Dowe v. Prudential Financial Inc.

Background

Maureen Dowe, Elvie Moore, and Esther Buckram were former employees of Prudential Securities, Inc. and former clients of Leeds & Morelli, P.C. or its successors, which the opinion calls LMB. They brought a proposed class action alleging that LMB conspired with Prudential to settle employment-discrimination claims for less than their true value in exchange for undisclosed payments from Prudential to LMB.

The plaintiffs’ settlement agreements with Prudential contained arbitration clauses. Their retainer agreements with LMB did not. Prudential and LMB separately moved to compel arbitration. LMB also moved in the alternative to dismiss the claims as barred by the statute of limitations.

Arbitration of Claims Against Prudential

The court granted Prudential’s motion to compel arbitration. The court found that the claims against Prudential fell within the broad arbitration clauses in the settlement agreements. The plaintiffs argued that the agreements had been fraudulently induced, but the court explained that their allegations challenged the settlement agreements as a whole, not the arbitration clauses specifically. Under federal arbitration law, a challenge to the contract generally must be decided by the arbitrator, while a challenge specifically directed at the arbitration clause is decided by the court.

The court also granted the motion as to Eric Schwimmer, the Prudential officer who signed the settlement agreements on Prudential’s behalf. The court stayed the action against Prudential pending the arbitration proceedings.

Arbitration of Claims Against LMB

The court denied LMB’s motion to compel arbitration. LMB was not a signatory to the settlement agreements containing the arbitration clauses. The court considered whether LMB could nevertheless enforce those clauses under equitable estoppel, a doctrine that can prevent a party from avoiding arbitration when the party’s relationship with the nonsignatory and the claims make arbitration fairly required.

The court assumed that the issues LMB wanted arbitrated were connected to the settlement agreements, but found that the required relationship among the plaintiffs, Prudential, and LMB was absent. The plaintiffs understood LMB to be their attorney and understood LMB’s relationship with Prudential to be adversarial. The settlement agreements did not indicate that LMB and Prudential would have an ongoing relationship known to or accepted by the plaintiffs. The court therefore concluded that the plaintiffs were not barred from pursuing their claims against LMB in court. It also concluded that an earlier decision allowing LMB to compel arbitration was no longer controlling in light of later appellate decisions limiting this form of estoppel.

Statute of Limitations

The court granted LMB’s motion to dismiss the claims against it as untimely. The plaintiffs asserted two federal claims under 42 U.S.C. § 1985 and nine New York claims, including fraudulent concealment, fraud conspiracy, breach of fiduciary duty, legal malpractice, statutory deceit and collusion, unauthorized receipt of client funds, and conversion.

The court assumed that the state claims could receive the longer fraud limitations period under New York law and that the federal claims were subject to a three-year limitations period. Even under those assumptions, the court held that none of the claims was timely. The latest alleged injuries occurred, at the latest, when the plaintiffs signed their settlement agreements in 1999, but the action was not filed until December 12, 2018.

The court rejected reliance on New York’s two-year fraud discovery rule. It reasoned that the plaintiffs should have questioned why they were asked to sign only a signature page numbered page six of the dispute-resolution agreement, without being shown the first five pages. The court also pointed to publicly reported allegations and earlier related litigation as information that could have led a reasonably diligent person to discover the alleged misconduct.

The court also rejected equitable estoppel as a way to prevent LMB from relying on the limitations defense. It found that the plaintiffs had not shown the required diligence in discovering their claims or in filing suit after learning of them. The court noted that Dowe allegedly learned of LMB’s misconduct in December 2016 but filed suit nearly two years later, and that Buckram allegedly learned of a potential issue in 2001. The court did not rely on extrinsic evidence concerning Moore’s separate settlement with LMB.

Disposition

Judge Denise Cote granted Prudential’s motion to compel arbitration, including as to Eric Schwimmer; denied LMB’s motion to compel arbitration; granted LMB’s motion to dismiss; and stayed the action against Prudential pending arbitration.