RAVIN v. SANDLER

The opinion of the court was delivered by

COBURN, J.A.D.

During arbitration under the rules of the American Arbitration Association ("AAA"), the arbitrator decided that he was authorized to appoint a receiver to administer plaintiff. Plaintiff asked the Law Division to enjoin the appointment. The individual defendants, Rosen, Levine, and Brawer, opposed the motion on the ground that the court lacked jurisdiction and on the merits. The court rejected the jurisdictional argument, but denied plaintiff's motion on the merits. We granted leave to appeal. R. 2:5-6.

This case was previously before us on an appeal brought by the individual defendants from a Law Division order denying submission of their disputes with plaintiff to arbitration. Of necessity, we include in our statement of facts the facts of that disposition to place in context our rejection of the claim of these defendants that the trial court lacked jurisdiction to rule on the arbitrator's authority to appoint a receiver. Because neither the parties' arbitration agreement nor the AAA rules can be fairly read to so empower the arbitrator, we reverse.

In February 2000, the individual defendants withdrew as shareholders from plaintiff, a law firm organized as a professional corporation, taking with them a substantial portion of its business to another law firm, defendant Lowenstein Sandler. Plaintiff sued all defendants in the Law Division, alleging various forms of tortious conduct. Relying on the written contract of plaintiff's shareholders, which provided for arbitration, the individual defendants moved to stay or dismiss the action. The Law Division denied their motion. We granted leave to appeal, reversed, and remanded "for entry of an order staying further proceedings pending arbitration of plaintiff's claims against the individual defendants." Ravin, Sarasohn, Cook, Baumgarten, Fisch Rosen, P.C. v. Rosen, No. A-2106-00T2 (App.Div. November 28, 2001). On remand, the Law Division entered an order staying the action against Lowenstein Sandler, but dismissing rather than staying plaintiff's action against the individual defendants.

An arbitrator was selected to determine the disputes between plaintiff and the individual defendants, who subsequently asked the arbitrator to appoint a receiver to administer plaintiff. They claimed that plaintiff was wasting its assets and endangering their ability to collect on their monetary claims. The arbitrator ruled that he had the authority to appoint either a statutory or custodial receiver but would await further submissions before he decided whether to exercise that authority.

Plaintiff returned to the trial court, seeking an order barring the arbitrator's creation of either form of receivership. The individual defendants argued that the court lacked jurisdiction because of its previous order dismissing them from the case. They also argued that the arbitrator had correctly interpreted the parties' agreement and the extent of his authority under the AAA rules and the law. Although the court rejected the jurisdictional argument, it decided not to interfere with the arbitrator's decision because that determination appeared to be a reasonable construction of the contract.

The shareholders' contract provides that "the parties shall be required to resort exclusively to arbitration . . . in accordance with the then prevailing rules of the [AAA] for commercial arbitrations." The relevant AAA rules are R-34(a) and (c). Subsection (a) defines the arbitrator's equitable powers in general terms, without mentioning receivership:

The arbitrator may take whatever interim measures he or she deems necessary, including injunctive relief and measures for the protection or conservation of property and disposition of perishable goods.

Subsection (c) acknowledges that the parties may seek interim ancillary relief in aid of the arbitration from the court in these words:

A request for interim measures addressed by a party to a judicial authority shall not be deemed incompatible with the agreement to arbitrate or a waiver of the right to arbitrate.

As a preliminary matter, we reject the individual defendants' argument that the trial court's order dismissing them from the case, following our remand, deprived that court of jurisdiction to determine whether the arbitrator could appoint a receiver. In general, entry of an order staying a Law Division action pending arbitration, the precise relief set forth in section 4 of the statute governing this arbitration, N.J.S.A. 2A:24-1 to -11, does not divest the court of jurisdiction. A party is entitled to maintain the stayed action so that a prompt application may be made to confirm an arbitration award, Shribman v. Miller, 60 N.J. Super. 182, 196 (Ch.Div. 1960), and to facilitate resort to the court for interim relief, such as an injunction or a receivership, in aid of arbitration, Rosenthal v. Berman, 14 N.J. Super. 348, 352 (App.Div. 1951).

The trial court's dismissal of the case against the individual defendants did not undercut application of those principles. When a case is remanded, as occurred here, the trial court must "obey in the particular case the mandate of the appellate court precisely as it is written." Flanigan v. McFeely, 20 N.J. 414, 420 (1956). Since we directed entry of an order by the trial court staying the action pending arbitration, it had no authority to dismiss the case against the individual defendants. Ibid.; In re Application of the Plainfield-Union Water Co., 14 N.J. 296, 302-03 (1954). Therefore, its order was to that extent a nullity, which it properly ignored when asked to rule on the merits of plaintiff's motion.

An "arbitrator has no authority beyond that delegated . . . by the parties." Local No. 153, Office Prof'l Employees Int'l Union v. Trust Co. of N.J., 105 N.J. 442, 450 (1987). Therefore, "[i]n the absence of an express contract provision conferring authority on the arbitrator, it is uniquely within the province of the courts, and not arbitrators, to make the initial and threshold determination regarding the arbitrability of a particular issue." Laborers' Local Union Nos. 472 172 v. Interstate Curb Sidewalk, 90 N.J. 456, 463 (1982).

In this case, as acknowledged by the arbitrator himself, neither the contract nor the incorporated AAA rules expressly empowered him to appoint a receiver, but since a receivership almost invariably involves injunctive relief and is a measure for conservation of property, a literal, though perhaps expansive, reading of R-34(a) arguably supports an interpretation allowing for such relief from the arbitrator. Running counter to that interpretation are two fundamental legal principles governing interpretation of contracts; New Jersey case and statutory law governing receiverships, which supports the expectation that receivers will be court-appointed; and a California decision specifically denying arbitrators the power to appoint a receiver.

The first interpretive principle, as famously expressed by Judge Learned Hand, is that "[t]here is no surer way to misread any document than to read it literally. . . ." Guiseppi v. Walling, 144 F.2d 608, 624 (2nd Cir. 1944), aff'd sub nom. Gemsco, Inc. v. Walling, 324 U.S. 244, 65 S. Ct. 605, 89 L. Ed. 921 (1945) (quoted with approval in Schierstead v. City of Brigantine, 29 N.J. 220, 231 (1959)). The second interpretive principle is that "[p]arties in New Jersey are . . . presumed to have contracted with reference to the existing law." Silverstein v. Keane, 19 N.J. 1, 13 (1955). The existing receivership law forming the contextual reference point for the contract in question may be briefly described as follows.

Statutory receiverships are discussed in First National State Bank v. Kron, 190 N.J. Super. 510 (App.Div.) certif. denied, 95 N.J. 204 (1983). We emphasized the rarity of resort to this device, as well as the delicacy of the decision, in these words:

The appointment of any receiver is an extraordinary remedy, and involves the delicate exercise of judicial discretion. It has been said that appointment of a receiver where corporate assets are involved may proceed only upon imposing and persuasive proof. This requirement stems in part from the "paralytic" effect of a receiver on the corporate affairs.

[Id. at 513 (citations omitted).]

And in Eelman v. Johnson Products Co., 103 N.J. Eq. 294 (E. A. 1928), while rejecting the demand of stockholders that they were entitled to name a statutory receiver for the corporation, the court observed that "the appointment of a receiver is a judicial act and the right to name him [or her] belongs to the court." Id. at 296. Moreover, when the Legislature created the concept of statutory receiverships, it specifically provided that jurisdiction for an action to place a corporation into receivership would be in the Superior Court. N.J.S.A. 14A:14-2(1).

Custodial receiverships are discussed in Roach v. Margulies, 42 N.J. Super. 243 (App.Div. 1956), as a device for courts of equity, which should look to them only as a last resort, thoughts that were expressed in these words:

It is well recognized that a court of equity has inherent power in a proper case to appoint a receiver for a corporation on the ground of gross or fraudulent mismanagement by corporate officers or gross abuse of trust or general dereliction of duty. And solvency of the corporation is not a bar to such action. However, such drastic action is avoided where possible, and if the relief necessary can be accomplished by some less onerous expedient.

[Id. at 245 (citations omitted).]

The power of a custodial receiver, like that of a statutory receiver, subject of course to the court's discretion, is great. It can include the power to sell assets of the company under the court's supervision and, if necessary, the company itself. In re Valley Road Sewerage Co., 295 N.J. Super. 278, 292-93 (App.Div. 1996), aff'd, 154 N.J. 224, 239-41 (1998).

In Barclays Bank v. Davidson Avenue Associates, 274 N.J. Super. 519 (App.Div. 1994), we ruled that "[a] contractual provision for the appointment of a rent receiver upon mortgage default usurps the judicial function and thereby contravenes public policy[,]" id. at 523, and inShribman, supra, the Chancery judge observed that "court action may be necessary to obtain a preliminary injunction, or a custodial receiver, . . . which forms of relief may not be available in arbitration." 60 N.J. Super. at 195.

In California, the only jurisdiction which appears to have dealt specifically with the issue, the court held that an arbitrator may not be empowered by the parties to appoint a receiver for a corporation. Marsch v. Williams, 28 Cal.Rptr.2d 402 (Ct.App. 1994). The court reasoned as follows:

There is no power vested in the courts more jealously guarded or safeguarded than this very power to appoint a receiver to take, for the court, the possession and control of the property of others, and this is because . . . the exercise of the power may mean the divesting the owner of his lawful right to remain in possession of his property. . . .

. . . Given the continuing nature of a receiver's duties and the court's supervision, any addition to the type of tribunals empowered to appoint and supervise receivers would represent a fairly profound change in our receivership law.

In sum, the precedents we have examined strongly suggest we are not at liberty to create or recognize a nonstatutory receiver, even where the parties have agreed to the appointment of one.

[Id. at 408-09 (citations omitted)]

The individual defendants attempt to distinguish Marsch by noting that the California arbitration statute specifically provides for an arbitration-party to apply to the court for a receiver in aid of arbitration. Id. at 407. However, New Jersey, like the AAA, has long recognized the right of an arbitration-party to make just such an application to the court. Rosenthal, supra, 14 N.J. Super. at 352.

It is generally recognized that "[w]hile arbitrators exercise judicial functions, and are often considered to be quasi-judicial officers[,] arbitrators are not vested with all of the powers of a judge. . . ." 21 Williston on Contracts § 57:77 (Lord ed. 2001) (footnote omitted). In light of that principle and the cited cases and statute, we doubt whether an arbitrator may be empowered by contracting parties to appoint a statutory or a custodial receiver. However, we need not decide the point since in this case we are satisfied that the parties did not agree to so empower the arbitrator. They certainly did not do so expressly; and, given the legal context surrounding their agreement, which at least strongly suggests that receivers are the business of courts and not of arbitrators, we are satisfied that they did not do so implicitly by their reference to the AAA rules. Moreover, there is a vast difference between the general concept of "injunctive relief," the phrase used by the AAA in R-34(a), and the appointment of a receiver, whether statutory or custodial, an act that usually deprives a corporation entirely of the ability to govern itself. A reasonable interpretation of the parties' contract does not support the proposition that plaintiff agreed to subject its governance to the control of a receiver answerable, in turn, to an arbitrator whose awards are almost entirely unreviewable in court.Tretina Printing, Inc. v. Fitzpatrick Assocs. Inc., 135 N.J. 349, 358 (1994). Therefore, the order is reversed and the case is remanded for entry of an order enjoining appointment of a receiver by the arbitrator.

Reversed and remanded.