In the Matter of Samuel Belzberg, Appellant, Doris Lindbergh, et al., Petitioners,v.Verus Investments Holdings Inc., Respondent.

Brief

N.Y.September 4, 2013

To be Argued by: CHARLES J. HECHT (Time Requested: 30 Minutes) New York County Clerk’s Index No. 600977/10 Court of Appeals of the State of New York In the Matter of the Application of SAMUEL BELZBERG, Petitioner-Appellant, - and - DORIS LINDBERGH, WINTON CAPITAL HOLDING and GIBRALT CAPITAL, Petitioners, - against - VERUS INVESTMENTS HOLDINGS INC., Respondent-Respondent. BRIEF FOR RESPONDENT-RESPONDENT WOLF HALDENSTEIN ADLER FREEMAN & HERZ LLP Attorneys for Respondent-Respondent 270 Madison Avenue New York, New York 10016 Tel.: (212) 545-4600 Fax: (212) 545-4653 Date Completed: January 22, 2013 DISCLOSURE STATEMENT Pursuant to Court of Appeals Rule 500.l(f), Respondent-Respondent Verus Investments Holdings Inc. states that it is wholly owned by Mr. Ajmal Khan. Its sole subsidiary is Verus International Group Ltd. TABLE OF CONTENTS Page(s) TABLE OF AUTHORITIES ..................................................................................... ii COUNTERST A TEMENT OF QUESTION PRESENTED ..................................... 1 PRELIMINARY STATEMENT ............................................................................... 2 FACTUAL BACKGROUND ................................................................................... 3 PROCEDURAL BACKGROUND ........................................................................... 8 ARGUMENT .......................................................................................................... 1 1 L THIS APPEAL SHOULD BE DISMISSED BECAUSE IT PRESENTS NO ISSUE OF NEW YORK STATE LAW ....................... 11 II. THE FIRST DEPARTMENT CORRECTLY HELD THAT BELZBERG MUST ARBITRATE THIS DISPUTE UNDER THE DOCTRINE OF DIRECT BENEFITS ESTOPPEL ............................ 13 A. Belzberg Knowingly Exploited the Customer Agreement. ................ 14 B. Belzberg Received a Direct Benefit under the Customer Agreement .......................................................................... 15 C. The Equities Require Belzberg to Arbitrate Verus's Dispute ............ 26 CONCLUSION ....................................................................................................... 30 TABLE OF AUTHORITIES Cases Page(s) Ace American Insurance Co. v. Huntsman Corp., 255 F.R.D. 179 (S.D. Tex. 2008) ............................................................. 11, 27,29 American Bureau of Shipping v. Tencara Shipyard S.P.A., 170 F.3d 349 (2d Cir. 1999) ............................................................... 13, 20, 21,22 Andres Holding Corp. v. Villaje del Rio, Ltd., No. SA-09-CA-127-XR, 2009 U.S. Dist. LEXIS 63686 (W.D. Tex. Jul. 24, 2009) ................................... 28 Arhontisa Maritime Ltd. v. Twinbrook Corp., No. 01 Civ. 5044 (GEL), 2001 U.S. Dist. LEXIS 15536 (S.D.N.Y. Sept. 27, 2001) ................................... 22 Barrack, Rodos & Bacine v. Bailon Stoll Bader & Nadler P.C., No. 08 Civ. 02152 (PKL), 2008 U.S. Dist. LEXIS 22026 (S.D.N.Y. Mar. 20, 2008) ............................. 27, 28 Deloitte Noraudit AIS v. Deloitte Haskins & Sells, U.S., 9F.3d l060(2dCir.l993) ............................................................................. 13,22 In re Diamond Waterproofing Systems, Inc. v. 55 Liberty Owners Corp., 4 N.Y.3d 247 (2005) ............................................................................................. 12 Kribs v. Bache, Halsey, Stuart, Shields, Inc., No. 82 Civ. 5794, 1982 U.S. Dist. LEXIS 16564 (S.D.N.Y. Dec. 7, 1982) ...................................... 12 Legacy Wireless Services v. Human Capital, L.L.C., 314 F. Supp. 2d 1045 (D. Or. 2004 ) ......................................................... 24, 26, 28 N.J.R. Associates v. Tausend, 19 N.Y.3d 597 (2012) ........................................................................................... 12 Shearson/American Express v. McMahon, 482 U.S. 220 ( 1987) ............................................................................................. 13 l1 Sherman v. Town of Rhinebeck, 133 A.D.2d 77 (2d Dep't 1987) ..................................................................... 26, 27 Smith/Enron Cogeneration Ltd. Partnership v. Smith Cogeneration International, Inc., 198 F.3d 88 (2d Cir. 1999) ................................................................................... 13 Southland Corp. v. Keating, 46 5 U.S. I ( I 9 84) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I 2 Wealth Rescue Strategies, Inc. v. Thompson, No. 08-3107, 2009 U.S. Dist. LEXIS 106989 (S.D. Tex. Nov. 17, 2009) ................................. 24 In re Weekly Homes, L.P., 180 S. W.3d 127 (Tex. 2005) ................................................................................ 26 Wood v. PennTex Resources, L.P., 458 F. Supp. 2d 355 (S.D. Tex. 2006) ........................................................... 27, 29 World Group Securities, Inc. v. Allen, No. 07-1657, 2007 U.S. Dist. LEXIS 89368 (D. Ariz. Nov. 20, 2007) ............................... 23, 24 STATUTES AND RULES Civil Practice & Law Rules 1 03(c) ...................................................................................................................... 9 408 .......................................................................................................................... 9 New York Business Corporation Law § 202(a)(8) ............................................................................................................ 20 OTHER AUTHORITIES NormanS. Poser, Making Securities Arbitration Work, 50 SMU L. Rev. 277 ( 1996) ................................................................................. 14 Siegel, NY Prac. § 448 (5th ed. 2011 ) .............................................................................................. 25 111 COUNTERST A TEMENT OF QUESTION PRESENTED I. Shall a person who is not a signatory to the customer agreement governing another person's brokerage account be compelled to arbitrate a dispute concerning the brokerage account under the doctrine of direct benefits estoppel, where the customer agreement contains an arbitration provision and the non- signatory personally organized a trade through the brokerage account and directed to whom the proceeds of the trade were paid? A unanimous panel of the First Department correctly answered in the affirmative because the facts show the non- signatory knowingly exploited and received direct benefits from the customer agreement. PRELIMINARY STATEMENT This case began with the refusal of Petitioner-Appellant Samuel Belzberg ("'Belzberg") to pay his fair share of taxes on an arbitrage trade that was his idea, that he arranged, and where he controlled how and to whom the proceeds were distributed. Belzberg asked to make the trade through the brokerage account of Respondent-Respondent Verus Investments Holdings Inc. ("Verus"), a company controlled by his friend with whom he had a longstanding business relationship. The Customer Agreement governing Verus's brokerage account requires disputes between V eros and its broker to be arbitrated before the Financial Industry Regulatory Authority (FINRA). The broker brought a claim in arbitration against Verus for the tax bill on Belzberg's investment. Verus asserted a third-party claim against Belzberg for the taxes attributable to Belzberg's portion of the proceeds. Instead of answering Verus's claim on the merits, Belzberg brought a petition to permanently stay the arbitration against him on the basis that he never agreed to arbitrate. The parties, the trial court and the First Department all agree that a nonsignatory to an agreement containing an arbitration clause will be equitably estopped from avoiding the agreement's obligation to arbitrate if he a) knowingly exploited the agreement, and b) received a direct benefit from the agreement. The 2 doctrine of direct benefits estoppel is equitable, meaning that its application depends upon the facts. Having thoroughly reviewed the record, a unanimous panel of the First Department correctly found that Belzberg must arbitrate Verus's third-party claim against him because he knowingly exploited and received direct benefits from the Customer Agreement between Verus and its broker. There is no basis to reverse the First Department. Belzberg's appeal should be dismissed, or in the alternative, the First Department's decision should be affirmed. FACTUAL BACKGROUND Belzberg is an investor who Lives in Vancouver, Canada and Palm Springs, California. A.63, A.262. He and his family control a number of offshore companies. A.96 at~ 9. He is the financial advisor to Winton Capital Holding, a British Virgin Islands company, owned by a Bermuda trust, with its principal place of business in the Cayman Islands (''Winton"). A.63 at~ 3, A.262-263, A.35l. He organized Winton for the benefit of his children and provided its initial capital. /d., A.297-298. Belzberg has unfettered authority to invest Winton's money. A.263- 264; A.294-295. Or maybe Belzberg has "no authority to act on behalf of or bind Winton." A.63, ~ 3. His testimony is contradictory and inconsistent, and there are no documents evidencing Belzberg's relationship with Winton. A.294:2-295: II. 3 Verus is a British West Indies corporation controlled by Ajmal Khan ("Khan"). A.96. Belzberg has done business with Khan for almost 20 years. A.265- 266. Khan and Belzberg were friends. A.96 at~ 6. In October 2008, Belzberg called Khan about what Belzberg characterized as a "terrific arbitrage opportunity" to take advantage of the discrepancy between the current price of Fording Canadian Coal Trust ("Fording") units and their expected value upon the closing of Fording's upcoming and well-publicized merger with another Canadian company. A.96 at~ 7. Belzberg told Khan the Fording trade had a "locked in profit" but needed to be made through an American brokerage account due to "goofy tax considerations." A.96 at~~ 7-8. Verus has an American brokerage account at Jefferies & Co. ("Jefferies"). A.96. The account is governed by a Customer Agreement with an arbitration clause. A.46-47, A.51-54 (at~ 30), A.96 at~ 5. Belzberg asked to use Verus's account at Jefferies to process the Fording trade. A.96 at~ 7. Khan agreed to Belzberg's request. A.96-97. At Belzberg's request, Verus e-mailed Belzberg the pertinent information about its account on October 14, 2008. A.l 08 at~ 6, A.ll3. About two weeks later, Belzberg caused Winton to wire $5 million into Verus's brokerage account at Jefferies to buy Fording securities. 1 A.96-97, A.l 00, A.267: 20-25. Belzberg's usual practice was to delegate the execution of his 1 Following Belzberg's strong recommendation, Verus wired $1 million into its account to buy Fording units for itself too. A.96 at~ 8, A.97 at~ 10, A.l 00, A.284, A.307. 4 investment decisions to his Canadian family holding company, Gibralt Capital ("Gibralt"). A.264-265, A.286. A few days after the Fording units were purchased, Gibralt's CEO e-mailed Verus's broker Jefferies that "'Sam Belzberg [note, not Winton] wired $5mm fund [sic] last week" to buy Fording units. A.l 14- 115. The Fording merger closed and the proceeds were distributed to Verus's brokerage account at Jefferies in early November 2008. A. I 03. Immediately after Verus received the proceeds, Belzberg made a number of requests "to send out his share of the profits and principal as soon as possible." A.97 at~ 14. At Belzberg's direction, Verus returned the $5 million principal investment to Winton on November I 0, 2008. A. I 03, A.ll5, A.l4l-143. The profits from the Fording arbitrage attributable to the $5 million put up by Winton amounted to $223,655.25. A.l07-I08, A.l30. But instead of sending the profits to Winton, Belzberg instructed V erus to send the profits to Doris Lindbergh, his good friend of 25 years and a lawyer who formerly worked in the securities industry. A.236, A.268. See A.97 at~ 13 (Belzberg gave Lindbergh's wiring information to Khan); A.269:3-6 (Belzberg testifying that Lindbergh told him "she was trying to buy a country home and it was impossible to get a mortgage, and I directed the money, through Winton, to her"); A.280:4-9 (Belzberg confirming the profits from the Fording trade were sent from Verus's account at Jefferies to Lindbergh at his direction). 5 Lindbergh testified that this money came to her from Belzberg. She testified that "it was in November of 2008 that I had a call from Sam Belzberg saying that he was going to send me some money and to please give him my bank information. And to please let him know when and if I received the money. So I gave him my bank wiring instructions, and .... I received a large sum ofmoney."2 A.2I0:5-12. She testified that "It was a surprise when he called me up and said 'I'm sending you money."' A.244:23-24. She testified that Belzberg "had told me, he said, 'I'm going to send you some money." A.244:5-6. Belzberg told Lindbergh that he was sending her money "Because I couldn't get a mortgage and he was going to help me pay for the house." A.244:8-9. Lindbergh told Belzberg that she "was very grateful and I didn 't know if and when I could repay him. And he said, 'Don't worry, you 'II pay me back. You will repay me."' A.212:6-8. "When you can," Belzberg said, ''you will pay me back."A.239:8. When asked how she was treating this $223,655.25, Lindbergh replied: "I'm treating it as money that Sam Belzberg gave me that when I can repay, I will, because that's what he said." A.241 :7-9. Testifying a month later in Rancho Mirage, California because he was supposedly unable to testify at the scheduled hearing in New York, Belzberg characterized this transfer of money from Verus's account at Jefferies as a "loan" from Winton to Lindbergh. A.269:8. Belzberg's self-serving assertion overlooks 2 Emphasis in all quotations in this brief has been added unless otherwise indicated. 6 that Winton never had possession or control over the profits from the Fording trade, A.l 03. His self-serving assertion is flatly contradicted by Lindbergh's testimony that she never even heard of Winton before being served with papers in this case. A.207:21-208:4. Over two years after Winton supposedly lent her $223,655.25, Lindbergh testified that "I don't know who is Winton Capital Holding." A.246:4-5. She also averred that "I have no relationship ... with Winton." A.72 at~ 11. This transaction has none of the indicia of a bona-fide loan. Lindberg was an unemployed person who did not qualify for a mortgage but wanted to buy a summer house. A.235:18-23, A.239:13-14; A.244:8-9. There is no writing evidencing this purported loan. A.269:20-21, A.238:25-26. The terms of this purported loan are indefinite - Belzberg testified that Lindbergh would repay the loan "one of these days[.]" A2. 70: 17-19. The payment of interest is apparently optional. A.239:2-8. When questioned about its particulars, Lindbergh replied that you "don't look a gift horse in the mouth, or a loan horse in the n1outh." A.238:23- 24. This Freudian slip underscores the conclusion that Winton did not really lend a quarter-million dollars with no terms to a person who did not even know of Winton's existence, and that this was really a gift from Belzberg to Lindbergh. At Belzberg's direction, Verus wired $223,655.25 to Lindbergh from its account at Jefferies on November 18, 2008. A. I 03; A.280:4-9. The next day, 7 Canadian authorities notified Jefferies that a $928,053.45 withholding tax was owed on the proceeds of the Fording trade, including the profit paid to Lindbergh. A.98, A. I 03. Belzberg and Gibralt are the only Canadians among the parties. A.23- 24, A.63. Belzberg refused to cover the proportionate share of the withholding tax attributable to the $5 million put up by Winton and the profit distributed to Lindbergh.3 A.98. PROCEDURAL BACKGROUND On September 2, 2009, Jefferies brought FINRA Arbitration No. 09-05141 (the "Arbitration") against Verus for the unpaid balance of the Canadian withholding taxes. A.46-54. On March 5, 2010, Verus answered the Statement of Claim in the Arbitration and asserted third-party claims against Winton, Belzberg, Gibralt and Lindbergh for reimbursement of their proportionate share of the Canadian withholding tax. A.29-45. On April 16, 20 l 0, Winton, Belzberg, Gibralt and Lindbergh filed a Petition to stay the Arbitration before the Supreme Court of the State of New York, New York County (the "Trial Court"). A.22-28. All of them are represented by the same counsel. /d. Verus opposed the Petition and moved to compel arbitration. A.74- 3 The $5 million that Belzberg caused Winton to wire into V erus' brokerage account represented 84.26% of the Fording trade. A.l34. To date, Verus has paid $308,028.26 of the $928,053.45 tax bill. This is far in excess ofthe 15.74% proportionate withholding tax attributable to Verus's $1 million investment. A.31, A.47-48, A.l34. 8 80. The Trial Court treated Verus' s motion to compel arbitration as a petition under CPLR l 03( c). A.l92. A hearing was held on July I, 20 I 0. A. I 53. There is no discovery in a special proceeding except for a Notice to Admit. CPLR 408. Lindbergh and Belzberg responded selectively to Verus's trial subpoenas, picking and choosing which categories of documents they would produce and in most cases not producing any responsive documents at the hearing. A.223-226, A.289- 290. On October 8, 2010, the Trial Court issued an order compelling Winton to arbitrate, permanently staying the Arbitration against Gibralt, and holding the proceeding in abeyance as to Belzberg and Lindbergh pending their testimony. A 189-203. This order was not appealed. Lindbergh testified before the Trial Court at a second hearing on December 6, 2010. A204. Upon her testimony, the Trial Court observed that "Mr. Belzberg himselfhad total control of this money. That's what we've established." A.219:25- 220:2. Belzberg represented that he was unable to attend the hearing in New York and testified at a continuation of the hearing in Rancho Mirage, California, a month later on January 7, 20 ll. A.254-258. Belzberg was not admonished to refrain from reading the transcript of Lindbergh's testimony, and he admitted to having reviewed it before testifying. A.275-276. The Trial Court did not request closing or post-hearing briefs from the parties. 9 On May 25, 20 l I , the Trial Court issued an order permanently staying the Arbitration against Belzberg and Lindbergh. A. I 0-19. The Trial Court held that Belzberg "cannot be compelled to arbitrate because the second requirement of the 'arbitration by estoppel' test is not met in this case. Even if Belzberg initiated and orchestrated the entire transaction on behalf of Winton, and even if he knew of the arbitration clause in the Customer Agreement, Belzberg did not receive a benefit flowing directly from the Customer Agreement." A.l6-l 7 (emphasis in original). Verus timely appealed the Trial Court's decision as to Belzberg. A.6. On May 24, 20 12, a unanimous panel of the First Department reversed the Trial Court's decision as to Belzberg and granted Verus's cross-petition to compel Belzberg to arbitrate. CA.4-l2. The First Department correctly concluded that there is "no question that Lindbergh considered the money a loan from Belzberg, not Winton[,]'' and that "Lindbergh's testimony that she never heard of Winton undermines any claim that the loan came from Winton." CA. 1 0. The First Department observed the critical inconsistencies between Belzberg's hearing testimony (A.258-352) and the affidavit he filed in support of his petition to stay the arbitration ( A.62-65): In the affidavit, Belzberg stated that he is "merely a financial advisor of Winton, and ... [has] no authority to act on behalf of or bind Winton." But at the hearing, Belzberg admitted that he has the power to make investments for Winton. Likewise, his affidavit statement that he "had no involvement in Winton's transfer of funds to Verus' [ s] account at Jefferies or the purchase of Fording securities" is flatly contradicted by his hearing testimony that he 10 directed that $5 million be transferred from Winton to the Jefferies account for purchase of the securities. Belzberg's contradictory statements on these material issues cast doubt on his present claim that the loan came from Winton and not him, and warrant our rejection of his factual characterization of the money transfer. CA. II. The First Department correctly concluded that Belzberg received a benefit flowing directly from the Customer Agreement because "the profits Belzberg diverted to Lindbergh were generated in the Fording trade that Belzberg orchestrated using Verus's account at Jefferies." /d. Having reviewed the record and briefs and entertained oral argument, a unanimous panel of the First Department correctly applied the equitable doctrine of direct benefits estoppel to the facts and concluded that Belzberg must arbitrate this dispute with Verus. There is no basis to disturb the First Department's decision. ARGUMENT I. THIS APPEAL SHOULD BE DISMISSED BECAUSE IT PRESENTS NO ISSUE OF NEW YORK STATE LAW Belzberg urged this Court to hear his appeal because there is no guidance from the Court of Appeals about how to apply the doctrine of direct benefits estoppel. But such guidance is unnecessary because the doctrine arises out of the federal substantive law of arbi trability. The question of "whether a non-signatory is bound [by an arbitration provision] presents no state law question of contract formation or validity." Ace Am. Ins. Co. v. Huntsman Corp., 255 F.R.D. 179, 20 I (S.D. Tex. 2008) (analyzing arbitrability of reinsurance dispute governed under I 1 New York law) (internal quotation and citation omitted). The doctrine of direct benefits estoppel is a creature of federal law. Belzberg has offered no reason why his case should depart from the body of established federal law concerning who is required to arbitrate in matters affecting interstate commerce. Indeed, this Court has recognized that federal law "applies to any arbitration provision in a contract that affects interstate commerce." N.J.R. Assocs. v. Tausend, 19 N.Y.3d 597,601 (2012). A customer agreement for a brokerage account allowing for the purchase and sale of securities indisputably affects interstate commerce. See, e.g., Kribs v. Bache, Halsey, Stuart, Shields, Inc., No. 82 Civ. 5794, 1982 U.S. Dist. LEXIS 16564, at *5 (S.D.N.Y. Dec. 7, 1982) (brokerage agreements evince transactions in interstate commerce). The Customer Agreement between Verus and Jefferies must be enforced under federal law because the agreement is silent as to which body of law governs its enforcement. A.52 at -u 16. See In re Diamond Waterproofing Sys., Inc. v. 55 Liberty Owners Corp., 4 N.Y.3d 247, 253 (2005) (federal law applies where choice of law provision in agreement containing an arbitration clause did not specify that enforcement is governed under New York law). There is a strong national policy favoring arbitration, and all doubts concerning the arbitrability of claims should be resolved in favor of arbitration. Southland Corp. v. Keating, 465 U.S. I, 10 ( 1984 ). This appeal should be 12 dismissed because it presents no issue of state law to be decided by the Court, and there is no reason to reverse the First Department's unanimous application of federal principles to the facts of this case. II. THE FIRST DEPARTMENT CORRECTLY HELD THAT BELZBERG MUST ARBITRATE THIS DISPUTE UNDER THE DOCTRINE OF DIRECT BENEFITS ESTOPPEL It is well settled that non-signatories to an arbitration agreement may nevertheless be compelled to arbitrate under ordinary principles of contract and agency. See, e.g., Smith/Enron Cogeneration Ltd. P'ship v. Smith Cogeneration Int 'I, Inc., 198 F .3d 88, 97 (2d Cir. 1999) (compelling non-signatory to arbitrate under estoppel). A nonsignatory is compelled to arbitrate under doctrine of direct benefits estoppel when he "receives a 'direct benefit' from a contract containing an arbitration clause." Am. Bureau of Shipping v. Tencara Shipyard S.P.A., 170 F.3d 349, 353 (2d Cir. I 999) (internal citation omitted) (compelling non-signatory to arbitrate). It applies when the nonsignatory knowingly exploits an agreement with an arbitration clause and receives benefits flowing directly from the agreement. Deloitte Noraudit AIS v. Deloitte Haskins & Sells, U.S., 9 F.3d l 060, l 064 (2d Cir. 1993) (compelling non-signatory to arbitrate). Applying this doctrine depends heavily upon the facts and circumstances of each case. Smith/Enron at 97. Contrary to Belzberg's assertions, this does not require the doctrine to be applied 13 sparingly. The doctrine of direct benefits estoppel applies if it is merited by the facts and the equities. A. Belzberg Knowingly Exploited the Customer Agreement Not even Belzberg seriously disputes that he knowingly exploited the Customer Agreement. American brokerage accounts have invariably required arbitration after the United States Supreme Court held such provisions are strictly enforceable in Shearson/Am. Express v. McMahon, 482 U.S. 220 ( 1987). See, e.g., NormanS. Poser, Making Securities Arbitration Work, 50 SMU L. Rev. 277, 278 (1996) (''Today, most brokerage firms require their customers to sign standard- form printed agreements containing arbitration clauses as a condition of opening an account"). A person like Belzberg, who has offshore interests, organizes arbitrage trades and is the financial advisor for a British Virgin Islands company owned by a Bermuda Trust and based in the Cayman Islands, must be presumed sophisticated enough to know that American brokerage accounts are subject to mandatory arbitration provisions. There is no question that "Belzberg initiated and orchestrated the entire transaction" at issue in this case. A.200. Belzberg knowing exploited the Customer Agreement between Verus and Jefferies by asking to use Verus's brokerage account at Jefferies to process the Fording trade. A.96 at~ 7. At Belzberg's request, Verus sent him the information he needed to wire money into its account. 14 A.l 08 at~ 6, A.ll3. Belzberg caused Winton to wire $5 million into Verus's account at Jefferies. A.96 at~ 9, A. I 00, A.267:20-24. After the Fording merger closed and Jefferies released the proceeds, Belzberg immediately directed Verus to wire the $223,655.25 profit fron1 its account at Jefferies to Lindbergh and to return the $5 million principal to Winton. A.97 at~ 14, A. I 03, A.l2l, A.269: 13-15, A.279:24-A.280:9. Belzberg further exploited the Customer Agreement because he used the profit from the Fording trade for his own personal purposes. As noted by the Trial Court at the hearing, "Belzberg used this money. Whether he used it to put in his pocket or to put back somewhere, he used it by giving it, literally giving it to [Lindbergh] either as a loan or as a gift .... So clearly, Mr. Belzberg himself had total control of this money. That's what we've established." A.219:20-A.220:2. B. Belzberg Received a Direct Benefit under the Customer Agreement The First Department correctly concluded that Belzberg directly benefitted from Verus's Customer Agreement with Jefferies because that is the only conclusion that is supported by the record. CA.ll-12. Belzberg admits that he caused Verus to send $223,655.25 to his good friend Lindbergh so that she could buy a summer house. A.269: 15-16, A.279:24-A.280:9. Lindbergh was unemployed at the time. A.239: 13-14. Belzberg knew that Lindbergh couldn't get a mortgage. A.244:8-9, A.269:3-6. Lindbergh had never 15 heard of Winton until being served with papers in this case and didn't even know who Winton was when she testified two years after she received the money. A.207:2l-208:8, A.246:4-5. A person borrowing almost a quarter million dollars when she could not otherwise obtain credit should be expected to know who lent it to her. Lindbergh is a lawyer who worked on Wall Street and then as a branch manager for Drexel Burnham and Smith Barney. A.206-207. She is sophisticated. It is simply not credible that she would not know to whom she owes a quarter million dollars. Lindbergh testified unequivocally that she would repay this money to Belzberg personally on Belzberg's instructions. A.2l2:6-9; A.239:5-8; A.24l :5-9. Her testimony was properly credited by the First Department because it makes no difference to Lindbergh if she has to repay the money to Belzberg or Winton. See CA.l 0. There is no reason for Lindbergh to be untruthful. In contrast, Belzberg's testimony - that this was a loan from Winton - is transparently self-serving. Were Belzberg to admit that he gave or personally loaned this money to Lindbergh, or that she must repay this money to him personally, then he would unquestionably be required to arbitrate. Belzberg's assertion that Winton loaned the money to Lindbergh is simply his attempt to avoid arbitration. The following table shows how Belzberg' s self-serving testimony is replete with inconsistencies and contradictions and is consistently rebutted by the record: 16 Belzberg's Sworn Testimony Contradiction in the Record "I am merely a financial advisor of "1 have authority to act for Winton." Winton, and I have no authority to act A.314:3-4; See also A.263:25-A.264:3 on behalf of or bind Winton." A.63, ~ 3. (same). Lindbergh will repay $233,655.25 to Belzberg told Lindbergh, "Don't worry, Winton. See A.270:3-6. you '11 pay me back. You wil1 repay me." A.212:6-8. See also A.239:8 (same). "I had no involvement in Winton's "I did" act as financial consultant for transfer of funds to Verus' account at Winton in connection with the purchase Jefferies or the purchase of Fording of $5 million worth ofF ording units in securities in Verus' account at Verus's account at Jefferies. A.284: 17- Jefferies." A.64 at~ 12. 21; A.284:25-285:2 (he recommended the trade); A.285 :6-7 (he directed the money be wired). See also A.1 14-1 15 (Chan's e-mail that "Sam Be1zberg wired $5mm fund [sic] last week to buy Fording Canadian Coal units.") "I directed the money, through Winton, Winton never had possession of the to [Lindbergh]." A.269:5-6. $233,655.25 profit from the Fording trade. See A.l03. "I have never made a dollar from Lindbergh "didn't know if and when Winton in my life." A.264:23-24. See [she] could repay him. And he said, also A.274: 14-19 (Belzberg claiming he 'Don't worry, you'll pay me back. You obtained no personal benefit from will repay me."' A.212:6-8. "When you For ding trade). can," Belzberg said, "you will pay me back." A.239:8. Belzberg is not credible, and his characterization of this transaction is just not believable. Belzberg argues that the First Department erred by not examining the source of his authority over Winton, but there was nothing for the First Department to examine. The record is devoid of any documents setting forth Be1zberg's relationship with Winton. A.294:2-295: 11. The only evidence 17 concerning Belzberg's authority is his own self-serving and contradictory testimony. Compare A.314:3-4 ("I have authority to act for Winton) with A.63 at~ 3 ("I have no authority to act on behalf of or bind Winton"). The First Department correctly concluded that "Belzberg's contradictory statements on these material issues cast doubt on his present claim that the loan came from Winton and not him, and warrant [the Court's] rejection of his factual characterization of the money transfer." CA. II. There is no legitimate reason for Winton to enter into a transaction (the Fording trade) where it bore the entire risk of loss and did not receive any profits because they were loaned on preposterous terms to somebody with whom Winton has no relationship. Likewise, investment companies simply do not lend a quarter million dollars to an unemployed borrower with whom the company had no prior relationship so that she could buy a summer house, without any documentation, interest, security, lien or any other terms typically found in a real estate loan. A loan as described by Belzberg provides zero benefit to Winton. Indeed, Lindbergh testified that she never even heard of Winton. The First Department correctly gave no credence to Belzberg's contrived testimony that Winton lent Lindbergh a quarter million dollars under these circumstances. CA. I 0. The fact that this was not a bona fide loan or investment by Winton is established conclusively by Lindbergh's admission that she was unable 18 to get a mortgage from a normal lender. A.244:8-9. As Lindbergh testified, you "'don't look a gift horse in the mouth, or a loan horse in the mouth." A.238:23-24. Although it is utterly inconsistent with a loan or investment, the disposition of the profits from the Fording trade is perfectly consistent with Belzberg giving Lindbergh a gift. This is supported by Lindbergh's testimony about her telephone call with Belzberg in which he told her that ""he was going to send me some money;" "You will repay me;""/ 'm going to send you some money;" "he was going to help me pay for the [summer] house," and 44/'m sending you money." A.210:6-7, A.212:8, A.244:5-6, A.244:8-9, A.244:24. See also A.ll4-ll5 (Belzberg's agent Ryan Chan advising Jefferies that "Sam Belzberg wired $5mm fund [sic] last week to buy Fording" securities). On this record, the First Department correctly found that "Belzberg appropriated the $223,655 of trading profits by instructing Verus to transfer them to his good friend of 25 years so that she could buy a summer house, and then directed that she repay him.'' CA.9-1 0. Giving this money to Lindbergh (or even causing Winton to lend her this money as Belzberg testified at the hearing) clearly oversteps any authority Belzberg may have as Winton's investment advisor. A.263-264. Indeed, in his Affidavit supporting his Petition to stay arbitration, Belzberg averred: "l am merely a financial advisor of Winton, and I have no authority to act on behalf of or bind Winton." A.63, ~3. Since Belzberg admittedly does not have the authority to 19 bind Winton, he could not possibly have caused Winton to lend Lindbergh this money under color of corporate authority. It is a fundamental tenet of corporate law that the power to loan a company's money belongs to the company. See, e.g., BCL § 202(a)(8). When a third party claims authority to loan money on behalf of a company, he must therefore be authorized to act on the company's behalf and have the power to bind the company. Since Belzberg admits that he does not have any authority to act on Winton's behalf, A.63, ~ 3, A.294-295, the transfer of $223,655.25 must have been made in Belzberg's personal capacity or through an improper usurpation of Winton's corporate power. 4 lfBelzberg would have to arbitrate if he kept this money for himself, he should have to arbitrate if he had the money sent to his good friend Lindbergh without the authority to do so. Belzberg's relationship to the Customer Agreement is similar to the yacht owners in American Bureau of Shipping v. Tencara Shipyard, supra, who were held to have directly benefited from a classification agreement between the American Bureau of Shipping and the shipyard that built their yacht in order to 4 Belzberg's ability to control the profits attributable to the money put up by Winton and send the profits to Lindbergh when Winton has no business reason to do so is evidence of Belzberg' s total control over Winton. A.284-286; A.294:13- A.295:25. Winton's deliberately opaque corporate structure- it is a British Virgin Islands company owned by a Bermuda trust with its principal place ofbusiness in the Cayman Islands- coupled with Belzberg's unfettered control over Winton's assets strongly suggests that collection of any judgment or award against Winton can and likely will be frustrated by Belzberg. A.262-263, A.351. 20 procure favorable insurance and register their vessel under the French flag.5 Belzberg directly benefited from the Customer Agreement by causing Winton to put up $5 million for a trade through Verus's account at Jefferies and then send all of the profit from that trade to Lindbergh, a person with whom Winton had absolutely no relationship whatsoever. See A. 72, ~ 11 (Lindbergh averring that she has no relationship with Winton); A.210:5-7, A.241:7-9, A.244:5-9 (Lindbergh testifying that the loan was from Belzberg, not from Winton). The yacht owners in Tencara Shipyard directly benefited from the classification agreement because they were able to realize dramatically lower insurance costs for their vessel. 170 F .3d at 351. Here, Belzberg directly benefited from the Customer Agreement because he was able to send $223,655.25 to Lindbergh without spending any of his own money. His benefit will be even greater if and when Lindbergh repays the money to him personally, as she testified she intends to do. In Tencara Shipyard, the Cou11 held that the yacht's owners directly benefited from the classification agreement because registering their vessel would have been practically impossible without the classification certificate issued under the classification agreement/d. at 353. Likewise, Belzberg directly 5 ..... _.n .. ~., agreements are "unique to the realm of admiralty; these inspections and resulting certificates [issued under the classification agreement] are required either legally or practically before a shipowner may ply navigable waters." Tencara Shipyard, t 70 F.3d at 351 (internal quotation and citation omitted). Likewise, having a brokerage account governed by a customer aQfc~emtent containing an arbitration clause is a practical requirement for executing a trade through a broker. See Point Il(A), supra. 21 benefited from the Customer Agreement because profits sent to Lindbergh would not exist were it not for the trade executed through Verus's account at Jefferies governed by the Customer Agreement. It would have been impossible to execute this trade without a brokerage account governed by a customer agreement containing an arbitration provision. See Point II( A), supra. But for the profits from the Fording trade made through V ems's account at Jefferies, Belzberg would have had to either send his own money to Lindbergh or find some other source of funds to enable her to buy a summer house. This case is therefore different than Arhontisa Maritime Ltd. v. Twinbrook Corp., No. 01 Civ. 5044 (GEL), 2001 U.S. Dist. LEXIS 15536 (S.D.N.Y. Sept. 27,2001) (discussing Tencara Shipyard, supra) because the non-signatory in that case received no personal benefit whatsoever from the transaction in question. Here, Belzberg received the benefit of controlling the quarter-million dollar profit from the Fording trade and giving that n1oney to his friend. Belzberg fails in attempting to distinguish Deloitte Noraudit, 9 F.3d 1060. Just like the accounting firm in Deloitte, Belzberg knowingly accepted the benefits of the Fording trade which he initiated and executed through V ems's account at Jefferies by directing that all of the profits be funneled to his longtime friend who is a stranger to Winton. This benefit- the ability to do with the profits as he wished notwithstanding that he does not have any authority to do so- flows 22 directly from the trade executed through Verus's account at Jefferies and not from the relationship of the parties. The First Department correctly concluded that ''the benefit to [Belzberg] flowed directly from the customer agreement. The profits Belzberg diverted to Lindbergh were generated in the Fording trade that Belzberg orchestrated using Verus's account at Jefferies.'' CA.ll. The $223,655.25 which Belzberg directed be sent to Lindbergh would simply not exist were it not for the Fording trade which Belzberg caused Winton to execute through Verus's account at Jefferies. Even if this Court were to accept that Belzberg' s appropriation of the profits from the Fording trade were a bona fide loan from Winton to Lindbergh, Belzberg still directly benefited from the Customer Agreement because he personally controlled the disposition of the proceeds from the Fording trade made through Verus's account at Jefferies. Belzberg still used the Fording trade as a conduit to funnel this money to his good friend Lindbergh, who had no relationship with Winton. This is conceptually similar to what happened in World Group Securities, inc. v. Allen, No. 07-1657, 2007 U.S. Dist. LEXIS 89368 (D. Ariz. Nov. 20, 2007). In that case, a nonsignatory broker-dealer was compelled to arbitrate where it received fees from a pass-through arrangement between a signatory and a third party. The Court bound the nonsignatory to the arbitration agreement because pass- through arrangements are "entirely contingent on the initial obligation." ld. at * 1 I- 23 12. See also Legacy Wireless Servs. v. Human Capital, L.L.C., 314 F. Supp. 2d l 045, l 056 (D. Or. 2004) (fees received under a pass-through arrangement are direct benefits under the contract containing the initial obligation); Wealth Rescue Strategies, Inc. v. Thompson, No. 08-3107, 2009 U.S. Dist. LEXIS l 06989 (S.D. Tex. Nov. 17, 2009) (compelling FINRA arbitration because nonsignatory's collection of revenue earned by the signatory is a direct benefit). The record is unambiguous that if Lindbergh were ever to repay this money, she would do so to Belzberg. A.212:6-9; A.239:5-8; A.24l :5-9. There would be no question Belzberg would receive a direct benefit if he kept the $223,655.25 profit for himself, or if he directed the money to a creditor. In this case, Belzberg arranged for the profits from the Fording trade to be sent to his good friend either as a gift outright or on terms so favorable as to effectively be a gift. Giving the $223,655.25 profit from this trade to Lindbergh without any documentation and only a vague promise of possible repayment son1eday in the future is as much a benefit to Belzberg as if he kept the money for hin1self. There is no doubt that Belzberg would have received a direct benefit if he lent himself the money without interest, documentation or the requirement of repayment. The fact that he gave the money to his friend instead of keeping it for himself or sending it to a creditor makes no difference. Belzberg merely skipped the intermediate step of transferring Winton's money to himself before giving it to Lindbergh. Per 24 Belzberg's instructions, the entire profit from the Fording trade attributable to Winton's investment was sent directly from Verus's account at Jefferies to Lindbergh. Winton never saw the profit. A.97, ~ 13; A.l03; A.l46; A.235-238. Nor will Winton ever see the profit; as the First Department correctly observed. Lindbergh "will repay the money directly to Belzberg, which means that Belzberg will ultimately receive the profits from the trade." CA.11-12. The First Department correctly found that a benefit flowed to Belzberg directly from the Customer Agreement because the money that was purportedly lent to Lindbergh was generated in the Fording trade that Belzberg executed through Verus's brokerage account at Jefferies. CA. II. This money would not exist if it were not for the trade. This is identical to the Trial Court's reasoning in its decision compelling Winton to arbitrate, in which it found that "Absent the Customer Agreement, Winton would not have been able to place [the Fording trade] with Jefferies; and receive back its principal investment after the trade was closed." A.l99. The Court accordingly concluded that "Winton received a direct benefit under the Customer Agreement." /d. That decision was not appealed. Thus it is the law of the case. Siegel, N.Y. Prac. § 448 at 781 (5th ed. 2011 ). Likewise, the $223,655.25 profit that Belzberg directed be sent to Lindbergh would not exist absent the same Fording trade. There is no principled reason for the profits to be 25 treated any differently than the principal on the same trade. The First Department properly corrected the Trial Court's inconsistent treatment of the principal and profits on the same trade. If being able to place a trade resulting in the return of its principal is a direct benefit to Winton under the Customer Agreement, then Belzberg's disposition of the profits from the same trade is a direct benefit to him under the Customer Agreement. It would have been impossible for Belzberg to dispose of the profits from the Fording trade if the Fording trade had not been made through Verus's account at Jefferies. Lindbergh testified that she would repay this money to Belzberg, which means that Belzberg will ultimately receive the profits from the Fording trade. See CA.1 1. Belzberg would have clearly obtained a direct benefit under the Customer Agreement if he received the profits from the Fording trade right away. Instead, Belzberg will receive the profits later when Lindbergh repays him personally. Either way, Belzberg directly benefits under the Customer Agreement. C. The Equities Require Belzberg to Arbitrate Verus's Dispute Direct benefits estoppel is founded in equity and requires courts to exercise discretion according to the facts of each case. In re Weekly Homes, L.P., 180 S.W.3d 127, 135 (Tex. 2005) (compelling nonsignatory to arbitrate). See also Legacy Wireless Servs., supra, 314 F. Supp. 2d at 1055 (applying estoppel in the arbitration context is a discretionary, fact-intensive decision); Sherman v. Town of 26 Rhinebeck, 133 A.D.2d 77, 79 (2d Dep't 1987) (estoppel is an equitable doctrine intended to prevent wrong and injustice). "The keys are whether the nonsignatory demanded and received substantial and direct benefits under the contract[;] the relationship between the claims to be arbitrated and the contract; and whether equity prevents the nonsignatory from avoiding the arbitration clause that was part of that contract." Wood v. PennTex Resources, L.P., 458 F. Supp. 2d 355, 371 (S.D. Tex. 2006) (granting motion to compel arbitration), cited by Ace Am. Ins. Co., 255 F.R.D. at 201 (denying motion to dismiss complaint seeking arbitration). The doctrine of direct benefits estoppel was developed because Courts recognized that people should not be allowed to baldly exploit arbitration agreements and then disclaim the obligation to arbitrate. The First Department correctly held that Belzberg must be compelled to arbitrate with Verus because he knowingly accepted the benefits of the Customer Agreement between Verus and Jefferies and he directly benefited from that agreement. CA.l2. The First Department's conclusion is supported by the law and by the equities. The authority cited by Belzberg as being instructive is not relevant at all. In Barrack, Rodos & Bacine v. Bailon Stoll Bader & Nadler P.C., No. 08 Civ. 02152 (PKL), 2008 U.S. Dist. LEXIS 22026 (S.D.N.Y. Mar. 20, 2008), an attorney and his law firm entered into an agreement containing an arbitration clause concerning future fees for most of their pending matters. The agreement was 27 si1ent about the future fees for one particular matter, the Intel suit. The attorney later moved to a different law firm, which was not a party to that agreement, and which was subsequently awarded legal fees in the lntel suit. Citing its agreement with the attorney, his old law firm claimed the new law firm was required to arbitrate whether the fees from the Intel suit were covered under the old law firm's agreement with the attorney. The Court found that the new law firm did not assume or exploit the agreement between the attorney and his old law firm and that "a more direct benefit is necessary" to invoke the doctrine of direct benefits estoppel than the facts presented. Id. at* 17. This shows only that the application of direct benefits estoppel depends upon the equities of each individual case. See Legacy Wireless Servs., supra, 314 F. Supp. 2d at 1055 (application of estoppel to compel arbitration is discretionary and fact-intensive). Here, Belzberg exploited the Customer Agreement to execute a trade through Verus's account at Jefferies and used the profits for his personal purposes. In Andres Holding Corp. v. Villaje del Rio, Ltd., No. SA-09-CA-127-XR, 2009 U.S. Dist. LEXIS 63686 (W.D. Tex. Jul. 24, 2009), the Court held that it was "without sufficient information from which it can conclude" that the non- signatories are compelled to arbitrate. /d. at * 14. Specifically, the Court found that there was no evidence of the non-signatory's "pursuit or receipt, in his individual capacity, of benefits under the contract." Id. at* 13 (emphasis original). In contrast, 28 Belzberg concedes that he took it upon himself to send the profit from the Fording trade to Lindbergh after she told him that she could not obtain a mortgage to buy a summer house. Although she was currently unemployed, Lindbergh emphasized in her testimony that, when she could, she would repay this money to Belzberg personally pursuant to his instructions and not to Winton. A.212:3-8; A.239:5-8; A.241 :5-9. Lindbergh clearly testified that Belzberg lent her this money personally. A.21 0:5-20; A.24l :5-9; A.244:3-9, 20-24. Belzberg reviewed the transcript of Lindbergh's testimony and testified some weeks after Lindbergh that she would actually repay the money to Winton. A.270:3-6; A.275: 14-276:5. Belzberg's testimony is transparently self-serving. It is contrary to Lindbergh's testimony that she has no relationship with Winton and that she never even heard of Winton before being served with papers in this case. A.72 at~ 11, A.207:21-208:4; A.246:4-5. It is also contrary to his own sworn affidavit where he averred that he has "no authority to act on behalf of or bind Winton." A.63, ~ 3. Belzberg thus satisfies the key considerations outlined in Wood, 458 F. Supp. 2d at 371 and Ace American Ins. Co., 255 F.R.D. at 201. First, Belzberg asked to use Verus's brokerage account, A.96 at~ 7, and received substantial and direct benefits from doing so. Second, Verus seeks to arbitrate its claim against Belzberg for his proportionate share of the Canadian withholding tax resulting from the Fording trade orchestrated by Belzberg and executed at his request 29 through Verus's account at Jefferies. Verus's claim is directly related to the Customer Agreement and is asserted as a third-party claim in the Arbitration by Jefferies against Verus for the unpaid tax bill. A.29-6l. Equity must prevent Belzberg from evading the arbitration clause contained in the Customer Agreement. Belzberg conceived of and orchestrated the Fording trade. He asked to use Verus's account at Jefferies. He personally controlled all aspects of this trade, including to whom the proceeds should go. He gave the money to Lindbergh, which is no different than if he kept it for himself. lt is manifestly unjust for Belzberg to exploit Verus's brokerage account, use the profits from the Fording trade for his personal benefit, and then stiffVerus for the entire tax liability. Allowing Belzberg to do this is grossly inequitable. The First Department's decision that Belzberg must arbitrate this dispute with Verus is correct and should be affirmed. CONCLUSION If this appeal is not dismissed because it does not involve any issue of New York state law, then the First Department's decision should be affirmed. The First Department correctly held that Belzberg must be compeUed to arbitrate Verus 's claims against him. Belzberg knowingly exploited the Customer Agreement between Verus and its broker by orchestrating the arbitrage of Fording securities through Verus 's brokerage account at Jefferies governed by the 30 Customer Agreement. He directly benefitted from the Customer Agreement because he personally controlled how and to whom the proceeds from the Fording trade were distributed. Direct benefits estoppel is an equitable remedy designed to prevent a non- signatory from exploiting an agreement without having to be bound by the arbitration clause within the agreement. Belzberg knowingly exploited the Customer Agreement and received a direct benefit from that agreement by taking control of the profits from the Fording trade when he had no authority to do so. Belzberg's explanation that he n1erely facilitated a loan from Winton to Lindbergh is internally inconsistent and defies con1mon sense. Dated: New York, New York January 22, 2013 31 f LF HALDENSTEIN ADLER ~EM;y4 & HERZ LLP ~~ Charles J. Hecht Daniel Tepper 270 Madison A venue New York, New York 10016 (212) 545-4600 Attorneys for Respondent-Respondent Verus Investments Holdings Inc. 706008