Summary
finding that "arising out of or relating to" constitutes broad language in an arbitration provision
Summary of this case from Detroit Medical Center v. Provider Healthnet ServicesOpinion
C.A. No. 19501
Submitted: May 29, 2002
Decided: June 24, 2002
Karen L. Morris, Esquire, Patrick F. Morris, Esquire, MORRIS AND MORRIS, LLC, Wilmington. Delaware; Lynne Bernabei, Esquire, Alan Kabat, Esquire, BERNABEI KATZ, PLLC, Washington, D.C.; Stanley Sporkin, Esquire, WEIL, GOTSHAL MANGES, LLP, Washington, D.C., Attorneys for Plaintiff.
William J. Lafferty, Esquire, Yvette C. Fitzgerald, Esquire, MORRIS, NICHOLS, ARSHT TUNNELL, Wilmington, Delaware; Jeffrey L. Willian, Esquire, Joseph T. Jaros, Esquire, KIRKLAND ELLIS, Chicago, Illinois, Attorneys for Defendants.
MEMORANDUM OPINION
I. INTRODUCTION
This is an action to stay an arbitration relating to a dispute over the membership units owned by the plaintiff David Karish ("Karish") in the defendant SI International, L.L.C. ("LLC"). Also named as defendants are SI International, Inc. ("Company"), Ray J. Oleson ("Oleson"), Frontenac VII Limited Partnership, and Frontenac Masters VII Limited Partnership (collectively, "Frontenac"). The plaintiff filed a motion to stay the arbitration hearing that is to take place before the American Arbitration Association. In response, the defendants filed a motion to dismiss for lack of subject matter jurisdiction.
The court concludes that the dispute underlying the claim in arbitration is one "relating to" to the LLC Agreement and, thus, is arbitrable. For that reason, the motion to stay will be denied and the action will be dismissed.
II. FACTUAL BACKGROUND
A. Contractual Arrangement
On January 15, 1999, Karish and the other founders of the LLC amended the original LLC agreement of SI ("LLC Agreement"). On the same date, Karish entered into a Management Agreement with the LLC, the Company, and Frontenac ("Management Agreement"). The two agreements, which refer to each other in various sections, both contain provisions concerning the scope of the agreement, the valuation of membership units, and the remedies which are available to the parties in case of a breach. Additionally, the Management Agreement explains under what circumstances and by what methods the LLC may repurchase an executive's units.
See, e.g., LLC Agreement § 3.1(c)(ii) ("In connection with any approved issuance of Class A Units or Class B Units to a Management Purchaser hereunder, . . . such Management Purchaser . . . shall enter into such other documents and instruments to effect such purchase as are required by the Managing Member (including, without limitation, a Management Agreement, the applicable Registration Rights Agreement(s) and any other document or instrument contemplated hereby or thereby). . . ."); Management Agreement § 10(c)(v) ("Executive has reviewed, or has had an opportunity to review, a copy of the LLC Agreement. . . .").
In terms of scope, the agreements have identical provisions that describe the parties' complete agreement. The Entire Agreement section of the LLC Agreement and the Complete Agreement clause of the Management Agreement both comprise one sentence, as follows:
This Agreement, those documents expressly referred to herein and other documents of even date herewith embody the complete agreement and understanding among the parties and supersede and preempt any prior understanding, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way.
LLC Agreement § 14.15; Management Agreement § 17(c) (emphasis added).
The Management Agreement also expressly prescribes the LLC's right to repurchase membership units from departing executives and the steps that it must take to effect the transaction. If the executive is terminated for any reason, the executive's units "shall be subject to repurchase . . . by the LLC," which must deliver notice to the executive within 60 days after termination. The purchase price of the units for the repurchase transaction is equal to their "Fair Market Value." However, if the executive is terminated "for Cause" or the executive resigns, the price of the units shall be the lower of either the Fair Market Value or the "Original Cost."
Management Agreement § 12(a).
Id. § 12(c).
Id. § 12(b).
Id.
This repurchase provision of the Management Agreement has no correlative provision in the LLC Agreement. Nevertheless, the LLC Agreement may be relevant to a determination of the Fair Market Value of securities repurchased pursuant to the Management Agreement. This is so because the Management Agreement requires a person valuing such securities first to calculate the "Total Equity Value" of the LLC, as that amount is defined in the LLC Agreement.
The LLC Agreement defines the Total Equity Value of the LLC as "the aggregate proceeds which would be received by the Unitholders if . . . the assets of the LLC as a going concern were sold at their Fair Market Value." LLC Agreement at 10. The Fair Market Value definition from the LLC Agreement then refers to Article XIII, the valuation section. LLC Agreement at 4. Article XIII, in turn, describes the valuation of the common stock, preferred stock, and all other non-cash assets. LLC Agreement §§ 13.1-13.2. The end result is that the Fair Market Value of the Executive Securities is based on the value of the underlying assets of the LLC.
Of particular significance in this case, the two agreements take a different approach to remedies. As a first step, if an executive disputes the valuation of the membership units subject to repurchase, the Management Agreement provides for the appointment of a third-party neutral appraiser, although there is no term in that agreement making the conclusions reached by that person binding on the parties. The Management Agreement further provides that disputes arising thereunder may be litigated in court, as follows:
Management Agreement § 15(c), at 11 ("Executive and the managing member shall jointly select an independent third party appraiser. . . .").
Remedies. Each of the parties to this Agreement (including the Investors) shall be entitled to enforce its rights under this Agreement specifically, to recover damages and costs (including reasonable attorney's fees, not to exceed $20,000 in any one case) caused by any breach of any provision of this Agreement and to exercise all other rights existing in its favor. The parties hereto agree and acknowledge that money damages would not be an adequate remedy for any breach of the provisions of this Agreement and that any party may in its sole discretion apply to any court of law or equity of competent jurisdiction (without posting any bond or deposit) for specific performance and/or other injunctive relief in order to enforce or prevent any violations of the provisions of this Agreement.
Id. § 17(g).
The LLC Agreement has a similar remedies section, but it is expressly made subject to a broad, binding arbitration clause. That clause reads, as follows:
LLC Agreement § 14.4 ("Any person having any rights under any provision of this Agreement . . . shall be entitled to enforce such rights . . . and, subject to Section 14.18, to exercise all other rights granted by law.").
Arbitration. Any controversy or claim arising out of or relating to this Agreement shall be settled exclusively by final and binding arbitration in accordance with the rules of the American Arbitration Association and shall take place in Chicago, Illinois.
Id. § 14.18.
Finally, the LLC Agreement provides that "[w]herever a conflict exists between this Agreement and any other agreement, this Agreement shall control but solely to the extent of such conflict."
Id. § 14.8.
On December 22, 2000, Karish signed a letter with the LLC, the Company, and Frontenac ("December Letter"). In the December Letter, Karish agreed to resign his position as Chief Financial Officer of the Company and each of its related affiliates, and he agreed to accept a new job as Vice President. Karish also consented to a reduced number of units in the LLC. In addition, the December Letter contained a provision regarding its enforceability and scope:
4. The provisions set forth in this letter shall become effective and enforceable immediately upon your acknowledgment below. This letter, together with the Management Agreement and the LLC Agreement . . ., embodies the complete agreement and understanding between [Karish] and the Company. . . .
December Letter § 4 (emphasis added).
B. The Dispute
Karish's complaint alleges that, in October of 2000, the Company informed him that it intended to demote him from CFO to VP and to remove him from the Board of Directors of the Company. Ultimately, he signed the December Letter agreeing to these changes. Karish alleges that he was fraudulently induced to sign that letter by the defendants' failure to disclose their pre-conceived plan to terminate him. He claims that the defendants' ulterior motive was to obtain the right to repurchase his units for less than if they had simply terminated him in October.
On March 1, 2001, the new CFO (allegedly at the defendants' behest) changed Karish's responsibilities so that his only function would be to mentor finance and accounting personnel. Karish alleges that he was, thus, constructively terminated. The defendants then sought to repurchase his membership units according to the Management Agreement. Karish disputed their valuation, both in terms of number of units owned by him and per unit pricing.
After the parties failed to agree on the designation of a third-party neutral arbitrator, the defendants filed an arbitration claim pursuant to the LLC Agreement. Karish responded by filing this action, seeking a stay of arbitration. The defendants maintain that any dispute concerning the number or value of Karish's units subject to repurchase under the terms of the Management Agreement is arbitrable because it requires a determination of the Total Equity Value of the LLC. Thus, they say it is a matter that "aris[es] out of" or "relat[es] to" the LLC Agreement.
III. ANALYSIS
A. Scope of the Agreement
The court must first determine the scope of the agreement between Karish and the defendants. Karish maintains that the relevant contracts are separate documents controlling different aspects of their relationship. The defendants, on the other hand, contend that the contracts work together as a group to define the entire relationship and that the LLC Agreement is the controlling document in case of any conflicts. "Under general principles of contract law, a contract should be interpreted in such a way as to not render any of its provisions illusory or meaningless." "The cardinal rule of contract construction is that, where possible, a court should give effect to all provisions." However, in order to harmonize two agreements, a court may find it necessary to give primacy to one agreement when there is a dispute.
Sonitrol Holding Co. v. Marceau Investissements, 607 A.2d 1177, 1183 (Del. 1992) (citing Seabreak Homeowners Ass'n, Inc. v. Gresser, 517 A.2d 263, 269 (Del.Ch. 1986), aff'd, 538 A.2d 1113 (Del. 1988)).
Id. at 1184 (emphasis added).
See Bayless v. Davox Corp., C.A. No. 17560, 2000 WL 268310 at *5 (Del.Ch. Mar. 1, 2000).
The LLC Agreement and the Management Agreement clearly must be read together as forming one agreement between the parties. "The specific provisions of these Agreements and the interrelationship thereof make it clear that the parties intended these two Agreements to operate as two halves of the same business transaction." "Where two agreements are executed on the same day and are coordinated to the degree outlined above, in essence, they form one contract and must be examined as such."
E.I. du Pont de Nemours Co. v. Shell Oil Co., 498 A.2d 1108, 1115 (Del. 1985).
Id.
Because the Management Agreement and the LLC Agreement must be read together, it is necessary to determine the proper scope and interrelationship of their potentially conflicting remedies sections. As Karish suggests, it is possible to imagine situations in which the remedies section of the Management Agreement would operate independently of the arbitration clause of the LLC Agreement. Nevertheless, there is also obvious potential for conflict whenever a claim asserted under the Management Agreement arguably arises under or relates to the LLC Agreement. The documents themselves provide the solution in such circumstances. As previously noted, § 14.8 of the LLC Agreement provides that where there is a conflict between that agreement and any other agreement, the LLC Agreement "shall control but solely to the extent of such conflict." This provision has clear application to the potential for conflict between the remedy section of the Management Agreement and the arbitration clause of the LLC Agreement. The court interprets § 14.8 to mean that, whenever a claim asserted under the Management Agreement also falls within the scope of the LLC Agreement's arbitration clause, the arbitration clause will control.
B. Is the Dispute Arbitrable?
The court must next examine whether Karish's claim falls within the scope of arbitration clause. "In determining arbitrability, the courts are confined to ascertaining whether the dispute is one that, on its face, falls within the arbitration clause of the contract." Additionally, "the public policy of this State . . . favors the voluntary resolution of claims through agreed-upon dispute resolution mechanisms and . . . is respectful of the congressional mandate (expressed in the Federal Arbitration Act) prohibiting states from exerting jurisdiction over claims which contracting parties committed to arbitration." "A court will not compel a party to arbitrate, however, absent a clear expression of such an intent."
SBC Interactive, Inc. v. Corporate Media Partners, 714 A.2d 758, 761 (Del. 1998).
Bayless, 2000 WL 268310 at *3.
SBC Interactive, 714 A.2d at 761.
The arbitration clause of the LLC Agreement uses the broadly written phrase "arising out of or relating to." This court has previously analyzed similar language by treating either alternative as independently sufficient. Therefore, assuming (without deciding) that Karish's claim does not arise out of the LLC Agreement because the valuation of an executive's units is not specifically mentioned in that agreement, his claim may still be found to relate to the LLC Agreement. A central issue in this case is the valuation methodology used to determine the fair market value of Karish's units. To resolve that issue, it is unquestionably necessary to interpret and apply the provision of the LLC Agreement, which defines Total Equity Value and prescribes (in Article XIII) the method for its calculation. Indeed, Karish's complaint itself acknowledges that one must refer to both agreements together in order to determine the "appropriate valuation" of the units. For all these reasons, it is inescapable that Karish's dispute relates to the LLC Agreement and is subject to arbitration.
See, e.g., Bayless, 2000 WL 268310; Green Isle Partners, Ltd. v. Ritz-Carlton Hotel Co., C.A. No. 18416, 2000 WL 1788655 (Del.Ch. Nov. 29, 2000).
Even if a claim does not arise out of a contract, it can still relate to the contract. See Bayless, 2000 WL 268310 at *4.
Complaint ¶ 46 ("Thus, pursuant to the terms of the Management Agreement and the LLC Agreement, the above reflects the appropriate valuation methodology the LLC must apply to arrive at the Fair Market Value in any forced repurchase of the Plaintiff's Executive Securities.").
C. Fraudulent Inducement
Finally, the court concludes that Karish's claim of fraudulent inducement in connection with the December Letter does not take this action outside the scope of the LLC Agreement's arbitration clause. "A claim of fraud in the inducement of the contract generally — as opposed to the arbitration clause itself — is for the arbitrators and not for the courts." Courts have previously ordered arbitration for claims of fraudulent inducement when the contract's arbitration clause specifically referred to issues "aris[ing] under" the contract. Here, the arbitration clause covers all matters "arising out of and relating to" the LLC Agreement, which is a "more encompassing phrase."
Prima Paint Corp. v. Flood Conklin Mfg. Co., 388 U.S. 395, 400 (1967).
See Anadarko Petroleum Corp. v. Panhandle Eastern Corp., C.A. No. 8738, 1987 WL 16508 at *2 (Del.Ch. Sept. 8, 1987).
Id.
In this cases Karish does not assert a claim of fraud with regard to the arbitration provision. Rather, he asserts fraud only with regard to the December Letter. This claim does not challenge the fact that he signed the LLC Agreement, which contains the arbitration clause at issue. Karish's attempt to separate the agreements for the purpose of this dispute cannot be supported. "Adoption of [such an] approach requires the court to assume that [the parties] intended to create a very inefficient dispute resolution process whereby parts of the same dispute would be arbitrated and other parts would be litigated." "This rather odd intention is not supported by the language of the contracts as issue." Since the complaint does not allege fraud with regard to the method of dispute resolution and the underlying issue of valuation methodology is related to the LLC Agreement, Karish must arbitrate his fraudulent inducement claim.
Bayless, 2000 WL 268310 at *5 n. 22.
Id.
IV. CONCLUSION
For the foregoing reasons, the plaintiff's motion to stay the arbitration is DENIED and the defendants' motion to dismiss for lack of subject matter jurisdiction is GRANTED. IT IS SO ORDERED.