Noble Captial Grp. v. US Capital Partners, Inc.
| Decision Date | 12 May 2020 |
| Docket Number | Case No. A-19-CV-1255-LY |
| Parties | NOBLE CAPTIAL GROUP, LLC AND NOBEL CAPTIAL FUND MANAGEMENT, LLC, Plaintiffs v. US CAPITAL PARTNERS, INC., JEFFREY SWEENEY, CHARELS TOWLE AND PATRICK STEELE, Defendants |
| Court | U.S. District Court — Western District of Texas |
Before this Court are Defendants' Motion to Compel Arbitration and Stay Proceedings, or Alternatively Motion to Dismiss, filed on March 4, 2020 (Dkt. No. 17); Plaintiffs' Response, filed on March 18, 2020 (Dkt. No. 19); and Defendants' Reply, filed on April 1, 2020 (Dkt. No. 22). On April 2, 2020, the District Court referred the motions and related filings to the undersigned Magistrate Judge for report and recommendation pursuant to 28 U.S.C. § 636(b)(1), Federal Rule of Civil Procedure 72, and Rule 1 of Appendix C of the Local Rules of the United States District Court for the Western District of Texas.
Plaintiff Noble Capital Group, LLC, a Texas limited liability company with its principal place of business in Austin, Texas, is a private lending organization. Plaintiff Noble Capital Fund Management, LLC ("NCFM") is the "operations arm" and a subsidiary/affiliate of Noble Capital Group. Dkt. No. 14 at ¶ 6. Together, Noble Capital Group and NCFM are referred to as "Plaintiffs."
Defendant US Capital Partners, Inc. ("USCP"), a California corporation, is in the business of providing financial advisory services. USCP is an affiliate of US Capital Global Group, the "flagship brand" under which a group of San Francisco-based companies operate. Those companies include US Capital Investment Management, LLC, an investment management affiliate, and US Capital Group Securities, a broker-dealer affiliate. Dkt. No. 17 at 3. Defendants Jeffrey Sweeney, Charles Towle, and Patrick Steele ("Individual Defendants"), also California residents, are partners and principals of USCP and/or the related entities.
In 2016, Plaintiffs met with USCP to discuss the possibility of establishing an investment fund; USCP would administer the fund and Plaintiffs would manage its investments. Plaintiffs allege that the Individual Defendants "made a whole host of fraudulent representations . . . to induce Noble to place investor dollars with a US Capital affiliate" and "to secure Noble's agreement to establish the Fund." Dkt. No. 14 at ¶¶ 8, 12.
A series of agreements followed. On August 16, 2016, NCFM and USCP entered into a letter agreement providing that USCP would act as financial advisor to NCFM in connection with NCFM's "objective to raise up to $50,000,000 in equity and debt" in exchange for a commission. Dkt. No. 17-3 at 1 (the "2016 Agreement"). The 2016 Agreement included an arbitration clause requiring the parties to arbitrate any claims related to the agreement. Id. at 4. Subsequently, the parties created the "US Capital/Noble Capital Texas Real Estate Income Fund, LP (the "Fund"), a $25 million private investment fund that invests in the Texas residential real estate market through short-term "fix-and flip" rehab loans. Dkt. No. 1-1 at 8. On January 18, 2017, the Fund, NCFM, and US Capital Investment Management (USCP's investment management affiliate) entered into a Management Advisory Services Agreement ("MASA") providing that NCFM would manage the Fund's investments. Dkt. No. 17-4 at 1. The MASA also contained an arbitration clause. Id. at 5.On February 3, 2017, NCFM and US Capital Group Securities (USCP's broker-dealer affiliate) executed another letter agreement (the "2017 Agreement"), which provided that US Capital Group Securities would "act as exclusive Placement Agent" to the Fund "for a private placement transaction . . . offering of securities of up to Two Hundred and Fifty Million US Dollars ($250,000,000)." Dkt. No. 17-5 at 1. This agreement also contained an arbitration clause. Id. at 5.
Plaintiffs allege that, almost immediately after the Fund was established, they became concerned that USCP and the Individual Defendants "were not delivering on their promises, including the promise that they would raise significant capital for the Fund." Dkt. No. 14 at ¶ 14. Plaintiffs allege that USCP told them to raise the Fund's seed capital from their own investor networks and USCP would obtain other investors to follow. Plaintiffs allege that they sourced $25 million from their longtime clients, but USCP failed to raise any capital for the Fund.
According to Plaintiffs, Defendants "then began efforts to string Noble along so they could continue to extract fees from the Fund." Id. Specifically, Plaintiffs contend that Defendants falsely told them that investors would participate in the Fund if Plaintiffs raised ever increasing amounts of money, completed an audit, and hosted and paid for several marketing events. Plaintiffs aver that they did all of this, but Defendants failed to deliver any investors. Plaintiffs also allege that Defendants continued to collect exorbitant fees, despite failing to deliver any investors as promised. In late 2018, Plaintiffs stopped paying fees to Defendants.
On January 16, 2019, NCFM filed an arbitration proceeding against US Capital Investment Management in San Francisco, California, pursuant to the arbitration clause in the MASA, asserting many of the same allegations as in this lawsuit. See Dkt. No. 1-1 . Although the arbitrator issued an emergency award granting NCFM some relief, a final arbitration award has not been issued. Id.
On May 20, 2019, the Fund filed a lawsuit in the Northern District of California against Noble Capital Group, NCFM, and numerous other entities and individuals, alleging fraud, false advertising, unfair competition, breach of contract, conversion, unjust enrichment, intentional interference with contractual relations, and Civil RICO, and demanding an accounting. US Capital/Noble Cap. Tex. Real Estate Income Fund v. Newman, No. 3:19-cv-2750 (N.D. Cal. May 20, 2019); Dkt. No. 26-1. On July 22, 2019, the District Court for the Northern District of California referred that case to arbitration (to be consolidated with JAMS Arbitration No. 1100104841) and entered a stay. Dkt. No. 25 in No. 3:19-cv-2750. The arbitrator has yet to enter a final arbitration award in the consolidated case. Id. at Dkt. No. 27.
On February 21, 2020, US Capital Group Securities filed an arbitration proceeding against Noble Capital Group, NCFM, and two other entities. FINRA Case No. 20-00631; Dkt. No. 26.
On December 27, 2019, Plaintiffs filed this suit against USCP and the Individual Defendants, alleging fraud and conspiracy. Dkt. No. 1. In response, Defendants filed a Motion to Compel Arbitration and Stay Proceedings. Dkt. No. 8. In reply, Plaintiffs filed their First Amended Complaint, alleging fraud, fraudulent inducement, and conspiracy. Dkt. No. 14. In light of the First Amended Complaint, on February 24, 2020, the District Court dismissed the first Motion to Compel Arbitration and Stay Proceedings without prejudice. Dkt. No. 16.
In the instant Motion to Compel Arbitration, Defendants argue that the Court should compel the parties to arbitrate pursuant to the multiple arbitration clauses in their agreements. Plaintiffs oppose the Motion, contending that the arbitration clauses at issue are unenforceable because they were fraudulently procured and that not all of the parties are bound by the agreements.
Under the Federal Arbitration Act ("FAA"), parties to a contract may agree that an arbitrator rather than a court will resolve disputes arising out of the contract. Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524, 527 (2019). The FAA provides that written agreements to arbitrate controversies arising out of an existing contract "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. "The FAA was designed to overrule the judiciary's long-standing refusal to enforce agreements to arbitrate and to place such agreements upon the same footing as other contracts." Volt Info. Scis., Inc. v. Bd. of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 478 (1989) (cleaned up). Thus, the FAA establishes "a liberal federal policy favoring arbitration agreements" and "requires courts to enforce agreements to arbitrate according to their terms." CompuCredit Corp. v. Greenwood, 565 U.S. 95, 97 (2012) (quoting Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983)).
Although there is a strong federal policy favoring arbitration, the policy does not apply to the determination of whether there is a valid agreement to arbitrate between the parties. Will-Drill Res., Inc. v. Samson Res. Co., 352 F.3d 211, 214 (5th Cir. 2003). The FAA "does not require parties to arbitrate when they have not agreed to do so." Volt, 489 U.S. at 478. Rather, "arbitration 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 of Am. v. Warrior & Gulf Nav. Co., 363 U.S. 574, 582 (1960). The FAA "simply requires courts to enforce privately negotiated agreements to arbitrate, like other contracts, in accordance with their terms." Volt, 489 U.S. at 478.
When considering a motion to compel arbitration, courts apply a two-step framework to determine whether a dispute must be arbitrated. First, the court must determine "whether theparties entered into any arbitration agreement at all." Kubala v. Supreme Prod. Servs., Inc., 830 F.3d 199, 201 (5th Cir. 2016). "This first step is a question of contract formation only—did the parties form a valid agreement to arbitrate some set of claims." IQ Prods. Co. v. WD-40 Co., 871 F.3d 344, 348 (5th Cir. 2017), cert. denied, 138 S. Ct. 2620 (2018). This initial question is for the...
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