This case arose when Petitioner Samuel Belzberg appealed an order from the appellate division that denied his application for a permanent stay of third-party arbitration claims by Respondent Verus Investments Holdings, Inc. (“Verus”). The New York Court of Appeals reversed because Belzburg’s conduct, as a third-party non-signatory, was not sufficient under the direct benefits theory of estoppel to compel him to arbitrate.
In October 2008, Belzburg helped broker a deal with Verus, in which Verus used its brokerage account at Jefferies & Co., Inc. (“Jefferies”) to move money around to complete the purchase of securities in Fording Canadian Coal Trust. The business deal was funded with $5 million dollars from Winton Capitol Holding (“Winton”), a company owned by a trust established by Belzberg, and with $1 million from Verus. All $6 million was initially transferred to the Jefferies account. After the completion of the business deal, Jefferies transferred all the money plus profits back to Verus. Then, Verus transferred the $5 million back to Winton. Upon receipt, and at the direction of Gibralt Capital (another holding company Belzburg used to facilitate the business deal), Winton transferred the $5 million to his friend, Doris Lindbergh, to purchase a summer home.
Later, Canadian tax authorities informed Jefferies that it owed $928,053.45 in taxes for the business deal. Pursuant to the arbitration clause in the agreement between Verus and Jefferies, Jefferies commenced arbitration against Verus to pay the Canadian tax. Verus answered and asserted third-party arbitration claims against Belzburg, Winton, Lindbergh, and Gibralt for their share of the taxes. On appeal, Belzburg and the others asserted that, since they were not signatories to the contract between Verus and Jefferies, they cannot be compelled into arbitration.
Since arbitration is a matter of contract, non-signatories are generally not subject to arbitration agreements. However, under limited circumstances non-signatories may be compelled to arbitrate. A third-party non-signatory may be compelled to arbitrate under the direct benefits theory of estoppel where the non-signatory “knowingly exploits” the benefits of an agreement containing an arbitration clause and receives benefits flowing directly from the agreement. It was the application of this direct benefits theory by the appellate division that Belzberg challenged before the Court of Appeals.
The Court explained that a benefit is indirect where the non-signatory exploits the contractual relation of the parties but not the agreement itself. In distinguishing between direct and indirection benefits, the guiding principle is whether the benefit gained by the non-signatory is one that can be traced directly to the agreement containing the arbitration clause.
Here, the Court agreed with Belzburg that he did not receive the type of direct benefit from the Jefferies-Verus contract encompassed by the estoppel theory. First, Belzburg’s access and appropriation of the profits was based on his relationship with Winton, not based on the Jefferies-Verus agreement. Second, Belzburg’s influence over the appropriation of the profit is several steps removed from the formation of the arbitration agreement between Jefferies and Verus. The Court found that this attenuated connection did not justify an application of the direct benefits estoppel theory and, accordingly, reversed the appellate division’s holding.
21 N.Y.3d 626, 2013 N.Y. Slip Op. 06729