Opinion
04 Civ. 4599 (DC), 04 Civ. 5859 (DC).
March 9, 2005
SKLOVER ASSOCIATES, LLC By: Alan L. Sklover, Esq. New York, New York, Attorneys for Plaintiffs.
BROWN RUDNICK BERLACK ISRAELS LLP By: Emilio A. Galvan, Esq. New York, New York, Attorneys for Defendants.
MEMORANDUM DECISION
In these diversity actions, plaintiffs Michael and Steven Israel sue defendant Surinder Chabra, president of plaintiff's former employer, "AMC Computer Corporation" (AMC), for breach of contract. Specifically, plaintiffs allege Chabra failed to fulfill his obligations under guaranties he issued for AMC's payment of plaintiffs' bonuses. Plaintiffs seek,inter alia, a declaratory judgment on the proper rate of interest on the bonus payments required by the employment agreements and guaranteed by Chabra.
Plaintiffs also sue Paran Realty Corp., alleging that Paran Realty is Chabra's "alter ego" to which Chabra made fraudulent conveyances to frustrate payment of monies due to plaintiffs. (Compl. ¶ 5). Because the claims against Paran Realty Corp. are wholly derivative of those against Chabra, I focus the discussion here on Chabra.
The parties filed simultaneous motions. Plaintiffs move for partial summary judgment on the proper rate of interest and Chabra's obligation to pay plaintiffs' court courts and attorneys' fees. Defendants move to compel arbitration.
For the reasons that follow, defendants' motion to compel arbitration is granted. Plaintiffs' motion for partial summary judgment is denied as moot. The action is dismissed without prejudice to reinstatement following the completion of arbitration proceedings.
BACKGROUND
A. The Facts
Plaintiffs are former employees of AMC. Chabra is the president and chief executive officer of AMC. On May 1, 2000, plaintiffs together entered into a "Letter of Intent" with Chabra, AMC, and AMC Investors LLC. (Pl. Mem. Ex. A). Also on May 1, 2000, plaintiffs each entered into an individual "Employment Agreement" (the "Agreements") with AMC. (Pl. Mem. Ex. B). The Letter of Intent and the Agreements include provisions regarding plaintiffs' duties, conditions of employment, and salary and bonuses. The contracts were amended on July 31, 2000. The amended contracts required, upon the completion of a restructuring transaction, the payment to each plaintiff of a $1.75 million bonus, to be paid with interest in monthly installments. (Pl. Mem. Ex. D).
Where "Pl. Mem." is cited, reference is made to Plaintiffs' Memorandum of Law in Opposition to Defendants' Motion to Compel Arbitration.
On August 25, 2000, Chabra executed personal guaranties (the "Guaranties") for those bonus payments. (Pl. Mem. Ex. E). Plaintiffs have filed suit based on the Guaranties, alleging that AMC has not paid the bonuses in full and Chabra is liable for the remainder. The gravamen of the parties' dispute is the proper interest rate as required by the contracts, and whether, based on that rate, plaintiffs are owed money or in fact have been overpaid by AMC.
Plaintiffs contend that the contracts require the interest on the bonus payments to be calculated based on a fixed rate of interest, determined on the date of the closing of the restructuring as the Prime Rate plus one percent; calculated at the fixed rate, plaintiffs are owed interest on the bonus payment. Defendants contend that the contracts provide for a variable interest rate and that, calculated at the variable rates, plaintiffs have been overpaid by AMC.
The Agreements include an arbitration provision requiring that "any claim, dispute, disagreement or controversy that arises among the parties relating to this Agreement . . . be resolved by arbitration." (Pl. Mem. Ex. B). The Agreements also include a forum selection clause, subject to the arbitration provision, designating any state or federal court sitting in the City of New York and waiving objections to venue. (Id.). The Guaranties, which were signed only by Chabra and not by plaintiffs, include a forum selection clause designating state or federal courts sitting in New York, and waiving objections to venue or forum. Each Guaranty provides:
The Guarantor hereby irrevocably and unconditionally consents to submit to the exclusive jurisdiction of the federal and New York State courts located in the City of New York for any action, suit or proceeding instituted by Israel to enforce this Guaranty. . . . The Guarantor hereby irrevocably and unconditionally waives any objection the Guarantor may have at any time to the venue or forum of any such proceeding brought in such a court.
(Pl. Mem. Ex. E). The Guaranties do not contain an arbitration provision.
B. Prior History and Other Proceedings
Plaintiffs currently are in arbitration with AMC over various issues, including the proper rate of interest payable on the bonus payments. (Pl. Mem. Ex. F). Although unclear from the record when the arbitration proceedings were initiated, plaintiffs' Statement of Claims is dated May 18, 2004. (Id.).
Michael Israel filed his complaint in this Court on June 18, 2004, and Steven Israel filed his complaint on July 28, 2004. A conference was held, and defendants' motion to compel arbitration and plaintiffs' motion for partial summary judgment followed. By order dated February 9, 2005, the Court requested additional briefing on issues raised by the motion to compel arbitration.
DISCUSSION
1. Applicable Law
By this motion, defendants seek to compel plaintiffs to arbitrate this matter. "The Second Circuit has established a two-part test for determining arbitrability of claims not involving federal statutes: (1) whether the parties agreed to arbitrate disputes at all; and (2) whether the dispute at issue comes within the scope of the arbitration agreement." ACE Capital Re Overseas Ltd. v. Cent. United Life Ins. Co., 307 F.3d 24, 28 (2d Cir. 2002). Plaintiffs refuse to arbitrate based on the first step of the test, arguing that Chabra cannot rely on an arbitration agreement to which he was not a signatory, and that the forum selection clause in the Guaranties between Chabra and plaintiffs precludes arbitration.
There is a strong and "liberal federal policy favoring arbitration agreements." Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 625 (1985) (internal quotations and citation omitted). Nevertheless, arbitration is contractual by nature, and generally "a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." Thomson-CSF, S.A. v. Am. Arbitration Ass'n, 64 F.3d 773, 776 (2d Cir. 1995) (quoting United Steelworkers of Am. v. Warrior Gulf Navigation Co., 363 U.S. 574, 582 (1960)). In some situations, however, even a nonsignatory to an arbitration agreement has been held bound. The Second Circuit has recognized circumstances in which a signatory may bind a nonsignatory to an arbitration agreement, Thompson-CSF, 64 F.3d at 776, and circumstances where the Court will "estop a signatory from avoiding arbitration with a nonsignatory." Choctaw Generation L.P. v. Am. Home Assur. Co., 271 F.3d 403, 406 (2d Cir. 2001). Courts are more willing to require arbitration in the latter situation. See Merrill Lynch Inv. Mgrs. v. Optibase, Ltd., 337 F.3d 125, 131 (2d Cir. 2003).
2. Application
The instant case presents the latter situation. Here, Chabra, a nonsignatory to the arbitration agreement between AMC and plaintiffs, seeks to arbitrate against signatories — plaintiffs. The Second Circuit has made clear that under principles of estoppel, "a non-signatory to an arbitration agreement may compel a signatory to that agreement to arbitrate a dispute where a careful review of `the relationship among the parties, the contracts they signed . . ., and the issues that had arisen' among them discloses that `the issues the nonsignatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed.'" JLM Inds, Inc. v. Stolt-Nielsen SA, 387 F.3d 163, 177 (2d Cir. 2004) (quoting Choctaw Generation, 271 F.3d 403, 406 (2d Cir. 2001)). The issues in the suit between plaintiffs and defendant under the Guaranties "could hardly be more closely bound to the dispute now in arbitration" between plaintiffs and AMC under the Employment Contracts. Choctaw Generation, 271 F.3d at 406.
In the arbitration against AMC, the central issue is the proper rate of interest payable on plaintiffs' bonuses. (Pl. Mem. Ex. F). Plaintiffs' Statement of Claims in arbitration explicitly asks the panel to determine the proper rate of interest on bonus payments under the Agreements, the same issue plaintiffs have asked this Court to determine in the instant actions. There is no question, and plaintiffs do not dispute, that a central issue in the arbitration is intertwined — indeed, is identical — to the central issue in the instant actions. In other words, "the merits of [the] issue between the parties [is] bound up with a contract binding one party and containing an arbitration clause." Choctaw Generation, 271 F.3d at 407.
The facts of the instant case are so closely aligned with those of Choctaw Generation that the degree of relatedness of the parties, contracts, and controversies surely is sufficient to estop plaintiffs from avoiding arbitration. Choctaw Generation involved a construction contract between Choctaw Generation Limited Partnership ("Choctaw") and Bechtel Power Co. ("Bechtel"), that contained an arbitration clause. The parties entered arbitration over the delay in Bechtel's performance. American Home Assurance Co. ("American Home") issued an $81 million surety bond to secure Bechtel's performance under the construction contract; the surety contract did not contain an arbitration provision. Choctaw sued American Home under the surety contract.
To obtain payment of the liquidated damages it claimed for the delay, Choctaw drew down in full a $33 million dollar letter of credit that Bechtel had posted as required by the construction contract. In the federal action, Choctaw demanded that American Home as surety replenish the letter of credit to fund the accruing liquidated damages, up to the full amount of the surety bond. Choctaw Generation, 271 F.3d at 403.
The Second Circuit held that Choctaw, as signatory, was estopped from avoiding arbitration with the non-signatory because of the "tight relatedness of the parties, contracts and controversies." Id. at 406. The issue of whether Choctaw could compel replenishment of the letter of credit to fund the liquidated damages turned upon many of the same provisions of the construction contract at issue in the arbitration, in which Choctaw sought liquidated damages against Bechtel. Id. at 407. The parties, contracts, and controversies in the instant case are bound up in the same manner as in Choctaw Generation: just as American Home would not be liable to Choctaw if the arbitrator believed Bechtel had not breached the contract, so would Chabra avoid liability to plaintiffs if the arbitrator determined AMC had paid plaintiffs in full. See HG Estate, LLC v. Corporation Durango, S.A. DE de C.V., 271 F. Supp. 2d 587, 595 (S.D.N.Y. 2003) (same analysis).
Plaintiffs make no attempt to distinguish their case fromChoctaw Generation, nor do they deny the great extent to which the controversy between plaintiffs and AMC and plaintiffs and defendants are intertwined. They argue instead that (1) reliance and detriment are necessary elements to this theory of estoppel and are not present in the instant case, and (2) the forum selection clause precludes arbitration. I address each argument in turn.
First, plaintiffs argue that the elements of traditional estoppel, including reliance and detriment, are required in this alternative theory of estoppel. No court has so held, and I decline to do so. Traditional "equitable estoppel" applies where one party make a representation (e.g., a promise or a representation of fact) to another party who reasonably relies upon it, to his detriment. 4 Richard A. Lord, Williston on Contracts § 8:3 (4th ed. 2004). Plaintiffs do not make clear in what manner reliance and detriment are elements under the alternative theory of estoppel under which a signatory may be estopped from avoiding arbitration. Rather, plaintiffs broadly allege that "the requisite estoppel elements of reliance and detriment will likely be found in the vast majority of fact patterns" in which the alternative theory of estoppel is applied. (Pl. Sec. Mem. at 12). The fact patterns of cases in which estoppel has been found, as well as the Second Circuit's enunciation of the test for estoppel, belie such an argument.
Where "Pl. Sec. Mem." is cited, reference is made to Plaintiffs' Second Memorandum of Law in Opposition to Defendants' Motion to Compel Arbitration.
As discussed above, Choctaw Generation, one of the Second Circuit's leading cases on the issue, bears a striking resemblance to this case; in that case, there are no facts that suggest that American Home Assurance in any way relied on Choctaw's agreement to arbitrate with Bechtel, nor did the Second Circuit look to any such reliance or detriment. Rather, the Second Circuit outlined a test that focuses on the extent to which the issues are intertwined such that arbitration is appropriate.
Second, plaintiffs argue that, despite the intertwined nature of the issues raised in the instant case to those in arbitration, the parties here specifically contracted "out of the ambit of alternative estoppel," because the Guaranties contained a forum selection clause. (Pl. Sec. Mem. at 13). Judge Haight was presented with a nearly identical question in HG Estate, LLC v. Corporacion Durango S.A. DE de C.V., 271 F. Supp. 2d 587 (S.D.N.Y. 2003), and I find his reasoning persuasive. HG Estate involved a contract (stock purchase agreement) that was the subject of an arbitration between HG Estate and Durango USA pursuant to the contract's arbitration provision, and an indemnity agreement between HG Estate and Durango Mexico with a forum selection clause and no arbitration clause. Judge Haight found that estoppel applied, and that Durango Mexico, the nonsignatory, could invoke against HG Estate, the signatory, the arbitration provision. He then turned to the issue of HG Estate's right to invoke against Durango Mexico the forum selection clause. Judge Haight framed the question as one of the primacy of two competing forum selection clauses: an arbitration provision, as the Second Circuit has recognized, is "merely a specialized type of forum selection clause." Id. at 590 (quoting Roby v. Corporation of Lloyd's, 996 F.2d 1353, 1363 n. 2 (2d Cir. 1993)). Once estoppel applies to hold a signatory to an arbitration provision, the question is whether the arbitration provision or a competing forum selection clause "wins."
In answering this question of first impression, Judge Haight ruled, and I agree, that "primacy should go to the arbitration clause . . ., for two reasons: one grounded in public policy, and the other in considerations of judicial economy." HG Estate, 271 F. Supp. 2d at 595. While forum selection clauses are to be enforced by the courts, the federal policy favoring arbitration clauses is stronger, receiving expression in legislation. Id. at 595 (citing the Federal Arbitration Act, 9 U.S.C. § 1 et seq.). Judicial economy also favors arbitration in this situation, as the central issue of the proper rate of interest will be resolved more efficiently in the existing arbitration, and the concern for inconsistent judgments will be alleviated.
That the forum selection clause here contains a waiver of any objection to venue and forum in New York does not alter the analysis. Such language is typical of forum selection clauses, and is not inconsistent with enforcing arbitration. Litigation, where appropriate (e.g., to confirm an arbitration award), must occur in the courts of New York, and the parties waived their right to insist that litigation occur in another state. It cannot be read, as plaintiffs suggest, as an "anti-arbitration forum designating clause." (Pl. Sec. Mem. at 9). A forum selection clause and waiver of objections will not overcome arbitration where estoppel applies. See HG Estate, 271 F. Supp. 2d at 590-91 (similar forum selection clause).
The parties apparently do not dispute whether the issues in this litigation are within the scope of the arbitration clause, the second step of the Second Circuit's test. I hold that the language of the arbitration agreement requiring arbitration of "any claim, dispute, disagreement or controversy that arises among the parties relating to this Agreement" covers the issues raised in the instant action.
CONCLUSION
For the reasons set forth above, defendants' motion to compel arbitration is granted. Plaintiff's motion for partial summary judgment is denied as moot. The action is dismissed, without prejudice to reinstatement within sixty days after the final conclusion of the arbitration proceedings, should further litigation be necessary. The Clerk of the Court shall enter judgment accordingly and close this case.
SO ORDERED.