Sternklar et al v. Heritage Auction Galleries, Inc. et al

1
UNITED STATES BANKRUPTCY COURT
DISTRICT OF M ASSACHUSETTS
EASTERN DIVISION
_________________________________________
IN RE:
MARTIN BARRY PAUL, Chapter 7
DEBTOR Case No. 05-22881-W CH
_________________________________________
JEFFREY D. STERNKLAR, CHAPTER 7
TRUSTEE,
PLAINTIFF,
Adversary Proceeding
v. No. 08-1069
HERITAGE AUCTION GALLERIES, INC.,
HERITAGE GALLERIES AND AUCTIONEERS,
HERITAGE CAPITAL CORPORATION,
HERITAGE AUCTIONS, INC., STEVEN IVY,
AND JAMES HALPERIN,
DEFENDANTS.
_________________________________________
IN RE:
THE RARITIES GROUP, INC., Chapter 7
DEBTOR Case No. 03-18371-W CH
_________________________________________
JEFFREY D. STERNKLAR, CHAPTER 7
TRUSTEE.,
PLAINTIFF,
Adversary Proceeding
v. No. 08-1070
HERITAGE AUCTION GALLERIES, INC.,
HERITAGE GALLERIES AND AUCTIONEERS,
HERITAGE CAPITAL CORPORATION,
HERITAGE AUCTIONS, INC., STEVEN IVY,
AND JAMES HALPERIN,
DEFENDANTS.
_________________________________________
MEMORANDUM OF DECISION
I. INTRODUCTION
The matters before the Court are the Motions to Dismiss or Stay and Compel Arbitration and
Alternative Motion to Dismiss Fraud Claims Pursuant to Rule 9(b) (the “Motion to Compel”) filed
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According to a footnote in the Motion to Compel, Heritage Auction Galleries, Inc., is1
not the correct name of any Defendant or any entity affiliated with the Defendants.
The parties have filed identical papers in each case using a joint caption. Although2
these adversary proceedings have not been consolidated, I note that consolidation is appropriate
under Fed. R. Civ. P. 42(a), made applicable to adversary proceedings by Fed. R. Bankr. P. 7042,
because both involve the same nucleus of material fact and questions of law. In the interest of
clarity and expediency, I will refer to the adversary pleadings in the singular, and all docket
citations will refer to Adv. P. No. 08-1070 unless stated otherwise.
2
by Heritage Auction Galleries, Inc., Heritage Galleries and Auctioneers, Heritage Capital1
Corporation, Heritage Auctions, Inc. (collectively, “Heritage”), Steven Ivy (“Ivy”), and James
Halperin (“Halperin”) (collectively, the “Defendants”) in two identical adversary proceedings
brought by Jeffrey D. Sternklar, Chapter 7 trustee (the “Trustee”) for the estates of Martin Barry Paul
(“Paul”) and the Rarities Group, Inc. (“RGI”) (collectively, the “Debtors”), and Paul (collectively,
the “Plaintiffs”) asserting various counts arising from a prior business relationship between Paul and
Heritage. Through the Motion to Compel, the Defendants seek to enforce arbitration clauses2
contained within various documents Paul executed, both as an individual and as an officer and
director of RGI, while participating in Heritage’s coin auctions and stay or dismiss these adversary
proceedings. In the alternative, the Defendants seek to dismiss the Plaintiffs’ fraud claims under
Fed. R. Civ. P. 9(b). For the reasons set forth below, I will enter an order denying the Motion to
Compel.
II. BACKGROUND
From the outset, I note that the Trustee’s allegations as set forth in the Complaint span
thousands of individual transactions involving both Debtors over the course of many years. As such,
the allegations with respect to these transactions are generalized and somewhat vague. The parties
have further complicated this matter by submitting numerous documents which may or may not
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Complaint, Docket No. 1, ¶ 2.3
Id.4
Id. at ¶ 3.5
Id.6
Id. at ¶¶ 8-9.7
Id. at ¶ 9.8
Id. at ¶ 9(a).9
Id.10
3
relate to some or all of these transactions. With this in mind, the relevant background of the dispute
is as follows.
Paul is a buyer and curator of rare coins. For many years, Paul operated RGI as a vehicle3
for buying and selling coins, as well as sports and entertainment memorabilia. Heritage is a4
collections auctioneer based in Dallas, Texas, and is purportedly the world’s largest rare coin firm.5
Upon information and belief, Ivy and Halperin are co-chairmen of Heritage. Since the early 1980’s,6
Paul, or companies in which he held an ownership interest, have conducted business with Heritage
encompassing thousands of individual transactions.7
In the Complaint, the Trustee alleges that these transactions fall roughly into four categories:
consignments, purchases of memorabilia, split coin deals, and loans. In consignment transactions,8
Paul or RGI would consign individual coins or memorabilia to Heritage, and pursuant to
consignment agreements, Heritage would, from time to time, advance funds to be applied against
the sale price. Commissions, interest rates, auction sale placements, and other terms would be9
negotiated. In memorabilia purchase transactions, Paul or RGI would purchase individual10
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Id. at ¶ 9(b).11
Id. at ¶ 9(c).12
Id.13
Id.14
Id.15
Id. at ¶ 9(d).16
4
memorabilia items at Heritage Auctions on credit, which Heritage would deliver. Split coin deals11
were transactions where Heritage and Paul or RGI purchased coins together with the intention of
Heritage reselling them for profit. At times, Paul or RGI might curate the coins to increase their12
grade and value. Profits from split coin deals would be split between Heritage and Paul or RGI13
according to agreed formulae, taking into account the funds advanced by Heritage, an implied rate
of interest, expenses incurred in curating the coins, the grading, and the ultimate disposition of the
coin. From time to time, Heritage might also compensate Paul for curating services by an hourly14
rate or a commission. In loan transactions, Heritage would advance money to Paul, purporting to15
reserve a right to offset against Paul’s share of future profits.16
Over the course of their business relationship, the parties entered into numerous agreements
to govern these transactions. The Defendants assert that its standard Terms and Conditions of
Auction (the “Standard Auction Terms”) are applicable to all auction participants and transactions.
The Standard Auction Terms provide in relevant part:
Dispute Resolution and Arbitration Provision
45. By placing a bid or otherwise participating in the auction, Bidder accepts
these Terms and Conditions of Auction, and specifically agrees to the
alternative dispute resolution provided herein. Arbitration replaces the right
to go to court, including the right to a jury trial.
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Terms and Conditions of Auction, Exhibit A-2, ¶ 45, 48, 50, Docket No. 10. I note that17
the footer to this document indicates that this page of the Standard Terms was revised on April
15, 2008.
5
* * *
48. Arbitration Clause: All controversies or claims under this Agreement or
arising from or pertaining to: this Agreement or related documents, or to the
Properties consigned hereunder, or the enforcement or interpretation hereof
of this or any related agreements, or damage to Properties, payment, or any
other matter, or because of an alleged breach, default or misrepresentation
under the provisions hereof or otherwise, that cannot be settled amicably
within one (1) month from the date of notification of either party to the other
of such dispute or question, which notice shall specify the details of such
dispute or question, shall be settled by final and binding arbitration by one
arbitrator appointed by the American Arbitration Association (“AAA”). The
arbitration shall be conducted in Dallas, Dallas County, Texas in accordance
with the then existing Commercial Arbitration Rules of the AAA. The
arbitration shall be brought within two (2) years of the alleged breach, default
or misrepresentation or the claim is waived. The prevailing party (a party that
is awarded substantial and material relief on its claim or defense) may be
awarded reasonable attorney’s fees and costs. Judgment upon the award
rendered by the arbitrator may be entered in any court having jurisdiction
thereof; provided, however, that the law applicable to any controversy shall
be the law of the State of Texas, regardless of its or any other jurisdiction’s
choice of law principles and under the provisions of the Federal Arbitration
Act.
* * *
50. In consideration of their participation or application for the Auction, a person
or entity (whether the successful Bidder, a Bidder, a purchaser and/or other
Auction Participant or registrant) agrees that all disputes in any way relating
to, arising under, connected with, or incidental to these Terms and Conditions
and purchases, or default in payment thereof, shall be arbitrated pursuant to
the arbitration provision. In the event that any matter including actions to
compel arbitration, construe this agreement, actions in aid or arbitration or
otherwise needs to be litigated, such litigation shall be exclusively in the
Courts of the State of Texas, in Dallas Country, Texas, and if necessary, the
corresponding appellate courts. The successful Bidder, purchaser, or Auction
participant also expressly submits himself to the personal jurisdiction of the
State of Texas.17
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See Exhibits B, B-1, B-2, Docket No. 10.18
Exhibit A-6, Docket No. 10.19
Exhibit A-6, Docket No. 10, ¶ 10.20
Exhibit A-5, Docket No. 10.21
Id.22
6
Paul and/or RGI purportedly agreed to the Standard Auction Terms, including the arbitration clause,
by placing bids and otherwise participating in Heritage’s auction and by registering online at
Heritage’s internet auction site.18
Additionally, the Defendants attached other documents with arbitration clauses to the Motion
to Compel. One was a document titled “Extended Payment Terms for Dealers with Preapproved
Credit” (the “Extended Payment Terms”) for Heritage’s 2001 February Long Beach Signature Sale.
Paul executed the Extended Payment Terms on February 23, 2001. Paragraph 10 of the Extended19
Payment Terms provides:
10. All disputes in any way arising relating to, arising under, connected with, or
incident to this agreement, shall be submitted to binding arbitration under the
commercial rules of the American Arbitration Association (heard at Dallas, Texas)
or if applicable, the Professional Numismatists Guild.20
The next attached document was an Auction Consignment Agreement (the “Consignment
Agreement”) executed by Paul on behalf of RGI on March, 19, 2002 for a Signature Sale to be held
on or about April 25-27, 2002. There are several notable things about the Consignment Agreement.21
First, a schedule of coins to be consigned is not attached to the agreement despite a reference to one
in the first paragraph. Second, the following notice appears before the signature block: “Important22
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Id.23
Id.24
Id.25
Id.26
Id.27
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notice: Further items and conditions of this agreement appear on the reverse side.” The document,23
as submitted to the Court, does not have a reverse side. There is, however, a second page titled
“General Consignment Terms and Conditions Auction Consignment Agreement” (the “Consignment
Terms”). The Consignment Terms state as follows:24
The sale will be conducted in accordance with the Terms and Conditions of Sale that
are printed in the Sale catalog, a copy of which you will receive approximately two
weeks before a Signature Sale™, one week before a Bullet Auction™ . . . .
* * *
This Agreement is the entire agreement between you and us concerning the
consignment of your Coins, and it supercedes any prior agreement or representation.
This Agreement can only be changed in writing by both you and us. . . .
* * *
Arbitration Clause: if any disputes arise regarding any matter pertaining to the sale,
Consignor and Auctioneer agree that the dispute shall be submitted to binding
arbitration in accordance with the rules of the Professional Numismatists Guild
(PNG) or the commercial rules of the American Arbitration Association (A.A.A.).
The A.A.A. arbitration shall be conducted under the provisions of the Federal
Arbitration Act with locale in Dallas, Texas. . . .25
The signature block of the Consignment Agreement contains three boxes. One is signed by Ivy, as
a consignment assistant on behalf of Heritage. The box indicating acceptance by the consignor is26
conspicuously blank. The third box, apparently to be completed when the consignor is a27
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Id.28
Invoices A627376, A633482, A695848, A695849, Exhibit A, Docket No. 2.29
Id.30
Exhibit A-7, Docket No. 10.31
Id. at ¶ 16.32
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corporation, is signed by Paul as President of RGI, but that box does not contain any language
indicating assent to the Consignment Terms.28
Four invoices were attached to both the Complaint and Motion to Compel with dates ranging
from October 25, 2004, to May 28, 2005. Each contain the following acknowledgment: “I have29
read and agree to the Terms and Conditions of Sale as they appear in the catalogue.” A document30
titled Terms & Conditions of Sale (the “Terms of Sale”), attached to an executed document titled
“Central States Signature Sale & Internet Bullet Auction, April 25-28, 2002 (the “Bullet Auction
Document”),” similarly contains an arbitration clause. It is unclear whether the Terms of Sale is31
the document referenced by the invoices and Consignment Agreement. In the Motion to Compel,
the Defendants assert that the invoices reference the Standard Auction Terms. Nonetheless, it
provides in part:
If any disputes arise regarding payment, authenticity, or grading or any other matter
pertaining to the sale, the bidder or a participant in the Auction Sale and/or the
Auctioneer agree that the dispute shall be submitted, if otherwise mutually
unresolved, to binding arbitration in accordance with the rules of the Professional
Numismatists Guild (PNG) or American Arbitration Association (A.A.A.). The
A.A.A. arbitration shall be conducted under the provisions of the Federal Arbitration
Act with locale in Dallas, Texas. . . .32
The Bullet Auction Document appears to be an agreement by which Paul acknowledged that he
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Id.33
Exhibit A-1, Docket No. 10, ¶ 2.34
Id. at ¶ 1.35
Id.36
Id. at ¶ 5.37
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agreed to the Terms of Sale in consideration of his participation in that particular auction.33
On May 1, 2003, Paul, on behalf of RGI, executed the Participation Agreement by which
RGI, through Paul, would provide services to Heritage as an independent contractor. Under34
Heritage’s general direction and with funds it provided, Paul would purchase “numismatic items”
and, if necessary, curate them. Heritage would then resell the coins through its normal business35
operations. As compensation, Paul would be paid an advance of $30,000 per month against his36
fifty percent commission from the net profits of the resales. The Participation Agreement further37
provided:
4. Term. Provided Paul exclusively performs Participant’s duties under this
Agreement, the term of this Agreement shall commence from May 1 and shall
continue for six (6) months, and is automatically renewed at six (6) month intervals,
upon the same terms and conditions, or until sooner terminated by either the
Company or the Participant upon provided written notice to the non-terminating
party, which notice is deemed complete upon posting by certified mail. Termination
may be by either party at any time either for or without cause. Upon termination of
this Agreement, and, except as other provided in Sections 9, 11, 14, 16, and the
Arbitration section of 24 of this Agreement, all rights and obligations of the
Company and the Participant under this Agreement shall cease.
* * *
18. Prior Agreements. The parties hereto stipulate and acknowledge that they
previously entered into a series of prior agreements from time to time. Any and all
prior agreements of the parties with respect to the subject matter hereof, whether
oral or in writing, are superseded by the terms of this Agreement. . . .
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Exhibit A-1, Docket No. 10, ¶¶ 4, 18, 24 (emphasis added).38
See Case No. 03-18371-WCH.39
Schedule D, Docket No. 16, Case No. 03-18371.40
Complaint, Docket No. 1, ¶ 13.41
10
* * *
24. Miscellaneous. . .
* * *
Arbitration. Agreement for Arbitration. Company, Participant and Paul
hereby agree that any dispute arising [sic] pertaining to this Agreement or its
termination, shall be resolved in Dallas, Texas, by final and binding arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association and AAA’s National Rules for the Resolution of Employment Disputes
in effect on the date the dispute arises. . . .
* * *
This Agreement contains the entire understanding and agreement between the
parties with respect to the subject matter hereof. Except as otherwise provided
herein, this Agreement may not be altered, amended, or rescinded, nor may any of
its provisions be waived, except by an instrument in writing signed by the parties
hereto or, in the case of an asserted waiver, by the party against whom the waiver
is sought to be enforced.38
On October 7, 2003, RGI filed a voluntary Chapter 11 petition. On Schedule D- Creditors39
Holding Secured Claims (“Schedule D”), RGI listed Heritage as the holder of unsecured debt totaling
approximately $174,000. Heritage did not file a proof of claim. On February 14, 2005, I confirmed40
RGI’s plan of reorganization.
The Trustee alleges that on or about February 7, 2005, Heritage, through Ivy and Halperin,
outlined the terms of a five year employment agreement (the “Employment Agreement”). The41
material terms of the Employment Agreement included: a $55,000 monthly advance against
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Id.42
Id.43
Id. at ¶ 14.44
Id. at ¶ 15.45
Id.46
Id.47
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commissions on Paul’s purchases; a $200,000 annual salary based on an average of 15 hours worked
weekly plus $300 per hour for any additional hours worked; an annual bonus up to $200,000; a
minimum $100,000 per year early buy-out provision in the event of a termination without cause
during the five year term; and a balloon payment of $500,000 at the end of the five year term.42
There were additional terms to the Employment Agreement and subsequent negotiations among
Paul, Ivy, and Halperin. The Trustee alleges, however, that the parties orally agreed to the43
Employment Agreement no later than March 15, 2005, as evidenced by Heritage increasing Paul’s
monthly draw to $55,000.44
According to the Trustee, the Employment Agreement placed a number of conditions on
Paul’s employment with Heritage. He alleges that it required Paul to sell his Massachusetts home45
and establish permanent residency in Dallas, Texas, abandon all business interests, immediately
settle all pending litigation, and consign personal and RGI collectible inventories to Heritage for
auction. At this time, Paul was involved in a “bitterly contested” divorce proceeding, several non-46
bankruptcy lawsuits, and a “hotly contested” confirmation hearing in RGI’s bankruptcy case. The47
Trustee alleges that in reliance on the generous terms of the Employment Agreement, Paul settled
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Id.48
Id. at ¶ 16.49
Id.50
Id.51
Id. at ¶ 17.52
Id.53
Id.54
12
all pending litigation on otherwise disadvantageous terms.48
In early April, 2005, Paul allegedly expressed concern to Heritage that it had not yet
memorialized the Employment Agreement to which they had agreed and under which they had been
operating. On April 5, 2005, Ivy responded by email, apologizing that the preparation of the49
written contract had not yet started, and assuring Paul that the delay was due to a need to seek the
advice of a tax attorney in order to maximize Paul’s cash flow under the Employment Agreement.50
Paul allegedly reiterated his concern on subsequent occasions, only to be reassured each time by Ivy
that the contract would be prepared soon.51
The Trustee alleges that Paul was provided with a written draft purporting to memorialize
the Employment Agreement (the “Draft Agreement”) on July 21, 2005. Although the Complaint52
is unclear on this point, Heritage allegedly terminated Paul a day before providing the Draft
Agreement, but subsequently “changed course,” presumably, rehiring him. The Trustee alleges that53
the Draft Agreement was materially different to the Employment Agreement to which both Heritage
and Paul had agreed. In contrast, the Draft Agreement allegedly introduced many new terms and54
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Id.55
Exhibit A-1, Docket No. 2.56
Complaint, Docket No. 1, ¶ 27.57
Exhibit A-1, Docket No. 2.58
Id.59
Id. (emphasis added).60
13
terms unfavorable to Paul. Ultimately, the parties never executed the Draft Agreement.55
On September 30, 2005, Heritage, specifically identified as Heritage Galleries and
Auctioneers, and Paul, with no mention of RGI, executed a document titled “Bill of Sale” (the “Bill
of Sale”). The Trustee alleges that Heritage required Paul to execute the Bill of Sale as a condition56
of his continued employment. The Bill of Sale, as submitted to the Court, is a two page document57
with approximately sixty pages of invoices, spreadsheets, and photocopies of coins attached. The58
first page of the document consists of a single paragraph of recitals followed by nine numbered
sentences outlining the terms of the agreement. The Bill of Sale recites the following:59
IT IS AGRRED [sic] by and between the Parties as follows:
[Heritage]'s business is that of auctioneer and dealer in collectibles. [Paul] has
consigned and tendered items to [Heritage] ("Consignments") and [Paul] has received
multiple advances at various dates against those consignments. [Heritage] has a
perfected security interest in the Consignments. [Paul] has participated in [Heritage]'s
auctions and has acquired numerous lots from [Heritage] ("Auction Purchases"). All
of the Consignments and Auction Purchases were made for the [Paul]'s personal
account. [Paul] owns clear title to all Consignments and has not otherwise pledged
his Auction Purchases. [Heritage] has possession of the [Paul]'s Auction Purchases
and the Consignments. [Heritage] retains title to the Auction Purchases to such date
of the full payment for such purchases. [Heritage] is a secured party on the Auction
Purchases under the terms of its sales to which [Paul] as an auction purchaser has
agreed. [Paul] has not paid for his Auction Purchases ("Debt"). The Parties desire
to settle any and all issues pertaining to the Consignment, Advances and Debt.60
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Id.61
Complaint, Docket No. 1, ¶ 24.62
Exhibit A-1, Docket No. 2.63
Id.64
Id.65
Complaint, Docket No. 1, ¶ 22.66
14
The second page of the Bill of Sale contains only two undated signature lines where Paul, in his
individual capacity, and Ivy, as co-chairman of Heritage Auctions, Inc., executed the document.61
The Trustee maintains that the Bill of Sale as produced by Heritage and submitted to the
Court is incomplete and has been manipulated. Paul, for reasons explained below, does not have62
his own copy of the Bill of Sale. Notably, the first page of the Bill of Sale identifies “Heritage
Galleries and Auctioneers” as a party to the agreement, but the signature line on page two indicates
that Ivy signed on behalf “Heritage Auctions, Inc.” The Trustee also points out that several of the63
documents currently attached to the Bill of Sale have a “run date” of October 7, 2005, and therefore
could not have been attached on September 30, 2005. I also note that the word “advances” is64
capitalized in the final sentence of the above paragraph as if it were an identified term, but it is not
identified in any part of the document, nor is it referenced further.65
The parties also disagree as to the purpose of the Bill of Sale. Heritage maintains that the Bill
of Sale constituted an outright sale of coins and memorabilia that Paul had either previously
purchased at Heritage’s auction and not yet paid for or consigned to Heritage. The Trustee alleges66
that the Bill of Sale was meant to be an accounting mechanism reflecting the Heritage’s purchase
of an interest in the scheduled items for $50,000 so that it could resell them and receive a twenty-five
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Id. ¶ 24.67
Id.68
See Case No. 05-22881-WCH.69
Complaint, Docket No. 1, ¶ 18; see also Schedule I - Current Income of Individual70
Debtor(s), Docket No. 23, Case No. 05-22881-WCH (“In November, 2005, Debtor’s employer,
Heritage Auction Galleries, terminated its [sic] employment with the Debtor.”).
Complaint, Docket No. 1, ¶ 18.71
Id. at ¶ 21.72
Id. at ¶ 19.73
Id. at ¶ 21.74
15
percent share of the profits. Reiterating his allegation that the Bill of Sale is incomplete, the67
Trustee notes that the document in its current form does not contain any terms with respect to profit
sharing.68
Paul filed his own individual Chapter 7 case on October 14, 2005 and the Trustee was
appointed Chapter 7 trustee of his estate. At the time of his filing, Paul remained employed at69
Heritage. By November, 2005, however, Heritage terminated Paul’s employment, allegedly without
cause. Paul did not receive the severance payment allegedly required by the Employment70
Agreement. Moreover, Paul alleges that upon his termination, Heritage retained or sold his71
personal property, only some of which had been consigned. Paul estimates that his inventory at72
Heritage was approximately $6,000,000 in coins, the profits of which he and Heritage were to share
equally. Additionally, Heritage allegedly retained some of Paul’s personal effects, as well as files73
regarding his personal financial and legal affairs, including his various dealings with Heritage.74
Heritage filed two proofs of claim in Paul’s Chapter 7 case. These claims total
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See Claims Nos. 13, 14, Case No. 05-22881-WCH.75
Docket No. 16, Case No. 03-18371-WCH.76
Id.77
Complaint, Docket No. 1, ¶ 30.78
Id.79
Id. at ¶ 31.80
Docket No. 287, ¶ 4(b), Case No. 03-18371-WCH.81
16
approximately $401,958.89. As previously stated, Heritage did not file any proofs of claim in75
RGI’s case, but Schedule D reflects that Heritage is the holder of secured claims totaling
$174,771.05. Additionally, RGI’s Schedule F - Creditors Holding Unsecured Nonpriority Claims76
(“Schedule F”), reveals that Paul holds unsecured claims totaling $223,020.99.77
Paul subsequently obtained employment as a buyer for Rare Coin Wholesalers (“RCW”).78
The Trustee alleges that Paul’s employment arrangement with RCW was “very lucrative,” with
potential annual income from commissions in excess of $700,000. Despite his employment at79
RCW, Paul remained dependant on Heritage as he made over ninety percent of his coin purchases
at auctions, of which Heritage was the largest.80
On January 31, 2006, RGI moved to convert its case to one under Chapter 7. The motion to
convert stated that Paul was unable to continue RGI’s business operations because, inter alia, Paul
commenced full-time employment with a Dallas based company, presumably RCW, which required
that he devote himself exclusively to the business of the employer and discontinue the business of
buying and selling memorabilia. I granted the motion to convert on February 1, 2006. The Trustee81
was subsequently appointed Chapter 7 trustee of RGI’s estate.
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Complaint, Docket No. 1, ¶ 32.82
Id. at ¶ 32; Exhibit B, Docket No. 2.83
Id. at ¶ 33.84
Id.85
17
On December 29, 2006, the Trustee filed motions in both RGI’s and Paul’s bankruptcy cases
seeking to retain Scott Gray of the Dallas law firm of Gray & Gray as special counsel to prosecute
claims against Heritage on behalf of both Debtors’ estates. While Heritage’s Dallas counsel,
Attorney Deirdre Ruckman of the Dallas law firm of Gardere & Wynne, had not filed a formal
appearance in either case, the Trustee provided Attorney Ruckman a copy of these motions via
email. Shortly thereafter, on January 10, 2007, Ivy forwarded a copy of the Trustee’s email to82
Steve Contursi (“Contursi”), the owner of RCW and Paul’s employer, with the following message
(the “Email”):
Please find attached a lovely missive from Martin’s bankrupt estate(s) attorney. Not
surprisingly, we have an entirely different view of the facts than does Martin. The
reason for this email isn’t to involve you in our dispute with Martin as I’m sure you
have enough to deal with, but rather it is to inform you that until said dispute is
resolved Martin will not be allowed to participate in any Heritage auction. Clearly
our dispute isn’t with you. We have a great relationship, and I see no reason why it
shouldn’t continue as such. Hopefully you will appreciate the reasons we are taking
this action[.] Please call or write if you have any questions.83
Two days later, Contursi informed Paul of the Email and terminated his employment. Todd84
Griffith, Contursi’s associate, told Paul that he was dramatically less profitable to RCW as a result
of being barred from Heritage’s auctions and therefore, RCW could not continue to employ him.85
In addition to all his prior allegations, Paul believes Heritage is engaged in systemic
fraudulent conduct and deceptive practices with respect its auctions. Examples of this conduct
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Complaint, Docket No. 1, ¶¶ 37-39.86
18
include: selling memorabilia to which it has no proof of ownership; improperly “reholdering” coins
with major coin grading services; improperly using inside bidding information to provide selective
parties with an unfair advantage; selling gradable coins at it auction without grades so that Heritage
could purchase them cheaply and make a profit on the graded resale; and intentionally making its
settlement and reporting paperwork confusing to limit the ability to reconcile transactions. As a86
result of these deceptive practices, the Plaintiffs’ allege that Paul and the Debtors’ estates have been
economically damaged, and that Paul has suffered mental anguish, both in amounts yet to be
determined.
On March 27, 2008, the Trustee commenced the present adversary proceedings by filing a
twenty-five count Complaint. In light of the procedural posture of the case, further discussion
requires a brief summary of each individual count of the Complaint. In Count I - Tortious
Interference, Paul alleges that Ivy and Heritage willfully and intentionally interfered with Paul’s
employment relationship with RCW by sending the Email. In Count II - Promissory Estoppel, Paul
and the Trustee of his estate allege that the Defendants promised to provide Paul with certain terms
and conditions of employment if he moved to Texas, wound up his business, and finalized all
pending litigation, intending that he rely on such representations, but failed to provide the promised
terms after Paul performed his obligations. Alternatively, in Count III - Negligent
Misrepresentation/Employment Agreement, Paul and the Trustee of his estate allege that the
Defendants made the above representations recklessly and without reasonable care, leading to Paul’s
detrimental reliance. In Count IV - Deceit/Employment Agreement, Paul and the Trustee of his
estate repeat their allegations under Count I. In Count V - Breach of Contract/Employment
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19
Agreement, Paul and the Trustee of his estate allege that Heritage breached the Employment
Agreement by failing to pay him all amounts due under the agreement. In Count VI - Breach of
Contract/Bill of Sale, Paul and the Trustee of his estate allege that Heritage failed to account for
Paul’s seventy-five percent interest in the profits on items subject to the Bill of Sale. In Count VII -
Breach of Contract/Other, the Plaintiffs allege that Heritage breached various agreements concerning
consignments, auction purchases, split coin deals, and loans with both Paul and RGI, damaging both
Debtors’ estates. In Count VIII - Breach of the Implied Covenant of Good Faith and Fair Dealing,
the Plaintiffs allege that Heritage breached the implied covenant of good faith and fair dealing arising
under the agreements concerning their various transactions, damaging both Debtors’ estates. In
Count IX - Breach of Fiduciary Duty, the Plaintiffs allege that Heritage breached fiduciary duties
owed to the Debtors under their various agreements, damaging both Debtors’ estates. In Count X -
Conversion, the Plaintiffs allege that Heritage converted property of the Debtors that is property of
one or both of the Debtors’ estates. In Count XI - Unjust Enrichment, the Plaintiffs allege that
Heritage has been unjustly enriched at the expense of the Debtor’s respective estates. Through
Count XII - Accounting, the Plaintiffs seek an accounting pursuant to 11 U.S.C. § 542(e) based on
original documentation that is exclusively in Heritage’s control in order to reconcile the various
transactions among the parties. In Count XIII - Wrongful Termination, Paul and the Trustee of his
estate allege that Heritage terminated Paul’s employment in order to avoid paying him amounts
owed. Through Count XIV - Turn Over Order, the Trustee, as Chapter 7 trustee of both Debtors’
estates, seeks an order pursuant to 11 U.S.C. § 542 directing Heritage to turn over property of the
estate currently in its possession. In Count XV - Preference, 11 U.S.C. § 547, the Trustee of Paul’s
estate alleges that Heritage is the transferee of certain transfers of interests of Paul’s property, made
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20
within ninety days of the commencement of Paul’s bankruptcy and while Paul was insolvent, on
account of an antecedent debt which enabled Heritage to receive more than it would in a case under
Chapter 7 and is thus avoidable. In Count XVI - Fraudulent Transfer, 11 U.S.C. § 548, the Trustee
of both Debtors’ estates asserts that property interests of one or both of the Debtors were fraudulently
transferred to Heritage to the extent that the Debtors did not receive reasonably equivalent value at
a time when they were insolvent due to Heritage’s failure to properly credit the transfers. In Count
XVII - Uniform Fraudulent Transfer Act, Mass. Gen. Laws Ch. 109A, § 5(a)(2)(I) and Texas
Business and Commercial Code, § 24.005(a)(2)(A), the Trustee of both Debtors’ estates asserts that
Heritage failed to credit transfers of interest from one or both Debtors at a time when one or both
Debtors were engaged or were about to engage in a transaction for which the remaining assets of the
Debtors were unreasonably small in comparison. In Count XVIII - Uniform Fraudulent Transfer Act,
Mass. Gen. Laws Ch. 109A, § 6(a) and Texas Business and Commercial Code, § 24.006(a), the
Trustee of both Debtors’ estates repeats his argument under Count XVI. In Count XIX -
Unauthorized Post-Petition Transfers, 11 U.S.C. § 549, the Trustee of both Debtors’ estates alleges
that some transactions were made after the commencement of the Debtors’ respective bankruptcy
cases and were not authorized by the Court. Through Count XX - Recovery of Avoided Transfers,
11 U.S.C. § 550, the Trustee of both Debtors’ estates seeks to recover any property transferred to
Heritage or its value to the extent that any transfer is avoided. In Count XXI - Trustee’s Objection
to Allowance of Claim, 11 U.S.C. § 502, the Trustee of both Debtors’ estates objects to the
allowance of all claims asserted or held by Heritage in the Debtors’ cases. Through Count XXII -
Equitable Subordination of Claims, 11 U.S.C. § 510(c), the Trustee of both Debtors’ estates seeks
to subordinate the claims of Heritage on the basis of its inequitable conduct which has resulted in
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The Motion to Compel was originally scheduled for hearing on May 21, 2008, but the87
parties continued the hearing several times by agreement to afford the Trustee an opportunity to
analyze and respond to the Motion to Compel.
21
injury to creditors or an unfair advantage to Heritage. In Count XXIII - Texas Business and
Commercial Code, § 17.50, the Plaintiffs assert that while the Debtors were consumers under §
17.45 of the Texas Business and Commercial Code, the Defendants knowingly and intentionally
engaged in false, misleading, or deceptive conduct upon which Paul detrimentally relied. In Count
XXIV - Mass. Gen. Laws Ch. 93A, § 11, the Plaintiffs assert that each Defendant is engaged in trade
or commerce and have committed unfair and deceptive acts and practices. Through Count XXV -
Declaratory Judgment, the Plaintiffs seek a declaration of the parties’ rights regarding the claims
asserted, particularly with respect to any property belonging to the estate of either Debtor.
On April 28, 2008, the Defendants filed the Motion to Compel and a supporting
memorandum of law. After numerous continuances, the Trustee filed the Plaintiffs’ Opposition to
Motion to Dismiss or Stay and Compel Arbitration (the “Opposition”) on August 22, 2008. On87
August 26, 2008, the Defendants filed a Reply in Support of the Motion to Compel (the “Reply”).
I conducted hearing on the Motion to Compel on August 27, 2008, at the conclusion of which, I took
the matter under advisement. At the hearing, the parties declined the opportunity to further brief the
issues now before the Court.
III. POSITIONS OF THE PARTIES
A. The Defendants
The Defendants move to dismiss, or alternatively stay, the present adversary proceedings and
compel arbitration of the parties’ dispute in Dallas, Texas, pursuant to the broad language of the
various arbitration agreements between them. They argue that these various agreements cover all
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9 U.S.C. § 1 et. seq.88
See 9 U.S.C. § 2.89
See, e.g., McCarthy v. Azure, 22 F.2d 351 (1st Cir. 1994).90
Sourcing Unlimited, Inc. v. Asimco Int’l. Inc., 526 F.3d 38 (1st Cir. 2008).91
22
causes of action, whatever their nature. Specifically, the Defendants assert that the Plaintiffs’
consent to the arbitration of these issues is evidenced by: 1) Paul’s execution of the Participation
Agreement which includes a broad arbitration clause; 2) Paul’s participation in Heritage auctions
under the Standard Auction Terms; 3) Paul’s online registration with Heritage’s internet auction site
under its terms and conditions; 4) Paul’s execution of the Bill of Sale which references the Standard
Auction Terms; 5) the multiple invoices attached to the Complaint which state, “I have read and
agree to the Terms and Conditions of Sale as they appear in the Catalogue;” 6) Paul’s execution of
the Consignment Agreement under the Consignment Terms; 7) Paul’s execution of the Extended
Payment Terms; and 8) Paul’s execution of the Bullet Auction Document under the Terms of Sale.
The Defendants contend that because these agreements involve interstate commerce and expressly
state that the Federal Arbitration Act (the “FAA”) applies, arbitration is mandatory under the88
FAA.89
The Defendants maintain that all claims contained within the Complaint fall within an
enforceable arbitration agreement. They argue that the United States Court of Appeals for the First
Circuit broadly interprets arbitration agreements which cover claims “arising from” or “relating to”
an agreement to encompass both breach of contract claims and any tort or other claims related to the
agreements. Moreover, the Plaintiffs are equitably estopped from litigating claims otherwise90
arbitrable simply because Ivy and Halperin are not signatories of the agreements. To the extent that91
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Nolde Brothers, Inc. v. Local No. 358, 430 U.S. 243, 255 (1977); Riley Mfg. Co., Inc. v.92
Anchor Glass Container Corp., 157 F.3d 775, 781 (10th Cir. 1998); Homestake Lead Co. of
Missouri v. Doe Run Resources Corp., 282 F.Supp.2d 1131, 1142 (N.D. Cal. 2003); Berkery v.
Cross Country Bank, 256 F.Supp.2d 359, 368-369 (E.D. Pa. 2003).
Shearson/Am. Express , Inc. v. McMahon, 482 U.S. 220, 227 (1987).93
11 U.S.C. § 1 et. seq.94
23
the Plaintiffs assert that the Bill of Sale superceded any prior agreement, including the Participation
Agreement and Standard Auction Terms, the Defendants disagree and contend that nothing in the
Bill of Sale purports to amend, supercede, or supplant the terms of any other agreement. To the
contrary, the Defendants argue that the Bill of Sale expressly references the Standard Auction Terms
and by signing the Bill of Sale, Paul reaffirmed his consent to the mandatory arbitration provision.
Further, even assuming, arguendo, that the Bill of Sale superceded the parties’ prior agreements, the
Defendants rely on several cases for the proposition that an arbitration clause remains effective
absent a specifically manifested intent to rescind the arbitration clause itself. Similarly, the92
Defendants assert that the Employment Agreement could not have rescinded the Participation
Agreement’s arbitration clause because oral modifications are ineffective under the express terms
of the Participation Agreement.
Citing Shearson/Am. Express, Inc. v. McMahon, the Defendants argue that to overcome93
the strong federal policy in favor of arbitration, the Plaintiffs must prove that there is an
irreconcilable conflict between the FAA and the underlying purpose of the Bankruptcy Code.94
Moreover, they rely on a number of cases for the proposition that a bankruptcy court has no
discretion to refuse to compel arbitration of matters not involving core bankruptcy proceedings as
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See Hays and Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F.2d 1149, 1156-95
61 (3rd Cir. 1989); Merrill v. MBNA Am. Bank, N.A. (In re Merrill), 343 B.R. 1, 11 (Bankr. D.
Me. 2006); Bezanson v. Consolidated Contructors & Builders (In re P & G Drywall and
Acoustical Corp.), 156 B.R. 704, 706 (Bankr. D. Me. 1993).
Id.96
See The Whiting-Turner Contracting Co. v. Elec. Mach. Enters., Inc. (In re Elec. Mach.97
Enters., Inc.), 479 F.3d 791 (11th Cir. 2007); Mintze v. Am. Gen. Fin. Servs., Inc. (In re Mintze),
434 F.3d 222 (3rd Cir. 20006); Ins. Co. of N. Am. v. NGC Settlement Trust & Asbestos Claims
Mgmt. Corp. (In re Nat’l Gypsum Co.), 118 F.3d 1056 (5th Cir. 1997).
24
no irreconcilable conflict arises. Here, the Defendants assert that the breach of contract and related95
state law tort claims arising from either the auction purchase and sales transactions conducted
between the parties on an independent contract basis or the alleged employment contract between
Heritage and Paul must be arbitrated because they are non-core claims which are not created by or
rely on provisions of the Bankruptcy Code. The Defendants note that arbitration of such claims
remains mandatory even when pursued by a trustee in bankruptcy.96
Additionally, the Defendants argue that the fraudulent transfer and recovery-related causes
of action arising under the Bankruptcy Code must also arbitrated for several reasons. First, the
Defendants assert that any “ancillary” causes of action that implicate the Bankruptcy Code should
be considered non-core because they are merely derivative of the underlying contractual dispute and
seek to vindicate the same rights. Second, even if such causes of action are core, they still must be
arbitrated unless the Plaintiffs establish that arbitration “severely conflicts” with the purposes of the
Bankruptcy Code. In the present case, the Defendants contend that there is no conflict between97
arbitration and the objectives of the Bankruptcy Code as the arbitration proceeding may be promptly
commenced, discovered, and concluded without unduly delaying the administration of the Debtors’
estates. Moreover, the few ancillary bankruptcy claims asserted require no specialized knowledge
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Alternative Sys. Concepts, Inc. v. Synopsys, Inc., 374 F.3d 23, 29 (1st Cir. 2004).98
25
and can be readily adjudicated based on common factual findings. To the extent that I find that any
claims should resolved in the bankruptcy court, the Defendants request that I stay any proceedings
with respect to those claims and compel arbitration of the remaining claims in accordance with the
parties’ agreements.
In addition to the numerous legal reasons for compelling arbitration, the Defendants assert
that it will also be equitable as the Trustee is the only party located in Massachusetts, while all the
other parties, witnesses, and evidence are already located in Dallas, Texas.
In the alternative, the Defendants argue that the Plaintiffs’ fraud based claims should be
dismissed under Fed. R. Civ. P. 9(b), made applicable to adversary proceedings by Fed. R. Bankr.
P. 7009, because they are not plead with particularity. The Defendants argue that Fed. R. Civ. P.
9(b) requires that Plaintiffs plead specific facts to establish the “who, what, where, and when” of the
alleged fraud by each defendant. Specifically, the Defendants note that none of the Plaintiffs’ fraud98
claims specify the role of each Defendant in the alleged fraudulent acts. Additionally, the Plaintiffs’
allegations do not identify where and when the alleged fraudulent representations took place.
Moreover, the fraudulent transfer allegations fail to identify what property is involved, or where and
when it was allegedly transferred. In the event that I deny the request to dismiss, the Defendants
request an additional ten days to answer the Complaint pursuant to Fed. R. Civ. P. 12(a)(4).
B. The Trustee
The Trustee disputes that any applicable arbitration agreement remains in effect. First, the
Trustee argues that the Participation Agreement was superceded by the Employment Agreement,
which had no arbitration clause. Moreover, any amounts that were left outstanding under the
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Cibro Petroleum Products, Inc. v. Albany (In re Winimo Realty Corp.), 270 B.R. 10899
(S.D.N.Y. 2001).
Brown v. Mortgage Elec. Registration Sys., Inc. (In re Brown), 354 B.R. 591 (D.R.I.100
2006).
26
Participation Agreement were “rolled into” the Employment Agreement. Second, the Trustee
similarly asserts that the Standard Auction Terms was superceded by the Bill of Sale. To the extent
that the Defendants rely on other documents, such as the Consignment Agreement, the Bullet
Auction Agreement, and the Extended Payment Terms, the Trustee asserts that the Defendants have
failed to indicate what items these documents relate to and whether the transactions remain
outstanding. To the extent that they relate to any unpaid auction purchases, the Trustee argues that
they were closed out by the Bill of Sale, which he notes does not contain an arbitration clause. Even
assuming, arguendo, that these arbitration clauses remain in effect, the Trustee argues that the
Defendants have failed to demonstrate what specific transactions, if any, they encompass.
Additionally, the Trustee notes that many of the Plaintiffs’ claims were brought in the name of the
Trustee, or against Ivy and Halperin, none of whom are parties to any arbitration agreement.
The Trustee relies on In re Winimo Realty Corp. for the proposition that where a Defendant99
files a proof of claim and thus seeks the benefit of the bankruptcy court’s jurisdiction, the entire
matter, even if based on a pre-petition contract claim, is deemed core. This is because the adversary
proceeding would affect the allowance or disallowance of the creditor’s claim. As such, the Trustee
asserts that all the Plaintiffs’ breach of contract claims are core proceedings. In contrast to the
Defendants, the Trustee asserts that bankruptcy courts retain discretion to decide whether to compel
arbitration of core matters. The Trustee contends that compelling arbitration here would not serve100
the goal of centralized resolution of purely bankruptcy issues, the need to protect creditors and
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See Cavanaugh v. Conseco Fin. Serv. Corp. (In re Cavanaugh), 271 B.R. 414 (Bankr.101
D. Mass. 2001).
Frontier Mgmt. Co. v. Balboa Ins. Co., 658 F.Supp. 987 (D. Mass. 1986).102
Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 615 (1985);103
Scherk v. Alberto-Culver Co., 417 U.S. 506, 519 (1964).
27
reorganizing debtors from piecemeal litigation, or the undisputed power of the bankruptcy court to
enforce its own orders. The Trustee also argues that the need for Court supervision of the101
discovery process militates against compelling arbitration where key documentation is in the
Defendants’ possession and there are allegations of misconduct.
With respect to the Defendants’ motion to dismiss claims under Fed. R. Civ. P. 9(b), the
Trustee contends that the allegations give the Defendants adequate notice to allow them to respond
to the Complaint. While the allegations may not provide the specific who, what, when, and where,102
the Trustee argues that the Complaint is sufficiently particular to suggest that the suit is not frivolous.
The Trustee also notes that pleading fraud with more specificity would be difficult without further
discovery as the key documentary evidence in the case is currently under the Defendants’ control.
In the event I find fraud was not plead sufficiently, the Trustee requests an opportunity to amend the
Complaint.
IV. DISCUSSION
A. Arbitration
1. The Standard of the Review for the Motion to Compel
The Supreme Court of the United States has alternatively described arbitration clauses as
“contractual choice-of-forum provisions,” or “a specialized kind of form-selection clause.” The103
United States Court of Appeals for the First Circuit has held that dismissal of a complaint based on
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LFC Lessors, Inc. v. Pacific Sewer Maintenance Corp., 739 F.2d 4, 6-7 (1st Cir.104
1984); see also Lambert v. Kysar. 983 F.2d 1110, 1112 n. 1 (1st Cir. 1993).
Braunstein v. Panagiotou (In re The McCabe Group, P.C.), Adv. P. No. 06-1242,105
2006 WL 2604685 *3 (Bankr. D. Mass. Sept. 11, 2006).
See Banco Santander de Puerto Rico v. Lopez-Stubbe ( In re Colonial Mortgage106
Bankers Corp), 324 F.3d 12, 16 (1st Cir. 2003).
9 U.S.C. § 2.107
9 U.S.C. § 3.108
28
a forum selection clause falls under Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which
relief can be granted, stating that a forum selection clause “merely constitutes a stipulation in which
the parties join in asking the court to give effect to their agreement by declining to exercise its
jurisdiction.” Therefore, I must treat the Motion to Compel procedurally as one for dismissal104
under Fed. R. Civ. P. 12(b)(6). For purposes of this case, this means I must accept as true all well
pleaded factual allegations of the Complaint. Moreover, as the agreements attached to the105
Complaint and the Motion to Compel are “matters fairly incorporated within [the Complaint],” I
need not apply a summary judgment standard.106
2. The Standard for Enforcing an Applicable Arbitration Clause
The FAA provides that arbitration agreements “shall be valid, irrevocable, and enforceable,
save upon such grounds as exist at law or in equity for the revocation of any contract.” It further107
provides that the court, “upon being satisfied that the issue involved in such suit or proceeding is
referable to arbitration under such an agreement, shall on application of one of the parties stay the
trial of the action until such arbitration has been had in accordance with the terms of the agreement
. . . .” “The Supreme Court of the United States has long recognized that ‘federal statutory claims108
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In re Merrill, 343 B.R. at 5 (quoting Green Tree Fin. Corp.-Alabama v. Randolph, 531109
U.S. 79, 89 (2000)).
Randolph, 531 U.S. at 90.110
McMahon, 482 U.S. at 227; In re Cavanaugh, 271 B.R. at 421.111
Nat’l Cas. Co. v. First State Ins. Group, 430 F.3d 492, 500 (1st Cir. 2005);112
Painewebber Inc. v. Elahi, 87 F.3d 589, 599 (1st Cir. 1996).
Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983).113
29
can be appropriately resolved through arbitration, and [has] enforced agreements to arbitrate that
involve such claims.’” To determine whether statutory claims are arbitrable, the Supreme Court109
of the United States articulated the following two part inquiry in Randolph:
In determining whether statutory claims may be arbitrated, we first ask whether the
parties agreed to submit their claims to arbitration, and then ask whether Congress
has evinced an intention to preclude a waiver of judicial remedies for the statutory
rights at issue.110
By resisting the Motion to Compel, the Plaintiffs bear the burden of showing that Congress intended
to preclude a waiver of judicial remedies for the statutory rights at issue.111
The United States Court of Appeals for the First Circuit has held that courts may presume
that parties have committed to arbitration of a dispute where the parties have entered into a valid
arbitration agreement and the arbitration agreement covers the subject matter of the underlying
dispute between them. Any doubts concerning the scope of arbitrable issues should be resolved112
in favor of arbitration.113
With respect to the second prong of the Randolph test, the Supreme Court of the United
States in McMahon set forth the following standard:
If Congress did intend to limit or prohibit a waiver of judicial forum for a particular
claim, such an intent ‘will be deducible from [the statute’s] text or legislative
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McMahon, 482 U.S. at 227 (quoting Mitsubishi Motors Corp. v. Soler Chrysler-114
Plymouth, Inc., 473 U.S. 614, 627 (1985))
See In re Elec. Mach. Enters., Inc., 479 F.3d at 796; Crysen/Montenay Energy Co. v.115
Shell Oil (In re Crysen/Montenay Energy Co.), 226 F.3d 160 (2d Cir. 2000); In re Nat’l Gypsum
Co., 118 F.3d at 1064; Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F.2d at 1152; MCI
Telecommunications Corp. v. Gurga (In re Gurga), 176 B.R. 196 (B.A.P. 9th Cir. 1994).
In re Brown, 354 B.R. at 599.116
Phillips v. Congelton, L.L.C. (In re White Mountain Mining Co., L.L.C.), 403 F.3d 164117
(4th Cir. 2005).
30
history,’ . . . or from an inherent conflict between arbitration and the statute’s
underlying purposes.114
Applying these principles, courts have generally accepted that bankruptcy courts have no discretion
to refuse to compel the arbitration of non-core matters, as they are unlikely to present a conflict
sufficient to override the presumption in favor of arbitration. Courts applying the same approach115
to core matters, however, have reached “widely-divergent conclusions both with respect to what
qualifies as an ‘inherent conflict,’ and what constitutes ‘interference’ in the administration of the
estate.”116
In In re White Mountain Mining Co., L.L.C., the United States Court of Appeals for the117
Fourth Circuit held that the bankruptcy court did not abuse its discretion by refusing to enforce an
international arbitration agreement in a Chapter 11 bankruptcy case. Finding an inherent conflict
between arbitration and the underlying purposes of bankruptcy laws in an action seeking a
declaration as to whether pre-petition cash advances were debt or equity, the court stated:
“[T]he very purpose of bankruptcy is to modify the rights of debtors and creditors,”
and Congress intended to centralize disputes about a debtor's assets and legal
obligations in the bankruptcy courts. Arbitration is inconsistent with centralized
decision-making because permitting an arbitrator to decide a core issue would make
debtor-creditor rights “contingent upon an arbitrator's ruling” rather than the ruling
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In re White Mountain Mining Co., L.L.C., 403 F.3d at 169 (quoting 1 Collier on118
Bankruptcy,¶ 3.02[2] (15th ed. rev.2005)) (citations omitted).
Id.119
In re Brown, 354 B.R. at 603.120
Id. at 594, 603.121
31
of the bankruptcy judge assigned to hear the debtor's case.118
While heavily influenced by the core/non-core distinction, the Fourth Circuit stopped short of
holding that the bankruptcy court’s core jurisdiction, by itself, reveals a congressional intent to
choose those courts in exclusive preference to all other adjudicative bodies to decide core claims.119
In In re Brown, however, the United States District Court for the District of Rhode Island held that
where a conflict exists between the Bankruptcy Code and the FAA, the bankruptcy court retains
discretion to decide whether to compel arbitration of a core matter. Recognizing what it120
characterized as a conflict of “polar extremes” between the purpose of Bankruptcy Code and the
FAA, the district court concluded that the core/non-core distinction represented the best approach
for resolving conflicts because it creates a bright-line test while heeding McMahon’s directive.121
In contrast, the United States Court of Appeals for the Fifth Circuit stated:
[W]e believe that nonenforcement of an otherwise applicable arbitration provision
turns on the underlying nature of the proceeding, i.e., whether the proceeding derives
exclusively from the provisions of the Bankruptcy Code and, if so, whether the
arbitration of the proceeding would conflict with the purposes of the Code.
* * *
The core/non-core distinction conflates the inquiry set forth in McMahon and
Rodriguez [de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989)] with
the mere identification of the jurisdictional basis of a particular bankruptcy
proceeding. Certainly not all core bankruptcy proceedings are premised on provisions
of the Code that “inherently conflict” with the Federal Arbitration Act; nor would
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32
arbitration of such proceedings necessarily jeopardize the objectives of the
Bankruptcy Code. Although, as appellees suggest, “the core/non-core distinction is
a practical and workable one,” it is nonetheless too broad. The “discretion” . . .
should exist only where a particular bankruptcy proceeding meets the standard for
nonenforcement of an arbitration clause set forth in McMahon and Rodriguez.
* * *
[D]istinguishing between those actions derived from the debtor and those created by
the Bankruptcy Code explains the consistent reluctance to permit arbitration of
actions brought to adjudicate bankruptcy rights. There can be little dispute that where
a core proceeding involves adjudication of federal bankruptcy rights wholly divorced
from inherited contractual claims, the importance of the federal bankruptcy forum
provided by the Code is at its zenith. Arguably, these actions are simply beyond the
coverage of most, if not all, arbitration provisions. But, assuming an otherwise
applicable arbitration provision, the adjudication of these actions outside the federal
bankruptcy forum could in many instances present the type of conflict with the
purpose and provisions of the Bankruptcy Code alluded to in McMahon. See Hays,
885 F.2d at 1155 (“Claims asserted by the trustee under section 544(b) are not
derivative of the bankrupt. They are creditor claims that the Code authorizes the
trustee to asset on their behalf.”); In re Barney's Inc., 206 B.R. 336 (Bankr. S.D.N.Y.
1997) (finding Chapter 11 debtor's section 544(a) avoidance action, section 549
avoidance action, and section 542 turnover action were not subject to arbitration); In
re Dunes Hotel Associates, 194 B.R. 967, 992 (Bankr.D.S.C.1995) (finding Chapter
11 debtor's section 544(a) avoidance action, section 542 turnover action, and section
365 rejection action were not subject to arbitration); In re Arentson, 126 B.R. 236,
238 (Bankr. N.D. Miss.1991) (refusing to order arbitration of a wrongful termination
action brought by a Chapter 7 debtor under section 525(b), which provides redress
for discrimination against an individual because of a bankruptcy filing, because it
was a cause of action “exclusively related to a bankruptcy statute ... that literally begs
for resolution in a bankruptcy forum”); cf. In re Pate, 198 B.R. 841, 846 (Bankr. S.D.
Ga. 1996) (finding Chapter 13 debtor's Federal Truth in Lending Act claim involving
the financing of a mobile home, which was core under 28 U.S.C. § 157(b)(2)(C)
(counterclaims by the debtor's estate), was arbitrable).
We think that, at least where the cause of action at issue is not derivative of the
pre-petition legal or equitable rights possessed by a debtor but rather is derived
entirely from the federal rights conferred by the Bankruptcy Code, a bankruptcy court
retains significant discretion to assess whether arbitration would be consistent with
the purpose of the Code, including the goal of centralized resolution of purely
bankruptcy issues, the need to protect creditors and reorganizing debtors from
piecemeal litigation, and the undisputed power of a bankruptcy court to enforce its
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In re Nat’l Gypsum Co., 118 F.3d at 1067-1069.122
See In re Elec. Mach. Enters., Inc., 479 F.3d at 796; In re Mintze, 434 F.3d at 231; In123
re Crysen/Montenay Energy Co., 226 F.3d at 166; Gandy v. Gandy (In re Gandy), 299 F.3d 489,
495 (5th Cir. 2002); In re Merrill, 343 B.R. at 9; In re Cavanaugh, 271 B.R. at 424-426.
33
own orders.122
The analysis set forth in In re Nat’l Gypsum Co. has been adopted by a the United States Court of
Appeals for the Second, Third, Fifth, and Eleventh Circuits, as well as bankruptcy courts within this
circuit. As this reasoning best explains the application of the Supreme Court’s standard set forth123
in McMahon, I will follow suit and adopt this rationale as well. While use of the core/non-core
distinction has superficial appeal, it is ultimately too broad as it fails to consider that not all core
proceedings are premised on provisions of the Bankruptcy Code that “inherently conflict” with the
FAA. In contrast, the In re Gypsum Co. analysis strikes the correct balance between the relevant
considerations by focusing on the underlying nature of the proceeding.
3. Whether the Parties Agreed to Submit Their Claims to Arbitration
As previously stated, I may presume the parties have committed to the arbitration of a dispute
where they have entered into a valid arbitration agreement and the dispute falls within the scope of
the arbitration clause. It cannot be fairly disputed that at one time the parties agreed to arbitrate
certain matters between them. This is evidenced by the Consignment Terms, the Extended Payment
Terms, the Bullet Auction Document, the Terms of Sale, the Standard Auction Terms, and the
Participation Agreement. The Trustee concedes this point, but disputes the continued validity and/or
applicability of these agreements.
The Trustee argues that on September 30, 2008, all outstanding transactions were included
in the Bill of Sale, which does not contain an arbitration clause, superceding all prior agreements
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Berkery, 256 F.Supp.2d at 368. See also Litton Fin. Printing Div. v. NLRB, 501 U.S.124
190, 205-206 (1991); Nolde Brothers, Inc., 430 U.S. at 255; Koch v. Compucredit Corp., No. 07-
1948, 2008 WL 4305903 (8th Cir. Sept. 23, 2008); Riley Mfg. Co., Inc., 157 F.3d at 781;
Homestake Lead Co. of Missouri, 282 F.Supp.2d at 1140.
Nolde Brothers, Inc., 430 U.S. at 255.125
Hinnant v. Am. Ingenuity, LLC, 554 F.Supp.2d 576, 583 (E.D. Pa. 2008).126
Litton Fin. Printing Div., 501 U.S. at 205-206 (1991).127
34
related to those transactions and rendering them non-arbitrable. I disagree as “the well settled
jurisprudence . . . holds arbitration agreements to a life and validity separate and apart from the
agreement in which they are embedded.” The Supreme Court of the United States held that124
“where the dispute is over a provision of the expired agreement, the presumptions favoring
arbitrability must be negated expressly or by clear implication.” “If a post-expiration claim ‘arises125
under’ the expired contract, . . . then the agreement to arbitrate survives expiration, but only with
respect to that claim.” The Supreme Court further explained:126
A postexpiration grievance can be said to arise under the contract only where it
involves facts and occurrences that arose before expiration, where an action taken
after expiration infringes a right that accrued or vested under the agreement, or
where, under normal principles of contract interpretation, the disputed contractual
right survives expiration of the remainder of the agreement.127
In the present case, there is no language in the Bill of Sale which expressly negates any prior
arbitration clauses and therefore, I must presume their validity was unaffected by the Bill of Sale
transaction. Similarly, the Trustee’s argument that the Employment Agreement, which contains no
agreement to arbitrate, supercedes the Participation Agreement fails for the same reasons.
Having disposed of the Trustee’s initial arguments, I must now consider whether the parties’
dispute falls within the scope of a valid arbitration clause. This question is complicated by the
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Exhibit A-1, Docket No. 10, ¶¶ 1-2.128
Id. ¶¶ 5, 9.129
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Trustee’s generalized allegations with respect to thousands of individual transactions and the
Defendants reliance on several agreements without identifying the transactions subject to these
agreements. To illustrate the problem, transaction specific agreements, like the Consignment
Agreement or Extended Payment Terms, are too narrow as they apply only to specific sales without
further reference to what was purchased, sold, or consigned. Others, like the Terms of Sale or the
Standard Auction Terms, are too broad in as much as each could have applied to every transaction
between the parties or none. Terms, by themselves, are not a contract. In order for them to be an
agreement, the parties must mutually agree to apply them to a specific transaction. The Defendants’
assertion that Paul agreed to the Standard Auction Terms by bidding or otherwise participating at
Heritage’s auction is insufficient without first demonstrating that Paul bid or otherwise participated
at an auction subject to the Standard Auction Terms.
In this case, the Participation Agreement represents the most encompassing agreement with
respect to auction related transactions. The Participation Agreement sets forth the terms by which
Heritage and Paul, as an independent contractor, would engage in the purchase, resale, and
conservation of numismatic items. These terms included how the parties would share the profits128
from resold numismatic items and Paul’s right to an accounting of his purchases. Paragraph 18129
of the Participation Agreement is a merger clause which acknowledges that the parties had
previously entered into a series of transactional agreements and indicates that “[a]ny and all prior
agreements of the parties with respect to the subject matter hereof, whether oral or in writing, are
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Id. ¶ 18.130
Id. ¶ 4.131
Id. at ¶ 24 (italics added, bold in original).132
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superceded by the terms of this Agreement.” As such, all outstanding transactions prior to May130
1, 2003, became subject to the Participation Agreement. Moreover, the automatic renewal
provisions of the Participation Agreement provided that it would automatically renew every six
months until terminated by either party. Here, the Participation Agreement would have terminated131
roughly around November, 2005, when Heritage terminated Paul’s employment. This means that
all auction transactions up to November, 2005, were subject to the Participation Agreement and the
arbitration clause contained therein.
The Participation Agreement’s arbitration clause provides in relevant part:
Arbitration. Agreement for Arbitration. Company, Participant and Paul hereby
agree that any dispute arising [sic] pertaining to this Agreement or its termination,
shall be resolved in Dallas, Texas, by final and binding arbitration in accordance
with the Commercial Arbitration Rules of the American Arbitration Association and
AAA’s National Rules for the Resolution of Employment Disputes in effect on the
date the dispute arises. . . .132
Construing this arbitration clause liberally, as I am bound to do, I conclude that all disputes relating
to the purchase, sale, resale, accounting, and profit sharing with respect to transactions involving
numismatic items prior to November, 2005, are within the scope of this arbitration clause.
Moreover, any dispute with respect to Paul’s compensation as an independent contractor would also
fall within the scope of the Participation Agreement’s arbitration clause.
Notably, the Participation Agreement makes no reference to memorabilia. The Bill of Sale,
however, purports to transfer title to goods listed on the attached schedules. Four invoices attached
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Id. at ¶ 16.133
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to the Bill of Sale describe various items of memorabilia. While the Trustee argues that these
invoices have a “run date” of October 7, 2005, after the execution of the Bill of Sale, these invoices
clearly have transaction dates prior to September 30, 2005. The “run date” is likely when these
invoices were printed and not when the sale took place. As previously stated, each contain the
following acknowledgment: “I have read and agree to the Terms and Conditions of Sale as they
appear in the catalogue.” Assuming that the Terms of Sale is the document referenced by the
invoices, these items would be subject to the following arbitration clause:
If any disputes arise regarding payment, authenticity, or grading or any other matter
pertaining to the sale, the bidder or a participant in the Auction Sale and/or the
Auctioneer agree that the dispute shall be submitted . . . to binding arbitration . . . in
Dallas, Texas. . . .133
I note, however, that only memorabilia specifically identified in those four invoices are subject to
this arbitration clause.
Having determined the scope of the applicable arbitration clauses, it appears that several
disputes between the parties fall outside the scope of any arbitration agreement. First, there clearly
is no agreement to arbitrate Paul’s claim for tortious interference. There is simply nothing before
me that explains the nature of Paul’s participation in Heritage’s auctions after his termination. As
Paul’s status as an independent contractor under the Participation Agreement was terminated by
November, 2005, its provisions cannot apply actions taken against him, as an employee of RCW,
in January, 2007. As such, Count I is not arbitrable.
Second, the Plaintiffs’ claims for promissory estoppel, negligent misrepresentation, deceit,
breach of the Employment Agreement, and wrongful termination do not fall within the scope of any
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I note, however, that the Plaintiffs’ failure to connect these allegations to specific134
transactions involving Paul or RGI may ultimately speak to whether or not they were damaged by
such “systemic fraud.”
38
arbitration clause. The allegations underlying these claims all relate to Paul’s compensation under
the Employment Agreement. There is no allegation that the parties agreed to arbitrate disputes
arising under the Employment Agreement. Moreover, contrary to the Defendants’ argument, the
Employment Agreement is not an impermissible oral alteration, amendment, rescission, or waiver
of the Participation Agreement. Accepting the Trustee’s allegations as true, the Employment
Agreement was a new distinct agreement between the parties with respect to Paul’s compensation
and status as an employee of Heritage. As the Participation Agreement outlines the terms of Paul’s
independent contractor status and relationship with Heritage, the Employment Agreement supercedes
those provisions and is not subject to the arbitration clause. I note, however, that the Employment
Agreement, as described, does not reference the purchase, sale, resale, accounting, or profit sharing
with respect to any items, and therefore those matters remain subject to prior agreements.
Accordingly, Counts II, III, IV, V, and XIII are not arbitrable.
Third, the Plaintiffs’ claims under Texas Bus. & Com. Code Ann. § 17.50 and Mass. Gen.
Laws Ch 93A, § 11, largely fall outside the scope of any arbitration clause. With perhaps the
exception of Paul’s allegation that Heritage’s settlement documentation is purposefully confusing,
which could fall within the scope of the Participation Agreement as it contemplates accounting and
reconciliation, the remainder of these allegations are not contractually based. Instead, they are
allegations of systemic fraud with respect to Heritage’s business practices not expressly linked to any
particular transaction. As such, Counts XXIII and XXIV are not arbitrable.134
Finally, to the extent that any other count of the Complaint concerns a dispute regarding: 1)
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As will be discussed in the next section, a trial on the discrete issue of whether the135
Non-Covered Transactions do in fact fall within the scope of an arbitration clause is not
necessary.
39
the purchase, sale, resale, accounting, or profit sharing with respect to items involved in transactions
after November, 2005, 2) memorabilia not listed on the four invoices, and 3) deceptive practices not
contemplated by the Participation Agreement (1, 2, and 3 collectively, the “Non-Covered
Transactions”), there is nothing before me to demonstrate that they fall within an existing arbitration
clause. Even if the Non-Covered Transactions were incorporated into the Bill of Sale, I find that
there is nothing on the face of that document to suggest that it incorporates an arbitration clause. The
Defendants’ reliance on the phrase “[Heritage] is a secured party on the Auction Purchases under
the terms of its sales to which [Paul] as an auction purchaser has agreed,” is misplaced. First, in
order for the Bill of Sale to incorporate the whole “terms of its sales,” that phrase would need to
modify “Auction Purchases, ” rather than “secured party on the Auction Purchases.” While this
document is poorly drafted, such a reading of the sentence is ungrammatical. The clear import of
the sentence’s construction is that “terms of its sale” modifies “secured party on the Auction
Purchases,” indicating that the “terms of its sale” further defines Heritage’s secured status. Second,
the “terms of its sale” is not an identified term in the agreement and is ambiguous in light of
Heritage’s use of both the Terms of Sale and Standard Auction Terms. While currently there is no
basis to find the Non-Covered Transactions arbitrable, it is possible such a basis may be found upon
further discovery.135
The Trustee’s assertion that neither he, nor Ivy and Halperin, are parties to any arbitration
agreement is unavailing. When stepping into the shoes of the Debtors, the Trustee is equally bound
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See Hays, 885 F.2d at 1161; In re Merrill, 343 B.R. at 11; In re P & G Drywall and136
Acoustical Corp., 156 B.R. at 706.
Sourcing Unlimited, Inc., 526 F.3d at 47.137
In re Nat’l Gypsum Co., 118 F.3d at 1067.138
Id. at 1068-1069.139
40
to arbitrate causes of action derivative of the Debtors. It is also irrelevant that Ivy and Halperin136
are not signatories of the arbitration agreements as the United States Court of Appeals for the First
Circuit has held that non-signatories may enforce an arbitration agreement against a signatory. In137
sum, all disputes in Counts VI through XII, XXV (collectively, the “Contract Claims”) other than
those with respect to the Non-Covered Transactions, and Counts XIV through XXII (collectively,
the “Bankruptcy Claims”) have met the first prong of the Randolph test.
4. Whether an “Inherent Conflict” Exists
Turning now to the second prong of the Randolph test, I must follow the McMahon standard
and determine whether there is an inherent conflict between arbitration and the Bankruptcy Code’s
underlying purpose. Having adopted the Fifth Circuit’s rationale from In re Nat’l Gypsum Co., I
must look to the underlying nature of the proceeding and determine whether the proceeding derives
exclusively from the provisions of the Bankruptcy Code, and if so, whether arbitration would conflict
with the purpose of the Bankruptcy Code. If such a conflict exists, I have discretion to refuse to138
compel the arbitration of the Covered Transactions. Noting that “the importance of the federal
bankruptcy forum provided by the Code is at its zenith” in “actions brought to adjudicate bankruptcy
rights,” I will begin my analysis with the Trustee’s claims brought under the Bankruptcy Code.139
The avoidance claims brought by the Trustee under 11 U.S.C. §§ 547, 548, 549, and 550 are
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See 11 U.S.C. §§ 547(b) (““Except as provided in subsection (c) or (i) of this section,140
the trustee may avoid any transfer of interest of the debtor in property – . . .”), 548(a)(1) (“The
trustee may avoid any transfer . . .”), 549(a) (“Except as provided in subsection (b) or (c) of this
section, the trustee may avoid a transfer of property of the estate – . . .”), 550.
See, e.g., Allegaert v. Perot, 548 F.2d 432 (2d Cir. 1977) (refusing to compel141
arbitration of trustee’s preference and fraudulent transfer claims under the Bankruptcy Act).
Hays, 885 F.2d at 1155; In re Barney’s, Inc., 206 B.R. 336 (Bankr. S.D.N.Y. 1997).142
41
statutory causes of action created by the Bankruptcy Code that belong to the Trustee. They are not140
derivative of the Debtors’ claims, but are unique rights given to bankruptcy trustees on behalf of the
creditors of the estate and are not available to debtors outside the bankruptcy court. Similarly, the141
Trustee’s fraudulent transfer claims under Texas Bus. & Com. Code Ann. § 24.005-6, and Mass.
Gen. Laws Ch. 109A, §§ 5 and 6, are creditor claims which 11 U.S.C. § 544(b)(1) allows the Trustee
to assert on behalf all creditors of the estate. As such, these claims are proceedings derived142
exclusively from the Bankruptcy Code. Having made such a determination, I must turn to the second
part of the In re Nat’l Gypsum Co. analysis and consider whether arbitration inherently conflicts with
the purpose of the Bankruptcy Code.
I note that the fact that only the Trustee can bring these claims in bankruptcy court may
evidence Congressional intent to preclude arbitration of such claims and satisfy the Randolph test.
In any event, I find that an inherent conflict exists as arbitration will not serve the goal of centralized
resolution of purely bankruptcy issues, the need to protect creditors from piecemeal litigation, or the
undisputed power of a bankruptcy court to enforce its own orders. This is particularly the case where
there are allegations of unauthorized post-petition transfers which could diminish the Debtors’
estates and harm the other unsecured creditors. Therefore, having satisfied the second prong of the
Randolph test, I have discretion to refuse to compel arbitration of Counts XV through XX, which
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See 11 U.S.C. § 510(c).143
See In re Transport Associates, Inc., 263 B.R. 531, (Bankr. D. Kan. 2001).144
42
I will exercise.
The Trustee’s claim for equitable subordination also arises exclusively under the Bankruptcy
Code and is unique to bankruptcy proceedings. With respect to the second part of the In re Nat’l143
Gypsum Co. analysis, I find that arbitration of this claim inherently conflicts with all the previously
mentioned purposes of the Bankruptcy Code. An arbitrator could not subordinate Heritage’s claim144
against the Debtors’ estates under 11 U.S.C. § 510(c) without effecting the rights of other creditors.
As such, the determination of the priority of claims is solely a function of the bankruptcy courts and
cannot be arbitrated. Accordingly, I have discretion under the Randolph test, and will use it to
decline to compel arbitration of Count XXII.
In a slightly different vein, an objection to claim is not a cause of action, but a proceeding
derived exclusively from 11 U.S.C. § 502(b). The United States Court of Appeals for the Fifth
Circuit explained the claims objection process as follows:
A claim against the estate is instituted by filing a proof of claim as provided by the
bankruptcy rules. The filing of the proof invokes the special rules of bankruptcy
concerning objections to the claim, estimation of the claim for allowance purposes,
and the rights of the claimant to vote on the proposed distribution. Understood in this
sense, a claim filed against the estate is a core proceeding because it could arise
only in the context of bankruptcy. Of course, the state-law right underlying the claim
could be enforced in a state court proceeding absent the bankruptcy, but the nature
of the state proceeding would be different from the nature of the proceeding
following the filing of a proof of claim.
The Court's language would seem equally applicable in the case at bar. Only in
bankruptcy court are there these peculiar, summary procedures for resolving claim
objections. While the underlying rights at issue in the objection might be enforceable
outside the bankruptcy context, different, unique procedures are utilized to resolve
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Wood v. Wood ( In re Wood), 825 F.2d 90, 97 (5th Cir.1987) (citations omitted)145
(emphasis added).
See In re Mirant Corp., 316 B.R. 234 (Bankr. N.D. Tex. 2004); Martinez v. Beneficial146
of Texas, Inc. (In re Martinez), Adv. P. No. 06-3669, 2007 WL 1174186 (Bankr. S.D. Tex. Apr.
19, 2007); cf. Erie Power Tech., Inc. v. Ref-Chem, L.P., 315 B.R. 41 (Bankr. W.D. Pa. 2004)
(arbitrating claims objection did not inherently conflict with the Bankruptcy Code where the
Debtor initiated the arbitration proceedings, which were set to begin, and no other causes of
action specific to the Bankruptcy Code existed); In re Winimo Realty Corp., 270 B.R. at 108
(reversing the bankruptcy court’s refusal to compel arbitration because there was no evidence
that arbitration would jeopardize the underlying policy of the Bankruptcy Code).
In re Nat’l Gypsum Co., 118 F.3d at 1067 (emphasis added).147
In re Mirant Corp., 316 B.R. at 238 (emphasis in original).148
Id.149
43
the claim in the bankruptcy court.145
Courts interpreting In re Nat’l Gypsum Co. have noted that its two part analysis requires an
examination of the underlying proceeding and not necessarily the cause of action asserted. While146
the court of appeals in In re Nat’l Gypsum Co. explained that bankruptcy courts have the most
discretion when adjudicating bankruptcy rights, it clearly recognized that discretion exists “where
a particular bankruptcy proceeding meets the standard for nonenforcement of an arbitration clause
set forth in McMahon and Rodriguez.” Reading In re Nat’l Gypsum Co. in this light, the court in147
In re Mirant Corp. concluded that “[w]hile the substance of a dispute may be governed by law
peculiar to bankruptcy, the court does not perceive the first part of the Nat'l Gypsum test to require
that the substantive issues in dispute be derived from the Code.” As such, the court found that148
it had discretion to refuse to compel arbitration of an objection to claim.149
In the present case, the Trustee’s objection to claim, although partly sounding in contract, is
clearly a proceeding derived exclusively from the provisions of the Bankruptcy Code. Moreover,
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See Systolic Nerworks, Inc. v. Bizfon, Inc. (In re Bizfon, Inc.), No. 01-12547 JMD,150
2002 WL 181975 (Bankr. D.N.H. Jan. 29, 2002).
While Heritage only filed a proof of claim in Paul’s bankruptcy case, I note that it was151
not required to do so in RGI’s. “A secured creditor may, but need not, file a proof of claim.
Under the express provisions of § 501, if it does so, and no objection is filed, its secured claim is
“deemed allowed.” If it files no proof of claim and no action is taken with regard to its lien, the
lien is unaffected by bankruptcy. In other words, unless the secured creditor is hailed into
bankruptcy court to respond to an effort to alter, amend or avoid its position, it may ignore the
bankruptcy proceedings. The lien passes through bankruptcy.” In re Maylin, 155 B.R. 605, 611-
613 (Bankr. D. Me. 1993); see also In re Tinker, 355 B.R. 380, 384-385 (Bankr. D. Mass. 2006).
44
while the core/non-core distinction is not determinative, courts have held that resolving a disputed
claim is a core matter under 28 U.S.C. § 157(b)(2)(B) to be decided by the bankruptcy court, even
where the basis for the creditor’s claim involves a pre-petition breach of contract claim. As such,150
the Debtors’ Contract Claims, as well as the Trustee’s claim for Turnover pursuant to 11 U.S.C. §
542, may be procedurally characterized as a defense to Heritage’s proof of claim within the objection
to claim proceeding.151
With respect to the second part of the In re Nat’l Gypsum Co. analysis, arbitration of the
Trustee’s objection to claim proceeding, which includes the determination of the Contract Claims,
would contravene the Bankruptcy Code’s purpose of providing a central forum for the resolution of
claims. As other claims have been filed in this case, arbitration of these claims would require the
Trustee to resolve claims in multiple fora. Moreover, where at least sixteen out of twenty-five causes
of action in these adversary proceedings will not be sent to arbitration, and where the remaining
counts include a subset of Non-Covered Transactions which are not arbitrable, arbitration of these
final claims would result in piecemeal, and possibly duplicative, litigation. While admittedly neither
Debtor is reorganizing, resolution of these remaining counts in the bankruptcy court would also serve
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Fed. R. Civ. P. 9(b).152
New England Data Servs., Inc. v. Becher, 829 F.2d 286, 288 (1st Cir. 1987).153
Alternative Sys. Concepts, Inc., 374 F.3d at 29 (emphasis added); Powers v. Boston154
Cooper Corp., 926 F.2d 109, 111 (1st Cir.1991); McGinty v. Beranger Volkswagen, Inc., 633
45
the purpose of expeditiously and equitably distributing the Debtors’ assets. I find that arbitration of
the Trustee’s objection to claim, Contract Claims, and Turnover claim inherently conflict with the
purposes of the Bankruptcy Code, granting me discretion to refuse to compel the arbitration of these
claims under the Randolph test. As such, I will not refer Counts VI through XII, XIV, XXI, and
XXV to arbitration.
As I will not refer the Plaintiffs’ fraud claims to arbitration, I must now consider whether they
should be dismissed for failure to plead fraud with the requisite particularity.
B. Dismissal of Fraud Claims Under Fed. R. Civ. P. 9(b)
Fed. R. Civ. P. 9(b) provides:
Fraud or Mistake; Conditions of Mind. In alleging fraud or mistake, a party must
state with particularity the circumstances constituting fraud or mistake. Malice,
intent, knowledge, and other conditions of a person's mind may be alleged
generally.152
“Generally, there are three purposes behind Rule 9(b)'s particularity requirement: (1) to place the
defendants on notice and enable them to prepare meaningful responses; (2) to preclude the use of
a groundless fraud claim as a pretext to discovering a wrong or as a “strike suit”; and (3) to safeguard
defendants from frivolous charges which might damage their reputations.” The United States153
Court of Appeals for the First Circuit has held that where Plaintiffs plead fraud under Fed. R. Civ.
P. 9(b), “the pleader usually is expected to specify the who, what, where, and when of the allegedly
false or fraudulent representation.” “[T]he particularity requirement of Rule 9(b) must be relaxed154
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F.2d 226, 228 (1st Cir.1980).
Corley v. Rosewood Care Center, Inc., 142 F.3d 1041, 1051 (7th Cir. 1998).155
See, e.g., Frontier Mgmt. Co., Inc. v. Balboa Ins. Co., 658 F.Supp. 987, 992-993 (D.156
Mass. 1986).
Complaint, Docket No. 1, ¶¶ 13, 15.157
Id. at ¶ 13-14.158
Id. at ¶ 15.159
Id. at ¶¶ 16-18.160
46
where the plaintiff lacks access to all facts necessary to detail his claim.” Courts have noted that155
where the information needed to plead the particulars of fraud are in the hands of the defendant,
allegations of fraud that are sufficiently particular to suggest that the plaintiff is not engaged in a
frivolous suit and enables the defendants to respond will not be dismissed prior to discovery.156
Here, the Plaintiffs’ promissory estoppel, negligent misrepresentation, and deceit claims are
premised on allegations that on or about February 7, 2005, Heritage, Ivy, and Halperin outlined the
Employment Agreement which included favorable terms of compensation and conditioned Paul’s
employment on him first doing a number of things, including: selling his Massachusetts home and
establishing permanent residency in Dallas, Texas; abandoning all business interests; immediately
settling all pending litigation; and consigning personal and RGI collectible inventories to Heritage
for auction. They further allege that subsequent negotiations among Paul, Ivy, and Halperin took157
place, but that an agreement was reached no later than March 15, 2005. Moreover, the Plaintiffs158
allege that in reliance on the terms of the Employment Agreement, Paul settled all pending litigation
on otherwise disadvantageous terms. Despite alleged reassurances from Ivy, Heritage never159
provided the promised terms of employment.160
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Vincent v. Ameriquest Mortgage Co. (In re Vincent), 381 B.R. 564, 574 (Bankr. D.161
Mass. 2008).
Complaint, Docket No. 1, ¶¶ 101, 108.162
47
The Plaintiffs allegations successfully state: the “who,” i.e., Ivy, Halperin, and Heritage; the
“what,” i.e., representations of generous employment terms; and the “when,” i.e., on or around
February 7, 2005, with negotiations culminating in an agreement by March 15, 2005. Admittedly,
they do not allege where such representations took place. This failure, however, does not require
dismissal of these claims because this fact is known, or readily ascertainable, to the Defendants.161
Moreover, I disagree with the Defendants assertion that the Plaintiffs’ failed to state the role of each
actor in the alleged fraud as the Plaintiffs’ plead in the conjunctive, indicating that each Defendant
made the representation during the course of negotiations.
With respect to his fraudulent transfer claims, the Trustee asserts the following:
To the extent that any transfers of interest of the property of the Debtors[,] Mr. Paul
or RGI were made to Heritage and were not properly credited by Heritage, such
transfers were transfers of interest of one or both of the Debtors in property, for
which the Debtor received less than a reasonably equivalent value in exchange for
such transfers, at a time when the Debtor was insolvent on the date that such transfers
were made.162
The Defendants, therefore, seek dismissal of these claims because the Trustee has not identified the
alleged fraudulent transfers with particularity. While true, without an opportunity for discovery, the
Trustee has no ability to specifically identify which transfers out the thousands that have allegedly
taken place between the Debtors and Heritage are fraudulent. Moreover, as the documentation the
Trustee requires to identify these transfers is in the possession of Heritage, grounds currently exist
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See Alternative Sys. Concepts, Inc., 374 F.3d at 29; Frontier Mgmt. Co., Inc., 658163
F.Supp. at 992-993. While the Trustee must ultimately amend his Complaint, ordering him to do
so at this time is inappropriate as a discovery schedule is not yet in place.
48
to relax the otherwise strict standard under Fed. R. Civ. P. 9(b).163
V. CONCLUSION
In light of the foregoing, I will enter an order denying the Motion to Compel.
______________________________
William C. Hillman
United States Bankruptcy Judge
Dated: November 4, 2008
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