Citadel Servicing Corp. v. Castle Placement, LLC
Posted on Categories Court Decisions, Securities Arbitration

By Jill I. Gross

FINRA Arbitrators decide whether claims by non-signatories of an arbitration agreement are arbitrable when the agreement is broadly worded and incorporates FINRA arbitration rules.

Citadel Servicing Corp. vs. Castle Placement, LLC, No. 19-cv-3212 (S.D. N.Y., 12/19/19).

Non-party StoneCastle Securities, LLC (“StoneCastle”), an investment banker, entered into a Placement Agreement with plaintiff Citadel, a lender and servicer of non-prime home mortgage loans, pursuant to which StoneCastle would locate investors for Citadel in exchange for compensation. The Placement Agreement included an arbitration clause, which required Citadel and StoneCastle to arbitrate “all controversies between [them] and/or any of their agents arising out of or concerning this Agreement, the services provided hereunder, or any related matter.” When Citadel refused to pay sums allegedly owed under the Placement Agreement, defendants in this action, non-signatories to the Placement Agreement but who claimed to be either individual agents or corporate alter egos or successors in interest of StoneCastle, filed a FINRA arbitration claim against Citadel.

FINRA at first declined jurisdiction, since the FINRA claimants were not parties to the arbitration agreement, but, after claimants briefed the matter, FINRA accepted jurisdiction and served the Statement of Claim on Citadel. At a telephonic hearing, the FINRA panel denied Citadel’s motion to dismiss or stay the arbitration for lack of jurisdiction. Citadel then filed the current action, seeking declaratory and injunctive relief from the district court, including an order declaring the non-signatories’ claims were not arbitrable at FINRA. The Court denies Citadel’s motion for a preliminary injunction and, instead, issues an order compelling arbitration.

The Court concludes that the broad language of the arbitration provision, as well as the agreement’s incorporation by reference of FINRA arbitration’s rules, served to delegate the arbitrability question to the arbitrators, even for the non-signatories. Unmistakable evidence from the language of the arbitration clause confirms that the parties intended the arbitrators to decide the arbitrability of the claims against defendants, as purported agents of StoneCastle. In addition, FINRA Rule 13413 vests authority in the panel “to interpret and determine the applicability of all provisions under this Code [of Arbitration Procedure for Industry Disputes].”

The Court also concludes that the forum selection clause in the Placement Agreement (providing for jurisdiction in state or federal courts in the City of New York), rather than suggesting the parties wanted a court to decide arbitrability questions, instead applies only to disputes that are not arbitrable. Finally, Citadel’s argues that FINRA’s letter stating it would “continue to process” the case “unless or until [it] receive[s] a court order staying the matter” indicates that “FINRA implicitly recognized that a court should decide arbitrability.” Not so -- the letter is just a “non-controversial statement that FINRA would comply with a court order if Citadel would obtain one.” Thus, the Court grants defendants’ cross-motion to compel arbitration.

(J. Gross: The opinion subtly criticizes FINRA for accepting claimants’ (defendants in this case) jurisdictional argument pre-Answer without giving respondent an opportunity to oppose that contention. However, FINRA was just following its own rules and allowing the case to proceed to appointment of a panel so the panel could consider the jurisdictional argument. The Court more directly critiqued “interim orders” issued by FINRA (presumably by the panel) that directed “Citadel’s compliance with a host of seemingly expensive and time-consuming pre-trial requirements, including paying its forum fees and the hourly fees of three arbitrators, answering, complying with discovery, attending pretrial telephone hearings, preparing for the final hearing, and flying witnesses and counsel to the final hearing at FINRA’s offices in New York.” Recent experiences suggest that FINRA might consider coming up with a better process for panels to resolve arbitrability challenges before a party has to incur the full expense of a complete proceeding for a claim that might not even be arbitrable.)

(SOLA Ref. No. 2020-04-02)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis. 

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