In Fava v. Morgan Stanley Smith Barney, Inc., Justice Barry R. Ostrager of the New York County Commercial Division denied Petitioner Frank Fava’s (“Fava”) motion to vacate an arbitration award issued by the Financial Industry Regulatory Authority (“FINRA”), and granted Respondent Morgan Stanley Smith Barney, Inc’s (“Morgan Stanley”) request to confirm the award.[1] The opinion addresses whether a party who objects to an arbitration panel’s jurisdiction but participates in arbitration may vacate an arbitral award on the ground that the arbitrators exceeded the scope of their authority.

Factual Background

According to the Court’s decision, Morgan Stanley employed Fava as a financial advisor from 2007 through 2011.[2] During his employment, Fava was given certain promissory notes which he allegedly failed to pay back. As a result of Fava’s alleged default on the promissory notes, Morgan Stanley commenced a FINRA arbitration against Fava seeking repayment of the notes, which resulted in an arbitration award in favor of Morgan Stanley for approximately $450,000.[3]

In July 2013, the parties entered into a settlement agreement in which Fava agreed to pay the amount due to Morgan Stanley over three years.[4] The settlement agreement contained a forum selection clause providing that “the state and federal courts of the State of New York shall decide any cause or controversy arising from this Agreement,” and the parties consented “to submit to the jurisdiction of the New York courts for this purpose.”[5]

Fava only made partial payment to Morgan Stanley under the settlement agreement, and Morgan Stanley commenced a second FINRA arbitration to recover the balance of the amount owed to it.[6] Fava moved to dismiss the second arbitration, arguing that the forum selection clause in the settlement agreement required Morgan Stanley to litigate its claims in court rather than in arbitration.[7] FINRA denied Fava’s motion to dismiss without explaining its reasoning and proceeded with the arbitration.[8] Throughout the proceedings, Fava preserved his objection to the arbitrators’ jurisdiction but otherwise participated fully in the arbitration.[9]

In April 2020, FINRA ruled in Morgan Stanley’s favor and held that Fava was required to pay Morgan Stanley nearly $450,000, plus interest and attorneys’ fees.[10]

After FINRA issued its second arbitral award in favor of Morgan Stanley (the “Award”), Fava moved to vacate the Award on the ground that FINRA lacked jurisdiction based on the forum selection clause in the parties’ settlement agreement. Morgan Stanley opposed Fava’s motion and asked the Court to confirm the Award.

Justice Ostrager's Opinion

Justice Ostrager began his analysis by rejecting Fava’s argument that FINRA exceeded its authority when it proceeded with the arbitration despite the forum selection clause in the parties’ settlement agreement.

Although CPLR § 7511(b)(1) permits a party to move to vacate an arbitration award on the ground that the arbitrators “exceeded their authority,” the Court found Fava’s reliance on that provision of the CPLR flawed because Fava’s claim in this case is “really that no valid agreement to arbitrate exists.”[11]

Justice Ostrager noted a similar case in which Justice Lucy Billings of the New York Supreme Court rejected a motion to vacate an arbitration award based on an argument similar to Fava’s.[12] The Court went on to note that Justice Billings’s analysis was supported by “the unambiguous language in CPLR § 7511(b)(2)(ii).”[13] That section of the CPLR provides for vacatur of an arbitration award where “a valid agreement to arbitrate was not made,” but only in the case of a “party who neither participated in the arbitration nor was served with a notice of intention to arbitrate.”[14] Here, the Court found that Fava participated in the arbitration despite his objection to FINRA’s jurisdiction.

Justice Ostrager also noted that CPLR § 7503 permits a party to move to stay arbitration on the ground that “a valid agreement was not made,” but Fava failed to move to stay the arbitration and “cannot now argue that FINRA exceeded its authority by proceeding with the hearing.”[15]

Justice Ostrager also rejected Fava’s alternative argument to vacate the Award because of a “manifest disregard of the law.” The Court explained that vacatur on this ground is only appropriate if the Court finds that “(1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case.”[16]

Justice Ostrager held that the criteria for “manifest disregard” had not been met here because, among other reasons, the Court had no basis to find that the arbitrators refused to apply a governing legal principle.[17] The Court found that Fava’s argument “still boils down to the claim that FINRA proceeded when no agreement to arbitrate existed,” which is an argument foreclosed by CPLR § 7511(b)(2)(ii) because Fava participated in the arbitration.[18]

Accordingly, the Court denied Fava’s motion to vacate the Award, and granted Morgan Stanley’s request to confirm the Award.

Conclusion

The Court confirmed an arbitration award in favor of Morgan Stanley despite Fava’s objection to the arbitrators’ jurisdiction based on a forum selection clause choosing New York courts as the forum for resolving the parties’ dispute. The decision highlights the need for the respondent in an arbitration to consider whether to participate in the arbitration or move to stay the arbitration based on an objection to the arbitrators’ jurisdiction.