Fsp, Inc. v. Société Générale, Docket No. 03-7059.

• Decision Date: 12 November 2003
• Docket Number: Docket No. 03-7059.
• Citation: 350 F.3d 27
• Parties: FSP, INC. f/k/a Cowen Incorporated, Plaintiff-Appellee, v. SOCIÉTÉ GÉNÉRALE, Defendant-Appellant.
• Court: U.S. Court of Appeals — Second Circuit

350 F.3d 27

FSP, INC. f/k/a Cowen Incorporated, Plaintiff-Appellee, v. SOCIÉTÉ GÉNÉRALE, Defendant-Appellant.

Docket No. 03-7059.

United States Court of Appeals, Second Circuit.

Argued: May 29, 2003.

Decided: November 12, 2003.

Edward M. Spiro, Morvillo, Abramowitz, Grand, Iason & Silberberg, P.C., New York, N.Y. (Jay Goldberg, Jay Goldberg, P.C., New York, NY, on the brief), for Plaintiff-Appellee.

Daniel M. Mandil, Covington & Burling, New York, N.Y. (Michael Winger, on the brief), for Defendant-Appellant.

Before: CALABRESI and SACK, Circuit Judges, and GARAUFIS, District Judge.^*

GARAUFIS, District Judge.

Defendant Société Générale ("SG") appeals from a decision and order of the United States District Court for the Southern District of New York (Daniels, J.) denying its motion to stay this action in favor of arbitration, pursuant to Section 3 of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 3. SG contends that the counterclaims it has asserted against plaintiff FSP, Inc. ("FSP") implicate FSP's exchange-related activities and should therefore be arbitrated pursuant to the rules of the New York Stock Exchange ("NYSE" or "Exchange"), of which FSP is a member. We affirm based on the record before us, but remand for further consideration in light of the claims made in SG's answer, which the District Court did not have when it decided the motion to stay.

I. BACKGROUND

FSP, formerly known as Cowen Inc., is the general partner of Financial Square Partners, L.P., formerly known as Cowen & Co. ("Cowen"). In February 1998, SG and FSP executed an Acquisition Agreement by which SG acquired substantially all of the investment banking and brokerage business of Cowen.¹ Pursuant to the Acquisition Agreement, SG assumed certain liabilities and agreed to indemnify and defend FSP against losses resulting from the assumed liabilities. The Acquisition Agreement also states that if a dispute arises concerning the obligation to indemnify and defend, and if the parties cannot resolve that dispute amicably, "any party may institute suit against the other party in the United States District Court located in New York, New York, to resolve the matter." Acquisition Agreement § 10.4. Just such a dispute has arisen in this case.

In January 2002, it was revealed that a broker named Frank Gruttadauria committed multiple acts of securities fraud while employed by Cowen. Soon after these revelations came to light, multiple lawsuits alleging, inter alia, common law fraud and violations of federal and state securities laws were filed against various entities that employed Gruttadauria, including FSP.² FSP then wrote to SG claiming a right to indemnification and defense pursuant to the terms of the Acquisition Agreement. SG responded by suggesting that it may not be required to indemnify FSP against losses attributed to Gruttadauria's fraud if FSP "knew or recklessly avoided knowledge (through faulty procedures or otherwise) of Mr. Gruttadauria's improper activities." SG did not dispute, however, that the losses for which FSP might become liable as a result of the lawsuits were within the definition of assumed liabilities under the Acquisition Agreement and therefore would be within the scope of its indemnity provisions.

FSP then filed a declaratory judgment action in the District Court, seeking a declaration that SG is bound to indemnify and defend FSP in connection with the Gruttadauria-related lawsuits. Before filing an answer, defenses or counterclaims, SG moved to stay that action in favor of arbitration, pursuant to § 3 of the FAA.³ It argued that, because FSP was a member of the Exchange, by virtue of its ownership of Cowen, and because SG's own defense to the claims of indemnification and defense implicate FSP's exchange-related conduct, the rules and constitution of the NYSE mandate arbitration of the indemnification and defense claims. SG also argued in the District Court that even if its dispute with FSP is not exchange-related, its allegation of FSP's misconduct in failing to uncover Gruttadauria's fraud places in issue FSP's business practices, which is sufficient to bring this dispute within the mandatory arbitration rules of the Exchange. See FSP, Inc. v. Société Générale, No. 02-CV-4786, 2003 WL 124515 at 1-2, 2003 U.S. Dist. LEXIS 493, at *4-5 (S.D.N.Y. Jan. 14, 2003).

FSP argued that the instant dispute is simply one of contract interpretation, as SG's obligation to defend and indemnify arises out of the Acquisition Agreement. Moreover, FSP asserted that § 10.4 of the Acquisition Agreement evinces the parties' intent to have indemnification-related disputes resolved in a judicial forum.

The District Court denied the motion to stay, finding that the parties' dispute does not concern exchange-related business. Rather, it found that "[t]his is simply a contractual dispute wholly separate and apart from plaintiff's exchange-related activities." Id. at 3, 2003 U.S. Lexis 493 at *7-8. Notably, however, the District Court did not have the benefit of SG's answer, which may contain more specific facts or claims concerning FSP's alleged misconduct. SG appeals the denial of the motion to stay.

II. DISCUSSION

We review a district court's denial of a motion to stay an action in favor of arbitration de novo. In re Salomon Inc. Shareholders' Derivative Litig., 68 F.3d 554, 557 (2d Cir.1995).

A. The "Exchange-Related" Requirement

Although the FAA expresses a strong federal policy favoring arbitration, see Oldroyd v. Elmira Sav. Bank, FSB, 134 F.3d 72, 76 (2d Cir.1998), "arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." United Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582, 80 S.Ct. 1347, 4 L.Ed.2d 1409 (1960); see also Bell v. Cendant Corp., 293 F.3d 563, 566 (2d Cir.2002). SG argues that the constitution and rules of the Exchange, which bind FSP, provide the requisite arbitration agreement in this case.

The constitution of the NYSE provides in relevant part, "any controversy between a member ... and any other person arising out of the business of such member... shall at the instance of any such party, be submitted for arbitration." NYSE Const. art. XI, § 1. Furthermore, Rule 600(a) of the NYSE Arbitration Rules provides that "[a]ny dispute, claim or controversy between a ... non-member and a member ... arising in connection with the business of such member ... shall be arbitrated under the Constitution and Rules of the New York Stock Exchange ... upon the demand of the ... non-member." These provisions are "sufficient in and of themselves to compel arbitration of covered disputes under § 3 [of the FAA]." Paine, Webber, Jackson & Curtis, Inc. v. Chase Manhattan Bank, N.A., 728 F.2d 577, 580 (2d Cir.1984). Non-members of the Exchange may invoke these rules in certain cases as third party beneficiaries. See Spear, Leeds & Kellogg v. Central Life Assur. Co., 85 F.3d 21, 26 (2d Cir.1996) (stating that "decisional law recognizes that the FAA requires the enforcement of an arbitration agreement not just in favor of parties to the agreement, but also in favor of third party beneficiaries of the members' agreement to abide by the Exchange's Constitution and Rules when they join the NYSE").

This Court has, on several occasions, considered whether a particular dispute is "covered" by the Exchange's constitution and rules. We have held that when a member of the Exchange accuses a non-member of wrongdoing, the non-member may compel arbitration of that dispute only when the dispute arises "out of the member's exchange-related business." Paine, Webber, 728 F.2d at 580. The difference in this case is that the member, rather than the non-member, is being accused of wrongdoing. We have expressly left open the question of whether the underlying dispute in a case such as this, where it is the member's conduct at issue, also must be "exchange-related". See id. at n. 5 ("We wish to note that we are not deciding today whether a non-member could compel arbitration of a dispute in an action in which the alleged wrongdoer is an exchange member and the transaction is not related to exchange business. We acknowledge that, depending on the facts, such a situation might come within the purview of an arbitration agreement adopted in light of the Congressional mandate to exchanges of self-regulation.").

In Haviland v. Goldman, Sachs & Co., 947 F.2d 601 (2d Cir.1991), plaintiff, a member of the NYSE, accused a non-member affiliate of Goldman Sachs of wrongdoing. The affiliate's motion to stay the action in favor of arbitration was denied by the district court, and this Court affirmed, based on the absence of an exchange-related dispute. We noted in passing that if the non-member affiliate had alleged misconduct by the plaintiff a broader reading of the arbitration rules may be warranted, because of the "Exchange's interest in the business conduct of its members." Id. at 607. In that case, however, it was not necessary to decide that question, because "no misconduct by [the plaintiff] has been...