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Camofi Master Ldc v. Associated Third Party Admini.

United States District Court, N.D. California

June 16, 2016

CAMOFI MASTER LDC, et al., Plaintiffs,


          EDWARD M. CHEN United States District Judge.

         Plaintiffs CAMOFI Master LDC ("CAMOFI") and CAMHZN Master LDC ("CAMHZN") (collectively, "CAM") have filed suit against multiple defendants, including Associated Third Party Administrators ("ATPA") and Richard E. Stierwalt. ATPA has filed cross-claims against Mr. Stierwalt. Currently pending before the Court is Mr. Stierwalt's motion to compel arbitration. Mr. Stierwalt moves to compel arbitration of ATPA's cross-claims against him. He also moves to compel arbitration of two of the claims asserted against him by CAM. Having considered the parties' briefs and accompanying submissions, the Court hereby GRANTS in part and DENIES in part the motion to compel. More specifically, ATPA's claims shall be arbitrated, but not CAM's.

         I. DISCUSSION

         A. ATPA's Cross-Claim

         In its cross-claim, ATPA alleges that Mr. Stierwalt was formerly ATPA's CEO and director. See CC ¶ 3. According to ATPA, if CAM's

allegations [against ATPA] are proven, those claims would in turn establish claims in favor of ATPA against Stierwalt personally, in both his capacity as an officer and a director of ATPA. If [CAM's] allegations are proven, they would establish that [Mr.] Stierwalt breached his duties to ATPA by engaging in self-dealing, ignoring conflicts of interest and colluding with other named Defendants as outlined in the Complaint. [CAM's] allegations may also establish that [Mr.] Stierwalt exceeded his authority as an officer of ATPA during the relevant time period with regard to the negotiation and handling of the Notes and the transactions leading up to the execution of the Notes all of which caused and continues to cause substantial financial and reputational harm to ATPA. For these reasons, if [CAM's] allegations are proven, [Mr.] Stierwalt must be held personally liable for any and all damages he caused to ATPA vis a vis any judgment awarded to [CAM] in this litigation.

CC ¶ 8.

         In his motion, Mr. Stierwalt argues that the entirety of ATPA's cross-claim is subject to arbitration based on an employment agreement that he entered into with United Benefits and Pension Services, Inc. ("UBPS"), a company affiliated with ATPA. See Stierwalt Decl., Ex. A (Emp. Agmt., Recital A) (reciting that ATPA is a wholly-owned subsidiary of UBPS). That agreement specifically provided that Mr. Stierwalt would be an executive officer and director for not only UBPS but also ATPA. A copy of the employment is attached to the Stierwalt declaration as Exhibit A. The employment agreement reflects that UBPS "desires to retain [Mr. Stierwalt] as an executive officer and director of [UBPS] and its present or future Affiliates . . ., including, without limitation, [ATPA], a California corporation and a wholly-owned subsidiary of [UBPS]." Emp. Agmt., Recital A (emphasis added). The agreement further provides that it shall be governed by New York law and that "[a]ll disputes relating in any way to this Agreement shall be resolved exclusively through arbitration conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association as then in effect." Emp. Agmt. ¶ 9(F) (emphasis added).

         According to Mr. Stierwalt, based on the above provisions in the employment agreement, a New York district court has already determined that any employment-related dispute between him and ATPA is subject to arbitration, and issue preclusion prevents this Court from reconsidering ATPA's argument to the contrary. In response, ATPA concedes the New York court's ruling but asserts that no preclusion can apply at this juncture because it is currently appealing the district court's judgment to the Second Circuit (and part of that appeal concerns the issue of whether ATPA is bound by the arbitration provision).

         Because this Court is presented with the question of what preclusive effect to give to a federal court judgment, federal common law applies. See Taylor v. Sturgell, 553 U.S. 880, 891 (2008) (stating that "[t]he preclusive effect of a federal-court judgment is determined by federal common law"); cf. Migra v. Warren Cit Sch. Dist. Bd. of Educ., 465 U.S. 75, 81 (1984) (stating that "a federal court must give to a state-court judgment the same preclusive effect as would be given that judgment under the law of the State in which the judgment was rendered"). Under the federal common law, where a federal court judgment is based on diversity jurisdiction (as here), a court must look to the rules of preclusion of the state where the court that rendered the judgment sat. See Semtek Int'l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 508-09 (2001) (stating that, where there is a federal judgment arising from diversity jurisdiction, "the federally prescribed rule of decision [is that] the [preclusion] law that would be applied by state courts in the State in which the federal diversity court sits" governs, except where "the state law is incompatible with federal interests"); see also Taylor, 553 U.S. at 891 n.4 (stating that, "[f]or judgments in diversity cases, federal law incorporates the rules of preclusion applied by the State in which the rendering court sits" except where "the state law is incompatible with federal interests"); Q Int'l Courier Inc. v. Smoak, 441 F.3d 214, 218 (4th Cir. 2006) (holding that, under Semtek, the preclusive effect of a federal court's diversity judgment is controlled by the law of the state in which the federal court sat).

         In the instant case, the federal court judgment was issued in New York. ATPA has cited authority indicating that, under New York state law, "res judicata applies where . . . there has been a final disposition the merits from which no appeal has been taken." Jacobson v. Fireman's Fund Ins. Co., 111 F.3d 261, 268 (2d Cir. 1997). But the issue before the Court is not res judicata but rather collateral estoppel (i.e., whether ATPA is barred from re-arguing the issue as to whether, as a nonsignatory to the employment agreement, it can be bound by the arbitration agreement contained therein). "There is authority in New York that collateral estoppel may apply to a lower court decision pending appeal, " although "there are many New York cases suggesting caution in applying preclusion in such situations." Indus. Risk Insurers v. Port Auth., 493 F.3d 283, 288 n.3 (2d Cir. 2007); see also Law Enforcement Officers Union v. State by Seide, 647 N.Y.S.2d 916, 920 n.5 (1996) ("The doctrine of collateral estoppel or issue preclusion operates where there has been a final judgment on the merits, and may be used as a basis for collateral estoppel even though an appeal is pending. However, the doctrine is a flexible one and the court is not required to automatically apply it even where formal prerequisites are met."). "[T]he majority view in New York is that even the possibility of appeal from a final order does not alter the collateral estoppel effect of that order under New York law." Access 4 All, Inc. v. Trump Int'l Hotel & Tower Condo., No. 04-CV-7497 (KMK), 2007 U.S. Dist. LEXIS 13560, at *13 n.5 (S.D.N.Y. Feb. 27, 2007).

         In light of the above authority, the Court finds that collateral estoppel is a bar to ATPA's position that it cannot be compelled to arbitration because it was not a signatory to the employment agreement. However, even if preclusion could not apply because of the pending appeal, ATPA would fare no better. That is, the Court agrees with the merits of the New York court's conclusion that ATPA is subject to arbitration, even though it is not a signatory to the employment agreement.

         In Arthur Andersen LLP v. Carlisle, 556 U.S. 624 (2009), the Supreme Court made clear that "state contract law regarding the scope of agreements (including the question of who is bound by them)" applies even in cases governed by the Federal Arbitration Act ("FAA"). Id. at 630. Therefore, even if this case is governed by the FAA, the Court still looks to state law to see whether ATPA, as a nonsignatory, can be compelled to arbitrate. As to which state law is applicable, the employment agreement between Mr. Stierwalt and UTPA provides that New York state law governs. See Emp. Agmt. ¶ 9(F) ("This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed in that state, without regard to any of its principles of conflicts of laws or other laws that would result in the application of the laws of another jurisdiction.").

         Under New York law, "[a]rbitation is a matter of contract grounded in agreement of the parties, " and so "nonsignatories are generally not subject to arbitration agreements." Matter of Belzberg v. Verus Invs. Holdings Inc., 21 N.Y.3d 626, 630 (2013) (internal quotation marks omitted). However, "under limited circumstances nonsignatories may be compelled to arbitrate." Id. For example, "[u]nder the direct benefits theory of estoppel, a nonsignatory may be compelled to arbitrate where the nonsignatory knowingly exploits the benefits of an agreement containing an arbitration clause, and receives benefits flowing directly from the agreement." Id. at 631 (internal quotation marks omitted). There is a distinction, however, between a direct benefit and an indirect one. "Where the benefits are merely indirect, a nonsignatory cannot be compelled to arbitrate a claim. A benefit is indirect where the nonsignatory exploits the ...

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