Yip v. Grant Thornton LLP (In re Providence Fin. Invs., Inc.)
Yip v. Grant Thornton LLP (In re Providence Fin. Invs., Inc.)
Opinion of the Court
THIS MATTER came before the Court at a hearing on September 11, 2018 ("Hearing") upon the Motion to Compel Arbitration and Stay Pending Adversary Proceeding ("Motion") [ECF No. 10] filed by Cadwalader, Wickersham & Taft LLP ("Cadwalader") and the Response to the Motion ("Response") [ECF No. 22] filed by Plaintiff, Maria Yip, as Chapter 7 Trustee ("Trustee") for the jointly administered bankruptcy estates of Providence Financial Investments, Inc. ("Providence Financial") and Providence Fixed Income Fund, LLC ("Providence Fund" and, together with Providence Financial, the "Debtors"). The Court having carefully reviewed and *887considered the Motion, Response, Court file,
I. FACTUAL BACKGROUND
On August 21, 2018, Trustee filed her Amended Complaint against Defendants, Cadwalader, Grant Thornton LLP ("GT"), and Greene Espel, PLLP ("GE") (collectively the "Defendants") relating to pre-petition professional services that Defendants provided to Debtors ("Complaint") [ECF No. 7]. As against all Defendants, the Trustee asserts a claim for aiding and abetting fraud on account of such pre-petition services. The Trustee also seeks an accounting and turnover of Debtors' property allegedly still in Defendants' hands. No other claims are asserted against Cadwalader. The allegations in the Complaint, summarized below, are assumed as true solely for purposes of the Court's analysis.
The Debtors were part of a global Ponzi scheme that from 2010 to 2016 raised over $64 million in the United States and $150 million worldwide. Id. at ¶¶ 23, 37. Antonio Buzaneli ("Buzaneli"), who has since pled guilty to thirteen counts of criminal misconduct, was the Chief Executive Officer ("CEO") of the Debtors, as well as the CEO of numerous affiliates of the Debtors in the United States, and throughout the world, including London, Hong Kong, Taipei, Shanghai, Suzhou, Singapore, Cayman Islands, Brazil, Guernsey, Canada, Istanbul, Dubai, and Panama (collectively the "Providence Entities"). Id. at ¶¶ 24, 31. The Providence Entities commingled funds and were operated without corporate formalities such that their independent identities were non-existent and they were merely alter egos of the Debtors. Id. at ¶¶ 28, 97. The Providence Entities recruited investors to purchase promissory notes, the proceeds of which would be used to provide working capital in the form of intercompany loans to various businesses in Brazil. Id. at ¶¶ 3, 49. The Brazilian companies would then use the intercompany loan proceeds to acquire receivables or other financial instruments. Id. at ¶ 49. In total, the Providence Entities promised annual returns of 12% to 13% to the investors through the investments in factoring accounts receivable in the Brazilian businesses. Id. at ¶¶ 3, 49. The investors' funds, however, were instead diverted to other uses, some being used to pay principal and interest payments to old investors (the "Fraud"). Id. at ¶¶ 50, 51.
On January 31, 2016, the U.S. Securities and Exchange Commission ("SEC") served several of the Providence Entities with an SEC Subpoena requesting various financial, accounting, and tax records, as well as documentation on the investor promissory notes. Id. at ¶ 60. The SEC also requested a presentation addressing the details on the transactions involving the Providence Entities. Id. at ¶ 63.
In response to the Subpoena, Providence Financial and non-Debtor Providence Entity Providence Global, Inc. ("Providence Global") engaged Cadwalader "in connection with responding to civil subpoenas *888issued to some of the Providence Entities by the U.S. Securities and Exchange Commission." Id. at ¶ 64. On February 1, 2016, in order to document the engagement, Buzaneli, as Chief Executive Officer of Providence Financial and Providence Global, signed an engagement letter with Cadwalader ("Engagement Letter"). Motion at Ex. A. The Engagement Letter, in the section titled "Resolution of Disputes - Mediation and Arbitration" ("Arbitration Provision") provides that
"any dispute arising out of or relating to [Cadwalader's] rendering professional services to you or [Cadwalader's] fees, disbursements, and charges will first be submitted to private, non-binding mediation ...." Engagement Letter at 5. "If resolution through mediation is not achieved, any such dispute will be finally resolved by private, confidential binding arbitration ... [which] will be conducted in New York City ...." Id. "Any issue concerning the extent to which any dispute is subject to arbitration, or concerning the applicability, interpretation or enforceability of any of these procedures shall be governed by the Federal Arbitration Act and resolved by the arbitrators." Id.
In addition, Buzaneli, on behalf of the Providence Entities, also engaged GE and GT, to respond to the Subpoena. Compl. at ¶ 65. In that capacity, GT representatives interviewed Buzaneli and other officers of the Providence Entities regarding their use of investor funds. Id. Trustee alleges that it was during that investigation that GT purportedly learned of the Fraud, and in late February 2016, shared its findings with GE and Cadwalader. Id. at ¶¶ 75, 76.
Pursuant to the Engagement Letter, Cadwalader, together with GT and GE, prepared a PowerPoint presentation, as requested by the SEC, and on March 21, 2016, Cadwalader, GT, and GE made the presentation to representatives of the SEC in Chicago. Id. at ¶¶ 79, 82. The Trustee alleges that the Defendants "took painstaking efforts to omit any references to fraud as they collaboratively refined the PowerPoint presentation" and that because of such efforts, Buzaneli continued to solicit and enroll new investors, continued to transfer funds between the Providence Entities, and continued to utilize the funds for his personal use. Id. at ¶¶ 80, 89; see also Motion at 5.
Two and half months later, on June 7, 2016, the SEC filed a complaint in the United States District Court for the District of Minnesota, against the Debtors and other Providence Entities, alleging violation of various securities laws. Id. at ¶ 86. A month and a half after that filing, Debtors filed separate voluntary petitions for relief under Chapter 7, title 11, United States Code, which cases are being jointly administered.
On August 21, 2018, Trustee filed her Amended Complaint, which asserts the following claims against the Defendants, including Cadwalader: Count I for Aiding and Abetting Fraud ("Aiding and Abetting Claim"), Count VIII for Turnover ("Turnover Claim"), and Count IX for Equitable Accounting ("Accounting Claim") (collectively the "Cadwalader Claims"). Counts II through VII consist of fraudulent transfer counts asserted against only GE.
In its Motion, Cadwalader argues that its Arbitration Provision specifically encompasses the Cadwalader Claims, as they are disputes "arising out of or related to [Cadwalader's] rendering professional services to" Providence Financial pursuant to the Engagement Letter and as such, are subject to binding arbitration pursuant to the Federal Arbitration Act ("FAA") and applicable law. Motion at ¶ 3. Cadwalader also argues in response to the Trustee, that even though Providence Fund was not a signatory to the Engagement Letter, the *889claims asserted by the Trustee on behalf of Providence Fund are arbitrable because Providence Fund's claims against Cadwalader are inextricably intertwined with Providence Financial's claims against Cadwalader. Reply at 3-6.
Trustee opposes Cadwalader's Motion to Compel, arguing that the Arbitration Provision does not apply to the Cadwalader Claims because the Aiding and Abetting Claim is really a tort claim that has no relationship to the Engagement Letter. Response, ECF No. 22, at § 1. The Trustee also argues that there is an inherent conflict between arbitrating the Cadwalader Claims and the underlying purpose of the Bankruptcy Code because sending the Cadwalader Claims to arbitration, while retaining the claims against the remaining Defendants, would be inefficient, risk inconsistent results, and would be too costly to the Trustee. Id. at § 2. Lastly, the Trustee argues that the Court cannot order Providence Fund to arbitrate since it was not a signatory to the Engagement Letter. Id. at 15-16; Response to Motion to Clarify at 3-7. The Court addresses each argument in turn.
II. ANALYSIS
A. The Arbitration Provision is Valid and Enforceable
Under the FAA, written agreements to arbitrate controversies arising out of an existing contract "shall be valid, irrevocable and enforceable."
In Whiting-Turner , the seminal case on enforceability of arbitration agreements in the Eleventh Circuit, the court first looked to whether the parties "entered into a valid arbitration agreement to resolve any and all claims or issues between them." Whiting-Turner ,
The Eleventh Circuit's opinion in JPay, Inc. v. Kobel also recognized the ability of parties to " 'agree to arbitrate 'gateway' questions of 'arbitrability' because 'arbitration is a matter of contract.' "
In the present case, it is clear and unmistakable that Providence Financial and Cadwalader delegated the gateway determinations to the arbitrator ("Gateway Provision"). The Gateway Provision states:
"[a]ny issue concerning the extent to which any dispute is subject to arbitration, or concerning the applicability, interpretation or enforceability of any of these procedures shall be governed by the Federal Arbitration Act and resolved by the arbitrators. "
Engagement Letter at 5 (emphasis added). The parties not only agreed to arbitrate whether they agreed to arbitrate in the first place, but also whether the Arbitration Provision covers a certain controversy.
The Trustee argues that the Gateway Provision only addresses "[a]ny issue concerning the extent to which ... any dispute is subject to arbitration..." Transcript of Hearing, ECF No. 37, p. 12, ll. 22-24 (emphasis added). The term "any dispute," the Trustee continues, must be read within the confines of the first paragraph of the Arbitration Provision, in which the parties agreed to arbitrate "any dispute arising out of or relating to [Cadwalader's] rendering professional services to [Providence Financial]. " Id. at p. 13, ll. 1-7 (emphasis added). Thus, according to the Trustee, since the Cadwalader Claims do not fall under the description of "any dispute arising out of or relating to [Cadwalader's] rendering of professional services to [Providence Financial]," they are similarly not subject to the Gateway Provision. The Court disagrees. If the parties meant to include in the Gateway Provision only "any dispute arising out of or relating to [Cadwalader's] rendering of professional services to [Providence Financial]" they would have so stated. Instead, the parties included the term "any dispute" in the Gateway Provision, without any clarifying language to follow. The Court believes the unequivocal language of the Arbitration and Gateway Provisions allows the arbitrators to decide, inter alia , whether the parties agreed to arbitrate the Cadwalader Claims.
The Trustee also argues that because the Cadwalader Claims include a tort claim, they cannot be referred to arbitration. Response at § 1. The Trustee's argument is unpersuasive. The parties agreed to arbitrate "any dispute arising out of or relating to [Cadwalader's] rendering professional services" to Providence Financial. While the Trustee's Aiding and Abetting Claim may not arise out of the Engagement Letter, it most certainly is related to the Engagement Letter. Cadwalader was engaged to respond to the Subpoena on behalf of Providence Financial, including making a presentation to the SEC on behalf of Providence Financial relating to the Subpoena. Compl. at § 60-62. The Trustee's characterization that the presentation to the SEC and the preparation leading up to presentation somehow allegedly provided "substantial assistance" to the Fraud, does not negate or diminish the simple fact that Cadwalader was still "rendering professional services" to Providence Financial.
The Trustee cited case law to support the argument that an arbitration clause in a contract does not cover a dispute concerning a tort claim, but those cases do involve the type of "gateway provision" discussed herein. In this case, the parties here delegated to the arbitrators the determination of whether a certain dispute is subject to arbitration. Accordingly, the Court refers the issue of whether the Cadwalader Claims are subject to arbitration - to the arbitrators. Rent-A-Center,
B. There is No Inherent Conflict Between Arbitration of the Cadwalader Claims and the Underlying Purpose of the Bankruptcy Code
The Court must determine whether an "inherent conflict" exists between enforcing the Arbitration Provision as to the Cadwalader Claims and the purpose behind the Bankruptcy Code. See Whiting-Turner ,
However, in the case of a core proceeding, the bankruptcy court must "analyze whether enforcing a valid arbitration agreement would inherently conflict with the underlying purposes of the Bankruptcy Code." Whiting-Turner ,
In determining whether a claim is core or non-core, courts are not bound by a plaintiff's characterization and may look beyond the label asserted in the complaint to ascertain the "claim's true substance." McCallan v. Hamm , Case No. 2:11-CV-784-MEF,
*8921. The Aiding and Abetting Claim and Accounting Claim are Non-Core Because They Involve No Rights Created under the Bankruptcy Code and They Could Exist Outside of the Bankruptcy Proceeding
The Trustee's Aiding and Abetting Claim and Accounting Claim against Cadwalader were not created by the Bankruptcy Code and could arise outside of the bankruptcy context. As to the Aiding and Abetting Claim, the Eleventh Circuit has found that "[a]lthough no Florida court has explicitly recognized a cause of action for aiding and abetting fraud, Florida courts have assumed that the cause of action exists." Chang v. JPMorgan Chase Bank ,
As to the Accounting Claim, Florida's Third District Court of Appeal has recognized a cause of action for an accounting when " 'the contract demands between litigants involve extensive or complicated accounts and it is not clear that the remedy at law is as full, adequate and expeditious as it is in equity.' " Bankers Trust Realty, Inc. v. Kluger ,
2. The Turnover Claim as a Non-Core Claim
The Turnover Claim against Cadwalader, as alleged, appears from its title to be core. However, " '[t]he label a party attaches to a claim does not require the court to wear blinders as to that claim's true substance.' " Tomberlin ,
"Courts in the Eleventh Circuit generally follow the majority rule that a debt must be undisputed to be subject to turnover." In re White ,
3. Referring Turnover Claim to Arbitration Does Not Inherently Conflict with the Purpose of the Bankruptcy Code
Even if the Turnover Claim were to be considered a core claim, the Turnover Claim would still be subject to arbitration, absent some inherent conflict between the enforcement of the provision and the Bankruptcy Code. See Whiting-Turner ,
Here, the Trustee contends that Cadwalader "benefited from [its] participation in concealing the Ponzi scheme [by earning] income from professional, accounting, and/or legal fees from the Providence Entities." Compl. at ¶ 94. As pled, the Turnover Claim appears "directly connected to the facts undergirding" the Aiding and Abetting Claim, and the Aiding and Abetting Claim will "rise and fall together" with the Turnover Claim. Harrelson ,
C. Possible Inconsistent Results, Inefficiency, and Costs Do Not Outweigh the Liberal Policy in Favor of Arbitration
The Eleventh Circuit has noted, "[i]f otherwise required, arbitration must be ordered 'even where the result would be the possibly inefficient maintenance of separate proceedings in different forums.' " Telecom Italia, SpA v. Wholesale Telecom Corp.,
The Trustee argues that referring the Cadwalader Claims to arbitration would be inefficient, risk inconsistent results, and would force the Trustee to litigate the Cadwalader Claims "in a distant forum and under unfamiliar rules, at appreciable expense to the estate and with considerable delay." Response at 14. However, these considerations do not outweigh the FAA's clear mandate. The Trustee brought these claims, accepting the risk of enforcement of arbitration. As the Court noted at the Hearing, "if debtors could make agreements which they could not afford to defend, they would emasculate the legal system. If they made a bad deal, that's unfortunate ...." Transcript of Hearing at p. 17, ll. 7-10.
D. Providence Fund Will Not Be Compelled to Arbitrate
The Trustee in this case represents two related but distinctly separate bankruptcy estates, whose cases are being jointly administered, but are not substantively consolidated. The claims by the Trustee are asserted on behalf of each debtor's estate, for the benefit of the creditors of each respective estate. The Trustee argues that regardless of whether the Court orders Providence Financial to arbitrate the Cadwalader Claims, the Court cannot order Providence Fund, a non-signatory to the Engagement Letter, to arbitrate the Cadwalader Claims. Response at 15-16; Response to Motion to Clarify at 3-7. The Trustee relies on Lawson v. Life of the S. Ins. Co. ,
Defendant Cadwalader, on the other hand, seeks to compel arbitration against the non-signatory plaintiff Trustee. Cadwalader cites principles of estoppel as a basis to require arbitration of claims involving nonparties to arbitration agreements, relying on MS Dealer Serv. Corp. v. Franklin ,
While the claims asserted by the Trustee in the Complaint, on behalf of the estate of non-signatory Providence Fund, indeed appear to mirror Providence Financial's claims that are subject to arbitration, and the Court recognizes that arbitrating the Providence Financial claims against Cadwalader without arbitrating the Providence Fund claims may risk inconsistent results, the Court does not find these considerations to be a valid basis to force a party to submit a dispute to arbitration when that party did not intend and agree to arbitrate. See , Seifert v. U.S. Home Corp. ,
E. The Trustee's Claims, on Behalf of the Providence Financial Bankruptcy Estate, Against Cadwalader are Stayed, Pending Arbitration
Cadwalader further seeks a stay of this adversary proceeding, in its entirety, pending arbitration of the Trustee's claims against it in the Providence Financial case. Cadwalader cites the FAA to support its position.
ORDERED AND ADJUDGED that the Motion to Compel is GRANTED IN PART as follows:
1. The Trustee shall initiate arbitration of all claims by and on behalf of the Providence Financial bankruptcy estate against Cadwalader, pursuant to the terms of the Engagement Letter, within thirty (30) days of the entry of this Order.
2. All claims and litigation with respect to the Trustee's claims on behalf of Providence Financial against Cadwalader in this adversary proceeding are STAYED pending the resolution of arbitration.
3. The Expedited Motion for Clarification is DENIED AS MOOT.
ORDERED.
As noted in footnote 1 to the Motion, Cadwalader simultaneously filed an Expedited Motion to Stay the Adversary Proceeding Pending Adjudication of the Motion to Compel ("Motion to Stay") [ECF No. 11]. On September 11, 2018, the Court granted the Motion to Stay, but that parties have sought clarification with respect to the scope of the Court's ruling. On September 12, 2018, Cadwalader filed its Expedited Motion for Clarification of Ruling on the Motion to Stay ("Motion to Clarify") [ECF No. 25], Trustee filed her Response to the Motion to Clarify ("Response to Motion to Clarify") [ECF No. 26], and Cadwalader filed its Reply to the Response to Motion to Clarify ("Reply") [ECF No. 28]. The Court has carefully reviewed and considered these papers as well.
See also , Marcus v. Fla. Bagels, LLC ,
Reference
- Full Case Name
- IN RE: PROVIDENCE FINANCIAL INVESTMENTS, INC., Providence Fixed Income Fund, LLC, Debtors. Maria Yip, as Trustee of Providence Financial Investments, Inc. and Providence Fixed Income Fund, LLC v. Grant Thornton LLP, Cadwalader Wickersham & Taft LLP, & Greene Espel PLLP
- Cited By
- 1 case
- Status
- Published