New York Bay Capital, LLC v. Cobalt Holdings, Inc.

Background

Cobalt sought financing for an $82.5 million telecommunications project in Mexico. On July 15, 2017, Cobalt and New York Bay Capital, LLC (NYBAY) entered into a mutual nondisclosure agreement. On August 10, 2017, they entered into a contract under which NYBAY agreed to provide financial advice and help identify and introduce potential investors, partners, or lenders for a proposed $25 million transaction.

The contract required Cobalt to pay NYBAY a three-percent closing fee for debt transactions involving a lender introduced by NYBAY or participating as a result of NYBAY’s efforts. It also contained a New York choice-of-law provision and required each party to submit any action, suit, or proceeding arising out of or relating to the engagement or contemplated transactions to the exclusive jurisdiction of the United States District Court for the Southern District of New York. The contract further stated that, after unsuccessful mediation, the matter would be resolved by litigation.

Cobalt later obtained financing from Credit Suisse. NYBAY did not introduce Cobalt to Credit Suisse, but NYBAY alleged that it prepared and presented work product for the project and demanded payment under the contract. Cobalt refused to pay, and NYBAY sued Cobalt in this court.

More than nine months after NYBAY filed its lawsuit, Cobalt initiated a Financial Industry Regulatory Authority (FINRA) arbitration against Julio Marquez, NYBAY’s managing partner, and Young America Capital LLC. Cobalt’s arbitration claims alleged that Marquez violated federal securities laws and FINRA rules by allowing NYBAY to act as Cobalt’s investment bank without registering as a broker-dealer. Cobalt also alleged that Young America Capital failed to supervise Marquez’s investment-banking activities.

Motions and legal standard

NYBAY filed a motion described as a motion to stay the FINRA arbitration. The court construed it as a request for an injunction because NYBAY sought to prevent the arbitration from proceeding. Cobalt opposed that motion and cross-moved to compel arbitration of all claims in the court action and to stay the court proceedings while the FINRA arbitration continued.

The court applied the standard for a preliminary injunction, an order issued before final judgment to prevent harm while a case proceeds. NYBAY had to show irreparable harm—harm that could not be adequately remedied by money—and either a likelihood of success on the merits or sufficiently serious questions supporting relief and a balance of hardships favoring NYBAY.

Court’s analysis

The court held that NYBAY showed a likelihood of success because the FINRA arbitration fell within the contract’s forum-selection clause. The court found that the clause was unambiguous and covered any action, suit, or proceeding arising out of or relating to the engagement or contemplated transactions. Under the court’s reading, the clause showed that the parties intended to resolve these disputes through litigation in the Southern District of New York rather than FINRA arbitration.

The court relied on Second Circuit precedent holding that a forum-selection clause requiring all actions and proceedings to be brought in federal court supersedes an earlier agreement to arbitrate. The court treated FINRA Rule 12200 as an agreement to arbitrate because FINRA rules are interpreted under contract principles. It held that the contract’s forum-selection clause superseded the arbitration agreement in Rule 12200.

The court rejected Cobalt’s argument that the forum-selection clause did not apply because the FINRA arbitration named Marquez and Young America Capital, neither of whom signed the contract. The court explained that Cobalt itself was a signatory and had agreed to submit related proceedings to the Southern District of New York. The court also rejected Cobalt’s argument that the arbitration involved different issues, reasoning that the arbitration arose from and related to the contract even if it asserted different claims.

The court did not decide whether Cobalt was a FINRA “customer.” It also stated that it did not decide whether FINRA rules would otherwise have required Cobalt to pursue its claims in arbitration. Those issues did not change the court’s conclusion that the contract’s forum-selection clause controlled.

The court further found irreparable harm. Although NYBAY was not a party to the FINRA arbitration, the court concluded that allowing the arbitration to proceed could result in inconsistent rulings because both proceedings were substantially based on the contract. The possibility that an arbitrator’s findings could later receive preclusive effect supported an injunction.

Disposition

The court granted NYBAY’s motion to enjoin the FINRA arbitration. It denied Cobalt’s motion to compel arbitration of the claims in the court action and to stay the court proceedings. The Clerk of Court was directed to terminate the two pending motions.