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March 30, 1995



The opinion of the court was delivered by: KEVIN THOMAS DUFFY


 Plaintiff Spear, Leeds & Kellogg ("SLK") seeks a preliminary injunction against three life insurance companies: Central Life Assurance Company, Alexander Hamilton Life Insurance Company of America, Inc., and Canada Life Assurance Company, (collectively referred to as "Defendants"). Plaintiff seeks to enjoin Defendants from compelling Plaintiff to submit to arbitration. For the reasons stated below, Plaintiff's motion for a preliminary injunction is granted.

 Plaintiff is a registered futures commission merchant and a member of the New York Stock Exchange ("NYSE" or "Exchange"). As such, is subject to the Constitution of the New York Stock Exchange ("NYSE Constitution") and the Exchange Arbitration Rules ("NYSE Rules"). Defendants are life insurance companies who are not members of the NYSE. Pursuant the NYSE Constitution and Rules, Defendants filed an arbitration demand seeking recovery of monies they paid out on life insurance policies of a customer of SLK. Plaintiff claims that it is not subject to NYSE arbitration because it has no transactional nexus with Defendant, and therefore, the NYSE Constitution and Rules relied upon by Defendant do not apply.

 Plaintiff opened a commodities account for Marvin Goodman in 1990. Prior to opening the account, SLK states that they conducted a background check on Goodman, and found no financial or regulatory problems. Plaintiff set up Goodman's account in the same way that Goodman's previous account with Balfour Maclaine Futures, Inc. ("Balfour"), also a NYSE member, was established. Goodman transferred his account from Balfour to Plaintiff. Goodman maintained various subaccounts with Plaintiff, all of which bore his name and social security number. Some of these subaccounts had debit balances and some had credit balances. According to Plaintiff, SLK sent these account statements on a regular basis to Goodman and to people specified by Goodman.

 Goodman had also obtained life insurance policies from Defendants and others in excess of $ 23 million. Part of the applications for the life insurance required Goodman to supply Defendants with his financial statements. Apparently, Plaintiff's account statements were among those submitted by Goodman. Defendants supplied $ 3 million and upon Goodman's sudden death were required to pay $ 1.9 million to the policy beneficiaries. Many of the recipients of this money were clients of Goodman's for whom he had made various investments. Goodman apparently hid from his clients that their investments had lost money. According to Plaintiff, Goodman had been "doctoring" the account statements when he received them from SLK and sending out inaccurate statements to his clients. SLK alleges that they knew nothing of Goodman's actions until after his death. Defendants allege that Plaintiff either falsified the documents or knew of the falsification and seeks to hold SLK liable for the amounts paid out on the insurance policies. To this end, Defendants filed a "Statement of Claim" in an arbitration demand with the NYSE. The instant action to enjoin arbitration followed.


 The standard for granting a preliminary injunction is well settled in this Circuit. The plaintiff must show "(1) irreparable harm and (2) likelihood of success on the merits." Reuters, Ltd. v. United Press Int'l, Inc., 903 F.2d 904, 907 (2d Cir. 1990) (quoting Coca-Cola Co. v. Tropicana Products, Inc., 690 F.2d 312, 314-15 (2d Cir. 1982). In the alternative, the plaintiff must show that there are "sufficiently serious questions going to the merits to warrant litigation and a balance of hardships in favor of the movant." Roso-Lino Beverage Distributors v. Coca-Cola Bottling Co., 749 F.2d 124, 125 (2d Cir. 1984).

 If a court determines that a valid arbitration agreement does not exist or that the matter at issue clearly falls outside the substantive scope of the agreement, it is obliged to enjoin arbitration. PaineWebber Inc. v. Hartmann, 921 F.2d 507, 511 (3d Cir. 1990). (hereinafter referred to as "Hartmann"). In the present case, there is no agreement between the parties, and thus, no arbitration clause to bind the parties. A party cannot be required to submit to arbitration any dispute which he has not agreed to so submit. AT&T Technologies, Inc. v. Communications Workers of America, et al., 475 U.S. 643, 648, 89 L. Ed. 2d 648, 106 S. Ct. 1415 (1986). A party so situated will suffer per se irreparable harm if a court compels the party to submit to arbitration when it has not agreed to do so. See Hartmann, 921 F.2d at 515. Never having agreed to arbitrate, SLK will suffer irreparable harm if it is forced to submit to arbitration.

 The second factor to be considered on a preliminary injunction motion is whether Plaintiff has a likelihood of success on the merits. The determination of whether a matter is arbitrable is one to be made by the court. Litton Financial Printing Division v. NLRB, 501 U.S. 190, 208, 115 L. Ed. 2d 177, 111 S. Ct. 2215 (1991). Both the Constitution and the Rules are clear and unambiguous as to the arbitration of disputes. The issue lies in whether there is a sufficient relationship between the member (Plaintiff) and the non-member (Defendants).

 It is undisputed that Plaintiff never had any direct contact or business transaction with Defendants. Goodman obtained the life insurance policies independently of Plaintiff and without Plaintiff's knowledge. Defendants do not claim they were customers of Plaintiff. *fn1" Defendants do not claim there was any contractual relationship with Plaintiff. In fact, Defendants do not allege any contact with Plaintiff at all. Rather, Defendants claim that their reliance on falsified documents, whether by the fraudulent conduct of Goodman or that of Plaintiff, makes Plaintiff accountable to Defendants.

 In order for Defendants to compel Plaintiffs to submit to arbitration, they must show that the relationship between the parties is of the nature specified in the NYSE Constitution and the Rules. See Paine, Webber, Jackson & Curtis, Inc. v. The Chase Manhattan Bank, N.A., 728 F.2d 577, 580 (2d Cir. 1984) (hereinafter referred to as "Paine, Webber"). The NYSE Constitution, art. XI, P 1501, ยง 1 provides, in pertinent part:

. . . any controversy between a member . . . and any other person arising out of the business of such member. . . shall at the insistence of any such party be submitted for arbitration in accordance with the provisions of this ...

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