Fifth Circuit Holds Motion to Compel Arbitration Not Enough to Defeat Preliminary Injunction

The Fifth Circuit Court of Appeals has held that a motion to compel arbitration did not defeat a federal district court’s preliminary injunction.

In Janvey v. Alguire, et al., No. 10-10617, (5^th Cir. December 15, 2010), the U.S. Securities and Exchange Commission filed suit in U.S. district court against the Stanford Group and other related corporate entities (collectively Stanford) alleging that Stanford perpetrated a multi-billion-dollar Ponzi scheme. A receiver, Janvey, was appointed to marshal the estate. Janvey moved for a preliminary injunction to freeze the accounts of several former Stanford financial advisors and employees pending the outcome at trial. The employees filed a motion to compel arbitration based on promissory notes which contained a broad arbitration clause they entered into with Stanford. The employees argued that Janvey was bound by the arbitration clause because he stood in Stanford’s shoes while acting as receiver. The district court did not rule on the employees’ motion to compel arbitration and granted a preliminary injunction under the Texas Uniform Fraudulent Transfer Act (TUFTA). The employees filed an interlocutory appeal arguing “the district court should have granted their motion to compel arbitration, and that the district court had no power to grant the preliminary injunction when the motion to compel arbitration was pending.”

First, the Fifth Circuit held the district court was within its power to issue a preliminary injunction where the issue of arbitrability was not yet decided. Next, the court analyzed the four elements necessary to issue an injunction and found the district court did not abuse its discretion when it granted the preliminary injunction. After that, the court held the injunction was not overly broad despite that it included Individual Retirement Accounts (IRA’s) and did not account for losses on personal investments. According to the court, it was up to the employees to prove they had a legal right to the funds in their IRA’s and, just as with any other creditor, employee losses on personal investments had to be sought through the receiver claims process. The Fifth Circuit next held that the district court acted within its power when it granted an injunction under the TUFTA because the “TUFTA expressly provides for an injunction and the district court exercised its discretion to grant that injunction.”

After the employees’ noted a circuit-split existed regarding whether a district court may issue an injunction while arbitration is pending, the court declared “the circuit-split cases are not applicable,” because the district court did not rule on the employees’ motion to compel arbitration. Finally, the Circuit Court reviewed the employees’ motion to compel arbitration de novo. The court held that the arbitration provision at issue did not apply to Janvey because in his role as receiver he was acting on behalf of the creditors, not Stanford.

In conclusion, the court stated:

In this appeal concerning the Receiver’s attempt to marshal estate assets, we hold: (1) The district court acted within its power when it considered and decided the motion for preliminary injunction before deciding the outstanding motion to compel arbitration. (2) The district court did not abuse its discretion in issuing the preliminary injunction. (3) The preliminary injunction was not an attachment, nor was it overly broad. And (4) The Receiver’s claims are not subject to arbitration because he is suing on behalf of estate creditors.

The Fifth Circuit Court of Appeals affirmed the U.S. district court’s ruling and remanded the case.

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