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NETHERLANDS CURACAO CO., N.V. v. KENTON CORP.

November 12, 1973

NETHERLANDS CURACAO CO., N.V., Plaintiff,
v.
KENTON CORPORATION, Defendant


Gurfein, District Judge.


The opinion of the court was delivered by: GURFEIN

GURFEIN, District Judge:

The defendant, Kenton Corporation ("Kenton"), has applied for an order pursuant to 9 U.S.C. §§ 3 and 6 and Fed.R.Civ.P. 12(b), directing that this action be stayed or dismissed in view of a pending arbitration. The plaintiff moves for a stay of the arbitration. This action, based on diversity jurisdiction, is to recover on four promissory notes made by the defendant in the aggregate amount of $1,340,000. The plaintiff, Netherlands Curacao, N.V. ("Netherlands") is the assignee of the notes with the consent of Kenton. The notes were given pursuant to a series of related transactions between Kenton, on the one hand, and Etablissement Rulodes of Lichtenstein ("Rulodes"), and related parties. *fn1"

 Pursuant to a series of interrelated agreements, all dated as of November 10, 1969, Kenton acquired certain worldwide assets, good will and the trade name "Valentino" associated with the high fashion couturier enterprise of one Valentine Garavani and his business associate, Giancarlo Giammetti, both Italian nationals. In a purchase agreement, Kenton acquired from Rulodes all the stock of another corporation, "Itel," which held certain Valentino assets. In addition to the purchase agreement referred to, there were also agreements under which: a) Kenton acquired from Rulodes all the stock of V.B. Creations, Inc. ("V.B.") whose assets consisted of the right to use the Valentino trademarks and good will in the United States. *fn2" b) A Kenton subsidiary acquired from Rulodes certain "perfume rights" in two agreements. c) Garavani and his partner agreed to transfer to Kenton certain "Italian assets" -- Garavani's sole proprietorship. d) Garavani and his partner gave certain warranties relating to the sale of V.B. e) They gave certain warranties relating to the sale of Itel.

 In addition, there was a "Purchase Option and Escrow Agreement" among Kenton, Garavani and the United States Corporation Company as Escrow Agent, to which further reference will be made. There was also an "Umbrella Agreement" to which further reference will be made.

 Before this action was begun, Kenton failed to pay a note for $558,333 payable on July 15, 1973. On July 31, 1973, Kenton requested arbitration before the International Chamber of Commerce. In its request, Kenton sought rescission of the agreements, return of amounts heretofore paid pursuant to the agreements and cancellation of the promissory notes. It based its right to arbitrate upon an arbitration clause contained in the Purchase Agreement reading as follows:

 
" Arbitration. All disputes arising in connection with the present contract shall be finally settled by arbitration. The arbitration shall be held at Paris, France, and conducted by three arbitrators in accordance with the Rules of the International Chamber of Commerce. Judgment upon the award rendered may be entered in any court having jurisdiction or application may be made to such court for a judicial acceptance of the award and an order of enforcement, as the case may be. Such arbitrators are expressly authorized to render an award in the nature of injunctive relief in addition to any other appropriate remedy."

 The plaintiffs have refused to arbitrate. Instead they started this action. Kenton cannot move to compel arbitration because the place for the arbitration is not in this district. 9 U.S.C. § 4. See Lawn v. Franklin, 328 F. Supp. 791, 793 (S.D.N.Y.1971); China Union Lines, Ltd. v. Steamship Co. of 1949, Inc., 136 F. Supp. 597 (S.D.N.Y.1955); International Refugee Org. v. Republic S.S. Corp., 93 F. Supp. 798, appeal dismissed, 189 F.2d 858 (4 Cir. 1951). It moves to stay the action pending the outcome of the arbitration which it believes would resolve the matter. The court has power to grant a stay. See Shanferoke Coal & Supply Corp. v. Westchester Service Corp., 293 U.S. 449, 453, 55 S. Ct. 313, 79 L. Ed. 583 (1935). The plaintiff contends that the issue is not arbitrable under the agreements.

 Section 3 of the Federal Arbitration Act, 9 U.S.C. § 3 reads:

 
"§ 3. Stay of proceedings where issue therein referable to arbitration.
 
If any suit or proceeding be brought in any of the courts of the United States upon any issue 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."

 A federal court under Section 3 may consider only whether there was an agreement to arbitrate and its scope. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404, 87 S. Ct. 1801, 18 L. Ed. 2d 1270 (1967). The question is, in the language of the statute, whether the court is satisfied "that the issue involved in such suit or proceeding is referable to arbitration."

 The issue involved in this action is whether there was a failure to pay the notes, which is conceded, and whether Kenton had the right to refuse payment because of breach of warranty or otherwise. We must, therefore, look to the agreements to see whether there is any provision for arbitration in the precise circumstances of the action, namely, a failure to pay a note on the basis of a claim that the maker is not obligated to pay. *fn3"

 There is such a provision in paragraph 7 of the Purchase Option and Escrow Agreement. I shall quote it in full:

 
"7. Payment into Escrow of Disputed Note Obligations. If at any time Kenton believes that the maker of any Note is not obligated to pay any sum of principal thereof or interest thereon, and if Kenton shall take the following actions, any failure to make such payment to the holder of such Note ...

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