Citadel Servicing Corp. v. Castle Placement, LLC

431 F.Supp.3d 276

CITADEL SERVICING CORPORATION , Plaintiff,

v. CASTLE PLACEMENT, LLC , Castle Placement Group, LLC, Kenneth Margolis, and Richard Luftig, Defendants.

19 Civ. 3212 (KPF)

United States District Court, S.D. New York.

Signed December 19, 2019

Michael R. Tein, T. Omar Malone, Tein Malone, PLLC, Coconut Grove, FL, for Plaintiff.

James William Halter, Rasco Klock Perez & Nieto LLC, New York, NY, for Defendants.

OPINION AND ORDER

KATHERINE POLK FAILLA, District Judge:

Plaintiff Citadel Servicing Corporation ("Citadel") entered into a contract (the "Placement Agreement") with non-party StoneCastle Securities, LLC ("StoneCastle"). The Placement Agreement contained an arbitration provision (the "Arbitration Provision") requiring that Citadel and StoneCastle "and/or any of their agents" arbitrate their disputes with the Financial Industry Regulatory Authority ("FINRA"). Defendants in this action — corporate defendants Castle Placement LLC and Castle Placement Group, LLC (together, "Castle"), and individual defendants Kenneth Margolis and Richard Luftig (together with Castle, "Defendants") — filed a statement of claim with FINRA seeking to arbitrate a dispute about monies ostensibly owed to them for services provided under the Placement Agreement. After initially questioning Castle's right to enforce the Arbitration Provision, FINRA allowed Castle, Luftig, and Margolis to proceed in arbitration. Citadel then filed the instant action seeking a declaratory judgment that Defendants could not enforce the Arbitration Provision. Additionally, Citadel moved for a preliminary injunction enjoining Defendants and FINRA from proceeding with the arbitration. Defendants then cross-moved for a court order to compel arbitration. For the reasons explained below, Citadel's motion is denied and Defendants' motion is granted.

BACKGROUND¹

A. Factual Background

Citadel is a lender and servicer of non-prime home mortgage loans that is based in Irvine, California. In October 2011, Citadel entered into the Placement Agreement with StoneCastle. (Tein Decl. ¶ 2, Ex. A). Under the Placement Agreement, Citadel appointed StoneCastle to act for one year as its "exclusive agent ... [for] soliciting potential investors to make investments" in Citadel. (Compl., Ex. A at 1).

Paragraph 18 of the Placement Agreement states:

This Agreement and any claim or dispute of any kind or nature whatsoever arising out of, or relating to, this Agreement or the Placement Agent's engagement hereunder, directly or indirectly (including any claim concerning services provided pursuant to this Agreement), shall be governed and construed in accordance with the laws of the State of New York, Borough of Manhattan. Any rights to trial by jury with respect to any claim, action or proceeding, directly or indirectly, arising out of, or relating to, this Agreement or the Placement Agent's engagement hereunder are waived by the Placement Agent and the Company, on its own behalf and on behalf of Newco. Notwithstanding anything to the contrary contained herein, the parties hereby agree to the terms of the Arbitration of Controversies section included in Schedule IV herein.

(Compl., Ex. A at ¶ 18). Schedule IV to the Placement Agreement, entitled "Arbitration of Controversies," states:

This Agreement contains a pre-dispute arbitration clause. By signing an arbitration agreement the parties agree as follows:

(A) All parties to this Agreement are giving up the right to sue each other in court, including the right to a trial by jury, except as provided by the rules of the arbitration forum in which a claim is filed.

(B) Arbitration awards are generally final and binding; a party's ability to have a court reverse or modify an arbitration award is very limited.

(C) The ability of the parties to obtain documents, witness statements and other discovery is generally more limited in arbitration than in court proceedings.

(D) The arbitrators do not have to explain the reason(s) for their award.

(E) The panel of arbitrators will typically include a minority of arbitrators who were or are affiliated with the securities industry.

(F) The rules of some arbitration forums may impose time limits for bringing a claim in arbitration. In some cases, a claim that is ineligible for arbitration may be brought in court.

(G) The rules of the arbitration forum in which the claim is filed, and any amendments thereto, shall be incorporated into this Agreement.

[Citadel] and StoneCastle agree that all controversies between [Citadel] and StoneCastle and/or any of their agents arising out of or concerning this Agreement, the services provided hereunder, or any related matter shall be determined by arbitration in accordance with the rules of the Financial Industry Regulatory Authority (FINRA). Any such arbitration proceeding shall be held in the Borough of Manhattan in The City of New York. The award of the arbitrator or a majority of the arbitrators shall be final. Judgement on the award rendered may be entered in any state or federal court having jurisdiction.

Applicable Law; Jurisdiction; Jury Waiver

This Agreement shall be governed by and construed in accordance with the laws of the State of New York. Any claim or action arising under this Agreement and not subject to arbitration in accordance with this section may be brought in the state or federal courts located in the Borough of Manhattan in The City of New York and [Citadel] hereby irrevocably consents to and accepts the exclusive jurisdiction of such courts. [CITADEL] HEREBY WAIVES THE RIGHT TO A JURY TRIAL IN ANY SUCH ACTION AND UNDERSTANDS THAT SUCH WAIVER IS A CONDITION TO STONECASTLE'S ACCEPTANCE OF THIS AGREEMENT.

(Id. at Schedule IV).

On October 26, 2018, Castle filed a statement of claim (the "Statement of Claim") against Citadel with FINRA. (Tein Decl. ¶ 8; Tein Reply Decl., Ex. 1). In relevant part, the Statement of Claim outlined the bases for Castle's entitlement to bring the FINRA arbitration against Citadel. (See Tein Reply Decl., Ex. 1). In this regard, Castle explained that the Arbitration Provision "itself explicitly includes StoneCastle's agents, which includes Castle, and the [Placement] Agreement bound StoneCastle's ‘successors, assigns, and personal representatives,’ which also includes Castle — Castle was a wholly-owned subsidiary of StoneCastle Partners, and acted through StoneCastle at the time." (Id. ).

Castle then explained the evolution of StoneCastle Placement Advisors, LLC into Castle Placement Group, LLC:

From 2009 through 2015, StoneCastle Placement Advisors, LLC (currently named Castle Placement Group, LLC) had an agreement to provide its services through StoneCastle Securities, LLC, an entity registered with FINRA. During that time period, StoneCastle Securities held the FINRA licenses of Mr. Luftig and Mr. Margolis. In 2015, Castle Placement, LLC registered with FINRA and, from that point through the present, Castle has held the licenses of Mr. Luftig and Mr. Margolis.

In 2011, Citadel asked Castle to assist it in soliciting the investors for the financing it sought. Mr. Luftig and Mr. Margolis agreed to do so.

On or about October 25, 2011, Citadel signed an agreement with StoneCastle Securities, LLC for Castle to provide such services (the "Agreement"). The Agreement is attached hereto as Exhibit A. Pursuant to the Agreement, Citadel retained StoneCastle Securities, acting through Castle, to be the exclusive placement agent for Citadel. As the exclusive placement agent, Citadel agreed to compensate StoneCastle if an investment occurred regardless of whether StoneCastle was involved in finding the particular investor.

Castle, through Mr. Luftig and Mr. Margolis, performed all services requested by Citadel pursuant to the Agreement. In fact, Castle had over 1,000 communications with prospective investors by meeting, phone and/or email. As a result of Castle's efforts, at least 118 qualified institutional investors (including Seer Capital — one of the ultimate investors — and several of the largest institutional investors in the world) were interested in the transaction ....

While described as compensation to StoneCastle Securities, LLC, the parties understood that Castle, through Mr. Luftig and Mr. Margolis, would be performing the work and would be entitled to compensation. As such, the Agreement explicitly requires that notices under the Agreement be delivered to Mr. Luftig. In fact, the Agreement specifically stated that any rights, duties and obligations thereunder, "shall inure to the benefit of and be binding upon the successors, assigns and personal representatives of each of the parties hereto." (Agreement at ¶ 16). Castle, Mr. Luftig, and Mr. Margolis are such personal representatives.

(Tein Reply Decl., Ex. 1 (emphasis in original)).

As further evidence that Citadel and StoneCastle understood the Arbitration Provision to include Castle, the Statement of Claim explained that the signatories to the Placement Agreement

included a broad indemnification provision which states: "[Citadel] agrees to indemnify, or cause Newco to indemnify, on a joint and several basis, the Placement Agent, any controlling person of the Placement Agent and each of their respective directors, officers, employees, Agent, affiliates and representatives (each, an ‘Indemnified Party’) and hold each of them harmless against any and all losses, claims, damages, expenses, liabilities, joint or several (collectively, ‘Liabilities’) to which the Indemnified Parties may become liable, directly or indirectly, arising out of, or relating to, the agreement to which this Schedule I is attached (the ‘Agreement’) or the Placement Agent's services thereunder ..." (Agreement, Schedule I at 11 (emphasis added)).

(Tein Reply Decl., Ex. 1 (emphasis in original)).

In addition to addressing arbitrability issues, the Statement of Claim also summarized the merits of Castle's claim. In brief, Castle alleged that Citadel had closed a...