UBS Wins EFL Arbitration On Wall Street With No Name

April 17, 2019

Some say that Wall Street's Employee Forgivable Loans (also known as a "Promissory Notes" or  "EFLs") is a charade -- according to that line of thought, these are really signing bonuses or retention bonuses masquerading as loans. Frankly, that's one hell of a masked ball but the courts generally (but not always) sustain these arrangements as loans requiring repayment. As it turns out, it proves quite the uphill battle to argue that the promissory notes you signed weren't meant to be enforced; or that the provision in the agreement you signed whereby you agreed to repay any loan balances upon termination of registration was just so much legalese. Yeah . . . I know . . . I've heard it all. It was a wink-wink-nudge-nudge transaction. It was meant to be a bonus. Good luck with that. Oh, and by the way, should your former firm pursue collection of your EFL balance, you better make sure that you timely file an Answer and that you show up at the designated dates and times for all the hearings. And make sure that your address-of-record is current. As shown in a recent FINRA EFL arbitration, an up-to-date address isn't all that easy to accomplish, and even if you think everyone knows where you are and where you aren't, that may not be enough to ensure that you get notice.

2016 FINRA Arbitration

In a FINRA Arbitration Statement of Claim filed in January 2016, Claimants UBS asserted breach of promissory note contract and unjust enrichment. Claimants sought $1,441,157.60 in compensatory damages plus interest, fees, and costs. In the Matter of Arbitration Between UBS Financial Services Inc.and UBS Credit Corp., Claimants, v. Michael James DiNapoli, Respondent (FINRA Arbitration Decision 16-00254) The FINRA Arbitration Decision asserts:

The Arbitrator determined that Respondent Michael James Dinapoli was served with the Statement of Claim by regular mail and an Overdue Notice and Notification of Arbitrator by certified mail and is therefore bound by the Arbitrator's ruling and determination. 

The Decision further states that Respondent DiNapoli "did not enter an appearance in this matter." The FINRA Arbitrator found Respondent DiNapoli liable and ordered him to pay to Claimants UBS $1,441,157.60 plus interest and a $300 fee reimbursement.

New York Supreme Court / New York County Appeal

Thereafter, DiNapoli filed a motion in the New York State Supreme Court for New York County (the "NY Sup Ct") seeking to vacate the FINRA Arbitration Award. In his Petition to Vacate the Arbitration Award
Servlet?documentId=hWzJzwgoy4Z_PLUS_IgYeF3iXsw==&system=prod, DiNapoli asserted in part that following his association with UBS in 2012, he moved to Florida in 2013; however, following that relocation, DiNapoli alleged that:

11. However, following his move to Florida, UBSFS' s Human Resources Department ("UBS HR") required DiNapoli to provide it with a New York address since he would be working in New York and because he did not have a Series 66 License which is required in Florida, but not in New York. UBS HR also indicated to DiNapoli that because he would be working out of the New York office, he was not permitted to have a Florida address on file. 

12. While in New York City, DiNapoli would stay at the New York Athletic Club (the "NYAC"), located at 180 Central Park South, New York, New York 10019. The NYAC is a private club that, among other things, provides mail drop boxes for its members, Accordingly, DiNapoli set up a mail drop box at the NYAC (the "NYAC Box") so that he would have a New York address for UBS HR. 

13. During his employment, DiNapoli asked UBS HR if he could change his address on file to reflect his Florida home address, but UBS rejected his request. Further, because the NYAC is considered a commercial establishment, mail cannot be forwarded from the NYAC to any other location. Accordingly, DiNapoli checked his mail regularly while working at UBSFS and staying at the NYAC. 

14. When DiNapoli was terminated by UBSFS, he requested an address change for all mail that he believed was being sent to the NYAC Box, including mail from UBS HR. 

15. Critically, at all relevant times, UBS has known that DiNapoli lives in Florida. 

16. DiNapoli never provided FINRA with the NYAC Box address, which, upon information and belief, was provided to FINRA by UBS. 

17. Further, FINRA had actual knowledge that the NYAC Box address was not DiNapoli's correct or current address at the time it served the Statement of Claim. UBS's Statement of Claim states that DiNapoli maintains residences in both New York and Florida. A copy of the Statement of Claim is annexed as Exhibit C. In Exhibit C to the Statement of Claim, UBS includes a letter addressed to DiNapoli in Warwick, New York (a previous home address for DiNapoli) and also a letter addressed to DiNapoli's Florida home address. Nowhere in the Statement of Claim or the exhibits attached to it did UBS include any reference to the NYAC Box address. 

18. Thus, FINRA had actual knowledge that the NYAC Box address was not the proper address for DiNapoli based on the very pleading it was tasked with serving. 

19. DiNapoli terminated his membership at the NYAC on or about October of 2015 and no longer used the NYAC Box after that. 

Online FINRA BrokerCheck records as of April 17, 2019, disclose that DiNapoli was first registered in 1993, and from December 2012 to October 2015, he was registered with FINRA member firm UBS Financial Services Inc. Following DiNapoli's departure from UBS and his alleged termination of his NYAC membership and box-address, he alleged that UBS initiated its FINRA Arbitration against him, and that:

26. Upon information and belief, FINRA mailed the Statement of Claim to the NYAC Box only, despite the fact that -- as indicated above -- the document annexed as Exhibit C to the Statement of Claim established that the NYAC Box was not DiNapoli's residential address or usual place of abode. 

27. In fact, at all relevant times, FINRA has known that DiNapoli has a residence in Florida, based both on the Statement of Claim submitted by UBS and FINRA's own records. 

28. As DiNapoli no longer belongs to the NYAC and no longer uses the NYAC Box, he was never notified that any mailing from FINRA was sent to him there and has no basis to know whether in fact it ever actually was sent to him there. 

29. Accordingly, DiNapoli never received the Statement of Claim, nor any documentation pertaining to the arbitration and was never afforded an opportunity to file a Statement of Answer or appear in the arbitration.  

During oral argument, things got heated between UBS's attorney Louis M. LaGalante, Esq.  and Justice Shirley Werner Kornreich.  In the Matter of Michael James DiNapoli, Petitioner/Respondent, v. UBS Financial Services Inc., et al., Respondents/Appellants
(Order and Judgment -- and --Transcript of Record, New York State Supreme Court/New York County, 653787/2016, December 6, 2016)

THE COURT: That is not what I am suggesting. I am suggesting that UBS, who fully knew that -- and there's nothing to refute it -- that Mr. DiNapoli lived in Florida, went along with this; and whether or not that is fundamental fairness, whether that's some kind of fraud, whether that -- 

MR. LAGALANTE: Well, your Honor -- 

THE COURT: -- undermines the -- 

MR. LAGALANTE: First of all -- 

THE COURT: -- entire proceeding. 

MR. LAGALANTE: Your Honor, no one except the Court has suggested fraud in this case. Only you have raised the issue of fraud in the case. 

THE COURT: Not really. 

MR. LAGALANTE: And there's nothing in the pleadings -- 

THE COURT: Please, please, let me talk. 

MR. LAGALANTE: Your Honor, there is nothing in the pleadings to suggest that UBS -- 

THE COURT: Do you want to change spots? 

MR. LAGALANTE: No. I think that it's -- 

THE COURT: Can I say something? Can I have permission to speak? 
The papers from the petitioner suggest that UBS all along knew -- over and over again it suggests this -- that he lived in Florida and did nothing to make certain that he was apprised of the proceeding. 

MR. LAGALANTE: UBS is not under any obligation, and, in fact, is precluded from serving the Statement of Claim on Mr. DiNapoli. That is FINRA's obligation pursuant to federal law. 

THE COURT: Are they precluded from saying anything to FINRA that he lives in Florida? Are they preclude from letting him know, not sending the claim, but letting him know that this is ongoing? 

MR. LAGALANTE: They are not precluded from doing it. 

THE COURT: Or from saying something when they realized he'd been only served at the Athletic Club? . . .

Pages 16 - 19 of the NYS Sup Ct Transcript

In vacating the FINRA Award, Justice Kornreich stated on the record in part that:

In a case such as this, which should be governed by New Jersey law, which specifically requires notice, where UBS on this record was fully aware that Mr. DiNapoli lived in Florida, I think this vacatur is required when he only received notice at an address at which he did not reside, where UBS informed FINRA of an address other than the one where FINRA served notice, and where those addresses were on the registration that Mr. DiNapoli swore to. So for all of these reasons, I am vacating the arbitration award and ordering a new hearing; and the new hearing is to be conducted under New Jersey law. . .

Page 27 of the NYS Sup Ct Transcript

New York State Supreme Court / Appellate Division

UBS appealed the NYS Sup Ct's vacatur to the New York State Supreme Court / Appellate Division (the "NYS App Div"). In the Matter of Michael James DiNapoli, Petitioner/Respondent, v. UBS Financial Services Inc., et al., Respondents/Appellants (Decision and Order, New York State Supreme Court/Appellate Division/First Department, 2019 NY Slip Op 02839 / April 16, 2019) In reversing the lower court's vacatur, the NYS App Div stated:

We conclude that the arbitrator correctly found that petitioner was properly served with notice (see Selective Ins. Co. v Coach Leasing, Inc. , 2008 WL 2404183, *7, 2008 NJ Super Unpub LEXIS 1104, *18 [NJ Sup Court, App Div, June 16, 2008] ["actual knowledge of the notice is not required by our statute provided service was made at a location held out by the person as a place of delivery of such a notice (internal quotation marks omitted)]). The record demonstrates that, in accordance with its rules, FINRA served respondents' Statement of Claim on petitioner by sending it to him by regular mail at one of the three residential addresses he had provided to FINRA in a filing six weeks earlier. Under the rules, it was petitioner's obligation to keep his address information current via supplemental amendments. No amendments supplementing petitioner's residential information were submitted between the date of the aforementioned filing and the date of the arbitration award six weeks later. Nor was the Statement of Claim returned to FINRA as undeliverable.

Bill Singer's Comment

Personally, I prefer the NYS Sup Ct Decision to that of the NYS App Div. Unfortunately for DiNapoli, my preferences don't mean jack. Regardless, let this case serve as a warning to all associated persons. Make sure that you keep your address current with FINRA. And if your street has no name, well, gee, that's gonna be a problem.