICE ALBIN X
JUSTICE HOENS X
JUSTICE PATTERSON X
JUDGE RODRÍGUEZ (t/a) X
JUDGE CUFF (t/a) X
TOTALS 7