London Arbitration; it appeared only as a witness.
Moreover, the London Arbitration decision did not encompass the fraud claims against LDSC. The target of the arbitration was Interdevco and the dispute between Interdevco and Plaintiffs over sums owed to one another under the contracts. See Central Hudson Gas & Electric Corp. v. Empresa Naviera Santa S.A., 56 F.3d 359, 368 (2d Cir. 1995) (holding that parties' interests must be identical for a finding of privity); Cf. United States v. International BHd. of Teamsters, 964 F.2d 180, 184 (2d Cir. 1992) (concluding privity requires coinciding interests to third parties). Plaintiffs were unable to assert their fraud claims against LDSC at the arbitration. Further, Interdevco cannot be deemed to have represented LDSC's interests in the London Arbitration because Plaintiffs could not assert its fraud claims against Interdevco in place of LDSC. See, e.g., Kremer v. Chemical Construction Corp., 456 U.S. 461, 481, 72 L. Ed. 2d 262, 102 S. Ct. 1883 (1982). There is therefore, as a matter of law, no identity of parties between LDSC and Interdevco.
2. Identity of Claims
LDSC argues that the fraud claims in the instant action are a dressed up version of Plaintiffs' already adjudicated contract claim. See Trusthouse Forte (Garden City) Management, Inc. v. Garden City Hotel, Inc., 106 A.D.2d 271, 272, 483 N.Y.S.2d 216 (1st Dep't 1994) (barring fraud claim because allegation of fraud was merely an attempt to relitigate contract claim). To preclude the fraud claims, LDSC must demonstrate that Plaintiffs base their suit on the same cause of action asserted in the prior arbitration. See Parklane, 439 U.S. at 326. The actions need not be identical; they need only be integrally related. G & T Terminal Packaging, 719 F. Supp. at 158, Although no one factor is dispositive, a court considers: (1) whether the same transaction is at issue; (2) whether the same evidence is needed to support both claims; and (3) whether the facts essential to the second action were present in the first. NLRB, 706 F.2d at 1260.
Although LDSC alleges that the fraud claim is a dressed up relitigation of the earlier contract claim, this Court has already found that Plaintiffs have pleaded sufficient allegations of fraud to withstand a motion to dismiss. Usina Costa Pinto S.A. Acucar E Alcool v. Louis Dreyfus Sugar Company, Inc., No. 93-2302 (S.D.N.Y. Apr. 8, 1993). Although there is some factual overlap, the two actions appear to be separate. The London Arbitration encompassed a contract dispute between Interdevco and Plaintiffs regarding the sums due under the various agreements. Plaintiffs "bait and switch" allegation was not raised or examined at that time. Further, the purpose of the London Arbitration was to untangle and settle the amounts Interdevco and Plaintiffs owed one another. A claim of fraudulent inducement against LDSC raises issues well beyond the scope of that litigation. As such, the fraud action is different from the breach of contract claim and, as a matter of law, there is no identity of claims.
B. Collateral Estoppel
LDSC argues that Plaintiffs have already fully and fairly litigated the issue of the Joint Agreement in the London Arbitration. LDSC further argues that the doctrine of collateral estoppel bars Plaintiffs from relitigating the fraud issues arising from that account.
Collateral estoppel prevents the relitigation of an issue that was raised, litigated, and decided in a prior proceeding. See Beck v. Levering, 947 F.2d 639, 642 (2d Cir. 1991); Balderman v. United States Veterans Administration, 870 F.2d 57, 62 (2d Cir. 1989). Unlike res judicata, however, collateral estoppel precludes the relitigation of conclusively determined issues even if the plaintiff bases the subsequent suit on a different cause of action. G & T Terminal Packaging, 719 F. Supp. at 159. Additionally, non-parties to the prior action may invoke the doctrine. See Fairchild, Arabatzis & Smith, Inc. v. Prometco (Produce & Metals) Co., Ltd., 470 F. Supp. 610, 617 (S.D.N.Y. 1979).
For collateral estoppel to apply, a party must show (1) that the issue was not only litigated but also was necessary to the outcome of the prior action; and (2) that the litigant had a full and fair opportunity to litigate its case. Jim Beam Brands Co. v. Beamish & Crawford, Ltd., 937 F.2d 729, 734 (2d Cir. 1991), cert. denied, 502 U.S. 1094, 117 L. Ed. 2d 415, 112 S. Ct. 1169 (1992); Owens v. Treder, 873 F.2d 604 (2d Cir. 1989).
In Murray, 631 F. Supp. at 537, this Court held that an investor's securities fraud action against a brokerage firm and its president was not barred by collateral estoppel despite a prior arbitration in favor of the investor against an affiliate of the brokerage firm. The Court concluded that the arbitration award did not necessarily encompass all issues which could be raised against the brokerage firm and its president, finding that "it is not possible to conclude that the entire conduct of [the brokerage firm and its president] were considered in the arbitrators' decision and award." Id. The same is true in the instant action. The contract issues asserted against Interdevco did not necessarily encompass the fraud issues now raised against LDSC. The record does not demonstrate that the arbitrators' decision considered the entire conduct of LDSC in connection with the Joint Account. Facts and evidence essential to showing that LDSC acted fraudulently were not present or required to support Plaintiffs' prior contract claims. As such, Plaintiffs have not had a full and fair opportunity to litigate the fraud issues concerning LDSC.
LDSC is not entitled to summary judgment on its collateral estoppel defense as the undisputed facts do not warrant a finding of collateral estoppel.
C. Order Compelling Arbitration And/Or Order Staying Action Pending Arbitration
1. Order Compelling Arbitration
Alternatively, LDSC argues that it is entitled to an order compelling Plaintiffs to arbitrate the issues raised in the complaint pursuant to the Federal Arbitration Act ("FAA"). The FAA provides, in part:
A party aggrieved by the alleged failure, neglect or refusal of another to arbitrate under a written agreement may petition any United States District Court . . . for an order directing that such arbitration proceed in the manner provided for in such agreement.
9 U.S.C. § 4.
Although not a formal party to the arbitration agreement, LDSC contends that it still may invoke the arbitration clause. In support of its argument, LDSC cites cases recognizing that an arbitration clause may, in some instances, apply to a nonsignatory. See Roby v. Corporation of Lloyd's, 996 F.2d 1353 (2d Cir. 1993), cert. denied, 510 U.S. 945, 126 L. Ed. 2d 333, 114 S. Ct. 385 (1993); Keystone Shipping Co. v. Texport Oil Co., 782 F. Supp. 28 (S.D.N.Y. 1992).
The Second Circuit has recognized five theories under which a court may apply an arbitration clause to a non-signatory: 1) incorporation by reference; 2) assumption; 3) agency; 4) veil-piercing/alter ego; and 5) estoppel. Thomson-CSF, S.A. v. American Arbitration Association, 64 F.3d 773, 776 (2d Cir. 1995) (providing thorough analysis of these theories). The case presented here implicates the agency and alter-ego theories.
Under an agency theory, a non-signatory may enforce an arbitration agreement contained in a contract that it signed on behalf of its principal. See Fisser v. International Bank, 282 F.2d 231, 234-35 (2d Cir. 1960); Continental U.K. Ltd. v. Anagel Confidence Compania Naviera, S.A., 658 F. Supp. 809, 813 (S.D.N.Y. 1987). However, signing an arbitration agreement as an agent for a disclosed principal is not sufficient to render the agent a party to the arbitration clause. See Keystone Shipping Co., 782 F. Supp. at 30. The fact that an LDSC employee signed the contracts on behalf of its disclosed principal, Interdevco, therefore does not give LDSC authority to enforce the arbitration clause.
Under an alter-ego theory, "the corporate veil may be pierced and a party may be held bound to arbitrate as the signatory's alter-ego." Interocean Ship Co. v. National Shipping and Trading Corp., 523 F.2d 527, 537 (2d Cir. 1975), cert. denied, 423 U.S. 1054, 46 L. Ed. 2d 643, 96 S. Ct. 785 (1976). Nevertheless, the corporate affiliation alone does not provide a basis for allowing a non-signatory to enforce the arbitration clause. See Fried Krupp GmbH v. Solidarity Carriers, Inc., 674 F. Supp. 1022, 1027 (S.D.N.Y.), aff'd, 838 F.2d 1202 (2d Cir. 1987). A relationship that will permit a nonsignatory to act as an alter-ego (and thereby compel arbitration) exists where "the parent corporation so dominates and controls the affairs of its subsidiary that the subsidiary cannot be said to have any independent existence of its own." Coastal States Trading, Inc. v. Zenith Navigation, S.A., 446 F. Supp. 330, 336-37 (S.D.N.Y. 1977). LDSC has not demonstrated that such a relation between LDSC and Interdevco exists. Therefore, this Court cannot pierce the corporate veil and permit LDSC, a non-signatory, to enforce the arbitration agreement between Interdevco and Plaintiffs under an alter-ego theory.
Other circuits have recognized an alternative estoppel theory which allows a non-signatory to enforce an arbitration clause against a signatory. See generally Thomson-CSF, S.A., 64 F.3d at 778 (noting, although not expressly adopting, alternative estoppel theory); Sunkist Soft Drinks, Inc. v. Sunkist Growers Inc., 10 F.3d 753, 757-58 (11th Cir. 1993), cert. denied, 130 L. Ed. 2d 123, 115 S. Ct. 190 (1994); J.J. Ryan & Sons, Inc. v. Rhone Poulenc Textile, SA., 863 F.2d 315, 320-21 (4th Cir. 1988); McBro Planning & Dev. Co. v. Triangle Elec. Constr. Co., 741 F.2d 342, 344 (7th Cir. 1984). In these cases, signatories were required to arbitrate with non-signatories because of "the close relationship between the entities involved, as well as the relationship of the alleged wrongs to the nonsignatory's obligations and duties in the contract . . . and [the fact that] the claims were intimately founded in and intertwined with the underlying contract obligations." Sunkist, 10 F.3d at 757 (quotation omitted).
This case is similar to those addressed by the courts that permitted a non-signatory to compel arbitration pursuant to the alternative estoppel theory. LDSC's relationship and obligations regarding the Joint Account go to the heart of the fraud claim. LDSC played a pivotal role in the formation and execution of the Joint Account. It negotiated with Plaintiffs before being replaced at the last minute by Interdevco. It is now accused of using the Joint Account to effect a fraud against Plaintiffs. LDSC's nexus to the underlying contract is a predicate to determining whether it fraudulently managed the Joint Account. Accordingly, because of the close relationship between LDSC and Plaintiffs and the integral link between the fraud claim and the underlying contractual obligations, LDSC, as a non-signatory, may invoke the arbitration clause.
Moreover, facts which led to Plaintiffs' discovery of the alleged fraud were uncovered in the arbitration proceeding. It is logical that this matter be sent back to arbitration to further explore those issues touched upon, but not fully deliberated or settled, in that proceeding. As such, LDSC may compel Plaintiffs to arbitrate in accordance with the arbitration clause.
2. Order Staying Motion Pending Arbitration
Because this Court finds that Plaintiffs' claim should be submitted to arbitration, LDSC's request to stay the action pending arbitration is granted. The action is hereby placed on the suspense docket.
For the foregoing reasons, Defendant's motion for summary judgment is denied, and its motion for an order compelling arbitration is granted.
Shira A Scheindlin
Dated: New York, New York
April 16, 1996