United States District Court, S.D. New York
September 27, 2004.
SANDS BROTHERS & CO., LTD., Plaintiff,
ALBA PEREZ TTEE CATALINA GARCIA REVOCABLE TRUST U/A DTD 9/04/01, Defendant.
The opinion of the court was delivered by: JOHN KEENAN, Senior District Judge
OPINION and ORDER
In 1988, Ms. Catalina Garcia suffered permanent brain damage as
the result of medical malpractice. Defendant's Motion ("Def.
Motion") at 2. The personal injury settlement she received was
used to fund a trust allegedly established under the laws of
Florida, with its address in Miami, Florida, known as the
Catalina Garcia Revocable Trust U/A DTD 9/04/01 ("the Trust").
Id.; Complaint ¶ 3. Alba Perez, Ms. Garcia's daughter and the
trustee of the Trust, hired Shochet Securities, Inc.,
("Shochet"), a securities broker-dealer in Florida, to manage the
Trust funds. Def. Motion at 2. The individual Shochet broker,
Leila Shuminer, allegedly mismanaged the Trust's assets, "wiping
out the Trust Account's equity" by late October, 2001. See
Complaint Exhibit A at 2-3.
On October 17, 2003, Alba Perez Ttee Catalina Garcia Revocable
Trust U/A DTD 9/04/01 (the same Trust as above, also the
defendant in the instant case) filed a "Statement of Claim" for
arbitration with the National Association of Securities Dealers,
Inc. ("NASD") "to recover losses it sustained as a direct result
of [the] mismanagement of its investment assets." Complaint
Exhibit A at 1; Complaint ¶ 3. The respondent given in the
caption, however, was not Shochet, but Sands Brothers & Co., Ltd.
("Sands") (plaintiff in the instant case), a Delaware Corporation with its principal place of business in New York
City. Complaint Exhibit A at 1; Complaint ¶ 2. Sands is named as
respondent because on November 7, 2001, Sands acquired through a
Purchase Agreement the Trust account, along with other assets of
Bluestone Capital Corp. ("Bluestone"), of which Shochet was a
subsidiary. See Complaint ¶¶ 4, 7, 9; Complaint Exhibit B (the
Purchase Agreement). Under Section 8 of the Purchase Agreement,
Sands did not assume the liabilities of Bluestone or Shochet when
it acquired the Bluestone assets: "BlueStone acknowledges that
. . . Sands Brothers shall not assume any liabilities, debts, or
obligations of BlueStone . . . including, without limitation, any
Litigation Liabilities. `Litigation Liabilities' means any debts,
obligations, or liabilities arising from or relating to pending,
threatened and unasserted claims . . . or arbitration . . .
against BlueStone or Shochet." Complaint Exhibit B § 8. The Trust
does not oppose this contention. See Def. Motion at 6 ("[T]here
is no need to even reach the issue of successor liability.").
The Trust account remained with Sands until approximately
December 2003. However, no account activity is alleged between
November 7, 2001 and December 2003. Def. Motion at 4-5; Complaint
On January 5, 2004, Sands filed a complaint with this Court seeking a declaratory judgment, pursuant to 28 U.S.C. § 2201,
that it is not a successor in interest to Bluestone or Shochet,
and that it is not liable or responsible for transactions that
took place at either Bluestone or Shochet, as alleged in the
Statement of Claim filed by the Trust before the NASD. Also on
January 5, 2004, Sands moved this Court, by Order to Show Cause,
for an order preliminarily enjoining defendant from prosecuting
the arbitration brought by the Trust against Sands and staying
such arbitration as to Sands. Sands' Memorandum of Law submitted
in conjunction with the Order to Show Cause does not support
Sands' request for a preliminary injunction, but rather supports
Sands' request for a declaratory judgment.
The Court set the return date for the Order to Show Cause for
January 8, 2004. On January 7, 2004, counsel for both parties
sent to the Court, via facsimile, a Joint Stipulation erroneously
dated December 7, 2003 ("Stipulation"). The Stipulation provided
that the Trust would serve and file its response by January 23,
2004, and Sands would serve and file its reply by January 28,
2004. The parties requested "that the Court then rule on the
papers, with no requirement that a hearing be held." Stipulation,
¶ 2. The Stipulation further provided that "[t]he parties have
reached agreement on an extension of time for plaintiff to
respond to the arbitration claim, if required." Stipulation, ¶ 4.
This Court entered an Order on January 7, 2004, granting the parties' request to decide the Order to Show
Cause on the papers, adopting the briefing schedule set forth in
the Stipulation, and noting that the parties have agreed to
extend the time for Sands to respond to the arbitration claim.
See Order dated January 7, 2004.
On January 22, 2004, the Trust served Sands, ostensibly as its
response to the Order to Show Cause, and without requesting a
pre-motion conference in accordance with this Court's rules, with
"Defendant's Motion to Dismiss Complaint and to Compel
Arbitration." The Trust has moved to dismiss Sands' complaint
pursuant to Federal Rule of Civil Procedure 12(b) (1) ("Rule
12(b)(1)") for lack of subject matter jurisdiction, and to compel
Sands to arbitrate before the NASD. In this submission, the Trust
states that "it is believed that the parties [the Trust and
Shochet] entered into a written arbitration agreement," and
refers the Court to "Shochet's standard arbitration agreement"
without providing the Court with an affidavit as to the
authenticity of that document. Def. Motion at 3 (emphasis added);
Def. Motion Exhibit A.
Sands' reply, served on January 26, 2004, addresses several,
but not all, arguments made in the Trust's Motion, and adds a
third request for declaratory relief: that Sands is not liable to
the Trust because there were no activities in the Trust account
after November 7, 2001. Neither party requested supplemental briefing for the two added issues.
Because of the unorthodox procedural posture of this matter,
and because of the parties' agreement that the Court rule on the
papers, the Court treats the parties' submissions as a motion for
declaratory judgment and a cross-motion to dismiss and to compel
arbitration. For the reasons that follow, Sands' motion for a
declaratory judgment is granted, and the Trust's cross-motion to
dismiss under Rule 12(b) (1) and to compel arbitration is denied.
I. Legal Standards
A. Rule 12(b)(1)
Federal Rule of Civil Procedure 12(b) (1) provides for the
dismissal of a complaint when the federal court lacks
jurisdiction over the subject matter. Because a lack of subject
matter jurisdiction renders other defenses moot, a court usually
gives first consideration to a motion to dismiss under Rule 12(b)
(1). Friedman v. United States, No. 01 Civ. 7518 (LTS) (RLE),
2003 WL 1460525 at *5 (S.D.N.Y. Mar. 18, 2003); Prestop v.
Hamlett, No. 99 Civ. 2747 (GBD), 2001 WL 363676 at *6 (S.D.N.Y.
Apr. 12, 2001). Where the defendant challenges the legal, and not
the factual, sufficiency of the plaintiff's jurisdictional
allegations, the district court takes all facts alleged in the
complaint as true, and draws all reasonable inferences in favor
of the plaintiff. Robinson v. Gov't of Malaysia, 269 F.3d 133,
140 (2d Cir. 2001) (citations omitted). However, when jurisdictional facts are called into question, id.,
"jurisdiction must be shown affirmatively, and that showing is
not made by drawing from the pleadings inferences favorable to
the party asserting it." Shipping Fin. Servs. Corp. v. Drakos,
140 F.3d 129, 131 (2d Cir. 1998) (citation omitted); Smith v.
Potter, 208 F. Supp. 2d 415, 417 (S.D.N.Y. 2002) (citations
B. Declaratory Judgment
In a case of actual controversy within its
jurisdiction, . . . any court of the United States,
upon the filing of an appropriate pleading, may
declare the rights and other legal relations of any
interested party seeking such declaration, whether or
not further relief is or could be sought. Any such
declaration shall have the force and effect of a
final judgment or decree and shall be reviewable as
28 U.S.C. § 2201 (a). "[T]he granting of a declaratory judgment
rests in the sound discretion of the trial court exercised in the
public interest." 10B Wright & Miller, Federal Practice and
Procedure § 2759 (3d ed.). That discretion is reviewable on
appeal only for an abuse of discretion. Id.; see Wilton v.
Seven Falls Co., 515 U.S. 277, 289 (1995).
A. Who Decides the Question of Arbitrability?
The Court must first determine the threshold question of who
decides whether the claim is arbitrable the Court or the
arbitrator. "Unless the parties clearly and unmistakably provide
otherwise, the question of whether the parties agreed to arbitrate is to be decided by the court, not the arbitrator."
John Hancock Life Ins. Co. v. Wilson, 254 F.3d 48, 53 (2d Cir.
2001) (quotation and citation omitted). Furthermore, "one party's
membership in [the NASD] is insufficient, in and of itself, to
evidence the parties' clear and unmistakable intent to submit the
`arbitrability' question to the arbitrators." Id. at 57; see
Sands Bros. & Co. v. Ettinger, No. 03 Civ. 7854 (DLC), 2004 WL
541846 at *2 (S.D.N.Y. Mar. 19, 2004).
The Trust's 12(b)(1) claim hinges on the threshold question of
who decides arbitrability: "Significantly, there is no
indication, let alone ambiguity, in the Arbitration Agreement to
even remotely suggest that the threshold question of the
arbitrability of this matter would properly be subject to
judicial determination." Def. Motion at 7. However, it is a
matter of speculation whether this arbitration agreement actually
exists. The Court cannot grant the Trust's motion to dismiss for
lack of subject matter jurisdiction based on this believed-in
document. The Trust's belief, without any stronger showing, that
the Trust and Shochet entered into an arbitration agreement fails
to constitute "clear and unmistakable" evidence that the parties
agreed to have an arbitrator decide question of arbitrability.
This Court, therefore, and not the arbitrator, has jurisdiction
to decide the question of arbitrability.
2. Is the Claim Arbitrable? The second issue a court must decide is whether the claim is,
in fact, arbitrable, keeping in mind the "strong federal policy
favoring arbitration," and resolving any doubts as to the scope
of arbitrable issues in favor of arbitration. Ettinger, 2004 WL
541846 at *3 (citations omitted). The court uses a summary
judgment standard. Bensadoun v. Jobe-Riat, 316 F.3d 171, 175
(2d Cir. 2003). If an issue of fact as to the making of the
agreement for arbitration exists, a trial must be held to
determine whether the claim is arbitrable. Id. (citing
9 U.S.C. § 4). However, if there is alternative basis for judgment, such
as resolution of the issue of arbitrability as a matter of law,
then the judgment of a district court remains undisturbed. Id.
Under Rule 10301(c) of the NASD Code, "[a]ny dispute, claim or
controversy . . . between a customer and a member" must be
submitted to arbitration "upon the demand of the customer." See
Ettinger, 2004 WL 541846 at *3. Customer status is determined
"as of the time of the events providing the basis for the
allegation of fraud," and "allegations against a
predecessor-in-interest d[o] not give rise to a duty to arbitrate
on the part of the successor." Id. (quoting Bensadoun,
316 F.3d at 177).
The Trust does not qualify as a Sands customer as of the time
of the events providing the basis for the Trust's allegations
specifically, the stock purchases that occurred before the end of
October 2001 because the Trust had no connection with Sands until November 7, 2001, when Sands
purchased the Bluestone assets. The Trust's arbitration claim
thus falls outside the NASD Rule and is not arbitrable.
3. Merits of the Claim
a. Successor-in-Interest Liability
New York common law provides four exceptions to the general
rule that an asset purchaser is not liable for its predecessor's
torts: (1) if the buyer expressly assumed the predecessor's tort
liability, (2) if the buyer and the predecessor entered into a
de facto merger, (3) if the buyer was a mere continuation of
the predecessor, or (4) if the buyer and the predecessor entered
into a transaction fraudulently to escape the predecessor's
torts. See Cargo Partner AG v. Albatrans Inc., 352 F.3d 41,
45 (2d Cir. 2003); Ettinger, 2004 WL 541846 at *4. The de
facto merger and mere continuation exceptions are so similar as
to be considered a single exception. Cargo Partners,
352 F.3d at 45 n. 3; Ettinger, 2004 WL 541846 at *4 n. 5. Because there
is no allegation here that Sands and Bluestone entered into the
Purchase Agreement for fraudulent purposes, and because Sands
expressly disclaimed any Bluestone liabilities, including
liability for claims in arbitration against Bluestone, only the
de facto merger and mere continuation exceptions are
potentially applicable here.
A de facto merger is a merger in substance but not in form.
Four conditions are required: continuity of selling corporation as demonstrated by the same management, personnel, assets, and
physical location; continuity of stockholders that occurs when
the purchaser pays for the acquired corporation with shares of
the purchaser's stock; dissolution of the selling corporation;
and assumption of liabilities by the purchaser. Ettinger, 2004
WL 541846 at *4 (citing Cargo Partners, 352 F.3d at 45-46).
Sands' acquisition of certain Bluestone assets demonstrates
none of the four conditions that place an acquisition within the
de facto merger exception. Sands paid cash for the purchase of
the assets, Bluestone acquired no Sands stock, and Sands did not
acquire Bluestone's liabilities. Purchase Agreement § 7.1, 8.
Bluestone's co-chairmen were prohibited from working at Sands,
and Sands was not required to hire any Bluestone employees. Id.
§ 3.1. The Sands/Bluestone acquisition thus falls within the
general rule that successor-in-interest liability does not exist
when one entity purchases assets of another. Even if this Court
were to assume that the ephemeral arbitration agreement between
Shochet and the Trust does, indeed, exist, Sands is entitled, as
a matter of law, to a declaratory judgment that it is not a
successor in interest to the liabilities of Shochet or Bluestone
and therefore cannot be compelled to arbitrate the Trust's
b. Duty of Ongoing Supervision
In the context of a non-discretionary account, that is, an account where the customer keeps control of the account and has
full responsibility for trading decisions, a broker need not give
ongoing advice to the customer. Instead, the broker's obligations
end after each transaction is complete. See De Kwiatkowski v.
Bear, Stearns & Co., 306 F.3d 1293, 1302 (2d Cir. 2002); Press
v. Chem. Inv. Servs. Corp., 166 F.3d 529, 536 (2d Cir. 1999);
Indep. Order of Foresters v. Donald, Lufkin & Jenrette, Inc.,
157 F.3d 933, 940-41 (2d Cir. 1998).
It is uncontested that no activity occurred in the Trust
account between November 7, 2001 and December 2003. Indeed,
according to the Trust's Statement of Claim, the account was
"wip[ed] out" by the end of October, 2001. In the absence of any
activity in the account, Sands is entitled to a declaratory
judgment that it had no ongoing duty to advise or supervise the
Trust account between November 7, 2001 and the closing of the
Trust account in December 2003. Conclusion
For the reasons given above, the Trust's motion to dismiss and
to compel arbitration is denied, and declaratory judgment is
granted in favor of Sands. The Clerk of the Court is instructed
to close this case and remove it from the Court's active docket.
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