Richard C. Yeskoo, Esq., Yeskoo, Hogan & Tamlyn LLP, New York, NY, for Plaintiffs.
Michael Anderson, Esq., Rosanna M. Neil, Esq., Joseph R. Profaizer, Esq. Paul Hastings LLP, Washington, DC, for Defendant.
OPINION AND ORDER
SHIRA A. SCHEINDLIN, District Judge.
This action to stay an arbitration demand arises out of a credit insurance policy (the "Policy") issued by defendant National Union Fire Insurance ("National Union") to Novel Commodities S.A. ("Novel") - a Swiss commodities trading company - and Access Global Capital, LLC ("Access"), a New Jersey limited liability company that acts as a financier for the sale of agricultural commodities in Latin America. The Policy insured against the risk of loss in transactions involving Novd's purchase and sale of agricultural commodities.
Novel - financed by Access - undertook two transactions in which a First Purchaser was to purchase agricultural commodities from Cia Arrocera Covadonga, S.A. de CV ("Covadonga") - a Mexican food producer and wholesaler - and sell them to Novel, which was then to sell them back to Covadonga. However, Covadonga allegedly failed to pay Novel when it repurchased the rice and beans.
Novel submitted two claims to National Union under the Policy, but National Union refused to pay. Novel then initiated arbitration proceedings against National Union to recover under the policy. Novel was later joined in these proceedings by Access.
On March 9, 2013, National Union served a demand to arbitrate upon Global Commodities Group, LLC ("Global") - the First Purchaser under the Policy for the transactions at issue - and James Besch - on the grounds that they are alter egos of Access. Besch and Global in turn brought this action seeking a stay of the arbitration demand and a declaratory judgment that they are not obliged to participate in the arbitration. National Union has cross moved to compel Global and Besch to arbitrate.
For the following reasons, plaintiffs' motion to stay arbitration is granted and defendant's motion to compel arbitration is denied with leave to re-file after limited discovery.
A. The Policy
National Union issued the Policy to Novel and Access (together, the "Insureds") on June 24, 2010. The Policy insured, with some restrictions, a triangular sales arrangement from Covadonga to a First Purchaser, which would sell the goods to Novel, who would then sell them back to Covadonga.
A condition of the Policy was that Novel could not purchase the product directly from Covadonga or any related entities. Specifically, Endorsement 15 of the Policy provides that "[tirade credit insurance will not be provided in situations where Access Global [Capital, LLC] and/or Novel have purchased product directly from either Agroindustrias Covadonga, S.A. de C.V., its subsidiaries, or its affiliates and subsequently on-sells the product to either Agroindustrias Covadonga, S.A. de C.V., its subsidiaries, or its affiliates."
B. The Disputed Transactions
The underlying dispute relates to two triangular transactions in which Global was the First Purchaser. After an alleged payment default by Covadonga, the Insureds filed two claims under the Policy, relating to: (1) their alleged sale of paddy rice to Covadonga (the "Paddy Rice Claim"); and (2) their alleged sale of mayocoba beans to Covadonga (the "Mayocoba Beans Claim"). Together, these claims totaled $9, 862, 189.84. In November 2011, National Union denied both claims, and disclaimed Novel and Access' coverage under the Policy.
1. The Paddy Rice Claim
The Insureds' first claim relates to the alleged sale of paddy rice to Covadonga on July 28, 2010. On June 16, 2010, Covadonga entered into a contract to sell 12, 346.447 metric tons of paddy rice to Global - to be stored in Covadonga's warehouses - for roughly $4, 000, 000. In its Answer in the arbitration, National Union alleges that title to the paddy rice did not pass from Covadonga to Global, because the Certificates of Deposit issued by Covadonga in connection with the transaction were invalid.
On July 26, 2010, Global contracted to sell the rice to Novel, allegedly transferring title to the rice by endorsing to Novel the Certificates of Deposit that it had received from Covadonga. Two days later, on July 28, 2010, Novel sold the rice back to Covadonga for a $822, 174.91 profit. National Union alleges that, because the Certificates of Deposit were invalid, this transfer of title was also ineffective. Further, National Union alleges that this transfer of title was ...