As printed on April 13, 2012 in the Daily Business Review, by L Andrew S. Riccio, Associate, and Daniel E. Vielleville, Partner, Assouline & Berlowe, P.A. (www.assoulineberlowe.com)
In the wake of the fall of the Madoff Securities Ponzi scheme, where multitudes lost millions from badly placed investments, litigation has been rampant. While many investors have sought remuneration from their bankers or investment advisors for making these bad calls, not all make it to court. In one such truly international instance, shareholders of personal investment holding corporations sued Banco Santander for placing their money with a Madoff Securities-managed fund. The case, Solymar Investments, Ltd v. Santander, 11thCir. Ct of Appeals, No. 11-12515, decided February 28, 2012, involved Panamanian shareholders of personal investment holding corporations organized under the laws of theCayman Islands who invested an undisclosed sum of money with Banco Santander, the giant Spanish bank.
The case, however, never made it to the merits arguments, as the U.S. District Court for the Southern District of Florida and the U.S. Court of Appeals for the Eleventh Circuit decided that the case was subject to arbitration and could not be tried before a judge. Santanderhad invested some of Solymar et al.’s money in a fund called Optimal Strategic. This fund happened to be managed by Madoff Securities and thus suffered the well-documented substantial losses incurred by Madoff’s Ponzi scheme. After the loss, and presumably in order to maintain the business relationship, many of Santander’s customers and the bank entered into exchange agreements, exchanging the suspended Madoff-invested accounts for preferred securities with Santander. Among these customers were Solymar et al., who agreed to execute the exchange memorandum as part of a multi-part, comprehensive settlement which included the issuance of additional promissory notes in Solymar’s favor. Pursuant to the exchange agreement, Solymar agreed to (i) releaseSantanderof any liability arising from the Madoff-related investments, and (ii) arbitrate any issues arising from the agreement inGeneva,Switzerlandin accordance with the Rules of Arbitration of the International Chamber of Commerce, and to submit to the jurisdiction of theGenevacourts for enforcement of the arbitration agreement.
Subsequent to the execution of the exchange agreement, Solymar and Santander could not agree on the promissory notes that were supposed to complement the exchange agreements. Despite the arbitration and forum selection clauses, Solymar filed a 149-page complaint against Santanderalleging that the parties had never entered into a valid contract. As a result of these clauses, the parties argued whether the district court had the authority to hear the case. Santanderwon on its motion to dismiss based on both the arbitration clause and the forum selection clause, and Solymar appealed. On appeal, the U.S.Court of Appeals was presented with the question of whether the exchange agreement itself was legally binding on the parties. From Solymar’s perspective, it was the district court’s role, rather than an arbitrator’s, to decide whether the exchange agreement was but one part of a comprehensive agreement between the parties. Simply put, the court was left to determine “who shall decide what.”
Following the relatively recent Supreme Court decision Granite Rock Co. v. International Brotherhood of Teamsters, 130 S. Ct. 2847 (2010), the U.S Court of Appeals for the Eleventh Circuit ultimately dismissed the case in favor of arbitration. Of course, the decision was not without a full analysis of the relevant case law, as this is a relatively new issue for the court. Distilled to the opinion’s most basic form, the court determined that there is a two-step process required in considering the arbitrability of any contract with an arbitration clause.
First, it is up to the court to determine any challenges to the formation of the contract containing the arbitration clause. Whether a contract is validly formed or created depends upon state law. In this case, the plain language of the exchange agreement exhibited a valid contract underFloridalaw; thus, any issue arising therefrom is properly determined by an arbitrator, not a court. The second step in the process is whether the challenge goes to the formation of the arbitration clause specifically or to the contract in which the arbitration clause is found. Because Solymar did not allege in its complaint that there was an issue of formation specific to the arbitration clause, the court did not give this issue much attention. However, for the international lawyer or businessman, it should be noted that the court maintained this distinction. Following the Supreme Court’s landmark decision in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), the Eleventh Circuit refused to “invade the province of the arbitrator” and rule on “broad challenges to general contracts containing arbitration clauses.”
This case represents a continuing trend inU.S.federal courts to follow the Federal Arbitration Act and enforce arbitration agreements when they appear valid on their face. Accordingly, the decision to accept an arbitration clause contained in a contract must not be taken lightly as it is very likely the agreement to arbitrate will be enforced and the dispute referred to arbitration, even when there are allegations that there was never a contract. Secondly, this case involves two quite sophisticated parties, international investment funds and one of the world’s largest banking institutions, in an argument over the world’s most infamous fraudulent investing scheme. Needless to say, it is a big deal.
Lesson: Read your contracts carefully. If you believe your contract is merely a piece of a larger agreement, make sure it says that clearly, before signing. One of Solymar’s underlying contentions was that the exchange agreement did not cover their entire settlement agreement and thus the arbitration clause was not applicable to all of their claims. However, the integration clause, stating that all relevant terms between the parties are contained in that document, was prominent in their exchange agreement. Besides a properly drafted contract, the inclusion of the integration clause helped the court dismiss the case in favor of arbitration because it was clearly apparent that the parties intended to arbitrate these claims.
L. Andrew S. Riccio, Esq. can be reached at email@example.com
and Daniel E. Vielleville, Esq. can be reached at firstname.lastname@example.org
Or by telephone at ASSOULINE & BERLOWE’s Miami Office: 305-567-5576.