99 Commercial Street, Inc. v. Goldberg
| Decision Date | 14 January 1993 |
| Docket Number | No. 92 Civ. 2879 (SS).,92 Civ. 2879 (SS). |
| Citation | 811 F. Supp. 900 |
| Parties | 99 COMMERCIAL STREET, INC., Martin Kennedy and Clark McLain, Plaintiffs, v. Gary H. GOLDBERG and Gary Goldberg & Company, Defendants. |
| Court | U.S. District Court — Southern District of New York |
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Alan Cohen, O'Melveny & Meyers, New York City, for plaintiffs.
Stephen Rinehart, Parker, Chapin, Flattan & Klimpl, New York City, for defendants.
Defendants' motion presents the question of whether plaintiffs may be required to arbitrate claims under a brokerage agreement signed by an escrow agent. Controlling principles of arbitration, escrow, and agency law lead to the conclusion that plaintiffs may be so required and, therefore, this Court grants Defendants' request for an order, pursuant to the Federal Arbitration Act, 9 U.S.C. § 1 et seq., to compel arbitration and stay this action.
Plaintiffs 99 Commercial Street, Inc. ("99 Commercial"), a developer of real estate in New York City, and its principals Martin Kennedy ("Kennedy") and Clark McLain ("McLain") (together, "Plaintiffs") commenced this action against Gary Goldberg & Co. ("GG & Co."), a securities broker-dealer, and its president Gary H. Goldberg ("Goldberg") (together "Defendants"), seeking to recover compensatory damages for claims arising under, inter alia, § 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and punitive damages under 18 U.S.C. § 1961 et seq.
Plaintiff 99 Commercial and its principals claim that Defendants made a series of fraudulent misrepresentations that induced them to invest mortgage proceeds in three funds that Defendants managed or owned: MFS Government Market Income Trust and MFS Intermediate Income Trust (together the "MFS Funds") and VMS Mortgage Investment Fund (the "VMS Fund") (together "the Funds"). Plaintiffs assert that through a pattern of securities fraud and racketeering activity, Defendants siphoned principal and interest from their investment. In this proceeding, Defendants have moved to compel arbitration of Plaintiffs' claims.
An abbreviated narrative of the facts is helpful in clarifying the issues raised by Defendants' motion.
The underlying events began when Kennedy and McLain mortgaged their homes and a building located at 99 Commercial Street with Liberty Credit Corporation ("LCC") in order to raise $1.3 million to acquire a property (the "Property") adjacent to the building.
Before the mortgages closed, Kennedy and McLain sought advice from Goldberg on how to invest the mortgage proceeds while they waited for the Property to become available for purchase. They asked Goldberg to recommend "safe, conservative and liquid short-term assets" because they had mortgaged the full value of 99 Commercial and their homes. Plaintiffs confided to Goldberg that they had no investment experience with securities and that they would rely exclusively on him. Goldberg recommended that they invest the mortgage proceeds in the MFS and VMS Funds by depositing the proceeds with Defendants' clearing house, Bear Stearns & Co. ("Bear Stearns").
The closing followed, and, in accordance with Defendants' instructions, McLain deposited $1 million of the mortgage proceeds with Bear Stearns (hereinafter the "Commercial Account"). Defendants have not produced a customer agreement for the Commercial Account but have proffered evidence that when an account is opened, Bear Stearns routinely sends to clients an executed customer agreement containing an arbitration clause. Plaintiffs deny receiving the agreement.
LCC and Plaintiffs also placed $100,000 of the mortgage proceeds in escrow with Steckler, Gutman, Morrisey & Murray ("Steckler & Gutman"), attorneys for LCC, in order to secure completion of certain conditions that had been required but were not completed at the closing (hereinafter the "Escrow Account"). The escrow agreement specified that the escrow monies would be held by the escrow agents in In their papers to the Court and at oral argument, Plaintiffs admit that they were told about and approved the placement of the escrow monies with Bear Stearns.
Partners of Steckler & Gutman, acting as escrow agents, signed a customer agreement with Bear Stearns ("the "Customer Agreement") for the Escrow Account about a week after the Commercial Account was opened. Although the partners signed the Customer Agreement using their own names, the account name was "FBO (for the benefit of) 99 Commercial St Inc" in all of Bear Stearns records.
In portions relevant to this matter, the Customer Agreement expressly incorporates GG & Co. as a third-party beneficiary. It provides that "You the customer agree that your broker Goldberg & Co. is a third party beneficiary of this Agreement, and that the terms and conditions hereof, including the arbitration provision, shall be applicable to all matters between or among any of you, your broker or Bear Stearns." (Emphasis added).
The Customer Agreement further provides that:
You the customer agree, and by maintaining an account for you Bear Stearns agrees, that controversies arising between you and Bear Stearns concerning your accounts or this or any other agreement with Bear Stearns, whether entered prior to, on or subsequent to the date hereof, shall be determined by arbitration.
(Emphasis added).
The Escrow and Commercial Accounts were invested in the MFS and VMS Funds, whose values then dropped precipitously. Kennedy and McLain grew less confident in Goldberg's investment advice and this led to the closing of the accounts and the commencement of this action.
Defendants move to compel arbitration of all of plaintiffs' claims citing the terms of the Customer Agreement signed by the escrow agents. Defendants maintain that Plaintiffs are the owners of the Escrow Account and, therefore, are bound by the Customer Agreement to arbitrate any disputes with them as brokers. Defendants argue that Plaintiffs are also compelled to arbitrate disputes arising from the Commercial Account because the plain language of the Customer Agreement requires arbitration of all disputes arising from any account with Bear Stearns owned by them even if it was opened before the Customer Agreement was signed. In the alternative, Defendants claim that a contract to arbitrate disputes involving the Commercial Account is implied in law because Bear Stearns routinely sent customer agreements containing an arbitration clause to clients when accounts were opened and Plaintiffs implicitly accepted the agreement by accepting and retaining the benefits of Bear Stearns' clearing services.
Although Plaintiffs concede that they authorized the placement of the escrow funds with Bear Stearns, they contest the assertion that they owned the account. Instead, they claim that either the escrow agents or LCC, but not 99 Commercial, owned the escrow account at the time escrow agents executed the Customer Agreement. Consequently, only LCC, or the escrow agents themselves, could be bound to arbitrate disputes with Defendants.
Plaintiffs emphasize that they never authorized the escrow agents to execute a customer agreement on their behalf. Moreover, there is no evidence that Plaintiffs, in contrast to the escrow agents, ever saw the Customer Agreement until the commencement of this litigation. Plaintiffs also deny ever receiving an executed customer agreement for the Commercial Account.
Plaintiffs point out that Defendants' reliance upon cases in which contracts to arbitrate have been implied in law is misplaced, because those cases involve situations in which a party, either during a transaction or in past transactions, had received a contract containing an arbitration clause and its course of conduct evinced an intent to be bound by the contract. Plaintiffs argue that parties such as themselves cannot be compelled to arbitrate disputes when they (1) never saw the agreement containing the arbitration clause; (2) never authorized the signing of such an agreement and never had a relationship with the party seeking to enforce the arbitration agreement from which one could infer a course of conduct evincing an intent to be bound to arbitration.
There is no dispute in this case that GG & Co., as a third-party beneficiary explicitly referenced in the arbitration clause of the Customer Agreement, can move to compel arbitration of its disputes with other parties to that Agreement. See, e.g., Port Chester Electrical Construction Corp. v. Atlas, 40 N.Y.2d 652, 655, 389 N.Y.S.2d 327, 330, 357 N.E.2d 983, 985-86 (1976); see also Cauble v. Mabon Nugent & Co., 594 F.Supp. 985, 991-92 (S.D.N.Y. 1984). Moreover, because "acts by employees of one of the parties to a customer agreement are equally arbitrable as acts of the principals as long as the challenged acts fall within the scope of the customer agreement," see Scher v. Bear Stearns & Co., Inc., 723 F.Supp. 211, 216 (S.D.N.Y. 1989) and cases cited therein, those claims asserted against Goldberg that arose in the context of his activities as President of GG & Co. are arbitrable. Similarly, the claims of McLain and Kennedy — which arose in the context of the activities of 99 Commercial — are arbitrable if 99 Commercial is a party to an arbitration agreement. The central issue in this case, therefore, is whether the Customer Agreement signed by the escrow agents can bind 99 Commercial to arbitrate disputes involving either the Escrow Account or the Commercial Account or both. In order to address this issue, the Court must examine applicable principles of arbitration, escrow, and agency law.
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