Citadel Servicing Corporation v. Castle Placement, LLC

Background

Citadel entered into a Placement Agreement with non-party StoneCastle Securities, LLC in October 2011. The agreement appointed StoneCastle as Citadel’s exclusive agent for soliciting potential investors. Its arbitration provision stated that all controversies between Citadel and StoneCastle “and/or any of their agents” arising out of or relating to the agreement, the services provided under it, or any related matter would be decided through arbitration under the rules of the Financial Industry Regulatory Authority (FINRA).

Castle Placement, LLC, Castle Placement Group, LLC, Kenneth Margolis, and Richard Luftig filed a FINRA statement of claim against Citadel. They alleged that they had provided services under the Placement Agreement and that Citadel failed to pay compensation after a financing transaction. They asserted breach-of-contract, quantum-meruit, and unjust-enrichment theories, requested an accounting, and demanded more than $7 million. FINRA initially questioned whether Castle could enforce the arbitration provision but later allowed Castle, Margolis, and Luftig to proceed.

Citadel filed this action seeking a declaration that the defendants could not enforce the arbitration provision. Citadel also moved for a preliminary injunction, which is a temporary court order intended to prevent ongoing harm while a case proceeds, to stop the defendants and FINRA from continuing the arbitration. The defendants cross-moved to compel arbitration, meaning they asked the court to require Citadel to arbitrate.

Issue

The key issue was who should decide whether the defendants qualified as StoneCastle’s “agents” under the arbitration provision: the court or the FINRA arbitrator. The court explained that courts normally decide whether a dispute is arbitrable, meaning subject to arbitration. But parties may delegate that question to an arbitrator when their agreement provides clear and unmistakable evidence of that intent.

Court’s analysis

The court held that the Placement Agreement showed clear and unmistakable intent to delegate the agency question to the arbitrator. The arbitration provision covered “all controversies” involving StoneCastle’s agents and extended to matters “arising out of or concerning” the agreement, the services provided under it, or “any related matter.” The court concluded that whether the defendants were StoneCastle’s agents was itself a related matter covered by the provision.

The court also relied on other contract terms. The agreement stated that the parties were giving up the right to sue each other in court, including the right to a jury trial, except as allowed by the arbitration forum’s rules. It incorporated the rules of the arbitration forum, and the court noted that FINRA Rule 13413 authorizes the arbitration panel to interpret and determine the applicability of the FINRA Code. Although the court said that incorporating FINRA rules alone was not necessarily enough, it found that the incorporation provided additional support for the conclusion drawn from the provision’s text.

The court rejected Citadel’s arguments that the forum-selection clause required a court to decide the issue, that FINRA’s willingness to comply with a court order showed that FINRA recognized court authority over arbitrability, and that the provision allowed only StoneCastle and Citadel—not their agents—to enforce it. The court read the provision as giving agents the right to enforce it as well.

Because the arbitrator, rather than the court, was to decide whether the defendants were agents entitled to arbitrate, the court concluded that Citadel could not show the irreparable harm required for a preliminary injunction.

Disposition

The court denied Citadel’s motion for a preliminary injunction and granted the defendants’ motion to compel arbitration. The Clerk was ordered to terminate the motions, the case was stayed, and the parties were ordered to update the court by July 3, 2020, about the arbitration’s status. The court did not decide whether the defendants ultimately were StoneCastle’s agents or whether their compensation claims had merit; it delegated that question to the arbitrator.

Judge

The opinion was issued by Katherine Polk Failla, United States District Judge.