Sher v. Goldman, Sachs & Co.

Filing 47

MEMORANDUM. Signed by Judge Catherine C. Blake on 4/19/12. (mps, Deputy Clerk)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND

JOEL I. SHER, ET AL.

v.

GOLDMAN SACHS

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Civil No. CCB-11-2796

MEMORANDUM
Plaintiff, Joel I. Sher (“Trustee”), in his capacity as Chapter 11 Trustee for TMST, Inc.,
f/k/a/ Thornburg Mortgage, Inc. (“TMST”), has filed suit against Goldman, Sachs & Co.
(“Goldman Sachs”). The suit arises from a repurchase agreement between the parties whereby
Goldman Sachs financed TMST’s acquisition of mortgage-backed securities. The Trustee
alleges, among other things, that Goldman Sachs manipulated mortgage-backed security pricing,
issued improper margin calls, and liquidated TMST assets in bad faith. The Trustee now asserts
claims for breach of contract and breach of the covenants of good faith and fair dealing.
(Complaint, ECF No. 9.)1
Now pending before the court are Goldman Sachs’s motions to compel arbitration and to
stay or dismiss the action or, in the alternative, to dismiss the complaint. (ECF Nos. 1, 24.) The
issues have been fully briefed, and the court finds oral hearing unnecessary. See Local Rule
105.6 (D. Md. 2011). For the reasons that follow, the court concludes, first, that the arbitration
clause is valid, and second, that the parties have agreed to have the threshold question of the

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The suit was initially filed in the United States Bankruptcy Court for the District of Maryland. (Case No.
09-17787.) The court issued an order on January 20, 2012, granting Goldman Sachs’s motion to
withdraw the reference. (ECF Nos. 1, 7.)

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arbitrability of TMST’s claims decided by the arbitrator. Accordingly, the court will grant
Goldman Sachs’s motion to submit the matter to arbitration on the question of arbitrability and
stay the action pending arbitration.

Background
This action arises from TMST’s dealings with Goldman Sachs as one of several financial
institutions that provided financing for TMST’s acquisition of mortgage-backed securities.
TMST is a financial institution incorporated under the laws of Maryland. Goldman Sachs is a
registered broker-dealer engaged in the purchase and sale of securities. TMST opened an
account with Goldman Sachs in May 1997. In 2002, TMST entered into an agreement with
Goldman Sachs which enabled TMST to purchase mortgage-backed securities by selling assets
to Goldman Sachs and agreeing to buy them back at a later date for a higher price. In the course
of their business relationship, TMST and Goldman Sachs entered into two written agreements
relevant to this dispute – a Corporate Account Agreement (“CAA”) in May 1997 and a Master
Repurchase Agreement (“MRA”) in August 2002. (ECF No. 25, Exh. 5; ECF No. 9, Exh. 1.)
The claims under consideration in this action arise from the terms of the MRA, which
TMST alleges that Goldman Sachs breached. At issue is whether the arbitration provision of the
1997 CAA compels arbitration with respect to TMST’s claims against Goldman Sachs. The
parties dispute whether the MRA vitiated the arbitration provision in the CAA and whether the
court or the arbitrator should determine the arbitrability of TMST’s claims. The parties also take
contrary positions on the substantive question of whether arbitration should be compelled with
respect to TMST’s repurchase-related claims.
TMST contends the MRA superseded and vitiated the arbitration provision in the CAA.
According to TMST, “[t]he MRA constitutes a separate, fully-integrated contract” enacted
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subsequent to the CAA. (ECF No. 32, p. 17.) TMST points to language in the MRA providing
that “[t]his Agreement shall supersede any existing agreements between the parties containing
general terms and conditions for repurchase transactions” as evidence that the CAA is invalid
with respect to matters covered by the MRA. (ECF No. 9, Exh. 1, § 14.) TMST also notes that
the MRA does not incorporate the CAA by reference or provide that its terms apply.
Accordingly, TMST contends that the CAA and MRA are collateral to one another and the
provisions of the CAA cannot apply to a dispute arising from the MRA. 2
As to the appropriate forum for deciding arbitrability, TMST argues the court must
decide whether arbitration is compelled with respect to its claims against Goldman Sachs.
TMST contends the arbitration provision of the CAA does not express the parties’ intent for an
arbitrator to determine arbitrability, even if it were valid and applicable. TMST notes that the
Federal Arbitration Act envisions courts, not arbitrators, making the threshold determinations
about whether a matter is arbitrable. 9 U.S.C. § 3. Moreover, TMST argues that Goldman Sachs
cannot overcome the presumption that arbitrability is a matter for judicial determination. See
AT&T Techs, Inc. v. Communications Workers of Am., 475 U.S. 643, 649 (1986) (“Unless the
parties clearly and unmistakably provide otherwise, the question of whether the parties agreed to
arbitrate is to be decided by the court, not the arbitrator.”). TMST regards the broad language of

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TMST also argues that the CAA does not apply to its particular claims which arise under the MRA.
(ECF No. 32, p. 13-16.) According to TMST, the CAA “was not a negotiated document intended by the
parties to be a general overarching umbrella agreement governing all present and future relations between
them.” (Id. at 14.) TMST observes that the CAA only lists two account numbers, neither of which is the
account number listed in the MRA. TMST also notes that the CAA does not refer at all to the repurchase
transactions which are the subject of this suit. TMST argues the arbitration provision of the CAA is
limited by its very text to controversies “arising out of or related to this agreement, the transactions
contemplated hereby, or the accounts established hereunder.” By TMST’s account, its claims against
Goldman Sachs lack the nexus to the CAA required for the arbitration provision to apply. For the reasons
explained herein, the question of the arbitrability of TMST’s particular claims will be reserved for
determination by the arbitrator. This ruling addresses only the validity of the arbitration provision and the
appropriate forum for deciding arbitrability.

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the CAA’s arbitration language as merely a “boilerplate recitation[ ] of the scope of arbitrable
matters,” which does not evince the parties’ intent to bypass judicial determination of
arbitrability. (ECF No. 32, p. 12.)
Goldman Sachs, by contrast, maintains that the arbitration clause in the CAA is valid and
clearly evinces the parties’ intent for an arbitrator to decide threshold matters of arbitrability.
Goldman Sachs contends, in the alternative, that if the court does not submit the question of
arbitrability to the arbitrator, the court should compel arbitration of TMST’s claims. According
to Goldman Sachs, the CAA represents the parties’ agreement to arbitrate all disputes related to
their business relationship. In support of its argument, Goldman Sachs points to the broad
language of the CAA itself. The agreement states that the parties “hereby agree to the following
with respect to any of [TMST’s] accounts with [Goldman Sachs] and all transactions with
[Goldman Sachs].” (ECF No. 25, Exh. 5) (emphasis added). The contract’s arbitration clause
provides that “[a]ny controversy between [Goldman Sachs] . . . and [TMST] . . . arising out of or
relating to this agreement, the transactions contemplated hereby, or the accounts established
hereunder, shall be settled by arbitration.” (Id., § 13.) Goldman Sachs argues the CAA was
intended to apply to the entirety of the parties’ relationship and asserts that the MRA’s complete
silence as to arbitration demonstrates that it does not preclude arbitration. Moreover, Goldman
Sachs notes that courts are instructed to “generously construe[]” parties’ intentions in favor of
arbitrability. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626
(1985).
With respect to the issue of who should determine arbitrability, Goldman Sachs argues
the contract reflects a “clear[] and unmistakabl[e]” agreement between the parties to have the
arbitrator decide arbitrability, as required under law. AT&T Techs, 475 U.S. at 649. Goldman

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Sachs claims the language in the CAA providing that “any controversy” will be settled by an
arbitrator dictates that arbitrability itself is to be determined by an arbitrator. Moreover,
Goldman Sachs points to language in the CAA stating that arbitration will proceed “in
accordance with the rules then obtaining to any one of the American Arbitration Association or
The New York Stock Exchange, Inc., or any other exchange of which [Goldman Sachs is] a
member, or the National Association of Securities Dealers, Inc. or the Municipal Securities
Rulemaking Board, as [TMST] may elect.” (ECF No. 25, Exh. 5, § 13.) Goldman Sachs asserts
that all of these rules “contain provisions that have been held to empower the arbitrator to decide
threshold issues of arbitrability.” (ECF No. 37, p. 6.) Accordingly, Goldman Sachs argues that
the CAA’s incorporation of rules empowering an arbitrator to decide arbitrability constitutes
sufficient evidence of the parties’ intent to delegate the issue to the arbitrator.

Discussion
In determining arbitrability, courts first consider whether a valid arbitration agreement
exists. Upon finding a valid agreement to arbitrate, the court must “determine who decides
whether a particular dispute is arbitrable: the arbitrator or the court.” Peabody Holding Co., LLC
v. United Mine Workers of Am., Int’l Union, 665 F.3d 96, 101 (4th Cir. 2012) (emphasis in
original). Only after “conclud[ing] that the court is the proper forum in which to adjudicate
arbitrability” should the court “decide whether the dispute is, in fact, arbitrable.” Id. (emphasis
in original).
The Supreme Court has held that “arbitration is simply a matter of contract.” First
Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995); see also AT&T Techs, 475 U.S. at
648. Therefore, “when deciding whether the parties agreed to arbitrate a certain matter

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(including arbitrability), courts generally . . . should apply ordinary state-law principles that
govern the formation of contracts.” First Options, 514 U.S. at 944 (emphasis added); see also
Adkins v. Labor Ready, Inc., 303 F.3d 496, 501 (4th Cir. 2002) (“Whether a party agreed to
arbitrate a particular dispute is a question of state law governing contract formation.”).3
With respect to the validity of the arbitration agreement, New York courts have
specifically considered whether a subsequent agreement containing a merger clause that makes
no reference to arbitration operates to invalidate a broad arbitration provision in an earlier
contract. See Primex Int’l Corp. v. Wal-Mart Stores, Inc., 89 N.Y.2d 594, 601 (1997); see also
Remco Maintenance, LLC v. CC Management & Consulting, 925 N.Y.S.2d 30, 32 (“[A]bsent a
clear manifestation of contrary intent, a broad arbitration clause survives and remains
enforceable for the resolution of disputes arising out of that agreement.”). Courts have
concluded that a subsequent agreement without reference to arbitration does not overcome the
presumption of arbitration created by a broad arbitration provision in an initial agreement. See
Primex, 89 N.Y.2d at 601; see also Bank Julius Baer & Co., Ltd. v. Waxfield Ltd., 424 F.3d 278
(2d Cir. 2005).
In Bank Julius Baer, the parties entered into an initial contract providing that arbitration
would apply to “any dispute, controversy or claim with regard to any agreement, the breach
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The CAA and the MRA both contain choice of law provisions providing that the agreements are
governed by the laws of the State of New York. (ECF No. 25, Exh. 5, § 11; ECF No. 9, Exh. 1, § 16.)
Both parties have acknowledged that New York state law applies to the interpretation of the arbitration
agreement. (ECF No. 24, p. 22; ECF No. 32, p. 13.) In keeping with the First Options directive, this
court will analyze the questions of arbitrability with reference to New York state law. This is consistent
with the practices of other courts in determining the validity of arbitration clauses and the appropriate
forum for deciding arbitrability. See, e.g., Grynberg v. BP P.L.C., 585 F. Supp. 2d 50, 55, n.2 (D.D.C.
2008) (applying New York law interpreting whether arbitrators or courts should arbitrate arbitrability);
Bell v. Cendant Corp., 293 F.3d 563, 566 (2d Cir. 2002) (“[T]he issue of arbitrability may only be
referred to the arbitrator if there is clear and unmistakable evidence from the arbitration agreement, as
construed by the relevant state law, that the parties intended that the question of arbitrability shall be
decided by the arbitrator.”) (internal quotations omitted, emphasis added).

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thereof or any account or transaction.” 424 F.3d at 282 (emphasis omitted). Shortly thereafter,
the parties entered into another agreement providing that it “supersedes all prior agreements and
understandings” between the parties. Id. The second agreement, like the MRA at issue in this
case, did not incorporate the first agreement by reference or mention the issue of arbitration.
Like TMST, the client opposed arbitration on the grounds that the merger clause in the
subsequent agreement invalidated the initial agreement to arbitrate.
In reaching its conclusion, the court noted that the merger clause in the subsequent
contract “acts only to require full application of the parol evidence rule to the writing in
question” – not to void the initial arbitration agreement. Id. at 283 (emphasis added) (citing
Primex, 89 N.Y.2d at 600). The court also noted that interpreting the merger clause in the
subsequent agreement as invalidating the first agreement “would also lead to absurd results, such
as expunging the account-opening agreements on which the [subsequent agreements] later rely.”
Id. More fundamentally, the court held that “[u]nder our cases, if there is a reading of the
various agreements that permits the Arbitration Clause to remain in effect, we must choose it:
[T]he existence of a broad agreement to arbitrate creates a presumption of arbitrability which is
only overcome if it may be said with positive assurance that the arbitration clause is not
susceptible of an interpretation that covers the asserted dispute.” Id. at 284 (internal quotations
omitted). Accordingly, the court concluded that the subsequent agreement did not vitiate the
arbitration agreement and the broad arbitration agreement was valid. Id. at 285.
The logic of Bank Julius applies squarely to this case. The court finds that the CAA’s
arbitration provision is not voided by the MRA and is therefore valid.

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Forum for the Determination of Arbitrability
Having determined that a valid arbitration agreement exists between the parties, the court
now considers whether the arbitrability of TMST’s claims is properly determined by the court or
the arbitrator. See Peabody Holding Co, 665 F.3d at 101.
As TMST has noted, courts presume that questions of arbitrability are issues for judicial
determination. See Smith Barney Shearson Inc. v. Sacharow, 91 N.Y.2d 39, 45 (1997) (“[W]e
note the well-settled proposition that the question of arbitrability is an issue generally for judicial
determination in the first instance.”). The Supreme Court has held that “questions of
arbitrability” – including “whether an arbitration clause in a concededly binding contract applies
to a particular type of controversy” – are appropriate for courts. Howsam v. Dean Witter
Reynolds, Inc., 537 U.S. 79, 84 (2002). The Court has also clarified, however, that parties may
agree to have an arbitrator determine issues of arbitrability if they “clearly and unmistakably
provide” so. AT&T Techs, 475 U.S. at 649. “Just as the arbitrability of the merits of a dispute
depends upon whether the parties agreed to arbitrate that dispute, . . . so the question ‘who has
the primary power to decide arbitrability’ turns upon what the parties agreed about that matter.”
First Options, 514 U.S. at 943 (emphasis in original).
Recognizing the presumption of judicial determination of arbitrability, the court
nonetheless finds in this instance that arbitration is the appropriate forum to decide the threshold
question of arbitrability because of the clear intent of the parties to so provide. The New York
State court has found that parties “evinced a ‘clear and unmistakable’ agreement to arbitrate
arbitrability as part of their alternative dispute resolution choice” primarily in two circumstances:
(1) when the language of an arbitration agreement is so broad as to submit “any” controversy for
arbitration, and (2) when the parties incorporated by reference arbitration rules which grant

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arbitrators the power to determine arbitrability. Sacharow, 91 N.Y.2d at 46-47. In this case,
both circumstances apply.
In Sacharow, the court found that language in an arbitration clause was so sweeping as to
evince the parties’ clear and unmistakable intent to submit the question of arbitrability for
arbitration and overcome the presumption of judicial determination. There, the court considered
language in the arbitration agreement providing that “any controversy . . . shall be resolved by
arbitration.” Id. at 40. The court characterized the arbitration provision as “plain and sweeping.”
Id. at 47. In reaching its holding, the court echoed the Second Circuit’s observations in
PaineWebber Inc. v. Bybyk, 81 F.3d 1193 (2d Cir. 1996), which examined a very similar
arbitration clause. There, the Second Circuit concluded that the meaning of the clause was
“plain indeed: any and all controversies are to be determined by arbitration. The wording is
inclusive, categorical, unconditional and unlimited. The words ‘any and all’ are elastic enough
to encompass disputes over . . . whether a claim is within the scope of arbitration.” Id. at 1199.
Accordingly, the Sacharow court, like the Bybyk court, held that the broad language of the
arbitration clause constituted sufficient evidence of “the parties’ intent and commitment to
arbitrate the issue of arbitrability” to overcome the presumption of judicial determination of
arbitrability. 91 N.Y.2d at 46.
Furthermore, in both Sacharow and Bybyk, the incorporation of arbitration rules which
provide for arbitrators to decide issues of arbitrability was found to constitute further evidence of
the parties’ intent. In Sacharow, the court concluded that the incorporation of the arbitration
rules of the National Association of Securities Dealers (NASD) into the parties’ arbitration
agreement reflected “a clear and unmistakable expression of their intent to leave the question of
arbitrability to the arbitrators” because “language of the [NASD] Code itself commits all issues,

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including issues of arbitrability . . . , to the arbitrators.” Id. at 47 (quoting Bybyk, 81 F.3d at
1202); see also id. (incorporation of NASD rules would serve as evidence “that the parties
intended to arbitrate the issue of arbitrability”). Courts have reached the same conclusion with
respect to the incorporation of other bodies of arbitral rules. See, e.g., Zachariou v. Manios, 891
N.Y.S.2d 54, 55 (2009) (“Where there is a broad arbitration clause and the parties’ agreement
specifically incorporates by reference the [American Arbitration Association] rules providing
that the arbitration panel shall have the power to rule on its own jurisdiction, courts will leave the
question of arbitrability to the arbitrators.”) (internal quotations omitted).
In this case, which set of arbitration rules is incorporated is somewhat less clear because
the CAA allows for TMST to select arbitration rules from among the AAA, NASD, The New
York Stock Exchange, Inc. (or any other exchange to which Goldman Sachs belongs), or The
Municipal Securities Rulemaking Board. 4 (ECF No. 25, Exh. 5, § 13.) Nonetheless, each of the
bodies of rules named in the CAA contains provisions submitting the question of arbitrability to
arbitration.5 Combined with the broad language of the CAA’s arbitration provision, the court
finds that there is clear and unmistakable evidence that TMST and Goldman Sachs intended to
submit the question of arbitrability to the arbitrator.6

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The CAA provides that “[i]f [TMST] does not make such an election by registered mail addressed to
[Goldman Sachs] . . . within ten days after receipt of notification from [Goldman Sachs] requesting such
election, then [TMST] authorizes [Goldman Sachs] to make such election on [its] behalf.” (ECF No. 25,
Exh. 5, § 13.) The record is silent as to whether TMST elected a body of arbitration rules or whether
Goldman Sachs requested that it do so.
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As noted, New York courts have held that incorporation of the AAA rules constitutes important
evidence that the parties intended to “leave the question of arbitrability to the arbitrators.” Life
Receivables Trust v. Goshawk Syndicate 102 at Lloyd’s, 888 N.Y.S.2d 458, 459 (2009) aff’d, 14 N.Y.3d
850 (2010). Sacharow reached the same conclusion with respect to the NASD Rules. Sacharow, 91
N.Y.2d at 47. The District Court of New Jersey has noted that Rule 621 of The New York Stock
Exchange “is identical” to NASD § 35, which the Second Circuit has found to be a “clear and
unmistakable expression of an agreement to leave the question of arbitrability to the arbitrators.” Bao v.
Gruntal & Co., Inc., 942 F. Supp. 978, 981 (D.N.J. 1996). Finally, The Municipal Securities Rulemaking
Board Rule incorporates by reference the NASD. (ECF No. 37, p. 6.)
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The court notes that the Fourth Circuit appears to have imposed a more exacting standard
than the Second Circuit with respect to the presumption of judicial determination of arbitrability.
The Fourth Circuit has rejected the notion that broad arbitration clauses alone reflect “clear and
unmistakable” evidence that the parties intended to submit the question of arbitrability to
arbitration. See, e.g., Carson v. Giant Food, 175 F.3d 325, 330 (4th Cir. 1999) (“[I]f contracting
parties wish to let an arbitrator determine the scope of his own jurisdiction, they must indicate
that intent in a clear and specific manner. Expansive general arbitration clauses will not suffice
to force the arbitration of arbitrability disputes.”). The Fourth Circuit has not ruled on the
significance of the incorporation of arbitral rules that grant authority to decide arbitrability to
arbitrators, and the district courts are split on the issue. Compare Sys. Research & Applications
Corp. v. Rohde & Schwarz Fed. Sys., Inc., 2012 WL 12785 *5 (E.D. Va. Jan. 4, 2012) (endorsing
“the rule adopted by a majority of federal courts . . . that the incorporation of AAA Rules into a
contract clearly and unmistakably vests the arbitrator, and not the district court, with authority to
decide which issues are subject to arbitration.”) (internal quotations omitted) with Diesselhorst v.
Munsey Bldg., L.L.L.P., 2005 WL 327532 *4 (D. Md. Feb. 9, 2005) (“That the parties agreed to
arbitrate in accordance with the AAA Rules, which provide that ‘[t]he arbitrator shall have the
power to rule on his or her own jurisdiction,’ . . . does not confer authority on the arbitrator to
decide which claims are arbitrable.”).
For reasons already stated, the court applies New York law to the questions in this case.
If the court were to apply federal law, however, the court would nonetheless grant Goldman
Sachs’s motion to compel arbitration and stay the action pending arbitration. Even if the court
concluded that under Fourth Circuit law, the parties had not overcome the presumption of
judicial determination of arbitrability through the CAA’s broad language and incorporation of

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arbitral rules submitting arbitrability to arbitration, the court would reach the issue of arbitrability
and find that the CAA’s arbitration clause was valid and applicable to TMST’s claims. The
Fourth Circuit has held at a “broadly-worded arbitration clause applies to disputes that do not
arise under the governing contract when a significant relationship exists between the asserted
claims and the contract in which the arbitration clause is contained.” Long v. Silver, 248 F.3d
309, 316 (4th Cir. 2001) (internal quotations omitted). In this case, there is no question that
TMST’s claims have a “significant relationship” to the CAA, which explicitly applies to any of
TMST’s accounts and all of its transactions with Goldman Sachs
In summary, the court concludes that the arbitration provision of the CAA is valid and
sufficiently evinces the parties’ intent to submit the question of arbitrability to the arbitrator.
Accordingly, the court will grant Goldman Sachs’s motion to compel arbitration and stay the
matter pending arbitration.7
A separate order follows.

April 19, 2012
Date

______________/s/______
Catherine C. Blake
United States District Judge

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The Fourth Circuit has recently noted some lack of clarity in the case law regarding whether courts
should stay or dismiss actions that are sent to arbitration:
There may be some tension between our decision in Hooters—indicating that a stay is required
when the arbitration agreement ‘covers the matter in dispute’—and Choice Hotels—sanctioning
dismissal ‘when all of the issues presented ... are arbitrable.’ Our sister circuits are divided on
whether a district court has discretion to dismiss rather than stay an action subject to arbitration.

Aggarao v. MOL Ship Mgmt. Co., Ltd., -- F.3d --, 2012 WL 887595 *14-15 and n.18 (4th Cir. 2012)
(citing Hooters of Am., Inc. v. Phillips, 173 F.3d 933, 937 (4th Cir. 1999), and Choice Hotels Int’l, Inc. v.
BSR Tropicana Resort, Inc., 252 F.3d 707, 709-10 (4th Cir. 2001)). Importantly, Choice Hotels
prescribes the dismissal of actions where the district court finds all claims to be arbitrable. In this case,
the court has found that the arbitrator should decide whether TMST’s claims are arbitrable. Therefore,
the court will stay the action rather than dismiss it while the arbitrator makes that determination.

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