In Re Sw Bach & Co.
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.
United States Bankruptcy Court, S.D. New York.
*82 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 *83 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.
BACKGROUND[2]
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 *84 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 *85 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 transfer of the accounts.
(Compl. ¶¶ 203-04.)
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Count 8 Aiding and AGI allegedly knowingly provided substantial assistance to Shapiro in breaching his
Abetting Liability fiduciary duties to the Debtor, including by: (i) inducing Shapiro to transfer the
against AGI Accounts with the false promise of compensation and future employment, (ii)
assisting with the transfer of the accounts; and (iii) accepting the transfer of the
accounts under the circumstances described in the Complaint. (Compl. ¶ 210.)
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*86
Count 9 Avoidance and The Debtor allegedly transferred the Accounts to AGI within two years of the
Recovery of Petition Date, for AGI's benefit. The Debtor was (i) insolvent on the date the
Fraudulent accounts were transferred, or became insolvent as a result of the transfer; and/or
Transfers to AGI (ii) engaged in business or a transaction for which any property remaining with the
Debtor was an unreasonably small capital at the time of, or a result of, the transfer
of the accounts. (Compl. ¶¶ 214, 217.)
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Count 10 Restitution and AGI allegedly obtained the Debtor's right to manage the Accounts prior to the
Unjust Enrichment Petition Date, for which the Debtor received no consideration, and, as a result of
against AGI which, AGI has earned substantial profits/fees, and from which AGI should not be
permitted to continue profiting without compensating the Debtor and its estate.
(Compl. ¶¶ 221-23, 225.)
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All of the defendants answered the Complaint on August 14, 2009. AGI asserted four affirmative defenses in its Answer (ECF # 14):(1) the litigation is not properly maintained under applicable and controlling industry rules; (2) AGI agreed to accept the transfer of the Accounts as part of the regulatory scheme, including SEC Rule 15c3-1, the "Net Capital Rule," and Rule 15c3-3, the "Customer Protection Rule," designed to protect customers of brokerage-firms that cease operations due to financial insolvency; (3) once the Debtor tendered its license to the NASD, it was prohibited from managing the Accounts as a matter of law and, therefore, the right to manage those Accounts was no longer an asset of the firm; (4) the Trustee's damages, if any, were caused by the actions of individuals or entities over whom AGI exerted no control and for whom it bears no responsibility. (AGI Answer, at 33-34.)
AGI filed its motion to stay the adversary proceeding and compel arbitration on October 14, 2009. On November 23, 2009, the Court heard oral argument of AGI's motion. The Court ordered Togut and AGI to submit supplemental briefs by December 15, 2009, which they did.
DISCUSSION
A. Introduction
"The Federal Arbitration Act ("FAA"), see 9 U.S.C. § 1 et seq., requires a federal court to enforce arbitration agreements and to stay litigation that contravenes them."[6]Burns v. New York Life Ins. Co.,
Accordingly, a bankruptcy court faced with a motion to compel arbitration must apply a four-part test:
[F]irst, it must determine whether the parties agree to arbitrate; second, it must determine the scope of that agreement; third, if federal statutory claims are asserted, it must consider whether Congress intended those claims to be nonarbitrable; and fourth, if the court concludes that some, but not all, of the claims in the case are arbitrable, it must then decide whether to stay the balance of the proceedings pending arbitration.
Bethlehem Steel Corp. v. Moran Towing Corp. (In re Bethlehem Steel Corp.),
AGI's motion, while seeking to stay litigation pending completion of the arbitration of Counts 8 and 10, does not seek to compel arbitration of Count 9, the fraudulent conveyance claim.
Avoidance claims are not derivative of the debtor's rights; rather, they are statutory claims created in favor of creditors that can only be prosecuted by a trustee or debtor in possession. ... Claims that are derivative of a debtor's rights may be subject to arbitration. Claims that belong exclusively to a trustee or debtor in possession belong to creditors who were not parties to the arbitration agreement and, therefore, are not subject to arbitration.
Bethlehem Steel,
B. Whether the Parties Agreed to Arbitrate
The parties do not dispute that AGI and the Debtor were members of FINRA and that FINRA Rule 13200 governing mandatory arbitration applies to the Debtor and AGI. (See Trustee's Objection Mot. AGI Stay Proceedings Pending Arbitration, November 18, 2009; ECF # 53.)[8]
*88 C. The Scope of the Arbitration Agreement
1. The Claims are Covered by the Broad Arbitration Provision
To determine the scope of an arbitration agreement, the Court first examines whether the arbitration clause is "narrow" or "broad," in light of the allegations of the complaint, not the legal theories espoused. Collins & Aikman Prods. Co. v. Bldg. Sys., Inc.,
In construing arbitration clauses, courts have at times distinguished between `broad' clauses that purport to refer all disputes arising out of a contract to arbitration and `narrow' clauses that limit arbitration to specific types of disputes. If a court concludes that a clause is a broad one, then it will order arbitration and any subsequent construction of the contract and of the parties' rights and obligations under it are within the jurisdiction of the arbitrator.
Collins & Aikman Prods. Co.,
In JLM Industries, Inc. v. Stolt-Nielsen SA,
Though not explicitly labeling the NASD Code/FINRA Rules as containing a "broad" or "narrow" arbitration provision, the court in McMahan Securities Co. L.P. v. Forum Capital Markets L.P.,
2. Congress Intended to Exclude Certain of the Disputes from Arbitration
Even if all the claims for which AGI seeks to compel arbitration were covered by the broad language in FINRA Rule 13200, the Court has discretion to deny arbitration of the claims. Bethlehem Steel,
"The issue of waiver predominates arbitration disputes involving bankruptcy claims. ..." Hagerstown,
If a claim is core, "the bankruptcy court must still carefully determine whether any underlying purpose of the Bankruptcy Code would be adversely affected by enforcing the arbitration clause," and the "arbitration clause should be enforced unless [doing so] would seriously jeopardize the objectives of the Code." Hagerstown,
[a] trustee in bankruptcy wears two hats. First, he stands in the shoes of the debtor, and may bring any suit that the debtor could have brought before bankruptcy. When the trustee sues as statutory successor to the debtor, his rights are limited to the same extent as the debtor's under applicable non-bankruptcy law. If the debtor agreed in a pre-petition contract to arbitrate a dispute, the trustee, suing as successor to the debtor, is likewise bound by the arbitration clause. Second, under 11 U.S.C. § 544, the trustee also stands in the `overshoes' of the creditors. ... Section 544(b) ... puts the trustee in the creditors' shoes, and allows him to assert claims that only they could assert outside of bankruptcy.
Id. at 206-07 (internal citations omitted).
"Core proceedings are matters arising under the Bankruptcy Code or arising in bankruptcy cases. Non-core proceedings are merely related-to bankruptcy cases." Cibro Petroleum Prods. v. City of Albany (In re Winimo Realty Corp.),
In many ways the issue here whether Counts 8 and 10 are core or non-core is made easier because AGI did not file a proof of claim in Debtor's bankruptcy case. When a proof of claim has been filed, a court is often faced with the task of determining whether a trustee's claim is a counterclaim to the proof of claim, rendering the entire dispute a core proceeding. See Iridium Operating LLC v. Motorola, Inc. (In re Iridium Operating LLC),
a. Procedurally Core Claims
Procedurally core claims are "garden variety pre-petition contract disputes dubbed core because of how the dispute arises or gets resolved." Hagerstown,
Courts in the Second Circuit have held that traditionally non-core claims against a creditor may turn into core claims after the creditor files a proof of claim since an adversary proceeding against such a creditor "would affect the allowance or disallowance of the creditor's claim." Iridium Operating,
*91 Procedurally core claims may still be subject to mandatory arbitration if arbitration of the claims would not violate any bankruptcy policy. In Hagerstown, for example, Judge Bernstein found the breach of contract claims to be "procedurally core," because they were "raised as counterclaims in connection with the trustee's objection to [the creditor's] proof of claim." The court nevertheless concluded that it was required to refer the contract claims to arbitration. Hagerstown,
b. Substantively Core Claims
Conversely, claims that are "not based on the parties' pre-petition relationship, and involve rights created under the Bankruptcy Code" are core for substantive reasons and are usually not arbitrable nor subject to a withdrawal of the reference. See id. at 203. As Judge Bernstein noted in Hagerstown, "such disputes will often fail the preliminary question of arbitrability because the parties did not agree to arbitrate them. Nevertheless, even if they are covered by the arbitration clause, it is more likely that arbitration will conflict with the policy of the Bankruptcy Code that created the right in dispute. The bankruptcy court enjoys much greater discretion to refuse to compel the arbitration of this type of dispute." Id.
Though not explicitly distinguishing substantively core claims from procedurally core claims, the Iridium Operating court found that a setoff defense can be particularly important in regarding the claims as core, as "a setoff claim takes on particular importance in the context of bankruptcy, as it, in effect, `elevates an unsecured claim to secured status to the extent that the debtor has a mutual, pre-petition claim' against the party asserting setoff. ..." Iridium Operating,
At the same time, other courts have found that where the action has a significant *92 impact on the administration of the estate, though again, not explicitly distinguishing between a procedurally and substantively core claim, a claim can be "core." See U.S. Lines,
The court addresses in turn each claim for which AGI seeks arbitration. The Court concludes below that the Trustee has failed to demonstrate that Counts 8 and 10 are either "procedurally core" or "substantively core," such that they are not subject to mandatory arbitration. Even if Counts 8 and 10 were core, arbitration of the claims will not severely conflict with the policies of the Bankruptcy Code.
c. Count 8: Aiding and Abetting Breach of Fiduciary Duty Is a Non-Core Claim That Must Be Arbitrated
Much of the authority concerning whether claims for aiding and abetting breach of fiduciary duty are arbitrable is in the context of whether the district court should withdraw the reference of an action to the bankruptcy court. Courts consider other factors in addition to whether a claim is core or non-core with respect to withdrawing the reference that may not be especially relevant in the arbitration context. For example, to withdraw the reference under 28 U.S.C. § 157(d), a court also considers: "(1) whether the claims are legal or equitable [as a bankruptcy court cannot hold a jury trial in a non-core matter]; (2) judicial efficiency; (3) prevention of forum shopping; and (4) the uniformity in bankruptcy administration." Iridium Operating,
Courts are split whether they find claims for aiding and abetting breach of fiduciary duty claims core when deciding to withdraw the reference. For example, the Iridium Operating court refused to withdraw the reference and found an aiding and abetting breach of fiduciary duty claim core for seemingly procedural reasons: the defendant was intimately involved in the bankruptcy, filed multiple proofs of claim, administrative claims, and asserted setoff defenses concerning the contract at issue in the adversary proceeding. Id. Also, in Cape Cod Mortgage Trust, Inc. v. Gee (In re Gee), No. 98 CIV 414 BSJ, 83327,
*93 Courts may find fiduciary duty claims core when they involve officers and directors of a debtor. For example, in Unsecured Creditors Committee of Debtor STN Enterprises, Inc. v. Noyes (In re STN Enterprises, Inc.),
Conversely, in Mirant Corp. v. The Southern Co. (In re Mirant Corp.),
Here, AGI did not file a proof of claim or assert a right to setoff in its affirmative defenses. Instead, the affirmative defenses asserted by AGI rely solely on "applicable and controlling industry rules," SEC Rule 15c3-1 and 15c-3-3, and law regarding the effect of the Debtor tendering its license to NASD and the conduct of individuals over whom AGI alleges it had no control. (AGI Answer, at 33-34.) Accordingly, the aiding and abetting breach of fiduciary duty claim is not procedurally core.
As to whether the claim is substantively core, the Trustee essentially relies on the argument that the claims against AGI involve the transfer of the most significant asset of the estatethe right to manage the accountsand will have a significant impact on the administration of the estate. However, the aiding and abetting breach of fiduciary duty claim seeks to adjudicate a private cause of action against a non-creditor entity, for its alleged aiding and abetting in the breach of fiduciary duties by the Debtor's principal. This does not affect the restructuring of debtor-creditor relations, nor does the aiding and abetting claim arise solely out of the Debtor's obligations in bankruptcy. See Messinger,
Furthermore, unlike in U.S. Lines, resolving the dispute whether AGI aided and abetted Shapiro in any breach of fiduciary duty will not necessarily have a "significant impact on the administration of the estate," as the Trustee alleges. In U.S. Lines,
D. Count 10: Restitution and Unjust Enrichment Is a Non-Core Claim That Must Be Arbitrated
As with the aiding and abetting breach of fiduciary duty claim, much of the jurisprudence concerning the core/non-core nature of the unjust enrichment and restitution claim is in the withdrawal of the reference context. Still, these decisions are instructive here. Some courts find unjust enrichment claims non-core, as they do not arise under the Bankruptcy Code. E.g., Miller v. Pierce, CIV-09-96-FHS, Bankr.No. 08-80228-M; Adv. Pro. No. 08039-M,
Even in In re I.E. Liquidation, Inc.,
On the other hand, other courts in this Circuit have considered unjust enrichment and restitution claims core, where the claims arose out of the same facts as the proof of claim. Caldor Corp. v. S Plaza Assocs., L.P. (In re Caldor, Inc.),
Other courts have found unjust enrichment claims core where they decided that other, related claims were core. In re 222 South Caldwell Street, Ltd. Partnership,
Here, the unjust enrichment and restitution claim is pled in the alternative to the fraudulent conveyance claim, which AGI acknowledges is non-arbitrable. As noted supra, AGI has not filed a proof of claim in this action; nor does it assert any right of setoff. AGI has no contract with the Debtor. As noted supra, there are no allegations that it is the alter ego, or related to any principal of the Debtor in any degree close to that in other cases. See In re Harvard Knitwear, Inc.,
While the "damages that flow" from the unjust enrichment may have some overlap with damages for the fraudulent conveyance claim, the unjust enrichment claim is not intimately intertwined with the fraudulent conveyance claim. See In re Prince,
E. Whether to Stay the Balance of the Proceedings Pending Arbitration
For the reasons explained below, though referring Counts 8 and 10 to arbitration, the Court declines to stay consideration of Count 9 in this court while staying the arbitration of Counts 8 and 10 until Count 9 is resolved.
Judge Bernstein in Hagerstown noted that non-arbitrable claims are not subject to the mandatory stay required by Section 3 of the FAA. Hagerstown,
Still, section 105 of the Bankruptcy Code authorizes the court to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title," including enjoining proceedings in other forums against non-debtors. See 11 U.S.C. § 105(a); McHale v. Alvarez (In re The 1031 Tax Group, LLC),
Because 105(a) injunctions are authorized by statute, they do not need to comply with the traditional requirements of Fed.R.Civ.P. 65. Rather, the bankruptcy court may enjoin proceedings in other courts when it is satisfied that such a proceeding would defeat or impair its jurisdiction with respect to a case before it. To enjoin claims against non-debtors under 105(a), a bankruptcy court must find that the claims threaten to thwart or frustrate the debtor's reorganization efforts, and that the injunction is important for effective reorganization.... [T]he courts have recognized that a stay should be provided to codefendants when the claims against them and the claims against the debtor are inextricably interwoven, presenting common questions of law and fact, which can be resolved in one proceeding. [T]he court [in Granite Partners,194 B.R. at 337 ] noted that a court should consider, among other relevant factors, whether the suits would (i) threaten the debtor's insurance coverage, (ii) increase the debtor's indemnification liability, (iii) result in inconsistent judgments, (iv) expose the debtor to risks of collateral estoppel or res judicata and (v) burden *100 and distract the debtor's management by diverting its manpower from reorganization to defending litigation.
Id. at 684 (internal quotation marks and other citations omitted).
The Court applies the Alvarez factors here in determining whether this Court should stay the arbitration of Counts 8 and 10 by the Trustee against non-debtor AGI until this Court has adjudicated Count 9. Granite Partners factors (i), (ii) and (v) are not present here because the claims are asserted by the Trustee against AGI, and not vice versa. However, as explained further below, Granite Partners factors (iii) and (iv) weigh strongly in favor of staying the arbitration of Counts 8 and 10 until this Court has adjudicated Count 9. Furthermore, the arbitration of Counts 8 and 10 before this Court rules on Count 9 would impair this Court's exclusive jurisdiction with respect to the Debtor's bankruptcy, and could thwart the Debtor's bankruptcy proceeding by taking from this Court a fraudulent conveyance claim that clearly arises under the Bankruptcy Code. The outcome of the fraudulent conveyance claim does not depend on the outcome of the aiding and abetting breach of fiduciary duty and unjust enrichment/restitution claims.
With respect to Granite Partners factor (iv), whether the proceedings will expose the debtor to risks of collateral estoppel or res judicata, courts as are split whether, and when, an arbitration proceeding forms the predicate for collateral estoppel. For example, in Grafstrom v. Bear, Stearns & Co., No. 85 Civ. 3679(JFK),
In In re Zangara,
Some courts also will apply collateral estoppel effect specifically to factual findings in arbitration proceedings. Doreen Ltd. v. Building Material Local Union 282,
Earlier Supreme Court cases, however, took a more conservative approach to whether collateral estoppel effect could apply to arbitration findings and conclusions. For example, in Dean Witter Reynolds, Inc. v. Byrd,
The most recent Second Circuit case regarding the collateral estoppel effect of an arbitration decision is Bear, Stearns & Co., Inc. v. 1109580 Ontario, Inc.,
[a]n arbitration decision may effect collateral estoppel in a later litigation or arbitration if the proponent can show with clarity and certainty that the same issues were resolved. Collateral estoppel is permissible as to a given issue if (1) the identical issue was raised in a previous proceeding; (2) the issue was actually litigated and decided in the previous proceeding; (3) the party had a full and fair opportunity to litigate the issue; and (4) the resolution of the issue was necessary to support a valid and final judgment on the merits.
(internal quotation marks and citations omitted) (emphasis added). The court afforded collateral estoppel effect to an arbitration panel's finding that a clearing broker had not aided and abetted securities fraud to similar claims arising out of the "same fraud," where, in a later arbitration, an individual plaintiff sought to use collateral estoppel offensively to preclude the clearing broker from arguing certain defenses it had argued against the another individual plaintiff in an earlier arbitration. See id. at 93.
Some courts applying factors similar to the Bear, Stearns & Co., Inc. factors will not apply collateral estoppel where the "arbitrators never made or adopted any findings of fact," as the court will "not infer the factual basis for the arbitrator's decision and then use those inferences" for the purposes of collateral estoppel. In re Klein, Maus & Shire, Inc.,
Here, it is possible that collateral estoppel would apply such that this Court would be deprived of its necessary jurisdiction over the 11 U.S.C. § 548 fraudulent conveyance claim, and, thus, as explained further below, Granite Partners factors (iii) and (iv) weigh heavily in favor of staying the arbitration of Counts 8 and 10 pending this Court's resolution of Count 9. Conversely, the Hagerstown factors weighing in favor of a broad stay order are not applicable here.
*103 A broad stay order is not appropriate here because Count 9 is not "directly connected" to Counts 8 and 10 as the fraudulent conveyance claim was to the breach of contract claim in Hagerstown. See Hagerstown,
Conversely, 11 U.S.C. § 548(a)(1)(B) provides, in relevant part (1) "The trustee may avoid any transfer ... of an interest of the debtor in property, or any obligation... incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and (ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or become insolvent as a result of such transfer or obligation...." The damages the Trustee seeks for Counts 8 and 10 are broader than, but arguably inclusive of, those it seeks for Count 9. The Trustee seeks damages in "an amount not less than the amount of the value of the Accounts Transfer, plus interest from the date hereof and the costs and expenses of this action including, without limitation, attorneys' fees." (Compl.¶ 219.)
While 11 U.S.C. § 548(a)(1)(B) permits a trustee to recover transfers "for less than a reasonably equivalent consideration," the purpose of the trustee's avoidance powers is to protect creditors, and arguably to encourage an equitable distribution of the debtor's property to creditors, and, in turn, prevent a debtor from favoring one creditor or third party over other creditors, all of which go to the "heart of federal bankruptcy proceedings" of restructuring debtor-creditor relations. See Messinger,
Furthermore, the factors supporting the injunction against the state court proceedings against the non-debtors in Alvarez and Granite Partners weigh in favor of the court deciding Count 9 and staying the arbitration of Counts 8 and 10 pending the outcome of that proceeding. See Alvarez,
While the FINRA Panel may not make any findings of fact that would bind the Court with respect the issue whether AGI received less than reasonably equivalent value for purposes of the fraudulent conveyance claim (though AGI has been deemed to admit that there was no consideration for the transfer), the Court need not take the risk that it will, potentially leading to inconsistent results. Even if collateral estoppel effect will not apply to any arbitration awards regarding Counts 8 and 10, inconsistent judgments detrimental to the Debtor could result if the Arbitration Panel is permitted to decide the amount owed to the Trustee for any alleged Transfer of the Accounts before this Court decides the fraudulent conveyance claim within its core jurisdiction.
CONCLUSION
For the reasons explained above, AGI's motion to compel arbitration of Counts 8 and 10 of the Complaint is GRANTED, however, arbitration of those claims is STAYED pending the outcome in this Court with respect to Count 9. AGI's motion *105 to stay this Court's consideration of Count 9 is DENIED.
IT IS SO ORDERED.
NOTES
Notes
[1] Originally, there were two motions filed to stay the adversary proceeding pending two separate arbitrations. One motion was filed by defendants RBC Dain Correspondent Services and RBC Capital Markets Corporation (together, "RBC Dain"), and one was filed by defendant AGI. The Trustee and RBC Dain have reached an agreement in principle to settle the adversary proceeding. A Rule 9019 motion to approve the settlement is on the calendar for presentment for March 15, 2010. (ECF # 100.). RBC Dain has withdrawn its motion to stay the action and compel arbitration without prejudice pending consideration of approval of the proposed settlement. Because the claims against AGI relate to alleged conduct of RBC Dain and defendant Shapiro, this opinion describes the allegations concerning RBC Dain and Shapiro to the extent relevant to the claims against AGI. Shapiro has answered the Complaint; he has not moved to compel arbitration. Another entity, JAS Management, Inc. ("JAS Management"), was also a defendant in this case, but its answer has been stricken and a default judgment entered against it. (ECF # 91.) This opinion deals only with AGI's motion. References to facts relating to RBC Dain and Shapiro are taken from the Complaint and do not constitute findings of fact by the Court; the defendants filed answers denying the material allegations of the Complaint.
[2] The Court takes the facts from the Complaint and certain documents submitted by the parties. The Background discussion does not reflect any factual findings, and recognizes that AGI (and other defendants) denied certain factual allegations cited herein.
[3] The Debtor and AGI disagree whether the Debtor retained the ability to transfer the accounts following its tender of a Financial Industry Regulatory Authority ("FINRA") Form BDW (Uniform Request for Broker-Dealer Withdrawal) ("BDW Form") on February 23, 2007. (See Supplemental Mem. Supp. Trustee's Objection Mot. AGI Stay Proceedings Pending Arbitration, ¶¶ 5-20 (ECF # 70); Supplemental Br. Supp. Mot. AGI Stay Proceedings Pending Arbitration, ¶¶ 2-9 (ECF # 71).) However, without making any factual findings, the Court assumes that the Debtor's membership in NASD concluded on April 24, 2007, the date indicated as the date registration status was "terminated" on the Debtor's FINRA Registration Status History. (Flores Dec., Ex. 5.) FINRA Rule 13100 defines "member" as "any broker or dealer admitted to membership in FINRA, whether or not the membership has been terminated or cancelled." (AGI's Answer, 33.)
[4] AGI contends that defendant Shapiro is also an "Associated Person" registered with the NASD. However, Shapiro has not sought to arbitrate the claims asserted against him. The Court does not decide whether any of the claims against Shapiro are arbitrable.
[5] The Trustee also asserts causes of action for Disallowance of Bankruptcy Claims filed under 11 U.S.C. § 502(d) (Count 17) and Equitable Subordination/Disallowance under 11 U.S.C. § 510(c) (Count 18), against all Defendants, including AGI. However, equitable subordination and recharacterization require filing a proof of claim: "[i]f a creditor has not filed a claim, there is nothing to subordinate nor any case or controversy to resolve." O'Connell v. Arthur Andersen LLP (In re AlphaStar Ins. Group Ltd.),
The Court recognizes that in both AlphaStar and In re NM Holdings Co., LLC the bankruptcy courts also decided motions to dismiss regarding breach of fiduciary duty claims against Debtor's former officers and directors, financial advisors, controlling shareholders, the CEO's family members, and/or certain alleged alter ego entities of a CEO, as well as unjust enrichment claims against certain of the same defendants in In re NM Holdings Co., LLC, outside of the arbitration context, and without determining the claims were core or non-core. See AlphaStar,
[6] The parties do not appear to dispute that the FAA applies to the parties' obligations under FINRA Rules.
[7] Section 2 of the FAA provides: "A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." Section 3 of the FAA provides: "If any suit or proceeding be brought in any of the courts of the United States upon any issues referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration."
[8] Even if the Debtor's membership in FINRA for purposes of the applicability of FINRA Rule 13200 was disputed, FINRA Rule 13100 defines "member" as "any broker or dealer admitted to membership in FINRA, whether or not the membership has been terminated or cancelled." (AGI's Answer, at 33.) (emphasis in original). The Debtor's registration status in FINRA was "terminated" as of April 24, 2007. (Flores Dec., Ex. 5, FINRA Registration Status History.) As noted, supra, the Debtor and AGI disagree whether the Debtor retained the ability to transfer the accounts following its tender of a Form BDW on February 23, 2007; however, neither the date of tender of the BDW form nor the date of termination are relevant under FINRA Rule 13100 in determining whether the Debtor was a "member" of FINRA and subject to FINRA Rule 13200. (See Supplemental Mem. Supp. Trustee's Objection Mot. AGI Stay Proceedings Pending Arbitration, December 15, 2009 ¶¶ 5-20 (ECF # 70); Supplemental Br. Supp. Mot. AGI Stay Proceedings Pending Arbitration, December 15, 2009, ¶¶ 2-9 (ECF # 71).) See also n. 3, supra.
[9] The CBI Holding court also, however, "express[ed] no judgment on the question of when, if ever, a claim that does not qualify as core under § 157(b)(2)'s express language could be rendered core only on the grounds that it is based on the same transaction as a core proceeding." Id. at 465 n. 19.
[10] More importantly, still, for present purposes, Judge Bernstein concluded "that the fraudulent transfer claims should be stayed against all defendants pending the conclusion of the arbitration." Hagerstown,
[11] The decision in Mirant was criticized for its characterization of an alter-ego/veil piercing claim as legal, determining that such claims have both legal and equitable roots. See In re Kollel Mateh Efraim, LLC,
[12] Arguably, aiding and abetting breach of fiduciary duty would also be a compulsory counterclaim under a traditional FED.R.Civ.P. 13 analysis, but, not necessarily under FED. R. BANKR.P. 7013. See Rossi v. Wohl,
[13] That the Trustee contends Shapiro owed a fiduciary duty to creditors is not sufficient for the Court to find that the aiding and abetting claims arise solely out of the Debtor's obligations in bankruptcy. At the very least, as this Court has noted before in this matter, the extent of fiduciary duties owed to creditors of an insolvent entity is a question of complicated state law, and does not arise out of the Bankruptcy Code. See Togut v. RBC Dain Correspondent Serv. (In re S.W. Bach & Co.), Bankr. No. 07-11569(MG), Adv. Pro. No. 09-01278(MG),
[14] AGI has admitted that it paid no consideration to the Debtor for the transfer of the Accounts by virtue of its failure to timely respond to the Trustee's First Requests for Admission. In re S.W. Bach & Co.,
[15] As noted supra, AGI has admitted in discovery there was no consideration for the transfer of the Accounts. See n. 13, supra.