NATHAN W. DRAGE, P.C. v. FIRST CONCORD SECURITIES, LTD.
New York Law Journal
July 1, 1999
SUPREME COURT
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IA PART 21
Justice Bransten
NATHAN W. DRAGE, P.C. v. FIRST CONCORD SECURITIES, LTD.-- QDS:22701271 -- The law firm of Nathan W. Drage, P.C. (the "law firm" or "plaintiff') moves, by Order to Show Cause, for an order of attachment and discovery, pursuant to CPLR 6201, against property in which defendants First Concorde Securities, Ltd. ("FCS") and Joseph Andres Mann,1 the managing director of FCS, have or claim an interest. Second, plaintiff seeks a temporary restraining order on the ground that FCS is an unauthorized foreign corporation and Mann is a nondomiciliary. Third, plaintiff seeks an order directing defendants Manufacturers and Traders Trust Company a/k/a M&T Bank Corporation ("M&T Bank") and M&T Securities, Inc. ("M&T Securities") to deposit into Court, during the pendency of this action, the property to which plaintiff claims title, consisting of Drage's shares of stock in a company known as GS Telecom, Ltd. ("GST"), as well as the proceeds from the sale of a portion of such stock, held in the possession of M&T Bank and/or M&T Securities under the direction and control of, and/or for the benefit of, FCS and/or Mann, until a judicial determination is made with respect to plaintiff's rights to the property.
Following the return date of the Order to Show Cause, plaintiff and M&T Bank entered into a court-ordered stipulation, dated April 28, 1999, vacating and dissolving the April 16, 1999 temporary restraining order ("TRO"), and permitting M&T Bank to liquidate securities seized by M&T Bank from FCS, provided that the proceeds of any sale were segregated into a separate defined holding account. The parties entered into a second court ordered stipulation, dated May 4, 1999, in which it was agreed that the TRO would remain in effect pending the hearing and determination of plaintiff's application for an order of attachment and preliminary injunction.
Defendants FCS and Mann cross-move to dismiss the complaint on the grounds that (1) this court lacks subject matter jurisdiction (CPLR 3211[a][2]); (2) this court does not have personal jurisdiction over these two defendants (CPLR 3211[a][8]); (3) forum non conveniens (CPLR 327) and (4) a foreign corporation doing business in New York without authority cannot maintain an action in this state unless it has been authorized to do business here and has paid all required fees and taxes (BCL 1312[a]).
Factual Background
Nathan W. Drage, Esq. is the president and principal of plaintiff, a professional corporation engaged in the practice of law with its principal place of business in Salt Lake City, Utah. FCS is a corporation organized and existing under the laws of Nevis, West Indies, with places of business in the West Indies and in Mexico. Mann is a resident of the West Indies and Mexico.
M&T Bank is a bank holding corporation organized under the laws of the State of New York, with its principal place of business in Buffalo, New York, and offices in New York City. M&T Securities is a brokerage subsidiary of M&T Bank. Through M&T Securities, M&T Bank operates a security clearance department, in which it acts as a custodial agent for customers buying and selling securities through broker-dealers. FCS clears its trades through M&T Bank and M&T Securities.
Plaintiff alleges in the complaint that, in or about May 1998, Drage consulted with Mann to establish a brokerage account for the law firm at FCS. Drage established an account with FCS for the sole purpose of effecting the sale of the law firm's shares of stock in GST. On July 1, 1998, Drage instructed the brokerage firm that held possession of the GST shares to transfer them, via the Depository Trust Company ("DTC") to FCS's clearing agent. When Drage was told the transfer could not be effected in this manner, Mann instructed Drage to transfer the shares directly to FCS's offices in Cancun, Mexico. After FCS received the stock, Drage executed the forms to complete clearance of the stock.
On or about June 30, 1998, FCS opened a security clearance account with M&T Bank. In connection with the opening of the account, M&T Bank issued a demand promissory note, titled Secured Grid Note and Pledge Agreement (the "Agreement"). The Agreement provides that M&T Bank may demand payment of, or decrease the amount of, its advances to FCS on demand, and that M&T Bank's advances to FCS were secured by the securities held in FCS's account.
After opening the account, FCS bought and sold securities, settling its trades through M&T Bank. M&T Bank paid for securities purchased by FCS and received securities into M&T Bank's account at DTC for FCS's benefit. M&T Bank also delivered securities sold by FCS and received payment for them. Beginning in September 1998, M&T Bank began extending credit to FCS in connection with its trading activities.
In or about January 1999, Drage orally instructed Mann to sell 1,000 shares of the GTS stock at $2.00 per share, the value at which it was then trading. Shortly thereafter, Drage requested an account statement from FCS confirming the sale of the shares, the proceeds due the law firm, and the balance of GST shares remaining in plaintiff's account. Upon receiving no response, Drage wrote to FCS, on February 4, 1999, requesting the information and requesting that the proceeds from the sale be wired to the law firm's bank account in Utah, and that the remaining shares be transferred via DTC to plaintiff's brokerage firm. When there was still no response, a second letter, dated February 12, 1999 was sent to FCS.
On February 23, 1999, Drage telephoned Mann, who advised Drage that FCS could not honor Drage's demands because another customer of FCS claimed to have a dispute with the law firm, or with a client of the law firm, and had instructed Mann not to transfer any of the stock or proceeds to plaintiff.
By March 16, 1999, the amount of credit M&T Bank had extended to FCS totaled $4.9 million. M&T Bank demanded that FCS cease buying additional securities and immediately decrease the amount of its outstanding loan by selling securities or wiring additional money into the account. FCS failed to comply with this demand and, in fact, purchased additional securities, which increased the amount of its debt.
On or about March 18, 1999, M&T Bank advised FCS that it was declaring an event of default, would be seizing all the securities held in FCS's account and would begin liquidating the account. M&T Bank seized the securities, including some shares of GST stock, and transferred them from M&T Bank's omnibus DTC account to a newly-established M&T Bank proprietary DTC account. By the end of March, M&T Bank had sold all the shares of GST that had been held in FCS's account, including plaintiff's shares.
M&T Bank continues to hold stock of certain issuers which was seized from FCS's account, and informs the court that it is trying to sell these securities in partial satisfaction of FCS's remaining outstanding debt, which totals approximately $4.5 million, exclusive of costs, interest and attorneys' fees. Because the current market value of the remaining securities in M&T Bank's custody is approximately $3.1 million, M&T Bank alleges that it will never recover the full amount of the debt it is owed by FCS.
Plaintiff alleges that as of the date this action was commenced, FCS has failed to furnish plaintiff with an account statement and has failed to transfer the proceeds from the sale of the GST shares and the balance of the GST shares. Plaintiff's complaint sets forth seven causes of action: (1) a breach of contract claim against FCS; (2) a breach of fiduciary duty claim against FCS and Mann; (3) a breach of the covenant of good faith and fair dealing claim against FCS and Mann; (4) a conversion claim against FCS and Mann; (5) a cause of action for an accounting against FCS; (6) a conversion claim against M&T Bank and M&T Securities; and, (7) a request for an injunction against M&T Bank and M&T Securities. Plaintiff also alleges that FCS and Mann are conducting business in violation of the rules and regulations of the United States Securities and Exchange Commission ("SEC").2
Cross Motion to Dismiss by FCS and Mann
The Account Application and Non Solicitation Agreement plaintiff signed with FCS provides that "only the law of the State of Nevis, West Indies will apply in respect to any transaction" between the parties, and that plaintiff consents "to the jurisdiction of the courts of Nevis, West Indies to the exclusion of any other judicial or regulatory authority."
Plaintiff ignores this choice of law and choice of forum provision. Rather, plaintiff asserts that FCS and Mann have sufficient contacts in New York by virtue of their relationship with M&T Bank so as to establish a presence in New York and confer jurisdiction. Even if this is the case, the fact remains that plaintiff signed a contract containing a choice of law and forum selection clause which plainly states that judicial relief may only be obtained in the courts of Nevis, West Indies, and that the laws of the West Indies would govern any disputes.
The First Department has held that "t is the policy of the courts of this State to enforce contractual provisions for choice of law and selection of a forum for litigation." Koob v. IDS Financial Services, Inc., 213 A.D.2d 26, 33 (1st Dep't 1995), citing Matter of Smith Barney, Harris Upham & Co. v Luckie, 85 N.Y.2d 193, 201, cert. denied sub nom, Manhard v. Merrill Lynch, Pierce, Fenner & Smith, 516 U.S. 811 (1995). Plaintiff does not make any showing that the consent to jurisdiction clause itself was procured by fraud or otherwise rendered unenforceable. British West Indies Guar. Trust Co. v. Banque Internationale A Luxembourg, 172 A.D.2d 234 (1st Dept 1991) ("In order to set aside such a clause, a party must show that enforcement would be unreasonable and unjust or that the clause is invalid because of fraud or overreaching, such that a trial in the contractual forum would be so gravely difficult and inconvenient that the challenging party would, for all practical purposes, be deprived of his or her day in court.") A dispute arising out of a transaction based upon an allegation of fraud does not render the forum selection clause unenforceable. Scherk v. Alberto-Culver Co., 417 U.S. 506, 519 n.14 (1974).
Because plaintiff has contractually agreed to resolve its dispute with FCS and Mann in another jurisdiction, this Court dismisses this action, as to FCS and Mann, without prejudice to the recommencement of an action against them in the proper forum, the West Indies. In view of the foregoing, this Court need not address the other grounds raised in FCS's and Mann's cross motion.
Plaintiff's Motion for an Order of Attachment and Injunction
CPLR 6201 sets forth the grounds on which an order of attachment may be granted. Having dismissed this action as to FCS and Mann, the foreign corporation and nondomiciliary defendants, the only remaining ground for an order of attachment is that "the defendant, with intent to defraud his creditors or frustrate the enforcement of a judgment that might be rendered in plaintiff's favor, has assigned, disposed of, encumbered or secreted property, or removed it from the state or is about to do any of these acts." CPLR 6201(3).
Plaintiff has failed to proffer any evidence of fraudulent intent on the part of M&T Bank or M&T Securities, nor, as set forth below, has plaintiff demonstrated a likelihood of success on the merits, as is also required. See Rosenthal v. Rochester Button Co., Inc., 148 A.D.2d 375 (1st Dep't 1989); see also Societe Generale Alsacienne De Banque, Zurich v. Flemingdon Development Corp., 118 A.D.2d 769, 773 (2d Dep't 1986) ("In addition to proving fraudulent intent, the plaintiff must also show probable success on the merits of the underlying action in order to obtain an order of attachment.") (citations omitted). Plaintiff has failed to meet the grounds for an attachment under CPLR 6201(3), therefore, plaintiff's request for an order of attachment is denied.
Plaintiff's request for a preliminary injunction, insofar as it requests an order enjoining M&T Bank from selling plaintiff's stock, is denied as moot. Currier v. First Transcapital Corp., 190 A.D.2d 507, 508 (1st Dep't 1993) ("[A]n injunction may not issue to prohibit a fait accompli."), citing Town of Oyster Bay v. New York Tel. Co., 75 A.D.2d 598 (2d Dep't 1980).
The only issue remaining is whether plaintiff is entitled to an injunction with respect to the proceeds from the sale of the GST stock. M&T Bank and M&T Securities oppose plaintiff's motion on the ground that prior to the initiation of this action, M&T Bank exercised its perfected security interest and seized all of the assets, including plaintiff's shares of GST stock, after FCS defaulted on loans secured by those assets. M&T Bank asserts that plaintiff has no valid claim to the proceeds from the sale. Plaintiff argues that because it did not allow FCS to grant M&T Bank a security interest in its GST shares in the first instance, M&T Bank's seizure and sale of the GST shares was unlawful and its priority as a secured creditor should be extinguished.
The question of the validity of M&T Bank's seizure and sale of the securities is governed by Article 8 of the New York Uniform Commercial Code ("NYUCC"). Section 8-504(b) of the NYUCC, effective October 10, 1997, provides that a securities intermediary "may not grant any security interests in a financial asset it is obligated to maintain" except as authorized by its customers. In addition, it is a violation of federal securities laws for a securities intermediary to grant security interests in positions that it needs to satisfy customers' claims, except under limited circumstances as authorized by the customers.
If FCS were a registered broker-dealer, plaintiff would have been protected, as noted by the Official Comment to õ8-511, which observes that investors who hold securities through an intermediary are protected
...by the regulatory regimes under which securities intermediaries operate. * * * Intermediaries * * * are prohibited from using customers' securities in their own business activities. Securities firms who are carrying both customer and proprietary positions are not permitted to grant blanket liens to lenders covering all securities which they hold, for their own account or for their customers. * * * Under SEC Rules 8c-1 and 15c2-1, customers' securities can be pledged only to fund loans to customers, and only with the consent of the customers. Customers' securities cannot be pledged for loans for the firm's proprietary business...
Official Comment, McKinney's Cons Laws of NY, Book 62-1/2, UCC õ8-511, 1999 Pocket Part, at 119 see also, Official Comment, McKinney's Cons Laws of NY, Book 62-1/2, UCC õ8-504, 1999 Pocket Part, at 107. Unfortunately, because FCS is not a registered broker-dealer, plaintiff may not claim the benefit of these regulatory protections.
Moreover, even though FCS violated the terms of õ8-504(b) by pledging the GST shares as collateral without plaintiff's permission, this offense is not dispositive of the issue of whether M&T Bank obtained a perfected security interest which takes priority over plaintiff's claim. The Official Comment to NYUCC 8-504(b) states that this subsection "does not determine the rights of a secured party to whom a securities intermediary wrongfully grants a security interest; that issue is governed by Sections 8-503 and 8-511." Official Comment, McKinney's Cons Laws of NY, Book 62-1/2, UCC õ8-504, 1999 Pocket Part, at 107.
NYUCC õ503(a) provides that "all interests in [a] financial asset [that are] held by the securities intermediary [here, FCS] are held by the securities intermediary for the entitlement holders [here, plaintiff], are not property of the securities intermediary, and are not subject to claims of creditors of the securities intermediary, except as otherwise provided in Section 8-511." In other words, except as allowed by õ8-511, the shares of GST stock held by FCS for plaintiff's benefit should not have been subject to the claims of M&T Bank, FCS's creditor, because the stock was not an asset of FCS.
NYUCC õ8-511 sets forth the priority rules for claims by a creditor of the securities intermediary and an entitlement holder. The Official Comment to õ8-511 notes that
...the entitlement holders of a securities intermediary cannot assert rights against third parties to whom the intermediary has wrongfully transferred interests, except in extremely unusual circumstances where the third party was itself a participant in the transferor's wrongdoing. Under subsection (b) the claim of a secured creditor of a securities intermediary has priority over the claims of entitlement holders if the secured creditor has obtained control. If, however, the secured creditor acted in collusion with the intermediary in violating the intermediary's obligation to its entitlement holders, then under Section 8-503(e), the entitlement holders, through their representative in insolvency proceedings, could recover the interest from the secured creditor, that is, set aside the security interest...
Official Comment, McKinney's Cons Laws of NY, Book 62-1/2, UCC õ8-511, 1999 Pocket Part, at 119 (emphasis added). Section 8-503(e) provides that "[a]n action based on the entitlement holder's property interest with respect to a particular financial asset under subsection (a), whether framed in conversion, replevin, constructive trust, equitable lien, or other theory, may not be asserted against any purchaser of a financial asset or interest therein who gives value, obtains control, and does not act in collusion with the securities intermediary in violating the security intermediary's obligation under Section 8-504."
Thus, under NYUCC õ8-511, plaintiff may only recover from M&T Bank the shares of GST or the proceeds of sale of the shares if M&T Bank acted in collusion with FCS in violating FCS's obligations under õ8-504. Whether or not there was any collusion between M&T Bank and FCS with respect to M&T Bank's seizure of the assets, and whether M&T Bank should have had reason to believe that the securities did not belong to FCS are disputed issues of fact that cannot be determined at this juncture. See, Aubrey Equities, Inc. v. SMZH 73rd Associates, 212 A.D.2d 397, 398 (1st Dep't 1995).
M&T Bank's sale of the stock, before any order of attachment, extinguished any ownership interest that FCS may have had in the stock. FCS also has no control with respect to the securities that were seized from FCS's account but have not yet been liquidated. M&T Bank obtained a perfected security interest in all securities that were purchased by FCS by holding possession of the securities in an account in M&T Bank's name at DTC. At least until such time a finding is made that M&T Bank has colluded or otherwise engaged in wrongdoing, M&T Bank has priority over all other claimants to the GST shares and proceeds, including plaintiff, because it had of the securities. See, UCC õ8-511(b); õ8-106.
In sum, plaintiff has failed to satisfy the prerequisites for a preliminary injunction, because plaintiff has not demonstrated a likelihood of success on the merits. Additionally, if plaintiff is ultimately successful, plaintiff may be made whole by monetary damages. Rosenthal v. Rochester Button Co., Inc., 148 A.D.2d 375, 376 (1st Dep't 1989).
Accordingly, it is
ORDERED that plaintiff's motion for an order of attachment is denied; and it is further
ORDERED that plaintiff's motion for a preliminary injunction is denied; and it is further
ORDERED that the cross-motion of defendants First Concorde Securities, Ltd. and Joseph Andres Mann to dismiss the complaint as to them is granted, together with costs and disbursements as taxed by the Clerk, and the first, second, third, fourth and fifth causes of action of the complaint are severed and dismissed, without prejudice to the recommencement of an action against these defendants in the West Indies; and it is further
ORDERED that the remainder of the action shall continue; and it is further
ORDERED that defendants Manufacturers and Traders Trust Company a/k/a M&T Bank Corporation and M&T Securities, Inc. are directed to serve an answer to the complaint within 10 days after service of a copy of this order with notice of entry; and it is further
ORDERED that the Clerk of the Court is directed to enter judgment accordingly.
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Notes
(1) FCS is named in the caption as First Concord Securities rather than First Concorde Securities, while Mann is named as Joseph Andrew Mann, rather than Joseph Andres Mann.
(2) FCS admits it is not registered with the SEC or the National Association of Securities Dealers, Inc. ("NASD"). While it is illegal for unregistered dealers and brokers to offer or sell securities through the use of the instrumentalities of interstate commerce (15 U.S.C. õ78o[a][1]), there is no private right of action for violation of the provision requiring that brokers and dealers comply with rules covering registration. Securities Exchange Act of 1934, õ15(c)(3), as amended, 15 USC õ78o(c)(3); Kidder Peabody & Co., Inc. v. Unigestion Intern., Ltd., 903 F. Supp. 479, 495 (S.D.N.Y. 1995).
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