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Creative Waste Management, Inc. v. Bay Owners Association, Inc.

2011 WL 2416857 (N.J. Super. App. Div. 2011) (Unpublished)

ARBITRATION — Where a party seeks arbitration relief against an assetless party (whose obligations are really those of its owners), the owners have a right to participate in the arbitration and any award granted without permitting those owners to appear will be vacated.

In order to arrange for the dredging of their boat slips, a group of slip owners created an association as a non-profit membership corporation. The association and its individual owners entered into an agreement with a dredging contractor. Under that agreement, the association’s primary function was to hold a separate account for funds from slip owners and to disburse those funds to the contractor as work progressed. It was clear from the agreement that the association would also oversee dredging operations. For that purpose, the association retained an engineering firm to act as project manager. Prior to the contractor commencing work on each owner’s slip, that owner was required to make a payment into an escrow account held by the association, but managed by a separate payment agent. Thus, the association would hold advance payment for all of the work to be done. Before entering into the agreement, each slip owner was required to submit a dredging plan for its individual slip, and any changes to that individual plan required that owner’s written consent.

In the agreement, the contractor acknowledged that the association was a non-profit corporation without significant assets and therefore that it would not seek payments from the association other than from the funds held in escrow. However, the contractor never agreed not to seek damages from the owners in case of a dispute, and the owners logically would have been the source for any such additional sums to which the contractor became entitled. The agreement had a binding arbitration clause. The agreement also required notices to be either hand delivered or mailed to slip owners at the addresses specified in their individual slip dredging agreements, with copies to the membership association and the association’s engineer.

After a dispute arose, the contractor filed a construction lien against each individual slip owner’s property. The slip owners, represented by a representative plaintiff, filed a complaint against the contractor in the Law Division. That lawsuit resulted in an order invalidating the construction liens and an order directing the contractor to pay counsel fees. Meanwhile, pursuant to the agreement, the contractor filed an arbitration demand against the association and the individual slip owners. The arbitration notice advised the owners that they could avoid personal participation in the arbitration by paying their individual proportional share of the damage demand. The individual owners filed responses and counterclaims. By letter, however, the contractor informed the National Arbitration Forum (NAF) that it wanted to withdraw its arbitration demand against the individual slip owners, without prejudice, after learning that the arbitration association would charge it an administrative fee. By letter, the owners’ attorney objected to that request, pointing out that his clients had asserted counterclaims, and the contractor was claiming damages against the association that it would eventually try to collect from the owners using estoppel principles. Nonetheless, the contractor was permitted to withdraw the arbitration claim against the owners.

Fearing that the association had insufficient funds to pay a possible arbitration award, the contractor sued the trustees of the association, personally, in federal court. That action was administratively dismissed pending the outcome of the arbitration. The association moved to dismiss the arbitration on the theory that it was only a payment agent for the individual owners. Additionally, before the arbitration hearing commenced, several individual slip owners moved to intervene in the arbitration. They supported their application with certifications attesting to their personal stake in the matter, including: that the association had insufficient funds to pay a judgment; their belief that the contractor would attempt to collect any arbitration award from the individual owners personally; and that the dispute had already affected their interests when the contractor filed a construction lien against their properties and then failed to pay the counsel fee award.

The contractor opposed the owners’ motion, claiming that it was untimely, and that the association was representing the owners’ interests. The contractor represented that the only party who could be held liable in the arbitration was the association although it also conceded that a determination in the arbitration about the amount of money damages could operate as against other potentially liable parties in other proceedings under the doctrine or principles of issue preclusion. In other words, the contractor made no promises that it would not sue the individual owners and seek to assert collateral estoppel with respect to the damages. Without citing reasons, the arbitrator denied the owners’ intervention motion. The arbitrator awarded damages against the association. The contractor then filed a complaint in the Law Division seeking to confirm the award, while the association filed a counterclaim seeking to have the award vacated.

During oral arguments, the lower court asked the contractor’s attorney if the contractor intended to try to collect the arbitration award from the slip owners. The attorney said it was likely to do so. In an oral opinion, the lower court reasoned that the contractor was attempting to get a judgment against the association and then ultimately enforce it against the slip owners. Thus, the lower court held that the slip owners were parties to the agreement and, under the terms of the agreement, they had the right to participate in the arbitration and were entitled to notice of the arbitration. It found that it was improper for the owners to have been dismissed from the arbitration and then not permitted to intervene. The lower court concluded that the arbitrator exceeded his authority by denying the slip owners the opportunity to participate in the arbitration.

The lower court also concluded that, because the agreement limited the membership’s liability to the amount held in its escrow account, the arbitrator exceeded his powers by failing to inquire as to the amount of money in the escrow account and by failing to limit the award against the membership to the amount in the escrow account. It reasoned that the arbitrator exceeded his authority by rendering an award that’s ultimately going to have to be paid by parties who were not permitted to participate in the arbitration. Accordingly, the lower court entered an order denying the application to confirm the arbitration award, and granting the membership’s application to vacate the award.

After the Law Division vacated the award, the contractor filed a request with the NAF to re-open the prior arbitration and to add claims against the individual slip owners. The slip owners filed a complaint and order to show cause in the Law Division seeking to enjoin the second arbitration, on the grounds that it was barred by the rules of the NAF and by the entire controversy doctrine. In an oral opinion, the lower court concluded that the owners had not satisfied the criteria for temporary injunctive relief. The lower court observed that there would be no immediate and irreparable harm if it did not enjoin the arbitration. The lower court also reasoned that it was for the arbitrator to decide, using the NAF’s procedural rules, whether to apply the entire controversy doctrine to the second arbitration. The lower court further considered that the law was unclear as to whether the entire controversy doctrine applied where an arbitrator had at least indirectly declined to join parties who sought to be included in the claim. Therefore, the owners had not established a likelihood of success on the merits of their application.

On appeal, the Appellate Division affirmed the lower court’s vacation of the arbitration award. The Court agreed that the arbitrator and the NAF had exceeded their authority by excluding the slip owners from the arbitration; the dispute that the contractor sought to arbitrate was one that included the owners, and the contractor obviously intended to pursue the owners for payment of any arbitration award it obtained against the membership. The owners were also indispensable or necessary parties to the arbitration.

Further, the Court agreed with the lower court that the owners had failed to satisfy the test for temporary injunctive relief, and that the second arbitration was not barred by the entire controversy doctrine; that doctrine no longer includes the mandatory joinder of parties, as opposed to issues.

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