noting that "[i]t is permissible for a non-signatory to an arbitration agreement to compel arbitration of claims brought by a signatory to that agreement"Summary of this case from Ragone v. Atlantic Video
No. 00 Civ. 8150 (MBM).
May 23, 2001
APPEARANCES: LEONARD D. STEINMAN, ESQ. MATTHEW J. SIEMBIEDA, ESQ. ALEXANDER D. BONO, ESQ. TIMOTHY D. KATSIFF, ESQ. (Attorneys for Petitioners) Blank, Rome, Comisky McCauley 405 Lexington Avenue New York, N.Y. 10174 (212) 885-5000
FREDERICK A. BRODIE, ESQ. TAKEMI UENO, ESQ. (Attorneys for Respondent) Pillsbury Winthrop LLP One Battery Park Plaza New York, N.Y. 10004-1490 (212) 858-1000
OPINION AND ORDER
In this diversity action, Chase Mortgage Company-West and Mellon Bank, N.A. petition the court pursuant to 9 U.S.C. § 4 (1994) for an order compelling Bankers Trust Company to submit to arbitration its third-party claims against petitioners in New Jersey state court. For the reasons stated below, the motion is granted.
Petitioner Chase Mortgage Company-West was formerly known as Mellon Mortgage Company ("Mellon Mortgage"). (Pet. ¶ 13) Mellon Mortgage entered into an Asset Purchase Agreement with Bankers Trust Company ("Bankers") in which Mellon Mortgage agreed to acquire most of Bankers' commercial mortgage loan servicing business. (Id. at 8) The parties referred to the loan servicing agreements that Mellon Mortgage did not acquire as Special Transactions. (Id. at 10) With respect to the Special Transactions agreements, Mellon Mortgage and Bankers entered into a separate Special Transactions Agreement in which Mellon Mortgage agreed to act as "Bankers' agent for the limited purpose of performing certain activities relating to the Special Transactions." (Id. at 11) Mellon Mortgage's parent company, Mellon Bank, WA., guaranteed Mellon Mortgage's obligations under both the Asset Purchase and Special Transactions Agreements. (Id. at 12)
The Special Transaction at issue here is one in which Bankers agreed to collect tax liens. In 1993 and 1994, Jersey City offered a portfolio of tax liens for sale. (Id. at 23) The portfolios were purchased by private trusts. (Id. at 24, 25, 28) Each of the two trusts entered into Master Servicing Agreements ("MSAs") with Bankers under which Bankers was responsible for collecting the liens. (Id. at 29) Subsequently, Bankers entered into a sub-servicing agreement with Breen Capital Services under which Breen was to fulfill Bankers' obligations under the MSAs. (Id. at 30) In addition, because the MSAs were subject to the Special Transaction Agreement, Mellon Mortgage was required to "perform certain limited functions in connection with some of Bankers' obligations to service" those agreements. (Id. at 31) Respondent explains that Mellon Mortgage "acted as a second sub servicer with respect to the 1993 and 1994 deals, above Breen and below Bankers . . . ." (Def. Mem. at 3)
In 1998, John Varsolona, on behalf of a class of property owners, sued Bankers, Breen, and several other defendants in New Jersey State court on various claims related to the collection of the 1993 tax liens. (Pet. at 33) In January 2000, Bankers filed a third-party complaint against Mellon Mortgage and Mellon Bank seeking indemnity or contribution for any judgment in the Varsolona action. (Id. at 38) In May, Louise Garretson, also on behalf of a class of property owners, sued Bankers, Breen and several other defendants on the same grounds — this time, however, related to the collection of the 1994 tax liens. (Id. at 50) Bankers filed an identical third-party complaint against Mellon Mortgage and Mellon Bank seeking indemnity or contribution for any judgment in theGarretson action. (Id. at 52) Mellon Mortgage and Mellon Bank then filed this petition to compel arbitration.
The Asset Purchase Agreement requires that "[a]ny controversy or claim between [Mellon Mortgage] and [Bankers] arising out of or relating to any Transaction Agreement . . . will at the request of any party, be determined by arbitration." (Pet., Ex. A) The Transaction Agreement[s] include the Asset Purchase Agreement and the Special Transactions Agreement. (Id.) Accordingly, Bankers must submit its third-party claims in Varsolona and Garretson to arbitration.
Bankers argues that Mellon Bank may not request arbitration of Bankers' claims against it because the Asset Purchase Agreement's arbitration clause covers disputes only between the signatories to that agreement, Mellon Mortgage and Bankers. (Def. Mem. at 7) It is permissible, however, for a non-signatory to an arbitration agreement to compel arbitration of claims brought by a signatory to that agreement. See Smith/Enron Cogeneration Ltd. P'ship v. Smith Cogeneration Int'l, 198 F.3d 88, 98 (2d Cir. 1999). A signatory will be estopped to "avoid arbitration with a non-signatory when the issues the nonsignatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed." Id.
When it recognized estoppel as a basis on which a nonsignatory can compel arbitration, the Second Circuit cited Sunkist Soft Drinks, Inc. v. Sunkist Growers, Inc., 10 F.3d 753 (11th Cir. 1993). In that case, the Eleventh Circuit explained that in one of its own prior cases, McBro Planning and Dev. Co. v. Triangle Elec. Constr. Co., 741 F.2d 342 (11th Cir. 1984), the Court had permitted a non-signatory to compel arbitration because the claims brought by the signatory against the non-signatory were "intertwined with the underlying contract obligations." Sunkist, 10 F.3d at 757. The Sunkist Court further explained that the McBro Court reached that conclusion based on the "close relationship of the alleged wrongs to the non-signatory's obligations . . . in the contract . . . ."Id.
Mellon Bank, the non-signatory, has no obligations under the Special Transactions agreement. However, in Sunkist, the non-signatory also had no obligations. See id. Rather, as the Sunkist Court explained, the key was the nature of the claims asserted by the signatory against the non-signatory. In that case, the Court concluded that estoppel was appropriate because the signatories' claims "arise out of and relate directly to" the underlying agreement. Id. at 757-58. In Smith/Enron, the Second Circuit clarified that the test is whether the signatory's claims arise under the "subject matter" of the underlying agreement.Smith/Enron, 198 F.3d at 98. Here, Bankers' third party claims against Mellon Bank seeking indemnity or contribution are based on Mellon Mortgage's performance under the Special Transactions agreement. (Pet., Ex. F) Therefore, those claims arise under the subject matter of that agreement.
The second factor in determining whether the signatory's claims were "intertwined with the underlying contract obligations" is whether there was a "close relationship" between defendant signatory and defendant non-signatory. Here, Mellon Bank was Mellon Mortgage's parent during the period of Mellon Mortgage's alleged misconduct under the Special Transactions agreement. (Pet. ¶ 12) Mellon Bank has since sold all of the stock in Mellon Mortgage to the Chase Mortgage Company. (Id. at 13) Nevertheless, it is sufficient that the companies were closely related at the time of Mellon Mortgage's alleged misconduct under the Special Transaction agreement. As explained in Sunkist, the purpose of this relationship factor is to determine whether Bankers' claims against Mellon Bank are intertwined with Mellon Mortgage's contract obligations. Whether they are intertwined depends on Mellon Bank's role when the misconduct occurred.
Because under the estoppel theory Mellon Bank can invoke the Asset Purchase Agreement's arbitration clause, Bankers must submit to arbitration its third-party claims against Mellon Bank in the Varsolona and Garretson actions.
Petitioners also seek an order enjoining Bankers' state court action. In general, the Federal Anti-Injunction Act, 28 U.S.C. § 2283, prohibits federal courts from enjoining state court actions. However, the Act creates an exception which authorizes a federal court to stay proceedings in a state court "where necessary in aid or its jurisdiction, or to protect or effectuate its judgment." Id. This exception authorizes a district court to stay a parallel state proceeding in favor of arbitration. See Hunt v. Mobil Oil Corp., 557 F. Supp. 368, 372 (S.D.N.Y. 1983) (Weinfeld, J.) Accordingly, the petition to enjoin the state court action is granted.
Bankers argues that the court's arbitration order should be subject to two conditions: petitioners must agree "to be bound by the results of the arbitration for purposes of apportionment in the . . . state court actions," and "to join in motions by [Bankers] in the . . . state court actions requesting that the results of the arbitration be given binding, preclusive effect for purposes of apportionment of responsibility between [Bankers] and [petitioners.]." (Def. Mem. at 12-16) Despite Bankers' arguments about the prejudice it might suffer without those conditions, I am without power to attach them to the injunction.
This court is permitted to enjoin the state court action for the purpose of protecting its judgment. Here, if the court could not stay Bankers' third-party claim, the court's order to compel arbitration would be undermined. There is no similar necessity, however, to ensure that the state court applies the arbitrator's apportionment of responsibility between Bankers and petitioners. Bankers' concern is that the state court will impose a higher judgment on it because petitioners are no longer a parties to that suit. Bankers would then need to ask the arbitrator to apportion that judgment between Bankers and petitioners. See id. at 14. However, regardless of whether the state court reduces Bankers' liability on the basis of the arbitrator's prior apportionment, or requires Bankers to seek apportionment from the arbitrator after judgment in the state court, Bankers' claim will have been decided by the arbitrator, and that decision can be enforced by this court in a judgment. Thus, Bankers' proposed conditions are not necessary to protect the court's judgment.
Petitioners ask the court to order Bankers to pay costs and attorney fees. Local Civil Rule 54.1 requires a party seeking to recover costs to file that request with the clerk within 30 days after the entry of final judgment. Fed.R.Civ.Pro. 54(d)(2)(B) requires a party seeking attorneys' fees to file a motion with the court no later than 14 days after entry of the judgment. Because the motion must, inter alia, "specify the judgment," (id.), a party generally cannot move for attorneys' fees prior to judgment. 10 James Win. Moore, et. al., Moore's Federal Practice § 54.151 (3d ed. 2000). Accordingly, this request is denied.
For the reasons stated above, the petition to compel arbitration, and the motion to stay the state court action, are granted. Settle order on 10 days' notice.