Morelli v. Alters

Background

Benedict P. Morelli and Jeremy Alters entered agreements involving loans, salaries, law-firm arrangements, and assignments of expected legal fees. Plaintiffs alleged that Alters falsely represented that he had earned or would receive tens of millions of dollars from class-action matters and that he had not already promised those fees to others. Plaintiffs alleged that these representations induced them to enter a 2015 agreement and a 2018 agreement.

The complaint asserted three claims: fraudulent inducement of the 2015 agreement, a declaration that the 2015 agreement was invalid and unenforceable, and fraudulent misrepresentation related to the 2018 agreement. Alters moved to dismiss under Federal Rule of Civil Procedure 12(b)(1) for lack of subject-matter jurisdiction and Rule 12(b)(3) for improper venue. He also moved to strike allegations under Rule 12(f) and asked the court to convert the motion into a motion for summary judgment.

Arbitration and the 2015 Agreement

The 2015 agreement required the parties first to mediate disputes and then to arbitrate any dispute if mediation failed. The court held that this was an unambiguous agreement to arbitrate under New York law. The provision covered Morelli’s fraudulent-inducement and declaratory-judgment claims because those claims arose from the 2015 agreement.

The court rejected Alters’s argument that the arbitration clause deprived the federal court of subject-matter jurisdiction. It explained that an arbitration clause is a type of forum-selection provision, not a limit on the court’s power to hear a case. Therefore, a motion seeking dismissal for lack of subject-matter jurisdiction was not the proper way to enforce the arbitration clause, and Alters’s Rule 12(b)(1) motion was denied.

The court did not order arbitration because Alters had not filed a request asking this court to compel arbitration. The court nevertheless analyzed the arbitration provision to provide guidance. It stated that, if Alters petitioned to compel arbitration, Morelli would likely have to arbitrate his claims under the 2015 agreement. The court also held that questions about whether mediation was a required preliminary step, and whether Morelli waived that step, would be for an arbitrator to decide.

The court held that Morelli Law was not required to arbitrate. Although Morelli Law signed the 2015 agreement, it agreed to be bound only by Sections I and II, not the arbitration provision in Section 7. The court rejected Alters’s arguments that Morelli Law had assumed the arbitration obligation, that Morelli acted as its agent, or that Morelli Law was prevented from avoiding arbitration because it received benefits from the agreement. Morelli Law therefore could pursue its 2015-agreement claims in court.

The 2018 Agreement

The court held that the 2015 arbitration clause did not cover the fraudulent-misrepresentation claim arising under the 2018 agreement. The 2018 agreement contained an integration clause and required disputes arising from that agreement to be brought in the Southern District of New York or specified New York state courts. The court therefore denied dismissal of the 2018-agreement claim on arbitration grounds.

Alters argued that he had not signed the final version of the 2018 agreement. The court did not consider declarations submitted by Alters and declined to convert the motion into a summary-judgment motion. At the motion-to-dismiss stage, the court accepted the complaint’s allegation that Alters had signed an earlier version and agreed that his signature applied to the final version. The court therefore could not conclude at that stage that Alters was not bound by the 2018 agreement.

Venue and Motion to Strike

The court held that Plaintiffs adequately alleged that a substantial part of the events occurred in New York, making venue proper at this stage. It also noted that the 2018 agreement expressly waived objections to venue in the Southern District of New York. The court denied Alters’s Rule 12(b)(3) motion.

The court also denied the motion to strike. Although some allegations portrayed Alters unfavorably, the court found no strong reason to remove them and could not conclude that they had no possible connection to the litigation.

Disposition

Judge Woods denied Alters’s motion to dismiss and to strike. The court did not compel arbitration, dismissed no claims, and did not convert the motion into a motion for summary judgment.