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Ravin, Sarasohn, Cook, Baumgarten, Fisch & Rosen, P.C. v. Lowenstein Sandler, P.C.

2003 WL 22964368 (N.J. Super. App. Div. 2003)

ARBITRATION—Absent an expressed agreement to the contrary between the parties, an arbitrator does not have authority to appoint a receiver.

A group of attorneys left a law firm to join another. The old firm’s shareholder agreement required disputes to be arbitrated. When the old law firm sued its former employees and the law firm to which they had gone, the lower court denied the former employee’s request that the matter be arbitrated. The Appellate Division reversed, sending the matter back to the lower court. The lower court then ordered a stay of action against the new law firm, but dismissed, rather than stay, the old law firm’s action against the individual attorneys.

The shareholder’s agreement called for arbitration in accordance with the then prevailing rules of the American Arbitration Association (AAA) for commercial arbitrations. Those rules, without mentioning receivership, state: “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.” The rules also acknowledged that the parties could seek “interim ancillary relief in aid of the arbitration from the court,” specifically saying: “A request for interim measures addressed by a party to a judicial authority shall not be deemed incompatible with the agreement to arbitrate or waiver of the right to arbitrate.”

Upon application of the individual shareholders, the arbitrator appointed a receiver. The arbitrator was convinced that this action was necessary to preserve the assets of the old law firm. Nonetheless, the arbitrator himself acknowledged that “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 the AAA rules supported his appointing an arbitrator. The Court held to the contrary. It believed that New Jersey case and statutory law governing receiverships “supports the expectation that receivers will be court-appointed.” Further, its examination of out-of-state law revealed a California decision “specifically denying arbitrators the power to appoint a receiver.” As a matter of interpretive principle, the Court cited Judge Learned Hand’s statement that “[t]here is no surer way to mistreat any document than to read it literally… .” It felt that “[t]he appointment of any receiver is an extraordinary remedy, it involves the delicate exercise of judicial discretion.” Even though courts of equity have the inherent power to appoint a receiver, “such drastic action is avoided where possible.” Even though arbitrators “exercise judicial functions, and are often considered to be quasi-judicial officers[,] arbitrators are not vested with all the powers of a judge… .” Consequently, the Court doubted that an arbitrator could appoint a statutory or a custodial receiver. Beyond that, the Court felt that there was a “vast difference between the general concept of ‘injunctive relief,’ the phrase used by the AAA…, and the appointment of a receiver, whether statutory or custodial, an act that usually deprives a corporation entirely of the ability to govern itself.”

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