CRT Capital Grp. v. SLS Capital, S.A., 14 Cv. 7243 JGK.

• Court: United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
• Writing for the Court: JOHN G. KOELTL, District Judge
• Citation: 63 F.Supp.3d 367
• Parties: CRT CAPITAL GROUP, et al., Plaintiffs, v. SLS CAPITAL, S.A., Defendant.
• Docket Number: No. 14 Cv. 7243 JGK.,14 Cv. 7243 JGK.
• Decision Date: 05 December 2014

63 F.Supp.3d 367

CRT CAPITAL GROUP, et al., Plaintiffs
v.
SLS CAPITAL, S.A., Defendant.

No. 14 Cv. 7243 JGK.

United States District Court, S.D. New York.

Signed Dec. 5, 2014.

63 F.Supp.3d 369

Michael Paul Jones, Michael Andrew Mix, Nancy Eileen Delaney, T. Barry Kingham, Curtis, Mallet–Prevost, Colt & Mosle, LLP, New York, NY, for Plaintiffs.

Alex Spizz, Nachamie, Spizz Cohen & Serchuk, P.C., New York, NY, for Defendant.

AMENDED OPINION AND ORDER

JOHN G. KOELTL, District Judge:

SLS Capital, S.A. (“SLS Capital”) initiated an arbitration proceeding before the Financial Industry Regulatory Authority (“FINRA”) against CRT Capital Group LLC (“CRT Capital”), Michiel McCarty, and Robert Gibson. McCarty and Gibson were employed by CRT Capital at all relevant times. In response, CRT Capital, McCarty, and Gibson filed this action seeking an order enjoining SLS Capital from pursuing its claims in arbitration and declaring SLS Capital's claims nonarbitrable.

The plaintiffs have now moved for a preliminary injunction. Because an arbitrator must determine whether SLS Capital's claims fall within the scope of the CRT Capital–SLS Capital arbitration agreement, CRT Capital's application for a preliminary injunction is denied. Moreover, because an arbitrator must determine whether SLS Capital may assert claims “on behalf of” the SLS Capital bondholders, the application for a preliminary injunction by McCarty and Gibson is also denied.

I.

A.

The following facts are taken from the Second Amended Complaint (“SAC”) unless otherwise noted.

63 F.Supp.3d 370

In 2004, David Elias—through BWT Holdings Limited—created SLS Capital to issue bonds to investors. SAC ¶ 16. SLS Capital used the bond proceeds to purchase in-force life insurance policies on the open market. Id. Upon the death of the insureds, SLS Capital planned to use the insurance policy proceeds to pay interest and principal to the bondholders. Id.

In 2005, CRT Capital agreed to advise SLS Capital; in exchange, CRT Capital received fees and an equity stake in SLS Capital. SAC ¶¶ 17, 19. The parties' Engagement Letter provides that “[a]ny dispute between the parties to this Engagement Letter shall be settled by arbitration before the facilities of the New York Stock Exchange, Inc. or the National Association of Securities Dealers, Inc. in the City of New York ....” Regan Decl. Ex. 1. In September 2007, CRT Capital sold its equity stake in SLS Capital and terminated the advisory relationship. SAC ¶ 25.

In 2008, SLS Capital liquidated its entire portfolio of life insurance policies, and Elias absconded with SLS Capital's assets. SAC ¶¶ 28–29. Thereafter, Elias reportedly died in Singapore. SAC ¶ 36. In October 2009, SLS Capital was placed into liquidation by an order of the Luxembourg District Court, and Me Baden was appointed as receiver. SAC ¶ 38. By an order dated July 25, 2012, the United States Bankruptcy Court for the Southern District of New York recognized the Luxembourg liquidation as a foreign main proceeding and Baden as a foreign representative of SLS Capital. See In re SLS Capital S.A., No. 12–br–12707 (Bankr.S.D.N.Y. July 25, 2012).

B.

On July 15, 2014, SLS Capital, through its liquidator, filed a Statement of Claim with FINRA against CRT Capital. Delaney Aff. Ex. 3. The Statement of Claim alleged eleven causes of action: 1) “Fraud on the Bondholders (Misleading Marketing Materials)”; 2) “Negligent Misrepresentation to the Bondholders (Misleading Marketing Materials)”; 3) “Aiding and Abetting Fraud on the Bondholders”; 4) “Fraud on the Bondholders”; 5) “Negligent Misrepresentation to the Bondholders”; 6) “Breach of Fiduciary Duty (Fiduciary Duty to SLS)”; 7) “Breach of Fiduciary Duty (Fiduciary Duty to SLS in insolvency)”; 8) “Negligence”; 9) “Unjust Enrichment”; 10) “Breach of Contract”; and 11) “Common Law Indemnification.” Id.

On July 23, 2014, SLS Capital filed a complaint in this Court against CRT Capital, CRT Associates LLC, Michiel McCarty, and Robert Gibson. The claims in the complaint are nearly identical to those in the FINRA Statement of Claim, except the complaint alleged claims against McCarty and Gibson, including a claim that they aided and abetted CRT Capital's breach of fiduciary duty. Compare Delaney Aff. Ex. 1, with Delaney Aff. Ex. 3. On September 8, 2014, CRT Capital filed the Original Complaint in this matter, seeking to enjoin SLS Capital from pursuing arbitration and requesting a declaratory judgment that SLS Capital's claims are not arbitrable. Delaney Aff. Ex. 5.

In a letter dated September 9, 2014, CRT Capital informed FINRA that it believed the dispute was not arbitrable and that it had initiated this action to enjoin the arbitration. Delaney Aff. Ex. 6. In a memo dated September 15, 2014, FINRA informed CRT Capital that if FINRA did not receive a Statement of Answer, FINRA may bar CRT Capital from presenting any defenses or facts at the arbitration hearing. Delaney Aff. Ex. 7. In a memo dated September 19, 2014, FINRA informed CRT Capital that the arbitrator rankings list was due October 13, 2014,

63 F.Supp.3d 371

and if CRT Capital failed to provide rankings by that date, FINRA would conclude that CRT Capital had approved all of the arbitrators on the list. Delaney Aff. Ex. 10. In a letter dated September 22, 2014, CRT Capital again informed FINRA that it believed the claims were not arbitrable. Delaney Aff. Ex. 9.

On September 29, 2014, CRT Capital filed an order to show cause for a temporary restraining order and a preliminary injunction in this action. On October 1, 2014, the Court denied the application for a temporary restraining order as moot. On October 2, 2014, FINRA agreed—at the parties' request—that the dates for the selection of arbitrators and for the selection of a preliminary conference would be adjourned until November 21, 2014. That date has since been extended to December 5, 2014.

On October 13, SLS Capital filed an Amended Statement of Claim with FINRA that added Michiel McCarty and Robert Gibson as respondents. Regan Decl. Ex. 2. The Statement of Claim also added an additional cause of action specifically against McCarty and Gibson, namely that those defendants aided and abetted CRT Capital's breach of fiduciary duty. Regan Decl. Ex. 2, at 38. CRT Capital in turn filed an Amended Complaint in this action on October 16, 2014, adding McCarty and Gibson as plaintiffs. On November 24, 2014, the plaintiffs filed their Second Amended Complaint, identifying 28 U.S.C. § 1331 and 9 U.S.C. § 203 as the bases for subject matter jurisdiction.

II.

The parties dispute whether the Court has subject matter jurisdiction over this action. The Original Complaint and the First Amended Complaint identified diversity of citizenship jurisdiction pursuant to 28 U.S.C. § 1332(a) as the basis for subject matter jurisdiction. That was incorrect.¹ The plaintiffs now contend that 28 U.S.C. § 1331 and 9 U.S.C. § 203 provide this Court with subject matter jurisdiction. That is correct.

A.

Chapter 2 of the Federal Arbitration Act (“FAA”), 9 U.S.C. § 201 et seq., implements the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 38, (the “New York Convention”). Section 203 provides that “[a]n action or proceeding falling under the Convention shall be deemed to arise under the laws and treaties of the United States.” Section 202, in turn, “describes which actions ‘fall under the Convention.’ ” Sarhank Grp. v. Oracle Corp., 404 F.3d 657, 660 (2d Cir.2005). That section provides that “[a]n arbitration agreement or arbitral award arising out of a legal relationship, whether contractual or not, which is considered as commercial, including a transaction, contract or agreement described in section 2 of this title, falls under the Convention.” It also excludes an agreement or award arising out of such a relationship that is entirely between citizens of the United States, unless it involves certain other international aspects.

63 F.Supp.3d 372

The Engagement Letter between SLS Capital and CRT Capital plainly is an arbitration agreement arising out of an international commercial agreement—SLS Capital is a foreign entity. However, SLS argues, without supporting case law, that Gibson and McCarty are not parties to an arbitration agreement under the New York Convention.

This argument is unpersuasive. Gibson and McCarty are both associated persons of a FINRA member—CRT Capital—and SLS Capital is a foreign entity. Under Rule 12200 of the FINRA Code of Arbitration Procedure for Consumer Disputes (the “FINRA Code”), parties must arbitrate a dispute under the FINRA Code if: “[a]rbitration ... is ... [r]equested by the customer; [t]he dispute is between a customer and a member or associated person of a member; and [t]he dispute arises in connection with the business activities of the member or the associated person.” Under the FINRA Code, “a person formerly associated with a member is a person associated...