United States District Court, Southern District of New York
March 27, 2003
OPTIBASE, LTD., PETITIONER,
MERRILL LYNCH INVESTMENT MANAGERS, RESPONDENT.
The opinion of the court was delivered by: Laura Taylor Swain, United States District Judge
Petitioner Optibase, Ltd. ("Optibase") seeks, pursuant to section 7 of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 7, to compel Respondent Merrill Lynch Investment Managers ("MLIM") to comply with a subpoena issued by a New York Stock Exchange arbitration panel on December 11, 2002 (the "Subpoena").*fn1 Respondent moves the Court to dismiss Optibase's petition pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim for the relief requested. The Court has considered thoroughly all written submissions and argument in connection with the instant motions. For the following reasons, Petitioner's motion is granted and Respondent's motion is denied.
The Court has jurisdiction of this action pursuant to 9 U.S.C. § 7 and 28 U.S.C. § 1331.
The following facts are undisputed except as otherwise indicated. MLIM is a limited partnership, organized under the laws of Delaware with its principal place of business in New Jersey. Its limited partner is Merrill Lynch & Co., Inc. (?ML&Co."), a publicly-held corporation with shares traded on the New York Stock Exchange. ML&Co. holds, directly or indirectly, full beneficial ownership of MLIM and MLIM's general partner and, accordingly, controls MLIM. Merrill, Lynch, Pierce, Fenner & Smith Incorporated (?MLPF&S") is a wholly owned subsidiary of ML&Co. Under the federal securities laws, MLIM is deemed to be an affiliate of ML&Co. and of MLPF&S.
MLIM and MLPF&S are separately registered as investment advisers with the United States Securities and Exchange Commission (the ? SEC"). MLIM, one of the world's largest asset management organizations, manages approximately $500 billion in funds. MLPF&S is registered as a broker-dealer with the SEC and is a member of the NYSE; MLIM is neither a registered broker-dealer nor a member of the NYSE. MLIM's products and services are sold to MLPF&S customers as well as to customers of other, unaffiliated broker-dealers. There is some revenue-sharing that occurs between MLIM and its affiliates and, in certain instances, MLPF&S receives compensation in connection with its customers' purchases of MLIM products and services.
Optibase is a corporation organized under the laws of Israel and its shares are traded publicly on NASDAQ. A Merrill Lynch broker, Alan Leventen (hereinafter ?Leventen"), after meeting with the Chief Financial Officer of Optibase and advising Optibase to invest in the Merrill Lynch Senior Floating Rate Portfolio (the ? Fund"), purchased approximately $14.8 million worth of shares of the Fund for Optibase's Merrill Lynch brokerage account from August of 1999 to August of 2000. (See Halperin Decl. ¶¶ 1, 4, 7, 9, 10, submitted in related action MLIM v. Optibase, 02 Civ. 4282 (the "Related Action").) In or about August of 2000, Optibase signed a Certification of Authority and executed a Working Cash Management Account Agreement in connection with its account at Merrill Lynch (hereinafter ?Agreement"). (Halperin Decl. ¶ 11.) MLPF&S was the counterparty to the Agreement, which provided, inter alia, that Optibase agreed ?to arbitrate any controversies which may arise with MLPF&S." (Agreement, Ex. C to Prelim. Stip. of Facts in Related Action.)
On February 5, 2002, Optibase filed the arbitration claims at issue with the NYSE, regarding the purchases of shares in the Fund. On March 11, 2002, Optibase filed an Amended Statement of Claim to demand arbitration of its claims against MLPF&S, ML&Co., and MLIM, alleging, inter alia, sale of unsuitable securities, breach of fiduciary duty and negligent mismanagement. On June 7, 2002 MLIM brought an action seeking a declaration that MLIM was not bound by any arbitration agreement, an injunction barring arbitration of the claims, and a declaration that Optibase's claims of mismanagement are derivative, rather than individual, claims that may only be asserted by and on behalf of the Fund and may not be arbitrated pursuant to NYSE Rule 600(e). See Complaint in Related Action, Ex. 1 to Resp.'s Appendix of Materials. On September 10, 2002, the Court issued a preliminary injunction staying the arbitration of Optibase's claims against MLIM on the ground that MLIM was not a party to any arbitration agreement with Optibase.
On December 12, 2002, Optibase commenced this action and sought an Order to Show Cause why an order should not be issued compelling MLIM to comply with the Subpoena. Attachments to the proposed order included the Subpoena as well as a motion to enforce the Subpoena. Judge Jones signed the Order to Show Cause on December 12, 2002, and directed Optibase to serve the Subpoena upon MLIM by December 14, 2002 at 5:00 p.m. A hearing was held before the undersigned on December 19, 2002, at which the undersigned heard argument on the motion to enforce the Subpoena.
On January 3, 2003, MLIM filed a motion to dismiss Optibase's petition on the grounds that the petition is jurisdictionally defective because it was filed prior to the issuance and service of a subpoena signed by the arbitrators, that the petition has never properly been served on MLIM, and that the petition does not state a claim for the relief requested. As to the first two grounds, the Court notes that, at the December 19, 2002 conference in this matter, MLIM urged the Court to address the merits of petitioner's motion, "leaving aside the procedural irregularities." (Tr. of December 19, 2002 conference ("Tr.") at 22-23.) Accordingly, Respondent is deemed to have waived any procedural objections to Petitioner's motion, and the Court will address its merits.
Discussion Section 7 of the FAA provides, in relevant
part, that The arbitrators . . . may summon in writing
any person to attend before them or any of them as a
witness and in a proper case to bring with him or them
any book, record, document, or paper which may be
deemed material as evidence in the case . . . . [I]f
any person or persons so summoned to testify shall
refuse or neglect to obey said summons, upon petition
the United States district court for the district in
which such arbitrators . . . are sitting may compel
the attendance of such person or persons before said
arbitrator or arbitrators, or punish said person or
persons for contempt in the same manner provided by
law for securing the attendance of witnesses or their
punishment for neglect or refusal to attend in the
courts of the United States.
9 U.S.C.A. § 7 (West 1999). "Section 7 of the FAA provides statutory authority for invoking the powers of a federal district court to assist arbitrators in obtaining evidence." National Broadcasting Company, Inc. v. Bear Stearns & Co., 165 F.3d 184
, 187 (2d Cir. 1999). Section 7 instructs district courts to compel compliance or punish contempt "in the same manner provided by law for securing the attendance of witnesses or their punishment for neglect or refusal to attend in the courts of the United States." 9 U.S.C.A. § 7 (West 1999). It is therefore appropriate for the Court to consider whether the evidence Petitioner seeks is relevant to "the claim or defense of any party" in the arbitration. Fed.R.Civ.Proc. 26(b)(1).
MLIM contends that the Court cannot compel compliance with the subpoena because the NYSE does not have subject matter jurisdiction of Optibase's claims against ML&Co. and MLPF&S. MLIM argues that claims against those entities relating to how the Fund performed are derivative claims under the law of the Cayman Islands and therefore do not fall within the jurisdiction of the NYSE arbitration panel. (Tr. at 20; Resp.'s Mem. of Law in Opp. at 5, 12-16.) MLIM further argues that the Court cannot enforce the Subpoena without deciding whether the arbitrators have jurisdiction of Petitioner's claims against ML&Co. and MLPF&S.
MLIM's position depends on two premises that the Court will assume without deciding for the purposes of the instant motions. First, that MLIM has third-party standing to object to the jurisdiction of the arbitration panel even when the parties to the arbitration have not raised such objections and no hindrances to their ability to raise such objections have been alleged. Second, that MLIM, a nonparty to the arbitration, can challenge the enforcement of an arbitral subpoena by challenging the subject matter jurisdiction of the arbitration panel. In support of the latter proposition, MLIM cites United States Catholic Conference v. Abortion Rights Mobilization, Inc., 487 U.S. 72 (1988), where the Supreme Court held that a nonparty witness in an action before a federal district court who refused to follow discovery orders could defend itself against a civil contempt proceeding by challenging the district court's subject matter jurisdiction of the underlying action. Even if MLIM has standing to challenge the arbitrators' jurisdiction, and even if United States Catholic Conference could be construed as applicable in the arbitration context,*fn2 MLIM has failed, however, to raise any substantial issue as to the arbitration panel's jurisdiction of Optibase's claims against ML&Co. and MLPF&S.
As the Supreme Court has repeatedly stressed, arbitration is a matter of contract. Howam v. Dean Witter Reynolds, 123 S.Ct. 588, 591 (2002). In this case, the Agreement between Optibase and MLPF&S provided, in relevant part, that [A]ll controversies that may arise between [Optibase] and MLPF&S, including
but not limited to, those involving any transaction or
the construction, performance or breach of this or any
other agreement between [Optibase] and MLPF&S . . .
shall be determined by arbitration.
(Agreement, Ex. C to Prelim. Stip. of Facts in Related Action, at last page.) MLIM does not attempt to construe the Agreement in its argument; instead it relies on the proposition that the question of arbitrability is for the Court, not the arbitrators. The Supreme Court has made clear, however, that:
Just as the arbitrability of the merits of a dispute
depends upon whether the parties agreed to arbitrate
that dispute, so the question `who has the primary
power to decide arbitrability' turns upon what the
parties agreed about that matter.
First Options of Chicago v. Kaplan, 514 U.S. 938
, 943 (1995) (internal citations omitted, emphasis in original). If the parties have submitted the question of arbitrability to arbitration, "a court must defer to an arbitrator's arbitrability decision." Id. The Court notes that the Second Circuit has found arbitration clauses almost identical to the arbitration clause in the Agreement broad enough to include questions of arbitrability. See Shaw Group, Inc. v. Triplefine Int'l Corp., 2003 WL 722837, *7 (2d Cir. 2003) (vacating district court decision on question of arbitrability of claim where parties had agreed to the submission of all disputes to arbitration on ground that district court "should have deferred to the arbitrator on the parties' dispute about the arbitrability of that claim"); PaineWebber Inc. v. Bybyk, 81 F.3d 1193, 1198-1200 (2d Cir. 1996) (where parties had agreed that "any and all controversies . . . shall be determined by arbitration," party contesting arbitrability should defend the arbitration action on that ground, not enjoin the arbitration altogether). In light of these considerations, the Court declines to address MLIM's jurisdictional argument.
The subject matter of Petitioner's Subpoena is relevant to its claims asserted against ML&Co. and MLPF&S before the NYSE arbitration panel. It appears that Respondent is simply trying to stymie an ongoing arbitration proceeding to protect itself from the possibility of claims being brought against it in the future. This is not an appropriate basis for denial of Optibase's application. Accordingly, the Court will exercise its authority under Section 7 of the FAA to enforce Petitioner's December 12, 2002 subpoena.
For the foregoing reasons, Petitioner's motion is granted and Respondent MLIM is hereby ordered to comply promptly with the December 12, 2002 subpoena. Respondent's motion to dismiss the instant application is denied. Each party shall bear its own costs. The Clerk of Court is directed to close this case.
IT IS SO ORDERED.