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holding that where distributorship agreement was between residents of different states and involved the distribution of products from outside the State of Louisiana and "where the claims and allegations of the suit involve[d] meetings and communications which took place between Ohio and Louisiana," the agreement was one which involved commerce within the meaning of the FAA
Summary of this case from PRESCOTT-FOLLETT ASSOC. v. DELAS/PRESCOTT FOLLETT A.Opinion
Civil Action 01-3440, Section "T"(6)
April 16, 2002
Before the Court is a Motion to Vacate Preliminary Default and Compel Arbitration and Stay Court Proceedings Pending Arbitration filed on behalf of the defendants, NMTC, Inc., d/b/a Matco Tools ("Matco") and Donald Hawkins (together, "defendants"). The parties waived oral argument and the matter was submitted for the Court's consideration on the briefs alone January 30,2002. The Court, having considered the arguments of counsel, the Court record, the evidence submitted, the applicable law and jurisprudence, is fully advised in the premises and ready to rule.
ORDER AND REASONS
I. BACKGROUND:
Plaintiffs, John R. Rushe and Glenda H. Rushe, entered into a franchise agreement with NMTC, Inc. d/b/a Matco Tools on December 27, 1999. Matco is a Delaware corporation with its headquarters and principle place of business in Stow, Ohio. Matco is a manufacturer and distributor of professional quality mechanics' tools and service equipment. Plaintiffs filed this suit alleging various claims for breach of contract, fraudulent misrepresentations, negligence, unfair trade practices, and loss of consortium. Plaintiffs assert that misrepresentations were made with an intent to defraud them into believing a better business opportunity existed. Specifically, plaintiffs contend that they were solicited and induced in conversations and documents, including Matco's Uniform Franchise Offering Circular and Distributorship Agreement, that they would have an "exclusive territory" containing a "minimum of 375 potential customers." Mr. Rushe later found that 22 of the 93 mechanic's shops listed in his Agreement were closed. It was further learned that a majority of those still open had told Donald Hawkins, District Manager for Matco, that they would not allow Matco representatives to solicit business on their premises. Hawkins further induced plaintiffs with annual earnings projections in excess of $45,000.00.
Suit was filed in the Civil District Court for the Parish of Orleans, State of Louisiana, on October 5,2001. Defendant, Matco, was personally served through it registered agent on October 18, 2001. A preliminary default was entered on November 6, 2001. Thereafter, a confirmation hearing was held on November 9,2001, at which time Judge Bagneris directed plaintiffs to submit a Judgment for his signature. Prior to the entry of the Judgment, Matco removed the action to federal court on November 15, 2001; therefore, Judge Bagneris declined to enter the submitted Judgment. Matco simultaneously filed an answer to the petitioners' action in this Court.
II. ARGUMENTS OF THE RESPECTIVE PARTIES:
A. Arguments of the Defendants in Support of their Motion:
First, defendants request that this Court vacate the entry of preliminary default as defendants timely removed the proceedings to this Court pursuant to 28 U.S.C. §§ 1446(b) and answered in accordance with Federal Rule of Civil Procedure ("Fed.R.Civ.P.") 81(c). Plaintiffs were able to obtain a preliminary default order in State Court based upon the shorter fifteen (15) day responsive pleading deadline provided by Louisiana law. Defendants however assert that "good cause" exists for setting aside the entry of default pursuant to Fed.R.Civ.P. 55(c).
Next, it is submitted that the Agreement entered into by the parties contained a broad dispute resolution provision including an expansive clause requiring that all breaches, claims, disputes, and controversies between the Distributor and Matco arising from the Agreement, including any allegations of fraud, misrepresentation, and violation of any federal, state, or local law or regulation, be decided by way of a specified dispute resolution procedure leading to final, binding arbitration. (Defendants' Exhibit A, § 12.1). Plaintiffs have raised claims that clearly are within the scope of the Agreement's binding arbitration provisions. As such, this Court should compel the parties to resolve this dispute according to the agreed upon procedure, including arbitration. Thus, these proceedings should be stayed pending said arbitration.
B. Arguments of the Plaintiffs in Opposition to the Motion:
The preliminary default was properly entered as Matco failed to timely file an answer pursuant to Louisiana law. Plaintiffs submit that Matco willfully allowed the default to occur as a tactical decision. Moreover, plaintiffs contend that a ruling to set aside the default would be financially and emotionally prejudicial to them. Finally, plaintiffs argue that no meritorious defense has been submitted. As such, plaintiffs contend that there is no good cause for setting aside the entry of default by the Civil District Court.
Next, plaintiffs argue that they should not be compelled to arbitrate their disputes as Louisiana law is applicable. It is asserted that misrepresentations were made concerning the number of potential customers in the Rushes' territory, as well as, the non-exclusive nature of the territory itself, which resulted in consent being vitiated at the time of the confection of the contract. Therefore, pursuant to Louisiana law, the agreement is void ab initio.
III. LAW AND ANALYSIS:
1. Entry of Preliminary Default 28 U.S.C. § 1446(b) allows a defendant thirty (30) days from the date of service to remove a case to federal court. When a case is removed to federal court, Fed.R.Civ.P. 81(c) provides that when a defendant has not answered prior to removal, an answer or other defenses or objections shall be filed within twenty (20) days after service or receipt of a copy of the initial pleading, or within five (5) days after the filing of the petition of removal, whichever is longer.
In this case, Matco was served with plaintiffs' petition on October 18,2001, and filed a notice of removal on November 15,2001, within the thirty (30) day removal period allowed by 28 U.S.C. § 1446(b). As no answer had been filed in state court, but twenty (20) days had elapsed since service of the initial pleading, Matco had five (5) days after the filing of the notice of removal to answer, in accordance with Fed.R.Civ.P. 81(c). Matco likewise timely complied with this provision as an answer was filed in federal court on November 15, 2001.
The wrinkle presented in this case, however, is that the plaintiffs had obtained a preliminary default order in state court prior to its removal. Louisiana Code of Civil Procedure Article 1001 provides fifteen (15) days for responsive pleadings. Our jurisprudence has made clear that the federal rules apply after removal and "neither add to nor abrogate what has been done in the state court prior to removal." Butner v. Neustadter. 324 F.2d 783 (9th Cir. 1963) (quoting Talley v. American Bakeries Co., 15 F.R.D. 391, 392 (E.D. Tenn. 1954). "The federal court takes the case as it finds it on removal and treats everything that occurred in the state court as if it had taken place in federal court."Id. (citing Savell v. Southern Ry., 93 F.2d 377, 379 (5th Cir. 1937). However, a motion to set aside the default may be asserted once the matter has been removed to federal court.
Fed.R.Civ.P. 55(c) provides that "for good cause shown" a court may set aside an entry of default and, if a judgment by default has been entered, may likewise set it aside in accordance with Rule 60(b). The factors to be considered in making a Rule 55(c) determination include: (1) whether the default was willful; (2) whether setting aside the default would prejudice the adversary; and, (3) whether a meritorious defense is presented. See CJC Holdings. Inc. v. Wright Lato. Inc., 979 F.2d 60,64 (5th Cir. 1992). Rule 60(b) of the Federal Rules of Civil Procedure sets forth the requirements for relief from ajudgment or order as follows:
(b) Mistakes; Inadvertence; Excusable Neglect; Newly Discovered Evidence; Fraud, etc. On motion and upon such terms as are just, the court may relieve a party or a party's legal representative from a final judgment, order, or proceeding for the following reasons:
(1) mistake, inadvertence, surprise, or excusable neglect;
(2) newly discovered evidence which by due diligence could not have been discovered in time to move for a new trial under Rule 59(b);
(3) fraud (whether heretofore denominated intrinsic or extrinsic), misrepresentation, or other misconduct of an adverse party;
(4) the judgment is void;
(5) the judgment has been satisfied, released, or discharged, or a prior judgment upon which it is based has been reversed or otherwise vacated, or it is no longer equitable that the judgment should have prospective application; or
(6) any other reason justifying relief from the operation of the judgment.
The motion shall be made within a reasonable time, and for reasons (1), (2), and (3) not more than one year after the judgment, order, or proceeding was entered or taken.
In in opinion by Judge Morey Sear of this Court, he set forth the following guidelines for applying this rule:
Rule 60(b) "must be equitably and liberally applied to achieve substantial justice." Blois v. Friday, 612 F.2d 938 (5th Cir. 1980). Accord, Laguna Royalty Co. v. Marsh, 350 F.2d 817, 823 (5th Cir. 1965). This rule, which allows the trial court to reopen a case, is:
most liberally applied to default judgments; its main application is to those cases in which the true merits of a case might never be considered because of technical error, or fraud or concealment by the opposing party, or the court's inability to consider fresh evidence. (Citations omitted.) The purpose of the motion is to permit the trial judge to reconsider such matters so that he can correct obvious errors or injustices and so perhaps obviate the laborious process of appeal. Weighing against the grant of a 60(b) motion is the desirability of finality injudgments. This is particularly true where the reopening of a judgment could unfairly prejudice the opposing party. (Citation omitted). But even without such prejudice, the desirability of orderliness and predictability in the judicial process speaks for caution in the reopening of judgments. These are matters that are addressed to the sound discretion of the trial court, and its ruling . . . will be reversed on appeal only upon a showing of abuse of discretion. (Citations omitted).Swift Chemical Co. v. Usamex Fertilizers, 490 F. Supp. 1343, 1349-1350 (E.D.La. 1980), affirmed 646 F.2d 1121 (5th Cir. 1981), rehearing denied 650 F.2d 282 (5th Cir. 1981) (quoting Fackelman v. Bell, 564 F.2d 734, 735-36 (5th Cir. 1977)).
As such, even though the initial entry of preliminary default was proper in accordance with the State procedural rules, vacating that order is appropriate in this case considering the fact that the defendants answered the complaint within five days of removal to federal court, in accordance with Fed.R.Civ.P.81(c) and securing that a default judgment was never entered. See, Tarbell v. Jacobs, 856 F. Supp. 101 (N.D.N.Y. 1994). This Court finds that good cause has been shown for setting aside the preliminary default entered in the State Court. Accordingly, this Court finds it proper to vaCate the preliminary default entered in State Court pursuant to Fed.R.Civ.P. 55(c) and/or 60(b).
2. Arbitration of claims against Matco
Arbitration is a matter of contract between the parties, and a court cannot compel a party to arbitrate a dispute unless the court determines the parties agreed to arbitrate the dispute in question. ATT Technologies. Inc. v. Communications Workers of Am., 475 U.S. 643,648, 106 S.Ct. 1415, 1418, 89 L.Ed.2d 648 (1986); Neal v. Hardee's Food Systems. Inc., 918 F.2d 34,37 (5th Cir. 1990). Determining whether the parties agreed to arbitrate the dispute in question involves two considerations: (1) whether a valid agreement to arbitrate between the parties exists; and, (2) whether the dispute in question falls within the scope of that arbitration agreement. Pennzoil Exploration and Prod. Co. v. Ramco Energy Ltd., 139 F.3d 1061, 1065 (St Cir. 1998).
The Federal Arbitration Act ("FAA') applies to written arbitration provisions contained in contracts evidencing a transaction involving commerce, and its reach is coextensive with the Congressional power to regulate under the Commerce Clause. Section 2 of the FAA provides that a "written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. The Supreme Court has stated that this section serves as a "congressional declaration of a liberal federal policy favoring arbitration agreements." Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983). As such, arbitration should be required "unless it can be said with positive assurance that an arbitration clause is not susceptible of an interpretation" that would include the claims at issue. See,Pennzoil, 139 F.3d at 1067 (quoting Neal, 918 F.2d at 37).
In this case, the Distributorship Agreement is "a contract evidencing a transaction involving interstate commerce." 9 U.S.C. § 2. The contract is between Matco, a Delaware corporation with its principle place of business in Ohio, and the Rushes, who are Louisiana residents, whereby the Rushes' would act as distributors of Matco products. The tools and products of Matco would be provided to the Rushes from outside the State of Louisiana. Moreover, the claims and allegations of this suit involve meetings and communications which took place in or between Louisiana and Ohio.
Moreover, there is no dispute that there is a written arbitration provision in said Agreement. Specifically, Section 12.1 of the Distributorship Agreement provides:
Except as expresslyprovided in Section 12.5 of this Agreement, all breaches, claims, disputes and controversies (collectively referred to as "reaches"or "reach") between the Distributor . . . and Matco, including its employees, agents, officers or directors . . . arising from or related to this Agreement, including any allegations of fraud, misrepresentation, and violation of any federal, state or local law or regulation, will be determined exclusively by binding Arbitration in accordance with the Rules and Regulations of the American Arbitration Association.
(Defendants' Exhibit A, § 12.1).
The Fifth Circuit has differentiated arbitration clauses which are "broad" and those that are "narrow." Where an arbitration clause is "broad," the action should be stayed and the arbitrator permitted to decide if the dispute falls within the clause. Whereas in cases where the clause is "narrow," the case is not referred to arbifration or stayed, unless the Court determines that the dispute falls within the clause. In re Complaint of Hornbeck Offshore Corp., 981 F.2d 752 (5th Cir. 1993). "Narrow" arbitration clauses are those which only require arbitration of disputes "arising out of" the contract, whereas "broad" arbitration clauses govern disputes which "relate to" or "are connected with" the contract. See, Pennzoil, supra. Additionally, clauses which contain the "any dispute" language are considered to be "broad" Id.; Rojas v. TK Communications. Inc., 87 F.3d 745(5th Cir. 1996) ("any other dispute" was sufficiently broad). In this case, the arbitration agreement refers to " all breaches, claims, disputes and controversies . . . arising from or related to this Agreement, including any allegations of fraud, misrepresentation, and violation of any federal, state, or local law or regulation . . ." (Defendants' Exhibit A, § 12.1) (emphasis added). This Court finds that this is a sufficiently "broad" arbitration clause. It applies to all claims arising from or related to the Agreement, including any of the enumerated allegations.
The plaintiffs have asserted claims for breach of the Agreement, misrepresentations, unfair trade practices, negligence, and loss ofconsortium. These claims fall within the scope of the "broad" arbitration provision over "all breaches, claims, disputes and controversies . . . including any allegations of fraud, misrepresentation, and violation of any federal, state, or local law or regulation." (Defendants' Exhibit A, § 12.1).
As such, it is the opinion of this Court tat this Agreement falls within the scope of the FAA and pursuant to Section 2, said arbitration provision is "valid, irrevocable, and enforceable." 9 U.S.C. § 2. Moreover, it is clear to this Court that (1) a valid agreement to arbitrate existed between the parties, and (2) that the dispute in question falls within the scope of that arbitration. See, Pennzoil, supra.
The plaintiffs have argued that it should not however be compelled to arbitration as Louisiana law is applicablerelying on Doctor's Associates. Inc. v. Casarotto, 517 U.S. 681, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996), George Engine Co., Inc. v. Southern Shipbldg. Corp., 350 So.2d 881 (La. 1977), and Sun Drilling Products Corp. v. Rayborn, 703 So.2d 818, 819 (La.App. 4 Cir. 1997). This Court, however, is not in agreement with plaintiffs' position. In George Engine, the plaintiff, as in this case, alleged that the agreement entered into, containing a "broad" arbitration provision, was void ab initio as a result of misrepresentation of material facts constituting error in the principal cause. George Engine supra. In that case, the Louisiana Supreme Court declined to follow Prima Paint Corp. v. Flood Conklin Mfg.Co., 388 U.S. 395, 875 S.Ct. 1801, 18 L.Ed.2d 1270 (1967) and held that it had jurisdiction to determine whether or not the contract was valid under Louisiana law. George Engine, supra. In George Engine, the Louisiana Supreme Court explained that it was interpreting the Louisiana Arbitration Act §§ 4201,4203, not the FAA; therefore, it found that the legislative intent of these provisions was that an arbitration agreement should be enforced by the courts, unless the court, not the arbitrator, finds grounds at law or in equity for the revocation of the contract. Id.
In Sun Drilling, the Court was asked to determine whether fraud in the inducement of a contract containing a mandatory arbitration clause was to be decided by the state court, rather than an arbitrator, where the contract was subject to the FAA. Sun Drilling, supra. The Court while suggesting that the Supreme Court of Louisiana may want to revisit its ruling in George Engine, stated that it was still the policy of the State and was therefore compelled to affirm the ruling of the lower court. Id. The Court further relied on Doctor's Associates, for the proposition that applicable state law contract defenses, such as fraud, duress or unconscionability, may be applied to invalidate arbitration agreements without contravening Section 2 of the FAA. Id.
This Court, however, is guided by the FAA and the body ofjurisprudence flowing from the federal courts including Prima Paint Corp., In Prima Paint Corp., the United States Supreme Court specifically held that under the FAA, the issue of fraud in the inducement of a contract generally must be submitted to arbitration when the contract contains an arbitration clause providing for reference of any controversy or claim arising out of or relating to an agreement or breach thereof, in the asence of evidence that the contracting parties intended to withhold that issue from arbitration. Prima Paint Corp., supra. Whereas, if the claim is fraud in the inducement of the arbitration clause itself, an issue which goes to the making of the agreement to arbitrate, the federal court may proceed to adjudicate it. Id.
Moreover, this Court finds that the case of Doctor's Associates, is consistent with Prima Paint Corp. and this Court's opinion herein. In that case, the Court relying on its finding from the case of Perry v. Thomas, 482 U.S. 483, 107 S.Ct. 2520, 96 L.Ed.2d 426 (1987) did state that "generally applicable contract defenses, such as fraud, duress, unconscionability, maybe applied to invalidate arbitration agreements without contravening § 2." Doctor's Associates, 517 U.S. at 687, 116 S.Ct. at 1656 (emphasis added). In that case, the issue of the validity of the entire contract was not at issue, but instead, only the validity of the arbitration agreement based upon a state law which required that notice that a contract is subject to arbitration be typed in underlined, capitalized letters on the first page of the contract. Id. The state law further provided that if said notice was not provided the contract may not be subject to arbitration. The Supreme Court ruled that this particular state law "placed arbitration agreements in a class apart from `any contract,' and singularly limits their validity" and therefore federal law preempted this state law. Doctor's Associates, 571 U.S. at 689, 116 S.Ct. at 1657.
In response to this motion, the plaintiffs contend that the Agreement is invalid as a whole based upon the misrepresentations made. However, at no time have the plaintiffs asserted that there was fraud in the inducement relative to the arbitration clause alone, nor has there been allegations that the arbitration clause is invalid based upon general contract defenses under state law. As the fraud in the inducement relates to the contract generally, the jurisprudence dictates that this issue ma be resolved by the arbitrator. Moreover, it is the finding of this Court that there is no evidence that the parties intended to withhold the matters submitted in this litigation from arbitration, especially in light of the "broad" arbitration clause which expressly includes claims of "fraud, misrepresentation, and violation of any federal, state, or local law or regulation." (Defendants' Exhibit A, § 12.1).
The Court notes that there is no assertion that the Agreement should be rescinded in the Complaint. The plaintiffs merely assert claims for breach of contract, misrepresentation, unfair trade practices, negligence, and loss of consortium.
When the parties agree in writing to arbitrate their disputes, Section 3 of the FAA requires courts to stay proceedings that are referable to arbitration as follows:
If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.9 U.S.C. § 3. Having found a valid and enforceable agreement to arbitrate, the parties are hereby compelled to arbitrate the issues presented in this suit and this Court shall stay these proceedings pending said arbitration.
3. Arbitration of claims against Hawkins
Having found that the claims against Matco are subject to arbitration, this Court must consider whether the claims asserted against Hawkins are likewise subject to arbitration. A review of the relevant jurisprudence shows that claims by or against agents, employees, financing entities, guarantors, and closely related companies be arbitrated pursuant to related arbitration agreements entered by the signatory affiliates. InLetizia v. Prudential Bache Securities. Inc., 802 F.2d 1185 (9th Cir. 1986), an investor filed suit against the broker and its employees. The Court held that the broker's employees, who were non-signatories to the brokerage agreement could be bound by the agreement's arbitration clause. Id. Following Letizia, the Sixth Circuit in Arnold v. Arnold Corporation, 920 F.2d 1269 (6th Cir. 1990) found that the language of the arbitration agreement indicated that the parties' basic intent was to provide a single arbitral forum to resolve all disputes arising under the agreement. As all of the alleged wrongful acts of the non-signatory defendants related to their behavior as the officers and directors or in their capacities as agents of the signatory defendant, the entire dispute was to be arbitrated including the individual defendants as agents. Id. See also, Eureka Homestead Society v. Howard. Weil. Labouisse. Frederichs Inc., 1994 WL 583274 (E.D.La. 1994) (compelling arbitration of claims against non-signatory employees).
Moreover, the arbitration provision specifically includes "all breaches, claims, disputes and controversies . . . between the Distributor . . . and Matco, including its employees, agents, officers or directors . . ." (Defendants' Exhibit A, § 12.1) (emphasis added). The claims asserted by the plaintiffs against Hawkins arise out of his serving as District Manager for Matco. As such, the parties are likewise compelled to arbitrate the claims against the non-signatory defendant, Hawkins.
Accordingly,
IT IS ORDERED that the Motion to Vacate Preliminary Default and Compel Arbitration and Stay Court Proceedings Pending Arbitration filed on behalf of the defendants, NMTC, Inc. dlb/a Matco Tools and Donald Hawkins, be and the same is hereby GRANTED.
IT IS FURTHER ORDERED that the Clerk of Court mark this action closed for statistical purposes, and,
IT IS FURTHER ORDERED that the Court shall retain jurisdiction and that the case shall be restored to the trial docket and shall be reset by order of this Court upon motion of a party if circumstances change, so that the case may proceed to final disposition. This order shall not prejudice the rights of the parties to this litigation.