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Suchodolski Associates, Inc. v. Cardell Financial Corp.


January 3, 2006


The opinion of the court was delivered by: William H. Pauley III, District Judge


Anastacio Empreendimentos Imobilarios e Participacoes Ltda., Compania City de Desenvolvimento, Deltec Empreendimentos e Participacoes Ltda., Financity Factoring e Representaceos Ltda. (collectively, the "Deltec Subsidiaries"), Deltec Holdings ("Deltec") and Cardell Financial Corporation ("Cardell") (collectively, the "Defendants") move for (1) a permanent anti-suit injunction preventing Suchodolski Associates, Inc. ("SAI") and Consultadora Worldstar, S.A. ("Worldstar") (collectively, the "Plaintiffs") from prosecuting a lawsuit in Brazil; and (2) an award of attorneys' fees.*fn1

For the reasons set forth below, the motion is granted in part and denied in part.


Cardell is the lender and secured party under a Loan and Security Agreement dated November 30, 2001 (the "Loan Agreement"), pursuant to which Cardell loaned Deltec $12.8 million (the "Loan"). (Affidavit of John H. Doyle III, dated Oct. 19, 2005 ("Doyle Aff.") ¶ 4.) To secure the Loan, Cardell, SAI, Worldstar and Metropolis Shipping and Business, Inc. ("Metropolis") executed the Stock Pledge Agreement dated November 30, 2001. (Reply Affidavit of John H. Doyle III, dated Nov. 16, 2005 ("Doyle Reply Aff.") Ex. 7.) Under the Stock Pledge Agreement, a default on the Loan would permit Cardell to foreclose against Plaintiffs' Deltec shares. (Stock Pledge Agreement § 11.) On May 30, 2003, Deltec defaulted on its loan payments. (Doyle Aff. ¶ 6.)

On December 9, 2003, this Court issued a preliminary injunction against foreclosure, pending the resolution of an arbitration initiated by Plaintiffs. Suchodolski Assocs., Inc. v. Cardell Fin. Corp., No. 03 Civ. 4148 (WHP), 2003 WL 22909149, at *5 (S.D.N.Y. Dec. 9, 2003) ("Suchodolski I"). The arbitration panel (the "Panel") issued a decision on July 8, 2004 (the "Award") which this Court later confirmed. Suchodolski Assocs., Inc. v. Cardell Fin. Corp., No. 04 Civ. 5732 (WHP), Corrected Judgment (Oct. 26, 2004) ("Suchodolski II"). The Award permitted Cardell to foreclose on Plaintiffs' Deltec shares beginning on October 15, 2004. (Award at 11.)

On October 18, 2004, Plaintiffs requested an accounting for Cardell's alleged strict foreclosure on Metropolis' Deltec shares. This Court ruled on October 22, 2004 that the Award had not provided for a strict foreclosure on Metroplis' interest in Deltec, and that Cardell was under no duty to provide Plaintiffs with an accounting. Suchodolski Assocs., v. Cardell Fin. Corp., No. 04 Civ. 5732, Transcript of Hearing at 18-22 (Oct. 22, 2004) ("Suchdolski III"). Plaintiffs appealed this ruling, and the appeal is currently pending before the Second Circuit.

Cardell commenced foreclosure of Plaintiffs' Deltec shares on October 28, 2004. (Doyle Aff. ¶ 22.) At an auction held on January 27, 2005 (the "Auction"), Cardell purchased the shares for $2.5 million. (Affidavit of Helen J. Williamson, dated Oct. 21, 2005 ("Williamson Aff.") ¶ 21.)

On August 2, 2005, SAI and Worldstar commenced an action against Cardell, Metropolis, Deltec, two Deltec Subsidiaries and several Deltec managers in the First Civil Court of Sao Paulo, Brazil (the "Brazilian Action"). (Doyle Aff. Ex. 1.) The complaint in the Brazilian Action (the "Brazilian Complaint") asserts essentially two claims. (Doyle Aff. Ex. 1.) First, the Brazilian Complaint alleges that prior to Deltec's default, Cardell breached its fiduciary duty to Deltec shareholders. (See, e.g., Brazilian Complaint at 24-25, 54, 56.) Cardell allegedly abused its de facto control of Deltec by undermining the real estate business of the Deltec Subsidiaries to prevent Deltec from making its payments under the Loan Agreement. (See, e.g., Brazilian Complaint at 52-55.) This enabled Cardell to assume de jure control over Deltec by foreclosing on Plaintiffs' Deltec shares. (See, e.g., Brazilian Complaint at 4, 17-18, 22, 74-77.)

Second, the Brazilian Complaint alleges that Cardell violated the terms of the Stock Pledge Agreement by failing to conduct the Auction in a "commercially reasonable manner." (Brazilian Complaint at 77.) For example, it is alleged that Cardell undermined the Auction by refusing to offer a majority interest in Deltec. (Brazilian Complaint at 30.) Cardell also purportedly underpriced Deltec's shares. (Brazilian Complaint at 31.)


I. Jurisdiction Transfer Rule

Plaintiffs contend that this Court lacks jurisdiction over Cardell's present motion

because Suchodolski III is currently on appeal. This Court disagrees. The filing of a notice of appeal "divests the district court of jurisdiction respecting the questions raised and decided in the order that is on appeal." New York State Nat'l Org. for Women v. Terry, 886 F.2d 1339, 1350 (2d Cir. 1989). However, the district court is only divested of jurisdiction concerning those questions raised on appeal. Terry, 886 F.2d at 1350; Compania Espanola De Petroleos, S.A. v. Nereus Shipping, S.A., 527 F.2d 966, 972 (2d Cir. 1975).

The sole issue on appeal in this action is whether the Award contemplated a strict foreclosure on Metroplis' interest in Deltec, thereby compelling Cardell to provide Plaintiffs with an accounting. That issue is not raised in the Brazilian Complaint. Therefore, this Court retains jurisdiction to decide Cardell's application for an anti-suit injunction. See Motorola Credit Corp. v. Uzan, 388 F.3d 39, 53 (2d Cir. 2004); Weg v. Macchiarola, No. 84 Civ. 4430 (PKL), 1992 WL 183406, at *1 n.1 (S.D.N.Y. July 20, 1992) ("Since the claims upon which the motion for reargument focuses are not currently before the Second Circuit, this Court retains jurisdiction to consider plaintiff's reargument motion.")

II. Anti-Suit Injunction

To obtain an anti-suit injunction, the moving party must show that the parties to each of the parallel proceedings are substantially the same and that the resolution of the case before the enjoining court would be dispositive of the enjoined action. SG Avipro Fin. Ltd. v. Cameroon Airlines, No. 05 Civ. 655 (LTS), 2005 WL 1353955, at *2-3 (S.D.N.Y June 8, 2005); Paramedics Electromedicina Comercial Ltda. v. GE Med. Sys. Info. Tech., Inc., No. 02 Civ. 9369 (DFE), 2003 WL 23641529, at *11 (S.D.N.Y. June 4, 2003). If the moving party satisfies these requirements, the Court should then consider, inter alia: (1) whether the foreign litigation poses a threat to the enjoining court's jurisdiction; and (2) whether the foreign litigation would frustrate important policies of the United States. GE Med., 2003 WL 23641529, at *11.

A. Abuse of Control Claim

Defendants have made the requisite showing to enjoin the abuse of control claim in Brazil. The parties to the Brazilian Action are similar to the parties before the Panel. See SG Avipro Fin. Ltd., 2005 WL 1353955, at *2. Further, Plaintiffs made a similar abuse of control claim to the Panel. (Doyle Reply Aff. Ex. 1 ¶¶ 20, 21, 29, 31.) The Panel rejected Plaintiffs' claim, finding that "there was no fiduciary relationship between [Plaintiffs] and Cardell" (Award at 8-9), and that even if such a fiduciary duty existed, Cardell "did absolutely nothing improper which would give rise to a breach of any such duty" (Award at 9). See Silva Run Worldwide v. Gaming Lottery Corp., No. 96 Civ. 3231 (RPP), 2002 WL 975623 (S.D.N.Y. May 9, 2002) (issuing anti-suit injunction against a Canadian litigation arising from the same issues that were previously decided by the district court). It is irrelevant that the Brazilian Complaint asserts the abuse of control claim under Brazilian law instead of New York law. Because the Brazilian Complaint "touches matters" covered by the Award, this Court must enjoin Plaintiffs from asserting the abuse of control claim. Paramedics Electromedicina Comercial Ltda. v. GE Med. Sys. Info. Tech., Inc., 369 F.3d 645, 654 (2d Cir. 2004); see also Smith/Enron Cogeneration Ltd. P'ship, Inc. v. Smith Cogeneration Int'l, 198 F.3d 88, 99 (2d Cir. 1999); Roby v. Corp. of Lloyd's, 996 F.2d 1353, 1360 (2d Cir. 1993); SG Avipro Fin. Ltd., 2005 WL 1353955, at *3. Specifically, Plaintiffs are enjoined from bringing a claim for "indemnification" under Brazilian law, to the extent that claim arises from an alleged abuse of control or breach of fiduciary duty.

Defendants have also established that this Court's jurisdiction is threatened by the abuse of control claim. By Order dated October 26, 2004, this Court confirmed the Award, including the Panel's ruling on abuse of control. An anti-suit injunction is needed to protect this Court's jurisdiction over the Award. GE Med., 369 F.3d at 654; see also Silva Run Worldwide, 2002 WL 975623, at *10. Additionally, the parties agreed to arbitrate disputes arising from the contract in New York. (Stock Pledge Agreement §§ 18-19.) The Brazilian Action therefore violates the policies favoring arbitration, Chelsea Square Textiles, Inc. v. Bombay Dyeing & Mfg. Co., 189 F.3d 289, 294 (2d Cir. 1999), and the enforcement of forum selection clauses. Farrell Lines Inc. v. Columbus Cello-Poly Corp., 32 F. Supp. 2d 118, 130 (S.D.N.Y. 1997).

Accordingly, Plaintiffs must withdraw the Brazilian Complaint insofar as it alleges breach of fiduciary duty.

B. Auction Claim

Cardell foreclosed on Plaintiffs' Deltec shares after the Award was issued. The Brazilian Complaint contends that Cardell failed to conduct the Auction in a commercially reasonable manner pursuant to the Stock Pledge Agreement. This claim involves events taking place after the issuance of the Award and could not have been decided by the Panel.

The Stock Pledge Agreement provides that "any dispute arising out of, or in connection with, the execution, interpretation, performance or non-performance of this Agreement (including the validity, scope and enforceability of these arbitration provisions) shall be settled by arbitration." (Stock Pledge Agreement § 19.) The Brazilian Complaint alleges that the Auction "infring[ed] the rule in the contract which determined that Cardell must sell [Plaintiffs'] shares in a commercially reasonable manner." (Brazilian Complaint at 77.) Because Plaintiffs' claims regarding the Auction "arise[] out of" the Stock Pledge Agreement, they must be resolved at arbitration in New York. (Stock Pledge Agreement §§ 18-19.)

However, neither party has requested that the claim be arbitrated. (Transcript of Hearing dated Nov. 18, 2005 at 9.) "The court thus does not have before it a proper petition to compel arbitration." Standard Tallow v. Kil-Mgmt. A/S, 901 F. Supp. 147, 151 (S.D.N.Y. 1995); see also Walker & Zanger (West Coast) Ltd. v. Stone Design S.A., 4 F. Supp. 2d 931, 937 (C.D. Cal. 1997) ("[N]othing. . .suggests the Court is required or empowered to sua sponte enforce an arbitration agreement.") Absent an arbitration proceeding conflicting with the Brazilian Action, Cardell cannot establish that resolution of the arbitration would be dispositive of the auction claim. Cardell has therefore failed to make the requisite showing to enjoin the auction claim. Although the claim clearly must be arbitrated, only the Brazilian courts can compel arbitration at the present moment.

III. Attorneys' Fees

The Award provides that "Cardell shall not receive any award of attorneys' fees and costs unless Claimants. . . initiate any challenge to this arbitration award in a Brazilian or Panamanian court." (Award at 11-12.) The Brazilian Action challenges the Panel's rejection of the abuse of control claim, and therefore triggers consideration of this provision of the Award. The Panel's language is subject to conflicting interpretations. Cardell argues that it is entitled to an award of attorneys' fees for work performed from the inception of the arbitration. However, the language is not hortatory, and this Court declines to construe it that broadly. A more reasonable interpretation of the provision would entitle Cardell to attorneys' fees incurred in prosecuting this application for a permanent anti-suit injunction. This Court adopts that approach and will award a reasonable attorneys' fee for the prosecution of this anti-suit injunction claim.

In the event the parties cannot stipulate to that reasonable attorneys' fee, then Cardell is directed to serve and file an application for fees by January 23, 2006.


For the foregoing reasons, Cardell's motion for a preliminary injuction and permanent anti-suit injunction is granted with respect to all aspects of the Brazilian Complaint except any claim for relief arising from the Auction. Plaintiffs must discontinue any claim arising from the alleged abuse of control or breach of fiduciary duty. Because the Brazilian Complaint's request for damages does not distinguish between the auction claim and the abuse of control claim (see Brazilian Complaint at 73-78), it is impossible to isolate the portions of the Brazilian Complaint that violate this Order. Therefore, Plaintiffs are directed to revise their submissions to the Brazilian courts in accord with this Order.

Plaintiffs are further directed to pay reasonable attorneys' fees incurred by Cardell in connection with this motion.

The Clerk of the Court is directed to mark this case closed.



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