Opinion
No. 05 Civ. 4631 (LTS).
June 29, 2005
MEMORANDUM ORDER
This matter arises from a demand for arbitration served by Respondent Robert J. Parnell ("Parnell") seeking to arbitrate claims relating to the termination of his employment with Petitioner Tremont Capital Management Corp., f/k/a Tremont Investment Management Inc. ("Tremont Canada") and certain transactions involving Tremont Canada and Tremont Capital Management, Inc., f/k/a Tremont Advisers, Inc. ("Tremont US"). Petitioners Tremont Canada, Tremont US, Barry Colvin ("Colvin"), and Barry Schulman ("Schulman") responded to Parnell's arbitration demand with an application in New York state court for a preliminary injunction staying the arbitration as to Colvin, Schulman and Tremont US. Parnell then removed the case to the United States District Court for the Southern District of New York and cross-moved to compel arbitration against Colvin, Schulman and Tremont US.
The Court rendered an oral opinion and issued an order resolving all but one aspect of the application on June 1, 2005. The Court reserved decision as to whether arbitration of the derivative claims Parnell has asserted on behalf of Tremont Canada should be stayed or compelled, pending further submissions by Parties on the issue.
BACKGROUND
As of June 1, 2005, the record before the Court reflected that Tremont Canada is a Canadian corporation, incorporated under the laws of New Brunswick. It was undisputed that New Brunswick law requires a court proceeding and determination to authorize a derivative claim. It was also undisputed that Parnell had obtained no such authorization. Parnell contended, however, that a provision of New York corporate law, permitting the assertion of derivative actions on behalf of certain foreign corporations, applied to authorize his derivative claims here, on the ground that Tremont Canada did business in New York at the relevant time. Because there had been no evidentiary submissions and little briefing on this point, the Court reserved decision and directed the parties to make supplemental submissions.
In response to Court's invitation, Parnell proffered his own affidavit describing business activities that he conducted on behalf of Tremont Canada. (Declaration of Parnell). According to the Affidavit, Parnell made daily calls and sent daily emails to individuals in New York, including Barry Schulman and Barry Colvin, both of whom were officers of Tremont Canada. (Id. at ¶ 5). He met with and corresponded with potential service providers and investment managers in New York. Parnell asserts that he frequently traveled to New York (10-20 times a year) for the purposes of conducting meetings with Tremont Canada, its clients, and Tremont US. (Id).
Petitioners tendered two affidavits by Barry Schulman. In the first affidavit, Schulman states that, from Tremont Canada's inception in 1998 to the present, the individuals responsible for its day-to-day operations have resided in Canada. (Supp. Affd. Of Schulman ¶ 6-7). While Tremont Canada is a subsidiary of Tremont US, it is intended to be an autonomous entity, distinct from its parent. (Id. at ¶ 4). Barry Schulman and Barry Colvin are officers of Tremont US who live and work in New York. (Id. at ¶ 17-8). They are also officers of Tremont Canada but, according to Petitioner, neither is actively involved in Tremont Canada's affairs. (Id. at ¶ 1, 17, 19).
In the second affidavit, Schulman asserts that Tremont Canada does not have any New York based offices, clients, customers, or service providers. (Decl. of Schulman ¶¶ 4, 16-7). "[A]ll the support and assistance that Tremont US provided Tremont Canada was with respect to the Canadian marketplace. None of Tremont US's dealings with Tremont Canada were for the purpose of doing business in New York, soliciting clients in New York, or attempting to gain any sort of presence here." (Id. at ¶ 10).
DISCUSSION
Under Section 1319 of the New York Business Corporation Law ("NYBCL"), a derivative claim can be brought on behalf a foreign corporation, not incorporated in New York, only if that corporation is "doing business" in the state. See N.Y. Bus. Corp Law § 1319 (McKinney 2003). Courts have defined "doing business" as activities that are "so systematic and regular as to manifest continuity of activity in the jurisdiction." A corporation's activities that are "merely incidental to its business" do not, however, rise to the level of "doing business." See Maro Leather Co. v. Aerolineas Argentinas, 617 N.Y.S.2d 617, 619 (1st Dep't 1994) (internal quotation marks omitted).
The Court finds that Petitioners have demonstrated a likelihood of success on its contention that Respondent's derivative claims are not arbitrable. Petitioners proffer that Tremont Canada does not have offices in New York, any bank accounts located in New York, or a New York telephone number. (Decl. of Schulman ¶ 4). Additionally, they contend that the company "does not have nor did it have at any time . . . any New York-based clients and/or customers," and point out that the company is registered with the Ontario Securities Commission, not the Securities and Exchange Commission or any other United States regulatory agency. (Id. at ¶¶ 4, 16).
The contacts upon which Parnell relies, namely daily telephone calls to Tremont US, 10-20 visits to New York conducting meetings with Tremont US including, daily emails and other written correspondence to representatives of Tremont US, correspondence with unnamed investment managers and other employees of Tremont Canada (Declaration of Parnell ¶¶ 5-7), even in the aggregate, do not rise to the level of "doing business" within the meaning of NYBCL. Nor does the fact that officers of a foreign corporation live in New York subject the corporation to New York law. Stark v. Howe Sound Co., 252 N.Y.S. 233, 236 (1931); aff'd 234 App. Div. 904, 254 N.Y.S. 959. Accordingly, because derivative claims do not arise from the Shareholders' Agreement, are not authorized under Canadian law, and have not been shown to be within the ambit of NYBCL seciton 1319, Petitioners are entitled to injunctive relief.
"The general standard for issuing a preliminary injunction requires that the movant show (a) irreparable harm and (b) either (1) likelihood of success on the merits or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief." Maryland Casualty Co. v. Realty Advisory Bd. on Labor Relations, 107 F.3d 979, 984 (2nd Cir. 1997) (internal quotation marks omitted).
Here, the facts warrant issuance of a preliminary injunction prohibiting arbitration of Respondent's derivative claims. The Petitioners are likely to succeed on the merits of their claim that Parnell's derivative claims are not currently arbitrable, and the Court finds that irreparable harm would ensue from a requirement that the companies litigate claims asserted by a person lacking standing to pursue them.
CONCLUSION
Accordingly, IT IS HEREBY ORDERED, pursuant to Rule 65 of the Federal Rules of Civil Procedure, that Respondents, and all parties working in concert with Respondents, be and hereby are preliminary enjoined and restrained from proceeding with the arbitration of claims 7 8 asserted against Petitioner Tremont Canada in Respondents' April 15, 2005, Demand for Arbitration.
SO ORDERED.