Opinion
No. C2-01-1271
July 15, 2002
OPINION AND ORDER
This case is before the Court to consider a number of interrelated motions. Those motions include a motion to dismiss filed by defendant, Universal Fidelity Corp., a motion to compel arbitration and stay action filed by plaintiff Nationwide Mutual Insurance Company, a similar motion to stay pending arbitration filed by Universal, and Nationwide's motion for an order of possession filed pursuant to Chapter 2737 of the Ohio Revised Code. Because it appeared that the latter motion would require an evidentiary hearing, it was referred to the Magistrate Judge, who conducted such a hearing on May 29, 2002, and who invited the parties to file post-hearing briefs, all of which have now been submitted. As it turns out, the facts relating to Nationwide's motion for an order of possession are not seriously in dispute. Because the issue of whether this case should be stayed or dismissed is interconnected with the question of whether the Court either can, or should, issue the requested order of possession, the Court now WITHDRAWS the order of reference and issues the following decision disposing of all pending motions.
I. PROCEDURAL HISTORY
Because the procedural history of this case is important to several of the pending motions, it will be described in some detail.
Nationwide and Universal are parties to at least two contracts covering different types of debts which Nationwide hired Universal to collect. Pursuant to these two contracts, Universal is currently pursuing the collection of approximately 150,000 accounts on Nationwide's behalf.
Although the parties have had a contractual relationship for at least five years, during calendar year 2001 Nationwide decided that it would not renew its contracts with Universal and would begin to place accounts which otherwise would have gone to Universal with other vendors. The parties disagree about whether Nationwide's decision to stop sending active accounts to Universal for collection during the term of the most recent contracts constitutes a breach of those contracts. They do agree, however, that Nationwide effectively terminated the contracts on November 1, 2001.
Believing that Nationwide's refusal to place further business with it during the terms of the contracts constituted a breach, and further believing that it had been damaged by that breach, Universal began withholding money which otherwise was due to Nationwide. Nationwide believes that Universal's decision to withhold money as a set-off breached the contracts. As a result of these various disagreements, the parties found themselves in a litigation posture by November, 2001.
Universal was the first to file suit. It sued Nationwide in a state court in Texas. Nationwide removed that action to the United States District Court for the Southern District of Texas. Seven days after Universal sued Nationwide in Texas, Nationwide sued Universal in the Franklin County Court of Common Pleas. Universal removed that case to this Court.
The contracts between the parties contain an arbitration clause. In Texas, Nationwide moved to stay the Texas case and for an order compelling the parties to arbitrate their contract disputes. The Texas court granted that motion in an order entered on March 13, 2002. Although Universal had originally opposed Nationwide's motion to stay and compel arbitration which was filed in this case, Universal subsequently filed its own motion to stay this case pending arbitration. Thus, there is apparently at least one matter not in dispute: both parties agree that the underlying contract disputes must be arbitrated.
Early in the case, Universal filed a motion to dismiss, arguing that this Court was required to abstain in favor of the Texas proceedings pursuant to the Supreme Court's decision in Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976). After a response was filed pointing out the inapplicability of Colorado River abstention to parallel federal proceedings, Universal revised the grounds of its motion, arguing in its reply memorandum that the Court should dismiss the case based on the "first-filed" rule which is sometimes applied when cases are proceeding in parallel federal courts.
While this wrangling over the proper forum in which to proceed was occurring, Nationwide filed its motion for an order of possession. Nationwide contends that, once the contract was terminated, whether properly or improperly, Universal was required, at Nationwide's request, to return to Nationwide all of the documentation relating to the accounts being collected, and to suspend further collection efforts. That is the motion which was initially referred to the Magistrate Judge. Universal argues that under the facts of this case, a writ of possession is not justified. It also argues that because the arbitration clause has been enforced by the Texas court and the parties are actively involved in the initial stages of arbitration, this Court lacks the power to enter the order requested by Nationwide because it would undercut the strong federal policy in favor of arbitration and conflict with the arbitrator's jurisdiction over matters relating to the merits of the case. Conversely, Nationwide argues that this Court both can and should enter an order requiring Universal to return the documents to it, either because it has satisfied the requirements of Ohio Revised Code Chapter 2737 or because it has met the standards for preliminary equitable relief applicable to proceedings conducted in federal court. Because the request for an order of possession cannot be decided in isolation, and because the arguments underlying both the motion to dismiss and motion to stay pending arbitration must also be considered in determining whether an order of possession is appropriate, the Court chooses to resolve all these matters through a single order.
II. FACTUAL BACKGROUND
Prior to the hearing on the motion for an order of possession, Nationwide filed a motion supported by extensive affidavits. The testimony presented at the hearing was very similar to that contained in the affidavits. The parties do not seriously dispute the course of conduct which has occurred, but do have some significant disagreements about the meaning of the applicable contract language.
Nationwide has historically employed a number of different vendors to perform collection activities for it. Universal has been one of those vendors since at least 1997. In 2001, concerned that it was not receiving the level of service from Universal which it expected, Nationwide decided to solicit additional collection vendors. Universal was invited to submit a proposal. Out of 16 vendors who replied, Universal was ranked eleventh. Nationwide selected three vendors for further negotiations, and, after it had entered into contracts with them, stopped sending Universal files in August, 2001. Although its contracts with Universal did not expire by their terms until December 31, 2001, Nationwide believed it had the right under the contract to stop sending new accounts to Universal for collection at any time during the course of the contract.
As noted above, Universal construed the refusal to send it more accounts for collection during the term of the contracts as a breach, and began withholding money which otherwise would have been transmitted to Nationwide. Nationwide then notified Universal that it was breaching the contract by withholding money, and, when Universal continued to withhold funds, Nationwide terminated the contracts effective November 1, 2001. Universal, however, has retained all of the documentation for the accounts which were placed with it during the terms of the contracts and continues to make collection efforts.
Nationwide has identified some actual or potential problems occurring with Universal's collections efforts. For example, it contends on at least one occasion a collection suit was maintained in violation of a bankruptcy stay, and Nationwide was threatened with contempt of court. It also asserts that on a number of occasions (although none of these appear to relate to accounts currently being collected by Universal) Universal permitted the statute of limitations to run on a subrogation claim which could have been asserted in a tort action. Finally, Nationwide identified some problems with being able to access information about the accounts. Apparently, Universal no longer allows Nationwide to access account information by computer because Universal believes that the security of its computer database was breached through this means. There was also a temporary problem with telephone access to Universal, although Universal claims that this problem has now been cured. In any event, there may be some instances where Nationwide is delayed in obtaining information about the status of an account being collected by Universal. There is, however, no evidence that similar issues do not exist with other vendors, or that Nationwide has suffered financial damage in any particular amount as a result of these problems. They are clearly isolated problems in light of the volume of accounts being collected by Universal.
The parties' major disagreement centers around certain contractual language. In the Collection Master Agreement signed on November 5, 1997 (its terms are substantially similar to the other contract between the parties), the parties set forth a procedure to be followed after termination or expiration of the agreement. In paragraph 12.2, they agreed that "[t]he expiration or earlier termination of this Agreement . . . shall not affect any rights or obligations hereunder which shall have previously accrued . . . and such rights and obligations shall continue to be governed by the terms, Service requirements and Prices of this Agreement." The last sentence of that paragraph, however, provides as follows:
"The terms, Service requirements and Prices of this Agreement shall continue to apply to any Collection which Vendor has commenced prior to the expiration or earlier termination of this agreement, unless determined otherwise by Nationwide."
The parties further agreed, in paragraph 15.19, to arbitrate any dispute arising in connection with the agreement. That paragraph also contains language whose interpretation is at issue here:
"Both parties shall continue performing their respective obligations under this agreement pending the ADR award."
Finally, the parties agreed in paragraph 8.9 that any materials Nationwide supplied to Universal in connection with its collection efforts were "the sole, exclusive and proprietary property of Nationwide. . . ."
Universal does not dispute that the materials which it has in its possession and which it is using to collect these accounts belong to Nationwide. However, it does dispute that Nationwide has the right to have those materials returned prior to the time that the accounts are either fully collected or farther collection efforts would be unproductive. Essentially, Universal argues that the agreement entitles it to possess those materials and to use them so long as it continues to have rights and obligations under the agreement with respect to the collection of accounts. Nationwide's view, however, is that all of Universal's rights and obligations ceased on the date of termination or, at the very latest, when Nationwide demanded return of the materials. This difference agreement about contract language underlies both the merits of the parties' respective claims and also the request for an order of possession.
III. DISCUSSION
Universal's first defense to the motion for an order of possession rests on the fact that the agreements in question contain arbitration clauses and that the United States District Court for the Southern District of Texas has already decided to enforce the arbitration agreement by entering an order in the Texas litigation staying the case and compelling arbitration. In fact, the parties have already begun to select arbitrators under the rules of the American Arbitration Association. Although Universal concedes that this Court would have the power to enter a preliminary injunction preserving the status quo in order to make the arbitration effective, Universal argues that because Nationwide's requested equitable relief goes beyond preserving status quo, the Court is powerless to entertain Nationwide's motion.
Both Universal and Nationwide cite the Sixth Circuit's decision inPerformance Unlimited v. Questar Publications, 52 F.3d 1373 (6th Cir. 1995) as support for their competing positions. The case does contain language which arguably supports both the position that injunctions pending arbitration should ordinarily be limited to preserving the status quo so that the arbitration is not a "hollow proceeding," and that the Court can grant preliminary equitable relief if the traditional factors governing such relief have been satisfied. The former proposition, however, is the holding of the case, and the latter is simply dictum.
As reflected in Performance Unlimited, there is a split of authority among the circuits as to the extent of a court's power to issue preliminary injunctive relief once an order staying a case and compelling arbitration has been entered under the Federal Arbitration Act, 9 U.S.C. § 1 et seq. The Eighth Circuit held, in a series of decisions, that once such an order is issued, the Court's ability to issue orders in a case comes to an end. By contrast, a number of other circuits have concluded that, at a minimum, injunctive relief can be issued which has the effect of preserving the status quo if preservation of the status quo is necessary to render the arbitration proceeding meaningful.
In Performance Unlimited, one of the parties argued that if the status quo, involving payments of substantial royalties from one party to the other, were not maintained while the arbitration was ongoing, the party receiving the royalties would be unable to continue its business. If that occurred, it would suffer irreparable injury which a damage award made in the arbitration agreement could not remedy. The Court of Appeals sided with those courts which had concluded that, because there is a strong federal policy favoring arbitration, and because the language of 9 U.S.C. § 3 literally speaks to a stay of the "trial" and not to other pre-trial proceedings, the court had the power to issue a status quo injunction in order to effectuate the parties' agreement to arbitrate their disputes in a way which would be meaningful. Although the Court of Appeals also indicated that other injunctive relief might be available beyond simply preserving the status quo pending arbitration, it did not so hold because such a situation was not presented in the case before it. It does not appear that the Sixth Circuit Court of Appeals has otherwise addressed this issue. Nationwide, however, relying on thedictum contained in Performance Unlimited, contends that the Court should treat its motion for an order of possession like any other motion seeking preliminary relief and should be unswayed by the fact that the parties have both agreed to arbitrate all disputes arising under the contracts and that the arbitration process is already under way.
This Court is prepared to assume, without actually deciding, that it is empowered to issue equitable or other preliminary relief in a case which will be resolved through arbitration even if that relief goes beyond preserving the status quo or otherwise requiring or preventing a party from taking some action which, if not taken or prevented, would seriously undermine the parties' ability to obtain a resolution of their legal dispute through the arbitration procedure to which they agreed. At the same time, however, the Court is mindful that a stay of proceedings pending arbitration ordinarily terminates all proceedings in the District Court, including proceedings which cannot properly be designated as the "trial" referred to in 9 U.S.C. § 3. See e.g., Corpman v. Prudential-Bache Securities, 907 F.2d 29 (3rd Cir. 1990) (after case is stayed pending arbitration, discovery is not permitted in the district court); Suarez-Valdez v. Shearson Lehman/American Express, 858 F.2d 648, 649 (11th Cir. 1988) (same). Ordinarily, when parties agree to arbitration, they do so as an alternative to litigation. Consequently, permitting them both to submit the merits of the dispute to the arbitrators and to take advantage of the full panoply of pre-trial procedures available in the United States District Courts or other trial courts would both be contrary to the parties' agreement and would undercut the benefit which they intended to reap as a result of that agreement as well as the policies underlying the Federal Arbitration Act. Cf. Ferro Corp. v. Garrison Ind., 142 F.3d 926, 932 (6th Cir. 1998).
Consequently, the Court believes that it is appropriate to distinguish between prejudgment remedies which are consistent with and further the purposes of the parties' arbitration agreement, and those which are inconsistent with, or do not further the purposes of, that agreement. Obviously, an injunction preserving the status quo, if such preservation is necessary in order to render the arbitration a meaningful proceeding, is completely consistent with the parties' agreement and the purposes behind allowing parties to agree to arbitrate disputes. On the other hand, there many preliminary proceedings in District Court, not limited simply to discovery, which would undermine the arbitrators' ability to render a decision on the merits of the case.
Here, Nationwide's motion for an order possession falls into that latter category. By statute, the Court is required to assess, among other things, the likelihood that Nationwide will ultimately prevail in the action and decide whether, as part of the ultimate relief to be obtained, it will unlikely recover possession of the property at issue. The Court cannot make that prediction without engaging in significant interpretation of the disputed contractual language. However, that is a matter which the parties have reserved for the arbitrators. Further, an order of possession would radically alter the existing status quo. Although the arbitrators might ultimately be able to restore the parties to the status quo if they resolve the contract dispute in Universal's favor, it would be more difficult to do so if the Court enters an order of possession in favor of Nationwide. Such an order would have the effect of significantly disrupting ongoing collection activities by Universal, as opposed to leaving the parties where they currently stand. There is no substantial evidence from which the Court could conclude that Nationwide will be irreparably injured if Universal is allowed to continue collection efforts in the same fashion as it did while the contracts were in place. Further, Universal has an incentive to pursue collection efforts in a competent manner because it derives its fees from the money it collects. If there are instances where Universal does not properly collect an account and causes damage to Nationwide, the arbitrators can both address that type of issue, as they are required to do under the parties' agreement, and assess damages. Although Nationwide argues that in some cases the damage assessment would be difficult, that difficulty does not rise to the level of an irreparable injury, and those instances do not appear to be so prevalent that the Court ought to entangle itself unnecessarily in matters about which the parties have agreed to arbitrate.
Consequently, although the Court is willing to assume that, under the correct circumstances, it has the power to issue preliminary equitable relief going beyond an injunction to preserve the status quo, and further to assume that power would include the power to award a party pre-judgment possession of property under O.R.C. § 2737, the Court does not believe that the facts of this case warrant the exercise of such power. Nationwide may, of course, seek a similar remedy from the arbitrators, and if they believe that Nationwide is entitled to such relief they may, after assessing the likelihood that Nationwide will succeed on its contractual arguments, enter such an order. This Court believes that it is a better exercise of discretion to leave that and other matters to the arbitrators in the absence of an overwhelming necessity for the Court to enter such an order. Finding that necessity lacking, the Court will deny Nationwide's motion for an order of possession.
The other motions pending before the Court can easily be disposed of. Since both parties have now requested a stay pending arbitration, this case will be stayed pending the arbitration which has been ordered by the United States District Court for the Southern District of Texas. Because that court has already compelled the parties to arbitrate, a similar order by this Court would simply be duplicative. Further, the Court notes that the Texas case was the first to be filed, and that the ordinary presumption is that a second duplicative lawsuit should be dismissed in favor of proceedings in the first case. Nationwide argues, citing a number of cases which elucidate exceptions to the general rule, that because this Court has conducted substantial proceedings with respect to the case, in the area of the motion for immediate possession of property, it should not defer to the Texas court, which has done nothing more than order arbitration. Because this Court has determined that Nationwide is not entitled to an order of possession, however, and because there are no other proceedings pending which would justify a continuation of this case, the Court believes that it would be appropriate to dismiss this case in favor of the Texas case, which itself is stayed pending arbitration. The dismissal will be without prejudice to Nationwide's ability to reopen the case if, following arbitration, it is unable to obtain appropriate relief from the Texas District Court in the form of an order affirming, modifying, or vacating the arbitration award.
IV. ORDER
Based upon the foregoing, this Court's order referring Nationwide's motion for an order of possession to the Magistrate Judge is WITHDRAWN. Further, Nationwide's motion for an order of possession (file doc. #5) is DENIED. Universal's motion to dismiss this case (file doc. #4) is GRANTED, and this action is DISMISSED WITHOUT PREJUDICE. Each party's motion to stay and to compel arbitration (file docs. #6 and #25) are DENIED AS MOOT.