Katt et al v. Riepe et al

Filing 65

ORDER finding as moot 48 Motion to Strike; denying 27 Motion to Compel. Signed by Judge David G Campbell on 7/25/2014.(DGC, nvo)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Brian M. Katt, et al.,

No. CV-14-08042-PCT-DGC
Plaintiffs,

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v.

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ORDER

Jordan J. Riepe, et al.,

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Defendants.

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Defendants Dominic Femia and Comprehensive Business Services, LLC, d/b/a

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WCI Brokers Business Opportunities & Real Estate Investments (collectively the “WCI

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Defendants”), have filed a motion to compel arbitration. Doc. 27. The motion is fully

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briefed and no party has requested oral argument. The Court will deny the motion.1

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I.

Background.

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This case involves an ill-fated transaction between Plaintiffs Brian and Rachel

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Katt and Defendants Jordan and Janette Riepe for the sale of the Katts’ business, U.S.

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Metro Towing and Recovery LLC (“U.S. Metro”). Plaintiffs entered into an agreement

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with the WCI Defendants to represent Plaintiffs in the sale of U.S. Metro. Doc. 1, ¶ 28.

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The WCI Defendants negotiated with the Riepes to buy U.S. Metro from Plaintiffs, and a

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“Business Assets Purchase Agreement” (the “Agreement”) was signed on June 5, 2013.

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Plaintiffs filed a sur-reply (Doc. 47) and the WCI Defendants moved to strike it
(Doc. 48). The Local Rules do not permit sur-replies (see LRCiv 7.2), and Plaintiffs did
not seek the Court’s permission to file any additional memoranda. The Court will
disregard the sur-reply and deny the motion to strike as moot.

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Id., ¶ 31. The Riepes did not have any financing in place by the July 1, 2013 closing date

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provided for in the Agreement. Id. at 32.

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Plaintiffs and the Riepes signed an amendment to the Agreement which provided

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that a payment of $40,000 would be made on July 17, 2013, followed by a payment of

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$250,000 on October 1, 2013. Id., ¶ 39. Plaintiffs then transferred U.S. Metro’s assets to

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the Riepes even though the Riepes had not yet secured financing or paid them any

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money. Id., ¶¶ 43-44. Plaintiffs allege that the Riepes have failed to pay them for U.S.

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Metro despite continued negotiations and additional amendments to the Agreement.

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Plaintiffs brought this action on March 14, 2014, and assert claims against the

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WCI Defendants for breach of fiduciary duty, constructive fraud, fraud, negligence,

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breach of contract, breach of the covenant of good faith and fair dealing, and unjust

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enrichment. See Doc. 1. The WCI Defendants seek to compel arbitration based on an

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arbitration provision in the Agreement. Doc. 27 at 2.

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II.

Legal Standard.

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Under the Federal Arbitration Act (“FAA”), “[a] written provision in . . . a

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contract evidencing a transaction involving commerce to settle by arbitration a

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controversy thereafter arising out of such contract or transaction, or the refusal to perform

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the whole or any part thereof, . . . shall be valid, irrevocable, and enforceable[.]” 9

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U.S.C. § 2; see also Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 113-19 (2001);

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Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000); Tracer

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Research Corp. v. Nat’l Envtl. Servs. Co., 42 F.3d 1292, 1294 (9th Cir. 1994), cert.

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dismissed, 515 U.S. 1187 (1995). “Although [a] contract provides that [state] law will

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govern the contract’s construction, the scope of the arbitration clause is governed by

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federal law.” Tracer Research Corp., 42 F.3d at 1294 (citing Mediterranean Enters.,

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Inc. v. Ssangyong Corp., 708 F.2d 1458, 1463 (9th Cir. 1983)); see Circuit City Stores,

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279 F.3d at 892; Simula, Inc. v. Autoliv, Inc., 175 F.3d 716, 719 (9th Cir. 1999).

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“Notwithstanding the federal policy favoring it, ‘arbitration is a matter of contract

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and a party cannot be required to submit to arbitration any dispute which he has not

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agreed so to submit.’”

Tracer Research Corp., 42 F.3d at 1294 (quoting United

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Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582 (1960)).

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Courts may not invalidate arbitration agreements under state laws applicable only to

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arbitration provisions, but general state-law contract defenses such as fraud, duress, or

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unconscionability may invalidate arbitration agreements. Circuit City Stores, 279 F.3d at

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892 (quoting Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996)).

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III.

Analysis.

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The WCI Defendants point to paragraph 45 of the Agreement, which provides that

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“any dispute arising between and/or among Buyer, Seller and/or Broker, or Broker’s

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agents,” related to or arising out of the Agreement or the Broker’s Agreement and

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Questionnaire, including disputes related to fiduciary duties, “shall be submitted to

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binding arbitration in accordance with the rules of the American Arbitration Association

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then prevailing.” Doc. 1 at 83, ¶ 45. The WCI Defendants argue that the Seller is suing

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the Broker and that the lawsuit arises from the Agreement. Doc. 27 at 2.

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Plaintiffs contend that “there is fraud in the inducement of the arbitration provision

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itself.” Doc. 35 at 5-6. Although the Court may only consider the validity of the

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arbitration provision and not the Agreement as a whole, it can consider a claim of fraud

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in the inducement of the arbitration provision. Prima Paint Corp. v. Flood & Conklin

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Mfg. Co., 388 U.S. 395, 403-04 (1967) (“[I]f the claim is fraud in the inducement of the

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arbitration clause itself – an issue which goes to the ‘making’ of the agreement to

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arbitrate – the federal court may proceed to adjudicate it.”). Fraud is a basis for revoking

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a contract under Arizona law. U.S. Insulation, Inc. v. Hilro Const. Co., Inc., 705 P.2d

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490, 493-94 (Ariz. Ct. App. 1985).

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Plaintiffs argue that the WCI Defendants “suppressed the material fact” that the

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arbitration provision applied to disputes between Plaintiffs and the WCI Defendants, and

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failed to disclose that the provision effectively amended the Broker Agreement between

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Plaintiffs and the WCI Defendants, which contained no such provision. Doc. 35 at 5.

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Plaintiffs contend that the WCI Defendants owed them a fiduciary duty to inform them of

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the arbitration provision, and that failure to call the provision to their attention before

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they signed the Agreement was “equivalent to fraudulent activity.” Id. at 6.

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The WCI Defendants do not dispute that they drafted the Agreement on Plaintiffs’

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behalf and included the provision for arbitration of disputes between them and Plaintiffs.

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Nor do the WCI Defendants claim that they specifically advised Plaintiffs that they had

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included the arbitration provision.

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In Arizona, “[a] broker owes a fiduciary duty to disclose material facts to its

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client.” Lerner v. DMB Realty, LLC, 322 P.3d 909, 919-20 (Ariz. Ct. App. 2014). The

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WCI Defendants agree that this duty applies to them, but argue that the existence of the

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arbitration provision was not material to the transaction between the Riepes and the

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Plaintiffs and therefore did not fall within their duty of disclosure. Doc. 46 at 4. But the

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duty recognized in Lerner is not limited to facts material to the business transaction. A

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broker must disclose “facts it ‘knows or has reason to know the principal would wish to

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have,” or facts “material to the agent’s duties to the principal.” Lerner, 322 P.2d at 919-

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agreement between the WCI Defendants and Plaintiffs – a provision that had not been

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included in the contract between the WCI Defendants and Plaintiffs – was a fact material

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to the WCI Defendants’ duty to Plaintiffs and a fact the WCI Defendants should have

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known Plaintiffs would wish to learn.

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Lerner cites § 8.11 of the Restatement of Agency, and one of the comments in that

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section provides that “[w]hen an agent deliberately withholds material information from

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the principal to further the agent’s own purposes, the agent’s conduct is inconsistent with

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the agent’s fiduciary duty to act loyally for the principal’s benefit[.]”

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(Third) of Agency § 8.11, cmt. d (2006). The WCI Defendants added the arbitration

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provision to Plaintiffs’ agreement with the Riepes, an act that did not necessarily benefit

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the WCI Defendants. But when they expanded the provision to apply to any dispute they

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might have with Plaintiffs, they did so clearly for their own benefit in any potential

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dispute with Plaintiffs. They then failed to call the provision, or its application to them,

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Restatement

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to the attention of Plaintiffs, conduct that falls within § 8.11 of the Restatement. The

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WCI Defendants may not be lawyers, but they were Plaintiffs’ brokers, and under Lerner

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and the Restatement they owed Plaintiffs a duty to disclose the new arbitration provision.

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The WCI Defendants argue that they provided Plaintiffs with a copy of the

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Agreement, suggested that Plaintiffs read it carefully, and advised Plaintiffs to seek legal

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counsel. But this was not enough to fulfill their fiduciary duty under Arizona law. In

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Leigh v. Lloyd, 244 P.2d 356 (Ariz. 1952), which Lerner cites as still good law, the

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Arizona Supreme Court held that “[a] real estate agent owes the utmost good faith and

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loyalty to his principal,” and that the agent in Leigh did not discharge that duty by

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providing the principal with a document that included the information he was obligated to

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disclose.

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[principal] to exercise due diligence, and to avail himself of means of knowledge within

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reach, does not apply if a relation of trust or confidence exists between the parties, so that

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one of them places peculiar reliance in the trustworthiness of the other, and in such cases

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the latter is under a duty to make a full and truthful disclosure of all material facts and is

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liable for either misrepresentation or concealment.” Id. (citing 37 C.J.S., Fraud, § 35, p.

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282) (ellipses and quotation marks omitted).

Id. at 358-59.

The court explained that “the general rule requiring the

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The Court concludes that the WCI Defendants had a fiduciary duty under Arizona

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law to disclose to Plaintiffs the arbitration provision and its application to disputes

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Plaintiffs might have in the future with the WCI Defendants. They did not do so.

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“Suppression of a material fact which a party is bound in good faith to disclose is

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equivalent to a false representation.” Id. at 358. The Court concludes that the arbitration

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provision is unenforceable because it was procured by the legal equivalent of fraud.

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IT IS ORDERED:

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(Doc. 27) is denied.

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The WCI Defendants’ motion to compel arbitration and stay proceedings

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Defendants’ motion to strike (Doc. 48) is denied as moot.

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All parties are advised to comply in the future with the font requirements of
LRCiv 7.1(b)(1).

Dated this 25th day of July, 2014.

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