Opinion
CIVIL ACTION NO. 04-80 SECTION "L"(4)
April 14, 2004
ORDER REASONS
Before the Court are two motions: (1) the Plaintiffs' Motion for a Declaration that the Contract is a Nullity; and (2) the Defendants' Motion to Stay Proceedings and Compel Arbitration. For the following reasons, the Plaintiffs' Motion is DENIED and the Defendants' Motion for a Stay is GRANTED.
I. BACKGROUND
The Plaintiffs are the successor and the former owners of Children's Place Ltd., a childcare facility located in New Orleans, Louisiana. In early 2001, the owners of Children's Place decided to sell the business. On July 13, 2001, officers of Children's Place signed a document entitled "Finder's/Consulting Fee Agreement" (Agreement) with the Defendants Barnett Financial Services, Inc. and Barnett Real Estate Services, Tennessee companies that specialize in the sale of child care businesses. The Defendants are licensed to sell real estate in the State of Tennessee.
The Agreement provides for the payment of a commission equal to the greater often percent of the total closing purchase price of the childcare business and associated assets or $40,000. (Agreement § 1.1). The agreement specifies that it is governed by and construed in accordance with Tennessee law and that the parties will voluntarily arbitrate "any controversy or claim" that arose out of or related to the agreement. (Agreement § 3.2).
The Plaintiffs allege that they became unhappy when the Defendants failed to aggressively market Children's Place to qualified buyers. The Plaintiffs assert that they found a qualified buyer without any assistance from Barnett and sold the property on their own. The Defendants maintain that they introduced two qualified potential buyers to Pinpoint Enterprises, one of whom eventually reached an agreement to purchase Children's Place.
When the Defendants learned of the sale, they demanded a commission of 580,120, but the Plaintiffs refused to pay. The Defendants initiated arbitration proceedings on October 16, 2003, invoking the Agreement's arbitration clause.
The Plaintiffs filed suit in Orleans Parish Civil District Court seeking a declaration that the Agreement was null and unenforceable. The Plaintiffs contend that Louisiana Revised Statutes §§ 37:1436(B) and 37:1445 render the Agreement a nullity because the Defendants are not licensed by Louisiana.
The Defendants removed the case to this Court on January 8, 2004, based on the parties' diverse citizenship. Shortly after removal, the Plaintiffs moved for summary judgment, seeking a declaration that the contract was null and therefore unenforceable. In response, the Defendants moved to compel arbitration and to stay the litigation, arguing that the arbitration clause was enforceable under federal and Louisiana law.
The Court heard oral argument on both motions on March 10, 2004. At oral argument the Court instructed the parties to submit supplemental briefing on whether Tennessee or Louisiana law governed the interpretation of the contract. Counsel complied with the Court's order and submitted supplemental briefing on the applicable conflicts law. The Court is now ready to rule on the motions.
II. ANALYSIS
A. Arbitration
Pursuant to federal law, "[a] party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court . . . for an order directing that such arbitration proceed in the manner provided for in such agreement." 9 U.S.C. § 4 (2000). The Fifth Circuit has articulated a two-step inquiry to determine whether a district court should compel arbitration. "First, the court must determine whether the parties agreed to arbitrate the dispute. Once the court finds that the parties agreed to arbitrate, it must consider whether any federal statute or policy renders the claims nonarbitrable." R.M Perez Assocs., Inc. v. Welch, 960 F.2d 534, 538 (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614). The Plaintiffs do not assert that any federal statute or policy renders the claims nonarbitrable, and the Court thus deems the second step satisfied. The parties hotly debate the first step, whether the parties formed an agreement to arbitrate. The resolution of that issue is dispositive of both motions.Courts determine whether the parties formed an agreement to arbitrate a dispute by examining whether a valid agreement to arbitrate exists between the parties and whether the particular dispute falls within the scope of that agreement. Webb v. Investacorp. Inc., 89 F.3d 252, 258 (5th Cir. 1996). State contract law determines whether a valid arbitration agreement has been formed by the parties, but ambiguities as to the scope of any arbitration agreement should be construed in light of the federal policy favoring arbitration. Id.
Challenges to a contract containing an arbitration agreement are assessed pursuant to the "separability doctrine" articulated in Prima Paint Corp. v. Flood Conklin Manufacturing Co., 388 U.S. 395, 403-04 (1967). The separability doctrine holds that "unless a defense relates specifically to an arbitration agreement, it must be submitted to the arbitrator as part of the underlying dispute." Primerica Life Ins. Co. v. Brown, 304 F.3d 469, 472 (5th Cir. 2002). This curious result, in which a court may review a challenge to a part of a contract (i.e. the existence of an agreement to arbitrate) but not the whole contract, arises from the language of the Federal Arbitration Act. Section 4 of the Federal Arbitration Act permits federal courts to adjudicate a dispute "which goes to the 'making' of the agreement to arbitrate," but the Act does not generally permit a federal court to consider a party's challenge to the validity or interpretation of the entire contract. Prima Paint, 388 U.S. at 404. A court thus may adjudicate a challenge to the validity of the making of an agreement to arbitrate, but the Act reserves for the arbitrator challenges to the validity or interpretation of the contract as a whole where the parties do not separately challenge "the making and performance of the agreement to arbitrate." Id.
The Plaintiff argues that the Fifth Circuit's recent decision in Will-Drill Resources v. Samson Resources Co., 352 F.3d 211 (5th Cir. 2003), changes or at least refines the existing arbitration law and requires the Court to adjudicate disputes that question the continued validity of any agreement containing an arbitration clause. In Will-Drill, the Fifth Circuit elaborated on the distinction between challenges to the "making" of an arbitration agreement, which may be adjudicated by a federal court, and challenges to the validity of the contract as a whole, which may not.
[W]here a party contends that it has not signed any agreement to arbitrate, the court must first determine if there is an agreement to arbitrate before any additional dispute can be sent to arbitration. . . . On the other hand, where parties have formed an agreement which contains an arbitration clause, any attempt to dissolve that agreement by having the entire agreement declared voidable or void is for the arbitrator. Will-Drill, 352 F.3d at 218 (emphasis added).
Contrary to the Plaintiffs' contentions, Will-Drill does not permit federal courts to question the validity of a contract that manifests the parties' clear agreement to be bound by an arbitration clause. This holds true even where the underlying contract is illegal and thus void ab initio, Mesa Operating Limited Partnership v. Louisiana Intrastate Gas Corporation, 797 F.2d 238, 244 (5th Cir. 1986), or unenforceable due to a signatory's lack of capacity, Primerica, 304 F.3d at 472. The underlying contract may be valid or invalid, legal or illegal, enforceable or void; but where the parties have expressed their assent to an arbitration agreement, the Federal Arbitration Act assigns the resolution of those legal challenges to the arbitrator.
Section 4 of the Federal Arbitration Act requires a federal court to examine whether an agreement to arbitrate has been formed, and then to examine whether any federal policy renders the claim nonarbitrable. R. M Perez Assocs., 960 F.2d at 538. Will-Drill merely clarifies the first step of that inquiry and explains the circumstances under which parties have made and formed an agreement to arbitrate. Will-Drill rejects the argument that every signed document is a valid contract or that a court must "send any general attacks on the agreement to the arbitrator." 352 F.3d at 218. Because arbitration agreements are matters of contractual consent, "where a party attacks the very existence of an agreement, as opposed to its continued validity or enforcement, the courts must first resolve that dispute." Id. at 219.
Will-Drill does not alter the established separability doctrine; it elaborates on the manner by which a party may challenge the existence of an agreement to arbitrate within the first step of the separability framework. A signatory to a purported contract can challenge his or her consent to an arbitration agreement either by: (1) specifically contesting his or her assent to an arbitration clause; or (2) contesting the very existence of any agreement between the parties to a document that contains an arbitration clause. See id at 218 (noting that under the separability doctrine, a party may adjudicate a challenge to "the very existence of any agreement"). Once a signatory has manifested his assent to enter into an arbitration agreement, he may not dissolve that agreement by asserting that the entire contract is void or voidable under state law. Id.
The Plaintiffs do not contest the formation of an agreement to arbitrate. Rather, they challenge the validity of the contract and assert that any agreement to arbitrate was rendered invalid ab initio by Louisiana's real estate license laws. On two separate occasions, the Fifth Circuit has rejected this same argument, upheld the separability doctrine, and compelled arbitration. See Lawrence v. Comprehensive Bus. Servs. Co., 833 F.2d 1159, 1162 (5th Cir. 1987); Mesa Operating, 797 F.2d at 244. The present case is indistinguishable from Lawrence and Mesa Operating in all relevant respects. The matter should be referred to the arbitrator for a resolution of this dispute, including consideration of the Plaintiffs' defense of illegality.
Louisiana law makes it unlawful for an unlicensed broker to collect a commission. La. Rev. Stat. Ann. § 37:1436(8) (West 2000). State law also forbids courts from enforcing contracts for brokerage charges where the broker is not licensed by Louisiana. La. Rev. Stat. Ann. § 37:1445 (West 2000).
The Plaintiffs contend that these real estate statutes render the Agreement between the parties illegal and thus void ab initio. A void contract, argue the Plaintiffs, is one wholly lacking any agreement whatsoever, including any agreement to arbitrate.
B. Choice of Law
There is another flaw in the Plaintiffs' arguments. The Plaintiffs presume the application of Louisiana law and further presume the illegality of the contract. Even if the Plaintiffs' interpretation of Will-Drill were correct, and the federal courts were generally permitted to adjudicate the Plaintiffs' challenge, it is not clear that Louisiana's real estate license law is applicable to this dispute. The Agreement contains a choice of law provision stating that the Agreement "is governed by and construed in accordance with the laws of the State of Tennessee and shall be binding upon and inure to the parties hereto and their respective heirs, legal representatives, successors, and assigns." (Agreement § 3.2.)
A federal court sitting in diversity must apply the choice of law rules of the forum state. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 496 (1941). Louisiana's conflicts law gives express deference to the parties' autonomy to choose the substantive law governing a conventional obligation. La. Civ. Code Ann. art. 3540 (West 2003). That autonomy is limited only by the strongly held public policy of the state whose law would otherwise be applicable under Article 3537, the conflicts law applicable to conventional obligations. La. Civ. Code Ann. art. 3540, cmt. f (West 2003); Robinson v. Robinson, 778 So.2d 1105, 1116 (La. 2001).
The Plaintiffs' assertion that the Agreement is void ab initio presupposes the applicability of Louisiana's real estate statutes. The Agreement expressly indicates that the parties intended Tennessee law to govern the contract, and it is not clear that the parties' choice of law violates the strongly held public policy of either Louisiana or Tennessee. It is thus unclear whether Louisiana law would render the contract a nullity, even if the Court could consider the Plaintiffs' argument.
III. CONCLUSION
The parties manifested an agreement to arbitrate that is enforceable under the Prima Paint separability doctrine. The Plaintiffs' defense (i.e. that the contract is a nullity under Louisiana law) is an issue for the arbitrator to resolve. For the foregoing reasons, the Plaintiffs' Motion for a Declaration that the Contract is a Nullity is DENIED, and the Defendants' Motion to Stay Proceedings and Compel Arbitration is GRANTED. The matter is hereby stayed and the parties are ordered to proceed to arbitration as specified in the Agreement.