R&G FINANCIAL CORPORATION

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO
IN RE: : CASE NO. 10-04124 (ESL)
:
R&G FINANCIAL CORPORATION : CHAPTER 11
:
:
Debtor :
____________________________________:
OPINION AND ORDER
This case is before the court upon Debtor’s motion to determine whether the automatic stay
provisions of 11 U.S.C. §§362(a) and 105(a) of the Bankruptcy Code may be extended to R&G
Investments Corporation (“RGIC”), a duly dissolved subsidiary of R&G Financial Corporation
(hereinafter referred to as “RGFC” or “Debtor”), in relation to certain arbitration proceedings before
the Financial Industry Regulatory Authority (“FINRA”) (Docket No. 27). On July 16, 2010, Rebecca
A. Diaz-Cruz, Lourdes R. Diaz-Antommattei and José Morales-Steinman (hereinafter referred to as
the “FINRA claimants”) jointly filed their brief and memo in opposition to Debtor’s emergency
motion for extension of the automatic stay provisions to RGIC arguing that FINRA Rule 13200
governs mandatory application of arbitration proceedings and that the claims in controversy in the
FINRA arbitration proceedings are non-core matters unrelated to Debtor’s bankruptcy and thus, are
governed by the Federal Arbitration Act (“FAA”) (Docket No. 77). For the reasons stated herein,
Debtor’s request for the provisions of the automatic stay to be extended to its duly dissolved
subsidiary is hereby granted.
Facts and Procedural Background
RGFC filed a bankruptcy petition under Chapter 11 of the Bankruptcy Code on May 14, 2010.
On May 21, 2010, the Clerk of the Court gave notice to creditors, amongst other pertinent
information, of the date of the meeting of creditors and of the bar date for all creditors (except a
governmental unit) to file a proof of claim, that is, September 21, 2010 (Docket No. 11). RGFC in
its original schedules failed to include the claims of the FINRA claimants (Docket Nos. 51). Debtor
in line item number four (4) of its Statement of Financial Affairs included the FINRA arbitration
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proceedings (Docket No. 50). On June 8, 2010, Debtor filed an urgent motion to determine that the
provisions of the automatic stay should be extended to Debtor’s dissolved subsidiary, RGIC and thus,
stay the FINRA arbitration proceedings based on the following grounds: (i) RGFC, the sole
shareholder of RGIC, has assumed liability for all RGIC claims, thus any action against RGIC would
be an action against RGFC in conformity with 14 L.P.R.A. §§3008 & 3012; (ii) resolving the FINRA
claimants rights in the arbitration proceeding, rather than in the bankruptcy proceeding, will consume
the Debtor’s limited financial and managerial resources; since preparation for a complex and technical
FINRA arbitration proceeding would entail Debtor to deplete estate assets in the preparation of a
proper defense for said arbitration, and such arbitration proceedings would significantly drain its
scarce managerial resources; (iii) Debtor will have to bear 100% of all costs since RGIC has no
available assets to satisfy the defense costs or any potential indemnification obligations which result
from the FINRA arbitration proceedings; and (iv) the arbitration proceeding seeks to adjudicate a core
matter, namely the allowance or disallowance of the FINRA claimants claims (Docket No. 27).
Debtor also filed a motion requesting an emergency hearing to determine that the automatic stay
applies to arbitration proceedings (Docket No. 28). Subsequently, the court entered an interim/bridge
order enjoining FINRA claimants from further prosecuting the FINRA arbitration against the Debtor
and RGIC, until a final order is entered, and scheduled a hearing for July 6, 2010 (Docket No. 31).
The 341 meeting of creditors was held on June 23, 2010, and closed on July 7, 2010 (Docket
Nos. 56 & 71). On July 5, 2010, the attorneys representing the FINRA claimants filed a Notice of
Appearance and Request of Notices (Docket No. 69). On July 6, 2010, a hearing was held regarding
the extension of the automatic stay provisions to RGIC in which the court granted the FINRA
claimants ten (10) days to file a legal memorandum in opposition to Debtor’s motion to extend the
provisions of the automatic stay to RGIC (Docket Nos. 70 & 75).
On July 16, 2010, the FINRA claimants filed their opposition to Debtor’s motion to determine
that the automatic stay should be extended to RGIC by which they argue the following: (i) FINRA
Rule 13200 governs mandatory application of arbitration proceedings; (ii) the claims presented to
FINRA arise from a contract amongst the FINRA claimants and RGIC; (iii) the claims in controversy
in the FINRA arbitration proceedings are non-core matters unrelated to Debtor’s bankruptcy which
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do not interfere with the Bankruptcy Code, thus the same are governed by the FAA and courts must
enforce the same; (iv) the claims in controversy in the FINRA arbitration proceedings are excepted
from the provisions of the automatic stay pursuant to 11 U.S.C. §362(b)(6) because they arose “from
securities and investments;” and (v) the arbitration process is the most cost efficient and expedited
mechanism to solve the specific and highly specialized controversies (Docket No. 77) . Subsequently,
Debtor filed its supplemental brief in support of its position on July 26, 2010 (Docket No. 89) by
which it argues that the automatic stay provisions should be extended to RGIC based on the
following: (i) the arbitration plaintiffs have failed to establish that RGFC is required to participate in
the arbitration proceedings in conformity with the FINRA rules or that it has consented to arbitrate
before FINRA; (ii) RGIC has no assets or resources, thus any action against RGIC would effectively
be an action against Debtor, who has assumed liability for all RGIC claims; (iii) resolving the FINRA
plaintiffs’ rights in the arbitration proceedings, rather than in bankruptcy court will consume Debtor’s
limited financial and managerial resources; (iv) the arbitration plaintiffs have failed to establish
“cause” for lifting the automatic stay to permit the arbitration to proceed against Debtor; and (v) the
arbitration plaintiffs through the arbitration proceedings are litigating a “core” bankruptcy matter,
namely the allowance of a prepetition claim against the Debtor’s estate which should be administered
by the bankruptcy court (Docket Nos. 27& 89).
On September 10, 2010, Debtor filed an amended Schedule F- Creditors Holding Unsecured
Nonpriority Claims whereby it includes the following claims: (i) creditor Rebecca Diaz Cruz is listed
as having a contingent, unliquidated and disputed claim in the amount of $0.00; (ii) creditor Lourdes
A. Diaz Antommattei is listed as having a contingent, unliquidated and disputed claim in the amount
of $0.00; and (iii) creditor José Morales Steinman is listed as having a contingent, unliquidated and
disputed claim in the amount of $0.00, namely the claims of the FINRA claimants (Docket No. 130).
On September 10, 2010, Debtor also filed a Notice of Amendment to Schedules of Assets and
Liabilities by which it informed those creditors which were added in the amended schedules that in
conformity with PR LBR 1009-1(c) they had ninety (90) days from the date of service of this
document to file a proof of claim, hence the bar date is December 9, 2010 (Docket No. 132). The
court notes that as of the issuance of this Opinion and Order the FINRA claimants have not filed proof
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of claims in the instant case.
Uncontested Material Facts
1. On June 29, 2007, RGFC and RGIC executed an Agreement and Plan of Liquidation and
Dissolution (“Liquidation Agreement”) of its subsidiary (Docket No. 27, Exhibit A).
2. Pursuant to the terms of the Liquidation Agreement, RGIC was to transfer certain assets to
RGFC, and the latter was to assume certain liabilities of RGIC, including “...any contingent liabilities
for lawsuits or claims made by customers of the Subsidiary” (Docket No. 27, Exhibit A).
3. On August 14, 2007, RGIC was duly dissolved per Certification of the Secretary of State
of the Commonwealth of Puerto Rico (Docket No. 27, Exhibit B).
4. On March 1, 2010, the FINRA claimants filed their claims against RGIC, RGFC, Myrsa
Acevedo and UBS Financial Services Incorporated of Puerto Rico before FINRA in an arbitration
proceeding (Docket No. 77).
5. On May 19, 2010, FINRA informed the Debtor that the FINRA arbitration would be stayed
as to RGFC and RGIC and that arbitration would proceed against UBS Financial Services
Incorporated of Puerto Rico and Myrsa Acevedo.
6. On May 25, 2010, FINRA issued a letter of correction informing that the FINRA arbitration
proceedings would be stayed with respect to the Debtor, but would proceed against RGIC absent a
court ordered stay or agreement of the parties.
Applicable Law & Analysis
Extension of automatic stay to Non Debtors pursuant to §§362(a) & 105(a) Procedure &
Requirements
Procedure
A request for extension of the automatic stay provisions of Section 362(a) to a non debtor
constitutes an action for injunctive relief and should be initiated by an adversary proceeding. In re
Bora Bora, 424 B.R. 17, 24-25 (Bankr. D.P.R., 2010); Fed. R. Bankr. P. 7001(7); See also ; Alan N.
Resnick and Henry J. Sommer, 3 Collier on Bankruptcy, ¶362.04[1] (16 ed. 2010)(“Rule 7001(7)th
provides that a request for injunctive relief is governed by part VII of the Bankruptcy Rules. This will
mean that when the automatic stay of section 362 does not apply, injunctive relief will have to be
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sought by filing a complaint initiating an adversary proceeding and then seeking a temporary
restraining order”).
“The power of the bankruptcy courts to enjoin certain actions not subject to the automatic stay,
such as an action against non debtor parties, has been recognized, when such action is interfering
improperly with the purposes of the bankruptcy law or the debtor’s reorganization efforts.” In re Bora
Bora Inc., 424 B.R. 17, 23 (Bankr. D.P.R. 2010) citing A.H. Robins Co., Inc. v. Piccinin, 788 F. 2d
994 (4 Cir. 1986). “Although called an extension of the automatic stay provisions of the Bankruptcyth
Code to non-debtor parties, these are in fact injunctions issued by a bankruptcy court under 11 U.S.C.
§105(a), after determining that the situation requires it in order to protect the interests of the
bankruptcy estate.” Id. citing In re Cincom ¡Outsource, Inc. 398 B.R. 223, 227 (Bankr. S.D. Ohio,
2008). “Under the Bankruptcy Act, it was believed that the bankruptcy court lacked jurisdiction to
issue such an injunction. Under the Code, broad injunctive power is available under section 105, and
the issue appears to be one directed to the discretion of the court rather than to its jurisdiction.” Alan
N. Resnick and Henry J. Sommer, 3 Collier on Bankruptcy, ¶362.04 (16 ed. 2010). A preliminaryth
injunction is an extraordinary and drastic remedy which should only be granted when the movant has
carried its burden through clear and convincing evidence. Mazurek v. Armstrong, 520 U.S. 968, 972,
117 S. Ct. 1865, 138 L. Ed. 2d 162 (1997). Thus, the broad injunctive power under Section 105(a)
should be used sparingly. In re Lazarus Burman Assoc., 161 B.R. 891, 901 (Bankr. E.D.N.Y. 1993).
The court in analyzing whether to extend the protection of the automatic stay to non debtors,
must determine if the requirements of both Sections 362(a) and 105(a) are satisfied in order to grant
a preliminary injunction extending the provisions of Section 362(a) to non debtors. In re Bora Bora
Inc., 424 B.R. at 24 referencing In re Philadephia Newspapers, LLC, 407 B.R. 606 (E.D. Pa. 2009).
The court notes that the Debtor failed to follow the appropriate procedural mechanism established in
Fed. R. Bankr. P. 7001(7) to request an extension of the automatic stay to a nondebtor. Nonetheless,
the court for the sake of expediency, will entertain Debtor’s request as a contested matter. Fed. R.
Bankr. P. 9014.
Requirements under Section 362(a)
Section 362(a)(1) operates as a stay, “...applicable to all entities, of the commencement or
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continuation, including the issuance or employment of process, of a judicial, administrative, or other
action or proceeding against the debtor that was or could have been commenced before the
commencement of the case under this title, or to recover a claim against the debtor that arose before
the commencement of the case under this title.” 11 U.S.C. §362(a)(1). The scope of the protection
of the automatic stay is broad, but it only stays actions against the debtor, hence the protections of the
stay do not extend to entities such as, “sureties, guarantors, co-obligors, or others with a similar legal
or factual nexus to the ... debtors.” McCartney v. Integra Nat’l Bank N., 106 F. 3d 506, 509-510 (3rd
Cir. 1997) quoting Maritime Elec. Co. v. United Jersey Bank, 959 F. 2d 1194, 1204 (3 Cir. 1991).rd
However, the protection of the automatic stay may be extended to non debtors if “unusual
circumstances” are found such as; “(i) the non debtor and debtor enjoy such an identity of interests
that the suit of the non-debtor is essentially a suit against the debtor; or (ii) the third-party action will
have an adverse impact on the debtor’s ability to accomplish reorganization.” In re Philadelphia
Newspapers, LLC, 407 B.R. at 616.
In the instant case, a Liquidation Agreement was executed on June 29, 2007 between RGFC
and its subsidiary RGIC. RGFC at the time of the Liquidation Agreement was the sole stockholder
of RGIC. The Liquidation Agreement discloses that RGIC’s assets are approximately $10,851,000,
its liabilities are approximately $59,000 and its stockholder’s equity is approximately $10,792,000.
Clause 1.1. of the Liquidation Agreement established that RGIC would transfer to RGFC all the assets
(as defined in the Liquidation Agreement) in exchange for the assumption by RGFC of all of the
liabilities (as defined in the Liquidation Agreement) namely, the accrued expenses and other liabilities
of RGIC and any contingent liabilities for lawsuits or claims made by customers of RGIC; the
cancellation of the intercompany advance agreement (defined as “...the agreement executed by the
Stockholder and the Subsidiary to evidence the advance made to the Stockholder, dated June 7, 2007,
in the amount of $8,000,000.00.”); and the complete redemption and cancellation of all the shares.
Clause 1.2 of the Liquidation Agreement also establishes that on the effective date (June 29, 2007),
RGIC shall declare and pay a dividend to RGFC in the amount of $3,092,516.
The Department of State of the Commonwealth of Puerto Rico issued RGIC’s Certificate of
Dissolution on August 14, 2007. Article 9.08 of the General Corporations Law of 2009, as amended,
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Article 9.08 of the General Corporations Law of 2009, as amended, provides:	1
“[a]ll corporations, whether they expire by their own limitation or are otherwise dissolved, shall
continue to exist as corporate entity for a period of three (3) years from the date of extinction or
dissolution, or for any such longer period which the Court of First Instance (Superior Part) may,
in its discretion, direct for purposes of advancing any suits initiated by the corporation and
continuing the defense of the suits pending against it, whether civil, criminal or administrative, as
well as for purposes of liquidating and terminating the business of the corporation, of complying
with its obligations and distributing the remaining assets to the stockholders. The legal entity
shall not continue for the purpose of continuing the business for which the corporation was
organized.
With respect to any action, suit or proceeding filed or initiated by or against the
corporation before its extinction, or within the period of three (3) years following its extinction or
dissolution, the corporation shall continue as a corporate body after the three (3) year term, and
until all judgments, orders or decrees with respect to the aforementioned actions, suits or
proceedings are fully executed, without the need for any special provision to that effect by the
Court of First Instance (Superior Part).” 14 L.P.R.A. §3708.
Article 9.12 of the General Corporations Law of 2009, as amended, provides:	2
“(a) [a] stockholder of a dissolved corporation whose assets were distributed, to the stockholders
shall not be liable for any claim against the corporation in an amount in excess of his pro rata share
of the claim or of the amount distributed to him by the corporation, whichever is less.
(b) A stockholder of a dissolved corporation whose assets were distributed to the stockholders shall
not be liable for any claim against the corporation in which such action, suit or proceeding is not
begun prior to the expiration of the term provided in §3708 of this title.
(c) The total liability of a stockholder of a dissolved corporation for claims filed against the
dissolved corporation shall not exceed the amount distributed to the stockholder in the dissolution.”
14 L.P.R.A. §3708.
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of the Commonwealth of Puerto Rico, 14 L.P.R.A. §3708 establishes that all dissolved corporations1
shall continue to exist as a corporate entity for three (3) years from the date of dissolution and it
further provides that if any proceeding is commenced before the three (3) year period lapses, the
corporation shall continue as a corporate body. Article 9.12 of the General Corporations Law, 14
L.P.R.A. §3712 , provides that a stockholder of a dissolved corporation, whose assets were2
distributed, will be liable the lesser of his or her pro rata share of the claim or of the amount actually
distributed by the corporation, if the proceeding is commenced prior to the three (3) year term
referenced in Article 9.08. This court concludes that RGFC as RGIC’s sole stockholder in conformity
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with the General Corporations Law of 2009, as amended of the Commonwealth of Puerto Rico, is
statutorily the only party that may be potentially liable to the FINRA claimants depending on the
outcome of their claims.
In the instant case, the arbitration proceedings against RGIC are essentially and statutorily
against the Debtor, given that their identity of interests are in essence merged into RGFC, as its sole
stockholder, and as the real party in interest RGFC will have to prepare and incur all legal defense
fees and may ultimately be liable depending on the outcome of the FINRA claimants claims. Thus,
the “unusual circumstances” to extend the protection of the automatic stay pursuant to Section 362(a)
are present.
Requirements under Section 105(a)
The movant requesting the preliminary injunction under Section 105(a) must satisfy the four
(4) factor test which consists of the following (1) that the debtor would suffer irreparable injury if the
injunction were not granted; (2) that such injury outweighs any harm which granting injunctive relief
would inflict on a defendant; (3) that the debtor has exhibited a likelihood of success on the merits;
and (4) that the public interest will not be adversely affected by the granting of the injunction. In re
Codfish, 97 B.R. 132, 135 (Bankr. D.P.R. 1987) citing In re Supermecado Gamboa, 68 B.R. 230, 232
(Bankr. D.P.R. 1986). “Evidence that goes beyond the unverified allegations of the pleadings and
motion papers must be presented to support or oppose a motion for a preliminary injunction.” 11A
Wright, Miller & Kane, Federal Practice and Procedure: Civil 2d §2949 at 214.
The Supreme Court has stated that, “the basis of injunctive relief in the federal courts has
always been irreparable harm and inadequacy of legal remedies.” Sampson v. Murray, 415 U.S. 61,
88, 94 S. Ct. 937, 952 39 L. Ed. 2d 166, 185 (1974) (quoting Beacon Theatres, Inc. v. Westover, 359
U.S. 500, 506-507, 3L. Ed. 2d 988, 79 S. Ct, 948 (1959)). “The sine qua non is whether the [movants]
are likely to succeed on the merits.” Acevedo Garcia v. Vera-Monroig, 296 F. 3d. at 16 (quoting
Weaver v. Henderson, 984 F. 2d 11, 12 (1 Cir. 1993)); New Comm Wireless Services, Inc. v.st
Sprintcom, Inc., 287 F. 3d 1, 9 (1 Cir. 2002). However, the degree of likelihood of success is notst
determinative as it must be balanced with the hardships caused to the parties if the injunction is not
granted. If plaintiff’s showing of probable success on the merits is uncertain, he may be entitled to
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a preliminary injunction if he demonstrates a strong probability that he will be injured if the court fails
to act. 11A Wright, Miller & Kane, Federal Practice and Procedure: Civil 2d § 2948.3 at 189 & 194-
195. To establish irreparable harm, the movant does not need to show that the injunctive relief will
be fatal to the business, only that its legal remedies are inadequate. Ross-Simons of Warwick, Inc.
v. Baccarat, Inc., 102 F. 3d 12, 15 (1 Cir. 1996). “If the plaintiff suffers a substantial injury that isst
not accurately measurable or adequately compensable by money damages, irreparable harm is a
natural sequel.” Id. The Supreme Court has defined the concept of irreparable harm as follows, “[t]he
key word in this consideration is irreparable. Mere injuries, however substantial, in terms of money,
time and energy necessarily expended in the absence of a stay, are not enough. The possibility that
adequate compensatory or other corrective relief will be available at a later date, in the ordinary
course of litigation, weighs heavily against a claim of irreparable harm.” Sampson v. Murray, 415
U.S. at 90 (quoting Virginia Petroleum Jobbers Association v. FPC, 104 U.S. App. D.C. 106, 259 F.
2d 921 (D.C. Cir. 1958).
In the instant case this court finds that Debtor would sustain irreparable harm or injury if the
continuation of proceedings against RGIC (a defunct entity with no assets) is not stayed, since as
already explained herein, Debtor would be the entity legally and financially responsible in providing
not only all the legal costs of RGIC’s defense in the FINRA arbitration proceedings but also its
limited managerial resources would also be diverted in assisting towards the preparation for such
proceedings, meaning that its automatic stay protections under Section 362(a)(1) would in essence
be violated. Moreover, at this juncture, the FINRA claimants have not requested from this court to
lift the automatic stay with respect to the Debtor in order to proceed with the arbitration proceedings.
The second prong of the preliminary injunction test, “likelihood of success,” has been defined
for the purposes of an injunction in a bankruptcy case “as the probability of a successful
reorganization.” Lazarus Burman Assocs. v. National Westminster Bank USA (In re Lazarus Burman
Assocs.), 161 B.R. 891, 901 (Bankr. E.D.N.Y. 1993). The second prong is related to the first prong,
given that it would contravene the protections afforded to debtors under Section 362, namely to
provide the same a breathing spell by halting all collection efforts and harassment by creditors while
permitting the debtor to attempt a plan of reorganization. See H.R. Rep. No. 595, 95 Cong., 1 Sess.th st
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340 (1977); S. Rep. No. 989, 95 Cong. 2d Sess. 54-55 (1978), reprinted in App. Pt. 4(d)(i) andth
4(e)(i) infra. (“The automatic stay is one of the fundamental debtor protections provided by the
bankruptcy laws. It gives the debtor a breathing spell from his creditors. It stops all collection efforts,
all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or
reorganization plan, or simply to be relieved of the financial pressures that drove him into
bankruptcy”). Thus, this court finds that Debtor meets the second prong of the preliminary injunction
test because it would hamper its attempt for a successful reorganization if the protections of the
automatic stay were not provided to Debtor.
The third prong of the preliminary injunction test, the relative harm to be suffered or the
balance of relevant positions, is met by the Debtor because the degree of harm that would be imparted
to the Debtor and its estate outweighs the harm that the FINRA claimants would face if a preliminary
injunction were not issued, given that the preliminary injunction will not invalidate the alleged rights
of the FINRA claimants but it will simply delay the enforcement of those rights. See In re Lazarus
Burman Assocs., 161 B.R. at 901.
Lastly, the fourth prong of the test, the public interest in the context of a bankruptcy
proceeding, consists in promoting a successful reorganization. Id at 901. This court concludes that
the public interest is best protected if the Debtor continues to work in their reorganization rather than
having to face immediate adverse economic consequences stemming from legal fees in the arbitration
proceedings and the syphoning off of its limited managerial resources in such proceedings.
Exemption from the Automatic Stay under §362(b)(6)
Section 362(b)(6) exempts from the automatic stay, “...the exercise by a commodity broker,
forward contract merchant, stockbroker, financial institution, financial participant, or securities
clearing agency of any contractual right (as defined in section 555 or 556) under any security
agreement or arrangement or other credit enhancement forming a part of or related to any commodity
contract, forward contract or securities contract, or of any contractual right (as defined in section 555
or 556) to offset or net out any termination value, payment amount, or other transfer obligation arising
under or in connection with 1 or more contracts, including any master agreement for such contracts.”
11 U.S.C. §362(b)(6). “The Financial Netting Improvements Act of 2006 clarifies that this stay
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exception includes the exercise by such entities of any contractual right (as defined in section 555 or
556) under any security agreement, arrangement or other credit enhancement in or related to any
commodity contract, forward contract or securities contract.” Alan N. Resnick and Henry J. Sommer,
3 Collier on Bankruptcy, ¶362.05[6] (16 ed. 2010).th
The FINRA claimants argue that they are exempted from the automatic stay pursuant to the
provisions of Section 362(b)(6), but their reliance is misplaced given that such section allows for
setoffs, which involve mutual debts and claims, which in turn originate from short-term contracts
(such as securities and commodities contracts which involve margin calls) and entered into by certain
entities described in said section. The court in the instant case, is simply not before this type of
scenario (transaction), rather the FINRA claimants causes of actions arise from alleged violations of
securities laws which occurred with respect to RGIC before the same was liquidated on June 29,
2007.
The FINRA claimants citing In re Coachworks Holdings, Inc., 418 B.R. 490 (Bankr. M.D. Ga.
2009) and Smith v. Tricare Rehabilitation Sys. (In re Tricare Rehabilitation), 181 B.R. 569 (Bankr.
N.D. Ala. 1994) argue that the existence of pending litigation against the debtor in a non-bankruptcy
case may constitute case for lifting the automatic stay. The court in both of these cases was presented
with motions for relief from the automatic stay pursuant to Section 362(d)(1). This issue is simply
not before the court, given that the FINRA claimants have not filed before the court a motion
requesting relief from the automatic stay pursuant to Section 362(d)(1) and (g).
Mandatory Arbitration under FINRA Rules
FINRA claimants argue that FINRA Rule 13200 establishes mandatory application of
arbitration proceedings. FINRA Rule 13200 must be employed in conformity with the Code of
Arbitration Procedure for Industry Disputes. FINRA Rule 13200 provides,
“ (a) Except as otherwise provided in the Code, a dispute must be arbitrated under the
Code if the dispute arises out of the business activities of a member or an associated
person and is between or among: Members; Members and Associated Persons; or
Associated Persons.
(b) Disputes arising out of the insurance business activities of a member that is also
an insurance company are not required to arbitrate under the Code.” FINRA Rule
13200.
FINRA Rule 13100 defines the following terms:
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FINRA Rule 12100(i) defines customer as, “[a] customer shall not have include a broker or	3
dealer.”
FINRA Rule 12100(o) defines member as follows; “[f]or purposes of the Code, the term	4
‘member’ means any broker or dealer admitted to membership in FINRA, whether or not the
membership has been terminated or cancelled; and any broker or dealer admitted to membership in
a self regulatory organization that, with FINRA consent, has required its members to arbitrate
pursuant to the Code and/or to be treated as members of FINRA for purposes of the Code, whether
12
“(f) Code- The term ‘Code’ means the Code of Arbitration Procedure for Industry
Disputes. For disputes involving customers, see the FINRA Code of Arbitration
Procedure for Customer Disputes.
(o) Member- For purposes of the Code, the term ‘member’ means any broker or dealer
admitted to membership in FINRA, whether or not the membership has been
terminated or cancelled, and any broker or dealer admitted to membership in a self-
regulatory organization that, with FINRA consent, has required its members to
arbitrate pursuant to the Code and/or to be treated as members of FINRA for purposes
of the Code, whether or not the membership has been terminated or cancelled.
(a) Associated Person- The term ‘associated person’ or ‘associated person of a
member’ means a person associated with a member, as that term is defined in
paragraph (r).
(r) Person Associated with a Member- The term ‘person associated with a member’
means: (1) A natural Person who is registered or has applied for registration under
Rules of FINRA; or
(2) A sole proprietor, partner, officer, director, or branch manager of a
member, or other natural person occupying a similar status or performing
similar functions, or a natural person engaged in the investment banking or
securities business who is directly or indirectly controlling or controlled by a
member, whether or not any such person is registered or exempt from
registration with FINRA under the By-Laws or the Rules of FINRA.” FINRA
Rule 13100(a), (f), (o) and (r).
In the instant case, the FINRA claimants are citing FINRA Rule 13200 which is used for
industry disputes amongst members of FINRA or persons that are associated with a FINRA member.
The dispute in this case is between RGIC (a former FINRA member) and the FINRA claimants which
are not FINRA members. Thus, the applicable FINRA Rules would be those in conformity with Code
of Arbitration Procedure for Customer Disputes. FINRA Rule 12200 provides the following:
“Parties must arbitrate a dispute under the Code if: Arbitration under the Code is
either: (1) Required by a written agreement, or
(2) Requested by the customer3
The dispute is between a customer and a member or associated person of a4 5
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or not the membership has been terminated or cancelled.”
FINRA Rule 12100(a) defines associated person as follows; “[t]he term ‘associated person’	5
or ‘associated person of a member means a person associated with a member, as that term is defined
in paragraph (r).” FINRA Rule 12100(r) defines person associated with a member as follows; “[t]he
term ‘person associated with a member’ means: (1) A natural person who is registered or has
applied for registration under the Rules of FINRA; or (2) A sole proprietor, partner, officer,
director, or branch manager of a member, or other natural person occupying a similar status or
performing similar functions, or a natural person engaged in the investment banking or securities
business who is directly or indirectly controlling or controlled by a member, whether or not any
such person is registered or exempt from registration with FINRA under the By-Laws or the Rules
of FINRA. For purposes of the Code, a person formerly associated with a member is a person
associated with a member.”
However, without making any factual findings the court assumes that RGIC’s	6
membership with FINRA terminated or the same withdrew its application with FINRA on June
26, 2007 pursuant to an online FINRA BrokerCheck Report.
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member; and
The dispute arises in connection with the business activities of the member or
the associated person, except disputes involving the insurance business
activities of a member that is also an insurance company.” FINRA Rule
12200.
RGIC is a defunct entity which was duly dissolved on August 14, 2007. FINRA Rule 122026
provides the following regarding claims against inactive members:
“[a] claim by or against a member in one of the following categories is ineligible for
arbitration under the Code unless the customer agrees in writing to arbitrate after the claim
arises: A member whose membership is terminated, suspended, cancelled or revoked;
A member that has been expelled from FINRA; or
A member that is otherwise defunct.”
In the instant case, the entity that would be incurring in the costs of legally representing
RGIC in the arbitration proceedings would be RGFC, because RGIC has no assets since it was
liquidated on June 29, 2007. RGFC is not a former or a current FINRA member, or a natural person
associated with a member. Thus, FINRA may not oblige RGFC to arbitrate in said arbitration
proceedings.
However, this issue does not control the outcome because this court has ordered the provisions
of the automatic stay to be extended to RGIC. Moreover, even if RGFC were obligated by the FINRA
Rules to participate in said arbitration proceedings, the FINRA claimants would have had to file a
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The parties do not dispute that the FAA applies to arbitration proceedings brought before	7
FINRA.
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motion to compel arbitration before this court, and they have not as of this date.
The Federal Arbitration Act & Bankruptcy7
The Federal Arbitration Act (“FAA”), 9 U.S.C.S. §1 et seq., requires federal courts to
enforce arbitration agreements and to stay litigation that contravenes it. See 9 U.S.C. §§ 2& 3; Burns
v. New York Life Ins. Co., 202 F. 3d 616, 620 (2d Cir. 2000). The FAA represents a “congressional
declaration of a liberal federal policy favoring arbitration agreements,” and “any doubts concerning
the scope of arbitrable issues should be resolved in favor of arbitration.” Moses H. Cone Mem’l Hosp.
v. Mercury Constr. Corp., 460 U.S. 1, 23, 74 L. Ed. 2d 765, 103 S. Ct. 927 (1983). However, “like
any statutory directive, the Arbitration Act’s mandate may be overridden by a contrary congressional
command.” Shearson/Am. Express Inc. v. McMahon, 482 U.S. 220, 226, 96 L. Ed. 2d 185, 107 S.
Ct. 2332(1987).
A bankruptcy court presented with a motion to compel arbitration must apply a four (4) prong
test which consists of the following: (i) whether the parties agreed to arbitrate; (ii) the scope of the
agreement; (iii) if federal statutory claims are asserted, it must consider whether Congress intended
those claims to be nonarbitrable; and (iv) if the court concludes that some, but not all, of the claims
in the case are arbitrable, it must then decide whether to stay the balance of the proceedings pending
arbitration. Togut v. RBC Dain Correspondent Servs. (In re S.W. Bach & Co.), 425 B.R. 78, 87
(Bankr. S.D.N.Y. 2010) (citing Bethlehem Steel Corp. v. Moran Towing Corp. (In re Bethlehem Steel
Corp.), 390 B.R. 784,789)(Bankr. S.D.N.Y. 2008) (quoting Oldroyd v. Elmira Sav. Bank, FSB, 134
F. 3d 72, 75-76 (2d Cir. 1998).
In the instant case, the court has not been presented with a motion to compel arbitration by
the FINRA claimants, thus it would be premature for the court to enter into the four prong test
analysis and make a determination as to whether the FINRA claimants’ claims are core or non-core,
and whether the same are arbitrable or non-arbitrable.
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Conclusion
In view of the foregoing, the court finds and concludes as follows: (1) RGFC, as RGIC’s sole
stockholder in conformity with the General Corporations Law of 2009, as amended of the
Commonwealth of Puerto Rico, is statutorily the only party that may be potentially liable to the
FINRA claimants depending on the outcome of their respective claims. Thus, the arbitration
proceedings against RGIC are essentially and statutorily against the Debtor, given that RGFC as its
sole stockholder, and as the real party in interest will be ultimately liable to the FINRA claimants; (2)
the “unusual circumstances” to extend to RGIC the protection of the automatic stay pursuant to
Section 362(a) are present in the instant case; (3) the exemption from the automatic stay provided by
Section 362(b)(6) is simply inapplicable because this particular section allows for setoffs, that involve
mutual debts and claims, which in turn originate from short-term contracts (such as securities and
commodities contracts which involve margin calls) and entered into by certain entities described in
said section. The court is not before this type of transaction, rather the FINRA claimants causes of
actions arise from alleged violations of securities laws which occurred prior to the June 29, 2007
liquidation date of RGIC; (4) furthermore, this court finds that the FINRA claimants’ argument
regarding that the existence of pending litigation against a debtor in a non-bankruptcy forum may
constitute cause for lifting the automatic stay is misplaced. The FINRA claimants have not filed
before this court a motion requesting relief from the automatic stay pursuant to Section 362(d)(1) and
(g); (5) in the instant case, FINRA pursuant to either the Code of Arbitration Procedure for Industry
Disputes or the Code of Arbitration Procedure for Customer Disputes may not oblige RGFC to appear
in the arbitration proceedings because they have not as of this date filed a motion to compel
arbitration before this court; and (6) given that the FINRA claimants have not presented to this court
a motion to compel arbitration, it would be premature for this court to enter into the four (4) prong
test analysis to determine whether the FINRA claimants’ claims are core or non-core and whether the
same are arbitrable or non-arbitrable.
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In summary, this court concludes that Debtor has satisfied the requirements pursuant to
Sections 362(a) and 105(a) for the extension of the automatic stay to be extended to its duly dissolved
subsidiary, namely RGIC. Consequently, the Debtor’s motion requesting the provisions of the
automatic stay to be extended to RGIC is hereby GRANTED.
In San Juan, Puerto Rico, this 17 day of November 2010.h
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