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.
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.
Defendants issued various life insurance policies to Goodman which named various trusts as the beneficiaries. Upon Goodman's death, Defendants paid the proceeds of the insurance to the trusts. The requirements of the trusts resulted in the money being paid to Goodman's customers. Defendants seek to hold SLK liable for the misdeeds of its customer. Whether Defendants claims have merit is not for me to determine. The matter before me involves solely the arbitrability of Defendants' claims.
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, § 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 Constitution and such rules as the Board may from time to time adopt.
The Rules state substantially the same provision:
(a) Any dispute, claim or controversy between a nonmember and a member . . . arising in connection with the business of such member . . . shall be arbitrated under the Constitution and Rules of the New York Stock Exchange, Inc. as provided by any duly executed and enforceable written agreement or upon the demand of the non-member.