Opinion
No. CV 08 4032655
March 12, 2009
MEMORANDUM OF DECISION RE MOTION TO COMPEL ARBITRATION No. 101
The plaintiff, Anthony Farina, seeks to compel the defendant, Frank Perrotti, to arbitrate a dispute between the plaintiff and two corporate entities that the defendant controls. The plaintiff claims the defendant controls the entities and has manipulated them to the plaintiff's detriment. The corporate entities have agreed to arbitrate the disputes. The defendant, who is not a signatory to the Operating Agreement of Hometown Waste, LLC, has refused to participate in the arbitration. The court requested briefing from the parties on the issue of whether the court should compel the defendant to arbitrate the plaintiff's claim of piercing the corporate veil.
FACTS
On July 31, 2008, the plaintiff filed an application to compel arbitration against the defendant. On October 20, 2008, the parties filed a stipulation of facts in which they agreed to the following facts. The plaintiff, a resident of Connecticut, owns a 25 percent interest in Hometown Waste, LLC. The defendant, also a resident of Connecticut, is the owner of HTW Funding, LLC which owns the remaining 75 percent interest in Hometown Waste. Hometown Waste and HTW Funding are Delaware limited liability companies with principal places of business in Connecticut. Both companies are engaged in the business of waste management.
On or about August 3, 1999, the plaintiff, as the sole initial member of Hometown Waste, executed the Operating Agreement of Hometown Waste (Operating Agreement). On December 22, 1999 HTW Funding was later added as an additional member of Hometown Waste, with HTW Funding receiving a seventy-five (75) percent ownership interest in Hometown Waste. The plaintiff retained a 25 percent ownership interest in Hometown Waste and the plaintiff served as its manager. On or about August 12, 2004, the plaintiff entered into a Separation Agreement with Hometown Waste in which he resigned from his position of manager of the company, but retained his ownership interest in the LLC. Despite the execution of the Separation Agreement, the provisions of the Operating Agreement, to the extent that they governed the rights of the plaintiff as a member thereof, remained in full force and effect.
The arbitration provision in the Operating Agreement provides as follows: "In the event that any dispute shall arise between the Members as to the interpretation of this Operating Agreement or any dispute that [sic] may arise between the Members under this Operating Agreement or any dispute in regard to the management of the Company, such dispute may be submitted to a board of arbitrators." The Operating Agreement further provides that "`[c]ompany' shall refer to Hometown Waste, LLC" and "[m]ember shall mean each of the parties who executes a counterpart of this Operating Agreement as a Member and each of the other parties who may hereafter become a Member in accordance with the terms of this Operating Agreement."
On March 13, 2008, the plaintiff made a demand for arbitration against Hometown Waste, HTW Funding and the defendant. The plaintiff's demand for arbitration claims, in essence, that the individual defendant used HTW Funding, which he alone controlled, to control Hometown Waste LLC, of which HTW Funding was the majority owner. Specifically the demand for arbitration claims (1) Hometown Waste owes him "$695,518 pursuant to the Operating Agreement"; (2) Hometown Waste and HTW Funding "breached the Separation Agreement and owe [the plaintiff] a minimum of $630,371" because Hometown Waste "failed to pay [him] his share of the profits and losses from 1999 to 2006" and "improperly reduced its profits by payments to" HTW Funding; (3) Hometown Waste, HTW Funding and the defendant "breached the covenant of good faith and fair dealing" and their "fiduciary obligations" to the plaintiff, a minority holder; and (4) HTW Funding has been unjustly enriched.
Hometown Waste and HTW Funding have agreed to arbitrate the issues raised in the plaintiff's demand for arbitration, but the defendant Frank Perrotti has refused to do so.
I
The court first addresses the claim of the individual defendant that he cannot be required to arbitrate because he is not a signatory to the Operating Agreement of Hometown Waste, LLC. Under General Statutes § 52-410, "a party seeking to compel another party to comply with an arbitration agreement may file a concise complaint with the court." Fishman v. Middlesex Mutual Assurance Co., 4 Conn.App. 339, 343, CT Page 5012 494 A.2d 606, cert. denied, 197 Conn. 806, 499 A.2d 57 (1985). "When confronted with such an application, the task of the court is to determine whether the parties did, in fact, enter into an agreement and whether the agreement provides for arbitration." Salomon Smith Barney, Inc. v. Cotrone, 81 Conn.App. 755, 758, 841 A.2d 1199 (2004). "Arbitration is a creature of contract . . . It is designed to avoid litigation and secure prompt settlement of disputes and is favored by the law . . . But a person can be compelled to arbitrate a dispute only if, to the extent that, and in the manner which, he has agreed so to do." (Citations omitted; internal quotation marks omitted.) Dubreuil Sons, Inc. v. Lisbon, 215 Conn. 604, 608, 577 A.2d 709 (1990). Conn. Gen. Stat. Sec. 52-408 provides, in relevant part: "An agreement in any written contract . . . to settle by arbitration any controversy shall be valid, irrevocable and enforceable, except when there exists sufficient cause at law or in equity for the avoidance of written contracts generally."
"[A] party who contests the making of a contract containing an arbitration provision cannot be compelled to arbitrate the threshold issue of the existence of an agreement to arbitrate . . . [o]nly a court can make that decision." Nussbaum v. Kimberly Timbers, Ltd., 271 Conn. 65, 73, 856 A.2d 364 (2004); see also Total Property Services of New England, Inc. v. Q.S.C.V., Inc., 30 Conn.App. 580, 588, 621 A.2d 316 (1993) ("A party's claim that it is not a signatory to a contract and therefore not bound by the agreement is clearly `sufficient cause . . . for the avoidance of contracts generally'").
In Wesleyan University v. Rissil Construction Associates, Inc., 1 Conn.App. 351, (1984) a subcontractor sought to enforce an arbitration agreement between the university and its general contractor. The subcontractor asserted the general contractor was an agent of the university and therefore the university was compelled to arbitrate. The university sought to enjoin the defendant from proceeding with the arbitration claims. The trial court ordered the university to proceed with the arbitration. On appeal, the appellate court reversed the trial court. It determined there was no factual basis in the record to support a finding of agency between the university and the general contractor and that the university had not signed an agreement to arbitrate with the subcontractor. There was therefore no contractual basis to require the university to arbitrate these claims. "Even though it is the policy of the law to favor settlement of disputes by arbitration . . . arbitration agreements are to be strictly construed and such agreements should not be extended by implication." Internal citations omitted. Wesleyan University v. Rissil Construction Associates, Inc., supra at 354-55.
In Total Property Services of New England, Inc. v. Q.S.C.V., Inc., 30 Conn.App. 580 1993 the court reversed the trial court's confirmation of an arbitration award and ordered a new trial on the issue of whether the defendant was a party to the agreement to arbitrate. The trial court failed to conduct a hearing on whether or not an agency relationship existed between the defendant and the alleged principal that was a signatory to the agreement that provided for arbitration.
There are instances when a nonsignatory to an agreement can be required to arbitrate disputes, but in those cases there has a judicial determination of the obligation to participate in the arbitration process.
Connecticut courts have looked to federal law to determine the circumstances under which nonsignatories may be bound to arbitration agreements. See Total Property Services of New England, Inc. v. Q.S.C.V, Inc., 30 Conn.App. 580, 587, 621 A.2d 316 (1993); see also Nussbaum v. Kimberly Timbers, Ltd., 271 Conn. 65, 73, 856 A.2d 364 (2004) ("when there is no Connecticut case law directly on point, we may turn for guidance to the applicable federal law"). A nonsignatory to a contract containing an arbitration provision will be deemed a party to the contract under the doctrine of piercing the corporate veil where he is found to be an "alter ego or instrumentality" of a party bound by the arbitration. Fisser v. International Bank, 282 F.2d 231, 233-35 (2d Cir. 1960); see also Thomson-CSF, SA. v. American Arbitration Ass'n., 64 F.3d 773, 776 (2d Cir. 1995) ("we have recognized five theories for binding nonsignatories to arbitration agreements").
In the case at bar the defendant has asserted that he was not a signatory to the Operating Agreement or the Separation Agreement between the plaintiff and Hometown Waste and that he cannot be compelled to arbitrate. "We long have recognized "two procedural routes by which a party may preserve the issue of the arbitrability of a particular dispute for judicial determination. A party initially may refuse to submit to an arbitration and instead compel a judicial determination of the issue of arbitrability. Alternatively, the issue of arbitrability may properly be left to an arbitrator or arbitration panel for a determination, along with the merits of the underlying dispute. In the latter situation, a court may properly entertain a challenge to an award alleging disregard of the limits in the parties' agreement with respect to arbitration. As we previously have indicated, a claim that a dispute is not subject to arbitration is an attack on the power of the arbitrator to decide the underlying dispute. Such a claim may be raised through a collateral judicial action prior to the arbitration, through an application or motion to vacate the arbitration award or through an objection to the confirmation of the arbitration award." (Internal quotation marks omitted.) MBNA America Bank, N.A. v. Boata, 283 Conn. 381, 392-93 (2007).
The court will now examine the stipulation provided by the parties to determine if the stipulation provides a factual foundation for such an order. The stipulation entered into by the parties does provide information as to the corporate ownership structure of Hometown Waste, LLC and HTW Funding, LLC but it does not provide any information about the actual management or operation of the entities. The stipulation submitted by the parties does not provide a foundation for this court to determine that the defendant has used this entities in a way that would allow a court to compel him to proceed with arbitration. The stipulation deals with issues of ownership rather than agency or misuse of the corporate entities. This is a different case from the situation in CT Page 5014 General Technology v. Thompson, supra, where the court had before it pleadings that provided a factual foundation for its order compelling arbitration.
Connecticut "recognizes two theories under which it will permit the protection of the corporate structure to be set aside," both of which "apply to the protection afforded by a limited liability company": (1) the "instrumentality rule," which requires proof of "control" (i.e., "complete domination") that was "used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or a dishonest or unjust act in contravention of plaintiff's legal rights" and that "proximately cause the injury or unjust loss complained of'; and (2) the "identity rule," which requires "such a unity of interest and ownership that the independence of the corporations had in effect ceased or had never begun." Morris v. Cee Dee, LLC, 90 Conn.App. 403, 414, 877 A.2d 899, cert. granted on other grounds, 275 Conn. 929, 883 A.2d 1245 (2005).
For the above reasons, the court denies the plaintiff's application to compel the defendant Frank Perrotti to proceed with arbitration.
The Court