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SANDS BROTHERS & CO., LTD. v. PEREZ

September 27, 2004.

SANDS BROTHERS & CO., LTD., Plaintiff,
v.
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

Factual Background

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 ¶ 12.

  Procedural Background

  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 ...


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