Free Motion for Preliminary Injunction - District Court of California - California


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Case 3:07-cv—02844-JSW Document 30-11 Filed 09/06/2007 Page 1 of 4
Westlaw
Not Reported in F.Supp.2d Page 1
Not Reported in t?Supp.2d, 2004 WL 54E 846 (S.D.N.Y.)
(Cite as: Not Reported in F.Supp.2d)
C The foilowing facts are undisputed or as 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 Westiaw citation is currently available. GKN”). A broker at GKN, Robert Nosei ("Nosel"),
United States District Court,S.D. New York. was assigned to handle her account. Foiiowing
SANDS BROTHERS & CO.,L”1`D.,Plaintit1§ 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. ln the letter, Nose] stated that he had "
l\/iarch19,200¤i. taken into account your expressed conservatism
when tailoring this portfolio? Included among
Nosers recommendations were speculative equity
Ariel Berschadsky, New York, New York, for the mutual funds. Neither Nosel nor his associate
Plaintifi reviewed with Ettinger the risks associated with the
Andrea Fischer, Olshan Grundman Frome LLP, proposed asset ailocation plan. On January 28,
New York, New York, for the Defendant. Ettinger invested $256,519.00 in accordance with
the recommended asset allocation pian devised by
OPINIONAND ORDER Nosel.
CO'I`E,J. .
*1 Sands Brothers & Co., Ltd. (“Sands"), a Ettingers account moved with Nose] to Shochet in
Delaware €0l13€>Yf*~Yl0¤ wid? U5 lmildlliidl ljiddd df December 2000, and to Biuestorie in August 2001.
business in New York, tiled this action against PN2 On Nwcmbgl. 7: 200;, Smds and Biugugm
Ciiidi Edldgdf (“Ed?l¤Sd*'”)> 8 citizen Of executed a Purchase Agreement whereby Sands
P€¤¤$}’l‘r’d¤ldi dd Odidbdl 6» 2093 Sands has acquired certain of Bluestone‘s accounts and assets
¤$'10V€d lid? d dddldidldiy iddgdldm P`dl’Sudm_i0 28 in exchange for $1,075,000 in cash. One of the
USC- § 2201 md? It hdsdw least Obhgmfcm {G accounts purchased by Sands was that ofEttinger.FN3
arbitrate any ciauns arising out of Ettingers
dealings with Bluestone Capital Corp. ("Bluestone"
) or its subsidiary, Shochet Securities, lnc. ("Shochet
"},FNl who were Etti.ngei"s brokers before Sands pN2_ By gn agrgcment Of August ia 2003,
purchased Bluestone. For the reasons described ghochct assigned to Btugstong mm,. mug,
bdidwiihdllldllddis Srddiddid tid]? all of its customer accounts, trademarks,
and copyrights, including titie and interest
_ _ to its corporate name. As consideration for
FNL Sands did ddt did d ddlldd sf mdildd the transaction, Bluestone paid Shochet in
as required by S.D.N.Y. Local Civil Ruies Cash and Stgckl
6.1, 7.2 (2001). This statement of the relief
Sands seeks through this motion is taken pN3_ il, Dccambgy 20015 NOSE; dgpgmd
ddm did ld'd"dddCYdl”}’ ildfddmidli Of iis Sands for employment at another
Ocldbdr 2‘i» 2003 msmefsndum Of law ld brokerage house. and no longer served as
SUPPOK ef ds mdtldd Ettingers broker.
B¤C·" © 2007 Thomson/West. No Ciaim to Orig. U.S. Govt. Works.
= EXHIBIT `
. J ;
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Case 3:07-cv—O2844-JSW Document 30-11 Filed O9/06/2007 Page 2 of 4
Not Reported in F.Supp.2d Page 2
Not Reported in F.Supp.2d, 2004 WL $@1846 (S.D.N.Y.)
(Cite as: Not Reported in F.Supp.2d)
Sands would be permitted, but not required, to offer On July 24, 2003, Ettinger initiated an arbitration
to hire "so1ne or all" of Bluestones personnel other proceeding against Sands before the NASD.
than the eo—chai1men; thatB1uestone would transfer Ettinger charged. Sands with fraud and “
all rights in Shochet's trademarks and copyrights to unsuitability with respect to the sale of specuiative
Sands; and that, upon Sands' request, Bluestone equity mutual funds" in her IRA account, as well as
wouid assign to Sands all of Bhrestones properties claims for breach of contract and lack of
other than its headquarters in New York and supervision. On October 6, Sands tiled this action.
specified other properties. Section S of the Purchase In its first cause of action, Sands seeks a declaration
Agreement also released Sands from any of that it is not a successor in interest to either
Bluestones "liabi1ities, expenses, debts or Bluestone or Shochet. En 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 first cause of action.
The clause defined "litigation liabiiities" 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 ex parte stay of the arbitration. The Court
claims (including, without limitation, customer refused to issue an m parte order, and scheduled a
complaints), litigation, legal actions, counterclaims, conference for October 10. 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: (1)
for the purpose of updating Ettingeifs file and Sands, as a member of NASD, is bound by the
account information, Sands introduced itseif as NASD Code of Arbitration Procedure ("NASD
having had "successt°u11y acquired" Shochet. The Code"); (2) Ettinger was a Sands customer from
letter asked Ettinger to update her tile and account November 7, 200t, the date of the Purchase
infomation 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 ERA account to
that it "ioo1<[ed;t 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 forrns, checking off Act ("FAA"),9U,S.C. §§ 1-14 (1988).
boxes indicating "low-risk exp0sure," "preservatior1 _
of capital" and “long terrn growth" as investment
obyectives, and retained them to Sands. A broker at Discnsiori
Sands who had taken over Ettingers account after
Nosel's departure called her in April and introduced Sands contends that it has no legal obligation to .
himseif. Sands and Ettinger had no further contact. arbitrate Ettingers claim against it because Ettinger
was not its "customer" for purposes of the NASD
*2 By October 2002, Ettingens IRA account had Code for any period before it acquired Bluestone on
declined 53%, from $292,}% to $i38,287. Ettinger November 7, 200i, and because it is not a "
showed her account statements to one of her successor in interest" to Btuestone. As a threshoid
brokers at UBS PaineWebber ("PaineWebber"), matter, it shouid be noted the question of
another brokerage house with which she maintained arbitrability is for the Court. ‘°Un1ess the parties
investment accounts. The PaineWebber broker clearly and unrnistakably 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 arbitrator? John
speculative equity mutual funds. Ettinger Hancock Lgfe Ins. Co. v, Wilson, 254 F.3d.48, 53
immediateiy transferred the speculative mutual fund (2d Cir.2001) (citation omitted}, see Benmdoan v.
investments from Sands to PaineWebber. In Jobs-Riot, 316 F.3d E7}, 175 (2d Ch·.2003). “[O]ne _
December, she iiquidated those investments, paying party's membership in [the NASD], is insufticient,
approximately $4,000 in sales charges. in and of itself, to evidence the parties' clear and
© 2007 '1`homson/West. No Claim to Orig. U.S. Govt. Works. `
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Case 3:07-cv—O2844-JSW Document 30-11 Filed O9/06/2007 Page 3 of 4
Not Reported in F.St:pp.2d Page 3
Not Reported in ¥.Supp.2d, 2004 Wi, 541846 {S.D.N."Y.}
{Cite as: Not Reported in F.Supp.2d)
unmistakable intent to submit the ‘arbitrability’ arbitrate on the part ofthe successor" Benszzdozm,
question to the ari:>itrators." John Hancock, 254 316 F.3d at E'77 {quoting Wheat, First Saczmnes,
?.3d at 57. Since Ettinger has pointed to no Inc. v. Green, 993 F.2d 8i4, 820 (lith Cir.l993)).
agreement between her and Sands that would place An investor is a "customer" of a brokerage house,
the issue of arbitrabiiity before the arbitrator, this and able to compel the brokerage house to arbitrate,
Court will decide the issue of arbitration. only for conduct that falls within the scope of the
specific account between the investor and the
*3 There is a strong federal policy favoring ‘orok.e1·age house. ld at i78 (the investor "would be
arbitration. See Howsam v. Dear: Witter Reynolds, unabie to reiy on the existence of his personal
Inc., 537 U.S. 79, 83 (2002) (citing Moses H. Cone account to demand arbitration on issues relating to a
Mem? Hosp. v. Mercury Corzsw. Corp., 460 U.S. l, different account outside the scope of [the
24-25 (1983)). "{Q]uestions of arbitrabiiity must be investors] customer relationship with [the NASD
addressed with a. healthy regard for the federal member]"),
poiicy favoring arbitration? Gilmer v.
Interstate/Johnson Lame Corp., 500 U.S. 20, 26 Ettinger cannot, under the theory that she was once
(199i) (citation o1nitted)."[A]ny doubts concerning a Sands customer, compel Sands to arbitrate her
the scope of arbinabie issues should be resolved in losses stemming from activity in her account before
favor oi` arbitration." Moses H. Cone, 460 U.S. at the account was acquired by Sands. To the extent
24-25. ` that Nosel engaged in misconduct with respect to
her account whiie 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. Bensadotm, 3i6 F.3d at 175 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. id (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
1, Ezzz'rzger's Smrus as at Customer regarding the management of her IRA account from
the date she became a Sands customer, that is,
Rule lO3Ui(c) of the NASD Code provides that " November 7, 2001, to the time her IRA account was
ialny dispute, claim, or controversy between a transferred to PaineWebber. it is for the arbitrator
customer and a member andfor associated person to decide to what extent, if any, Sands is Eiable to
arising in connection with the activities of such Ettinger for its handling of her account Som
associated persons”m1istbe submitted to arbitration November 7, 2GGl to the date in October 2002
"upon the demand of the customer? The NASD when Ettinger transferred her account to
Code “detines ‘custoiner’ broadly, excluding only ‘ PaineWebber.
a broker or dealer." ’ John Hancock, 254 F.3Ci at 59
. if any ambiguity exists in the meaning of “custonier
" as used in Rnie 10301, "the term should be 2.SuccessorinL·2z‘erestLi¤2biliz3»
cotistmed in favor of arbitration? Bensadozm, 316 _
?.3d at l76. *4 Sands aiso seeks a declaratory judgment that it is
not required to arbitrate Ettingers claims for
The Second Circuit has recently noted that " ‘ conduct that occurred while she had an account with
ctistoiner status mast be determined as ci the time either Shochet or Biuestone because it is not a
of the events providing the basis for the allegation successor in interest to their liabilities. Ettinger does
of fraudj so that allegations against a not oppose this prong of Sands’ motion.
predecessor—in—interest did not give rise to a duty to
© ZGG7 Thornsonfwest. No Claim to Orig. U.S. Govt. Works.
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Case 3:07-cv-02844-JSW Document 30-11 Filed 09/06/2007 Page 4 of 4
Not Reported in F.Supp.2d page 4
Not Reported in F.Supp.2d, 2004 WL 54l846 (S.D.N.Y.)
(Cite as: Not Reported in F.Supp.2d)
Under New York common law,FN4 a purchase of the Putohese Agreement prohibited Bluestone's
assets does not render the purchaser liable for the co-chairmen from working at Sands, and Sands was
torts of its predecessor unless (1) it expressly notrequired to hire Bluestones employees.
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 Bluestones liabilities. The transaction between the
of the selling corporation, or (4) the transaction is two parties does not satisfy any of the exceptions to
entered into fraudulently to escape such obligations. the general rule that a successor business entity is
Cargo Partner AG v. Albatraris, Inc., 352 F.3d 4l, not liable for the torts ofits predecessor.
45 (2d Cir.2003) (citing Schumacher v. Richards
S/tear Co., 59 N.Y.2d 239, 244-45 (N.Y.l983)).
Because Sands expressly rejected any of Conclusion
Bluestones liabilities, and there is no allegation or
evidence that the parties entered into the Purchase For the rooooos stated above, Sands' motion for a
Agreement for trauduient purposes, only the second Glooierofoty judgment is granted in part. Sands has
and third raCm,·m·g Etgssug hBm_FN5 no obligation to arbitrate Ettirigers claims for the
period before November 7, 2001. The parties shall
4 ` advise the Court by April 2, 2004 whether there is ·
FN4' The parties cig EO]; disputg New ally l"€&SUl`l HO? to BINCCT El flngl lll this
`L/Drk law govgyns {hc Purchase AgrBBH]BHt_ Hctigll based Oi,] the Cclillialncd hargln.
FNS. The second and third items are so SO ORDERED?
similar that some courts consider them to
he the same exception. Cargo Partrzcr, 352 SD-N-Y·»2OO4·
pid 31:45 IL 3_ Sands Bros & Co., Ltd. v. Ettinger
Not Reported in F.Supp.2d, 2004 WL 541846
A de facto merger occurs when a transaction is a (SDN-Y-)
merger in substance it not in form. Cargo Partner,
352 F.3d at 46. To lind that a do 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 coritimttzy 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 or the doctrine of de facto
merger, Id,
There was no de facto merger of Sands with
Bliiestone. 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. Bluestone owners
did not receive any stock in Sands. in addition,
under the terms of the Purchase Agreement, Sands
did not acquire Bluestones liabilities. Moreover,
© 2007 Thomson/West. No Claim to Orig. U.S. Govt. Works.
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