City of Almaty, Kazakhstan v. Sater

Background

City of Almaty, Kazakhstan and BTA Bank JSC sued Felix Sater and other defendants. The plaintiffs alleged that the defendants helped launder money stolen from the plaintiffs and asserted claims including unjust enrichment, money had and received, fraud, conversion, conspiracy under English law, and punitive damages.

Sater’s company, Litco LLC, had entered into a Confidential Assistance Agreement with the plaintiffs, the Republic of Kazakhstan, and Arcanum (Asia) Limited. The agreement included a release covering Litco and certain related people and entities, as well as an arbitration clause covering disputes arising from or relating to the agreement. Litco later began an American Arbitration Association proceeding against the plaintiffs and others. In that proceeding, Litco asked the arbitrators to rule that the release barred the plaintiffs’ claims against Sater and to award Litco costs and attorney’s fees connected to Sater’s defense.

Sater was not a signatory to the Confidential Assistance Agreement or a party to the arbitration. He asked the court to stay, or pause, this lawsuit under Section 3 of the Federal Arbitration Act or under the court’s inherent power to manage its cases. He argued that he could enforce the arbitration clause because he was an owner or officer of Litco, a third-party beneficiary of the release, or entitled to use equitable estoppel—a doctrine that can sometimes prevent a contract signatory from avoiding arbitration with a closely connected non-signatory.

Ruling on Arbitration and the Requested Stay

Judge Katharine H. Parker denied Sater’s motion to stay. The court first held that the question whether Sater could invoke the arbitration clause was properly before the court because Sater was not a signatory and the plaintiffs had not clearly and unmistakably agreed to arbitrate disputes with him.

The court then concluded that Sater could not enforce the arbitration agreement under any of the theories he presented:

- Owner or officer theory: The court distinguished cases allowing corporate officers or owners to enforce an arbitration agreement when the claims concerned conduct performed for the corporation under the agreement. The claims against Sater instead concerned alleged conduct before Litco existed and unrelated to Litco’s work under the Confidential Assistance Agreement. - Third-party-beneficiary theory: Although the release referred to Litco’s members, the arbitration clause referred to arbitration between the agreement’s parties and stated that the arbitrator’s decision would bind those parties. It did not expressly give non-parties such as Sater the right to compel arbitration. The court also found factual disputes about whether the plaintiffs knew Sater was affiliated with Litco, preventing a finding on the motion that he was an intended third-party beneficiary. - Equitable-estoppel theory: The court held that the dispute between Sater and the plaintiffs was not sufficiently connected to the Confidential Assistance Agreement. It also found that the relationship between Sater and the plaintiffs was not close enough to show that the plaintiffs had agreed, even implicitly, to arbitrate claims against him personally.

Because Sater could not enforce the arbitration clause, the court held that he also could not use Section 3 of the Federal Arbitration Act to obtain a stay based on the Litco arbitration.

Inherent-Power Stay

The court separately declined to stay the case under its inherent power to manage litigation. Sater had not shown that a stay was necessary. The arbitration would not decide the plaintiffs’ direct claims against Sater or the other defendants, and it might not decide the release issue at all. The arbitration could also be delayed if the panel first considered whether the Confidential Assistance Agreement was invalid from the beginning.

The court further determined that delaying the case could prejudice the other defendants and the plaintiffs, would not eliminate Sater’s likely role as a witness or document producer, and would not avoid overlapping discovery because the arbitration’s discovery was unrelated to the discovery in this case.

Disposition

The court denied Sater’s motion to stay and directed the Clerk of Court to terminate the motion at docket entry 77. The court expressly made no ruling on the strength or validity of Sater’s affirmative defense based on release and waiver. It stated that issue would be decided later in the litigation if necessary.