The 5th U.S. Court of Appeals rarely lets parties out of contracts that mandate that their disputes must be settled through binding arbitration. That could turn out to be true even for the federally appointed receiver who's seeking to recover the allegedly fraudulently transferred assets of convicted financier R. Allen Stanford and his related companies.
The background to the case, according to the 5th Circuit's Aug. 30 per curiam decision in Ralph S. Janvey v. James R. Alguire, et al., is as follows.
The suit arises out a Securities and Exchange Commission lawsuit against Stanford, his associates and his related companies, which the 5th Circuit refers to as "the Stanford Entities." The SEC suit alleged securities law violations in connection with a Ponzi scheme perpetrated by Stanford. A judge sentencedStanford to 110 years in prison last year, after a Houston federal jury convicted him of numerous fraud allegations.
Ralph Janvey was acting in his capacity as receiver for the Stanford Group Co. and its related entities when he filed suit against some former employees of the Stanford Entities, claiming that the employees received fraudulent transfers in violation of the Texas Uniform Fraudulent Transfer Act (TUFTA) and were unjustly enriched at the expense of creditors of the receivership estate.
The employees filed motions to compel arbitration in the district court. Before it addressed those motions, the district court granted a preliminary injunction freezing certain assets of the employees. On appeal of that order, the 5th Circuit ruled that the receiver's claims were not subject to arbitration in a 2010 decision in Janvey v. Alguire, et al.,known as Alguire I. However, the 5th Circuit subsequently withdrew that opinion and substituted a new ruling, known as Alguire II, in which the court concluded that it lacked jurisdiction to address the motions to compel and remanded them to the trial court for a ruling in the first instance [See " 5th Circuit: Motion to Compel Arbitration Doesn't Unfreeze Assets" Texas Lawyer, Jan. 3, 2011 page 1.]
On remand, the trial court denied the motions to compel arbitration, holding that the receiver had standing to bring claims on behalf of creditors and therefore was not bound by the arbitration agreements. The employees again appealed that ruling to the 5th Circuit.
The 5th Circuit in its Aug. 30 decision examined whether the receiver had standing to bring suit against the former employees on behalf of creditors. The receiver argued that he did have standing and therefore, he is a stranger to the arbitration agreements between Stanford and the former employees.
But the 5th Circuit noted that the receiver's argument was foreclosed by a ruling earlier this year in Janvey v. Democratic Senatorial Campaign Committee, in which the appellate court held that "a federal equity receiver has standing to assert only the claims of the entities in receivership."
"The district court below relied on its erroneous conclusion that the Receiver was authorized to sue on behalf of creditors in denying the motions to compel arbitration, reasoning that the creditors were 'not party to the arbitration agreements,' " the 5th Circuit panel wrote. "On appeal, the parties have focused on whether the Receiver has standing to sue on behalf of creditors and not on whether he is bound by the arbitration clauses if he sues, as he must, on behalf of the Stanford Entities. The district court did not address this issue. We therefore remand to allow the district court to consider that question in the first instance."
Brad Foster, a partner in Andrews Kurth in Dallas, represents 115 financial advisers who were employed by the Stanford Group. He says the decision is a significant victory for his clients.
"For the last three years, we have asked the receiver to arbitrate his claims under the terms of my clients' arbitration agreements and [Financial Industry Regulatory Authority] rules governing broker-dealers. He has refused. Instead, the receiver has tried to side-step Stanford's arbitration agreements by arguing that he stands in the shoes of third-party creditors rather than the Stanford entities," Foster writes in an emailed statement. "The Fifth Circuit squarely rejected the Receiver's arguments."
Kevin Sadler, a partner in Baker Botts in Palo Alto, Calif., who represents Janvey, did not return two calls for comment.