Stonington Capital Advisors, LLC v. Southfield Capital LLC

Background

Stonington Capital Advisors, LLC and Stonington Drive Securities, LLC served as placement agents for a private-equity fund managed by Southfield Capital, LLC. Their 2014 agreement required Southfield to pay Stonington re-up fees for certain investments in a successor fund. The agreement also required the parties to submit disputes relating to the agreement to binding arbitration under American Arbitration Association rules.

An earlier arbitration decided that Stonington was entitled to re-up fees under the agreement, although it rejected Stonington’s separate claim that it had the right to serve as placement agent for the successor fund. The court later confirmed that arbitration award in its entirety. Southfield initially made four quarterly re-up-fee payments, but later determined that it had overpaid because only two investors who invested in the original fund also invested in the successor fund. Southfield requested a refund and began a second arbitration seeking a declaration that it had overpaid.

Motions

Stonington moved to enforce the court’s earlier judgment by ordering Southfield to pay the remaining disputed re-up fees. Stonington also moved for a preliminary injunction stopping the second arbitration. While those motions were pending, Stonington sought a temporary restraining order, or TRO, to stop the arbitration immediately.

Stonington argued that the court, rather than an arbitrator, had to decide the dispute because Stonington’s right to the fees arose from the court’s judgment. It also argued that arbitration could cause irreparable harm, including the risk of inconsistent decisions by the court and an arbitrator. Southfield argued that the dispute required interpretation of the agreement’s definition of “Investors” and therefore had to be arbitrated.

Court’s reasoning

The court applied the same standard to the TRO as to a preliminary injunction. Stonington had to show, among other things, a likelihood of irreparable harm and either a likelihood of success or sufficiently serious questions about the merits.

The court found that Stonington had not shown irreparable harm. It explained that the earlier arbitration and judgment established Stonington’s entitlement to re-up fees but did not determine which investors qualified under the agreement or interpret the agreement’s definition of “Investors.” The court concluded that deciding which investors qualified would require interpreting the agreement, and that the parties had expressly agreed to arbitrate disputes relating to the agreement.

The court also found that Stonington had not raised a sufficiently serious question about whether the dispute was arbitrable. It stated that the dispute clearly concerned the agreement’s terms, that the equities favored Southfield because it was seeking to enforce the arbitration agreement, and that the public interest generally favored enforcing arbitration provisions.

Disposition

Judge Edgardo Ramos denied Stonington’s motion for a temporary restraining order. For the same reasons, the court denied Stonington’s motion to enforce the judgment by directing payment of the remaining disputed re-up fees and denied Stonington’s motion to enjoin arbitration. The clerk was directed to terminate those motions.