In Re the Arbitration Between Republique Francaise & Cellosilk Manufacturing Co.

128 N.E.2d 750, 309 N.Y. 269, 1955 N.Y. LEXIS 954

• Court: New York Court of Appeals
• Decided: July 8, 1955
• Status: Published

Opinions

Conway, Ch. J.

In October, 1945, the respondent, Bepublique Francaise (hereinafter designated Bepublique), entered into a contract with the Cellosilk Manufacturing Company (hereinafter called Cellosilk) for the purchase of $512,100 worth of a glass substitute, to be delivered F.A.S. Port of New York, in six installments, the last of which was due in March, 1946. Among the “ General Terms and Conditions ” of the contract there was a provision that the warranty given by the seller “ shall expire not sooner than at the end of one year from the date of receipt by us [Bepublique] of the material ” and a provision that the order “ shall be governed by and construed according to the laws of the State of New York and all questions and controversies arising in connection therewith shall be submitted to arbitration in accordance with the rules of the American Arbitration Association ”.

In March, 1946, Bepublique entered into another contract with Cellosilk for an additional $256,050 worth of the same glass substitute, to be delivered F.A.S. New York City, in two installments, one in March and the other in April, 1946. The “ General Terms and Conditions ” of this contract, similar to those in the earlier contract, contained provisions that the warranty given by the seller with respect to the goods or material “ shall expire twelve months from the date of receipt by Buyer of such goods and material * * * that the “ agreement shall be governed by and construed according to the laws of the State of New York ” and that the seller and buyer “ agree to submit to arbitration, to be held in the City of New York, all claims or controversies ” arising out of the agreement.

On October 20, 1949, almost three and one-half years after the last scheduled delivery to Bepublique, Cellosilk filed with the Secretary of State of Illinois a statement of intent to dissolve, setting forth therein the names and addresses of its officers and directors as required by the laws of Illinois. (Laws of Illinois, 1933, pp. 308, 347-348, § 77; Smith-Hurd HI. Anno. Stat. [Perm, ed.], ch. 32, § 157.77, p. 386). Thereafter, on April 28,1950, the Secretary of State of Illinois issued a certificate of dissolution, whereupon Cellosilk was dissolved, ceased doing business and closed its office at Barrington, Hlinois — the address given on the contracts with Bepublique.

Bepublique apparently received the goods contracted for and made no attempt to commence arbitration proceedings until on or about February 25, 1952, almost six years after the last scheduled delivery to Bepublique and about two months before the expiration of the two-year period following the date of Cellosilk’s dissolution within which, according to Hlinois law, an action or proceeding might be brought against Cellosilk. (See 1 Ill. Rev. Stat., 1949, ch. 32, § 157.94; Smith-Hurd HI. Anno. Stat. [Perm, ed.], p. 437; see, also, Title Co. v. Wilcox Bldg. Corp., 302 U. S. 120, 124-125, involving an Illinois corporation.) It then mailed a demand for arbitration to Cellosilk at its address at Barrington, Illinois. At the same time it mailed a copy of the demand to the American Arbitration Association (hereinafter designated the Association), setting forth the nature of the dispute and the amount of the award sought. Ho demand for arbitration was sent to the Secretary of State of Illinois. Similarly, no formal demand was ever sent to appellant Brown, who had been an officer and director of Cellosilk as well as its sole stockholder, or to Cellosilk in care of Brown. The next day, February 26th, the Association mailed to Cellosilk a letter addressed in the same manner as the demand sent by Republique, stating that Republique had filed a demand for arbitration, and enclosing the list of names from which the arbitrators were to be appointed. On February 28,1952, this letter was returned to the Association bearing the notation “ out of business ”. In his affidavit in support of the motion to vacate the order confirming the award and directing the entry of a money judgment against Cellosilk, Brown states that all the proceedings, except those taken in the District Court in Illinois, to be discussed infra, “ were without proper or effectual notice to ” Cellosilk, the Appellate Division found that ‘ ‘ The post office returned the notices [sent] to the corporation ” by Republique and the Association, and Republique itself does not deny or contest the allegations that wo notice of any hind of the attempted arbitration was actually delivered to or served upon Cellosilk.

After learning that Cellosilk was “ out of business ” and that it had not received the notices sent to it, the Association wrote an informal letter, dated March 10, 1952, to appellant Brown, enclosing also a formal notice of hearing, but no demand for arbitration, the process necessary to initiate arbitration. In that letter the Association stated in part :

‘1 On February 28, the post office returned our letter which had been addressed to the Cellosilk Manufacturing Company, with the notation that it was 1 out of business.’ We so notified the attorneys for Republique Francaise, who wrote us, in part, as follows:

‘ ‘ ‘ Regardless of this fact, our client, Republique Francaise, wishes to proceed with the arbitration of the matter set forth in its Demand for Arbitration.’

“ We were further advised by * * * [the attorneys for Republique] that you were connected with Cellosilk Manufactaring Company in some way. In view of such information, we wish to point out to you Sections 39 and 29 of the enclosed Rules.” (Emphasis supplied.)

Rule 39 of the Rules of the Association, mentioned in the letter to Brown provided: * ‘ 39. Serving of Notices — Each party to a Submission or other agreement [Brown, of course, was not a party] which provides for arbitration under these Rules shall he deemed to have consented and shall consent that any papers, notices or process necessary or proper for the initiation or continuation of an arbitration under these rules and for any court action in connection therewith or for the entry of judgment on any award made thereunder may he served upon such party (a) by mail addressed to such party or his attorney at his last known address or (b) by personal service, within or without the state wherein the arbitration is to be held (whether such party be within or without the United States of America); provided that reasonable opportunity to be heard with regard thereto has been granted such party.” (Emphasis supplied.)

Cellosilk did not appear at the above-mentioned hearing, either by representative or by counsel. On the same day as. the hearing — March 24,1952 — the arbitrators made an unanimous award in writing, which was duly acknowledged.

It is manifest from the foregoing that the entire arbitration proceeding was a nullity. No service of process in that proceeding was ever effected on Cellosilk, the Secretary of State of Illinois or Brown, the sole stockholder of Cellosilk. It is true that rule 39 of the Rules of the American Arbitration Association provided that all papers could he served upon any party to an arbitration agreement governed by its rules “ by mail addressed to such party * * * at his last known address That rule also contained the proviso, however: “ provided that reasonable opportunity to be heard with regard thereto has been granted such party ”. Knowing prior to the arbitration hearing that the notices sent to Cellosilk by itself and Association had been returned unopened, and having learned or been put upon notice of the dissolution of Cellosilk, it cannot reasonably be said that Republique afforded Cellosilk a ‘ ‘ reasonable opportunity to be heard ” when it promptly directed the arbitration to proceed without further ado. Indeed, it must he held that by so proceeding Repffblique denied Cellosilk a right to which it was entitled by the terms of the same contract which gave New York courts jurisdiction and gave consent to service by mail. The arbitration award having been thus procured in violation of the contract and of due process was null and void.

Thereafter, by a notice of motion dated March 26, 1952, Republique sought an order of the Supreme Court of this State confirming this null and void award and directing the entry of a money judgment thereon. In neither the notice of motion to confirm the award and direct entry of a money judgment thereon nor in the affidavit in support thereof did Republique make any mention to our Supreme Court of the fact that the notice of arbitration had been returned by the Post Office marked “ out of business Neither did the notice of motion to confirm the award and to direct the entry of a money judgment make mention of the fact that the notice of motion had been mailed to Cellosilk’s address in Barrington from which the former notices had been returned marked ‘ ‘ out of business ”, or of the fact that no notices of any kind had been sent to the Secretary of State of Illinois. The Supreme Court of this State, therefore, received no notice from Republique that there had been no jurisdiction obtained over Cellosilk in the arbitration proceedings or on the motion for confirmation of the award and entry of judgment. Cellosilk neither appeared nor submitted papers in opposition, and the motion to confirm the award was granted on April 14, 1952. Thereafter, on April 22, 1952, six days before the expiration of the Statute of Limitations of Illinois, Republique commenced a civil action in the United States District Court in Illinois (Northern District Eastern Division) against both appellants, Cellosilk and Brown, to recover the amount of the money judgment which had been entered upon the arbitration award.

On April 9, 1953, Cellosilk and Brown appeared specially before the Supreme Court of New York and moved for an order vacating and setting aside the order which confirmed the arbitration award and directed the entry of a money judgment ‘ ‘ upon the grounds that the court had no jurisdiction to make such order or to direct entry of such judgment and that the notices of motion to confirm award and enter judgment and to settle order were not properly served on * * * [Cellosilk] ”. Special Term granted the motion. The Appellate Division unanimously reversed and the present appeal to this court is taken, as of right, from that reversal.

It is settled that an Appellate Division order which reverses an order vacating a final judgment and denies the motion to vacate is not a final order and, so, an appeal therefrom to this court does not lie as of right but only by permission of the Appellate Division (see Cohen and Karger, Powers of the New York Court of Appeals, p. 143 and cases there cited; Civ. Prac. Act, § 589, subd. 1, par. [a]). There is, on the other hand, an equally well-settled exception to this rule. Thus, an order denying a motion to vacate a final judgment is itself regarded as final where the motion to vacate has been made by a person not previously a party to the action or proceeding (see United States Trust Co. of N.Y. v. Bingham, 301 N. Y. 1; Matter of Burdak, 288 N. Y. 606). Where one has been named a party to the action or proceeding but jurisdiction over his person has not been obtained, he is to be regarded osa“ third party ” for the purposes of the finality rule. Here the judgment entered on the arbitration award runs against Cellosilk alone, although Republique has instituted suit in a Federal court in Illinois against Brown, the holder and sole distributee of the assets of Cellosilk, as well as against Cello-silk, seeking to recover the amount of said judgment. If Cellosilk is correct in its contention that the Supreme Court had no jurisdiction over its person, Cellosilk will be regarded as a 1‘ third party” for the purpose of this appeal, taken as of right, a reversal of the Appellate Division determination must follow and the judgment must be vacated. Since we agree that Cellosilk has established its contention we need not further discuss the status of Brown on this appeal or in the action now pending in Illinois in which he is a party.

Cellosilk was a foreign corporation — an artificial entity whose existence and powers depended upon the laws of the State of its incorporation. The general rule at common law where a corporation has been dissolved — whether it be by voluntary action, court decree, or expiration of its chartered life — is that all of its obligations cease and all actions against it abate. Thus, in Title Co. v. Wilcox Bldg. Corp. (302 U. S. 120, supra), a case involving a dissolved Illinois corporation, the Supreme Court wrote at pages 124-125: “ The decisions of this court are all to the effect that a private corporation in this country can exist only under the express law of the state or sovereignty by which it was created. Its dissolution puts an end to its existence, the result of which may be likened to the death of a natural person. There must be some statutory authority for the prolongation of its life, even for litigation purposes. [Citing cases] ”. Except as modified by specific statutes, the Supreme Court went on to state (302 U. S. 125), the law of Illinois follows the above-quoted general rule. There is such a survival statute in Illinois (1 Ill. Rev. Stat., 1949, ch. 32, § 157.94; Smith-Hurd 111. Anno. Stat. [Perm, ed], p. 437). Before seeking an order of the Supreme Court of this State confirming the award and directing the entry of a money judgment against Cellosilk, Republique was* under a duty to determine the exact legal status of Cellosilk and what, if any, actions or proceedings could be brought against it. It was incumbent upon Republique to make certain that the Supreme Court of New York had jurisdiction to enter the order confirming the award and directing the entry of the money judgment so that Cellosilk be not deprived of due process. Therefore, when the notices of demand for arbitration and the other correspondence were returned, Republique was under an obligation to determine the meaning of the notation “ out of business ”. That inquiry must have disclosed the prior dissolution of Cellosilk, and the fact that it no longer was possible for Republique to send notices to that corporation by mailing them to its former office at Barrington. Despite this knowledge that no notice of any kind was being effected, Republique chose that same method of service for the notice of motion for an order confirming the arbitration award and directing entry of a money judgment thereon. The rule of the Arbitration Association which prescribed the manner for the service of the demand for arbitration also, by its terms, regulated the service of notices “ for any court action in connection ” with the arbitration. That rule, therefore, permitted the notice of motion to confirm the award and to direct entry of a money judgment to be mailed to the last known address of the party provided that a reasonable opportunity was given such party to be heard in opposition. If the notices of demand for arbitration and subsequent correspondence had not been' returned unopened and marked “ out of business ”, then it would not have been unreasonable for Republique to conclude that service of the notice to confirm the award and to direct the entry of a money judgment had been effected on Cellosilk. That, however, was not the case, for the notices, sent by mail to the last post-office address of Cellosilk by Republique and the Association were, as the Appellate Division found, returned unopened and marked 11 out of business ”.

The method of service by which parties have agreed to be bound must be complied with according to the exact terms thereof in order that the requirements of due process be satisfied (De Dood v. Pullman Co., 57 F. 2d 171; Grover & Baker Mach. Co. v. Radcliffe, 137 U. S. 287). It has been said that where a plaintiff has been given alternative methods for the service of process and notices upon his adversary, ‘ ‘ the complainant is under a constitutional duty to select that alternative that is reasonably calculated to notify the adverse party. Stated negatively, the complainant may not select an alternative that he knows (or should know) will not notify the other party when he also knows (or should know) that one of the other alternatives, if selected, would notify the adverse party.” (People v. One 1941 Chrysler 6 Touring Sedan, 81 Cal. App. 2d 18, 34; see, also, Mouldings Div. of Thompson Inds. v. Review Bd., 122 Ind. App. 497). In the present case, Republique knew from its examination of the Illinois law that the Secretary of State of Illinois was the irrevocable, statutory agent for the service of process and notices in those instances where the same could not be served upon this corporation at Barrington. Service upon him would have been service upon the corporation within the two-year period expiring on April 28, 1952, within which an action or proceeding could be brought against Cellosilk and Brown following the dissolution of Cellosilk on April 28,1950, provided that a £ ‘ remedy [was] available to or against such corporation, its directors, or shareholders, for any right or claim existing, or any liability incurred, prior to such dissolution ”. (That proviso we do not reach here.) Although experience had shown Republique that it was impossible to serve Cellosilk in Barrington, nevertheless, the notice of motion to confirm the award and to enter a money judgment thereon was sent to that address, and not to the Secretary of State of Illinois. That was not a bona fide compliance with the rule for service of process and notices “ for any court action” by which the parties had agreed to be bound (rule 39 of the Rules of the Association, supra). It was, rather, a method of service which Republique knew from the past would not give notice to its adversary and would not give its adversary a reasonable opportunity to be heard in opposition. What the Supreme Court has said with regard to constructive service statutes is applicable with equal force here: ‘ ‘ No doubt there may be some extension of the means of acquiring jurisdiction beyond service or appearance, but * * * great caution should be used not to let fiction deny the fair play that can be secured only by a pretty close adhesion to fact ”. (McDonald v. Mabee, 243 U. S. 90, 91.) It is only by closing our eyes to the facts and background of this case that we might possibly consider that mailing the notices of motion to confirm the award and to enter judgment to Cello-silk at Barrington, Illinois, would give the Supreme Court of New York jurisdiction over Cellosilk. The realities of the case dictate a contrary conclusion, and since the Supreme Court did not acquire the necessary in personam jurisdiction over Cellosilk, Cellosilk is to be regarded as a “ third party” for the purposes of the finality rule and, as a matter of law, the order confirming the award and the judgment entered upon that order must be vacated.

The order of the Appellate Division should be reversed, and the order of Special Term reinstated, with costs in this court and in the Appellate Division.