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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 2000
- **Citation:** 531 U.S. 815

## Text

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.

4a

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.

6a

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

10a

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386014_1071%3A1. Public record. Not legal advice.