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COMMER. STREET. INC. v. GOLDBERG

January 14, 1993

99 COMMERCIAL STREET. INC., MARTIN KENNEDY and CLARK McLAIN, Plaintiffs
v.
GARY H. GOLDBERG and GARY GOLDBERG & COMPANY, Defendants


Sotomayor


The opinion of the court was delivered by: SONIA SOTOMAYOR

Defendants' motion presents the question of whether Plaintiffs may be required to arbitrate claims under a brokerage agreement signed by an escrow agent. Controlling principles of arbitration, escrow, and agency law lead to the conclusion that plaintiffs may be so required and, therefore, this Court grants Defendants' request for an order, pursuant to the Federal Arbitration Act, 9 U.S.C. § 1 et seq., to compel arbitration and stay this action.

 I. Background

 Plaintiffs 99 Commercial Street, Inc. ("99 Commercial"), a developer of real estate in New York City, and its principals Martin Kennedy ("Kennedy") and Clark McLain ("McLain") (together, "Plaintiffs") commenced this action against Gary Goldberg & Co. ("GG & Co."), a securities broker-dealer, and its president Gary H. Goldberg ("Goldberg") (together "Defendants"), seeking to recover compensatory damages for claims arising under, inter alia, § 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and punitive damages under 18 U.S.C. § 1961 et seq.

 Plaintiff 99 Commercial and its principals claim that Defendants made a series of fraudulent misrepresentations that induced them to invest mortgage proceeds in three funds that Defendants managed or owned: MFS Government Market Income Trust and MFS Intermediate Income Trust (together the "MFS Funds") and VMS Mortgage Investment Fund (the "VMS Fund") (together "the Funds"). Plaintiffs assert that through a pattern of securities fraud and racketeering activity, Defendants siphoned principal and interest from their investment. In this proceeding, Defendants have moved to compel arbitration of Plaintiffs' claims.

 II. Facts

 An abbreviated narrative of the facts is helpful in clarifying the issues raised by Defendants' motion.

 The underlying events began when Kennedy and McLain mortgaged their homes and a building located at 99 Commercial Street with Liberty Credit Corporation ("LCC") in order to raise $ 1.3 million to acquire a property (the "Property") adjacent to the building.

 Before the mortgages closed, Kennedy and McLain sought advice from Goldberg on how to invest the mortgage proceeds while they waited for the Property to become available for purchase. They asked Goldberg to recommend "safe, conservative and liquid short-term assets" because they had mortgaged the full value of 99 commercial and their homes. Plaintiffs confided to Goldberg that they had no investment experience with securities and that they would rely exclusively on him. Goldberg recommended that they invest the mortgage proceeds in the MFS and VMS Funds by depositing the proceeds with Defendants' clearing house, Bear Stearns & Co. ("Bear Stearns").

 The closing followed, and, in accordance with Defendants' instructions, McLain deposited $ 1 million of the mortgage proceeds with Bear Stearns (hereinafter the "Commercial Account"). Defendants have not produced a customer agreement for the Commercial Account but have proffered evidence that when an account is opened, Bear Stearns routinely sends to clients an executed customer agreement containing an arbitration clause. Plaintiffs deny receiving the agreement.

 LCC and Plaintiffs also placed $ 100,000 of the mortgage proceeds in escrow with Steckler, Gutman, Morrisey & Murray ("Steckler & Gutman"), attorneys for LCC, in order to secure completion of certain conditions that had been required but were not completed at the closing (hereinafter the "Escrow Account"). The escrow agreement specified that the escrow monies would be held by the escrow agents in "one or more interest bearing account [sic] with the interest for your [99 Commercial's] benefit. All the interests earned on the funds escrowed [sic] [would] remain in escrow and [would only] be paid upon completion of the matter for which the funds were escrowed [sic]." In their papers to the Court and at oral argument, Plaintiffs admit that they were told about and approved the placement of the escrow monies with Bear Stearns.

 Partners of Steckler & Gutman, acting as escrow agents, signed a customer agreement with Bear Stearns ("the "Customer Agreement") for the Escrow Account about a week after the Commercial Account was opened. Although the partners signed the Customer Agreement using their own names, the account name was "FBO (for the benefit of) 99 Commercial St Inc" in all of Bear Stearns records.

 In portions relevant to this matter, the Customer Agreement expressly incorporates GG & Co. as a third-party beneficiary. It provides that "You [the customer] agree that your broker [Goldberg & Co.] is a third party beneficiary of this Agreement, and that the terms and conditions hereof, including the arbitration provision, shall be applicable to all matters between or among any of you, your broker or Bear Stearns." (Emphasis added).

 The Customer Agreement further provides that:

 You [the customer] agree, and by maintaining an account for you Bear Stearns agrees, that controversies arising between you and Bear Stearns concerning your accounts or this or any other agreement with Bear Stearns, whether entered prior to, on or ...


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