IN RE SW BACH & CO.

• Decision Date: 10 March 2010
• Docket Number: Adversary No. 09-01278 (MG).,Bankruptcy No. 07-11569 (MG).
• Citation: 425 B.R. 78
• Parties: In re S.W. BACH & COMPANY, Debtor. Albert Togut, as Chapter 7 Trustee of S.W. Bach & Company, Plaintiff, v. RBC Dain Correspondent Services, A Division of RBC Dain Rauscher Inc., RBC Capital Markets Corporation (f/k/a RBC Dain Rauscher, Inc.), Andrew Garrett, Inc., Scott Shapiro and Jas Management, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

425 B.R. 78

In re S.W. BACH & COMPANY, Debtor Albert Togut, as Chapter 7 Trustee of S.W. Bach & Company, Plaintiff, v. RBC Dain Correspondent Services, A Division of RBC Dain Rauscher Inc., RBC Capital Markets Corporation (f/k/a RBC Dain Rauscher, Inc.), Andrew Garrett, Inc., Scott Shapiro and Jas Management, Defendants.

Bankruptcy No. 07-11569 (MG). Adversary No. 09-01278 (MG).

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

March 10, 2010.

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Togut, Segal & Segal LLP, by Steven S. Flores, Esq. New York, NY, for Albert Togut, Chapter 7 Trustee.

Law Offices of Joseph M. Heppt, by Joseph M. Heppt, Esq., New York, NY, for Defendant Andrew Garrett, Inc.

OPINION AND ORDER DENYING DEFENDANT ANDREW GARRETT INC.'S MOTION TO STAY PROCEEDINGS PENDING ARBITRATION

MARTIN GLENN, Bankruptcy Judge.

Pending before the Court is the motion to stay this adversary proceeding commenced by Albert Togut, the chapter 7 trustee ("Trustee" or "Togut") of the debtor, S.W. Bach & Co. ("S.W. Bach" or "Debtor"). Defendant Andrew Garrett, Inc. ("AGI") moved to stay the adversary proceeding with respect to Count 9 of the Complaint (Bankruptcy Code § 548 fraudulent conveyance claim), and to compel arbitration of Counts 8 (aiding and abetting breach of fiduciary duty by defendant Scott Shapiro ("Shapiro")) and 10 (restitution and unjust enrichment). ("AGI Stay Mot.," ECF # 39.)¹ The Trustee argues that Counts 8 and 10 are within the Court's core jurisdiction and those claims (along with Count 9) should be adjudicated in this Court. For the reasons explained below, the Court declines to stay Count 9, the fraudulent conveyance claim. The Court concludes that Counts 8 and 10 are state law claims that the Trustee brings standing in the shoes of the Debtor; those claims are subject to mandatory arbitration and will not be adjudicated by the Court. Nevertheless, the Court concludes that Count 9, the fraudulent conveyance claim, arises from common issues of fact with the state law claims, and does not arise from or depend upon the resolution of the state law claims. The strong interest of the Trustee and the estate to assure a federal forum for the resolution of the federal statutory fraudulent conveyance claim supports the issuance of a stay of the arbitration pursuant to 11 U.S.C. § 105 pending this Court's disposition of the fraudulent conveyance claim. Otherwise, there is a risk of inconsistent results and arguments about claim preclusion.

BACKGROUND²

A. The Parties

Debtor, a Georgia corporation, is a broker-dealer that provided, among other things, investment advice to customer account holders in exchange for advisory fees. (Compl.¶¶ 44, 59.) From at least 2001, Shapiro was President of the Debtor. (Compl. ¶ 46.) JAS Management is the sole shareholder of the Debtor. The Debtor ceased operations in or about February 2007. (Compl. ¶ 60.) On May 22, 2007, creditors of the Debtor filed an involuntary petition for relief against the Debtor in this Court under chapter 7 of the Bankruptcy Code, 11 U.S.C. § 101, et seq. (Compl. ¶ 1.) The Court entered an Order for relief on June 29, 2007 and Togut was appointed as the Trustee.

Prior to the Debtor's cessation of operations, the Debtor managed approximately 15,000 customer accounts ("Accounts"). (Compl. ¶ 61.) Togut contends that the right to manage and to earn fees from the Accounts is the Debtor's largest asset. (Compl. ¶ 10.) RBC served as the clearing firm for the Accounts, providing various services to the Debtor including cashiering services, bookkeeping, custodial services and the distribution of dividends to customers of the Debtor. (Compl. ¶ 66.) RBC provided clearing services to the Debtor pursuant to the terms of a clearing agreement executed on or about June 14, 2006 ("Clearing Agreement"). (Compl. ¶ 67.)

Defendant AGI is a national broker-dealer offering, among other things, private investment management services and investment banking services. (Compl. ¶ 55.) AGI and RBC have had a business relationship since at least 2001. (Compl. ¶ 82.) AGI and the Debtor were member firms of NASD.³ (See AGI Stay Mot. ¶ 1; Declaration of Stephen S. Flores, Esq., dated December 15, 2009 (ECF # 70) ("Flores Dec."), Ex. B). While members of NASD, AGI and the Debtor were subject to FINRA's Rule 13200, by its terms applicable to all claims filed after April 16, 2007. (AGI Stay Mot. ¶ 1; Dec. of Joseph M. Heppt, dated October 13, 2009 (ECF # 39) ("Heppt October Dec."), Ex. C.)

FINRA Rule 13200 provides, in relevant part:

(a) Generally

Except as otherwise provided in the Code, a dispute must be arbitrated under the Code if the dispute arises out of the business activities of a member or an associated person and is between or among: Members; Members and Associated Persons; or Associated Persons.⁴

(Heppt October Dec., Ex. C.)

According to the Complaint, with RBC's direction, assistance and involvement, Shapiro caused the Debtor to transfer all, or nearly all, of the Accounts to AGI, for which the Debtor received no consideration. (See Compl. ¶ 74.) The Trustee alleges this occurred because RBC's president, Craig Gordon ("Gordon"), became aware of the S.W. Bach's financial distress and wanted RBC to continue earning fees from the Accounts, which could only be accomplished if RBC or Gordon could convince Shapiro to transfer the Accounts to a current RBC customer such as AGI. (Compl. ¶¶ 89, 91.) On or about March 2, 2007, AGI notified the Debtor's customers by letter that their accounts had been transferred to AGI. (Compl. ¶ 118.)

AGI has not filed a Proof of Claim in this case. The Bar Date for non-governmental claims was April 11, 2008. (Case No. 07-11569, ECF # 36.)

B. Procedural Background

Togut filed the Complaint on June 15, 2009. He alleges that the facts support eighteen causes of action against RBC, Shapiro, JAS and AGI. The claims against AGI are asserted in Counts 8, 9 and 10, and are summarized below.⁵ Because the Trustee alleges that AGI and RBC Dain aided and abetted a breach of fiduciary duty by Shapiro, the breach of fiduciary duty claim against Shapiro (Count 6) and the aiding and abetting breach of fiduciary duty claims against RBC Dain (Count 7) are summarized as well.

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                  Count #        Cause of                      Elements
                                 Action
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                  Count 6        Breach of Fiduciary           Shapiro allegedly breached a duty to exercise due care and diligence in the
                                 Duty against                  management and administration of the affairs of the Debtor and in the use
                                 Shapiro                       preservation, or disposition of its assets; fiduciary obligations of loyalty and candor
                                                               including a requirement that he exercise control of the Debtor in a fair, just and
                                                               equitable manner and to act in the best interests of the Debtor. Shapiro allegedly
                                                               breached his duties by (1) failing to pursue a competitive bidding process for the
                                                               Accounts; (2) failing to commission a proper valuation of the Accounts (including the
                                                               right to manage them) to determine an appropriate sales price; (3) acting out of self
                                                               interest and to enhance his reputation by using the Accounts to try to obtain future
                                                               employment for himself, rather than maximizing return for the Debtor; (4) failing to
                                                               reasonably investigate or learn material facts before causing the Debtor to transfer
                                                               the Accounts; (5) failing to ensure a reasonable, prudent, orderly and/or equitable
                                                               transfer of the Accounts; and (6) essentially surrendering the selection-process
                                                               relating to the transfer of the accounts to RBC Dain thereby wasting a valuable
                                                               corporate asset in the process, improper actions which were allegedly motivated by
                                                               Shapiro's desire to further his own pecuniary interests and were outside the scope
                                                               of his agency relationship with the Debtor. (Compl. ¶¶ 191-92, 196-98.)
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                  Count 7           Aiding and                 RBC allegedly knowingly provided substantial assistance to Shapiro in breaching his
                                    Abetting Shapiro's         fiduciary duties to the Debtor. RBC allegedly (i) hand-picked AGI to be the next
                                    Breach of Fiduciary        manager of the Accounts, (ii) told Shapiro to transfer the Accounts to AGI in the
                                    Duties against RBC         manner described in the Complaint, (iii) encouraged the disloyal acts of Shapiro, (iv)
                                                               negotiated with AGI to facilitate the transfer of the accounts, and (v) provided the
                                                               direct assistance, including the personnel and technology and know-how necessary
                                                               to complete the transfer of the accounts, and misled Shapiro into thinking it would
                                                               not charge a Termination Fee in connection with the

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