Opinion
19 Civ. 4355 (VM) (GWG)
04-19-2021
UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. COLLECTOR'S COFFEE INC., et al., Defendants.
REPORT AND RECOMMENDATION
GABRIEL W. GORENSTEIN, UNITED STATES MAGISTRATE JUDGE
This lawsuit was brought by the Securities and Exchange Commission (“SEC”) against Collector's Coffee Inc., d/b/a Collectors Cafe (“CCI”), and Mykalai Kontilai, the founder, President, and Chief Executive Officer of CCI, alleging that the defendants violated federal securities laws by defrauding investors. See Amended Complaint, filed Nov. 4, 2019 (Docket # 134). The parties stipulated to SDJ Investments, LLC, Abode Investments, LLC, and Darren Sivertsen (collectively “Holders”) filing a complaint in intervention in which the Holders seek declaratory relief against CCI, Kontilai, and intervenor-defendant the Jackie Robinson Foundation, Inc. (“JRF”). See Holder's First Amended Complaint in Intervention, filed May 20, 2020 (Docket # 344) (“FACI”).
Before the Court is CCI and Kontilai's motion for judgment on the pleadings of the FACI, or, in the alternative, to stay the case and compel arbitration. For the reasons stated below, the motion for judgment on the pleadings should be denied, but the Holders' claims against defendants Collectors Coffee, Inc. and Mykalai Kontilai should be stayed pending arbitration.
See Notice of Motion, filed June 19, 2020 (Docket # 398); Memorandum in Support, filed June 19, 2020 (Docket # 399) (“Def. Mem.”); Declaration of James Vahl in Support, filed June 19, 2020 (Docket # 400) (“Vahl Decl.”); Memorandum of Law in Opposition, filed July 13, 2020 (Docket # 441) (“Int. Opp.”); Reply in Support of Motion for Judgment, filed July 27, 2020 (Docket # 483) (“Def. Reply”).
I. BACKGROUND
A. Procedural History
The SEC filed this action on May 14, 2019, alleging four schemes to defraud under federal securities laws. See Complaint (Docket # 1). The next day, the SEC made an ex parte application for a temporary restraining order. See Ex Parte Motion for Temporary Restraining Order, filed May 15, 2019 (Docket # 8). The district judge granted that motion the following day. See Temporary Restraining Order, filed May 16, 2019 (Docket # 12) (“TRO”). The order froze the “assets, funds, or other property held by or under the direct or indirect control of Defendants Collectors' Cafe or Mykalai Kontilai . . . wherever located, up to the amount of $46,121,649.68 ....” TRO ¶ I.A.
Among those assets, the TRO froze “original contracts signed by Jackie Robinson, ” id., the famous baseball player. A portion of the Complaint alleged that CCI and Kontilai's representation to investors that “Collectors Cafe owned contracts signed by Jackie Robinson” was false because “Collectors Cafe did not own a 100% interest in the contracts and was not entitled to all proceeds from the sale of the contracts ....” Complaint ¶ 56. The Complaint alleged that, while CCI had “acquired the two baseball contracts signed by Jackie Robinson in or around 2013, ” id. ¶ 57, Kontilai had falsely “represented to at least two investors . . . that their investment was ‘secured' or ‘protected' by the valuation of the Jackie Robinson contracts, ” id. ¶ 58.b. The Complaint alleged that these representations, among others, were false because CCI had executed several “Series A Notes” in 2013 under which “the holders of those notes are entitled to a return of 50% of any net proceeds from the sale of the Jackie Robinson contracts.” Id. ¶ 60. The Complaint also alleged that CCI had executed two “Series B Notes . . . which were payable upon the sale of the Jackie Robinson contracts, ” thereby further reducing CCI's share of the proceeds, and that CCI had additionally “contracted to give three other parties a portion of the proceeds.” Id. As a result, “Collectors Cafe only owned a fraction of the Jackie Robinson contracts, ” and “was only entitled to a fraction of the proceeds from the sale of the contracts . . . .” Id. ¶ 59. These allegations were subsequently repeated in the SEC's amended complaint. See Amended Complaint ¶¶ 62-67.
The Holders first sought to intervene in this case on July 31, 2019. See Motion to Intervene (Docket # 79). The motion papers noted that the motion was unopposed by the SEC, CCI, and Kontilai, id. at 6, and argued that the Holders were entitled to intervene as a matter of right under Fed.R.Civ.P. 24(a) or should be permitted to intervene under Fed.R.Civ.P. 24(b), id. at 4-6. The motion was denied without prejudice for failure to attach the proposed complaint in intervention as required by Fed.R.Civ.P. 24(c). See Memorandum Endorsement, filed Aug. 23, 2019 (Docket # 86).
The motion was then refiled in compliance with Rule 24(c) on September 5, 2019 (Docket # 88). No party opposed the motion and the Court granted it. See Memorandum Endorsement, filed Sept. 6, 2019 (Docket # 89). The Intervenor Complaint named CCI, Kontilai, the Los Angeles Dodgers, and unnamed individuals as defendants. See Intervenor Complaint ¶¶ 9-12, filed Sept. 10, 2019 (Docket # 92). CCI and Kontilai answered the Intervenor Complaint on November 18, 2019. See Docket ## 146-47. Nearly six months later, the Holders were granted leave to amend their complaint to substitute the JRF for the Los Angeles Dodgers as a defendant. See Motion for Leave to File, filed May 1, 2020 (Docket # 309); Order, filed May 15, 2020 (Docket # 333). The instant motion was filed approximately six weeks after that.
B. Allegations of the FACI
The FACI alleges that CCI acquired the Jackie Robinson contracts in 2013. FACI ¶ 22. That same year, CCI “obtained $6 million in loans” from the Holders, which “were secured by both Robinson Contracts and related Certificates of Authenticity, and perfected by the filing of UCC financing statements.” Id. ¶ 24. The FACI alleges that CCI executed 5 “Series A” promissory notes in 2013, and 2 “Series B” notes in 2014, all secured by the contracts. Id. ¶¶ 2527. The Holders acknowledge that, together with CCI, they signed “a Contract Escrow Agreement with Nevada Trust Company.” Id. ¶ 29. The FACI alleges that the loans “came with a one-year period to sell the Contracts, ” but that CCI did not sell them within that time, prompting a series of extensions. Id. ¶ 31. In 2016, the Holders “refused to provide any other extensions, declared a default, and demanded the Contracts be returned to a secure storage facility hired by their escrow agent.” Id. ¶ 32. After this, “the Holders, CCI and Mykalai Kontilai agreed to engage Goldin Auctions, the official auctioneer for the Jackie Robinson Foundation, to auction the contracts.” Id. ¶ 33. An auction was held in 2018 “and the Contracts did not sell.” Id. ¶ 34. Another auction was scheduled, but “Goldin Auctions received correspondence from counsel for the Los Angeles Dodgers, LLC, asserting a potential interest in the contracts, ” and the auction was canceled. Id. ¶ 35. The Holders, CCI, and Kontilai then “entered into an Asset Purchase Agreement for a private sale of the Contracts, ” but the agreement required that the dispute with the Dodgers be resolved before the sale could go forward. Id. ¶ 36. The SEC subsequently filed the instant lawsuit. Id. ¶ 37.
The FACI then recites various allegations in the SEC's amended complaint, along with CCI and Kontilai's denials of those allegations in their answers, and asserts that “an actual and justiciable controversy exists between Holders and the Defendants regarding Holders' rights related to the Contracts . . . .” Id. ¶ 53. Accordingly, the Holders “seek a judicial declaration that they have a first position perfected secured interest in the Contracts that would entitle[] them to receive the first proceeds of any sale of the Contracts until their interest is satisfied.” Id. ¶ 54.
As for JRF, the FACI states that in January 2019, the Dodgers “asserted that the Contracts were their property and therefore could not be sold by Collectors Coffee.” Id. ¶ 58. After the Dodgers “entered into two Deeds of Gift” with JRF, JRF was substituted into the case in the Dodgers' place. Id. ¶¶ 62, 66. As a result, the Holders now seek a declaration that neither the Dodgers nor JRF have “any right, title, or interest in the Contracts, ” id. ¶¶ 68-69, and CCI “had clear title/ownership to the Contracts at the time it entered into its transactions with the Holders . . ., ” Id. ¶ 70.
The FACI alleges that subject matter jurisdiction exists over this pleading pursuant to 28 U.S.C. § 1367(a) “because the claims asserted herein are so related to the claims in the action within the original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution.” Id. ¶ 42. Alternatively, the FACI alleges that the TRO conferred jurisdiction over its allegations because the court “exercised in rem jurisdiction over the contracts . . . .” Id. The FACI also alleges that jurisdiction exists because “the Court has already exercised jurisdiction over this matter and this Complaint in intervention needs no additional jurisdictional support.” Id.
II. DISCUSSION
CCI and Kontilai argue that judgment should be granted on the pleadings for three reasons. First, they argue that no subject matter jurisdiction exists over the FACI because the “legal and factual issues” therein “are not so related” to the SEC's Amended Complaint as to “constitute the same case in controversy” under 28 U.S.C. § 1367, and no other basis for jurisdiction exists. Def. Mem. at 1. Alternatively, CCI and Kontilai assert that the FACI fails to state a claim because of the existence of a settlement agreement between the parties that contains a covenant not to sue that encompasses the Holders' complaint. Id. at 2. Finally, defendants argue that the Court must order arbitration of this dispute pursuant to an arbitration clause contained within the settlement agreement and stay this case as a result. Id.
We address first the issue of subject matter jurisdiction and then turn to the issue of arbitration. As explained below, it is not necessary (and would be inappropriate) to address the covenant not to sue.
A. Subject Matter Jurisdiction
While the defendants cite to Fed.R.Civ.P. 12(h)(3) as the primary basis for their motion, id. at 1, it is more properly founded on 12(b)(1), which is the rule governing motions to dismiss for lack of subject matter jurisdiction. The failure to raise such a motion in a pre-answer motion to dismiss does not waive a party's ability to make such a motion and a court “must dismiss” an action if it determines “at any time” that it lacks subject matter jurisdiction, see Fed.R.Civ.P. 12(h)(3).
“A ‘case is properly dismissed for lack of subject matter jurisdiction under Rule 12(b)(1) when the district court lacks the statutory or constitutional power to adjudicate it.'” Nike, Inc. v. Already, LLC, 663 F.3d 89, 94 (2d Cir. 2011) (quoting Makarova v. United States, 201 F.3d 110, 113 (2d Cir. 2000)), affd, 568 U.S. 85 (2013). In deciding a motion to dismiss for lack of subject matter jurisdiction, the court “must accept as true all material factual allegations in the complaint, ” Triestman v. Fed. Bureau of Prisons, 470 F.3d 471, 474 (2d Cir. 2006) (punctuation omitted), but need not “draw inferences from the complaint favorable to plaintiffs, ” J.S. ex rel. N.S. v. Attica Cent. Sch., 386 F.3d 107, 110 (2d Cir. 2004) (citing Shipping Fin. Servs. Corp. v. Drakos, 140 F.3d 129, 131 (2d Cir. 1998)). The plaintiff bears the burden of proving by a preponderance of the evidence that subject matter jurisdiction is proper. Morrison v. Nat'l Austl. Bank Ltd., 547 F.3d 167, 170 (2d Cir. 2008), affd, 561 U.S. 247 (2010). A court “may refer to evidence outside the pleadings, ” Makarova, 201 F.3d at 113; accord Kamen v. Am. Tel. & Tel. Co., 791 F.2d 1006, 1011 (2d Cir. 1986) (“[W]hen, as here, subject matter jurisdiction is challenged under Rule 12(b)(1), evidentiary matter may be presented by affidavit or otherwise.”), but “may not rely on conclusory or hearsay statements contained in the affidavits, ” J.S. ex rel. N.S., 386 F.3d at 110 (citing cases). A court must decide a Rule 12(b)(1) motion before any other motion to dismiss. See Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 9395 (1998).
The defendants challenge the FACI as lacking subject matter jurisdiction by arguing that the FACI's factual allegations fail to come within 28 U.S.C. § 1367(a)'s grant of supplemental jurisdiction, which the FACI cites as supplying subject matter jurisdiction. See FACI ¶ 42; Def. Mem. at 10-12.
§ 1367(a) confers supplemental jurisdiction to a district court over any “claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution.” The statute specifically notes that this jurisdiction includes “claims that involve the . . . intervention of additional parties.” Id.
“For purposes of section 1367(a), claims ‘form part of the same case or controversy' if they ‘derive from a common nucleus of operative fact.'” Shahriar v. Smith & Wollensky Rest. Grp., Inc., 659 F.3d 234, 245 (2d Cir. 2011) (quoting Briarpatch Ltd., L.P. v. Phoenix Pictures, Inc., 373 F.3d 296, 308 (2d Cir. 2004)). To determine if that standard is met, a court asks whether “the facts underlying the . . . claims substantially overlapped . . . [or] the federal claim necessarily brought the facts underlying the state claim before the court . . . even if the state law claim is asserted against a party different from the one named in the federal claim.” Achtman v. Kirby, McInerney & Squire, LLP, 464 F.3d 328, 335 (2d Cir. 2006) (punctuation omitted).
The Holders argue that this Court “has supplemental jurisdiction over would-be intervenors that meet the requirements for intervention of right under the Federal Rules of Civil Procedure.” Int. Opp. at 8 (citing Mut. Fire, Marine & Inland Ins. Co. v. Adler, 726 F.Supp. 478, 481 (S.D.N.Y. 1989), York Rsch. Corp. v. Landgarten, 1992 WL 373268, at *1 (S.D.N.Y. 1992), and Maryland Cas. Co. v. W.R. Grace & Co., 1996 WL 34154, at *1 (S.D.N.Y. Jan. 30, 1996)). They thus focus on whether the Fed.R.Civ.P. 24(a) standard has been met, rather than examining whether the “common nucleus of operative fact” standard is met by their claims. See id. at 8-10. Defendants responds by arguing that the ability to use Rule 24(a) as a proxy for subject matter jurisdiction “was superseded by the enactment of section 1367, ” pointing to the Supreme Court's decision in Exxon Mobil v. Allapattah Services, Inc., 545 U.S. 546 (2005), as “explain[ing] that previous case law on subject matter jurisdiction for intervenors had been superseded by Section 1367's enactment.” Def. Reply at 5. While some courts have found that meeting Rule 24(a)'s requirements is sufficient to satisfy § 1367(a), see, e.g., Grace United Methodist Church v. City of Cheyenne, 451 F.3d 643, 673 (10th Cir. 2006), United States v. Mitchell, 2008 WL 11454765, at *2 (S.D. Ohio July 22, 2008), we do not find it necessary to reach this question because, even if satisfaction of the intervention as of right standard did not necessarily satisfy § 1367(a), we would conclude that the “common nucleus operative fact” standard is met here.
The standard is met when “the federal claim necessarily brought the facts underlying the state claim before the court.” Achtman, 464 F.3d at 335 (punctuation omitted). As noted, the Holders' interests in the Jackie Robinson Contracts formed a part of the SEC's claims in this case, see Amended Complaint ¶¶ 62-67. To prove that defendants made misleading and material misstatements related to the contracts, the SEC will have to prove the validity of the Holders' interests. In other words, the SEC's securities fraud claim against defendants in relation to the contracts relies upon a factual determination of the Holders' interest in the contracts, see id. ¶ 67 (“Defendants representations that Collectors Cafe owned the Jackie Robinson contracts were false and misleading and omitted material facts, because Collectors Cafe did not own a 100% interest in the contracts and was not entitled to 100% of the proceeds from their sale” and citing notes executed by the Holders). The Holders' complaint is exclusively about determining the interests in those same contracts. See generally FACI ¶¶ 44-71. Thus, the Court concludes that the claims asserted against defendants by the SEC “necessarily brought the facts underlying” the Holders' declaratory judgment action “before the court, ” Achtman, 464 F.3d at 335, and therefore subject matter jurisdiction exists under 28 U.S.C. § 1367(a).
B. Arbitration
Section 2 of the Federal Arbitration Act (“FAA”) provides in pertinent part:
A written provision in any . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.9 U.S.C. § 2. The FAA reflects “a strong federal policy favoring arbitration as an alternative means of dispute resolution.” Ross v. Am. Express Co., 547 F.3d 137, 142 (2d Cir. 2008) (punctuation omitted).
The Second Circuit has held that a court considering a motion to compel arbitration of a dispute first must
determine whether the parties agreed to arbitrate; second, it must determine the scope of that agreement; third, if federal statutory claims are asserted, it must consider whether Congress intended those claims to be nonarbitrable; and fourth, if the court concludes that some, but not all, of the claims in the case are arbitrable, it must then decide whether to stay the balance of the proceedings pending arbitration.JLM Indus., Inc. v. Stolt-Nielsen SA, 387 F.3d 163, 169 (2d Cir. 2004).
“[U]nder the FAA, ‘any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability.'” Id. at 171 (quoting Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983)). In determining whether an issue must be arbitrated, courts apply the same standard used at summary judgment. See Bensadoun v. Jobe-Riat, 316 F.3d 171, 175 (2d Cir. 2003). Thus, “[i]f undisputed facts in the record required the issue of arbitrability to be resolved against the Plaintiff as a matter of law, ” the motion must be granted. Id.
Defendants ask that arbitration be ordered only if this Court considers and rejects the defendants' argument that the Holders' lawsuit is barred by a covenant not to sue contained in a settlement agreement entered into by the defendants and the Holders. See Def. Mem. at 14. But we conclude that the Court does not have this option and instead must first address the question of whether the parties have agreed to arbitrate the dispute reflected in the FACI. While the parties have not cited (and the Court has not found) any cases addressing whether the applicability of a covenant not to sue must be decided by an arbitrator rather than a court, numerous cases hold that, where the parties have entered into an arbitration agreement, the arbitrator must decide the applicability of any release. See, e.g., Syngenta Crop Prot., LLC v. Ins. Co. of N. Am., Inc., 2018 WL 1587601, at *1 (S.D.N.Y. Mar. 29, 2018) (“disputes between the parties concerning the scope and enforceability” of a release must “be submitted to an arbitrator in the first instance”); Oriental Republic of Uruguay v. Chem. Overseas Holdings, Inc., 2006 WL 164967, at *1 (S.D.N.Y. Jan. 24, 2006) (requiring dispute to be submitted to arbitration over applicability of release provision “that potentially disposes of Plaintiffs' claims”); Bangkok Crafts Corp. v. Capitolo di San Pietro in Vaticano, 331 F.Supp.2d 247, 257 (S.D.N.Y. 2004) (“dispute as to whether the release entered into . . . bars all of the claims asserted . . . shall be determined by arbitration”). As a matter of logic, we conclude the same principle must apply to a covenant not to sue. See generally Shaw Grp. Inc. v. Triplefine Int'l Corp., 322 F.3d 115, 120 (2d Cir. 2003) (“the federal policy in favor of arbitration requires that any doubts concerning the scope of arbitrable issues be resolved in favor of arbitration”) (punctuation omitted). In other words, if this dispute between defendants and the Holders is arbitrable, then the Court must send the dispute to arbitration and allow the arbitrator to determine whether the covenant not to sue bars the Holders' claims.
Here, the document containing the arbitration clause is entitled “Settlement and Release Agreement, ” and is dated August 3, 2017 (annexed as Exh. 1 to Vahl Decl.) (“Settlement Agreement.”). The Settlement Agreement contains three main provisions: one mandates the sale of the contracts at auction, the next provides for the distribution of the proceeds of the auction, and the third requires dismissal of the then-pending litigation. See Settlement Agreement ¶¶ 1-3. The Settlement Agreement also contains provisions reciting the history of the parties' dealings and provisions in which the parties make representations and warranties. Id. ¶¶ A-L, 4-5. Further, the Settlement Agreement contains a section entitled “Dispute Resolution” which states that “All Parties agree that if a dispute arises on any other matter other than the terms, representations or performance of this Agreement, ” that the parties shall first use informal efforts to resolve the dispute and, if that fails “submit the dispute to JAMS for binding arbitration” in Clark County, Nevada, to be “administered by and in accordance with JAMS' Comprehensive Arbitration Rules and Mediation Procedures.” Id. ¶ 3(b)(i).
Defendants argue that an agreement to arbitrate was clearly made, that the dispute “falls within the scope of the arbitration provision, ” and that Holders' dispute with JRF “does not allow Holders to evade arbitration against” defendants. Def. Mem. at 18.
The Holders argue that “[i]f in fact this dispute is related to the terms of an agreement, it would arise out of the terms, representations, and performance of the Settlement Agreement, and would therefore be exempt from the arbitration clause in the Settlement Agreement.” Int. Opp. at 7; see also Id. at 8 (“the controversy falls squarely within the exception to the arbitration clause in the Settlement Agreement”). We reject this argument for two reasons. First, the arbitration clause provides that disputes must be resolved by the arbitrator “in accordance with JAMS' Comprehensive Arbitration Rules ....” Settlement Agreement ¶ 3(b)(i). Case law holds that “[i]ncorporating the JAMS Comprehensive Arbitration Rules is clear and unmistakable evidence that the parties delegated questions of arbitrability to the arbitrator.” Dhue v. O'Reilly, 2018 WL 11222900, at *4 (S.D.N.Y. Oct. 10, 2018) (punctuation omitted); accord Emilio v. Sprint Spectrum L.P., 508 Fed.Appx. 3, 5 (2d Cir. 2013). Second, even if the Court were to consider the scope of the arbitration clause, it would reject the Holders' argument because the Holders have not explained why their declaratory judgment action relates to the “terms, representations, and performance” of the Settlement Agreement. The FACI has nothing to do with the performance, terms or representations of the Settlement Agreement but instead seeks to confirm the validity of security interests that, by the Holders' own admission, existed long before the Settlement Agreement. FACI ¶¶ 25-26.
The Holders remaining arguments are (1) that defendants “waived their right to compel arbitration” by participating in this lawsuit, thereby prejudicing Holders, Int. Opp. at 15-16, and (2) that the Settlement Agreement is “void” because Kontilai “fraudulently induced” the Holders to enter into it. Id. at 19. We address each argument next.
1. Waiver
Courts look to three factors to determine waiver of the right to compel arbitration by litigation conduct: “(1) the time elapsed from when litigation was commenced until the request for arbitration; (2) the amount of litigation to date, including motion practice and discovery; and (3) proof of prejudice.” Louisiana Stadium & Exposition Dist. v. Merrill Lynch, Pierce, Fenner & Smith Inc., 626 F.3d 156, 159 (2d Cir. 2010) (punctuation omitted). “[T]he key to a waiver analysis is prejudice. Waiver of the right to compel arbitration due to participation in litigation may be found only when prejudice to the other party is demonstrated.” Id. (punctuation omitted).
Here, the Holders argue that these three factors weigh in favor of finding a waiver of defendants' right to arbitrate. They point out that defendants did not seek to compel arbitration until the Holders “filed Pre-Motion Conference requests related to Kontilai's and CCI's repeated failure to respond to their February 5, 2020, discovery requests ....” Int. Opp. at 17. The
The Holders also briefly allude to the fact that defendants did not raise “the arbitration clause as an affirmative defense in their Answers to the Complaint.” Int. Opp. at 16; see also Id. at 1 (“Neither [defendant] asserted an affirmative defense related to the existence of an applicable arbitration clause . . . FRCP 8 and the scheduling order required those to have been previously raised[.]”). While the Holders do not elaborate on this argument, the Court notes that even where an affirmative defense has not been pled, the Court may construe defendants' motion as impliedly seeking leave to amend, and thus “a district court may still entertain affirmative defenses . . . in the absence of undue prejudice to the plaintiff, bad faith or dilatory motive on the part of the defendant, futility, or undue delay of the proceedings.” Saks v. Franklin Covey Co., 316 F.3d 337, 350 (2d Cir. 2003). As discussed below, the Court finds no undue prejudice. The other factors mentioned are similarly not present, aside from delay, which “usually does not warrant denial of leave to amend.” State Farm Ins. Companies v. Kop-Coat, Inc., 183 Fed.Appx. 36, 38 (2d Cir. 2006) (punctuation omitted).
Holders' complaint in intervention was filed on September 10, 2019 (Docket # 92). Defendants' desire to compel arbitration was first brought up in opposition to the Holders' motion for leave to amend, see Opposition to Intervenor Plaintiffs' Motion for Leave, filed May 11, 2020 (Docket # 323). Thus, approximately eight months had passed before defendants mentioned their desire to compel arbitration. This period of delay is comparable to that in Merrill Lynch, where the Second Circuit affirmed a finding of waiver, and Leadertex, Inc. v. Morganton Dyeing & Finishing Corp., 67 F.3d 20, 26 (2d Cir. 1995), where the Second Circuit similarly affirmed. See Merrill Lynch, 626 F.3d at 159 (eleven-month delay supported waiver finding); Leadertex, Inc., 67 F.3d at 26 (seven-month delay). Thus, this factor weighs in favor of finding a waiver of the right to arbitrate.
However, there was little substantive litigation between the Holders and defendants during that time period. The Holders assert that they have “engaged in extensive written discovery with” JRF and the Dodgers, Int. Opp. at 17, but the discovery between the Holders and defendants has been far more limited. The Holders had a discovery dispute with Kontilai over his failure to respond to their requests, which resulted in judicial intervention. See Letter from Richard Schonfeld, filed April 21, 2020 (Docket # 297); Letter from Richard Schonfeld, filed April 29, 2020 (Docket # 303). Defendants also opposed the Holders' motion to amend (see Docket ## 323, 324), and the Holders filed a brief opposition to Kontilai's motion to stay the case (see Docket ## 329, 347). But the Holders do not assert that they produced any documents to the defendants or took any depositions relating to the claim against the defendants as of the date of defendants' filing of the motion to compel arbitration. Given these circumstances, the Court does not view the limited activities that took place as rising to the standard of “litigation of substantial material issues.” Leadertex, Inc., 67 F.3d at 25; cf. Nat'l Union Fire Ins. Co. of Pittsburgh, P.A. v. NCR Corp., 376 Fed.Appx. 70, 72 (2d Cir. 2010) (finding waiver after “discovery and scheduling conferences, motions addressing choice-of-law and various defenses, and several motions for summary judgment”); E. Fish Co. v. S. Pac. Shipping Co., 105 F.Supp.2d 234, 240 (S.D.N.Y. 2000) (no waiver where the “complaint and answer are essentially the only pleadings that have been exchanged. Little discovery has been conducted to date, ” and “no deposition(s) have been conducted”). Thus, this factor weighs against finding a waiver on defendants' part.
However, the most important factor is prejudice, of which the Second Circuit has recognized two types: “substantive prejudice and prejudice due to excessive cost and time delay.” Thyssen, Inc. v. Calypso Shipping Corp., S.A., 310 F.3d 102, 105 (2d Cir. 2002). As the Second Circuit has put it, “[p]rejudice can be substantive, such as when a party loses a motion on the merits and then attempts, in effect, to relitigate the issue by invoking arbitration, or it can be found when a party too long postpones his invocation of his contractual right to arbitration, and thereby causes his adversary to incur unnecessary delay or expense.” Kramer v. Hammond, 943 F.2d 176, 179 (2d Cir. 1991). “Sufficient prejudice to infer waiver has been found when a party seeking to compel arbitration engages in discovery procedures not available in arbitration . . . makes motions going to the merits of an adversary's claims . . . or delays invoking arbitration rights while the adversary incurs unnecessary delay or expense.” Cotton v. Slone, 4 F.3d 176, 179 (2d Cir. 1993). But “pretrial expense and delay - unfortunately inherent in litigation - without more, do not constitute prejudice sufficient to support a finding of waiver.” Leadertex, Inc., 67 F.3d at 26.
The Holders have not alleged any “substantive” prejudice from defendants' delay, nor could they, because no substantial litigation on the Holders' claim against defendants took place as of the filing of the motion. The Holders also do not allege that either of the defendants has propounded any discovery upon them, noting only that Kontilai served discovery requests on the JRF, and CCI subpoenaed a non-party company. Int. Opp. at 18. The Holders complain of the “time and expense” that responding to the motions mentioned above required and argue that CCI is “engaging in discovery that would be unavailable in arbitration” by serving the aforementioned subpoena. Id. But the Holders acknowledge, as they must, that such discovery is available to CCI regardless of whether their claim is sent to arbitration or not, because “both Kontilai and CCI will be able to continue in their pursuit of discovery in the SEC Action.” Id. Thus, unlike in cases where such discovery would not be available to a party seeking to compel arbitration, the Court does not view CCI's propounding of discovery as evidencing its intent to waive the arbitration right. And far from prejudicing the Holders, defendants' delay in asserting their arbitration right has likely advantaged the Holders, because it has enabled them to engage in “extensive written discovery” that would likely be unavailable to them in arbitration proceedings. Id. at 17. Moreover, the Holders' allegations of prejudice are largely directed at Kontilai's conduct; even if the Court were to find that Kontilai had prejudiced the Holders, that does not establish that CCI, a separate entity that has “timely responded” to the Holders' discovery requests, has prejudiced the Holders. Id. at 1. Thus, the Court finds that the Holders have failed to demonstrate any prejudice from defendants' delay in asserting their arbitration right.
Weighing the three factors, we conclude that the balance tips in favor of finding no waiver on defendants' part.
The cases cited by the Holders in support of finding a waiver of defendants' rights (see id. at 18 n. 14) are not to the contrary, because each involved far greater activity by the party seeking to compel arbitration than that at issue here. See Kelly v. Pub. Util. Dist. No. 2 of Grant Cty., 552 Fed.Appx. 663, 664 (9th Cir. 2014) (defendants “conducted discovery and litigated motions, including a preliminary injunction and a motion to dismiss”); Joca-Roca Real Est., LLC v. Brennan, 772 F.3d 945, 951 n.7 (1st Cir. 2014) (party opposing arbitration “had to respond to a lawsuit, litigate it over a nine-month period, prepare for trial, and then - shortly before trial was to begin - respond to a belated attempt to move the case to an arbitral forum”); Gray Holdco, Inc. v. Cassady, 654 F.3d 444, 460 (3d Cir. 2011) (finding waiver where parties had engaged in “quite extensive” preliminary injunction discovery, including deposing “eight separate individuals”); Messina v. N. Cent. Distrib., Inc., 821 F.3d 1047, 1051 (8th Cir. 2016) (party “only moved to compel arbitration after it lost the motion to transfer venue, ” thus demonstrating “that it wanted to play heads I win, tails you lose, which is the worst possible reason for failing to move for arbitration sooner than it did”) (punctuation omitted); In re Mirant Corp., 613 F.3d 584, 591 (5th Cir. 2010) (party opposing arbitration “had spent over $260,000 in legal fees that were solely attributed to defending against . . . discovery motions and motions to dismiss” brought by the party seeking arbitration). Comparable conduct is not present here.
2. Fraudulent Inducement
The Holders also briefly argue that the arbitration clause is void because they were “fraudulently induced” to enter into the Settlement Agreement by defendants. Int. Opp. at 19. But while the Holders cite case law that permits avoidance of contractual clauses in cases of fraud, see id. at 19 n.16, the cases all involved litigants who had actually pled a claim of fraud in the inducement. See Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F.2d 402, 404 (2d Cir. 1959); Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 398 (1967); Scherk v. Alberto-Culver Co., 417 U.S. 506, 509 (1974). Here, the Holders assert no cause of action seeking to void the Settlement Agreement on the basis of fraud and provide no admissible evidence regarding the manner in which the Settlement Agreement was the product of fraud. Thus, the Court has no warrant to adjudicate such a claim.
3. Which Claims Are Stayed
Having concluded that the claims against defendants by Holders are arbitrable, and that those claims should be stayed, the Court must next determine “whether to stay the remaining claims pending arbitration.” Genesco, Inc. v. T. Kakiuchi & Co., 815 F.2d 840, 856 (2d Cir. 1987). Defendants concede that the claim made by the Holders against JRF is not arbitrable. See Def. Mem. at 18. Yet they appear to briefly argue that the Court should stay that claim nonetheless: “The Court should stay all proceedings with respect to the Intervenor action, pending the completion of the arbitration.” Id. at 20. The party moving for a stay “bears the burden of demonstrating that such a stay is justified.” WorldCrisa Corp. v. Armstrong, 129 F.3d 71, 76 (2d Cir. 1997). Defendants have made no arguments as to why the Holders' claim against JRF should be stayed, and thus have plainly failed to carry that burden. Accordingly, the Court should not stay the Holders' claim against JRF, but rather limit the stay to the Holders' claim against defendants.
One issue remains that has not been addressed by either party. The arbitration clause provides that the arbitration “shall be conducted in Clark County, Nevada.” Settlement Agreement ¶ 3(b)(i). However, section 4 of the FAA provides a court with the authority to compel arbitration only “within the district in which the petition for an order directing such arbitration is filed.” 9 U.S.C. § 4. As a result, this Court can only stay this case to allow the arbitration mandated by the Settlement Agreement to occur. See Law Offices of Joseph L. Manson III v. Keiko Aoki, 2020 WL 767466, at *4 (S.D.N.Y. Jan. 3, 2020) (“Although the Second Circuit has not decided the question of whether Section 4 precludes a district court from compelling arbitration outside of its district, persuasive decisions in this Circuit have routinely held that it does.”) (collecting cases); accord Anderjaska v. Bank of Am., N.A., 2021 WL 841661, at *4 (S.D.N.Y. Mar. 5, 2021). Thus, while the Court “cannot grant Defendant's motion to compel” arbitration, the Court can issue “an order staying the litigation pending a final outcome of the arbitration.” Anderjaska, 2021 WL 841661, at *4 (citing 9 U.S.C. § 3). Accordingly, as occurred in Aoki, the Holders' claims against defendants should be stayed pending arbitration. If defendants fail to participate in the arbitration or otherwise obstruct it, the plaintiff will of course have leave to seek a vacatur of the stay.
IV. CONCLUSION
For the foregoing reasons, defendants' motion for judgment on the pleadings (Docket # 398) should be denied, but the Holders' claims against defendants Collectors Coffee, Inc. and Mykalai Kontilai should be stayed pending arbitration.
PROCEDURE FOR FILING OBJECTIONS TO THIS REPORT AND RECOMMENDATION
Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties have fourteen (14) days (including weekends and holidays) from service of this Report and Recommendation to file any objections. See also Fed.R.Civ.P. 6(a), (b), (d). A party may respond to any objections within 14 days after being served. Any objections and responses shall be filed with the Clerk of the Court. Any request for an extension of time to file objections or responses must be directed to Judge Marrero. If a party fails to file timely objections, that party will not be permitted to raise any objections to this Report and Recommendation on appeal. See Thomas v. Arn, 474 U.S. 140 (1985); Wagner & Wagner, LLP v. Atkinson, Haskins, Nellis, Brittingham, Gladd & Carwile, P.C., 596 F.3d 84, 92 (2d Cir. 2010).