2007 NY Slip Op 30168(U)
March 12' 2007
Supreme Court' New County
Docket Number: 0107245
Judge: Joan A. Madden
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publication.
JOAN A. MADDEN J.:'
Petitioner Ian Scott-Dunne ("Scott-Dunne") moves' by order to show
cause' for an order pursuant to CPLR 7503(b) permanently staying an arbilralion proceeding commenced by
respondent Joseph T.J. Slewart ("Stewart") bcfore the National Associalion of Secuiitics
Dealers' Inc. ("NASD") on the grounds that (i) he did not agree to arbitrate and is not subject to
arbitration under the NASD Code of Arbitration and Procedures' and (ii) the arbitrators do not
have jurisdiction over claims decided against public policy. Scott-Dunne also seeks
sanctions against Stewart for-improperly joining him in the arbitration. Stewart opposes
the petition' which is granted to the extent of permancntly staying the arbitration against Scott-Dunne.
Scott-Dunne is the majority owner' President and CEO of Stellar Financial' Inc.' which provides software and othcr scrvices to non-prorit organizations' donor advised fund programs and charitablc endowment programs. Stellar Financial is not a broker-dealer and is not rcgistered with the NASD. Scott-Dunne is not registered with the NASD. Stellar Financial is a wholly-owned subsidiary of Stcllar-McKim' LLC' which is a holding company' McKim Capital ("Mcfim")' which is a brokddealer registered with the NASD' is also a wholly owned subsidiary of Stellar-McKim.' Scott-Dunne is a managing member of Stellar-McGm and owns a 31.4% interest in Stellar-McKim. At issue here is whether any rclationship between Scott- Dunne and/or Slellar Financial and McKirn is sufficient 10 provide a basis for rcquiring Scotl- Dunnc to submit to arbitration before the NASD.
Stewart began working at McKim's offices in Denver' Colorado in January 2004.
According to the affidavit of McLm's Chief Compliance Officer' Jordan L. Loewcr' Stewart's
"duties at that timc were to support the Denver Officc by assisting with vaiious operational
dutics'" and that "beginning in September 2004' respondent began receiving a salary from Stellar
Financial ...." At the end of 2004' Stewart became registered with the NASD. After a
dispute arose regarding the payment of commission to Stewart' Stewart was informed in October
2005' that his services were no longer needed at McKim's offices in Denver. While Stewart alleges
that he was constructively terminated from employmcnt at that time' Scott-Dunne and the
principals of McKim maintain that Stewart's employment ended in December 2005'
aftcr Stewart refused an offer to relocale him to Stellar Financial's offices in Stroudsburg' Pennsylvania.
On January 26' 2006' Stewart filed a proceeding before the NASD againsl McKim and
McKim's principals' James J. Cahill and Robert Taggart' seeking to rccover damages arising out
of McKim's alleged wrongful failure to pay him $343'000 in commissions.
In March 2006' McKim filed a Uniform Termination Notice for Securities Industry Registration ("U-5") form in which it was stated that at thc time of his termination Stewart was
Stellar-McKim is
also
the parent company
of
Stellar Advisors' which is a registercd
investrncnt advisor.
under "internal review
...
regarding
[his]
undisclosed trading
of
firm's
client company's
at
outside broker/dealer against firm and regulatory policy and rule."
On or
about May
9' 2006'
Stewart served
a
second amended statement ofclaim2
alleging
that the
U-5
form contained
false
and defamatory statements
and
was filed in retaliation for his
commencing an arbitration proceeding against McKim and
its
principals. The amended
statement
of
claim added Scott-Dunne as a respondent and alleged that
"U-5
was
filed'
upon
information and belief' at the direction and with approval
of the
principals of
McKirn
and its
parent
and
affiliated companies'" and that "fines should be asscsscd against
Taggart'
Cahill'
Scott-Dunne.
..."
On
May 30'
2006'
Scott-Dunne commenced this proceeding seeking
to
stay thc
arbitration as to him' on the grounds that he is not subject to arbitration' and that statements in
the
U-5 foim are
absolutcly privileged
as
a matter of public policy
so
that their alleged falsity
cannot be arbitrated. Scott-Dunne
also
argued that as there is no basis for asserting claims
against
him
in arbitration' sanctions and attorneys'
fees
should be assessed against Stewart and
his counsel.
By letter dated July
24'2006'
attorneys
for
Stewait sought to
stay
this proceeding
so
that
limited discovery could be sought
in
the NASD arbitration regarding thc propriety of Scott-
Dunne's joinder
in the
arbitration. Scott-Dunne objected
to
the stay. By interim order dated July
27' 2006' this
court granted Stewart's request for
a
stay "to the extent of permitting any
submissions after completion
of
discovery in the arbitration'" denied Scott-Dunne's request for
'It
is unclear from the record whether-
a
first amended stalement
of
claim was filed.
sanctions' and provided
a
briefing schedule for submission
of
papers following discovery.
The
parties subsequently conducted discovery
and
made submissions
based
on such discovery.
There is no dispute that Scott-Dunne did not sign an agrccment to arbitrate. Thus' the
threshold issuc in this proceeding is whether Scott-Dunne is required
to
arbitrate based on the
NASD
Code
of
Arbitration and Procedure and its By-Laws.
Rulc 10101
of
the
NASD
Code
of
Arbitration and Procedure provides' in relevant
part:
10101.
Matters Eligible for Submission
This
Code
of
Arbitration Procedure is prescribed and
adopted pursuant to Article
VU'
Section l(a)(iv)
of
the By-Laws
of
the
Association
for
the arbitration
of
any dispute' claim
or
controversy arising
out of
or in connection with the business
of
any
member
of
the Association' or arising
out of
the employment or
termination
of
employment
of
associated person(s) with any
member..
(a)
between
or
among members;
(b) between
or
among members and associated persons;
(c) between or among members or associated persons and
public customers' or others
....
Rule 10201 (a)
of
the NASD Code
of
Arbitration and Procedure provides'
in
relevant
part:
10201. Required Submission
(a) ...
a
dispute' claim or controversy eligible
for
subniission under
the Rule 10100 Series between or
among
members andor
associatcd persons' andor certain others' arising in connection with
the business of such member(s) or in conncction with the activities
of
such associated persons(s)' or arising out
of
the employment
or
termination of employment
of
such associated person(s) with such
member'
shall
be
arbitrated under this Code' at the instancc
of:
(1) a member against another member;
(2) a
member against
a
person associated with
a
member
or
a
person associated with
a
member against a member; and
(3) a person associatcd with a member against a person associated with a member.
Ai-ticle
I of
the By-Laws of the NASD define an associated person as:
(dd) "person associated with a member" or "associated
person of
a
member" means:
(1)
a natural person who is registered
or has npplicd for registration under the Rules
of
Association;
(2) a
sole proprietor' partner' officer' director
or
branch manager of a
member' or other natural person occupying
a
similar status
or
perfoiming similar functions' or a natural persons engaged in
invcstmcnt banking or sccuritics business who is directly
or
indirectly controlling or controlled by a member.
The veiified petition alleges that Scott-Dunnc is not obligated to arbitrate the disputc with
Stewart
under
these provisions
as
Scott-Dunne
is
not an "associated person"
of a
member and
in
particular' McKim'
and
that Scott-Dunne has never been registered with the
NASD.
It is further
alleged that while Scott-Dunne is the President and
CEO of
Stellar Financial' Stellar Financial is
not a member
of
the
NASD'
and neither Scott-Dunne
nor
Stellar Financial
is
engaged in
invcstmcnt banlung or the securities business. Moreover' it alleged lhat Scott-Dunne is not
a
controlling member
of
Stellar-McKini and exercises no control either directly
or
indirectly ovcr
McKim or its business. It is
also
alleged that Stellar Financial exercises
no
control' directly or
indirectly' over McKim.
In opposition
to
the petition' Stewart argues that based
on
the discovery obtained
in
the
NASD
procccding' including Scott-Dunne's deposition testimony' that Scott-Dunne is required
to arbitrate
as
"an associated person" as dehed under Article
I of
the NASD By-Laws.
Stewart also asserts that Stellar Financial andor Stellar-McKim' acting through Scott-Dunne
personally'
so
dominates and controls McKim' that the corporate veil should be pierced to
require Scott-Dunnc to arbitrate based on McKim's status
as an
NASD member. Alternativcly'
Stewart argues that the
issue
of whether Scott-Dunne
is
amenable to arbitration should be
decided by the arbitrator.
In his supplemental reply' Scott-Dunne asserts that contrary
to
Stewart's characterization'
thc evidence does not provide
a
basis for finding that Scott-Dunne controlled McKim
or
engaged
in
investment banking such that
he is a "person associated
with
a
member'"
or
that
McKim
is
dominated
or
controlled by Scott-Dunne or Stellar Financial
or
Stellar
McKirn
such that the
corporate veil should be pierccd. In support of his position' Scott-Dunne relies on his own
affidavit and those
of
McKim's Chief Compliance Officer' Jordan
L.
Loewer' and McKim's
managing member James Cahill.
On this petition to stay arbitration' the initial inquiry for the court is whether there was an agreement to arbitrate. CPLR 7503; TNS Holdings' Inc. v MKI Sec. Cor-p.' 92 NY2d 335' 339 (1998); Smith Barney Shearson' Inc. v Sacharow' 91 NY2d 39' 45 (1997). As arbilration is contractual by nature' a party cannot be required to arbitrate any dispute that hc has not agreed to arbitrate. Waldron v Goddess. 61 NY2d 181' 183 (1984); a Thomson-CSF' S.A. v American Arbitration Ass'n.' 64 F3d 773' 776 (2d Cir 1995); Clarendon Natl. Ins. Co. v Lan' 152 F Supp2d 506' 5 I9 (SD NY 2001). An agrccment to iirbitrate must be clear' explicit' and unequivocal and must not depend upon implication or subtlety. Waldron v Goddess' 61 NY2d at 183-184; The Harriman Group. Inc. v. Napolitano' 213 AD2d 159' 163 (1" Dept 1995).
The first issue to bc addressed conceins whethcr Scott-Dunne is person associated with McKim' such that hc would be rcquired to arbitrate under- [he rclevant NASD provisions. Stewart contends that under the NASD By-Laws' Scott-Dunne is an "associated person'' as the record shows that Scott-Dunne controls McKim both directly and indirectly' and that Scott-Dunne "engaged in investment banking" by arranging a bridge loan with Vantage Funds' a mutual fund' for Kortec' Inc.' a company for which McKim was raising capital in an investment banking transaction.
In support of its argument that Scott-Dunne controls McKiin' Stewart relies on a BD Form which discloses that Scott-Dunne as an indirect owner of McKim based on his ownership interest in Stcllar-McKim' his position as a managing member of Stellar-McKim and a statement in Loewer's aflidavit that Scott-Dunne was required to write a letter to the NASD to verify that he was not involved in the investment banlung business. It also points to Scott-Dunne's dcposition testimony that McKim was established to perform invcstmcnt banking deals for Stellar Financial' that Stellar-McKim and Stellar Financial paid Mc&m's debts'3 and that while Stewart was cmploycd by Stellar Financial he performed work at McKim's offices.
Although the evidence relied on by Stewart demonstrates the existence of a mutually bcneficial business relationship among Stellar Financial and McKim' as affiliated companies' and their parent Stellar-McKirn' such evidence does not establish Scott-Dunne's control over McKim. Notably' while the BD Form discloses Scott-Dunnc's ownership interest in McKim's parent' Stellar-McKim' it also discloses that Scott-Dunne is not a controlling person at McKirn. Furthermore' it has becn held that a non-member will not he required to arbitrale bascd solely on its corporate affiliation with an NASD member or an ownership interest in a member. See CDC Capital Inc. v. Gershon' 282 AD2d 217 (1" Dept 2001)(staying arbitration as to entities which are not members of the NASD despite their corporate affiliation with a NASD member); Cantor-
'Although Stewart argues that Stellar Financial paid thc debts of McKim' the only evidence of this payment is Scott-Dunnc's testimony that it might have been true "in the early days ." Fitzgerald' L.P. v. PrebQn Securities (USA)' Inc.' 731 A2d 823 (Del. Ch. 1999)(limited partnership not required to submit claims to NASD arbitration bascd on its 99.5% ownership interest of a general partnership that was an NASD mcmber) '
Furthermore' while Scott-Dunne testified that McKim was not profitable in 2005 and that its debts wcre paid by Stellar-McKim' in his affidavit' McKim's President' James Cahill' states that this testimony is incorrect as McKim realized a small profit in 2005' and in support of this statement' submits McKim's auditcd financial statement for 2005. In any event' cvcn if Stcllar- McKim andor Stellar-Financial had paid the debts of McKim' this fact is insufficient to establish Scott-Dunne's control over McKim' particularly given the absence of any evidencc that Scott- Dunne used his personal funds to pay McKim's dcbts or intcrrningled his moncy with that of Stellar-Financial' McKim' or Stellar-McKim. See Amcrican Fucl Cow. v Utah Ener'yy Development Co.' Jnc.' 122 F3d 130 (2d Cir 1997)(holding that evidence was insufficient to show President of corporation dominated or controlled the corporation where there was no evidence that the President used the corporation's funds for personal matters or intcrrningled corporate funds with his own).
In addition' nothing in the record establishes that Scott-Dunnc or Stellar Financial were engaged in the inveslment banking or securities business. First' Scott-Dunne wrote a lettcr to rhe NASD stating that he did not engage in either such activity as managing membcr of McKim's parcnt. Second' evidence that Scott-Dunnc arrangcd for a bndgc loan to obtained by Kortec through a third party' Vantage Funds' to use in its deal with McKim does not requirc a conclusion to the contrary. Notably' while arranging the bridge loan facilitated an investrncnt banking transaction' Scott-Dunne actcd as an intermediary and was not directly involvcd in loaning the money or in the underlying transaction. SCc Slade v. Metropolitan Life Ins. Co.' 231 AD2d 467'469 (1" Dept 1996)(noting that "engaged in the investment banktng or securities business" as defined under the NASD by-laws "connotes some actual participation in the securities business and not just some tangential connection.").
In any cvcnt' cvcn if it could be argued that the arranging for the bridge loan constituted engaging in investment banking' in the absence of evidence that Scott-Dunne controlled McKim' Scott-Dunnc would not be required to arbitrate under the NASD definition of an "associated person" contained in Article 1 (dd) ol' its B y - l a w .
Stewart also argues that Scott-Dunne is an associated person since he "is a sole proprietor' partner' officer' director or branch manager of a member [i.e. McKim]' or other natural person occupying a similar status or perlorming similar functions." This argument is without merit as the record is dcvoid of any evidence that Scott-Dunne held any position at McKi m'
Accordingly' Scott-Dunne is not an associated person as defined under the NASD by- laws and cannot be compelled to arbitrate.
Equally unavailing is Stewart's argument that Stcllar Financial and StelliwMcKim'
Stewart belated submits a 2004 SEC filing for Vantage Funds' thc third party that loaned the funds to Kortec to facilitate its deal with McKim. The filing indicates that Stellar Financial serves as thc distributor of shares for Vantage Funds' that McKim receives a fee based on the total assets of Vantage Fund' and that Stellar Financial provides administrative serviccs for Vantage Funds and receives a fee based on the total assets of Vantage Fund. The filing also indicatcs that McKim sham an office address with Stellar Financial in Stroudsberg' PA. whcn the procecding was submitted in January 2007. In any event' the infoimation in the filing does not cieinonstrate that Scott-Dunne controlled McKim but' rathcr' further evidences the mutually beneficial relationship between Stellar Financial and McKim.
The court will not consider the 2004 filing' which should havc bcen available to Stewart through Scott-Dunne' so dominated and controlled McKim that the corporate veil should be pierced' and Scott-Dunne required to arbitrate based on McKirn's status as a member of the NASD. "Those seelung to pierce the corporate veil ... bear a hcavy burden of showing that the corporation was dominated as to the transaction attackcd and that such domination was the instrument of fraud or otherwise resulted in wrongful or cquitable consequences." TNS Holdings' Inc. v MKI Sec. Coin' 92 NY2d at 339' citing Morris v New YQrk State Dept. of Taxation and -' Fin I 82 NY2d 135' 143-144 (1993).
In this case' evidence that Stewart worked at McKirn's offices while employed by Stellar Financial' that Stellar-McKim guaranteed payment of McKim's debts' and agreed to pay certain of McKim's expenses is insufficient to satisfy this hcavy burden. American Fucl Cow. v Utah Eneiw Dev. Co.' Inc.' 122 F3d at 135 (cvidcncc that Prcsident of corporation personally paid the corporation's expenscs and guarantccd its loans was insufficient to justify piercing the coiporatc veil) ' Notably' there is no evidence that the three corporations at issue ignored corporate formalities. Instead' the record shows that the corporations maintained their distinct identities and that McKim and Stellar Financial had different managing members. Furtherrnorc' cvidence showing that Scott-Dunne was involved' along with McKim's principals' in decisions regarding Stewart's cmployment is inadcquate to dcmonstratc that Scott-Dunne controlled or dorninatcd McKim' paiticularly as Stewart was paid by Stellar Financial.
Finally' contrary to Stewart's alternative argument' as the issue of whether Scott-Dunne is subject to arbitration can be determined as a matter of law' it is for the court and not thc arbitrator to decide. Intern'l Forwarders' Inc. v. Meyer' 164 AD2d 541 (1" Dept 199l)(factual issue regarding CDC Capital Inc. v. Gershon' 282 AD2d 217; compare Schenkers whether arbitration agreement was terminated is for the arbitrator to decide).
As Scott-Dunne is not subjcct to arbitration' the court need not reach Scott-Dunne's argument that the claims against him are not arbitrable since the statements in U-5 are absolutely privilegcd undcr New York's public policy.5
Thus' pursuant to CPLR 7503 (b)' Scott-Dunne is entitled to an order permanently staying the arbitration that Stewart has dcmanded against him. Accordingly' it is hereby ORDERED that the petition is granted; and it is further ORDERED and ADJUDGED that the arbitration proceeding that respondent Joseph T.J. Stewart IT commenced with the National Association of Sccurities Dealers' Tnc. in New York' New York is permanently stayed as against pctitioner Ian Scott-Dunne. Date: M a r c 9 0 7
'The court notes' however' Justice Kibbic Payne rcjccted this argument when it was made by McKim and its principals in an application lo stay the arbitration brought against thein by Slewart. NY Co.' Sept. 27' 2006). McKim Capital. Inc. v. Stewart' 14 Misc3d 1209(A)' 2006 WL 3833659 (Sup Ct. NY Co., Sept. 27, 2006).
