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holding that fraud in the factum occurred, where forgery of a party's signature, renders underlying contract void and arbitration may not be compelled
Summary of this case from McCaddin v. Se. Marine Inc.Opinion
99-CV 3761 (ILG)
March 4, 2002.
MEMORANDUM ORDER
In this action, plaintiff Opals on Ice Lingerie, Designs by Bernadette, Inc. ("Opals") seeks to compel Bodylines, Inc. d/b/a Curves ("Bodylines") to submit to an arbitration pending before the American Arbitration Association in New York. Opals also seeks a declaration that a NonCircumvention Agreement purportedly signed by Bodylines's president is binding and enforceable. Bodylines has filed counterclaims against Opals, seeking declarations that (i) the agreement is unenforceable and (ii) Bodylines cannot be compelled to submit to the arbitration. The parties have now cross-moved for summary judgment. For the reasons set forth below, Bodylines's motion is granted, and Opals's cross-motion is denied.
BACKGROUND
Opals is a New York corporation with its principal place of business in Brooklyn, New York. (See DiVito Aff. ¶ 4.) Opals is engaged in the business of designing, manufacturing and selling ladies lingerie products. (See id.) Bodylines is a Nevada corporation with its principal place of business in California. (See Sautter Aff. ¶ 2.) Bodylines markets and distributes women's intimate apparel through catalogs, mail-order, and the Internet. (See id.)
In September of 1997, Irwin Karnick, the president of MZ, Inc., a catalog/production firm that was providing catalog services to both Opals and Bodylines, introduced Opals to Bodylines. (See DiVito Aff. ¶ 6; Sautter Aff. ¶ 4.) Opals and Bodylines then began discussing the possibility of Bodylines selling certain of Opals's products. (See DiVito Aff. ¶ 7; Sautter Aff ¶ 4.) In the course of negotiating an arrangement, Bodylines and Opals exchanged certain draft agreements, including drafts of at least two Non-Circumvention Agreements and a Confidentiality Agreement. (See DiVito Aff. ¶¶ 7-8 Exs. A-C; Sautter Aff. ¶¶ 5-7 Exs. A-1, D-E.) Opals also provided Bodylines with a number of samples of its products. (See DiVito Aff. ¶ 10; Sautter Aff. ¶ 8.) In the end, however, no arrangement was reached between Bodylines and Opals concerning the sale of Opals's products by Bodylines. (See Sautter Aff. ¶¶ 8-9; see also Compl. ¶ 17.)
Opals alleges that, not long after providing Bodylines with samples of its products, Bodylines "misappropriated Opals['s] designs, and proceeded to manufacture and distribute product lines of garments substantially identical to the trade secrets, designs and products belonging to Opals which were previously furnished to [Bodylines]." (Compl. ¶ 18.) Accordingly, on May 18, 1999, Opals served Bodylines with a demand for arbitration before the American Arbitration Association in New York, seeking $5 million in damages from Bodylines as a result of the alleged misappropriation. (See DiVito Aff. Ex. F.) Opals commenced arbitration proceedings instead of litigation due to a Non-Circumvention Agreement (the "Agreement"), which was purportedly executed by Julie Sautter, Bodylines's president. The Agreement — which, by its terms, limits Bodylines's right to copy, use or modify any of Opals's products — contains a provision stating: "Any dispute arising under or relating to this Agreement shall be submitted to binding arbitration in the State of New York pursuant to the rules for commercial arbitrations of the American Arbitration Association." (Compl. Ex. A.)
Bodylines, however, refused to submit to the arbitration, alleging that it never signed the Agreement and that Sautter's signature thereon was a forgery. (See DiVito Aff. Ex. G.) As a result, Opals commenced this action on June 2, 1999, seeking a declaration that the Agreement is valid and enforceable, and also seeking to compel Bodylines to submit to the arbitration. The sole factual basis for the relief sought by Opals in its Complaint is Bodylines's purported execution of the Agreement, which, according to Opals, requires arbitration of the parties' dispute. (See Compl. ¶¶ 23-26; see also id. Prayer For Relief.)
In the meantime, the AAA decided that the issue of arbitrability could properly be decided by a panel of arbitrators. The AAA therefore directed the parties to submit briefs on this issue. (See DiVito Aff. Ex.G.) Bodylines, citing the cost of preparing briefs on the issue, instead chose to participate in the arbitration, "without prejudice to its defense." (December 15, 1999 letter from Peter Mallon, Esq. to Michael Namias, AAA Executive Administrator, a copy of which is annexed to DiVito Aff. Ex.G.) Bodylines thereafter participated in extensive prearbitration discovery. (See DiVito Aff. Exs. H-J.) Nevertheless, shortly after Bodylines chose not to brief the issue of arbitrability with the AAA, it commenced an action in California state court in which it sought a preliminary injunction staying the arbitration. (See DiVito Aff. Ex.D.) The California court denied Bodylines's preliminary injunction motion. Opals then removed the California state court action to federal court, and the parties agreed that the issue of arbitrability would be decided by this Court. (See Def. Mem. at 4.) Bodylines subsequently participated in three days of arbitration hearings. (See DiVito Aff. Exs. K-M.) Bodylines continued to present its objections to the arbitration at those proceedings. (See, e.g., id. Ex.K at 3.)
The AAA recognized, however, that it would "abide by any court order directed against either party to the arbitration which is binding upon the parties." (Sautter Aff. Ex.F.)
Neither party has submitted a copy of the California court's decision to this Court. Therefore, on the present record, the Court is unaware of the reason the California court denied Bodylines's motion.
The three days of hearings amounted to only half of the time scheduled by the AAA for the arbitration. (See November 23, 1999 AAA Scheduling Order, a copy of which is annexed to DiVito Aff. Ex.G.) For this reason, it appears that the arbitration has not been concluded, and that there has been no decision by the arbitrator.
DISCUSSION
I. Standard for Summary Judgment
Summary judgment "shall be rendered forthwith if the pleadings, depositions . . . together with the affidavits . . . show that there is no genuine issue as to any material fact and . . . the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). A "moving party is entitled to judgment as a matter of law [if] the nonmoving party has failed to make a sufficient showing on an essential element of her case with respect to which she has the burden of proof."Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1985) (internal quotation marks and citations omitted). In deciding a summary judgment motion, a court need not resolve disputed issues of fact, but need only determine whether there is any genuine issue to be tried. Eastman Mach. Co. v. United States, 841 F.2d 469, 473 (2d Cir. 1988). A disputed fact is material only if it might affect the outcome of the suit under the governing law. A genuine factual issue exists if there is sufficient evidence favoring the nonmovant such that a reasonable jury could return a verdict in her favor. Anderson v. Liberty Lobby. Inc., 477 U.S. 242, 248-249 (1986). "In assessing the record to determine whether there is a genuine issue of fact, the court is required to draw all inferences in favor of the party against whom summary judgment is sought." Ramseur v. Chase Manhattan Bank, 865 F.2d 460, 465 (2d Cir. 1989).
II. The Agreement is Unenforceable, and Bodylines Cannot be Compelled to Submit to Arbitration
Although the parties' briefs obfuscate the issues, at bottom this case comes down to one simple point: both parties agree that Sautter's signature on the Agreement is a forgery created by a "photocopy transposition," i.e., it was "cut" from one document and "paste[d]" onto the Agreement. (See Sulner Aff. ¶ 6(b) (a copy of which is annexed to the Sautter Aff. as Ex.G); Sautter Aff. Ex. H;Pl. Reply at 10 n. 4.) Accordingly, both the Agreement and the arbitration clause therein are unenforceable. See, e.g., Orlosky v. Empire Sec. Sys., Inc., 230 A.D.2d 401, 403, 657 N.Y.S.2d 840, 842 (3d Dep't 1997) ("Under [New York] law and general contract law, a forged signature renders a contract void ab inftio.") (citing, inter alia, 10 Wihiston on Contracts § 1139 at 393 (3d ed. 1967)); Oberlander v. Fine Care. Inc., 108 A.D.2d 798, 799, 485 N.Y.S.2d 313, 314-15 (2d Dep't 1985) (forgery of signature on contract, if proven, would "invalidate the entire agreement, including the arbitration clause" contained therein). And yet in its Complaint, the only basis upon which Opals seeks to compel Bodylines to submit to the arbitration is Bodylines's purported execution of the Agreement. (See Compl. ¶¶ 20-26.) Because the Agreement and the arbitration clause are void and unenforceable, it necessarily follows that Bodylines cannot be compelled to submit to the arbitration pursuant to the terms of the Agreement.
Opals perversely suggests that Bodylines cut and pasted Sautters's signature. (See Pl. Reply at 10 n. 4.) Such a suggestion is incredulous, to say the least; there is absolutely nothing in the record to suggest that Bodylines had any reason to cut and paste its own president's signature from one document to another, and, indeed, it makes little sense to believe that Bodylines would have done so.
Opals, recognizing the invalidity of the Agreement, attempts to convince the Court that the validity of the Agreement is immaterial. Opals contends that "[u]nder the doctrine of separability, only challenges to the arbitration agreement are decided by the courts; challenges to the overall contract must be referred to arbitration." (Pl. Reply at 4 (citing Prima Paint Corp. v. Flood Conklin Mfg. Co., 388 U.S. 395, 403-04 (1967)).) However, Opals's reliance on Prima Paint, and similar cases, is misplaced. As this Court has previously held:
Where . . . a `fraud in the factum' is alleged, the Prima Paint notion of the severability of the arbitration clause has no application. In raising a claim of fraudulent inducement of contract, a party must argue that its knowing assent to the terms of the contract followed from a false promise by the other side. Thus, unless the specific arbitration provision itself was obtained via a false promise, the signatory has fairly agreed to submit disputes to arbitration. By contrast, where fraud in the factum of the entire contract is alleged, it makes no sense to apply Prima Paint's requirement of a specific attack on the making of the arbitration clause itself If no agreement ever arose between the parties, there can be no severable agreement to arbitrate. Similarly. if a party's signature were forged on a contract, it would be absurd to require arbitration if the party attacking the contract as void failed to allege that the arbitration clause itself was fraudulently obtained.Kyung In Lee v. Pac. Bullion (New York) Inc., 788 F. Supp. 155, 157 (E.D.N.Y. 1992) (emphasis added); see also Matter of Arbitration Between Nuclear Elec. Ins. Ltd. Cent. Power Light Co., 926 F. Supp. 428, 434 (S.D.N.Y. 1996) ("Where . . . a party claims that it never actually manifested assent to a contract containing an agreement to arbitrate — for example, because its signature was forged on the contract . . . — that party cannot be forced to arbitrate until it is first established by a court that the party willingly manifested assent to the underlying contract.").
There is no doubt that a forged signature on a contract is a "fraud in the factum." See, e.g., E. Allan Farnsworth, Contracts § 4.10 (2d ed. 1990) (fraud in the "factum," or the "execution," occurs where a misrepresentation goes "to the very character of the proposed contract itself, as when one party induces the other to sign a document by falsely stating that it has no legal effect").
Opals also argues that Bodylines should be compelled to submit to arbitration because Bodylines sent a draft Non-Circumvention Agreement to Opals which contained an arbitration clause — and thus Bodylines indicated its assent to arbitration — even though Opals never signed the draft agreement. In support of its argument, Opals cites numerous cases in which courts have held that an agreement to arbitrate need not have been signed, so long as the agreement demonstrated an intent by the drafter to consent to arbitration. (See Pl. Reply at 6-9.) Those cases, however, are inapposite. Here, the question is not whether Bodylines indicated an intent to arbitrate any disputes it might have with Opals by virtue of the fact that it exchanged draft agreements with Opals. Rather, the issue to be resolved on these cross-motions for summary judgment is limited to the claim set forth in Opals's Complaint, namely, whether Bodylines can be compelled to submit to arbitration because of the arbitration clause in the Agreement. At no time prior to filing its Opposition to Bodylines's summary judgment motion did Opals assert that Bodylines should be compelled to submit to arbitration because it exchanged draft agreements with Opals. Rather, Opals has consistently argued that Bodylines should be compelled to submit to the arbitration because of the arbitration clause in the Agreement.
At oral argument, Opals suggested that it had signed a draft agreement sent by Bodylines to Opals which contained an arbitration clause. Yet Opals was unable to direct the Court's attention to any agreement which was signed by both Opals and Bodylines.
Opals therefore cannot succeed on its motion by alleging these new bases for relief, which it has never previously raised. Although it is true that the Federal Rules of Civil Procedure are designed merely to give a defendant "fair notice of what the plaintiff's claim is and the grounds upon which it rests," Conley v. Gibson, 355 U.S. 41, 47 (1957), and, therefore, "federal pleading is by statement of claim, not by legal theory," Newman v. Silver, 713 F.2d 14, 15 n. 1 (2d Cir. 1983); See also Gins v. Mauser Plumbing Supply Co., 148 F.2d 974, 976 (2d Cir. 1945) ("particular legal theories of counsel yield to the court's duty to grant the relief to which the prevailing party is entitled, whether demanded or not"), the Court is "not require[d] . . . to fabricate a claim that a plaintiff has not spelled out in his pleadings," 5 Wright Miller, Federal Practice and Procedure § 1286 at 559 (2d ed. 1990). Were it otherwise, a defendant would be unable to "tailor its discovery to prepare an appropriate defense." Beckman v. United States Postal Serv., 79 F. Supp.2d 394, 407 (S.D.N.Y. 2000). Thus, courts have consistently ruled that "it is inappropriate to raise new claims for the first time in submissions in opposition to summary judgment." Id. (citations omitted);accord Caribbean Wholesale Serv. Corp. v. U.S. JVC Corp., 963 F. Supp. 1342, 1359 (S.D.N.Y. 1997) ("[Plaintiff] in effect is apparently attempting to add a claim never addressed, or even hinted at, in the complaint. Such a step is inappropriate at the summary judgment stage, after the close of discovery, without the Court's leave, and in a brief in opposition to a dispositive motion. Summary judgment cannot be granted as to this `claim' because it is not a claim."); Allen v. West Point-Pepperell. Inc., 908 F. Supp. 1209, 1224 (S.D.N.Y. 1995) ("A motion for summary judgment is not the appropriate place to present new claims which effectively amend the complaint.") (citation omitted). As one court has stated:
The potential exposure of the defendants in a litigation is controlled by the allegations set forth in the initial pleading. Fairness dictates that defendants be given a minimum degree of forewarning as to the underlying basis for the relief sought. Thus, even though the Court will liberally construe the substance of the information provided in the complaint and in particular situations may not require that the specific legal theory be identified, at least some notion of the grounds justifying the remedies sought in the proceedings must appear.Ocaso. S.A. Compania de Seguros y Reaseguros v. P.R. Mar. Shipping Auth., 915 F. Supp. 1244, 1253 (D.P.R. 1996). The only "notion of the grounds justifying the remedies sought" in Opals's Complaint is the Agreement. Since the Court has already determined that the Agreement is unenforceable, the Court finds no basis to compel Bodylines to arbitrate.
Furthermore, to the extent Opals is impliedly asking the Court for leave to amend its Complaint, the Court will not do so at this late stage. See Beckman, 79 F. Supp.2d at 408 ("[l]eave to amend a complaint will generally be denied when the motion to amend is filed solely in an attempt to prevent the Court from granting a motion . . . for summary judgment, particularly when the new claim could have been raised earlier") (alteration in original) (citations omitted).
Finally, Opals argues that Bodylines has waived its right to object to the arbitrability of the parties' dispute because (i) Bodylines agreed to submit the issue of arbitrability to the AAA, and (ii) Bodylines extensively participated in the arbitration up to this point. (See Pl. Mem. at 7-12.) Neither of these arguments has merit. As to the first point, Opals directs the Court's attention to a June 17, 1999 letter from Bodylines' s counsel to the AAA administrator which allegedly indicates that Bodylines submitted the issue of the arbitrability to the arbitrators for a decision. (See Pl. Mem. at 9-10.) Nothing in that letter, however, indicates that Bodylines was willing to submit this issue to the administrator for a decision. In fact, Opals's argument is belied by Bodylines's later correspondence indicating that it intended to have a court resolve the issue. (See November 17, 1999 letter from Peter Mallon, Esq. to Michael Namias, AAA Executive Administrator, a copy of which is annexed to DiVito Aff. Ex.G.)
Nor is there any merit to Opals's contention that, by participating in the arbitration to this point, Bodylines has waived its right to contest the arbitrability of the parties' dispute. In support of its argument, Opals cites New York Hotel Motel Trades Council v. Hotel Nikko of New York Inc., Nos. 91 Civ. 0795, 91 Civ. 0755, 1991 WL 168284 (S.D.N.Y. Aug. 22, 1991). In Hotel Nikko, the court refused to find that the defendant had preserved its objection to the arbitrator's jurisdiction because (i) no pre-hearing submissions indicated that the defendant contested jurisdiction, (ii) nothing in the record suggested that the defendant refused to brief the issue ofjurisdiction, (iii) the defendant never moved for a stay of the arbitration proceedings, and (iv) the only item in the record indicating that the defendant had objected to the jurisdiction of the arbitrator was submitted after the arbitration hearing. See id. at *4-5. Accordingly, the court held that the defendant's conduct did not "clearly evince its objection to jurisdiction." Id. at *4.
In this case, however, Bodylines has repeatedly "evinced its objection" to the AAA's jurisdiction. Indeed, numerous letters from Bodylines indicate its objection to jurisdiction (See DiVito Aff. Ex.G); Bodylines refused to brief the issue ofjurisdiction before the arbitrator, choosing instead to have a court resolve the issue (see id.), and, in fact, the arbitrators never resolved the issue; Bodylines moved for a stay of the arbitration proceedings (albeit belatedly); and Bodylines raised the issue of arbitrability before the end of the arbitration proceedings. Hotel Nikko, therefore, lends no support to Opals's argument. In fact, given the AAA's willingness to proceed with the arbitration despite the jurisdictional issue, as well as the fact that the California court refused to enjoin the arbitration, Bodylines likely had little choice but to participate in the arbitration proceedings, or else risk default. At every stage of the proceedings, however, Bodylines has raised its objection to the jurisdiction of the arbitrators. Thus, it cannot be said that Bodylines waived its right to contest the arbitrability of this dispute.
As such, contrary to Opals's assertion, Bodylines has not "participate[d] in an arbitration, with the assurance that if it loses it may later challenge whether it had ever agreed to arbitration." (Def. Mem. at 10 n. 7 (quoting Halley Optical Corp. v. Jagar Int'l Mktg. Corp., 752 F. Supp. 638, 639 (S.D.N.Y. 1990)).)
In a footnote, Opals argues that the Calfornia court's denial of Bodylines's preliminary injunction motion should estop Bodylines from arguing that it cannot be compelled to arbitrate the current dispute. (See Pl. Mem. at 9 n. 6.) Collateral estoppel, however, cannot preclude Bodylines from raising this issue, because the California court's denial of Bodylines's preliminary injunction motion was not a final judgment on the merits. See Flaherty v. Lang, 199 F.3d 607, 613 (2d Cir. 1999) (valid and final judgment required to implicate collateral estoppel).
CONCLUSION
For the foregoing reasons, Bodylines's motion for summary judgment is granted, and Opals's cross-motion for summary judgment is denied. The Clerk of the Court is directed to close this case.
SO ORDERED.