Sea Spray Holdings v. Pali Financial Group

• Decision Date: 20 June 2003
• Docket Number: No. 03 Civ. 1988(VM).,03 Civ. 1988(VM).
• Citation: 269 F.Supp.2d 356
• Parties: SEA SPRAY HOLDINGS, LTD., Plaintiff v. PALI FINANCIAL GROUP, INC. and Buyers United, Inc., Defendants
• Court: U.S. District Court — Southern District of New York

269 F.Supp.2d 356

SEA SPRAY HOLDINGS, LTD., Plaintiff v. PALI FINANCIAL GROUP, INC. and Buyers United, Inc., Defendants

No. 03 Civ. 1988(VM).

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

June 20, 2003.

Eric J. Grannis, New York City, for defendants.

DECISION AND ORDER

MARRERO, District Judge.

Plaintiff Sea Spray Holdings, Ltd. ("Sea Spray") commenced two proceedings in the New York State Supreme Court, New York County, against Pali Financial Group, Inc. ("Pali") and Buyers United, Inc. ("Buyers"), seeking to recover obligations asserted pursuant to a promissory note. That court issued an order directing a stay of arbitration proceedings that Buyers had commenced in Salt Lake City, Utah before the American Arbitration Association (the "AAA"). Thereafter, invoking this Court's diversity jurisdiction under 28 U.S.C. §§ 1332(a)(2) and subject matter jurisdiction under 28 U.S.C. § 1331 and 9 U.S.C. § 203, Buyers removed the two actions to this Court pursuant to 28 U.S.C. § 1441 and 9 U.S.C. § 205, where they were subsequently consolidated.¹ Now before this Court are Buyers's motions to vacate the stay of arbitration proceedings and to dismiss pursuant to Rules 12(b)(1) and (3) of the Federal Rules of Civil Procedure and the Federal Arbitration Act (the "FAA"), 9 U.S.C. § 1 et seq. For the reasons discussed below, Buyers's motions are GRANTED.

I. BACKGROUND

In August 2001, Sea Spray entered into a General Security Agreement dated August 2001 (the "Security Agreement") with Infotopia, Inc. ("Infotopia"), by which Sea Spray received an interest in certain designated property securing a loan by Sea Spray to Infotopia.² Section 1 of the Security Agreement provides:

The Borrower [Infotopia] hereby collaterally pledges, assigns and grants to the Lender [Sea Spray] a continuing valid and perfected Hen on and security interest in all of the Borrower's right, title and interest in and to the collateral described in Section 2 hereof ... in order to secure the payment and performance of the Loan.

The Security Agreement further provides that "any dispute arising out of or in connection with this security agreement, whether sounding in contract, tort, equity or otherwise, shall be governed by the internal laws (as opposed to the conflicts of laws provisions) and decisions of the State of New York." (Security Agreement, § 6(l).) The Security Agreement also contains a forum selection clause designating jurisdiction in the "state and federal courts located in New York, New York." (Id., § 6(m).)

On April 24, 2001, Buyers entered into a Loan Agreement By And Between Buyersonline.com, Inc., A Delaware Corporation, and Infotopia, Inc. dated April 24, 2001 (the "Loan Agreement"), attached as Exhibit A to Jarman Aff. Under this transaction, Buyers borrowed funds from Infotopia, by executing and selling to Infotopia a Buyersonline.com, Inc. Promissory Note dated April 24, 2001 (the "Note"), attached as Exhibit B to Jarman Aff., reflecting a principal sum of $500,000.00 to be repaid with interest within 18 months of the execution date. The Note is included in the collateral identified as the subject of Sea Spray's security interest pursuant to the Security Agreement with Infotopia. (Security Agreement, Schedule A.) The Loan Agreement contains an arbitration clause which provides:

Any controversy or claim between or among the parties, including but not limited to those arising out of or relating to this Agreement or any agreements or instruments relating hereto or delivered in connection herewith and based on or arising in contract or in tort, shall, at the request of any party be determined by arbitration. The arbitration shall be conducted in Salt Lake City, Utah, United States of America, in accordance with the United States Arbitration Act (Title 9, U.S.Code), notwithstanding any choice of law provision in this Agreement, and under the Commercial Rules of the American Arbitration Association ("AAA"), not later than sixty (60) days after appointment of an arbitrator. Any controversy concerning whether an issue is arbitrable shall be determined by the arbitrator.

(Loan Agreement, ¶ 14.)

Prior to the date; when repayment of the loan under the Note was due, Buyers contracted and executed an Agreement Of Understanding dated December 12, 2001 (the "Agreement Of Understanding"), attached as Exhibit C to Jarman Aff., with Pali to pay or purchase the Note from Infotopia at a discount. Pursuant to the Agreement Of Understanding, Pali in fact purchased the Note from Infotopia and was redeeming or selling it for a discounted price of $120,000.00 plus 35,000 shares of Buyers's common stock. The Agreement Of Understanding provides in relevant part that:

Upon execution of this Agreement and the payment of the purchase price (the "Purchase Price"), Pali agrees to sell, transfer, quitclaim and deliver the original Infotopia Note to Buyers, with the following written across the face of the Infotopia Note, signed and dated by Pali: THIS NOTE IS PAID IN FULL ON THIS 12TH DAY OF DECEMBER 2001. BY PALI FINANCIAL, INC.

(Agreement of Understanding, ¶ 2 (emphasis in original).) Buyers made the necessary payments and received the original Loan Agreement and Note, which had been signed by the president of Infotopia, dated December 13, 2001, and bearing the phrase, "obligation paid in full."

In a letter dated November 22, 2002 from Sea Spray to Buyers, Sea Spray alleged that Buyers's payment or repurchase of the Note was ineffective as against the security interest Sea Spray had acquired in the Note pursuant to the Security Agreement, and Sea Spray asserted that Buyers was in default of its continuing undischarged obligations under the Note. Thereafter, Buyers commenced an arbitration proceeding in Salt Lake City, Utah by filing with the AAA a Demand For Arbitration And Statement Of Claim dated February 18, 2003 (the "Demand For Arbitration"), attached as Exhibit E to the Petition To Stay Arbitration dated March 11, 2003, invoking the arbitration provision of the Loan Agreement.

Sea Spray, in turn, initiated two proceedings in the New York State Supreme Court, an action to stay arbitration and a plenary action to recover damages. In the Order To Stay Arbitration, that court granted Sea Spray's request for a stay of arbitration proceedings on March 11, 2003. On March 21, 2003, Buyers removed to this Court both proceedings, which were subsequently consolidated into a single action. Now before the Court lies Buyers's motions to vacate the Order To Stay Arbitration and to dismiss pursuant to Fed. R. Civ. P 12(b)(1) and (3) and the FAA.³

II. DISCUSSION

A. BUYERS'S ARGUMENTS UNDER THE FAA

Buyers argues that the present litigation should be dismissed in light of the arbitration provision in ¶ 14 of the Loan Agreement accompanying the Note. Sea Spray opposes this claim, arguing that it has no interest, through its Security Agreement with Infotopia, in the Loan Agreement but, rather, only in the Note, and that, at any rate, to the extent that the Note and Loan Agreement together constitute a single, integrated transaction or contract, Infotopia's commitment to arbitrate does not pass to Sea Spray via the Security Agreement.⁴ The Court agrees with Buyers.

1. The Transaction

Regarding Sea Spray's contention that the Loan Agreement and Note represent independent obligation, rendering the Loan Agreement's arbitration provision inapplicable to Sea Spray's interest in the Note, the Court finds no merit in this claim. New York law on this matter is clear and dictates that "`where two or more written instruments between the same parties concerning the same subject matter are contemporaneously executed, they will be read and interpreted together.'" Ameritrust Co. Nat'l Assoc. v. Chanslor, 803 F.Supp. 893, 896 (S.D.N.Y. 1992) (quoting Liamuiga Tours v. Travel Impressions, Ltd., 617 F.Supp. 920, 927 (E.D.N.Y.1985)); see This Is Me, Inc. v. Taylor, 157 F.3d 139, 143 (2d Cir.1998) ("Under New York law, all writings forming part of a single transaction are to be read together." (citations omitted)); Gordon v. Vincent Youmans, Inc., 358 F.2d 261, 263 (2d Cir.1965) ("New York law ... requires that all writings that form part of a single transaction and are designed to effectuate the same purpose be read together, even though they were executed on different dates and were not all between the same parties." (citations omitted)); Rhythm & Hues, Inc. v. Terminal Mktg. Co., Inc., No. 01 Civ. 4697, 2002 WL 1343759, at *6 (S.D.N.Y. June 19, 2002) (same); In re: Houbigant, Inc., 914 F.Supp. 964, 994-95 (S.D.N.Y.1995) ("[W]here two or more writings are executed as part of the same general transaction, they are to be read together as part of the same agreement...."); Nau v. Vulcan Rail & Constr. Co., 286 N.Y. 188, 36 N.E.2d 106, 110 (1941) ("All three instruments were executed at substantially the same time, related to the same subjectmatter, were contemporaneous writings and must be read together as one." (citations omitted)).

Here, the Loan Agreement references the Note. (See, e.g., Loan Agreement, ¶¶ 1, 2 ("Pursuant to the `Promissory Note' ... Lender has agreed to loan Debtor the aggregate principal amount of One Hundred Thousand Dollars ($500,000) [sic] (the `Loan').... In consideration thereof, Debtor will issue, cause to be executed and deliver to Lender, concurrent with its execution hereof, a Note equal to the amount of the Loan, upon the terms and conditions specified therein, and in the form attached hereto as Exhibit 1.").) Likewise, the Note references the Loan Agreement. (See, e.g., Note, ¶ 9(e) ("... contained in that certain Loan and Security Agreement, by and between the Parties relating to this Note...." (emphasis added)).) Both instruments were executed on the same date, both were executed between same parties, and the Note was attached to the Loan Agreement. Furthermore, both documents address the same subject matter, which lies at the core of the...