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DAPUZZO v. GLOBALVEST MANAGEMENT COMPANY

June 11, 2003

PETER J. DAPUZZO, PLAINTIFF,
v.
GLOBALVEST MANAGEMENT COMPANY, L.P. AND UTILITIVEST II, L.L.C., AND UTILITIVEST II, L.P., DEFENDANTS.



The opinion of the court was delivered by: VICTOR Marrero, United States District Judge

DECISION AND AMENDED ORDER

Plaintiff Peter J. DaPuzzo ("DaPuzzo") brought this action against defendants Globalvest Management Company, L.P. ("Globalvest"), Utilitivest II, L.L.C. ("Utilitivest LLC") and Utilitivest II, L.P. ("Utilitivest LP" or the "Fund") (collectively, "Defendants"), alleging Fraudulent inducement in connection with an investment DaPuzzo made in the Fund. Defendants moved, pursuant to the Federal Arbitration Act (the "FAA" or the "Act"),*fn1 9 U.S.C. § 1 et. seq., to stay this action and compel arbitration in the Bahamas pursuant to a provision of the partnership agreement governing the Fund. Alternatively, Defendants seek to dismiss the complaint for lack of subject matter or personal jurisdiction as to some or all of the Defendants, or for failure to state a claim. DaPuzzo cross-moved to compel arbitration in New York. On May 31, 2003 the Court issued a Decision and Order granting Defendants' motion to stay this action and indicated that its findings, reasoning and conclusions would be set forth in a separate Decision and Order to be made available to the parties. Accordingly, for the reasons discussed below, Defendants motion to stay this action is granted and DaPuzzo's motion to compel arbitration is denied.

I. FACTS

DaPuzzo alleges that in May of 1998 he met on two occasions with Harold Lindenthal ("Lindenthal"), of Berkeley Global Associates, Inc., and Peter Gruber ("Gruber"), a principal of Utilitivest LLC and Chair and President of Globalvest.*fn2 The meetings took place in DaPuzzo's office at Cantor Fitzgerald & Co. in New York, where he served as a co-president of institutional equity sales and trading. On those occasions, Lindenthal and Gruber sought DaPuzzo's investment in Utilitivest LP, a venture capital fund.

On May 26, 1998, DaPuzzo agreed to purchase a limited partnership interest in the Fund in the amount of $1 million, with an initial capital contribution of $400,000 upon subscription and two subsequent installments of $300,000 each, to be paid on November 24, 1998 and March 1, 1999, respectively. In this connection, DaPuzzo signed a Subscription Agreement (the "Subscription Agreement") committing him to make the capital payments as scheduled. (See Subscription Agreement, attached as Exhibit 2 to the Notice of Motion dated January 8, 2003.) DaPuzzo acknowledges having received on that occasion a copy of a Confidential Information Memorandum detailing the terms and conditions governing the Fund. (See Confidential Information Memorandum Dated March 9, 1998 (the "CIM"), attached as Exhibit 1 to the Notice of Motion.) In signing the Subscription Agreement, DaPuzzo represented that he had received and read a copy of both the CIM and the Fund's partnership agreement. (See Amended and Limited Restated Partnership Agreement for Utilitivest II, L.P. (the "Partnership Agreement", attached as Exhibit 3 to the Notice of Motion. At the same time, by his execution of the Subscription Agreement, DaPuzzo appointed the President and Director of Utilitivest LLC as his attorney-in-fact to sign the Partnership Agreement on his behalf.

DaPuzzo made the capital contributions called for by the Subscription Agreement by the dates specified. He acknowledges that he was provided a copy of the Partnership Agreement on March 22, 2001, and personally executed it soon thereafter. (See Notice of Motion, Ex. 4, at 32.)

The CIM includes a paragraph, under a heading of "Disputes" in a section entitled "Summary of the Partnership Agreement," that states: "The Partnership will be governed under the laws of the Cayman Islands. Any disputes will be settled by binding arbitration according to the rules and regulations of the American Arbitration Association." (Notice of Motion, Ex. 1, at 43.)

The Partnership Agreement, however, contains an arbitration clause, stating in relevant part that:

Any controversy between the Partners involving the construction or application of any of the terms, covenants, or conditions of this Agreement will be submitted to arbitration in the Bahamas on the request of the Partnership or any Partner, and the arbitration will comply with and be governed by the rules and procedures of the International Chamber of Commerce, as amended from time to time; provided, however, that nothing in this Section will constitute a waiver of any right any party to this Agreement may have to choose a judicial forum to the extent such a waiver would violate applicable law.

(Id. Ex. 3 ¶ 13.12, at 31.) In another paragraph, the agreement stipulates that it is governed by the laws of the Cayman Islands. (Id. ¶ 13.10, at 30.)

DaPuzzo alleges that at each of his two meetings with them, Lindenthal and Gruber represented and he understood that an investment in the Fund was subject to a three-year "lock-up" period, after which investors would be free to redeem some or all of their capital contributions. This representation, according to DaPuzzo, was also made in summary materials prepared by Globalvest for promotion of the Fund that were handed to him by Lindenthal and Grubner prior to his subscription. (See Utilitivest II, L.P., attached as Exhibit A to the Affidavit of Peter J. DaPuzzo dated January 23, 2003 ("DaPuzzo Aff."), attached as Exhibit 2 to the Affidavit of Steven B. Feigenbaum dated January 30, 2003, at 3, 5.)

In June of 2001 DaPuzzo, through the Ayco Company ("Ayco"), his investment advisor, requested a full redemption of his $1 million investment. He alleges that Globalvest informed Ayco that the funds could not be returned at that time but that the request should be renewed toward the end of the year.

Globalvest responded to DaPuzzo in November 2001 that his capital could not be withdrawn after three years, but remained committed at the discretion of Utilitivest LLC, in accordance with the terms of the parties' agreements, for a period of between five and fifteen years. In support, Defendants cite and interpret a provision of the Partnership Agreement specifying that investments in the Fund were subject to a two-year commitment period (the "Commitment Period"), during which partners could be called upon to make additional capital contributions, and that liquidation of the Fund's assets was anticipated to commence three years after the Commitment Period, thus — at the earliest — five years following the limited partner's initial investment. (See Notice of Motion, Ex. 3, ¶¶ 2.6 and 3.2, at 7 and 9.)

Asserting that he was fraudulently induced to invest in the Fund by misrepresentations made to him by Lindenthal and Gruber prior to his execution of the relevant documents, DaPuzzo then commenced this action, allegedly after Defendants declined his request to arbitrate before the AAA. Defendants contend that the pertinent provisions of the parties' contract do not allow withdrawals until the period specified in the Partnership Agreement; and that DaPuzzo's claim therefore entails the construction and application of the terms and conditions of the Partnership Agreement and is subject to arbitration under the relevant provision of that document. Hence, Defendants move to stay this action and compel arbitration in the Bahamas, or to dismiss the complaint on jurisdictional grounds or for failure to state a claim.

Relying on the arbitration language contained in the CIM, DaPuzzo cross-moves to compel arbitration in New York under the rules of the American Arbitration Association (the "AAA").

II. DISCUSSION

A. THE FEDERAL ARBITRATION ACT

As a threshold matter, the Court notes that federal policy unequivocally encourages arbitration as an alternative means of dispute resolution. See David L. Threlkeld & Co. v. Metallgesellschaft Ltd., 923 F.2d 245, 248 (2d Cir. 1991) (citing Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989)); see also Oldrovd v. Elmira Sav. Bank, FSB, 134 F.3d 72, 76 (2d Cir. 1998). This "liberal federal policy favoring arbitration agreements" is manifested in the FAA, which requires courts to compel arbitration where the parties have contractually committed to resolve by arbitration matters within the scope of their agreement. Moses H. Cone Mem. Hosp. v. Mercury Const. Corp., 460 U.S. 1, 24 (1983); see also Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 218 (1985) ("By its terms, the Act leaves no place for the exercise of discretion by a district court, but instead mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed." (citing 9. U.S.C. § 3, 4) (emphasis in original)); Genesco, Inc. v. T. Kakijchi & Co., Ltd., 815 F.2d 840, 844 (2d Cir. 1987).

Reinforcing the FAA's mandate, the Supreme Court has instructed that courts apply the statute in accordance with ordinary contract principles, "with a healthy regard" for the Act's underlying policy, to this end resolving any doubts concerning the scope of arbitrable issues in favor of arbitration, whether the issue at hand is a construction of the language of the agreement itself, or a defense to arbitrability. See Moses H. Cone, 460 U.S. at 24-25; see also Chelsea Square Textiles, Inc. v. Bombay Dyeing and Mfg. Co., Ltd., 189 F.3d 289, 294 (2d Cir. 1999). This bias in favor of arbitration "is even stronger in the context of international business transactions." Threlkeld; 923 F.2d at 248 (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 629-31 (1985)); see also WorldCrisa Corp. v. Armstrong, 129 F.3d 71, 74 (2d Cir. 1997) ("[T]he existence of a broad agreement to arbitrate creates a presumption of arbitrability which is only overcome if it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted disputes. Doubts should be resolved in favor of coverage." (citations omitted; internal quotations omitted)); Associated Brick Mason Contrs. of Greater N.Y., Inc. v. Harrington, 820 F.2d 31, 35 (2d Cir. 1987) (quoting AT&T Technologies, Inc. v. Communications Wkrs. of Am., 475 U.S. 643, 650 (1986)). In applying this policy, the role of a court reviewing disputes potentially encompassed by arbitration provisions is limited to ascertaining two threshold inquiries: "whether a valid agreement or obligation to arbitrate exists, and . . . whether one party to the agreement has failed, neglected or refused to arbitrate, in whole or in part." PaineWebber Inc. v. Bybyk, 81 F.3d 1193, 1198 (2d Cir. 1996) (citing Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04 (1967)).

Here, the parties do not disagree that their dispute is subject to arbitration under the terms of the agreements that define their relationship and that govern the attendant investment transaction which gave rise to this action. For the purposes of the motions now before the Court, the litigants' only relevant difference pertains to the venue and applicable arbitration rules.

B. DEFENDANTS' MOTION

Defendants' motion to stay this action and compel arbitration was filed pursuant to Chapter 1 of the FAA, 9 U.S.C. § 1 et seq. They contend that DaPuzzo's claim regarding the circumstances surrounding his investment in the Fund raises an issue that implicates the terms and conditions of the Partnership Agreement. This action, Defendants claim, thus concerns a dispute that falls within the scope of the arbitration clause of the Partnership Agreement and, in accordance with its terms, demands arbitration of the matter in the Bahamas. Invoking the FAA, 9 U.S.C. § 3 Defendants request that DaPuzzo's action before this Court be stayed pending the outcome of arbitration proceedings pursuant to the Partnership Agreement. Section 3 provides in pertinent part that:

If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.

9 U.S.C. § 3.

DaPuzzo counters that Chapter 1 of the FAA applies only to purely domestic arbitration agreements and that, in the international context involved in the dispute at hand, it is not Chapter 1 of the statute that governs the parties' dispute, but the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the "Convention"), 21 U.S.T. 2517, 330 U.N.T.S. 38, June 10, 1958 (codified at Chapter 2 of the FAA, 9 U.S.C. § 201 et seq.).*fn3 DaPuzzo points out that, in accordance with the Convention's enabling act (the "Enabling Act"), codified in Chapter 2 of the statute, the Court lacks authority to compel arbitration in the Bahamas under Chapter 1 of the FAA because the parties' relationship at issue here is defined in an international agreement within the scope of the Convention and its Enabling Act, 9 U.S.C. § 202. Moreover, DaPuzzo maintains that because the Bahamas is not a signatory to the Convention,*fn4 the arbitration clause of the Partnership Agreement is unenforceable in this Court and cannot be applied to compel him to arbitrate in the Bahamas or to stay this action.

This case thus implicates the interplay between Chapters 1 and 2 of the FAA and the Convention,*fn5 enactments whose provisions contain "overlapping coverage" and which may apply in a given case to the extent they do not conflict.*fn6 Bergesen v. Joseph Muller Corp., 710 F.2d 928, 934 (2d Cir. 1983) ("There is no reason to assume that Congress did not intend to provide overlapping coverage between the Convention and the Federal Arbitration Act."); see 9 U.S.C. § 208 (prescribing that FAA Chapter 1 is incorporated into Chapter 2 to the extent not in conflict with the Convention); see also Yusef Ahmed Alghanim & Sons, W.L.L. v. Toys "R" Us, Inc., 126 F.3d 15, 20 (2d Cir. 1997), cert. denied, 522 U.S. 1111 (1998); Oil Basins Ltd. v. Broken Hill Proprietary Co. Ltd., 613 F. Supp. 483, 486 (S.D.N.Y. 1985).

A brief contextual note may assist in understanding the relationship of the FAA Chapters 1 and 2 and the Convention insofar as they are germane to the resolution of the controversy at hand. As enacted in 1925, the Federal Arbitration Act (the "1925 Act"), codified in Title 9 as Chapter 1 and now comprising §§ 1-16, represented Congress's reversal of longstanding judicial antipathy, in both federal and state courts, to arbitration agreements. For centuries, such agreements had been perceived as executory contracts designed to oust courts of jurisdiction to adjudicate future disputes and consequently were held invalid or unenforceable. See Scherk v. Alberto-Culver Co., 417 U.S. 506, 510-11 (1974); Kulukundis Shipping Co., S/A v. Amtorg Trading Corp., 126 F.2d 978, 984-85 (2d Cir. 1942).

Emphatically rejecting that hostility, Congress, in § 2 of the 1925 Act, declared that a written agreement to arbitrate "in any maritime transaction or a contract evidencing a transaction involving commerce . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. "Commerce" is defined in § 1 to embrace both interstate and foreign transactions. See 9 U.S.C. § 1. The 1925 Act thus gave rise to "a body of federal substantive law of arbitrability" applicable to any arbitration agreement within its scope. Moses H. Cone, 460 U.S. at 24; Robert Lawrence Company, Inc. v. Devonshire Fabrics, Inc., 271 F.2d 402, 409 (2d Cir. 1959), cert. granted, 362 U.S. 909, dismissed under Rule 60, 364 U.S. 801 (1960); see also U.S. Titan, 241 F.3d at 146.

The legislation empowered federal courts to recognize and specifically enforce arbitration agreements within the reach of the statute. Among the courts' primary means to serve these ends, the statute authorized staying litigation that contravenes the parties' contractual obligation to arbitrate, see 9 U.S.C. § 3; directing the parties to arbitrate covered disputes in accordance with the terms of their contract, see 9 U.S.C. § 4; and confirming awards rendered pursuant to valid arbitration, see 9 U.S.C. § 9.

The 1925 Act, however, embodied several anomalies and limitations. Though the statute established a distinct area of federal law fostering arbitration and enforcing the contractual commitment to do so, it did not create an independent source of federal jurisdiction for this purpose. See Moses H. Cone, 460 U.S. at 26 n. 34; Robert Lawrence, 271 F.2d at 408; see generally Donald P. Swisher, International Commercial Arbitration Under the United Nations Convention and the Amended Federal Arbitration Statute, 47 Wash. L. Rev. 441, 451 (1972). Hence, a litigant who seeks to invoke the statute to aid arbitration must satisfy the requirements of jurisdictional amount and diversity of citizenship, or demonstrate the existence of some other independent basis of subject matter jurisdiction, before the court may validly entertain an application for any remedy authorized by the statute. See Moses H. Cone, 460 U.S. at 26 n. 34. While federal courts may stay litigation instituted in violation of an arbitration clause, this relief is available only in the court in which the particular suit has been instituted. See 9. U.S.C. § 3; Provident Bank v. Kabas, 141 F. Supp.2d 310, 315 (E.D.N.Y. 2001); Couleur Int'l., Ltd. v. Saint-Tropez West, 547 F. Supp. 176, 177-78 (S.D.N.Y. 1982). Additionally, the statute confines the federal courts' authority to recognize arbitration agreements and confirm arbitral awards only when such proceedings are to occur, or the awards have been rendered, within the bounds of their own districts. See 9 U.S.C. § 4; Snyder v. Smith, 736 F.2d 409, 418 (7th Cir. 1984), overruled on other grounds, Felzen v. Andreas, 134 F.3d 873, 877 (7th Cir. 1998); Provident Bank, 141 F. Supp.2d at 315; Couleur Int'l, 547 F. Supp. at 177-78.

Nonetheless, federal jurisdiction over some actions brought to adjudicate controversies arising from international transactions covered by arbitration agreements existed under the 1925 Act, though limited in scope and hindered by the constraints described above. Absent some independent basis, federal courts lacked subject matter jurisdiction over cases involving foreign parties on both sides of the dispute. However, if original jurisdiction was properly invoked through the pleading of a federal question or the prerequisites of diversity, the Court, absent a bilateral treaty permitting otherwise, lacked authority, as circumscribed by 9 U.S.C. § 4, to direct arbitration abroad, or indeed beyond the bounds of the court's own district, even if the arbitration agreement's forum selection clause so specified. See Batson Yarn and Fabrics Machinery Group, Inc. v. Saurer-Allma GmbH-Allgauer Machinebau, 311 F. Supp. 68, 70 (S.C. 1970).

In such cases, litigation instituted with regard to issues subject to arbitration in a foreign state generally prompted either dismissal — if the only relief sought was arbitration and all of the issues in dispute were arbitrable — or more commonly, a stay of judicial proceedings pending foreign arbitration. See id. at 75 (construing the arbitration statute to mean that "[t]he power to grant a stay pending arbitration under Section 3 of the Act was not conditioned upon the existence of a power to compel arbitration under Section 4 and that, acting under Section 3, the court may properly `order a stay even when it cannot compel the arbitration' and even though arbitration must take place beyond the jurisdiction of the court. And this is true, whether the arbitration is to be in the United States or in a foreign county." (quoting Shamferoke Coal & Supply Co. v. Westchester Service Corp., 293 U.S. 449, 453 (1935))); see also Scherk v. Alberto-Culver Co., 417 U.S. 506, 519-20 (1974)*fn7; Carcich v. Rederi A/B Nordie, 389 F.2d 692, 696 (2d Cir. 1968); Kulukundis, 126 F.2d at 987-88; Mannesman Rohrleitungsbau, G.M.B.H. v. S.S. Bernhard Howaldt, 254 F. Supp. 278, 279 (S.D.N.Y. 1965) ("The circumstance that the arbitration is to take place in a foreign country does not affect the right to a stay under 9 U.S.C. § 3."); see generally Swisher, supra, 47 Wash. L. Rev. at 462 (noting that "it has been generally held that section 4 has no application to arbitration in a foreign county," prompting courts to distinguish between motions under § 3 to stay proceedings and those under § 4 to compel arbitration).

By ratifying the Convention and legislating the accompanying Enabling Act, then codified as Chapter 2 of the FAA, 9 U.S.C. § 201-08, Congress intended to cure these limitations. The Convention itself, negotiated at a United Nations conference in New York in 1958, sought to remedy deficiencies that had impeded the effectiveness of two predecessor international agreements — the 1923 Geneva Protocol on Arbitration Clauses and the 1927 Geneva Convention on the Execution of Foreign Awards. See Smith/Enron Cogeneration Ltd. Part., Inc. v. Smith Cogeneration Int'l, Inc., 198 F.3d 88, 93 (2d Cir. 1999); Bergesen, 710 F.2d at 930-31; see generally Quigley, supra, 70 Yale L.J. at 1058; Albert Jan van den Berg, The New York Arbitration Convention of 1958: Towards a Uniform Judicial Interpretation 7-8 (1994). Specifically, the earlier treaties Limited their applicability to arbitration agreements involving parties subject to the jurisdiction of different contracting states; to proceedings procedurally governed by local Law; and to enforcement of arbitral awards made only in contracting states. The Convention addressed these flaws by authorizing the recognition and enforcement of qualifying arbitration agreements in courts of signatory states, without jurisdictional restrictions as to the citizenship of the parties to the contract or distinctions concerning the location of the matter in dispute. See Smith/Enron, 198 F.3d at 93-94; Bergesen, 710 F.2d at 931, 933; Quigley, supra 70 Yale L.J. at 1060-61.

In § 202, the Enabling Act describes the types of arbitration agreements and awards enforceable by federal courts under the Convention. It provides:

An arbitration agreement or arbitral award arising out of a legal relationship, whether contractual or not, which is considered as commercial, including a transaction, contract, or agreement described in section 2 of this title, falls under the Convention. An agreement or award arising out of such a relationship which is entirely between citizens of the United States shall be deemed not to fall under the Convention unless that relationship involves property located abroad, envisages performance or enforcement abroad, or has some other reasonable relation with one or more foreign states.

9 U.S.C. § 202; Toys "R" Us, 126 F.3d at 20; Smith/Enron, 198 F.3d at 92.

The Convention has been uniformly applied to actions between foreign entities and United States parties concerning disputes that, as in the instant case, principally involve conduct and performance abroad with respect to contracts entered into in the United States. See U.S. Titan, Inc. v. Guangzhou Zhen Hua Shipping Co., Ltd., 241 F.3d 135, 146 (2d Cir. 2001); Chelsea Square, 189 F.3d at 294; Toys "R" Us, 126 F.3d at 19; see also Scherk, 417 U.S. at 508, 511 n. 5 (agreement between American Company and German citizen negotiated in the United States and Europe which called for transfer of certain interests to the American corporation). In Toys "R" Us, the Second Circuit, interpreting § 202, concurred with the Seventh Circuit in declaring the provision to mean that "`any commercial arbitral agreement, unless it is between two United States citizens, involves property located ...


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