Citigroup Global Mkt.S v. Opportunities

• Decision Date: 10 March 2010
• Docket Number: Docket No. 08-6090-cv.
• Citation: 598 F.3d 30
• Parties: CITIGROUP GLOBAL MARKETS, INC., Plaintiff-Appellee, v. VCG SPECIAL OPPORTUNITIES MASTER FUND LIMITED, f/k/a CDO Plus Master Fund Limited, Defendant-Appellant.
• Court: U.S. Court of Appeals — Second Circuit

598 F.3d 30

CITIGROUP GLOBAL MARKETS, INC., Plaintiff-Appellee, v. VCG SPECIAL OPPORTUNITIES MASTER FUND LIMITED, f/k/a CDO Plus Master Fund Limited, Defendant-Appellant.

Docket No. 08-6090-cv.

United States Court of Appeals, Second Circuit.

Argued: Nov. 24, 2009.

Decided: March 10, 2010.

Steven G. Mintz (Terence W. McCormick and Joshua H. Epstein, on the brief) Mintz & Gold LLP, New York, NY, for Defendant-Appellant.

Allan J. Arffa (Karen R. King, on the brief), Paul, Weiss, Rifkind, Wharton &amp Garrison LLP, New York, NY, for Plaintiff-Appellee.

Before: FEINBERG, WALKER KATZMANN, Circuit Judges.

JOHN M. WALKER, JR., Circuit Judge:

VCG Special Opportunities Master Fund Limited ("VCG") appeals from the November 12, 2008 order of the United States District Court for the Southern District of New York (Barbara S. Jones, Judge) granting the plaintiff-appellee Citigroup Global Markets, Inc.'s ("CGMI") motion for a preliminary injunction and enjoining VCG from proceeding with an arbitration initiated against CGMI before the Financial Industry Regulatory Authority ("FINRA"). VCG also appeals from the district court's May 29, 2009 order denying its motion for reconsideration of the preliminary injunction. Because we conclude that the "serious questions" standard for assessing a movant's likelihood of success on the merits remains valid in the wake of recent Supreme Court cases, and because neither the district court's assessment of the facts nor its application of the law supports a finding of abuse of discretion we AFFIRM as to both orders.

BACKGROUND

On July 17, 2006, VCG, a hedge fund based on the Isle of Jersey, entered into a brokerage services agreement with CGMI. Under the agreement, CGMI was obligated to provide prime brokerage services by clearing and settling trades in fixed income securities for VCG. VCG then entered into a credit default swap agreement with Citibank, N.A. (Citibank) (a sister-affiliate of appellee CGMI under the corporate umbrella of Citigroup, Inc.). VCG alleges that it was a "customer" of CGMI, which allegedly acted as the middleman with respect to the series of transactions culmi nating in the credit default swap agreement with Citibank. After entering into the swap, Citibank eventually declared a writedown of the assets covered in its credit default swap agreement with VCG triggering VCG's obligation to pay Citibank a total of $10,000, 000.

VCG sued Citibank, seeking a declaration that, by declaring the writedown, Citibank had violated the terms of the parties' credit default swap agreement. The district court found in Citibank's favor and also found that VCG was in breach of the agreement by failing to fulfill its payment obligation. VCG Special Opportunities Master Fund Ltd, v. Citibank, N.A., 594 F.Supp.2d 334 (S.D.N.Y.2008), affd. No. 08-5707, 2009 WL 4576542 (2d Cir. Dec. 8, 2009).

In addition to litigating its claims against Citibank, VCG began arbitration proceedings against CGMI before the FINRA pursuant to FINRA Rule 12200.¹In response, CGMI filed a complaint in the district court to permanently enjoin the arbitration and for a declaration that CGMI had no obligation to arbitrate with VCG regarding the claims submitted to the FINRA arbitrators. On June 20, 2008, CGMI moved for a temporary restraining order and preliminary injunction against the FINRA arbitration pending a final resolution of CGMI's claims. CGMI asserted that it was not a party to, and did not broker, the VCGCitibank credit default swap. Compl. 11 3. Specifically, CGMI argued that VCG was not a "customer" of CGMI for purposes of those transactions and, therefore, CGMI was under no obligation to arbitrate VCG's claims under the FINRA rules.

In opposition to the preliminary injunction motion, VCG submitted a declaration stating that "CGMI recommended and set the terms for" the credit default swap and that VCG's employees had "dealt with several CGMI representatives in connection with the transaction, but most often with Jeff Gapusan, Donald Qu(i]ntin, and Jaime Aldama." Wong Decl. ¶ 7.² The declaration further stated that "[t]he terms of the contract were negotiated directly with [a] CGMI employee, Jeff Gapusan, who acted as liaison for the trading desk at CGMI." Id. at ¶ 19; see also Gruber Decl, Ex. B (FINRA records listing the three men identified by Wong as the go-betweens on the Citibank deal as employees of CGMI).

In arguing that it had not acted as a middleman for the VCGCitibank credit default swap and that VCG was not its "customer, " CGMI contended that the people identified by VCG as its CGMI contacts were acting as agents of Citibank rather than CGMI, though they were formally employed by CGMI at the time of the VCG-Citibank negotiations. Vogeli Decl. ¶ 6. CGMI also submitted a copy of VCG's initial disclosures, from VCG's action against Citibank, in which VCG had listed Jeff Gapusan and Donald Quintin as trad ing personnel employed by Citibank, not CGMI. Arffa Deck, Ex. 6.³

On November 12, 2008, the district court granted CGMI's motion for a preliminary injunction. In granting the injunction, the district court applied this circuit's longestablished standard for the entry of a preliminary injunction, under which the movant is required to show " 'irreparable harm absent injunctive relief, and either a likelihood of success on the merits, or a serious question going to the merits to make them a fair ground for trial, with a balance of hardships tipping decidedly in plaintiffs favor.' " Citigroup Global Mkts. Inc. v. VCG Special Opportunities Master Fund Ltd., No. 08-cv-5520, 2008 WL 4891229, at *2 (S.D.N.Y. Nov. 12, 2008) (quoting Almontaser v. N.Y. City Dep't of Educ, 519 F.3d 505, 508 (2d Cir.2008)). The district court held that CGMI had demonstrated a likelihood of irreparable harm, but had failed to make a showing of "probable success" on the merits based on its claim that there was no customer relationship between CGMI and VCG with respect to the credit default swap transactions. Id. at *2, *4, The district court found, however, that CGMI had provided evidence that raised "serious questions" as to whether VCG was in fact a customer of CGMI with respect to the swap transaction and granted the preliminary injunction on that basis. Id. at *5-*6.

The district court further noted that, while some prior cases have required arbitration under the FINRA rules for claims involving non-securities, those cases "dealt in large part with individual brokers' fraudulent conveyances or investments, where there is a strong policy argument favoring arbitration." Id. The district court concluded that, "in light of the undefined scope of Rule [12200's 'business activities' prerequisite and its application to cases not involving securities transactions,] and the unique set of facts before the Court, " CGMI had presented legal and factual issues that made its assertions a "fair ground for litigation." Id. at *6. Finally, the district court found that the balance of hardships tipped decidedly in CGMI's favor given that an injunction would simply freeze the arbitration without destroying VCG's ability to continue that arbitration in the event that the district court determined that the dispute fell within the scope of the FINRA rules. Id.

On May 29, 2009, the district court denied VCG's motion for reconsideration, rejecting VCG's argument that Winter v. Natural Resources Defense Council, Inc., -U.S.-, 129 S.Ct. 365, 172 L.Ed.2d 249 (2008), had eliminated the "serious questions" prong of this circuit's preliminary injunction standard.

This appeal followed.

DISCUSSION

This Court reviews the grant of a preliminary injunction for abuse of discretion. See Almontaser, 519 F.3d at 508; Grand River Enter. Six Nations, Ltd. v Pryor, 481 F.3d 60, 66 (2d Cir.2007). "A district court abuses its discretion when it rests its decision on a clearly erroneous finding of fact or makes an error of law." Almontaser, 519 F.3d at 508.

VCG first contends that the district court abused its discretion by applying the wrong legal standard to CGMI's request for a preliminary injunction. VCG argues that three recent decisions of the Supreme Court—Munafv. Geren, 553 U.S. 674, 128 S.Ct. 2207, 171 L.Ed.2d 1 (2008); Winter, — U.S.-, 129 S.Ct. 365, 172 L.Ed.2d 249; and Nken v. Holder, -U.S.-, 129 S.Ct. 1749, 173 L.Ed.2d 550 (2009)— have eliminated this circuit's "serious questions" standard for the entry of a preliminary injunction, and that, in light of the district court's finding that CGMI failed to demonstrate its likelihood of success on the merits, the entry of a preliminary injunction in this case must be reversed. In the alternative, VCG argues that even if this circuit's standard for a preliminary injunction remains intact, the district court committed several legal errors in determining that CGMI had presented "serious questions" as to the arbitrability of VCG's claims.

Winter articulates the following standard for issuing a preliminary injunction:

!!! A plaintiff seeking a preliminary injunction must establish that he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, and that an injunction is in the public interest.

Winter, 129 S.Ct. at 374; see also Munaf, 128 S.Ct. at 2219; Nken, 129 S.Ct. at 1761. Although not stated explicitly in its briefs, we take VCG's position to be that the standard articulated by these three Supreme Court cases requires a preliminary injunction movant to demonstrate that it is more likely than not to succeed on its underlying claims, or in other words, that a movant must show a greater than fiftypercent probability of success on the merits. Thus, according to VCG, a showing of "serious questions" that are a fair ground for litigation will not suffice..See VCG Br. 23-25 (describing the required showing as a "probability" of success, as opposed to a "possibility").

I. The Continued Viability of the ...