AMENDED OPINION AND ORDER
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.
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 dis-. pute 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 Deck 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, FIN-RA 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,
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.
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 2Ó2, in turn, “describes which actions ‘fall under the Convention.’ ” Sarhank Grp. v. Oracle Corp.,
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: “[arbitration ... is ... [requested 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 with a member.” Rule 12100(r).
In Kidder, Peabody & Co. v. Zinsmeyer Trusts Partnership,
Kidder and West Virginia University Hospitals made clear that membership in an exchange that requires arbitration constitutes an “agreement in writing” to arbitrate under 9 U.S.C. § 2. And § 202 provides ’ that a commercial arbitration “agreement described in section 2 of this title[ ] falls under the Convention.” Therefore, the dispute between the individual plaintiffs and SLS Capital falls under the New York Convention.
B.
SLS Capital next argues that the implementing legislation for the New York Convention provides only three judicial remedies: compelling arbitration, 9 U.S.C. § 206, appointing arbitrators, id., and confirming arbitration awards, id. § 207. Thus, according to SLS Capital, the Court lacks jurisdiction to enjoin an arbitration proceeding. This argument is ultimately unpersuasive.
After Hydra Offshore, the Court of Appeals slightly expanded the scope of § 203. In Borden, Inc. v. Meiji Milk Products Co., the court held that § 203 provides jurisdiction to “entertain[] an application for a preliminary injunction in aid of arbitration.”
However, after Hydra Offshore and Borden, the Second Circuit Court of Appeals has held that jurisdiction under the New York Convention is not limited by §§ 206 and 207. In Republic of Ecuador v. Chevron Corp.,
Although dicta in International Shipping Co.t v. Hydra Offshore, Inc. suggests that the New York Convention is enforceable only where the party invoking its provisions seeks “either to compel arbitration or to enforce an arbitral award,”875 F.2d 388 , 391 n. 5 (2d Cir.1989), in light of the principle that the Convention should be interpreted “broadly to effectuate its recognition and enforcement purposes,” Bergesen v. Joseph Muller Corp.,710 F.2d 928 , 933 (2d Cir.1983), we conclude that the case law applying the New York Convention and the federal policy favoring arbitration apply where a court acts to protect its prior judgments by staying incompatible arbitral proceedings otherwise governed by that Convention.
And the Second Circuit Court of Appeals, although without explanation, has held that district courts have jurisdiction under the New York Convention to hear actions to vacate arbitration awards—a remedy not provided in § 206 or § 207. See Scandinavian Reinsurance Co. v. Saint Paul Fire & Marine Ins. Co.,
The recent approach by the Court of Appeals is consistent with the New York Convention and the FAA. The jurisdictional provision in Chapter 2 of the FAA 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.” § 203. The only section in Chapter 2 that defines the phrase “falling under the Convention” is § 202, which provides that “[a]n [international] 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.” Therefore, for jurisdiction to be proper, the arbitration agreement or award “(1) must arise out of a legal relationship (2) which is commercial in nature and (3) which is not entirely domestic in scope.” Pike v. Freeman,
Nothing in § 206 or § 207 limits the subject matter jurisdiction of federal courts. These sections merely identify the remedies that federal courts may grant, and do “not speak in jurisdictional terms or refer in any way to the jurisdiction of the district courts.” Zipes v. Trans World Airlines, Inc.,
Treating §§ 206 and 207 as jurisdictional provisions confuses the subject matter jurisdiction of federal courts with their remedial authority. Although “¡j]urisdiction ... is a word of many, too many, meanings,” Arbaugh v. Y & H Corp.,
Accordingly, the Court has subject matter jurisdiction over this action.
C.
The next issue is whether the Court has the remedial authority to enjoin an arbitration proceeding that arises under the New York Convention. A federal court should have the same power to enjoin an arbitration under the New York Convention as it would have to enjoin a domestic arbitration under Chapter 1 of the FAA. Indeed, 9 U.S.C. § 208 explicitly provides that “Chapter 1 applies to actions and proceedings brought under this chapter to the extent that chapter is not in conflict with this chapter or the Convention as ratified by the United States.”
The Court of Appeals has made it clear that federal courts do have the power to enjoin domestic arbitrations even though that remedial power is not explicitly provided in Chapter 1 of the FAA. In American Financial Services, Inc. v. Beland (In re American Express Financial Advisors Securities Litigation),
The Court of Appeals nonetheless held that “[if] the parties to this appeal have not consented to arbitrate a claim, the district court was not powerless to prevent one party from foisting upon the other an arbitration process to which the first party had no contractual right .... It makes little sense to us to conclude that district courts lack the authority to order the cessation of an arbitration by parties within its jurisdiction where such authority appears necessary in order for a court to enforce the terms of the parties’ own agreement.” Id. at 141. The Court of Appeals also cited with approval Satcom International Group PLC v. Orbcomm International Partners, L.P.,
Because the Court of Appeals has found that federal courts have the remedial power to stay domestic arbitrations, it follows that they have the remedial authority to stay international arbitrations arising under the New York Convention. See Sphere Drake Ins. Ltd. v. Clarendon Nat. Ins. Co.,
The Court therefore may enjoin an arbitration proceeding governed by the New York Convention when the parties “have not entered into a valid and binding arbitration agreement” or when the claims are “not within the scope of an arbitration agreement.” In re Am. Express Fin. Advisors Sec. Litig.,
III.
While the Court has subject matter jurisdiction over this action and can enjoin the FINRA arbitration, the issue remains whether the plaintiffs have made the necessary showing for a preliminary injunction. They have not.
A.
“For the last five decades, this circuit has required a party seeking a preliminary injunction to show ‘(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.’ ”
The “serious questions” prong permits the Court to grant a preliminary injunction “where it cannot determine with certainty that the moving party is more likely than not to prevail on the merits of the underlying claims, but where the costs outweigh the benefits of not granting the injunction.” VCG Special Opportunities Master Fund,
B.
CRT Capital has failed to show a likelihood of success on the merits or sufficiently serious questions going to the merits to make them fair ground for litigation. The ultimate issue on the merits of the claim for injunctive relief is whether CRT Capital, McCarty, and Gibson are correct that SLS Capital’s arbitration against them should be enjoined because the claims are not subject to arbitration.
In deciding whether claims are subject to arbitration, a court must consider (1) whether the parties have entered into a valid agreement to arbitrate, and, if so, (2) whether the dispute at issue comes within the scope of the arbitration agreement. Before addressing the second inquiry, we must also determine who-the court or the arbitrator-properly decides the issue.
In re Am. Expess Fin. Advisors Sec. Litig.,
CRT Capital disputes that there is a valid arbitration agreement. According to CRT Capital, it agreed to arbitrate disputes with SLS Capital, not the SLS Capital bondholders, and SLS Capital’s claims were brought on behalf of the bondholders—particularly claims one through five, which are styled as “fraud on the bondholders,” “negligent misrepresentation to the bondholders,” and “aiding and abetting fraud on the bondholders.”
This argument confuses the “existence” of a valid arbitration agreement with the “scope” of a valid arbitration agreement. The question of whether there is a valid arbitration agreement “usually arises in one of two factual scenarios: (1) whether the parties ever entered into an arbitration agreement at all, and (2) whether an arbitration agreement has expired or been terminated.” Abram Landau Real Estate v. Bevona,
The Engagement Letter provides that it shall be “governed by and construed in accordance with the laws of the State of New York.” Regan Decl. Ex. 1. The existence of a valid agreement to arbitrate between parties is generally a question of state contract law. Schnabel v. Trilegiant Corp.,
Contec Corp. v. Remote Solution Co.,
However, because the agreement provided for “arbitration of the issue of arbi-trability,” the court concluded that an arbitrator must determine the arbitrability of the parties’ dispute. Id. at 209. The Court of Appeals recognized, that “in the end, an arbitrator” may well “determine that the dispute itself is not arbitrable because Contec Corporation cannot claim
CRT Capital next contends that it did not agree to arbitrate claims brought “on behalf of’ the bondholders. Those claims, according to CRT Capital, actually belong to the SLS Capital bondholders, and CRT Capital only agreed to arbitrate disputes arising between CRT Capital and SLS Capital. But whether CRT Capital agreed to arbitrate these claims must be determined in the first instance by the arbitrator. Under the terms of the Engagement Letter, a FINRA arbitrator must determine whether SLS Capital’s claims fall within the scope of the arbitration clause.
“The question whether the parties have submitted a particular dispute to arbitration, i.e., the ‘question of arbitrability,’ is san issue for judicial determination [u]nless the parties clearly and unmistakably provide otherwise.’ ” Howsam v. Dean Witter Reynolds, Inc.,
In Shaw Group Inc. v. Triplefine International Corp.,
Similarly, in PaineWebber Inc. v. Bybyk,
The arbitration clause here is broader than those in Bybyk and Shaw. It provides that “[a]ny dispute between the parties to this Engagement Letter shall be settled by arbitration”; unlike the agreements in By-byk and Shaw, there is no “concerning” modifier. And there is no qualifying provision in the arbitration clause “that at least arguably covers the present dispute.” See NASDAQ OMX Grp., Inc. v. UBS Sec., LLC,
Shearson Lehman Hutton, Inc. v. Wagoner,
In Wagoner, the Court of Appeals did not consider whether the district court or the arbitrator should have determined in the first instance whether the aiding and abetting fraud claim was arbitrable. That is not surprising. At no point did the bankruptcy trustee claim that the customer agreement required the. arbitrator to determine questions of arbitrability. See Brief for Appellant, Shearson Lehman Hutton, Inc. v. Wagoner,
CRT Capital also cites a number of cases holding that, a bankruptcy trustee lacks standing to sue third parties on behalf of the estate’s creditors. See, e.g., Picard v. JPMorgan Chase & Co. (In re Bernard L. Madoff Inv. Sec. LLC.),
Accordingly, whether SLS Capital’s claims against CRT Capital fall within the scope of the Engagement Letter must be determined in the first instance by the arbitrator.
C.
McCarty and Gibson have also failed to show a likelihood of success on the merits or sufficiently serious questions going to the merits to make them fair ground for litigation.
Unlike CRT Capital, neither McCarty nor Gibson signed the Engagement Letter with SLS Capital. However, under FINRA Code Rule 12200, parties must arbitrate a dispute before FINRA if: “[a]rbitration ... is ... [Requested 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.”
The FAA, 9 U.S.C. § 1 et seq., “requires courts to enforce privately negotiated agreements to arbitrate, like other contracts, in accordance with their terms.” Volt Info. Seis.,
The parties agree that Gibson and McCarty are “associated persons” under Rule 12100(r) of the FINRA Code. Although Gibson and McCarty are no longer employed by CRT Capital, under Rule 12100(r) “a person formerly associated with a member is a person associated with a member.”
But Gibson and McCarty’s status as associated persons is insufficient, standing alone, to prove that they intended to submit the question of arbitrability to a FIN-RA arbitrator. In John Hancock, the Second Circuit Court of Appeals held that a party’s membership in NASD, the predecessor to FINRA, did not “evidence the parties’ clear and unmistakable intent to submit the ‘arbitrability’ question to the arbitrators.”
Therefore, the Court must determine whether SLS Capital’s claims against Gibson and McCarty are arbitrable.
2.
SLS Capital’s claims against Gibson and McCarty fall within the scope of Rule 12200 and therefore are- arbitrable.
As explained above, McCarty and Gibson are considered to be associated persons of a FINRA Member—CRT Capital. And SLS Capital is a customer of CRT Capital. Rule 12100® defines “customer” in the negative: “A customer shall not include a broker or dealer.” While the Second Circuit Court of Appeals “ha[s] avoided offering an exhaustive definition of the term,” it did hold that “[t]he term ‘customer’ includes at least a non-broker or non-dealer who purchases, or undertakes to purchase, a good or service from a FINRA member.” W.Va. Univ. Hosps.,
Under the Engagement Letter, SLS Capital retained CRT Capital to serve as an advisor in relation to a Senior Life Settlement Asset Backed Securitization Bond issue. Regan Deck Ex. 1. And the Amended Statement of Claim alleges that McCarty and Gibson “were the principal instruments through which CRT [Capital] acted.” Regan Deck Ex. 2, at 3. SLS Capital purchased advisory services from and thus was a customer of CRT Capital. Further, the defendants do not dispute
McCarty and Gibson instead contend that the causes of action in the Statement of Claim “actually” belong to the SLS Capital bondholders, and therefore none of the causes of action are arbitrable. But SLS Capital alone brought these claims; none of the bondholders have been joined as a party. Whether SLS Capital has standing to bring claims on “behalf of the bondholders” is a question of standing for the arbitrator, not the Court, to decide.
In Howsam v. Dean Witter Reynolds, Inc.,
At best, McCarty and Gibson have raised an issue of standing'—that is, whether SLS Capital may sue on behalf of the bondholders. However, this is a “procedural gateway” question that must be determined by the arbitrator in the first instance. As Judge Wood explained:
In the context of arbitration, the term “standing” addresses the entitlement of the party to raise a given point before the arbitrator .... That is the sense in which standing to arbitrate should be understood: is the petitioner a proper party to raise a particular claim in the arbitration? This explains why courts have not hesitated to hold that standing is a matter for the arbitrator to resolve, even though ... arbitrability is usually an issue for the court.
Envtl. Barrier Co. v. Slurry Sys., Inc.,
To the extent that McCarty and Gibson argue that SLS Capital is not entitled to relief because they allegedly harmed the bondholders, not SLS Capital, that is an argument on the merits. Such a determi
D.
Finally, because the Court has concluded that the arbitrability of SLS Capital’s claims against CRT Capital must be determined by an arbitrator, and SLS Capital’s claims against McCarty and Gibson fall within the scope of Rule 12200, “it necessarily follows” that the plaintiffs have “shown neither a likelihood of success on the merits, nor a sufficiently serious question going to the merits along mth a balance of hardships tipping decidedly toward [them] to warrant the grant of a preliminary injunction barring arbitration.” Spear, Leeds & Kellogg v. Cent. Life Assur. Co.,
CONCLUSION
The Court has considered all of the arguments raised by the parties. To the extent not specifically addressed above, they are either moot or without merit. For the reasons explained above, the plaintiffs’ application for a preliminary injunction is denied. The Clerk is directed to close Docket Number 5.
SO ORDERED.
Notes
. CRT Capital is a limited liability corporation, one of its members is a citizen of a foreign state, and "a limited liability corporation has the citizenship of each of its members for the purposes of diversity jurisdiction.” See Handelsman v. Bedford Vill. Assocs. Ltd. P’ship,
. Whether the Engagement Letter between CRT Capital and SLS Capital in fact governs this dispute, and whether the dispute between the individual plaintiffs and SLS Capital in fact falls under FINRA Code, "depends entirely upon [the Court’s] view of the merits of the case, and therefore does not involve a lack of subject matter jurisdiction.” Sarhank,
. SLS Capital insists that eBay Inc. v. MercExchange, L.L.C.,
. In West Virginia University Hospitals, which neither party cited, the Court of Appeals for the Second Circuit suggested that the phrase "arises in connection with the business activities” may require some type of "nexus” between the claims asserted and the activities that "establish[] customer status.”