Westavv
Not Reported in P.Supp.2d Page l
Not Reported in P.Supp.2d, 2004 WL 54I846 (S.D.N.Y.)
(Cite as: Not Reported in F.Supp.2d)
C The following facts are undisputed or ets shown by
Sands Bros&Co.,Ltd. v. Ettinger Ettinger. In January 2000, Ettinger, an artist,
S,D.N.Y.,2004. opened an IRA account at GKN Securities Corp, ("
Only the Westlaw citation is currently available. GI
SANDS BROTHERS & CO., LTD., Plaintiff, several telephone conversations during which
‘ v. Ettinger told Nosel that she wanted to invest
Cindi ETTINGER, Defendant. conservatively, Nosel sent her a letter dated January
No. 03 Civ.7854(DLC). 24, 2000 outlining his investment strategy for her
account. In the letter, Nosel stated that he had "
March I9, 2004. taken into account your expressed conservatism
when tailoring this portfolio? Included among
NoseI‘s recommendations were speculative equity
Ariel Berschadsky, New York, New York, for the mutual funds. Neither Nosel nor his associate
Plaintiff. reviewed with Ettinger the risks associated with the
Andrea Fischer, Olshan Grundman Frome LLP, proposed asset allocation plan. On January 28,
New York, New York, for the Defendant. Ettinger invested $256,519.00 in accordance with
the recommended asset allocation plan devised by
OPINION AND ORDER A Nosel.
COTE,J,
*1 Sands Brothers & Co., Ltd. ("Sands"), a Ettingers account moved with Nosel to Shocliet in
Delaware Gcrpcraticrr with NS i>l`i¤GiP¤l l>lP¤G€ cf December 2000, and to Bluestone in August 2001.
business in New York, tiled this action against FN2 On Ncvemeer 7) 2001, Sends and Blueetem
Ciiidi EWHSGF C“EiYl¤i%€l“°°)» 3 Citizen Of executed a Purchase Agreement whereby Sands
Pennsylvania. OU OCTOPBT Gi 2003 Sands has acquired certain ofBluestone‘s accounts and assets
moved for a declaratory judgment pursuant to 28 ic Exchange fe,. $1,075,000 in ccc], One Of me
U-S·C· ii 2201 that it has im mgm Obiigamn te accounts purchased by Sands was that ofEttinger. FN}
arbitrate any ciaims arising out of Ettingers
dealings with Biuestone Capital Corp. ("Bluestoneâ€
) or its subsidiary, Shochet Securities, Inc. ("Shochet _ »
"),FNi who were Ettingens brokers before Sands pN2_ By cm agreement cf August 1, 2003
purchased Bluestone. Por the reasons described Shcchet assigned tc Bluecmcec me,. aim?
bel0W,th€ m<>ii0¤ is @F¤¤i€di¤ Pet? all of its customer accounts, trademarks,
and copyrights, including title and interest
_ I I _ _ to its corporate name. As consideration for
FN1. $@005 did NOT mi? ti notice Qf WOUOIM the transaction, Bluestone paid Shochet in
as required by S.D.N.Y. Local Civil Rules Cash and Steck,
6.1, 7.2 (200l). This statement of the relief
Sands seeks through this motion is taken FNB] In December 2001) Nceei eepemed
0010 Yhfi i¤U‘0€i¤¤liOFY Pmagiaph et IFS Sands for employment at another
OCIOl¤€Y 2fii ZOO3 m€mOi`@·PdUm Of MW Iii brokerage house and no longer served as
$‘~lPPO*'I Of IIS mOiiOP· Ettingefs broker.
B¢¥€k§I“Ok"id The Purchase Agreement provided, inter alia, that
© 2007 Thomson/West. No Claim to Orig. U.S. Govt. Works.
EXHIBIT _.
G
http://web2westlaw.com/print/printsti·eamaspx7prft=l¤ITMLE&destiiiatioii=atp&sv=Split&rs=W. ., 5/ i i/ 2 007
neta€pases3t@7stap¢@2844—JSW Document 32-8 Filed O9/06/2007 Page 2 ofP45g€2
Not Reported in F.Supp.2d, 2004 WL 54l 846 (S.D.N.Y.)
(Cite as: Not Reported in F.Supp.2d)
Sands would be permitted, but not required, to offer On Iuly 24, 2003, Ettinger initiated an arbitration
to hire "some or all" of Bluestone’s personnel other proceeding against Sands before the NASD.
than the co—chairmen, that Bluestone would transfer Ettinger charged Sands with fraud and "
all rights in Shochet‘s trademarks and copyrights to unsuitability with respect to the sale of speculative
Sands; and that, upon Sands‘ request, Bluestone equity mutual funds" in her IRA account, as well as
would assign to Sands all of Bluestone‘s properties claims for breach of contract and lack of
other than its headquarters in New York and supervision. On October 6, Sands filed this action.
specified other properties. Section 8 of the Purchase In its nrst cause of action, Sands seeks a declaration
Agreement also released Sands from any of that it is not a successor in interest to either
Bluestone`s "liabilities, expenses, debts or Bluestone or Shochet, In its second cause of action,
obligations contingent or absolute, known or it requests a stay of the arbitration until there is a
unknown, including any Litigation Liabilities? determination on its nrst cause ofaction.
The clause defined "litigation liabilities°’ as any "
debts, obligations or liabilities arising from or On October 6, Sands requested that the Court issue
relating to pending, threatened and unasserted an ax parte stay of the arbitration. The Court
claims (including, without limitation, customer refused to issue an ex parte order, and scheduled a
complaints), litigation, legal actions, countcrclaims, conference for October I0. At the October 10
suits or arbitration .... " conference, Sands requested an opportunity to
supplement its motion papers, This motion ensued.
in a March 28, 2002 letter from Sands to Ettinger The parties do not contest the following facts: (l)
for the purpose of updating Ettingers nie and Sands, as a member of NASD, is bound by the
account information, Sands introduced itself as NASD Code of Arbitration Procedure ("NASD
having had "successfully acquired" Shochet. The Code"); (2) Ettinger was a Sands customer from
letter asked Ettinger to update her file and account November 7, 200l, the date of the Purchase
information by completing and returning the Agreement with Bluestone, to the date in October
enclosed forms. Sands closed the letter by stating 2002 on which she transferred her IRA. account to
that it "lookledj forward to continuing our PaineWebber; and (3) the dispute between Sands
long—standing relationship with you.†According to and Ettinger is subject to the Federal Arbitration
Ettinger, she filled out the forms, checking off Act ("FAA"),9U.S,C. §§ I—l4 (i988).
boxes indicating "low—risk exposure," "preservation
of capital" and "long term growth" as investment
objectives, and returned them to Sands. A broker at Discrision
Sands who had taken over Ettinger's account after
Nosel's departure called her in April and introduced Sands contends that it has no legal obligation to
himself. Sands and Ettinger had no further contact. · arbitrate Ettinger's claim against it because Ettinger
was not its "customer" for purposes of the NASD
*2 By October 2002, Ettinger’s IRA account had Code for any period before it acquired Bluestone on
declined 53%, from $292,I48 to Sl38,287. Ettinger November 7, 200l, and because it is not a "
showed her account statements to one of her I successor in interest" to Bluestone. As a threshold
brokers at UBS PaineWebber ("PaineWebber"), matter, it should be noted the question of
another brokerage house with which she maintained arbitrability is for the Court. "Unless the parties
investment accounts. The PaineWebber broker `clearly and unmistakably provide otherwise, the
reviewed the Sands account statements and question of whether the parties agreed to arbitrate is
informed Ettinger that she was invested in to be decided by the court, not the arbitr·ator·." Jo/in
speculative equity mutual funds. Ettinger Hancock Life Ins. Co. v. Wilson, 254 F.3d. 48, 53
immediately transferred the speculative mutual fund (2d Cir.200l) (citation omitted); see Bensadoun v.
investments from Sands to PaineWebber. In Jobe—Rrat, 3l6 P.3d l7l, i'/5 (2d Cir.2003). "lOjne
December, she liquidated those investments, paying party‘s membership in {the NASD}, is insufncient,
approximately $4,000 in sales charges. in and of itself, to evidence the parties' clear and
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Net R@aset3i:®$eovr132844—JSW Document 32-8 Filed O9/06/2007 Page 3 ofpggcg
Not Reported in F.Supp.2d, 2004 W1. 541846 (S,D.N.Y.)
(Cite as: Not Reported in F.Supp.2d)
unmistakable intent to submit the ‘arbitrability’ arbitrate on the part of the successor." Berzsodowi,
question to the arbitrators." Jo/er: Hancock, 254 316 F.3d at 177 (quoting Wheat, First Securities,
l?3d at 57. Since Ettinger has pointed to no Inc. v. Green, 993 1*.2d 814, 820 (llth Cir.l993)).
agreement between her and Sands that would place An investor is a "custorner" of a brokerage house,
the issue of arbitrabiiity before the arbitrator, this and able to compel the brokerage house to arbiate,
Court will decide the issue ofarbitration. only for conduct that falls within the scope of the
specific account between the investcr and the
*3 There is a strong federal policy favoring brokerage house. Id at 178 (the investcr "would be
arbitration. See Howsom v. Dean Witter Reynolds, unable to rely on the existence of his personal
Inc., 537 US. 79, 83 (2002) (citing Moses H, Cone account to demand arbitration on issues relating to a
Mem'! Hosp. v. Mercury Constr. Corp., 460 U.S. 1, different account outside the scope of [the
24-25 (1983)). "[Q]uestions of arbitrability must be investors] customer relationship with [the NASD
addressed with a healthy regard for the federal mernber]").
policy favoring arbitration? Gilmer v.
Interstate/Jo/msdn Lane Corp., 500 U.S. 20, 26 Ettinger cannot, under the theory that she was once
(1991) (citation omitted). "[A]ny doubts concerning a Sands customer, compel Sands to arbitrate her
the scope of arbitrable issues should be resolved in losses stemming from activity in her account before
favor of arbitration? Moses H. Cone, 460 U.S. at the account was acquired by Sands. T0 the extent
24-25. that Nosel engaged in misconduct with respect to
her account while at GKN, Shochet, or Bluestone,
Whether or not there is a motion to compel Ettinger cannot require Sands to arbitrate that claim
arbitration, any disputed issues of fact concerning under the theory that she became a "customer" of
the existence of a binding agreement to arbitrate are Sands thereafter.
decided under the standard that applies to a motion
for summary judgment. Bensodoun, 316 F.3d at l75 To the extent, however, that Sands seeks a
. lf material issues of fact are in dispute, the matter declaration that it is not required to arbitrate claims
is properly left for trial. Jo'. (citing 9 U.S.C. §4). associated with the period during which Ettinger
was Sands' customer, its motion is denied. Sands is
‘ required to arbitrate any claims by Ettinger
I. Erringers Status os o Customer regarding the management of her IRA account from
the date she became a Sands customer, that is,
Rule l0301(c) of the NASD Code provides that " November 7, 2001, to the time her IRA account was
[a]ny dispute, claim, or controversy between a transferred to PaineWebber. It is for the arbitrator
customer and a member and/or associated person to decide to what extent, if any, Sands is liable to
arising in connection with the activities of such Ettinger for its handling ofther account from
associated persons" must be submitted to arbitration November 7, 2001 to the date in October 2002 ·~
"upon the demand of the customer? The NASD when Ettinger transferred her account to
Code "detines “customer’ broadly, excluding only ‘ PaineWebber.
a broker or dealer." ’ Jo/in Hancock, 254 I’.3d at 59
. lf any ambiguity exists in the meaning of "customer
" as used in Rule 10301, "the term should be 2,SuccessorinIrzteres1Liabi/ity
construed in favor of arbitration? Berzsodourz, 316 g
F.3d at 176. *4 Sands also seeks a declaratory judgment that it is
not required to arbitrate Ettingens claims for
The Second Circuit has recently noted that " ‘ conduct that occurred while she had an account with
customer status must be determined as of the time either Shochet or Bluestone because it is not a
ofthe events providing the basis for the allegation successor in interest to their liabilities. Bttinger does
of fraudf so that allegations against a not opposethis prong ofSands‘ motion,
predecessor-in—interest did not give rise to a duty to
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N¤tR@>asei3>:®TB+cvr£®l2844-JSW Document 32-8 Filed O9/06/2007 Page 4 ofrdgsr
Not Reported in l*`.Supp,2d, 2004 WL 54l846 (S.D.N,Y.)
(Cite as: Not Reported in F.Supp.2d)
Under New Yorir common law,FN‘i 3 pnrennge gf the Purchase Agreement prohibited Bluestones
assets does not render the purchaser liable for the cc—chairmen from working at Sands, and Sands was
torts or its pretieeessor unless ii) it expressly nctrcquircdtc hireBl¤cStcnc‘semployees.
assumed the predecessors tort liability, (2) there
was a dc facto merger of seller and purchaser, (3) in Sum, Sands is not a successor in interest to
the purchasing corporation was a mere continuation BlU€StOn€’S liabilities. The transaction between the
ot the seiling corporation, or (4) the transaction is {WO parties does not Satisfy any of the exceptions to
entered into fraudulently to escape such obligations, thc gchcrdl rulc that a Successor business entity is
ijargo Partner AG it Albarrang, J;/ia, 352 F_3el All, not liable for the torts ofits predecessor.
45 (2d Cir.2003) (citing Schumacher v. Richards
Shear Co., 59 N.Y.2d 239, 244-45 (N.Y.l983)).
Because Sands expressly rejected any of Conclasiori
Bluestone's liabilities, and there is no allegation or
evidence that the parties entered into the Purchase FOT thc FcfiS0¤S stated above, S&nClS` motion for a
Agreement for fraudulent purposes, only the second declaratory judgment is granted in part, Sands has
ssdtimd {sms sl-s atissue i,sys_FN5 no obligation to arbitrate Ettingers claims for the
period before November 7, 200l. The parties shall
_ advise the Court by April 2, 2004 whether there is
FN4, The panics ds ms dispute that New any reason not to enter a final judgment in this
york isw gsvsms the Purchase Agsssmsml action based on the rulings contained herein.
FNS. The second and third items are so SO ORDERED:
similar that some courts consider them to
be the same exception. Cargo Partner, 352 S·D·N·Y·»2OO‘l·
pgs at 45 s_ 3_ Sands Bros & Co.,.Ltd. v. Ettinger
Not Reported in F.Supp.2d, 2004 \?\/`L 541846
A da facto merger occurs when a transaction is a (S·D·N·Y·)
merger in substance if not in form. Cargo Partner,
352 F.3d at 46. To find that a de facto merger has END OF DOCUMENT
occurred, there must be: "(l) a continuity of the ,
selling corporation, evidenced by the same
management, personnel, assets and physical
location; (2) a conrinuini of stockholders,
accomplished by paying for the acquired
. corporation with shares of stock; (3) a dissolution of _
the selling corporation; and (4) the assumption of ·
liabilities by the purchaser? Id. (citation omitted)
(emphasis supplied). The "continuity of ownership"
is an essential aspect of the doctrine ot dc facto — c A _
merger. Id.
There was no dc facto merger of Sands with
Bluestone. There was no continuity of ownership
between the two companies. Sands paid Bluestone
in cash for the purchase of certain of its assets,
including the customer accounts. Biuestone owners
did not receive any stock in Sands. ln addition,
under the terms ot the Purchase Agreement, Sands ·
did not acquire Bluestone’s liabilities. Moreover,
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