Goldman Sachs & Co. v. Golden Empire Sch. Fin. Auth.

• Decision Date: 08 February 2013
• Docket Number: No. 12 Civ. 4558(RJS).,12 Civ. 4558(RJS).
• Citation: 922 F.Supp.2d 435
• Court: U.S. District Court — Southern District of New York
• Parties: GOLDMAN, SACHS & CO., Plaintiff, v. GOLDEN EMPIRE SCHOOLS FINANCING AUTHORITY and Kern High School District, Defendants.

922 F.Supp.2d 435

GOLDMAN, SACHS & CO., Plaintiff,

v.GOLDEN EMPIRE SCHOOLS FINANCING AUTHORITY and Kern High School District, Defendants.

No. 12 Civ. 4558(RJS).

United States District Court,

S.D. New York.

Feb. 8, 2013.

Andrew Hunter Reynard, David Harold Braff, and Matthew Alexander Schwartz, Esqs., of Sullivan & Cromwell, LLP, New York, NY, for Plaintiff.

James L. Kauffman and Peter J. Mougey, Esqs., Levin, Papantonio, Thomas, Mitchell, Rafferty & Proctor, P.A, Pensacola, FL; James Richard Swanson, Jason W. Burge, and Joseph C Peiffer, Esqs., Fishman Haygood Phelps Walmsley Willis & Swanson, LLP, New Orleans, LA; Kevin Joseph Madonna, Esq., Kennedy & Madonna, LLP, Hurley, NY, for Defendants.

MEMORANDUM AND ORDER

RICHARD J. SULLIVAN, District Judge:

From 2004 to 2007, Defendants Golden Empire Schools Financing Authority and Kern High School District (collectively, “Golden Empire”) issued approximately $125 million of complex securities to fund projects, employing Plaintiff Goldman, Sachs & Co. (“Goldman”) as the sole underwriter and broker. In 2012, Golden Empire initiated an arbitration before the Financial Industry Regulatory Authority (“FINRA”) to settle disputes arising from that relationship. Before the Court is Goldman's motion to preliminarily enjoin that arbitration. For the reasons that follow, the Court grants Goldman's motion.

I. Background¹

In July 2004, Golden Empire, a public financing authority in Bakersfield, California, elected to issue approximately $95 million of bonds to refinance prior debt and to acquire and build new educational facilities. (Compl. ¶ 13; Defs.' Opp'n 2.) In time, Golden Empire approached Goldman about underwriting the debt, whereupon Goldman advised Golden Empire on the desirability of issuing the debt in the form of auction rate securities (“ARS”), which offered long-term liquidity at lower, short-term interest rates that would be reset at public auctions. (Compl. ¶ 13; Defs.' Opp'n 2–4.) Specifically:

ARS are long-term bonds and stocks whose interest rates or dividend yields are periodically reset through auction. At each auction, holders and buyers of the securities specify the minimum interest rate at which they want to hold or buy. If buy/hold orders meet or exceed sell orders, the auction succeeds. If supply exceeds demand, however, the auction fails and the issuer is forced to pay a higher rate of interest in order to penalize it and to increase investor demand.

Ashland Inc. v. Morgan Stanley & Co., 652 F.3d 333, 335 (2d Cir.2011).

Ultimately, Golden Empire retained Goldman as the sole underwriter and broker-dealer for the issue. As such, two contracts governed the relationship between the parties: an underwriter agreement setting forth Goldman's duty to purchase and offer the bonds (the “2004 Underwriter Agreement”), and a separate but contemporaneously executed broker-dealer agreement that outlined Goldman's obligations in the management of the auction and bids (the “2004 Broker–Dealer Agreement”). (Compl. ¶¶ 13–14.)

With respect to the resolution of disputes arising between the parties, the 2004 Underwriter Agreement is silent, stating only that the agreement is subject to “the laws of the State [of California].” ( Id. Ex. 5 ¶ 15.) However, the 2004 Broker–Dealer Agreement contains a forum selection clause (the “Forum Selection Clause” or “Clause”) providing that:

The parties agree that all actions and proceedings arising out of this Broker–Dealer Agreement or any of the transactions contemplated hereby shall be brought in the United States District Court in the County of New York and that, in connection with any such action or proceeding, submit to the jurisdiction of, and venue in, such court.

( Id. ¶ 15–16; see id. Ex. 2 ¶ 5.9.) The 2004 Broker–Dealer Agreement also contains a merger clause providing that:

This Broker–Dealer Agreement, and the other agreements and instruments executed and delivered in connection with the issuance of the [ ]ARS, contain the entire agreement between the parties relating to the subject matter hereof, and there are no other representations, endorsements, promises, agreements or understandings ... between the parties relating to the subject matter hereof.

( Id. ¶ 18; see id. Ex. 2 ¶ 5.4.) The parties entered into identical contracts in 2006 and 2007 (collectively, the “Underwriter Agreements” and “Broker–Dealer Agreements”), when Golden Empire issued ARS in the amounts of $20 million and $10 million, respectively, using Goldman as the sole underwriter and broker-dealer. ( Id. ¶¶ 19–30.)

In 2008, the ARS market collapsed. See UBS Fin. Servs., Inc. v. W. Va. Univ. Hosps., Inc., 660 F.3d 643, 646 (2d Cir.2011). As a result, Golden Empire's ARS auctions failed, triggering higher interest rates on the debt and, eventually, requiring Golden Empire to refinance. (Defs.' Opp'n 6.) On February 11, 2012, Golden Empire filed a Statement of Claim against Goldman before FINRA, pursuant to FINRA Rule § 12200, which states that FINRA members and their customers “must arbitrate a dispute ... [i]f arbitration ... is ... [r]equested by the customer; [t]he dispute is between a customer and a [FINRA] member ...; and [t]he dispute arises in connection with the business activities of the member....” (Compl. ¶ 31; Decl. of James R. Swanson, dated Sept. 5, 2012, Ex. A.) In its Statement of Claim, Golden Empire argued, inter alia, that Goldman fraudulently induced it to issue ARS by failing to disclose both Goldman's higher fees on ARS as well as its practice of placing “cover bids” at ARS auctions. (Compl. Ex. 1, ¶¶ 1–2.) That is, when serving as a broker-dealer, Goldman often placed support bids to “prop up” ARS auctions to prevent their failure. ( Id.) Allegedly, once Goldman ended this practice in 2008, auctions failed and the market collapsed, precipitating Golden Empire's losses. ( Id. Ex. 1, ¶ 4.) Had Golden Empire been aware of this scheme, it claims, it would have chosen another vehicle for its debt. ( Id. Ex. 1, ¶ 28.)

On June 11, 2012, Goldman brought suit in this Court pursuant to 28 U.S.C. § 2201 and Federal Rule of Civil Procedure 57, seeking declaratory relief and preliminary and permanent injunctions against the arbitration under the Forum Selection Clauses in the parties' Broker–Dealer Agreements. ( Id. ¶¶ 36–46.) Goldman filed the instant motion for a preliminary injunction on August 8, 2012. (Doc. No. 26.) Golden Empire filed its opposition brief on September 5, 2012 (Doc. No. 29), and Goldman replied on September 25, 2012 (Doc. No. 32). Defendants submitted supplemental authority on December 3, 2012, and Plaintiff replied on December 5, 2012. (Doc. Nos.35, 37.) The Court heard oral argument on January 11, 2013. On January 15, 2013, Plaintiff wrote the Court to clarify a point made at oral argument. (Doc. No. 37.) Defendants responded that same day. (Doc. No. 37.) Finally, Plaintiff submitted additional supplemental authorityon January 23, 2013, and Defendants responded the next day. (Doc. Nos. 36, 37.)

II. Legal Standard

A preliminary injunction is an “extraordinary remedy.” Winter v. Natural Res. Def. Council, 555 U.S. 7, 24, 129 S.Ct. 365, 172 L.Ed.2d 249 (2008). In the Second Circuit, a plaintiff seeking a preliminary injunction must establish: “(a) irreparable harm and (b) either (1) likelihood of success on the merits or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief.” Citigroup Global Mkts., Inc. v. VCG Special Opportunities Master Fund Ltd., 598 F.3d 30, 35 (2d Cir.2010). The party seeking the injunction carries the burden of persuasion to demonstrate “by a clear showing” that the necessary elements are satisfied. See Mazurek v. Armstrong, 520 U.S. 968, 972, 117 S.Ct. 1865, 138 L.Ed.2d 162 (1997).

III. Discussion

The parties do not dispute that Goldman will suffer irreparable harm if it is improperly forced to arbitrate. ( See Defs.' Opp'n 8); see also Merrill Lynch Inv. Managers v. Optibase, Ltd., 337 F.3d 125, 129 (2d Cir.2003) (holding that irreparable harm occurs where a movant is “forced to expend time and resources arbitrating an issue that is not arbitrable”). Rather, Golden Empire contests the likelihood of Goldman's success on the merits and the balance of the hardships. The Court addresses each argument in turn.

A. Likelihood of Success on the Merits

The Federal Arbitration Act evinces a strong federal policy favoring arbitration. See9 U.S.C. § 1 et seq.; Moses H. Cone Mem'l Hosp. v. Mercury Const. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). However, it is undisputed that an agreement to arbitrate “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 v. Warrior & Gulf Nav. Co., 363 U.S. 574, 582, 80 S.Ct. 1347, 4 L.Ed.2d 1409 (1960); see also Sole Resort, S.A. de C.V. v. Allure Resorts Mgmt., LLC, 450 F.3d 100, 104 (2d Cir.2006). Whether an agreement to arbitrate exists is a question of state contract law. Chelsea Square Textiles, Inc. v. Bombay Dyeing & Mfg. Co., Ltd., 189 F.3d 289, 295 (2d Cir.1999). In New York, “a written agreement that is complete, clear[,] and unambiguous on its face must be enforced according to the plain meaning of its terms.” Greenfield v. Philles Records, Inc., 98 N.Y.2d 562, 569, 750 N.Y.S.2d 565, 780 N.E.2d 166 (2002).

Thus, if the plain meaning of the Forum Selection Clause in the Broker–Dealer Agreements is to limit disputes to the Southern District of New York—thereby overriding the arbitration agreement in FINRA Rule § 12200—Goldman likely will prevail. Golden Empire argues against this result for three reasons. First, Golden Empire claims that, under Second Circuit precedent, the parties' Forum Selection Clause is insufficiently explicit to override the prior arbitration agreement in FINRA Rule § 12200 and...