In the Matter of Samuel BELZBERG, Appellant, et al., Petitioners,
VERUS INVESTMENTS HOLDINGS INC., Respondent.
[977 N.Y.S.2d 686]
Kaye Scholer LLP, New York City (H. Peter Haveles, Jr., and Stacey A. Lara of
counsel), for appellant.
Wolf Haldenstein Adler Freeman & Herz LLP, New York City (Charles J. Hecht and Daniel Tepper of counsel), for respondent.
[999 N.E.2d 1131] In this CPLR article 75 proceeding, petitioner Samuel Belzberg (Belzberg) appeals [977 N.Y.S.2d 687] [999 N.E.2d 1132] an order of the Appellate Division that, inter alia, denied his application for a permanent stay of third-party arbitration claims ( see 95 A.D.3d 713, 945 N.Y.S.2d 67 [1st Dept.2012] ). For the reasons that follow, we reverse.
In October 2008, Belzberg contacted a longtime business associate, Ajmal Khan, the principal of respondent Verus Investments Holdings Inc. (Verus), about an investment opportunity involving the purchase of securities in Fording Canadian Coal Trust to arbitrage a merger between Fording and another Canadian company (the Fording Trade). After several discussions about potential tax consequences, Belzberg and Khan decided to proceed with the Fording Trade. To complete the securities purchase Belzberg required an American brokerage account, and therefore agreed with Khan to use Verus' account at Jefferies & Co., Inc. (Jefferies). Belzberg's source for the investment money would be Winton Capital Holding (Winton), a British Virgin Islands corporation owned by a trust established by Belzberg and naming Belzberg's children as the sole beneficiaries, and for which Belzberg served as an unpaid financial advisor.  Belzberg directed that $5 million be sent from Winton to the Jefferies account for the purchase, and Verus wired an additional $1 million of its own funds.
After the merger, Jefferies wired to Verus both the original $5 million investment and $223,655.25 in profits attributable to the Winton funds. Verus thereafter wired the $5 million to Winton and upon instructions from Gibralt Capital, a Canadian holding company that Belzberg used to facilitate the Fording Trade, wired the profits to Doris Lindbergh (Lindbergh), a
friend of Belzberg. This money apparently was intended for Lindbergh to purchase a summer home.
The Canadian tax authorities thereafter informed Jefferies that it owed a $928,053.45 withholding tax on the Fording Trade. Pursuant to the arbitration clause in the agreement between Jefferies and Verus (Jefferies-Verus agreement), Jefferies commenced an arbitration against Verus for the unpaid taxes before the Financial Industry Regulatory Authority. Verus answered and asserted third-party arbitration claims against Belzberg, Lindbergh, Winton, and Gibralt for their share of the taxes.
Belzberg, Lindbergh, Winton, and Gibralt filed an article 75 petition to stay arbitration of the third-party claims, and Verus cross-moved to compel arbitration. Supreme Court permanently stayed the arbitration as against Gibralt, granted the motion to compel Winton to arbitrate, and held the proceeding against the remaining parties in abeyance, pending a hearing on the petition and cross motion as to Belzberg and Lindbergh.
At the hearing, Lindbergh testified as to the money Belzberg had forwarded her. Among other things, she claimed that Belzberg had told her to pay him back when she could. The court considered Belzberg's out-of-state deposition, in which Belzberg claimed that he had no ownership interest in Winton. Supreme Court determined that nonsignatories Belzberg and Lindbergh could not be compelled to [999 N.E.2d 1133] [977 N.Y.S.2d 688] arbitrate. The court concluded that the doctrine of arbitration by estoppel, which requires that a nonsignatory to an arbitration agreement receive a " direct benefit" from the agreement in order to be compelled to arbitrate a claim, did not apply, because Belzberg did not receive a benefit which flowed directly from the Jefferies-Verus agreement, and Lindbergh did not knowingly exploit that agreement.
On appeal, the Appellate Division reversed. The court determined that Belzberg should be estopped from avoiding arbitration because he knowingly exploited and received direct benefits from the agreement between Jefferies and Verus. It concluded that Belzberg diverted the profits from the trade to Lindbergh, and thus he directly ...