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holding that recital could not be read as enlarging unambiguous terms of agreement
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Civil Action No. 3:02-CV-0055-D
April 22, 2002
MEMORANDUM OPINION AND ORDER
This is an action in which plaintiff AFD Fund applies for confirmation of an arbitration award entered in its favor against defendants Midland Management, LLC ("Midland"), Paul W. Sill ("Sill"), and Pochin Michael Hsu ("Hsu"), jointly and severally. AFD Fund moves to confirm the award. Defendants move to vacate it, contending that Sill and Hsu were not signatories to the underlying agreement and that the arbitrator exceeded his authority, and acted arbitrarily and capriciously and in manifest disregard of the law, by entering an award against them. The court concludes that neither Sill nor Hsu agreed to binding arbitration. Accordingly, the court grants in part and denies in part AFD Fund's motion and grants in part and denies in part defendants' motion to vacate. The court enters judgment in favor of AFD Fund confirming the award against Midland and in favor of Sill and Hsu vacating the award against them.
I
AFD Fund is the post-confirmation estate of AmeriServe Food Distribution, Inc. ("AmeriServe") and its debtor affiliates. AmeriServe, the successor to ProSource Services Corporation ("ProSource"), contracted with BurgerKing franchisees to sell them food and restaurant supplies. It entered into a supply agreement ("Agreement") with Midland, a Burger King restaurants franchisee, that included an arbitration clause. The Agreement also contained a recital that Midland "ha[d] the authority to enter in this Agreement on behalf of all individuals who are franchisees for the listed restaurants who shall be jointly and severally bound under this agreement." Agrmt. at 1 (recital A) (emphasis added). Hsu signed the Agreement on behalf of the "Buyer." His signature is preceded by the preposition "BY." Under his signature, he printed his name, followed by the word "Francishee." See id. at 12. Hsu also signed a written personal guarantee in favor of ProSource by which he personally guaranteed Midland's indebtedness. Sill also signed a written personal guarantee, but he did not sign the Agreement.
The document is so entitled. See P. 1st Am. App. Confirm Arb. Award, Ex. E.
AFD Fund asserted that Midland owed AmeriServe for the unpaid purchase price of food and supplies. It maintained that Sill and Hsu were jointly and severally liable with Midland, Sill as guarantor and Hsu as franchisee and guarantor. AFD Fund made a demand for arbitration with the American Arbitration Association ("AAA"). Before the arbitration commenced, the arbitrator ruled that "[t]he claims by AFD Fund against Paul W. Sill and Pochin Michael Hsu are arbitrable claims within this arbitration[.]" P. Mar. 22, 2002 Resp. App. 87.
AED Fund's appendix is not a separate document from the response, as required by N.D. Tex. Civ. R. 7.1(i)(2) ("The appendix must be assembled as a self-contained document, separate from the motion and brief."). Because this defect has not interfered with the decisional process of the court, it has considered the content of the appendix. See infra note 4.
In December 2001 the arbitrator entered an award ("Award") in favor of AFD Fund against Midland, Sill, and Hsu, jointly and severally. He awarded $316,693.15, together with attorney's fees of $26,436.00, prejudgment interest of $131,206.95, and arbitration fees and expenses of $6,164.50. If these sums were not paid within 30 days of the date of the Award, defendants were held liable for post-judgment interest at the rate of 1.5% per month, commencing December 13, 2001 until paid in full.
AFD Fund moves to confirm the Award and defendants move to vacate it. Defendants maintain that the arbitrator exceeded his authority, and acted arbitrarily and capriciously and in manifest disregard of the law, by entering an award against Sill and Hsu for joint and several liability with Midland. They argue that the Agreement is between AmeriServe and Midland and does not give the arbitrator authority to determine that additional parties should be included in the arbitration. Defendants contend that, under Texas law, non-signatories are bound by arbitration clauses only when they sue on a contract that contains such a clause or are third-party beneficiaries of the contract, neither of which applies in this case.
It requests in the alternative that the court confirm the Award as to Midland and Hsu. See P. Apr. 12, 2002 Surresp. Rep. at 2, ¶ 1 6 (prayer).
The court comments briefly on the parties' papers. AFD Fund filed its first amended application to confirm arbitration award on February 7, 2002. Defendants responded to the application on March 8, 2002. They included in their response a motion to vacate arbitration award, but they did not submit a brief or supporting appendix until April 8, 2002. In the meantime, AFD Fund filed on March 22, 2002 a motion to confirm arbitration award and brief and it also filed a response to defendants' motion to vacate. Defendants filed on April 8 a response to AFD Fund's motion to confirm, a brief in support of their March 8 motion to vacate, and a reply in support of their March 8 motion to vacate and a reply appendix. In other words, on the same day, they filed both a brief and a reply brief in support of the same motion to vacate. On April 12, 2002 AFD Fund filed a combined "sur response" to defendants' reply in support of their motion to vacate and a reply to defendants' motion to vacate. Although the briefing varies from the regimen contemplated by Rule 7.1 — motion, response, reply — it appears that each side has had a fair opportunity due to the cross-nature of the motions to be heard in support of the side's own motion and in opposition to the other side's motion. Despite defects in the briefing (e.g., appendixes physically attached to briefs rather than made separate documents, one brief filed 30 days after the motion it supports, and a "sur response" that is not contemplated by the local civil rules), the court has determined that these errors do not materially interfere with the decisional process of the court and that undue delay and expense will result if the court directs the parties to re-brief the motions. Arbitration is intended to be a speedy and less expensive process. The court therefore will decide the motions on the present papers. To the extent a party has not had a formal opportunity to file a reply brief permitted by Rule 7.1(f), the court, in its discretion, is deciding the motion prior to receipt of a reply brief. See Solomon v. Godwin Carlton, P.C., 898 F. Supp. 415, 416 n. 2 (N.D. Tex. 1995) (Fitzwater, J.) (applying former Local Rule 5.1(f)).
AFD Fund posits that defendants agreed that the arbitrator would decide whether Sill and Hsu were properly the subject of the arbitration and cannot now obtain vacatur of his decision that they were. It also contends that Hsu and Sill were contractually bound to arbitration under the terms of the Agreement and other transactional documents, even if the arbitrator's decision did not resolve the issue conclusively.
AFD Fund advances other arguments that the court need not address in view of its rulings today. For example, AFD Fund argues that the Award must be confirmed because the arbitrator's ruling draws its essence from the contract at issue. See P. Mar. 22, 2002 Resp. at 3. The court holds infra, however, that the question concerning the arbitrator's authority to decide his own authority is subject to a presumption against AFD Fund's position and to analysis under a clear and unmistakable evidence standard, and it holds that AFD Fund failed to satisfy its burden under this standard. See infra § III. In these circumstance, the "draws its essence" argument need not be addressed, because the arbitrator lacked the authority to decide his own authority, and it is therefore of no consequence that his decision may have drawn its essence from the Agreement.
II
This court is authorized under 9 U.S.C. § 9, a provision of the Federal Arbitration Act, 9 U.S.C. § 1 et seq., to confirm an arbitration award, and it must do so unless the award is vacated, modified, or corrected. Under 9 U.S.C. § 10(a)(4), a party may move to vacate an arbitral award "[w]here the arbitrator[I] exceeded [his] powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made." A court may also vacate an arbitration award that is arbitrary and capricious, see Williams v. Cigna Financial Advisors Inc., 197 F.3d 752, 758 (5th Cir. 1999) (collecting cases), cert. denied, 529 U.S. 1099 (2000), or is in manifest disregard of the law, id. at 759.III
Much of the parties' briefing concerns whether defendants submitted to the arbitrator the question whether Sill and Hsu had agreed to arbitration. Despite the attention they have devoted to it, neither side appears to have recognized or cited the controlling jurisprudence. When the correct legal standard is applied, the court must rule on this issue in favor of defendants.
A
General Motors Corp. v. Pamela Equities Corp., 146 F.3d 242 (5th Cir. 1998), which neither side has cited, squarely addresses the law regarding whether the parties have agreed that the arbitrator will decide the scope of his own authority. "The question of whether an arbitrator has the power to arbitrate a dispute depends on whether the parties to the dispute agreed to submit the question to that arbitrator for decision." Id. at 248. Significantly, for purposes of today's decision, this question is controlled by a clear and unmistakable evidence standard. "If the dispute includes an issue as to the scope of the arbitrator's authority, courts should not assume or conclude that the parties agreed to submit the question of the scope of the arbitrator's own authority to that arbitrator unless there is `clear and unmistakable evidence' that they did so." Id. "[T]he law creates a presumption that the parties did not agree to submit any question as to the arbitrator's own power to that very same arbitrator. Consequently, any silence, ambiguity or doubts about this question should be resolved in favor of concluding that the parties did not agree to submit the issue to the arbitrator." Id. (citations omitted). AFD Fund has the burden of meeting the clear and unmistakable evidence standard and overcoming the presumption. "[W]hen a party to a dispute contends that he and the other disputant agreed to submit to a third person the question of whether that arbitrator had authority to arbitrate their dispute, that party must bear the burden of demonstrating clearly and unmistakably that the parties agreed to have the arbitrator decide that threshold question of arbitrability." Id. at 249. These principles are not res nova pronouncements first set out in General Motors. The Fifth Circuit merely applied principles and the standard drawn from First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995), "and its progenitors[.]" Gen. Motors, 146 F.3d at 248.
B
With the controlling jurisprudence in mind, the court has carefully studied the prehearing correspondence from defendants' counsel to the AAA, the parties' conduct in briefing the issue of arbitrability, the content of the arbitrator's Report of Preliminary Hearing and Scheduling Order ("Report"), and the arbitrator's decision to resolve the arbitrability question before the arbitration hearing. It is unable to hold, under a clear and unmistakable evidence standard and in light of the presumption against consent, that defendants agreed to submit the question of arbitrability to the arbitrator.
To be sure, there is evidence that supports the conclusion that defendants did agree. On July 24, 2001 defendants' counsel, Joel K. Belway, Esquire ("Belway"), wrote the AAA case manager. See P. Mar. 22, 2002 Resp. App. 5-6. In the first paragraph of the letter, he stated as follows:
This will confirm that this office represents Midland Management, LLC, Paul W. Sill and Michael Hsu with respect to claims asserted against them by AFD Fund. A threshold issue of arbitrability as to the individual respondents exists and should be determined in advance of further proceedings.Id. at 5. In the penultimate full paragraph, Belway expressed a similar position and request:
Absent an agreement by Mr. Hsu and Mr. Sill to arbitrate matters with AmeriServe Food Distribution, Inc. or its post-confirmation bankruptcy estate, I respectfully submit that the American Arbitration Association has no jurisdictional basis upon which to go forward with an arbitration against Mr. Hsu and Mr. Sill. I request that this jurisdictional issue be addressed first, before the matter against Midland Management, which has entered into an agreement to arbitrate, goes forward.Id. at 6. In the final full paragraph, Belway appeared to eliminate any doubt regarding whom defendants intended would resolve the threshold issue of arbitrability, stating:
Please advise me how the question of the absence of an agreement by Mr. Hsu and Mr. Sill to arbitrate should be raised with the panel.Id. (Emphasis added). Belway thus appeared to advise the AAA in the July 24, 2001 letter that he represented not just Midland, but Sill and Hsu as well. And he twice requested that the question of the arbitrabiity of AFD Fund's claims against "the individual respondents" be decided as a preliminary matter. Rather than simply object to their being included, state that the issue of arbitrabiity must be decided first by another tribunal ( e.g., a court), or advise the AAA that Sill and Hsu would decline to participate, Belway argued that the threshold issue of arbitrability as to the individual respondents should be determined in advance of further proceedings, and he concluded his letter by requesting advice concerning how the question " should be raised with the panel." See id. (emphasis added).
A few days later, however, on August 1, 2001, Belway wrote the AAA again. AFD Fund's counsel, James A. Ellis, Jr., Esquire ("Ellis"), had argued to the AAA that AED Fund's claims against Hsu and Sill were subject to arbitration in the instant proceeding. Belway responded that he "contend[ed] that Mr. Hsu has not agreed to have an arbitrator determine the arbitrability of the issue. In other words, the claimant cannot seek to have an arbitrator bootstrap the decision of arbitrability into the arbitration agreement, where bona fide dispute exists as to arbitrability concerning Messrs. Hsu and Sill." Ds. Apr. 8, 2002 App. 2. This position casts doubt on the conclusion that defendants agreed to have the arbitrator decide the question; Belway's letter explicitly objects to the arbitrator's doing so. It also corroborates that possibility that, when Belway requested guidance in the July 24 letter on how the matter should be raised with the panel, he was asking how he could formally object to arbitrator's making the decision rather than requesting that the arbitrator determine his own authority.
Belway again wrote to the AAA on August 10, 2001. In this letter, he "renew[ed] on behalf of Messrs. Sill and Hsu their individual objections to being involved in this arbitration." He "submit[ted] that neither of them is properly a party to this arbitration," and he "request[ed] that they be dismissed as respondents and that the matter go forward between AFD Fund and Midland Management LLC." Ds. Apr. 8, 2002 Rep. App. 37. Although he made no mention in the letter that the AAA lacked authority to decide whether Sill and Hsu were subject to arbitration, when this correspondence is considered together with the August 1 letter, it undercuts a clear and unmistakable conclusion that defendants consented to a decision by the arbitrator regarding his own authority.
The outcome of the prehearing conference and the arbitrator's action following the conference lend support to a finding that defendants were asking the AAA to resolve the status of Sill and Hsu in advance of the arbitration. On September 18, 2001 the arbitrator conducted a telephonic conference with Belway and Ellis. He recorded in the Report that he issued following the conference that the form of the arbitration award would be standard, unless the "individual respondents are included at the time of the hearing." P. Mar. 22, 2002 Resp. App. 13. He also noted that "[n]o later than 10/13/01, the parties shall submit briefs on the issue of the arbitrability of claims against individual respondents Paul W. Sill and Pochin Michael Hsu[.]" Id. AFD Fund submitted its brief to the arbitrator. See id. at 37-41. There is no indication in the record that, after Belway received the Report or AFD Fund's written submission on arbitrability, he protested that the Report inaccurately recorded the parties' agreement to submit this issue to the arbitrator or contended that AFD Fund was out-of-line by submitting a brief on the matter. The arbitrator seemed to understand that he was being asked to decide this question, because on November 6, 2001 he issued a ruling that "[t]he claims by AFD Fund against Paul W. Sill and Pochin Michael Hsu are arbitrable claims within this arbitration[.]" P. Mar. 22, 2002 Resp. App. 87.
In contrast with the foregoing facts, however, defendants have submitted Belway's declaration, in which he states inter alia that he intended the July 24, 2001 letter to put the arbitrator and AFD Fund on notice that, under the Agreement, the arbitrator did not have jurisdiction over Sill or Hsu; by August 1, 2001 letter he immediately informed the arbitrator and AFD Fund that he did not think it was proper for the arbitrator to make this determination; by August 10, 2001 letter he clearly objected to the arbitrator's deciding this issue; he participated in the preliminary conference call with the arbitrator and Ellis, and the arbitrator ordered that the parties submit briefing on the issue of arbitrability regardless of his prior objections to this issue's being submitted to the arbitrator; and he never agreed on defendants' behalf to submit this issue to the arbitrator for determination. Ds. Apr. 8, 2002 App. 33-34. Although the declaration is in some respects carefully worded or does not squarely refute AFD Fund's position, this evidence, combined with the text of Belway's letters, is sufficient to preclude the court from holding, in light of the presumption against AFD Fund's position, that there is clear and unmistakable evidence that defendants agreed to submit the arbitrability question to the arbitrator.
In ¶ 4 Belway states that he drafted the July 24, 2001 letter with the intent of putting "both the arbitrator and AFD Fund on notice that under the terms of the Supply Agreement at issue, the arbitrator did not have jurisdiction over either Sill or Hsu." Id. at 33. This contention is beside the point. AFD Fund concedes that defendants have always challenged the arbitrator's jurisdiction over Sill and Hsu. What it contends is that all parties agreed that the arbitrator would decide the jurisdictional question himself. In ¶ 7 Belway avers that after the conference call, the arbitrator ordered the parties to submit briefing on the arbitrability issue, "regardless of my prior objections to this issue being submitted to the arbitrator." Id. at 34. He does not state, however, whether the "prior objections" are those that he argues he made in his letters dated July 24, August 1, and August 10, or are objections he explicitly voiced during the conference call.
IV
Because the court cannot say that there is clear and unmistakable evidence that defendants agreed that the arbitrator would decide the issue of his own authority, it must decide whether the Agreement subjects Sill and Hsu to binding arbitration. "The question of arbitrability is to be decided by the court on the basis of the contract entered into by the parties." Gen. Motors, 146 F.3d at 251 (citing Commerce Park at DFW Freeport v. Mardian Constr. Co., 729 F.2d 334, 338 (5th Cir. 1984)).
A
AFD Fund argues that Hsu is subject to arbitration under the Agreement because the document contains a recital that Midland had the authority to enter into the Agreement on behalf of all individuals who are franchisees, and Hsu signed the contract as an individual franchisee. They also point to the fact that Hsu three times identified himself as a franchisee in related documents submitted to ProSource. Defendants contend that neither Sill nor Hsu was a party to the Agreement; instead, the contract was between AmeriServe and Midland. They argue that at the time the Agreement was signed, Sill was no longer a member of Midland and that he was never individually a franchisee, and that, although Hsu was a member, he likewise was never individually a franchisee. Defendants maintain that, under Texas law, non-signatories are bound by arbitration clauses only when they sue on a contract that contains such a clause or are third-party beneficiaries of the contract. They argue that the arbitrator acted arbitrarily and capriciously, and manifestly disregarded the law, by imposing liability on Sill and Hsu under an agreement between AmeriServe and Midland, where neither Texaslaw exception applied.
B
The court disagrees that Hsu's signature is sufficient of itself to bind him to the arbitration clause of the Agreement. The Agreement provides that "[t]he provisions of this Agreement shall be interpreted in accordance with the laws of the State of Texas." Agrmt. at ¶ 24(d); but see id. ¶ 19 ("This Agreement shall be construed and enforced in accordance with the laws of the State of Texas except to the extent that these laws are governed by the federal laws of the United States or the laws of the State of California, including, but not limited to, all matters of construction, validity and performance."). Under Texas law, the use of the word "By" before Hsu's signature indicates that he signed as an agent of Midland, not individually. See FDIC v. K-D Leasing Co., 743 S.W.2d 774, 776 (Tex.App. 1988, no writ) (note case) (agreeing with and quoting Restatement (Second) of Agency § 156 cmt. (a) that "[i]n the absence of a contrary manifestation in the document, the following signatures and descriptions, among others, create an inference that the principal and not the agent is a party: The principal's name followed by the agent's name preceded by a preposition such as `by' or "per";. . . ."); Priest v. First Mortgage Co. of Tex., 659 S.W.2d 869, 871-72 (Tex.App. 1983, writ ref'd n.r.e.) (note case) (holding that use of term "By" before signer's signature indicated that he signed as agent and that only corporation was liable).
This conclusion does not end the matter, however, because AFD Fund relies on more than this aspect of Hsu's signature; it bases its position on a recital in the Agreement, Hsu's signature, and related transaction documents. The court's primary concern when interpreting a contract is to ascertain the parties' true intentions as expressed in the instrument. Parks v. DeWitt County Elec. Coop., Inc., 962 S.W.2d 707, 710 (Tex.App. 1998, no pet.) (citing Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983)). To achieve this objective, the court should examine and consider the entire writing in an effort to harmonize and give effect to all the provisions of the contract so that none will be rendered meaningless. Id. (citing Coker, 650 S.W.2d at 393).
The court holds for three reasons that Hsu is not personally subject to the Agreement's arbitration clause. First, when he signed the Agreement, he disclosed his representative capacity and identified his true principal. He signed the Agreement under the designation "BUYER" and did so "By: Pochin M. Hsu." In such circumstances, the signer is not personally liable. See Southwestern Bell Media, Inc. v. Trepper, 784 S.W.2d 68, 72 (Tex.App. 1989, no writ) (holding in breach of contract case that, to avoid personal liability, defendant who contended he had signed contract as agent rather than as principal had duties to disclose his representative capacity and identify his true principal).
Second, Hsu's addition of the word "Franchisee" after his printed name cannot be read in isolation to provide that he intended to execute the contract individually. Under Texas law, the court is to ascertain a signer's intent from the entire instrument, not just the signature block. See Chaiken v. Boyd, 1996 WL 18810, at *2 (Tex.App. 1996, no writ) (unpublished opinion) (note case) ("In determining whether an instrument discloses representative capacity on its face, we review the entire instrument, not just the signature block."). The text of the Agreement makes clear throughout that the Buyer who is purchasing food and supplies from AmeriServe is Midland, not Hsu.
Third, AFD Fund is relying on a contractual recital to contend that individuals who are franchisees are liable under the Agreement and bound by its arbitration clause. "Recitals in a contract are not strictly a part of the contract unless it appears that the parties intended them to be such." Universal Health Serv's., Inc. v. Thompson, 63 S.W.3d 537, 543 (Tex.App. 2001, no pet. h.). Gardner v. Smith, 168 S.W.2d 278, 280 (Tex.Civ.App. 1942, no writ). Generally, recitals will not control operative clauses unless those clauses are ambiguous, but they may be examined to determine the proper construction of the contract and the parties' intention. Gardner, 168 S.W.2d at 280. Recitals should be reconciled with operative clauses and given effect so far as possible, but where a recital is so inconsistent with a covenant or promise that they cannot be harmonized, the latter, if unambiguous, prevails. Where the recitals are broader than the contract stipulations, the former will not extend the latter. Where the language of the covenants or promises in a contract is more comprehensive than that of the recitals, the intent is to be ascertained from a consideration of the entire instrument. Id.
The recital in this case is insufficient to control the operative clauses of the Agreement. It provides that Midland "has the authority to enter in this Agreement on behalf of all individuals who are franchisees for the listed restaurants who shall be jointly and severally bound under this agreement." Agrmt. at 1 (recital A). This is more akin to a warranty or representation of the Buyer's authority to act for individual franchisees than to a mutual agreement between AmeriServe and individual franchisees. In other words, it appears that Midland is representing to AmeriServe that it has authority to act on behalf of individuals who are franchisees, not that such individuals have themselves become parties to the Agreement. This recital cannot be read to enlarge the terms of the entire Agreement, which reflect that it is a contract between AmeriServe and Midland. Additionally, according to the recital, Midland has the authority to enter in the agreement on behalf of all individuals who are franchisees of restaurants identified on Exhibit A. That exhibit lists six restaurants, but Hsu has adduced evidence that he was not individually a franchisee. See Ds. Apr. 8, 2002 Rep. Br. at 2, ¶ 3 (citing Hsu Aff.). And AFD Fund's first amended application to confirm arbitration award contains an exhibit (Hsu's personal guarantee to ProSource) that shows that all six restaurants are franchises owned by Midland. P. 1st Am. App. Confirm Arb. Award, Ex. E.
AFD Fund also relies on Hsu's designation of himself as a franchisee in documents presented to ProSource. Although it is well settled under Texas law that "in order to ascertain the entire agreement between contracting parties, separate documents executed at the same time, for the same purpose, and in the course of the same transaction are to be construed together[,]" Jim Walter Homes, Inc. v. Schuenemann, 668 S.W.2d 324, 327 (Tex. 1984), the personal guarantee does not reflect that it was executed at the same time as part of the same transaction. Additionally, the account application that accompanied the guarantee clearly indicates that Midland is the operating business entity and that Hsu is an officer and principal of Midland. See P. 1st Am. App. Confirm Arb. Award, Ex. E.
The court holds that Hsu did not enter into the Agreement in his individual capacity. Hsu is therefore entitled to vacatur of the Award, at least for the reason that the arbitrator exceeded his authority in holding that Hsu had agreed to binding arbitration.
Sill did not sign the Agreement, and AFD Fund has failed to establish any other basis on which the court can conclude that he obligated himself to submit to binding arbitration. He is also entitled to vacatur of the Award.
* * *
Accordingly, the court grants in part and denies in part AFD Fund's February 7, 2002 first amended application to confirm arbitration award, and grants in part and denies in part defendants' March 8, 2002 motion to vacate arbitration award. The court enters judgment today in favor of AFD Fund confirming the Award against Midland and in favor of Sill and Hsu vacating the Award against them.
Of course, the fact that the court has vacated the arbitration award against them does not preclude AFD Fund from otherwise seeking to recover against Sill and Hsu on their personal guaranties.
SO ORDERED.