Petition for Writ of Certiorari — Smith Cogeneration International, Inc. v. Smith/Enron Cogeneration Ltd. Partnership

OFFICE OF THE CLERK

IN THE

Supreme Court of the United States

- Be QB Bip —

SMITH COGENERATION INTERNATIONAL, INC.,

Petitioner,

—against—

SMITH/ENRON COGENERATION LIMITED PARTNERSHIP, INC., ENRON

INTERNATIONAL C.V., ENRON DEVELOPMENT CORP., ENRON RESERVE

I B.V., ATLANTIC COMMERCIAL FINANCIAL B.V., and TRAVAMARK

Two B.V.,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SECOND CIRCUIT

PETITION FOR A WRIT OF CERTIORARI

JOSEPH D. BECKER

Counsel of Record

BECKER, GLYNN, MELAMED

& MUFFLY LLP

299 Park Avenue

New York, New York 10171

(212) 888-3033

RICHARD N. CHASSIN

ZEB LANDSMAN

KEVIN OLSON,

Of Counsel Counsel for Petitioner

“TV A4

i

QUESTION PRESENTED

In a proceeding under the Federal Arbitration Act, was the

Second Circuit right to hold that federal common law, rather

than state law (including state choice-of-law rules), deter-

mines that an absolute assignment of an interest in a foreign

limited partnership does not impair an assignor-partner’s

right to enforce the arbitration clause of the partnership

agreement?

‘3

PARTIES TO THE PROCEEDING

The caption of the case contains the names of all parties.

Pursuant to Rule 29.6, we advise the Court that the peti-

tioner does not have any parent corporations and there are

not any publicly held companies that own 10% or more of

its stock. -

TABLE OF CONTENTS

PAGE

SSE ED UGPEE PPT REEED veccccnsccsccegesescoccse i

PARTIES TO THE PROCEEDING...............-- ii

pe ER Be Sing 6 lg gs See geen iv

ns li bca de cbse panebnevaaas ]

Ne ah ceeae ems 2

ee ee nc bivckekuekesnienedets 2

I heh eh bs ea swea beads ves 3

REASONS FOR GRANTING THE WRIT ......... 5

I. THE DECISION BELOW CONTRA-

DICTS TWO LINES OF AUTHORITY .. 6

A. In FAA Cases, State Law Governs

Ordinary Contract Issues.............. 6

B. Even in Federal Question Cases,

State Law Not in Clear Conflict

With Federal Law Governs

I Ro oa ae oe acs 8

Il. THE SECOND CIRCUIT IS IN

CONFLICT WITH OTHER COURTS

ae wen w ene 9

III. THE RELATION OF FEDERAL TO

STATE LAW WAS MISCONCEIVED.... 10

PRI EEE fas ah nculens aHoUENe ee vncueecdsn sence. 14

iv

TABLE OF AUTHORITIES

Cases PAGE

Aaron Ferer & Sons, Ltd. v. The Chase Manhattan

Bank, 731 F.2d 112 (26 Cir. 19668) ..... 65 .00<. 1]

Atherton v. FDIC, 519 U.S. 213 (1997) ........... 8,9, 10

Clark v. Kelly, 1999 Del. Ch. Lexis 148 (Del.

Cas SE FR TOE ink a 13

Doctors Assoc., Inc. v. Casarotto, 517 U.S. 681

(FP in adncnaciebeuaind cota euea es ae 6,7

Edgar v. MITE Corp., 457 U.S. 624 (1982)........ 10

Erie R. Co. v. Tompkins, 304 U.S. 64 (1938)....... 6,9

Fidelity Fed. Savings & Loan Assoc. v. De la

Cuneta, 455 TE. FOE CUE ED onc aonsicccccccons 12

First Options of Chicago, Inc. v. Kaplan,

ae Wis OE CUD on 6 0G 5 clad oct een 6,7

Gibson v. Neighborhood Health Clinics, Inc.,

Peek bie fy fs 3 er ee 9

Hauenstein v. Lynham, 100 U.S. 483 (1880)....... ee

Klaxon Co. v. Stentor Elec. Mfg. Co., Inc.,

PED Ce ST Cee ii hin bs dnseetieeeeee 12 n.6

Mertz v. Seibel Realty, Inc., 696 N.Y.S.2d 598

CO Fs MIE cde tecslNiaseneccaes Nes Cas 5 n.4

Paladino v. Avnet Computer Tech., Inc., 134 F.3d

RO CRC rene WO ak 5 5 in kG hike | 9

Patterson v. Tenet Healthcare, Inc., 113 F.3d 832

SE aes BR Go yal oe ieee eae a

PAGE

Perry v. Thomas, 482 U.S. 483 (1987) .........+++: 6,7

Riley Mfg. Co. v. Anchor Glass Container Corp.,

157 F.3d 775 (10th Cir. 1998).............008. 7

Rosenberg v. Merrill Lynch, 170 F.3d 1

(Let Cir. 1999) 2... .ccccccccasccvevescccsecncene 9

Rosenmiller v. Bordes, 607 A.2d 465

{ao Me |) ewererrerrer errr errr rer rr 10, 13

Schiffartsgesellschaft Detlev von Appen GmbH

v. Voest Alpien Intertrading GmbH, [1997]

1 Lloyd’s Rep. 179 (Q.B.), appeal dismissed,

[1997] 2 Lloyd’s Rep. 279 (C.A.)......-.--++- 11

United States v. Bestfoods, 118 S.Ct. 1876 (1998)... 5n.4

Webb v. Investacorp, Inc., 89 F.3d 252

(Sth Cir. 1996) ........cccccccecccccnctocccceees 9

Wyss v. Albee, 469 N.W.2d 247

(Wis.Ct. App. 1991) ..........e eee renee ee ceees 11

Statutes

SiR Foe | > eErreeryy Terr ye Try tse 2,4

v1 ci Rome CYA) | ¢) Porpeeerrrcrerrrnr err erry rc 2

ri Bok Rome Gy Seererr re Nnnnadgnesedteamskeeees 2,9

N.Y. Partnership L. § 121-901 (McKinney

Supp. 2000).........- cece ee ee cece e eect e eee eeees 3, 10

Turks and Caicos Islands, Limited Partnership

Ordinance and Subsidiary Legislation

§ 6(4) (Rev. ed. 31 Oct. 1997) ........----+-+- 3, 4, 11

Vi

PAGE

Vernon’s Ann. Tex. Civ. Stat. art 6132a-1,

Oe PARGes FIED wnnccndsuede wicked teetnuas 13

Other Authorities

3 E. Allan Farnsworth, Farnsworth on Contracts

D RED CO) vsscccnaduccchonesedsesesanasecios 11

IN THE

Supreme Court of the United States

SMITH COGENERATION INTERNATIONAL, INC.,

Petitioner,

—against—

SMITH/ENRON COGENERATION LIMITED PARTNERSHIP,

INC., ENRON INTERNATIONAL C.V., ENRON DEVELOPMENT

Corp., ENRON RESERVE I B.V., ATLANTIC COMMERCIAL

FINANCIAL B.V., and TRAVAMARK Two B.V.,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SECOND CIRCUIT

~s> >a

PETITION FOR A WRIT OF CERTIORARI

Smith Cogeneration International, Inc. (“SCT”), respect-

fully petitions for a writ of certiorari to review the judgment

of the United States Court of Appeals for the Second Circuit

in this case.

OPINIONS BELOW

The Opinion of the Court of Appeals (Pet. App. la-22a) is

reported at 198 F.3d 88. The Order of the Court of Appeals ae

(Pet. App. 23a) denying SCI’s petition for panel rehearing

and for rehearing en banc is unreported.

2

The Judgment of the United States District Court for the

Southern District of New York (98 Civ. 6079 (RCC)) is

unreported.

JURISDICTION

The Opinion and the Judgment of the Court of Appeals

were entered December 8, 1999. SCI’s timely petition for

rehearing, with suggestion for rehearing en banc, was denied

by Order entered February 23, 2000. This Court’s jurisdic-

tion is invoked under 28 U.S.C. § 1254(1).

STATUTES INVOLVED

Federal Arbitration Act § 203 (9 U.S.C. § 203) provides:

An action or proceeding falling under the Convention?

shall be deemed to arise under the laws and treaties of

the United States. The district courts of the United

States (including the courts enumerated in section 460

of title 28) shall have original jurisdiction over such an

action or proceeding, regardless of the amount in con-

troversy.

The Rules of Decision Act, 28 U.S.C. § 1652, provides:

The laws of the several states, except where the

Constitution or treaties of the United States or Acts

of Congress otherwise require or provide, shall be

regarded as rules of decision in civil actions in the

courts of the United States, in cases where they apply.

| Judge Richard C. Casey ordered arbitration from the bench,

without formal opinion, on November 6, 1998. The final Judgment

was entered December 22, 1998.

2 The reference is to the Convention on the Recognition and

Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T.

2517, reprinted after 9 U.S.C.A. § 201 (1999).

3

Section 121-901 of the New York Partnership Law

(McKinney Supp. 2000) (Revised Limited Partnership Act)

provides:

Subject to the constitution of this state, the laws of the

jurisdiction under which a foreign limited partnership

is organized govern its organization and internal affairs

and the liability of its limited partners.

Section 6(4) of the Limited Partnerships Ordinance of

the Turks and Caicos Islands provides in pertinent part as

follows?:

Subject to any express or implied term of the part-

nership agreement to the contrary. . .

a person may with the consent of the general part-

ners assign his partnership interest and, if he does so,

the assignee shall become a limited partner with all

the rights of the assignor, notwithstanding the

absence of consent of the existing limited partner or

any of them.

STATEMENT

Pursuant to a 1994 partnership agreement, SCI joined

respondents in a limited partnership organized under the

Limited Partnerships Ordinance (the “Ordinance”) of the

Turks and Caicos Islands (the “Islands”) for the purpose of

distributing electricity in the Dominican Republic. The

Islands are a dependency of the United Kingdom.

Before 1996, all the respondents assigned away, abso-

lutely, their respective interests in the partnership to several

corporations with which respondents claim to have an

unspecified degree of affiliation. The instruments of assign-

3. Turks and Caicos Islands, Limited Partnership Ordinance and

Subsidiary Legislation (Rev. ed. 31 Oct. 1997).

4

ment did not reserve arbitration rights to the assignor-

respondents. Under § 6(4) of the Ordinance, respondents

thereby ceased to be parties to the agreement or limited part-

ners in the partnership.

In 1998, SCI filed suit against respondents in the courts of

the Dominican Republic alleging various torts. The 1994

agreement included an arbitration clause calling for arbi-

tration of disputes in New York City. Respondents, although

no longer parties to the 1994 agreement, applied to the

United States District Court for the Southern District of New

York for an order compelling arbitration. The application

invoked the District Court’s jurisdiction under Chapter Two

of the Federal Arbitration Act (“FAA”), 9 U.S.C. § 203,

asserting that the case fell under the international arbitra-

tion convention specified in § 203. (See supra, p. 2 n. 2).

A judgment enforcing the arbitration clause was granted,

and, on SCI’s appeal to the Second Circuit, the judgment

was affirmed. (Pet. App. 1a).

In both courts below, SCI contended that state law

(including state choice-of-law rules), not federal common

law, governed the effect of the assignments on the assignors’

right to enforce the 1994 agreement, including the arbitra-

tion clause, and that application of the proper law would

deny respondents’ arbitration rights. The Second Circuit dis-

agreed and disposed of the issue as follows (Pet. App. 15a):

First, as this is a federal question case under 9 U.S.C.

§ 203 and not a diversity case, we see no persuasive

reason to apply the law of New York simply because it

is the forum of this litigation. See Corporacion Vene-

zolana de Fomento v. Vintero Sales Corp. et al., 629

F.2d 786, 795 (2d Cir. 1980); Filanto, S.p.A. v.

Chilewich Int’! Corp., 789 F.Supp. 1229, 1235-37

(S.D.N.Y. 1992) (applying federal law to the question

of whether a contract is enforceable in a case arising

under the Convention); cf. Pescatore v. Pan Am. World

Airways, 97 F.3d 1, 12 (2d Cir. 1996) (noting that the

law is unsettled when it comes to applying federal com-

mon law or state common law in non-diversity cases).

The panel went on to apply federal common law and FAA

pro-arbitration policy to the preliminary issue whether the

respondents validly retained a post-assignment right to arbi-

trate. Misusing veil-piercing and estoppel theories derived

from federal cases and generalized contract principles, the

panel held that the assignor-respondents were entitled to

enforce the arbitration clause notwithstanding the assign-

ments. (Pet. App. 17a-19a).*

REASONS FOR GRANTING THE WRIT

The writ should be granted because the decision of the

Second Circuit to apply federal common law, rather than

New York choice-of-law rules, to save the assignors’ arbi-

tration rights plainly contradicts rulings of this Court, made

in two parallel lines of authority, that (i) state law governs

peripheral issues of contract law in proceedings under the

FAA, and that (ii) even in federal question cases, state law

governs substantive issues in the absence of a plain conflict

with federal law or policy. When applied, New York law

includes choice-of-law rules; the rules select the Ordinance,

and English law, to deny arbitration rights to the assignors.

4 The purpose of veil-piercing was to find an agreement, and

Sustain jurisdiction, by showing that the assignors were alter egos of

the assignees. That required showing that “the corporate form is mis-

used to accomplish certain wrongful purposes. . . .” United States

v. Bestfoods, 118 S.Ct. 1876, 1885 (1998). Respondents did not

adduce such evidence. The Second Circuit found most significant one

instrument of assignment where the same officer signed for assignor

and assignee. (Pet. App. 18a). That is not a basis for piercing. See,

e.g., Mertz v. Seibel Realty, Inc., 696 N.Y.S.2d 598, 600 (4th Dept.

1999) (no piercing when two corporations have same officers and

directors and one is landlord of other).

6

A decision by this Court on the issues should unify contra-

dictory positions in courts of appeals, resolve the relation of

the FAA to state law, and settle the point that, in non-diver-

sity cases, state law governs issues not manifestly controlled

by federal law.

I.

THE DECISION BELOW CONTRADICTS

TWO LINES OF AUTHORITY.

First, this Court’s recent decisions hold that, in proceed-

ings under the FAA, preliminary issues of ordinary contract

law affecting an arbitration clause are governed by state law.

Second, in a line of modern cases that give effect to Erie

doctrine, Erie R. Co. v. Tompkins, 304 U.S. 64 (1938), and

the Rules of Decision Act, 28 U.S.C. § 1652, the Court has

held that, in the absence of directly controlling federal law,

state law governs substantive issues arising in civil actions

even where (as here) the district court’s jurisdiction over the

subject matter is founded on a federal question.

The Second Circuit misunderstood: it was not at liberty to

“see nO persuasive reason to apply the law of New York sim-

ply because it is the forum of this litigation.” (Pet. App.

15a). As in diversity cases, the Rules of Decision Act obli-

gated the Circuit to apply that law precisely because New

York was the forum.

A. In FAA Cases, State Law Governs Ordinary

Contract Issues.

Beginning with Perry v. Thomas, 482 U.S. 483 (1987),

and running through First Options of Chicago, Inc. v.

Kaplan, 514 U.S. 938 (1995), and Doctors Assoc., Inc. v.

Casarotto, 517 U.S. 681, 686-87 (1996), the Court has pur-

sued the line that, except for issues of arbitrability or the

~ scope of arbitration clauses, state law must be given primacy

in determining ordinary contract issues that arise from such

clauses in FAA enforcement proceedings.

In Perry, in the course of holding that the FAA preempted

a California labor statute that undermined arbitration agree-

ments, the Court noted that “state law, whether of legislative

or judicial origin, is applicable if that law arose to govern

issues concerning the validity, revocability, and enforce-

ability of contracts generally.” 482 U.S. at 492 n. 9 (empha-

sis in original). In Kaplan, the courts were directed to “apply

ordinary state-law principles that govern the formation of

contracts” to arbitration agreements. 514 U.S. at 944. And

in Casarotto, while denying to Montana the right to dis-

criminate against arbitration contracts, the Court reaffirmed

Perry, adding that “generally applicable contract defenses,

such as fraud, duress, or unconscionability, may be applied

to invalidate arbitration agreements without contravening

[FAA] § 2.” 517 U.S. at 687 (citing additional cases of sim-

ilar tenor). Many courts of appeals now agree. (Point II). As

one has said, “[wJhen the dispute is whether there is a valid

and enforceable arbitration agreement in the first place, the

presumption of arbitrability falls away.” Riley Mfg. Co. v.

Anchor Glass Container Corp., 157 F.3d 775, 770 (10th Cir.

1998) (citing Kaplan).

The issue here is embraced by these cases. Whether the

absolute assignment of a limited partnership interest divests

the assignor of contract rights, including arbitration rights,

is a species of a genus of preliminary questions about con-

tract validity and formation. Assignment questions are

merely a variation on that theme. State contract law answers

such questions. The Court should issue the writ to establish

that proposition.

As will be seen in Point III, state law here means choice-

of-law rules of New York that refer to the law of the Islands.

8

B. Even in Federal Question Cases, State Law Not

in Clear Conflict With Federal Law Governs

Substantive Issues.

The Second Circuit, in speaking of the “unsettled” state of

the law in non-diversity cases (Pet. App. 15a), simply

ignored the recent line of cases of this Court culminating in

Atherton v. FDIC, 519 U.S. 213 (1997), holding that, even in

federal-question cases, federal common law may not be used >

to “create” a “special federal rule of decision,” unless “a sig-

nificant conflict between some federal policy or interest and

the use of state law [has first been] specifically shown.” Jd.

at 218. The Court in Atherton used state law to impose a

higher standard of care on wayward directors of a federally

chartered bank, sued by federal receivers under a federal

statute. The Court explained, idem, that

“cases in which judicial creation of a special federal

rule would be justified ... are ... ‘few and

restricted’.” O’Melveny & Myers v. FDIC, 512 U.S. 79,

87, 114 S.Ct. 2048, 2055, 129 L.Ed2d 67 (1994) (quot-

ing Wheeldin v. Wheeler, 373 U.S. 647, 651, 83 S.Ct.

1441, 1445, 10 L.Ed.2d 605 (1963)). “Whether latent

federal power should be exercised to displace state law

is primarily a decision for Congress,” not the federal

courts. Wallis v. Pan American Petroleum Corp., 384

U.S. 63, 68, 86 S.Ct. 1301, 1304, 16 L.Ed.2d 369

(1966). . . . Thus, normally, when courts decide to

fashion rules of federal common law, “the guiding prin-

ciple is that a significant conflict between some federal

policy or interest and the use of state law . . . must

first be specifically shown.” 384 U.S. at 68, 86 S.Ct., at

1304. Indeed, such a “conflict” is normally a “precon-

dition.” O’Melveny, supra, at 87, 114 S.Ct. at 2055. See

also United States v. Kimbell Foods, Inc., 440 U.S. 715,

728, 99 S.Ct. 1448, 1458-1459, 59 L.Ed.2d 711 (1979);

Kamen v. Kemper Financial Services, Inc., 500 U.S. 90,

98, 111 S.Ct. 1711, 1717, 114 L.Ed.2d 152 (1991).

9

Back of the cited cases is the Rules of Decision Act,

28 U.S.C. § 1652, and the historic doctrine that “there is no

federal general common law.” Atherton, 519 U.S. at 218

(quoting Erie, 304 U.S. at 78). These are fundamental

propositions. The Court should make plain that they are not

“unsettled.”

Il.

THE SECOND CIRCUIT IS IN CONFLICT WITH

OTHER COURTS OF APPEALS.

The Second Circuit decision also contradicts the holdings

of several other courts of appeals that have followed this

Court’s recent cases applying state law to the ordinary con-

tract issues that arise in FAA enforcement cases. See Rosen-

berg v. Merrill Lynch, 170 F.3d 1, 19 (1st Cir. 1999) (“When

deciding whether the parties agreed under the FAA to arbi-

trate a certain matter, courts ‘generally . . . should apply

ordinary state-law principles that govern the formation of

contracts.’ ”’); Webb v. Investacorp, Inc., 89 F.3d 252, 258

(Sth Cir. 1996) (“When deciding whether the parties agreed

to arbitrate the dispute in question, ‘courts generally...

Should apply ordinary state-law principles that govern the

formation of contracts.’ ”); Gibson v. Neighborhood Health

Clinics, Inc., 121 F.3d 1126, 1130 (7th Cir. 1997) (“In deter-

mining whether a valid arbitration agreement arose between

the parties, a federal court should look to the state law that

ordinarily governs the formation of contracts.”); Patterson

v. Tenet Healthcare, Inc., 113 F.3d 832, 834 (8th Cir. 1997)

(“Under the FAA, ordinary contract principles govern

whether parties have agreed to arbitrate, principles that in

this case are derived from Missouri law.”); Paladino v. Avnet

Computer Tech., Inc., 134 F.3d 1054, 1061 (11th Cir. 1998)

(arbitration clauses “are interpreted according to ordinary

state-law rules of contract construction”).

10

The writ should be granted to unify the positions in the

courts of appeals.

Ill.

THE RELATION OF FEDERAL TO STATE LAW

WAS MISCONCEIVED.

In choosing to apply federal common law rather than New

York law to the assignment issue, the Second Circuit ignored

a statute of New York mandating that the law of the Islands

must be applied to determine rights of assignor-partners in

a limited partnership of the Islands. The Revised Limited

Partnership Act, N.Y. Partnership L. § 121-901 (McKinney

Supp. 2000), provides that “the laws of the jurisdiction

under which a foreign limited partnership is organized gov-

ern its organization and internal affairs and the liability of its

limited partners.” The statute, enacted as uniform law by

every state except Louisiana, states a general rule of the con-

flict of laws and reinforces a provision of the 1994 agree-

ment providing that “matters relating to the formation and

organization of the Partnership shall be governed by the

[Turks and Caicos] Act.”* (Pet. App. 15a).

The “internal affairs” rule is a standard conflicts principle

used to choose a single law to regulate “matters peculiar to

the relationships among or between the corporation and its

current officers, directors, and shareholders. . . .” Ather-

ton, 519 U.S. at 223-24 (quoting Edgar v. MITE Corp., 457

U.S. 624, 645 (1982)). By analogy to relationships among

shareholders in a close corporation, see, e.g., Rosenmiller v.

Bordes, 607 A.2d 465 (Del. Ch. 1991) (applying Delaware

internal affairs rule to voting restriction in shareholders’

5 The Second Circuit construed the provision narrowly to mean

the original organization of the partnership when it more naturally

refers to continuous problems of organization that would arise from

transferable interests of limited partners. (Pet. App. 15a).

11

agreement of Delaware corporation regardless of New Jer-

sey choice-of-law clause), the uniform statute would regard

the relative rights of assignor and assignee of an entire inter-

est in an Islands’ limited partnership as an “internal affairs”

matter. Wyss v. Albee, 469 N.W.2d 247 (Wis.Ct. App. 1991)

(rights of limited partner in Iowa limited partnership to

payment from other limited partners governed by Iowa, not

Wisconsin, law). :

Ordinance § 6(4)(c) expressly treats the subject, evi-

dencing its importance: it provides that an assignee of a lim-

ited partnership interest acquires “all the rights of the

assignor. . . .” (emphasis supplied). The English law of the

Islands indicates that “all” rights includes arbitration rights:

“the better view is that upon a legal assignment the assignor

loses the right to arbitrate and the assignee acquires it

... .” Schiffartsgesellschaft Detlev von Appen GmbH v.

Voest Alpien Intertrading GmbH, [1997] 1 Lloyd’s Rep. 179,

188 (Q.B.) (quoting The Halcyon, [1984] 1 Lloyd’s Rep.

283, 289 (Q.B.)), appeal dismissed, [1997] 2 Lloyd’s Rep.

279 (C.A.)).

The rule is consistent with the general law of assignments,

which holds that “the transfer of a contract extinguishes the

assignor’s right to performance by the obligor and gives the

assignee a right to that performance.” 3 E. Allan Farnsworth,

Farnsworth on Contracts § 11.3, at 68 (1998) (emphasis sup-

plied); accord Aaron Ferer & Sons, Ltd. v. The Chase Man-

hattan Bank, 731 F.2d 112, 125 (2d Cir. 1984) (assignment

“extinguishes” rights of assignor). The instruments of

assignment did not reserve assignment rights to assignor-

respondents.

The Second Circuit justified departure from the New York

Partnership Law and its conflicts provision with the follow-

ing misconceived analysis of the relation between the FAA

and state law (Pet. App. 16a):

12

In this case, the 1994 Agreement’s dispute resolution

provision provided that arbitration “shall for all pur-

poses be governed by, and construed and enforced in

accordance with, the Federal Arbitration Act (“FAA”),

and matters of interpretation of the provisions of this

Agreement shall be governed by Texas law in any such

arbitration.” It is thus clear that neither party intended

New_York law, procedural or otherwise, to govern any

aspect of their dispute.

There are several errors here. First, it is not “New York

law” in its internal sense but its choice-of-law rule,

expressed in § 121-901 of the Partnership Law, that was

binding on the forum below. The position is analogous to the

duty of federal courts in Klaxon cases.°®

See ee ee

Second, the agreement’s choice of the FAA to govern

arbitration proceedings cannot be taken to imply a choice of

federal common law as the substantive law of the contract.

To the very limited extent the FAA is substantive, the statute

operates nationally in accordance with its terms, indifferent

to intentions of contract parties. Hauenstein v. Lynham, 100

U.S. 483, 490-(1880) (federal law is part of state law auto-

matically); Fidelity Fed. Savings & Loan Assoc. v. De la

Cuesta, 458 U.S. 141, 151 n. 12 (1982) (contract choice of

state law necessarily includes federal law). The 1994 agree-

ment’s reference to the FAA is a gratuitous procedural mat-

ter; the statute applies, or does not apply, willy-nilly. .

Third, the choice of Texas law solely to “interpret” the 7

1994 agreement does not affect the assignment issue, which |

does not turn on, and is external to, the text of the agree- |

ment. Nor could so narrow a provision override the New

York statute (a declaration of state policy uniform in the

6 See Klaxon Co. v. Stentor Elec. Mfg. Co., Inc., 313 U.S. 487 |

(1941) (in diversity cases, federal court must apply conflicts rule of

forum).

iia

13

country) applying foreign domiciliary law to the internal

affairs of a foreign limited partnership. See Clark v. Kelly,

1999 Del. Ch. Lexis 148 (Del. Ch. June 24, 1999) (even if

Delaware choice-of-law clause might apply, equity owner in

California corporation is determined by California law);

Rosenmiller, 607 A.2d 465 (Delaware internal affairs rule

applied to voting restriction in agreement among share-

holders of Delaware corporation; New Jersey choice-of-law

clause superseded). Moreover, Texas law, in adopting the

Revised Limited Partnership Act, is identical to New York

law and would look to the law of the Islands for resolution

of this internal affairs issue. Vernon’s Ann. Tex. Civ. Stat.

art. 6132a-1, § 9.01(a). Also, the Texas statute, for domes-

tic limited partnerships, states that when an assignee of a

limited partner becomes a partner, the assignor is divested

of rights. Id. § 7.02(a)(4). Like New York, Texas would

be equally bound to apply the conflicts rule mandated by

the statute to a dispute internal to a foreign limited part-

nership.

Granting the writ will establish the proper relation of

the FAA to state law, and settle the point that state law

applies in non-diversity cases absent clear, supervening

federal law.

14

CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted,

JOSEPH D. BECKER

Counsel of Record

BECKER, GLYNN, MELAMED

& MUFFLY LLP

299 Park Avenue

New York, New York 10171

(212) 888-3033 :

RICHARD N. CHASSIN

ZEB LANDSMAN

KEVIN OLSON,

Of Counsel Counsel for Petitioner

May 18, 2000

APPENDIX

la

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

August Term 1999

Argued: September 15, 1999 Decided: December 8, 1999

Docket No. 99-7101

SMITH/ENRON COGENERATION LIMITED PARTNERSHIP,

INC., ENRON INTERNATIONAL C.V., ENRON DEVEL-

OPMENT CORP., ENRON RESERVE I B.V., ATLANTIC

COMMERCIAL FINANCIAL B.V., and TRAVAMARK Two

B.V.,

Petitioners-Appellees,

—against—

SMITH COGENERATION INTERNATIONAL, INC.,

Respondent-Appellant.

Before:

FEINBERG, VAN GRAAFEILAND and SACK,

Circuit Judges.

Ses

2a

Appeal from order of United States District Court for the

Southern District of New York, Richard C. Casey, J., com-

pelling respondent-appellant Smith Cogeneration Interna-

tional, Inc. (SCI) to arbitrate claims asserted by SCI ina

lawsuit in the Dominican Republic against petitioners-

appellees. We find that the district court properly asserted

jurisdiction under Chapter Two of the FAA, implementing

the Convention on the Recognition and Enforcement of

Foreign Arbitral Awards. We further find that there was an

enforceable arbitration agreement, and that included within

its scope are the claims asserted by SCI. The order of the

district court is affirmed.

RICHARD N. CHASSIN, New York, NY (Becker,

Glynn, Melamed & Muffly LLP, Joseph D.

Becker, Zeb Landsman, of Counsel), for

Respondent-Appellant.

GREGORY A. MARKEL, New York, NY (Brobeck

Phleger & Harrison LLP, Ronit Setton, of

Counsel), for Petitioners-Appellees.

FEINBERG, Circuit Judge:

Respondent Smith Cogeneration International, Inc. (SCI)

appeals from an order of the United States District Court

for the Southern District of New York, Richard C. Casey,

J., compelling arbitration of claims asserted by SCI in

a lawsuit in the Dominican Republic (the Dominican Law-

Suit) against petitioners-appellees Smith/Enron Cogen-

eration Limited Partnership, Inc. (SECLP) and Enron Inter-

national C.V. (Enron Int’l) and a number of its affiliates

3a

(collectively referred to as Enron). SCI’s principal argu-

ments on appeal are (1) under the Convention on the

Recognition and Enforcement of Foreign Arbitral Awards

(Convention) the district court did not have jurisdiction

over this action; (2) the contracts between the parties con-

taining the arbitration clause are no longer enforceable by

Enron; and, (3) SCI’s claims in the Dominican Lawsuit are

not covered by the arbitration clause. For the reasons stated

below, we affirm the order of the district court.

I. Background

This case arises out of a number of agreements between

SCI and Enron regarding an electrical power plant in the

Dominican Republic. In July 1993, SCI signed a Power

Purchase Agreement with a state-owned utility, Compaiiia

Dominicana de Electricidad (CDE), to construct, finance

and manage the power plant (Power Purchase Agreement).

While negotiating this agreement, SCI encountered strong

competition from Enron, which was making its own offers

to the Dominican government. After some negotiation, SCI

and Enron Int’! agreed to create a joint venture in the con-

struction and operation of the plant as reflected in the Pro-

ject Agreement they both signed on November 12, 1993

(Project Agreement).

On November 24, 1993, Smith Cogeneration Dominicana

(SCD), SCI’s affiliate,’ entered into a limited partnership

agreement with Travamark Two B.V. (Travamark), an

Enron affiliate (1993 Agreement). The 1993 Agreement

created SECLP, a limited partnership organized under the

laws of the Turks and Caicos Islands. Pursuant to the 1993

Agreement SCI was to assign its interest in the Power Pur-

chase Agreement to SECLP, which would then take over

the construction and operation of the power plant.

| The principal of both SCD and SCI is the same person,

Donald Smith.

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Thereafter, a series of assignments by both signatories to

the 1993 Agreement (SCD and Travamark) took place.

SCD assigned part of its interest in SECLP to SCI. Simi-

larly, Travamark assigned its interest in SECLP to two

Enron affiliates, Atlantic Commercial Finance B.V. (ACF)

and Enron Reserve I B.V. (ER). The 1993 Agreement was

amended in December 1994 to reflect these changes (1994

Agreement).

The 1994 Agreement, like the 1993 Agreement and the

Project Agreement that preceded it, contained a broad arbi-

tration clause providing for the arbitration of “any dispute

. . arising under or relating to any obligation or claimed

obligation under the provisions of this Agreement.” All

three agreements also provided that the arbitration take

place in New York and be governed by the Federal Arbi-

tration Act (FAA), 9 U.S.C. §1 et seq., and Texas law. The

1993 and the 1994 Agreements were identical in all other

relevant respects.

Less than a year after SCI, SCD, ACF, and ER entered

into the 1994 Agreement, a second series of assignments

took place. In July 1995, ER assigned its general partner-

ship interest to Enron Dominican Republic Operations

(EDRO), and ACF assigned its limited partnership interest

to Enron Dominican Republic (EDR). Neither party dis-

putes that these assignments were permitted under the 1994

Agreement and were made with SCI’s knowledge and con-

sent. Enron additionally claims that, as with the previous

assignments, these assignees are Enron affiliates with iden-

tical economic interests and under common control. In con-

trast to all the previously named Enron affiliates (Enron

Int’1, Travamark, ACF, and ER), EDR and EDRO—the

current Enron partners in SECLP—were not sued by SCI

in the Dominican Lawsuit and are not petitioners in this

litigation.

The Enron-SCI relationship began to unravel in 1996

when it became clear that SCI was unable to meet its finan-

Sa

cial obligations to SECLP. As a result, in April 1996 the

1994 Agreement was amended to include the Smith

Dominicana Holding Limited Partnership (Holding Part-

nership). The Holding Partnership, a creation of SCD and

another Enron affiliate, Finven, was a mechanism for infus-

ing money into SECLP: SCD would in effect sell 35% of

its interest in SECLP to Finven, and either repurchase it by

November 1997 or receive $50,000 in consideration from

Finven. SCD proved unable to repurchase its interest, and

a dispute arose between it and Finven. As a result, the two

entities proceeded to arbitration in June 1998.2 That arbi-

tration took place under the contract creating the Holding

Partnership and its result is not the subject of this appeal.

Shortly after the debacle for SCI in the arbitration with

Finven and with SCI’s position in SECLP apparently erod-

ing, SCI filed the Dominican Lawsuit in July 1998. In that

suit, SCI named all of the petitioners in the instant case

as defendants, referring to them throughout the complaint

as “Enron,” the “Enron Group,” “the Enron companies,” and

describing them as affiliates. In its complaint in that action,

SCI alleged that it was coerced into the SECLP partnership

by Enron, that all of SCI’s Agreements with Enron were

fraudulently induced, and that Enron tortiously interfered

with SCI’s negotiations with CDE. SCI demanded rescis-

sion of the Project Agreement, the 1993 Agreement and

the 1994 Agreement and approximately $159 million in

damages.

Whereupon we arrive at the instant action. In August

1998, SECLP and Enron filed a petition in the Southern

District to compel arbitration of the dispute with SCI and

to enjoin SCI from prosecuting the Dominican Lawsuit. In

2

According to the record before us, that arbitration took place

in New York before the Honorable Abraham Sofaer. During the arbi-

tration, SCD conceded Finven’s rights under the Holding Partnership.

Judge Sofaer awarded Finven $300,000 in attorney’s fees which has

not yet been paid by SCD.

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the district court, Enron argued that under the broad arbi-

tration clause in the 1993 and 1994 Agreements, SCI is

bound to arbitrate its dispute with Enron. After oral argu-

ment in November 1998, Judge Casey ruled from the

bench, granting Enron’s motion to compel arbitration and

enjoining SCI from prosecuting the Dominican Lawsuit.

This appeal followed.

II. Discussion

On appeal, SCI argues that there is no federal subject

matter jurisdiction over this action because the 1994

Agreement is not “centered” in a state that is a signatory to

the Convention. Next, SCI claims that because none of the

petitioners are currently signatories to the 1994 Agreement

as a result of the various transactions outlined above, they

no longer have the right to compel arbitration of disputes

under that Agreement. Finally, SCI argues that its claims in

the Dominican Lawsuit are based upon Enron’s actions that

predate the 1994 Agreement and thus are beyond the scope

of the arbitration clause. We treat these claims in separate

sections below.

A. Jurisdiction under the Convention

SCI argues that the district court did not have subject

matter jurisdiction over this dispute. SCI and Enron agree

that the only basis for federal jurisdiction, if it exists,

is Chapter Two of the FAA, 9 U.S.C. §§ 201-208.? Section

201 provides for the enforcement of the Convention.* Sec-

3 §CI claims that diversity is lacking and Enron does not con-

test that point.

* Section 201 provides: “The Convention on the Recognition and

Enforce-ment of Foreign Arbitral Awards of June 10, 1958, shall be

enforced in United States courts in accordance with this chapter.” The —

full text of the Convention may be found immediately following

9 U.S.C. § 201.

——————

Ta

tion 203 provides that “[aJn action or proceeding falling

under the Convention shall be deemed to arise under the

laws and treaties of the United States.” In considering

whether the Convention applies to this arbitration, we are

mindful that “[t]he goal of the Convention is to promote

the enforcement of arbitral agreements in contracts involv-

ing international commerce so as to facilitate interna-

tional business transactions,” David L. Threlkeld & Co. v.

Metall gesellschaft Ltd., 923 F.2d 245, 250 (2d Cir.), cert.

- dismissed, 501 U.S. 1267 (1991), and to “unify the stan-

dards by which agreements to arbitrate are observed.”

Scherk v. Alberto-Culver Co., 417 U.S. 506, 520 n.15

(1974). The adoption of the Convention by the United

States promotes the strong federal policy favoring arbi-

tration of disputes, particularly in the international context.

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.,

473 U.S. 614, 638-40 (1985).

A district court may compel arbitration under Chapter

Two of the FAA pursuant to 9 U.S.C. § 206, which

provides:

A court having jurisdiction under this chapter may

direct that arbitration be held in accordance with the

agreement at any place therein provided for, whether

that place is within or without the United States.

Section 202 defines the type of arbitration agreements that

fall under Chapter Two of the FAA:

An arbitration agreement or arbitral award arising

out of a legal relationship, whether contractual or not,

which is considered as commercial, including a trans-

action, contract, or agreement described in section 2

of this title, falls under the Convention. An agreement

or award arising out of such a relationship which is

entirely between citizens of the United States shall be

deemed not to fall under the Convention unless that

relationship involves property located abroad, envis-

8a

ages performance or enforcement abroad, or has some

other reasonable relation with one or more foreign

States.

The Convention and the implementing provisions of the

FAA set forth four basic requirements for enforcement of

arbitration agreements under the Convention: (1) there

must be a written agreement; (2) it must provide for arbi-

tration in the territory of a signatory of the convention; (3)

the subject matter must be commercial; and (4) it cannot be

entirely domestic in scope. Ledee v. Ceramiche Ragno, 684

F.2d 184, 186-87 (1st Cir. 1982); see also Cargill Int’] S.A.

v. M/T Pavel Dybenko, 991 F.2d 1012, 1018 (2d Cir.

1993). We agree with (then Chief) Judge Coffin in Ledee

that a district court’s scope of inquiry in considering a peti-

tion to compel arbitration under Chapter Two of the FAA is

“very limited.” 684 F.2d at 186. Although the various

agreements between SCI and Enron apparently satisfy

these four requirements, SCI nonetheless claims that the

district court lacked jurisdiction.

SCI invites us to employ a “center of gravity” test to

determine whether the instant arbitration falls under the

Convention. SCI’s “center of gravity” test, which it does

not clearly define, apparently would require the subject mat-

ter of the arbitration, or the parties to the arbitration, or both,

to be located in a State that also is a signatory to the Con-

vention. SCI and SECLP are incorporated in the British

Virgin Islands and the Turks and Caicos Islands respec-

tively, and the location of the power plant is in the Dominican

Republic, none of which is a signatory to the Convention.°

Accordingly, SCI argues, this dispute lies beyond the scope

of the Convention. Enron responds that (1) the only State

that must be a signatory to the Convention is the State

a

5 The United Kingdom, a signatory to the Convention, did not

extend it to its dependencies, the Turks and Caicos Islands and the

British Virgin Islands. See Note 28 to the Convention.

9a

where the arbitration is to take place, the second require-

ment mentioned in Ledee; and (2) as the Agreements

between the parties provided for arbitration in the United

States (specifically in New York City), which is a signatory

to the Convention, there is federal jurisdiction. For the rea-

sons stated below, we agree with Enron and decline to

adopt SCI’s “center of gravity” test.

The starting point in construing a treaty is its text. East-

ern Airlines, Inc. v. Floyd, 499 U.S. 530, 534 (1991). The

relevant portion of the Convention is Article II, which gov-

erns an action to enforce an arbitration agreement. Article

II provides:

1. Each Contracting State shall recognize an agree-

ment in writing under which the parties undertake to

submit to arbitration all or any differences which have

arisen or which may arise between them in respect of

a defined legal relationship, whether contractual or

not, concerning a subject matter capable of settlement

by arbitration.

2. The term “agreement in writing” shall include an

arbitral clause in a contract or an arbitration agreement,

signed by the parties or contained in an exchange of

letters or telegrams.

3. The court of a Contracting State, when seized of

an action in a matter in respect to which the parties

have made an agreement within the meaning of this

article, shall, at the request of one of the parties, refer

the parties to arbitration, unless it finds that the said

agreement is null and void, inoperative or incapable of

being performed.

Thus, in Article II the “Contracting State” concept appears

only to designate the location of the court where “recog-

nition” of an agreement in writing to arbitrate is sought.

The purpose behind this drafting choice is clear: the courts

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of a signatory to the Convention should abide by its goal of

enforcing international agreements to arbitrate disputes.

Similarly, the FAA in 9 U.S.C. § 202 makes no mention of

a requirement that the arbitration involve parties subject to

the jurisdiction of Contracting States or that the location of

the dispute be “centered” in such a State. While 9 U.S.C.

§ 202 explicitly excludes domestic disputes from Chapter

Two of the FAA, it does not make any distinctions among

foreign disputes or foreign parties.

SCI’s effort to import a “center of gravity” test into

application of the Convention is further weakened by the

Convention’s history. The Convention was drafted to elim-

inate many of the problems that hindered enforcement

of its predecessor, the Geneva Convention of 1927. See

Leonard V. Quigley, Accession by the United States to the

United Nations Convention on the Recognition and Enforce-

ment of Foreign Arbitral Awards, 70 Yale L.J. 1049, 1055-

61 (1961). Most importantly, the Convention eliminated the

requirement in the Geneva Convention that the parties be

subject to the jurisdiction of Contracting States. See Cindy

Silverstein, Comment, Iran Aircraft Industries v. Avco Cor-

poration: Was a Violation of Due Process Due?, 20 Brook.

J. Int’] L. 443, 453-54 (1994); see also Albert Jan van den

Berg, The New York Arbitration Convention of 1958:

Towards a Uniform Judicial Interpretation 8-9 (1994).

Under Article II of the Convention, the citizenship of the

parties to the agreement and the location of the disputed

subject matter are not controlling.

In La Societe Nationale Pour La Recherche v. Shaheen

Natural Resources Co., 733 F.2d 260 (2d Cir. 1984) (per

curiam), this court affirmed a judgment of the Southern

District “for the reasons set forth” in the opinion of the dis-

trict judge, reported at 585 F. Supp. 57. In that case, Judge

Duffy had confirmed an arbitral award in favor of plaintiff,

a company owned by the Algerian government, a non-sig-

natory to the Convention. The contract between the parties

lla

involved the sale of crude oil by the plaintiff to the defen-

dant, an Illinois company with its principal place of busi-

ness in New York. The contract provided for arbitration in

Geneva, Switzerland (a signatory State) under Algerian

law. The defendant in that case argued that the plaintiff

could not invoke the Convention against it “because as an

arm of the Algerian government,” plaintiff was not a party

to the Convention. Id. at 64. Although the context for the

decision was Article I of the Convention, which deals with

arbitral awards rather than with arbitration agreements, the

court’s reasoning applies with equal force to the rest of the

Convention: “The focus of . . . the Convention is not on

the nationality of the party seeking to enforce an award but

on the situs of the arbitration. Indeed, arbitration awards

rendered by panels sitting in contracting countries have

been confirmed consistently when the plaintiff is a national

of a country which has not acceded to the Convention.” Id.

(emphasis added); see also Imperial Ethiopian Gov’t v.

Baruch-Foster Corp., 535 F.2d 334, 335 (Sth Cir. 1976)

(confirming an arbitral award in favor of the Ethiopian

government, a non-signatory); In re Arbitration Between:

Trans Chemical Ltd. and China Nat’] Mach. Import &

Export Corp., 978 F. Supp. 266 (S.D. Tex. 1997), aff’d,

161 F.3d 314 (Sth Cir. 1998) (confirming arbitral award in

favor of Pakistani corporation and against Chinese corpo-

ration regarding construction of a plant in Pakistan, a non-

signatory); National Oil Corp. v. Libyan Sun Oil Co., 733

F. Supp. 800 (D. Del. 1990) (enforcing an arbitration award

in favor of a company in Libya, a nonsignatory). We have

previously applied the Convention to an arbitration between

two foreign companies without commenting at all about the

contracting status of any of the states involved. See, e.g.,

Bergesen v. Joseph Muller Corp., 710 F.2d 928 (2d Cir.

1983) (confirming award between two foreign companies);

see also Jain v. Mere, 51 F.3d 686 (7th Cir. 1995) (com-

pelling arbitration between French and Indian citizens).

12a

The Convention’s sweeping approach toward arbitral

agreements in Article II and arbitral awards in Article I led

many of the signatory states, including the United States,

to adopt certain reservations to its implementation. One

such reservation, the exclusion from the Convention of

arbitral agreements and awards that are entirely domestic

in scope, see Ledee, 684 F.2d at 187, has already been

mentioned. The United States also adopted the reservation

provision in Article I(3) of the Convention, governing arbi-

tral awards, which provides that “any State may on the

basis of reciprocity declare that it will apply the Conven-

tion to the recognition and enforcement of awards made

only in the territory of another Contracting State.” See

Note 29 to the Convention. SCI relies on this “reciprocity”

provision to bolster its argument that the United States

cannot enforce SCI’s Agreements with Enron unless there

is another “Contracting State” involved in the dispute.

SCI’s reliance on the “reciprocity” provision is mis-

placed. First, it is questionable whether that provision,

which is found only in Article I of the Convention, even

applies to Article II. But even if it did, the reciprocity pro-

vision does not contemplate the “center of gravity” test

suggested by SCI. All that the reciprocity provision

requires is that the award be granted in a “Contracting

State.” In this case, the arbitration agreements between SCI

and Enron contemplated arbitration in the United States—

a signatory to the Convention. If the arbitration results in

an award, it will have been granted in a signatory State and

will be enforceable either here or in another Contracting

State. Bergesen, 710 F.2d at 933-34 (awards rendered in

the United States under the Convention may be enforced in

the United States as long as there is substantial foreign

nexus to the arbitration).

To support its “center of gravity” test, SCI also relies on

the refusal of the Fifth Circuit to compel arbitration in Mis-

sissippi in National Iranian Oil Co. v. Ashland Oil, Inc.,

13a

817 F.2d 326 (Sth Cir. 1987). However, the contract in

National Iranian provided for arbitration in Iran, a non-sig-

natory to the Convention. This is a far cry from holding

that an Iranian company could not be compelled to arbi-

trate a claim in the United States, if it has contracted to do

so. Indeed, in dicta, National Iranian suggested it could be

so compelled. 817 F.2d at 334.

Thus, since the 1993 and the 1994 Agreements satisfied

all the requirements set forth in Ledee—particularly as they

call for arbitration in New York—we conclude that the dis-

trict court had jurisdiction under the Convention and the

implementing provisions of the FAA.

B. Do the Enron Petitioners Have the Right to Compel

SCI to Arbitrate?

SCI’s second principal argument on appeal is that there

is no valid and enforceable agreement to arbitrate between

the parties to this proceeding. SCI argues that (1) the only

valid agreement respecting SECLP currently in effect is the

1994 Agreement, because it superseded the earlier Agree-

ments;° (2) the only Enron signatories to the 1994 Agree-

ment, ACF and ER, have assigned their rights under that

Agreement to EDR and EDRO (who are not petitioners

here); (3) therefore, none of the Enron petitioners have the

right to enforce a contract to arbitrate to which they are not

now parties.

In considering whether “a particular dispute is arbitra-

ble,” a court must first decide “whether the parties agreed

to arbitrate.” Chelsea Square Textiles, Inc. v. Bombay Dye-

€ In McAllister, 621 F.2d at 523, we held that a claim of “aban-

donment” of a contract that had concededly been made between the

parties should be decided by the arbitrator. It is thus arguable that

SCI’s claim that the 1994 Agreement superseded the previous Agree-

ments is for the arbitrator to decide. However, the Enron petitioners

do not press that contention, and we need not reach it as we find that

Enron may compel arbitration under the 1994 Agreement.

14a

ing & Mfg. Co., 189 F.3d 289, 294 (2d Cir. 1999); see also

Deloitte Noraudit A/S v. Deloitte Haskins & Sells, U.S.,

9 F.3d 1060, 1063 (2d Cir. 1993). We have held that

whether an entity is a party to the arbitration agreement

also is included within the broader issue of whether the

parties agreed to arbitrate. Interocean Shipping Co. v.

National Shipping & Trading Corp., 462 F.2d 673, 677 (2d

Cir. 1972); McAllister Bros., Inc. v. A&S Transp. Co., 621

F.2d 519, 524 (2d Cir. 1980).

Unquestionably, there were a number of enforceable con-

tracts between SCI (and its affiliate, SCD) and various

Enron entities, each of which contained an agreement to

arbitrate. The assignments of rights under the 1994 Agree-

ment from one set of affiliates to another set of affiliates

do not negate the prior existence of a contract to arbitrate

between the parties, and thus do not fall comfortably

within the inquiry into the making of an agreement. The

question before us is not whether SCI and the Enron peti-

tioners entered into an agreement to arbitrate—they did

(and more than once)—but whether subsequent events

deprived all of the Enron petitioners of the right to compel

SCI to live up to that agreement.

1. Choice of Law

Before we turn to that question, we must first resolve a

threshold issue concerning applicable law. SCI argues that

state contract law principles generally apply in an inquiry

into the making of the agreement. See Doctor’s Assocs.

Inc. v. Casarotto, 517 U.S. 681, 686-87, 116 S.Ct. 1652,

1656 (1996); Perry v. Thomas, 482 U.S. 483, 492 n.9

(1987). SCI suggests that we must use New York’s choice

of law to determine the applicable body of contract law,

and that New York’s choice of law points to the Turks and

Caicos Islands. Alternatively, SCI argues that the 1994

Agreement itself provides that “matters relating to the for-

mation and organization of the Partnership shall be gov-

15a

erned by the [Turks and Caicos] Act.” However, neither

approach has merit on this record. First, as this is a federal

question case under 9 U.S.C. § 203 and not a diversity

case, we see no persuasive reason to apply the law of New

York simply because it is the forum of this litigation. See

Corporacion Venezolana de Fomento v. Vintero Sales Corp.

et al., 629 F.2d 786, 795 (2d Cir. 1980); Filanto, S.p.A v.

Chilewich Int’] Corp., 789 F. Supp. 1229, 1235-37 (S.D.N.Y.

1992) (applying federal law to the question of whether a

contract is enforceable in a case arising under the Con-

vention); cf. Pescatore v. Pan Am. .World Airways, 97 F.3d

1, 12 (2d Cir. 1996) (noting that the law is unsettled when

it comes to applying federal common law or state common

law in non-diversity cases). Second, the contractual pro-

vision on which SCI relies relates to “the formation and

organization of the Partnership.” But the partnership

here—SECLP—was formed and organized well before the

assignments, so that language does not apply. Rather, the

primary question before us relates to the effect of the

assignments on rights and duties flowing from the arbi-

tration clause in the 1994 Agreement.

When we exercise jurisdiction under Chapter Two of the

FAA, we have compelling reasons to apply federal law,

which is already well-developed, to the question of whether

an agreement to arbitrate is enforceable. See David L.

Threlkeld & Co., 923 F.2d at 249-50 (holding Convention

and FAA preempt Vermont statute); Genesco, Inc. v. T.

Kakiuchi & Co., 815 F.2d 840, 845-46 (2d Cir. 1987)

(applying federal common law in case arising under the

Convention); Borsack v. Chalk & Vermilion Fine Arts,

Ltd., 974 F. Supp. 293, 299 n.5 (S.D.N.Y. 1997) (“[W]here

jurisdiction is alleged under chapter 2 of the Federal Arbi-

tration Act the issue of enforceability and validity of the

arbitration clause is governed by federal law.”) Under the

circumstances here, where there is little connection to the

forum and the Agreements between the parties state an

16a

intention to be governed by the FAA, proceeding otherwise

would introduce a degree of parochialism and uncertainty

into international arbitration that would subvert the goal of

simplifying and unifying international arbitration law.

In this case, the 1994 Agreement’s dispute resolution

provision provided that arbitration “shall for all purposes

be governed by, and construed and enforced in accordance

with, the Federal Arbitration Act (“FAA”), and matters of

interpretation of the provisions of this Agreement shall be

governed by Texas law in any such arbitration.” It is thus

clear that neither party intended New York law, procedural

or otherwise, to govern any aspect of their dispute. As no

party is domiciled in New York, and no transactions have

taken place here, New York has no connection to this liti-

gation other than it is the location of the arbitration. While

the language quoted immediately above might justify look-

ing to Texas law on assignments, neither party argued that

it applied. Thus, we will apply the body of federal law

under the FAA.’

2. Enron’s Right to Compel Arbitration.

Having determined that federal law applies, we turn now

to the effect of the assignments on the right of the Enron

petitioners to compel arbitration under the 1994 Agreement.

Even if we accept arguendo SCI’s claim that the Enron peti-

tioners are not signatories to the 1994 Agreement, that does

not end the matter.* In this circuit, we have repeatedly

=

We doubt our result would be any different were we to look

at Texas law. The Texas Supreme Court has several times announced

its pro-arbitration policy and the primacy of the FAA where an arbi-

tration agreement provides that it is governed by both Texas law and

the FAA. See, e.g., EZ Pawn Corp. v. Mancias, 934 S.W.2d 87, 90-91

(Tex. 1996) (applying the FAA to question of waiver of arbitration).

8 Of course, two of the Enron petitioners (ACF and ER) did

sign the 1994 Agreement, but later assigned their interests to two

other Enron affiliates, EDR and EDRO.

17a

found that non-signatories to an arbitration agreement may

nevertheless be bound according to “ordinary principles of

contract and agency.” McAllister Bros., 621 F.2d at 524:

Delloitte Noraudit A/S, 9 F.3d at 1064. These principles

include “(1) incorporation by reference; (2) assumption; (3)

agency; (4) veil-piercing/alter ego; and (5) estoppel.”

Thomson-CSF, S.A. v. American Arbitration Ass’n, 64 F.3d

773, 776 (2d Cir. 1995). We believe that a number of these

concepts justify allowing the Enron petitioners to compel

SCI to arbitrate its claims asserted against them in the

Dominican Lawsuit. ;

In applying these concepts, we note, as we did in Thom-

son-CSF with respect to “veil-piercing,” that such deter-

minations are often “fact specific” and differ with “the

circumstances of each case.” 64 F.3d at 777-78 (citation

omitted). More importantly, while a court should be wary

of imposing a contractual obligation to arbitrate on a non-

contracting party, we do not face that concern here. SCI

is the party trying to escape its obligation to arbitrate, but

it (and/or its affiliate SCD) was a Signatory to all three

arbitration Agreements with Enron—that is, the Project

Agreement, the 1993 Agreement and, most importantly, the

1994 Agreement.’ Normally, it is the signatory to an arbi-

tration agreement that urges us to apply a veil-piercing

doctrine, see, e.g., Thomson-CSF, 64 F.3d at 777-78, to

require the non-signatory to arbitrate because of the special

circumstances that apply. In this case, however, it is the

Enron petitioners (the alleged “non-signatories” to the con-

tract) that invite us to pierce their own corporate veil

because of claimed special circumstances.

Enron argues that the corporate relationship among the

various Enron affiliates justifies allowing the Enron peti-

tioners to invoke the arbitration clause in the 1994 Agree-

% SCD was the only “Smith Cogeneration” signatory on the

1993 Agreement. SCI was a signatory on the Project Agreement and

the 1994 Agreement.

18a

ment. The identity of interests between petitioners and the

current Enron signatories to the 1994 Agreement (EDR and

EDRO) is nowhere more apparent than on the assignment

instruments themselves: the signatures of the assignors in

the assignments from ACF and ER to EDR and EDRO are

the same as the signatures for the assignees. Similarly, vir-

tually all the correspondence between SCI and the various

Enron petitioners is mailed to the same address in Texas,

“c/o Enron Development Corp.” Perhaps most telling is

SCI’s own reference to the various Enron companies in its

complaint in the Dominican Lawsuit as the “Enron Group,”

“affiliates,” and “Enron.” In the Dominican Lawsuit, SCI

treated a group of related companies as though they were

interchangeable, but now it asks for strict adherence to the

corporate form in its opposition to arbitration. On this

record, that is not called for. We believe that all the cir-

cumstances here justify piercing the corporate veil.

In addition, Enron’s claim that SCI should be estopped

from resisting arbitration is equally, if not more, com-

pelling. In Thomson-CSF we set forth two types of estop-

pel cases. 64 F.3d at 778-79. The more typical case, as we

have already noted, arises when a signatory to an arbitra-

tion agreement seeks to bind a non-signatory to it. We have

held that the non-signatory may be compelled to arbitrate

when it has derived other benefits under the agreement

containing the arbitration clause. See American Bureau of

Shipping v. Tencara Shipyard S.P.A., 170 F.3d 349, 353 (2d

Cir. 1999); Deloitte Noraudit A/S, 9 F.3d at 1064. But even

when a non-signatory seeks to compel arbitration with a

signatory, we pointed out that the Fourth and Eleventh Cir-

cuits “have been willing to estop a signatory from avoid-

ing arbitration with a nonsignatory when the issues the

nonsignatory is seeking to resolve in arbitration are inter-

twined with the agreement that the estopped party has

signed.” Thomson-CSF, 64 F.3d at 779 (referring to-

Sunkist Soft Drinks, Inc. v. Sunkist Growers, Inc., 10 F.3d

19a

753, 757-58 (11th Cir. 1993); J.J. Ryan & Sons, Inc. v.

Rhone Poulenc Textile, S.A., 863 F.2d 315, 320-21 (4th

Cir. 1988)). We find that this case falls within the latter

category.

In the Dominican Lawsuit, SCI asked for the “nullifi-

cation or rescission of all of the agreements entered into

between [SCI] and its related companies and persons

related to [Enron] and any other entity or person of the

Enron Group,” and sued all the Enron signatories to the

Project Agreement, 1993 Agreement and the 1994 Agree-

ment except for EDR and EDRO, the most recent signato-

ries to the 1994 Agreement. It is clear that the Enron

defendants in the Dominican Lawsuit are the ones entitled

to relief, as the subject matter of that lawsuit arises under

all of those Agreements, particularly the 1994 Agreement.

Further, as already stated, by treating the Enron entities as

a single unit in its complaint in the Dominican Lawsuit,

SCI is estopped from claiming that the current signatories

to the 1994 Agreement are distinct from the defendants in

the Dominican Lawsuit. Therefore, we conclude that SCI

cannot now shield itself from arbitration by arguing that

only the 1994 Agreement contains an enforceable arbitra-

tion clause, and that only EDR and EDRO—the parties

ISCI intentionally did not sue in the Dominican Lawsuit—

would have the right to invoke it. Cf. IDS Life Ins. Co. v.

Sunamerica, Inc., 103 F.3d 524, 530 (7th Cir. 1996) (Pos-

ner, C.J.) (where a party to an arbitration agreement

attempts to avoid that agreement by suing a “related party

with which it has no arbitration agreement, in the hope that

the claim against the other party will be adjudicated first

and have preclusive effect in the arbitration. Such a maneu-

ver should not be allowed to succeed. . . .”).

For these reasons, we affirm the district court’s ruling

that the Enron petitioners have the right to compel SCI to

arbitrate.

20a

C. Are SCI’s Claims in the Dominican Lawsuit within

the Scope of the 1994 Arbitration Agreement?

Finally, SCI argues that the claims it asserted against

Enron in the Dominican Lawsuit are not arbitrable because

they are not covered by the arbitration provision in the

1994 Agreement. These claims are that SCI was coerced

into the SECLP partnership by Enron, that all of SCI’s

Agreements with Enron were fraudulently induced, and

that Enron tortiously interfered with SCI’s negotiations

with CDE.

The 1994 Agreement provides in relevant part:

11.14 Dispute Resolution (a) In the event of any

dispute, disagreement, controversy or claim arising

under or relating to any obligation or claimed obli-

gation under the provisions of this Agreement (a “Dis-

pute” which term shall include any tort claim relating

to or in connection with this Agreement. . .), the

party seeing resolution of such Dispute shall give

notice to the other party... .

(c) Any Dispute that is not resolved by the parties

shall be finally settled by arbitration.

Despite this broad language and the explicit reference to

“any tort claim,” SCI contends that its claims in the

Dominican Lawsuit fall outside the scope of this language.

SCI argues that because Enron’s alleged improper actions

took place in 1993, prior to the signing of the 1994 Agree-

ment, the arbitration provision does not cover them.

We have stated previously that in light of “the strong

federal policy in favor of arbitration, the existence of a

broad agreement to arbitrate creates a presumption of arbi-

trability which is only overcome if it may be said with pos-

itive assurance that the arbitration clause is not susceptible

of an interpretation that covers the asserted dispute. Doubts

2la

should be resolved in favor of coverage.” Worldcrisa Corp.

v. Armstrong, 129 F.3d 71, 74 (2d Cir. 1997) (citations and

internal quotation marks omitted). We stated in Genesco

that when we consider “whether a particular claim falls

within the scope of the parties’ arbitration agreement, we

focus on the factual allegations in the complaint rather than

the legal causes of action asserted. If the allegations under-

lying the claims ‘touch matters’ covered by the parties’. . .

agreements, then those claims must be arbitrated, whatever

the legal labels attached to them.” 815 F.2d at 846 (citation

omitted). |

SCI’s argument that its claims against Enron concern

events that predate the 1994 Agreement does not persuade

us that the district court erred here in ordering arbitration.

In Coenen v. R.W. Pressprich & Co., 453 F.2d 1209, 1212.

(2d Cir. 1972), we held that arbitration under the New York

Stock Exchange Rules applied to actions predating the

signing of the contract by the petitioner because the con-

tract stated that it governed “any controversy” between

the parties. As the arbitration clause here similarly does

not contain any temporal limitation, the relevant inquiry

is whether SCI’s claims “relat[e] to any obligation or

claimed obligation under” the 1994 Agreement, not when

they arose. We think it is evident that SCI’s claims in the

Dominican Lawsuit fall within this broad language. Fur-

ther, as fraudulent inducement claims necessarily involve

actions that predate the signing of a contract, taking SCI’s -

argument to its logical extreme would mean that such

claims are generally non-arbitrable. Yet, the Supreme Court

in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388

U.S. 395, 403-04 (1967), held that claims of fraudulent

inducement of a contract generally, as opposed to fraudu-

lent inducement of the arbitration clause specifically, are

arbitrable. SCI’s claims in the Dominican Lawsuit relate to

the inducement of the 1994 Agreement as a whole. Thus,

resolving any doubt with respect to the scope of the arbi-

22a

tration clause in favor of arbitration, we find that SCI’s

claims in the Dominican Lawsuit are arbitrable.

III. Conclusion

We affirm the decision of the district court to compel

arbitration and enjoin SCI from prosecuting the action in

the Dominican Republic. We conclude that there is federal

jurisdiction under the Convention and the FAA. The

assignments under the 1994 Agreement do not prevent

Enron from invoking the arbitration clause in that Agree-

ment; in any event, we find that SCI is estopped from rais-

ing this claim. Finally, SCI’s claims in the Dominican

Lawsuit fall within the scope of the arbitration clause in

the 1994 Agreement. We have considered all of SCI’s

claims and find them without merit.

23a ‘

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Docket No: 99-7101

Filed February 23, 2000

At a stated term of the United States Court of Appeals

for the Second Circuit, held at the United States Court-

house, Foley Square, in the City of New York, on the __

day of February two thousand.

SMITH/ENRON,

Petitioners-Appellees,

SMITH COGENERATION,

Respondent-Appellant.

A petition for panel rehearing and a petition for rehearing

en banc having been filed herein by the appellant Smith-

Cogeneration.

Upon consideration by the panel that decided the

appeal, it is Ordered that said petition for rehearing is

DENIED.

24a

It is further noted that the petition for rehearing en banc

has been transmitted to the judges for the court in regular

active service and to any other judge that heard the appeal

and that no such judge has requested that a vote be taken

thereon.

FOR THE COURT:

ROSEANN B. MACKECHNIE, Clerk

by:

BETH J. MEADOR

Beth J. Meador

Administrative Attorney