Opinion
No. 650473/08.
2010-08-4
BACHE COMMODITIES LIMITED and Prudential Equity Group, LLC, Plaintiffs, v. Manoel Fernando GARCIA and s/a Fluxo–Comércio E Assessoria Internacional, Defendants. Fluxo–Cane Overseas, Limited, Intervenor–Plaintiff, v. Bache Commodities Limited, Defendant–in–Intervention.
Kobre & Kim LLP, by Danielle L. Rose, Esq., New York, attorneys for the movants. Morgan Lewis & Bockius LLP, by Michael S. Kraut, Esq., New York, attorneys for non-movants.
Kobre & Kim LLP, by Danielle L. Rose, Esq., New York, attorneys for the movants. Morgan Lewis & Bockius LLP, by Michael S. Kraut, Esq., New York, attorneys for non-movants.
BERNARD J. FRIED, J.
Non-party, Fluxo–Cane Overseas, Limited (“Fluxo–Cane”) moves to intervene as of right under CPLR § 1012, or alternatively by permission under CPLR § 1013, in a pending Guaranty Action (the “Guaranty Action”) between Bache Commodities Limited (“Bache”) against Manoel Fernando Garcia (“Garcia”) and S/A Fluxo Comercio E Assessoria Internacional (“S/A Fluxo”).
There appears to be no dispute as to the following: Bache is a commodities and financial derivatives broker and dealer incorporated in England. Fluxo–Cane, a British Virgin Islands company engaging in the export of sugar and the trading of exchange-traded sugar derivatives, hired Bache to trade its commodities, including its Sugar No. 11 futures contracts and options on those contracts, on the ICE Future US, Inc. exchange (“ICE”).
At the time of the relevant January 2008 events, Fluxo–Cane held three accounts with Bache. First, Fluxo–Cane opened a commodities trading account (the “Trading Account”), through which Fluxo–Cane conducted its core trading of positions held with Bache. Second, Fluxo–Cane held a sub-account to that Trading Account (the “Secured Funds Account”), which held money market funds as an immediate liquid source of funds for Bache. Fluxo–Cane contends that as of January 17, 2008, the Secured Funds Account contained approximately $25.5 million. Lastly, Fluxo–Cane held a tripartite account (the “Tripartite Account”), which at the relevant time provided a third source of funds up to $18 million for Bache. The terms of these accounts were memorialized in two agreements: the Professional Client Agreement (referred to as the “Terms and Conditions Agreement”) and the Master Netting Agreement (collectively, the “Account Agreements”). (Rose Aff. Ex. B, Ex. C.) The Terms and Conditions Agreement governs Fluxo–Cane's relationship with Bache, enumerating when and how their customer accounts can be unilaterally liquidated. (Rose Aff. Ex. B § 17.2.) The Terms and Conditions Agreement also contains a mandatory arbitration provision and a forum selection clause favoring the courts of England as having exclusive jurisdiction over disputes pertaining to the Account Agreements. (Rose Aff. Ex. B §§ 27, 28.)
In January 2008, ICE declared that Fluxo–Cane held excessive short positions in its Sugar No. 11 contracts and requested that Fluxo–Cane reduce those positions. On January 14, ICE directed Fluxo–Cane's clearing firms to impose an additional 20% ”super margin” requirement on Fluxo–Cane on top of the existing 3–5% required margin. Fluxo–Cane met all of its super margin requirements.
On January 16, 2008, ICE instructed the clearing firms to: a) reduce Fluxo–Cane's short futures equivalent position in the Sugar No. 11 contract to a specified level by January 23; b) not accept orders that would increase Fluxo–Cane's short position in the Sugar No. 11 delivery months; and c) notify the ICE before approving the transfer of Fluxo–Cane Sugar No. 11 contracts to another account or clearing member. On January 17, Bache issued a margin call to Fluxo–Cane for $9,974,706, requesting same day payment. Later that day, Bache began liquidating Fluxo–Cane's positions.
The focus of the underlying action is a Guaranty Agreement (the “Guaranty Agreement”) which Bache entered with S/A Fluxo, Fluxo–Cane's Brazilian affiliate, and Garcia, their controlling shareholder and president (collectively, the “Guarantors”.)
(Rose Aff. Ex. E.) The Guaranty provides “[e]ach Guarantor hereby jointly, severally, unconditionally and absolutely guarantees the punctual payment when due, by acceleration or otherwise, of Debtor's Obligations to the Secured Party.” (Rose Aff. Ex. E § 1.) S/A Fluxo and Garcia expressly waived any requirement that Bache first sue Fluxo–Cane in order to recover for its defaults under the Guaranty. (Rose Aff. Ex. E § 3(c).) The Guarantors also waived their affirmative defenses in the event that Bache brought an action against them to enforce the terms of the Guaranty. (Rose Aff. Ex. E § 3(d).)
There is a dispute as to whether Bache is a party to the Guaranty, since, on its face the Guaranty is in favor of “Prudential Equity Group, Inc.” (Memo of Law in Supp. 8.) Bache claims that the Guaranty should be reformed in its favor because the flaws therein were the result of a “scrivener's error.” (Rose Aff. Ex. D ¶¶ 21–22.)
Bache brought the action against Garcia and S/A Fluxo under the Guaranty to recover Fluxo–Cane's account deficits incurred during the January liquidation of its accounts. In its complaint, Bache alleges that as a result of Fluxo–Cane's failure to meet numerous margin calls on the Trading Account, it had the authority to liquidate Fluxo–Cane's positions. (Rose Aff. Ex. D ¶ 14.) Bache claims that under the Guaranty, S/A Fluxo and Garcia are liable for Fluxo–Cane's outstanding debt and it now seeks to recover the sum of Fluxo–Cane's Account deficit, $19,564,613.40, with interest. (Rose Aff. Ex. D ¶¶ 25–26.)
The Guarantors maintain that Bache began liquidating Fluxo–Cane's accounts before it had defaulted on its margin calls
and without consideration of its alternative source of funds in the Secured Funds Account and the Tripartite Account. (Rose Aff. Ex. F ¶ 15.) Furthermore, the Guarantors allege that Bache had wrongfully pursued liquidation, and had therefore materially breached the Terms and Conditions agreement, under which Fluxo–Cane was no longer obligated to make payments. (Rose Aff. Ex. F ¶¶ 15, 34, 39.) The Guarantors also raise an objection to the fact that Fluxo–Cane is not a party to the action because it may be inequitably affected by a judgment in the Guaranty Action. (Rose Aff. Ex. F § 31.)
Default is defined in the Master Netting Agreement as a failure to make a payment when due “for two business days after notice of nonperformance has been given by the other Party to the defaulting Party.” (Rose Aff. Ex. C ¶ 4.1.)
Fluxo–Cane now moves to intervene as defendants in the underlying Guaranty Action as of right under CPLR § 1012. Fluxo–Cane maintains that it has a real and substantial interest in the outcome of the Guaranty Action by virtue of its own “property” that is at stake and because it may be bound by a judgment therein. (Memo of Law in Supp. 16.) CPLR § 1012(a)(2) provides that a person is “permitted to intervene in any action [ ][w]hen the representation of the person's interest by the parties is or may be inadequate and the person is or may be bound by the judgment.” Alternatively, if an “action involves the disposition or distribution of property [ ] and the [non-party] may be affected by the judgment,” it shall also be permitted to intervene as of right. C.P.L.R. § 1012(a)(3) (2005).
“Whether a movant will be bound by a judgment within the meaning of C.P.L.R. § 1012(a) is determined by its res judicata effect.” Tyrone G. v. Fifi N., 189 A.D.2d 8, 17 (1st Dep't 1993) (quoting Vantage Petroleum v. Board Of Assessment Review, 61 N.Y.2d 695, 698 (1984)). Fluxo–Cane argues that it will be so bound by a ruling in favor of Bache because, so it argues, as part of its prima facie case, Bache will have to establish that Fluxo–Cane did in fact default in its margin calls. (Memo of Law in Supp. 18.) Fluxo–Cane contends that such a judgment against the Guarantors, if obtained, will essentially preclude Fluxo–Cane from bringing any future litigation against Bache for its alleged wrongful liquidation. (Memo of Law in Supp. 18.)
Although it may be that Fluxo–Cane may be bound by a judgment in the Guaranty Action, Fluxo–Cane fails to establish the other essential elements of intervention as of right under § 1012(a). In order for Fluxo–Cane to be entitled to intervene as of right, its interests must either be inadequately represented by the existing parties (§ 1012(a)(2)) or alternatively, it must have property at stake (§ 1012(a)(3)). Fluxo–Cane fails to satisfy either of these essential elements.
Fluxo–Cane states that because S/A Fluxo and Garcia waived their affirmative defenses under the Guaranty, its own interests will be inadequately represented. (Memo of Law in Supp. 17.) Garcia is both president and sole shareholder of Fluxo–Cane, however, and it is difficult to conceive that he would act contrary to Fluxo–Cane's interests. In agreeing to the waiver provisions of the Guaranty, Garcia was acting within his capacity as president of Fluxo–Cane.
Additionally, in order for Bache to recover under the Guaranty, it must first satisfy the burden of establishing the prima facie elements of its own case. Banque Indosuez v. Pandeff, 193 A.D.2d 265, 268 (1st Dep't 1993). Thus, Fluxo–Cane's argument that Garcia's inability to raise certain defenses will undercut its ability to adequately represent Fluxo–Cane's interests is unpersuasive.
Fluxo–Cane's alternative argument that it is entitled to intervene because of its property at stake is similarly unpersuasive. Fluxo–Cane simply states that its property would be “affected” by a determination of the Guaranty Action, without delineating how its own property is implicated in the Guaranty Action. (Memo of Law in Supp. 16.) Bache merely seeks to recover under its Guaranty Agreement from Garcia and S/A Fluxo, as Guarantors, and not from Fluxo–Cane, as Debtor. (Memo of Law in Opp'n 20.)
Alternatively, Fluxo–Cane contends that it should be permitted to intervene under CPLR § 1013 which provides: “[u]pon timely motion, any person may be permitted to intervene in any action when a statute confers a right to intervene in the discretion of the court, or when the person's claim or defense and the main action have a common question of law or fact. In exercising its discretion, the court shall consider whether the intervention will unduly delay the determination of the action or prejudice the substantial rights of any party.”
As discussed above, Fluxo–Cane's interests are adequately represented by Garcia in the Guaranty Action, and there is little merit to the notion of Fluxo–Cane's interest in the property at stake. See Quality Aggregates Inc. v. Century Concrete Corp., 213 A.D.2d 919, 920 (3rd Dep't 1995) (“[W]hen the rights of the prospective intervenors are already adequately represented, and there are substantial questions as to whether those seeking to intervene have any real interest in the property which is the subject of the dispute, intervention should not be permitted.”).
Fluxo–Cane maintains that its participation in the Guaranty Action will raise questions and issues identical to those already involved, and would not unduly delay any determination of the action. (Memo of Law in Supp. 20.) However, allowing Fluxo–Cane to assert its defenses and potential claims against Bache, would raise arguments not otherwise available to the defendants in the Guaranty Action, which would inherently delay and complicate determination of the action. See East Side Car Wash, Inc. v. K.R.K. Capitol Inc., 102 A.D.2d 157, 160 (1st Dep't 1984) (“[A] proposed intervenor may not raise issues which are not before the court in the main action.”).
Even assuming that Fluxo–Cane's Proposed Verified Complaint may share common questions of fact or law with the underlying Guaranty Action, its participation would substantially prejudice Bache. See Teichman v. Community Hospital of Western Suffolk, 87 N.Y.2d 514 (1996) (In exercising their discretion, trial courts should consider the extent of prejudice to the existing parties if intervention is allowed).
Bache argues that it would be denied the benefit of its bargaining under the Guaranty Agreement and the Account Agreements if Fluxo–Cane was permitted to intervene. (Memo of Law in Opp'n 21.) As mentioned above, the Terms and Conditions Agreement contains both a mandatory arbitration clause providing that “[a]ny dispute arising from or relating to these Terms [ ] shall [ ] be referred to arbitration,” and a forum selection clause, dictating that Fluxo–Cane “submit[s][ ] to the exclusive jurisdiction of the courts of England of competent jurisdiction.” (Rose Aff. Ex. B §§ 27.1, 28.1.)
Fluxo–Cane attempts to bypass these provisions by arguing that Bache waived its right to compel arbitration and/or litigation in England by initiating the pending Guaranty Action in New York. (Memo of Law in Supp. 21–22.) Fluxo–Cane points out that an arbitration clause can in fact be waived if a party aggressively participates in litigation and manifests a preference for such litigation over arbitration. Stark v. Molod Spitz DeSantis & Stark, P.C., 9 NY3d 59 (2007). However, such waiver occurs where a party waives its right to enforce an arbitration clause against a counterparty by initiating legislation against that counterparty. Bache was free to initiate litigation to recover under the Guaranty, which does not contain an arbitration provision. See G.E. Howard & Co. v. Daley, 27 N.Y.2d 285, 330 (1970) (“[A]rbitration is essentially a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed to so submit”). Clearly, Bache did not waive its right to compel arbitration under its Account Agreements by bringing an action against Fluxo–Cane's Guarantors under an entirely different agreement.
Indeed, in Matter of Calvin Klein Company et al., v. Minnetonka, Inc., 88 A.D.2d 503 (1st Dep't 1982) the Court held that although a purchase and sale agreement, to which Calvin Klein was not a party, contained an arbitration clause, Calvin Klein was not bound to arbitrate disputes under a separate guaranty agreement, stating that “[i]n the absence of a specific agreement to arbitrate, the guarantors of a principal agreement containing an arbitration clause cannot be compelled to arbitrate.” Id. at 504. The Court recognized that a mere guarantee of performance does not transform into an assumption by the guarantor of the principal's agreement to submit to arbitration. Here, Bache was not required to pursue arbitration against Fluxo–Cane's Guarantors merely because its Account Agreements with Fluxo–Cane contained an arbitration provision. The different agreements executed by the parties are not “so inextricably interwoven” as to ignore that there was no arbitration provision in the Guaranty and render the arbitration clause contained in the Account Agreements applicable to the Guaranty Agreement.Parties to an agreement “will not be held to have chosen arbitration as the forum for the resolution of their disputes in the absence of an express, unequivocal agreement to that effect.” Id. See, e.g. Sherrill v. Grayco Builders, Inc., 64 N.Y.2d 261 (1985) (holding that where two agreements with similar subject matter exist, but involve different signatories and impose independent obligations, the arbitration provision in the first does not carry into the second). Thus, Bache was entitled to bring an action under the Guaranty without causing it to waive the arbitration provisions of the Account Agreements.
Moreover, permitting Fluxo–Cane's intervention would also prejudice Bache by allowing Fluxo–Cane to circumvent clear provisions of the Guaranty Agreement and by raising defenses and claims not available to the Guarantors. Permitting Fluxo–Cane to intervene would undermine the arbitration provision of the Account Agreements and the waiver provisions of the Guaranty Agreements, essentially transforming these agreements. Therefore, I decline to exercise my discretion in permitting Fluxo–Cane to intervene.
Accordingly, it is
ORDERED that the motion to intervene is, in all respects, denied.