Summary
granting the defendants' motion to compel arbitration and for dismissal or stay of proceedings, and dismissing case without prejudice
Summary of this case from Escobar v. Nat'l Maint. ContractorsOpinion
Civil No. 03-1344-MO.
March 1, 2004
OPINION AND ORDER
In this diversity action, plaintiffs assert eleven claims related to investment banking services provided by defendants. Before the court is defendants' motion to compel arbitration and for dismissal or stay of proceedings. (Doc. #14). For the reasons set out below, the motion is GRANTED as to all claims.
I
Plaintiffs sought to enter into a business relationship with a primary insurance carrier which would write insurance policies for the commercial trucking business. For their part, plaintiffs formed a Cayman Islands corporation to act as a reinsurer, i.e., to assume all or a portion of the risk assumed by the primary insurer. Under such an arrangement, the primary insurance company is known as a "fronting insurer."
The parties' ill-fated relationship began when plaintiffs sought investment banking services from defendants. Defendants William Leyton and Rod Pruitt told plaintiffs they could help locate an acceptable primary insurer. For example, defendants indicated they had an ownership interest in a New York primary insurer and an affiliation with a Utah primary insurer. Based on these representations the parties ultimately signed an agreement in December 2002. This agreement states that plaintiffs "retained [defendant Strategic Bancorp] for the purpose of rendering investment banking services." Ex. A. ¶ 2. The agreement, in relevant part, required plaintiffs to pay "an initial retainer of $50,000.00 (for costs of due diligence underwriting and loan commitment) in connection with the following services: A U.S. Fronting Insurance Company that is acceptable by the Cayman authorities to represent PNI, Ltd." Ex. A. ¶¶ 3-4. The agreement further provided that if defendant Strategic Bancorp did not find an appropriate fronting insurer within thirty days, it would refund the initial $50,000 retainer; if Strategic found such an insurer within thirty days, plaintiffs agreed to pay an additional $50,000. Ex. A. ¶ 3.
On December 17, 2003, plaintiffs dismissed Rod Pruitt from the lawsuit.
And central to this dispute, the December agreement contained an arbitration clause:
Any conflicts that cannot be settled by the parties pursuant to this Agreement shall be submitted for binding arbitration before a retired judge who is agreed upon by the parties.
Ex. A. ¶ 6.
By early 2003, plaintiffs had given up on defendants' initial representations they could locate an acceptable primary insurer with which plaintiffs could enter a contractual relationship. As a result, plaintiffs decided to purchase a primary insurance company which would directly write policies for the commercial trucking business. Even though plaintiffs had paid $100,000 to defendants without accompanying success in their endeavor to locate a primary insurer, defendants convinced plaintiffs they could finance the purchase of a primary insurer. In reliance on defendants' assurances, plaintiffs entered into a "letter of intent" to purchase a Missouri company, the Gateway Insurance Company. Gateway thereafter began to write policies for the commercial trucking business. Eventually, however, because defendants failed to provide certain necessary assets, the Missouri Department of Insurance issued an order prohibiting Gateway from writing any more commercial trucking policies. As a result, plaintiffs' negotiations to purchase Gateway collapsed.
As part of the attempted Gateway transaction, defendants promised to loan $18 million to plaintiff PNI Ltd. Plaintiffs James Cutler and Bradford Bishop executed personal guaranties for the promised loan. The loan proceeds were to be used for consolidating debt "in anticipation of a Form A [regulatory] hearing for [plaintiffs'] purchase of Gateway." Ex. L. In reliance on defendants' promises to remit the proceeds, plaintiff Bishop incurred several unrelated financial obligations. Defendants, however, never provided the promised loan funds.
Based on these failed transactions, plaintiffs make eleven claims. Plaintiffs' amended complaint categorizes the following four claims under the December 2002 agreement: fraud in the inducement, fraud in relation to the agreement, breach of the agreement, and breach of the covenant of good faith and fair dealing. In a second category of claims related to the Gateway transaction, plaintiffs assert claims for fraud in relation to the Gateway transaction, breach of the Gateway financing agreement, and breach of the covenant of good faith and fair dealing as to that transaction. Finally, in a third group of claims related to the personal loan agreement, plaintiffs allege claims for breach of the loan agreement, fraud, intentional infliction of emotional distress, and negligent infliction of emotional distress.
Plaintiffs contend that because the only arbitration clause appears in the December agreement, only those claims directly related to that agreement are subject to arbitration. Thus plaintiffs concede that their first four claims must be arbitrated, but argue that the remaining claims must be litigated in this court. Defendants, on the other hand, argue that all of plaintiffs' claims are subject to arbitration.
II
Federal cases consistently hold that the Federal Arbitration Act embodies a clear federal policy in favor of arbitration. See, e.g., Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 22-23 (1983). Any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.Id. at 24-25. In fact a court may deny arbitration only when it may be said with "positive assurance" that the arbitration clause does not govern the claims at issue. United Steelworkers of Am. v. Warrior Gulf Navigation Co., 363 U.S. 574, 582 (1960); accord Homestake Lead Co. of Mo. v. Doe Run Res. Corp., 282 F. Supp. 2d 1131, 1138 (N.D.Cal. 2003). The court must be mindful of the federal policy favoring arbitration "whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense." Moses H. Cone, 460 U.S. at 24-25. In light of the liberal policy of resolving doubts in favor of arbitration, "the burden is on the party opposing arbitration to rebut the presumption of arbitrability created by the existence of an arbitration agreement by showing a purpose to exclude particular disputes from arbitration." Chloe Z Fishing Co. v. Odyssey Re (London) Limited, 109 F. Supp. 2d 1236, 1255 n. 17 (S.D. Cal. 2000) (emphasis in original) (citing Teamsters Local 315 v. Union Oil Co. of Cal., 856 F.2d 1307, 1314 (9th Cir. 1988)). The party resisting arbitration may defeat the presumption in favor of arbitration only "with clear evidence that the parties did not intend the claims to be arbitrable."Harvey v. Joyce, 199 F.3d 790, 793 (5th Cir. 2000) (citingMoses H. Cone, 460 U.S. at 24-25).
Moreover, a district court has no discretion regarding whether to send to arbitration a dispute within the scope of an arbitration clause. Dean Witter Reynolds v. Byrd, 470 U.S. 213, 218 (1985). As plaintiffs correctly recognize, however, "[a]rbitration is a matter of contract and the court cannot require a party to arbitrate a dispute unless the party has agreed to do so." Homestake Lead Co., 282 F. Supp. 2d at 1138 (citing Warrior Gulf, 363 U.S. at 582). The determination of whether a particular dispute is arbitrable generally must be decided by the court, rather than an arbitrator. ATT Techs., Inc. v. Communications Workers of Am., 475 U.S. 643, 649 (1986).
At the outset, some points of agreement between the parties should be noted. Plaintiffs do not dispute defendants' argument that, if the arbitration clause otherwise applies, their tort claims must be arbitrated. Plaintiffs also do not dispute defendants' argument that non-signatories to an agreement may be compelled to arbitrate. In addition, the parties agree that the arbitration issues implicate the Federal Arbitration Act. The principal disagreements are whether the claims related to the personal loan and Gateway transactions are subject to arbitration, and whether the arbitration should take place in Oregon or California.
Plaintiffs' argument on this point depends on their argument that the claims related to the Gateway and loan transactions are not arbitrable: "[B]ecause there is no basis to compel the arbitration of claims arising from the Gateway Acquisition and Personal Loan Agreement, there is no basis for the Court to order Plaintiffs PNI, Inc, Pacific Northwest Insurance LLC, James Cutler, Bradford Bishop, or Nancy Bishop to arbitrate. Therefore, this Court should deny Defendants' Motion to Compel nonsignatories to arbitrate." Plaintiffs' Memorandum in Opposition at 13.
The parties' briefing mainly disputes whether the arbitration clause at issue is broad or narrow. Neither side cites any case involving an arbitration clause with the language at issue here. Characterizing the clause as broad, defendants rely on Simula, Inc. v. Autoliv, Inc., 175 F.3d 716 (9th Cir. 1999), involving an arbitration clause which stated that "all disputes arising in connection with this Agreement shall be [arbitrated]." In contrast, plaintiffs say the clause at issue is narrow, more like the clause in Mediterranean Enterprises, Inc. v. Ssangyong Corp., 708 F.2d 1458, 1464 (9th Cir. 1983), which required arbitration of any disputes "arising under" the agreement. Whether the arbitration clause is broad or narrow, or more like that in Simula or Ssangyong, are issues which do not answer the core question presented.
The court notes that the arbitration clause's literal language suggests that plaintiff's proffered interpretation — that "pursuant to this Agreement" essentially means "arising under this Agreement" — is not the most reasonable plain-meaning interpretation. The "pursuant to this Agreement" language follows the language "that cannot be settled by the parties." Thus, as written, the arbitration clause indicates that the parties contemplated arbitration when disputes could not be settled "pursuant to" some dispute resolution process contemplated by the agreement, and does not seem to support plaintiffs' position that the clause covers "any disputes . . . pursuant to" (or, accepting plaintiffs' gloss, "arising under") the agreement. In any event, as discussed in this order, the court's decision does not rest on such distinctions.
Again, the arbitration clause in the December agreement provides that "[a]ny conflicts that cannot be settled by the parties pursuant to this Agreement shall be submitted for binding arbitration." Even accepting plaintiffs' interpretation of "pursuant to this Agreement" to encompass only those disputes which arise directly out of the December agreement, the core question is what precisely is the scope of "this Agreement"? The answer is unclear.
The parties agree that the overarching purpose behind plaintiffs' approaching defendants was to seek assistance in locating a primary insurer which would enter into a business relationship with plaintiffs. The agreement — entitled "Retainer Agreement for Strategic Bancorp" — states that plaintiffs hired defendant Strategic Bancorp (or "SB") " for the purpose of rendering investment banking services." (Emphasis added). The agreement further provides, "SB agrees to provide . . . professional services and at all times will seek to achieve the purposes for which SB has been retained." It is undisputed that defendants' roles in the Gateway and loan transactions amounted to "investment banking services," in connection with plaintiffs' attempt to enter into a relationship with a primary insurer. For instance, defendants promised to provide financing to plaintiffs for the purchase of primary insurer Gateway. And the loan transaction was offered in an ostensible effort to effectuate the Gateway acquisition. See, e.g., Ex. L; Plaintiff's Complaint ¶¶ 125, 132.
Plaintiffs, however, insist that the December agreement was limited to a discrete endeavor, the attempt to locate a fronting insurer which would enter into a contractual relationship with plaintiffs, and excluded the additional services (including the personal loan agreement) provided in connection with the attempt to purchase Gateway.
It is true, as plaintiffs point out, that the December agreement specifically obligated SB to locate a "fronting insurance company that is acceptable by the Cayman authorities . . . within 30 days of the Retainer Agreement." Reading the December agreement as a whole, however, it is less than clear that the agreement was as limited as plaintiffs suggest. As an initial point, nowhere in the contract does it exclude the possibility of purchasing (rather than merely entering into a contract with) a primary insurer. In addition, even accepting plaintiffs' narrow interpretation of the provision mentioning a "fronting insurance company," the provision reasonably can be read as setting forth a single aspect of the "retainer agreement." The agreement establishes a 30 day life for defendants' obligation to find an acceptable fronting insurance company, in exchange for which defendants would be entitled to $100,000 compensation. The agreement, however, goes on to indicate that an obligation to provide "investment banking services" would have remained in effect regardless of whether a "fronting insurance company" was located: "This agreement shall have full force and effect unless terminated by either party upon 30 days notice served via certified mail for cause." If, as plaintiffs suggest, the only term of the agreement was procuring a fronting insurance company for a contractual relationship — an obligation to be completed within 30 days — it would seem superfluous for the parties to have a provision requiring 30 days notice to end the contract.
Moreover, no separate contract regarding defendants' financing of the Gateway purchase appears in the record, suggesting that this financing arrangement was merely an extension of the general relationship established by the December agreement. In sum, the December agreement reasonably can be read as broadly establishing an indefinite relationship between the parties for "investment banking services." In which event, the subsequent transactions at issue arise out of the December agreement (or, in the words of the arbitration clause, "this Agreement").
Accordingly, the December agreement, albeit in brief fashion, seems to create a general or "umbrella" agreement establishing an ongoing relationship between the parties. That is, the subsequent Gateway-related transactions were agreed upon to carry out the broader obligation to provide "investment banking services." As a result the disputes related to the subsequent transactions are "subsumed within the broader category of disputes" which could have arisen under the December agreement. S.A. Mineracao da Trindade-Samitri v. Utah Int'l, Inc., 576 F. Supp. 566, 573-74 (S.D.N.Y.), aff'd, 745 F.2d 190 (2d Cir. 1984) (requiring arbitration of disputes related to certain agreements which had no arbitration clause because the agreements were executed to "carry out" an earlier, more general agreement which had an arbitration clause).
In interpreting the December agreement, the court is guided by the well-established principle, " any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration [including when] the problem at hand is the construction of the contract language itself." Moses H. Cone, 460 U.S. at 24-25 (emphasis added); see also id. at 24 ("[Q]uestions of arbitrability must be addressed with a healthy regard for the federal policy favoring arbitration."). Thus the court does not find plaintiffs' narrower interpretation of the December agreement implausible. But the court cannot say "with positive assurance" that the contract language is not "susceptible of an interpretation that covers the asserted dispute[s]." Warrior Gulf, 363 U.S. at 582-83. And plaintiffs have not come forward with sufficient evidence establishing a contractual " purpose to exclude" the disputes at issue from arbitration. Chloe Z Fishing, 109 F. Supp.2d at 1255 n. 17 (emphasis in original).
The court recognizes that the promissory note associated with the loan agreement contains language contemplating the possibility of litigation. That language, however, is not implicated by the claims presented here. For instance, the note provides that "all sums paid by [defendant SB] for the expense of any litigation to prosecute or defend the right and lien created by this Note and the Stock Pledge Agreement this day given as security . . . shall be paid by [plaintiffs]." Ex. M. The note further provides that by the "disbursement of proceeds" SB would agree to pay plaintiffs' "court fees" accrued in defending "against claims made by [SB]." Ex. M (emphasis added). This lawsuit does not involve the defense or prosecution of any lien. Instead, it involves claims brought by plaintiffs which are based on allegations that the loan proceeds were never remitted. As a result, the note's reference to litigation is not sufficiently specific to trump the December agreement's arbitration clause as applied to plaintiffs' claims. See, e.g., Homestake Lead Co., 282 F. Supp. 2d at 1142-43 ("An arbitration clause can . . . fail where a subsequent agreement supersedes the arbitration clause with a `clear and specific waiver.' . . . [A]n active arbitration clause and the possibility of litigation are not mutually exclusive. (quotingWorldCrisa Corp. v. Armstrong, 129 F.3d 71, 75 (2d Cir. 1997)).
In sum, the court finds sufficient doubt in the meaning of the December agreement to compel arbitration of all claims. Plaintiffs have not produced sufficient evidence to persuade the court to refrain from broadly construing the purpose of the December agreement — the provision of "investment banking services" — so as to favor arbitration.
Because the court holds that all pending claims are arbitrable, it grants defendants' motion to dismiss and dismisses the case without prejudice. See Sparling v. Hoffman Constr. Co., 864 F.2d 635, 638 (9th Cir. 1988) (holding that district courts may dismiss a case when all claims are subject to arbitration).
III
The remaining issue is whether arbitration should occur in California or Oregon. For the reasons briefly outlined below, the court holds that Oregon is the proper forum.The arbitration clause does not designate a particular forum. Defendants nevertheless contend that California is the proper forum because all defendants live there, the parties negotiated the agreement there, and they performed most of the investment services at issue there. Plaintiffs respond that they executed the December agreement in Oregon. Moreover, the individual plaintiffs are Oregon residents, as are PNI, Inc. and PNI LLC. (PNI Ltd. is the only non-Oregon plaintiff.) Plaintiffs further emphasize that their documents related to the December agreement are located in Oregon.
Under a basic forum analysis, the arbitration should occur in Oregon. "[D]efendants must make a strong showing of inconvenience to warrant upsetting the plaintiff's choice of forum." Decker Coal Co. v. Commonwealth Edison Co., 805 F.2d 834, 843 (9th Cir. 1986). While holding an arbitration in Oregon will require the defendants to travel here, holding it in California would require Oregon plaintiffs to travel there and thus defeat plaintiffs' decision to seek relief in Oregon.
In any event, Section 4 of the Federal Arbitration Act limits a court's discretion as to where arbitration proceedings should occur:
The hearing and proceedings, under [an arbitration] agreement, shall be within the district in which the petition for an order directing such arbitration is filed.9 U.S.C. § 4. Many years ago, the Ninth Circuit interpreted the Arbitration Act as requiring arbitration proceedings to occur in the district from which the order requiring arbitration was issued. Continental Grain Co. v. Dant Russell, Inc., 118 F.2d 967, 968-69 (9th Cir. 1941); see also Textile Unlimited, Inc. v. A.BMH Co., 240 F.3d 781, 185 (9th Cir. 2001) (observing that the Act "confines the arbitration to the district in which the petition to compel is filed" (emphasis in original)). Courts have held that this rule applies even when the arbitration clause designates a particular location for the arbitration. See, e.g.,Homestake Lead Co., 282 F. Supp. 2d at 1144 (ordering arbitration to occur in the Northern District of California, where suit was filed, even though the arbitration clause designated Missouri). A fortiori, when, as here, the parties did not specify a forum, the parties must arbitrate in the district where the lawsuit was filed. Accordingly, the court orders arbitration to take place in Oregon.
IV
For the foregoing reasons, the court GRANTS defendants' motion to compel arbitration (Doc. #14) and dismisses the case without prejudice. The court orders the arbitration to occur in Oregon.
IT IS SO ORDERED.