Cook et al v. PenSa, Inc. et al

Filing 36

ORDER granting 15 Defendants' Motion and Brief to Compel Arbitration and Stay Proceedings. As soon as practicable the parties SHALL PROCEED to arbitration on Plaintiffs' claims asserted in this action. This case is STAYED pending the outcome of the arbitration of Plaintiffs' claims. The parties shall file a Status Report no later than 14 days after completion of arbitration, by Magistrate Judge Kathleen M. Tafoya on 8/1/14.(sgrim)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Magistrate Judge Kathleen M. Tafoya
Civil Action No. 13–cv–03282–RM–KMT

RICHARD COOK, an individual,
MARY D. COOK, an individual,
RICHARD M. HUGHES, an individual,
JAMES K. LUST, an individual, and
JAMES V. STEWART, LLC, a Washington limited liability company,
Plaintiffs,
v.
PENSA, INC., a Colorado corporation,
LOUIS W. PENDLETON, an individual, and
EDMUND A. PENDLETON, an individual,
Defendants.

ORDER

This matter is before the court on “Defendants’ Motion and Brief to Compel Arbitration
and Stay Proceedings.” (Doc. No. 15, filed Feb. 12, 2014.) Plaintiffs filed four separate
responses to Defendants’ Motion on March 10, 2014—James V. Stewart, LLC’s Response (Doc.
No. 21 [Stewart Resp.]), Richard and Mary Cook’s Response (Doc. No. 22 [Cooks Resp.]),
Richard Hughes’ Response (Doc. No. 23 [Hughes Resp.]), and James Lust’s Response (Doc. No.
24 [Lust Resp.]. Defendants’ Reply was filed on March 27, 2014. (Doc. No. 27 [Reply].)
Accordingly, this matter is ripe for the court’s review. For the following reasons, Defendants’
Motion to Compel is GRANTED.

FACTUAL AND PROCEDURAL BACKGROUND
Defendant PenSa, Inc. (“PenSa”) is an oil and gas exploration company owned by
Defendants Lou and Edmund Pendleton (the “Pendletons”). (Am. Compl., Doc. No. 9, ¶ 12.)
Beginning in 2003, PenSa and the Pendletons solicited Plaintiffs’ investments in various oil and
gas exploration projects in which PenSa had a non-operating working interest, including the
Treasure Valley Prospect (“TV Prospect”) and Treasure Valley North Prospect (“TV-North
Prospect”) in Garvin and Murray Counties, Oklahoma (collectively, the “Investment Prospects”).
(Id.¶ 13.) Ultimately, Plaintiffs each acquired equitable working interests in the Investment
Prospects from PenSa as follows. (Id. ¶ 20.)
A.

Plaintiff James V. Stewart LLC
James Stewart, the principal member of Plaintiff James V. Stewart, LLC (hereinafter,

referred to as “Stewart”), was solicited by the Pendletons and their father, Ed Pendleton, to
acquire a working interest in the TV Prospect. (Stewart Resp. at 3.) Ultimately, Stewart
invested a total of approximately $1.3 million to acquire interests in four different wells in the
TV Prospect as follows. (Id.)
During an initial meeting in September 2006, Stewart was provided with a copy of an
Operating Agreement, dated November 30, 2000, that governed the drilling and development
operations of the TV Prospect, which at that time was being conducted by Bays Exploration, Inc.
(Stewart Decl., Doc. No. 21-1, ¶ 4; Ex. A.) Stewart claims that Ed Pendleton represented that
this agreement was a “boilerplate” and “standard” agreement for this type of oil and gas
investment. (Stewart Decl. ¶ 4.)

2

Stewart first agreed to invest in a well in the TV Prospect known as the Tammy #1 Well.
(Id. ¶ 6.) Pursuant to this investment, Stewart signed a contract entitled “Development
Agreement – Treasure Valley Prospect – Garvin and Murray Counties, Oklahoma,” dated
September 7, 2006. 1 (Id., Ex. B (“Stewart Dev. Agmt.”).) The Development Agreement
contained the following arbitration provision:
Arbitration: Any dispute arising under this Agreement (“Arbitrable Dispute”)
shall be referred to and resolved by binding arbitration in Denver, Colorado, to be
administered by and in accordance with the Commercial Arbitration Rules of the
American Arbitration Association. Arbitration shall be initiated within the
applicable time limits set forth in this Agreement and not thereafter or if no time
limit is given, within the time period allowed by the applicable statute of
limitations, by one Party (“Claimant”) giving written notice to the other Party
(“Respondent”) and to the Denver Regional Office of the American Arbitration
Association (“AAA”), that the Claimant elects to refer the Arbitrable Dispute to
arbitration. All arbitrators must be neutral parties who have never been officers,
directors or employees of the parties or any of their Affiliates; must have not less
than ten (10) years experience in the oil and gas industry, and must have a formal
financial/accounting, engineering or legal education. The hearing shall be
commenced within thirty (30) Days after the selection of the arbitrator. The
Parties and the arbitrators shall proceed diligently and in good faith in order that
the arbitral award shall be made as promptly as possible. The interpretation,
construction and effect of this Agreement shall be governed by the Laws of
Colorado, and to the maximum extent allowed by law, in all arbitration
proceedings the Laws of Colorado shall be applied, without regard to any
conflicts of laws principles. All statutes of limitation and of repose that would
otherwise be applicable shall apply to any arbitration proceeding. The tribunal
shall not have the authority to grant or award indirect or consequential damages,
punitive damages or exemplary damages.
(Id. § 12, ¶ J.)
In December 2006, Stewart invested in an additional well in the TV Prospect, known as
the Konlee Jae #1 well. (Stewart Decl. ¶¶ 7-8.) Pursuant to this investment, Stewart signed a

1

Stewart actually signed this Development Agreement a few days later on September 12,
2006. (Stewart Decl., Ex. B.)
3

new contract on December 26, 2006 entitled “Amendment to the Development Agreement –
Treasure Valley Prospect.” (Stewart Decl., Ex. C.) The Amendment specifically stated that it
was an amendment of the terms and conditions to the Development Agreement – Treasure
Valley Prospect dated September 7, 2006 between PenSa and James V. Stewart, LLC. (See id.)
In June 2007, Stewart elected to invest in two additional wells, known as the Ethel Lou
and Donna Sue wells. (Stewart Decl. ¶ 17.) Funds that Stewart had paid several months earlier
were applied to his share of the estimated drilling and completion costs of the Ethel Lou well,
and he paid the remainder of over $500,000 of his share on June 20, 2007. (Id.) Stewart also
paid an additional sum of $412,508 for his share of the drilling and completion costs of the
Donna Sue well in July 2007. (Id.)
Pursuant to this investment in the Ethel Lou and Donna Sue wells, Stewart signed a
contract on July 7, 2007 entitled “Letter of Understanding - Treasure Valley Prospect.” (Stewart
Decl., Ex. J.) The Letter of Understanding specifically stated that “all the terms and conditions
of this Letter of Understanding is [sic] subject to the Development Agreement – Treasure Valley
Prospect – Garvin and Murray County, Oklahoma dated September 7, 2006 by and between
PenSa, Inc. and James V. Stewart, LLC.” (Id.)
B.

Plaintiffs Mary and Richard Cook
Based on their preexisting relationship with Ed Pendleton and his wife, Beverly

Pendleton, Mary and Richard Cook (“the Cooks”) elected to proceed with an investment in the
TV Prospect. (Decl. of Richard Cook, Doc. No. 22-1, ¶ 15.) Ultimately, the Cooks invested
approximately $1.1 million to acquire interests in six wells in the TV Prospect as follows. (Cook
Resp. at 2.)
4

Similar to Stewart, during an initial meeting with Ed Pendleton in 2006, the Cooks were
presented with a copy of the Operating Agreement. (Cook Decl. ¶ 16.) They were also advised
that the Pendletons would be sending addition documents related to their potential investment in
the TV Prospect. (Id. ¶ 17.)
The Cooks initially agreed to invest in one well in the TV Prospect, known as the El Ray
#1 well. (Cook Decl. ¶ 17.) Pursuant to this investment, the Cooks signed a contract entitled
“Development Agreement – Treasure Valley Prospect, Garvin County, Oklahoma,” dated March
6, 2006. 2 (Cook Decl., Ex. B [“Cook Dev. Agmt. #1”].) This Development Agreement
contained an arbitration clause identical to the Development Agreement signed by Stewart. (Id.
§ XII, ¶ J.)
Sometime after signing this Development Agreement, the Pendletons recommended, and
the Cooks agreed, to split their initial investment between two different wells, rather than
investing in a single well. (Cook Decl. ¶ 20.) Pursuant to this new investment, the Cooks signed
a new contract entitled “Development Agreement - Treasure Valley Prospect - Garvin County,
Oklahoma.” (Cook Decl., Ex. C [“Cook Dev. Agmt. #2”].) While the new Development
Agreement was dated March 6, 2006, the same date featured in the Cooks’ original
Development, the Cooks signed it on April 21, 2006. (See id.)
Under this second Development Agreement, the “Contract Area” included the El Ray #1
well discussed above, as well as an additional well in the TV Prospect, known as the Hallee Blair

2

The Cooks actually signed this Development Agreement a few days later, on March 12,
2006. (See Cook Dev. Agmt. #1.)
5

#1 well. (See id. at Ex. C.) This second Development Agreement included an arbitration clause
identical to the first Development Agreement signed by the Cooks. (Id. § XII, ¶ J.)
In September 2006, the Cooks acquired an additional interest in a third well in the TV
Prospect, known as the Tammy #1 well. (Cook Decl. ¶ 28.) Pursuant to this investment, the
Cooks signed a new contract on September 12, 2006, entitled “Amendment to the Development
Agreement – Treasure Valley Prospect – Garvin and Murray County, Oklahoma.” (Cook Decl.,
Ex. E.) The Amendment specifically stated that it was an amendment of the terms and
conditions to the Development Agreement – Treasure Valley Prospect dated March 6, 2006
between PenSa and the Cooks. (See id.)
In December 2006, the Cooks acquired an addition interest in a fourth well in the TV
Prospect, known as the Konlee Jae #1 well. (Cook Decl. ¶ 32.) Pursuant to this investment, the
Cooks signed a contract on December 25, 2006, entitled “Amendment to the Development
Agreement – Treasure Valley Prospect, Garvin and Murray County, Oklahoma.” (Cook Decl.,
Ex. F.) As with the September 2006 Amendment, this Amendment specifically stated that it was
an amendment of the terms and conditions to the Development Agreement – Treasure Valley
Prospect dated March 6, 2006 between PenSa and the Cooks. (See id.)
In January 2007, the Cooks were advised that their interest in the Konlee Jae #1 well had
to be reduced “for reasons that have to do with leasehold issues.” (Cook Decl, ¶ 35.) The Cooks
were provided with a new agreement entitled “Amendment to the Development Agreement –
Treasure Valley North Prospect, Garvin and Murray Counties, Oklahoma” that reflected a
reduction in their interest in the Konlee Jae #1 well from 6.6% to 6.0%. (Cook Decl, Ex. G.) As
with the prior Amendments, this Agreement specifically stated that it was an amendment of the
6

terms and conditions to the Development Agreement – Treasure Valley Prospect dated March 6,
2006 between PenSa and the Cooks. (See id.) The Cooks signed this agreement on February 16,
2007. (Id.)
In June 2007, the Cooks acquired an additional interest in two more wells, the Ethel Lou
and Donna Sue wells. (Cook Decl. ¶ 45.) Pursuant to this investment, on June 14, 2007, the
Cooks signed a document entitled “Letter of Understanding – Treasure Valley Prospect.” (Cook
Decl., Ex. K.) That Letter of Understanding specifically stated that “all the terms and conditions
of this Letter of Understanding is [sic] subject to the Development Agreement – Treasure Valley
Prospect – Garvin and Murray County, Oklahoma dated March 6, 2006 by and between PenSa,
Inc. and Mary and Richard Cook.” (Id.)
C.

Plaintiff Richard Hughes
Plaintiff Richard Hughes (“Hughes”) was solicited by the Pendletons and Ed Pendleton to

invest in the TV-North Prospect. (Hughes Resp. at 2.) Altogether, Hughes ultimately invested a
total of approximately $650,000 in connection with the TV-North Prospect as follows. (Id.)
In April 2005, Hughes agreed to obtain an interest in the TV-North Prospect. (Hughes
Decl., Doc. No. 23-1, ¶ 13.) Pursuant to this investment, Hughes signed a contract entitled
“Development Agreement – Treasure Valley North Prospect – Garvin and Murray Counties,
Oklahoma” dated April 18, 2005. 3 (Hughes Decl., Ex. A (“Hughes Dev. Agmt.”).) Through this
Development Agreement, Hughes obtained a “cost bearing beneficial interest” in the TV-North

3

Hughes actually signed this Development Agreement a few days later, on April 25,
2005. (See Hughes Dev. Agmt.)
7

Prospect. (Id. § II, ¶ A.) This Development Agreement contained an arbitration provision
identical to the Development Agreements signed by Stewart and the Cooks. (Id. § XII, ¶ J.)
Hughes was informed by the Pendletons the first well to be drilled in the TV North
Prospect was the Laticia Lee #1 well. (Hughes Decl. ¶ 13.) Hughes participated in the drilling
and completion of the initial test well for the Laticia Lee #1 well and submitted funds for his
share of the costs for these operations. (Id. ¶ 17.)
Due to a lack of return on his initial investment in the Laticia Lee #1, in December 2006,
Hughes informed the PenSa that he did not want to participate in drilling on any future wells in
the TV-North Prospect. (Id. ¶¶ 19-20.) To formalize Hughes’ withdrawal from the TV-North
Prospect, Hughes purportedly4 executed a new document entitled “Letter of Understanding Treasure Valley North Prospect.” (Hughes Decl., Ex. F.) This Letter of Understanding provided
that Hughes “relinquish[ed] and assign[ed] all of his rights, title, and intrest in and to the
Contract Area (AMI) as described in the Development Agreement Treasure Valley North
Prospect . . ., excepting the Laticia Lee #1 well . . . .” (Id. at ¶ 1.) The Letter of Understanding
further provided that “Hughes shall be responsible for his share of any costs that are associated
with the Laticia Lee #1 well per the Development Agreement Treasure Valley North Prospect
Garvin and Murray Counties, Oklahoma dated April 18, 2005.” (Id. ¶ 4.)
D.

Plaintiff James Lust
Plaintiff James Lust (“Lust”) was solicited by the Pendletons and Ed Pendleton to acquire

working interests in the Golden Trend Field, the Treasure Valley Prospect, and the Treasure

4

The Letter of Understanding is not signed by Hughes. (Hughes Decl., Ex. F.)
8

Valley North Prospect. (Lust Resp. at 2.) Altogether, Lust invested approximately $1.9 million
to acquire interests in six different wells in these prospects as follows. (Id.)
First, in April 2003, Lust acquired a working interest in the J.A. Payne #1 well, located in
the Golden Trend Prospect, a prospect separate and apart from the TV and TV-North Prospects.
(Lust Decl., Doc. No. 25-1, ¶¶ 9-10.) Pursuant to this investment, Lust signed a Letter
Agreement on April 27, 2006. (Lust Decl., Ex. A.) This Letter Agreement did not include an
arbitration clause. (See id.)
In August 2003, Lust acquired a working interest in the TV Prospect (a/k/a Davis Field
Prospect). (Lust Decl., ¶¶ 17-19.) Lust initially obtained this working interest by signing a
“Letter of Understanding” on August 26, 2003. (Id., Ex. C.) That Letter of Understanding
specifically provided that “[u]pon your acceptance of this Letter of Understanding a formal
Exploration and Development Agreement . . . will be forwarded to you for your acceptance and
signature and when executed will supercede this Letter of Understanding.” (Id. ¶ 8.)
Consistent with this language, Lust received a document entitled “Development
Agreement – Davis Field Project – Garvin County, Oklahoma” dated September 1, 2003. (Lust
Decl., Ex. E. [“Lust TV Prospect Dev. Agmt.”].) This Development Agreement contains an
arbitration clause identical to the Development Agreements executed by the other plaintiffs. (Id.
§ XII ¶ J.) Lust signed this Development Agreement on October 29, 2003. (See id.)
Lust participated in four wells in the Treasure Valley Prospect: the (1) Anderson #1 well;
(2) the El Ray #1 well; (3) the Hallee Blair #1; and (4) the Hallee Blair #1-Redrill well. (Lust
Decl., ¶¶ 22-26.)

9

In April 2005, Lust acquired a “cost bearing beneficial interest” in the TV-North
Prospect. (Id. ¶ 27.) Pursuant to this investment, Lust signed a contract on April 15, 2005,
entitled “Development Agreement – Treasure Valley North Prospect – Garvin and Murray
Counties, Oklahoma.” (Lust Decl., Ex. K [“Lust TV-North Dev. Agmt.”].) This Development
Agreement included an arbitration clause identical to the Development Agreement he previously
executed with respect to the TV Prospect. (Id. § XII ¶ J.) Lust participated in only one well in
the TV-North Prospect, the Laticia Lee #1 well. (Lust Decl. ¶ 28.)
Due to a lack of return on his investment, Lust notified PenSa he would no longer be
participating in the TV and TV-North Prospects. (Id. ¶ 29.) To formalize this withdrawal from
the TV and TV-North Prospects, Lust executed a new agreement entitled “Letter of
Understanding - Treasure Valley Prospect & Treasure Valley North Prospect.” (Lust Decl., Ex.
L.) That Letter of Understanding provided that Lust “relinquish[ed] and assign[ed] all of his
rights, title, and interest in and to the Contract Area (AMI) as described in the Development
Agreement Davis Field Project . . . dated September 1, 2003 and in the Development Agreement
Treasure Valley North Prospect . . . dated April 15, 2005” with the exception of the Anderson
#1, Hallee Blair # 1, El Ray #1, and Laticia Lee #1 wells. (Id. ¶ 1.) The Letter of Understanding
further provided that Lust would be responsible for his share of any costs that are associated with
those four wells per the September 1, 2003 and April 15, 2005 Development Agreements. (Id. ¶
4.)
E.

The Bays Exploration Lawsuit
In 2007, Bays Exploration, Inc. and Bays Energy Partners 2007, L.P. (“BEP”) filed a

lawsuit against PenSa in Oklahoma (the “Oklahoma Litigation”). (Am. Compl. ¶ 31.) Plaintiffs
10

were not parties to that litigation. Nevertheless, at Defendants’ request, Plaintiffs executed letter
agreements in which they generally acknowledged that PenSa maintained legal title to the
subject property at issue in the Oklahoma Litigation; authorized PenSa to pursue, for the benefit
of Plaintiffs, all defenses and claims applicable to Plaintiffs’ interests in the properties; and
agreed to be bound by any judgment entered at the conclusion of the Oklahoma Litigation. (Id. ¶
33, Ex. 6.)
In September 2012, the trial court in the Oklahoma Litigation entered judgment in favor
of Bays Exploration and BEP against PenSa. (Id. ¶ 51.) In November 2012, PenSa entered into
a Settlement Agreement in which Bays Exploration and BEP agreed to release PenSa from
liability on the Oklahoma Litigation judgment in exchange for, among other things, PenSa’s
agreement to (i) assign all of its rights, titles, and interest in the Investment Prospects to Bays
Exploration, (ii) disclaim any interest in any past or future production revenues attributable to its
interest in the Investment Prospects. (Id. ¶ 53.) Plaintiffs allege that the Settlement Agreement
extinguished all of their remaining equitable working interests in the Investment Prospects and
their rights to any past or future production revenues associated with those interests. (Id. ¶ 54.)
Defendants allegedly did not consult with Plaintiffs prior to negotiating or executing the
Settlement Agreement, nor did they inform Plaintiffs of the existence or terms of the Settlement
after it had been executed. (Id.¶ 55.)
In their Amended Complaint, filed January 21, 2014, Plaintiffs assert state law claims as
follows: breach of contract, breach of the duty of good faith and fair dealing; fraud; negligent
misrepresentation; breach of fiduciary duty; constructive fraud; violations of the Colorado
Securities Act, Colo. Rev. Stat. § 11-51-501 et seq.; taking of stolen property, pursuant to Colo.
11

Rev. Stat. § 18-4-405; conversion; violations of Oklahoma’s Production Standards Act, 52 Okla
Stat. §570.1 et seq; and alter ego liability against the Pendletons. (See Am. Compl.) Plaintiffs
assert that the court has diversity jurisdiction over this action pursuant to 28 U.S.C. § 1332.
Defendants’ Motion to Compel Arbitration was filed on February 12, 2014. (See Mot
Compel.) Defendants seek to compel arbitration based on the arbitration clauses included in the
Development Agreements signed by Plaintiffs with respect to the Investment Prospects.
Defendants also seek a stay of proceedings in this action pending completion of the arbitration.
LEGAL STANDARD
A.

Magistrate Judge Authority
As a threshold matter, the court addresses its authority under 28 U.S.C. § 636 with

respect to Defendants’ Motion to Compel Arbitration. A review of the case law reveals that
district courts have reached different conclusions on whether motions to compel arbitration are
dispositive for purposes of 28 U.S.C. § 636(b)(1). See Vernon v. Qwest Comm’ns Int’l, Inc.,
857 F. Supp. 2d 1136, 1140-41 (D. Colo. 2012) (comparing cases).
Unfortunately, the Tenth Circuit has not weighed in on this precise issue. Nevertheless,
the court agrees with Vernon that P & P Industries, Inc. v. Sutter Corp., 179 F.3d 861, 866-67
(10th Cir. 1999), provides some guidance. Vernon, 857 F. Supp. 2d at 1141. In P & P
Industries, the Tenth Circuit held that a district court has the authority to confirm an arbitration
award under Section 9 of the Federal Arbitration Act (FAA) where the parties “have agreed,
explicitly or implicitly, that any eventual arbitration award shall be subject to judicial
confirmation.” Id. at 867; see also Will v. Parsons Evergreene, LLC, Case No. 08-cv-00898DME-CBS, 2011 WL 2792398, at *1 (D. Colo. July 15, 2011)). Implicit consent may be
12

evidenced by the parties’ agreement that the arbitration shall be governed by the rules and
procedures of the American Arbitration Association, as the AAA’s rules “state that [p]arties to
these rules shall be deemed to have consented that judgment upon the arbitration award may be
entered in any federal or state court having jurisdiction thereof.” P & P Industries, 179 F.3d at
867 (quoting AAA Rule 47(c).) 5
Here, the parties have agreed that arbitration will be “administered by and in accordance
with the Commercial Arbitration Rules of the American Aribtration Association.” (See, e.g.,
Stewart Dev. Agmt. § XII ¶ 12.) Accordingly, the parties have implicitly consented to judicial
confirmation.
The Tenth Circuit has held that a motion may be considered dispositive for purposes of
28 U.S.C. § 636(b)(1) if it has an “identical effect” as one of the motions excepted in that statute.
First Union Mortg. Corp. v. Smith, 229 F.3d 992, 995 (10th Cir. 2000) (citing Ocelot Oil Corp.
v. Sparrow Indus., 847 F.2d 1458, 1462 (10th Cir. 1988). Measured by that standard, the court
finds that the instant Motion to Compel Arbitration is non-dispositive, as an Article III District
Judge ultimately will be required to confirm, modify, or vacate any arbitration award involving
the parties to this action. 6 Vernon, 857 F. Supp. 2d at 1141 (quoting Jackman v. Jackman, Case
No. 06-1329-MLB-DWB, 2006 WL 3792109 (D. Kan. Dec. 21, 2006)) (“‘because an Article III

5

This language is now found at AAA Rule 52(c). See American Arbitration Association,
www.adr.org (select “Search Rules” hyperlink under “Rules & Procedures” dropdown;
then select “Commercial Arbitration Rules and Mediation Procedures”) (last visited July
18, 2014).
6
Should District Judge Raymond P. Moore reach a different conclusion as to the
applicability of 28 U.S.C. § 636(b)(1)(A), this decision may be reviewed de novo
pursuant to Fed. R. Civ. P. 72(b)(3).
13

judge will ultimately be required to confirm, modify, or vacate any arbitration award, the order to
stay proceedings and compel arbitration is non-dispositive and is within the magistrate’s
authority.’”).
B.

Federal Arbitration Act
The FAA requires a court to stay actions involving matters referable to arbitration:
If any suit or proceeding be brought in any of the courts of the United States upon
any issue referable to arbitration under an agreement in writing for such
arbitration, the court in which such suit is pending, upon being satisfied that the
issue involved in such suit or proceeding is referable to arbitration under such an
agreement, shall on application of one of the parties stay the trial of the action
until such arbitration has been had in accordance with the terms of the agreement
....

9 U.S.C. § 3. The FAA further requires courts to compel arbitration in those cases. Id. § 4.
The FAA “manifests a ‘liberal federal policy favoring arbitration.’” Comanche Indian
Tribe v. 49, L.L.C., 391 F.3d 1129, 1131 (10th Cir. 2004) (quoting Gilmer v. Interstate/Johnson
Lane Corp., 500 U.S. 20, 25 (1991)). Thus, “as a matter of federal law, any doubts concerning
the scope of arbitrable issues should be resolved in favor of arbitration.” Moses H. Cone Mem’l
Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983).
However, when the parties dispute the existence of a valid arbitration agreement, there is
no presumption in favor of arbitration. Dumais v. Am. Golf Corp., 299 F.3d 1216, 1220 (10th
Cir. 2002). “‘[T]he question of arbitrability—whether a [contract] creates a duty for the parties
to arbitrate the particular grievance—is undeniably an issue for judicial determination. Unless
the parties clearly and unmistakably provide otherwise, the question of whether the parties
agreed to arbitrate is to be decided by the court, not the arbitrator.’” Riley Mfg. Co., Inc. v.
Anchor Glass Container Corp., 157 F.3d 775, 779 (10th Cir. 1998) (quoting AT&T Techs. v.
14

Comms. Workers, 475 U.S. 643, 649 (1995)). Thus, “[t]he existence of an agreement to arbitrate
is a threshold matter which must be established before the FAA can be invoked.” Avedon Eng’g,
Inc. v. Seatex, 126 F.3d 1279, 1287 (10th Cir. 1997).
This district approaches disputes over whether the parties have agreed to arbitrate by
applying “a standard similar to that governing motions for summary judgment.” Stein v. BurtKuni One, LLC, 396 F. Supp. 2d. 1211, 1213 (D. Colo. 2005); see also Goodwin v. H.M. Brown
& Assocs., Inc., 10-cv-01205-PAB-MEH, 2011 WL 820025, at *3 (D. Colo. Mar. 2, 2011)
(collecting cases); In re Universal Serv. Fund Tel. Billing Practices Litigation, 300 F. Supp. 2d
1107, 1116 (D. Kan. 2003) (“The Courts of Appeals have uniformly held that ‘[ i]n the context
of motions to compel arbitration brought under the Federal Arbitration Act . . . courts apply a
standard similar to that applicable to a motion for summary judgment.’”) Under this approach,
Defendants bear the initial burden of presenting evidence sufficient to demonstrate that an
enforceable arbitration agreement exists. Stein, 396 F. Supp. 2d at 1212. If they satisfy that
burden, the burden shifts to Plaintiffs, who must show that there is “a genuine issue of material
fact as to the making of the agreement, using evidence comparable to that identified in Fed. R.
Civ. P. 56.” Id. at 1213. Finally, the court must “look to state law principles of contract
formation to [determine] whether an agreement to arbitrate has been reached.” Avedon Eng’g,
Inc. 126 F. 3d at 1287 (citations omitted).
ANALYSIS
A.

Existence of an Enforceable Arbitration Clause
The court first considers whether an enforceable arbitration clause exists. At the outset,

the court finds that each of the Plaintiffs signed Development Agreements that contain identical
15

arbitration clauses. (See Stewart Dev. Agmt; Cook Dev. Agmt. #2; Hughes Dev. Agmt.; Lust
TV Prospect Dev. Agmt.; Lust TV-North Dev. Agmt.) The court thus considers Plaintiffs’
arguments as to why these arbitration clauses are not enforceable with respect to some or all of
their claims.
1.

Lust’s Investment in the J.A. Payne Well

Lust argues that the court cannot compel arbitration with respect to his initial investment
in the J.A. Payne well because the Letter Agreement he signed on April 27, 2006 did not include
any arbitration provision. (Lust Resp. at 5.) The court does not reach the question of whether it
can properly compel arbitration with respect to Lust’s investment in the J.A. Payne well because
it finds that his investment in that well is not a subject of this action.
Federal Rule of Civil Procedure 8(a)(2) requires “short and plain statement of the claim
showing that the pleader is entitled to relief.” The purpose of the rule is to “give the defendant
fair notice of what the claim is and the grounds upon which it rests.” Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 555 (2007) (citation and internal punctuation omitted).
The court finds that the Amended Complaint fails to give Defendants notice that Lust’s
claims are premised on his investment in the J.A. Payne Well. The Amended Complaint does
not mention the J.A. Payne Well whatsoever. (See Am. Compl.) While it does states that “the
Pendletons solicited money from the Plaintiffs under a guise of an investment in various oil and
gas exploration projects,” it explicitly mentions only “the Treasure Valley Prospect and Treasure
Valley North Prospect” (Id. ¶ 13.) Further, even assuming that vague term “various” could
conceivably encompass Lust’s investment in the J.A. Payne Well, in alleging that their
investment agreements with PenSa were “memorialized by separate but virtually identical
16

Development Agreement relating to each Investment Prospect” (id. ¶ 21), Plaintiff cite to and
attach only the Development Agreements for the TV Prospect and the TV North Prospect signed
by Lust (id. Ex. 3-4). Plaintiffs’ Amended Complaint does not mention, cite, or attach the Letter
Agreement concerning the J.A. Payne Well.
Notably, Plaintiffs first raised Lust’s investment in the J.A. Payne Well, including the
Letter Agreement establishing that investment, only after Defendants moved to compel
arbitration based on the Development Agreements relating to Lust’s and the other plaintiffs’
investments in the TV and TV-North Prospects. The court finds it likely that Plaintiffs did so
only to “muddy the waters” as to whether it was appropriate to compel arbitration in this action.
Altogether, the court finds that the Amended Complaint does not give notice to
Defendants that one of the bases for Lust’s claims is his investment in the J.A. Payne Well.
Therefore, the court finds that Lust’s investment in the J.A. Payne well is not properly a basis for
this action and, as a consequence, does not reach whether it may compel arbitration with respect
to Lust’s claims regarding that well.
2.

Lack of Consideration for Modification

Lust also argues that the September 1, 2003 Development Agreement establishing his
investment in the TV Prospect is unenforceable because it was a modification to the August 26,
2003 Letter of Understanding and was not supported by adequate consideration. (Lust Resp. at
6-7.) Although the court agrees that, generally, a modification to a contract requires
consideration, see, e.g., Hoagland v. Celebrity Homes, Inc., 572 P.2d 493, 494 (Colo. App.
1977), the court disagrees that the Development Agreement was a modification of the Letter of
Understanding. More specifically, the Letter of Understanding signed by Plaintiff Lust explicitly
17

provides that “[u]pon your acceptance of this Letter of Understanding a formal Exploration and
Development Agreement . . . will be forwarded to you for your acceptance and signature and
when executed will supercede this Letter of Understanding.” (Lust Decl., Ex. C ¶ 8.) Thus, the
Development Agreement was not a modification of the Letter of Understanding, but instead was
contemplated and agreed upon as a term of the Letter of Understanding.
3.

Subsequent Agreements signed by Cook and Stewart

Stewart and the Cooks argue that arbitration can only be compelled to the extent their
claims concern their initial investments that were obtained directly under the Development
Agreements. (Stewart Resp. at 12-13; Cooks Resp. at 11-12.) The Cooks and Stewart argue that
their other interests in the Investment Prospects were obtained under subsequent agreements that
did not include an arbitration clause.
The court rejects this argument. Although the Cooks and Stewart are correct that they
each directly obtained an interest in only one well each by way of their respective Development
Agreements, each of their subsequently-obtained interests were obtained through either (1)
amendments to the original respective Development Agreements, rather than a new, self-standing
agreement (see Stewart Decl., Ex. C; Cook Decl., Ex. F & G); or (2) a Letter of Understanding
specifically stating that “all the terms and conditions of this Letter of Understanding is [sic]
subject to the Development Agreement” between Stewart and PenSa (Stewart Decl., Ex. J). 7 As

7

Stewart argues that, although the 2007 Letter Agreement under which he acquired his
interest in the Ethel Lou and Donna Sue wells incorporate the terms of the Development
Agreement (Lust Decl., Ex. J), it was modification of two letter agreements dated May 30
and May 31, 2007 (see Lust Decl., Ex. I) and is unenforceable for lack of consideration
because the May 2007 letters already required prepayment of funds to participate in the
18

such, the court finds that the Cook’s and Stewart’s subsequently-obtained interests are all subject
to the terms of their respective Development Agreements, including the arbitration provisions.
4.

Relinquishment Agreements of Hughes and Lust

Hughes and Lust both argue that the arbitration provisions contained in the Development
Agreements they signed are not binding because the Development Agreements were superseded
by the Letters of Understanding that relinquished their rights and obligations with respect to the
Investment Prospects, with the exception of certain specified wells. (Hughes Resp. at 5-8; Lust
Resp. at 7-8.) Lust and Hughes maintain that, with the exception of their obligations to be
responsible for any costs associated with the wells that were not relinquished, the Letters of
Understanding do not reference or incorporate any of the terms of the Development Agreements
and, further, each letter explicitly provides that “should this Letter of Understanding conflict
with any prior Agreement said Letter of Understanding shall prevail.” (Hughes Aff., Ex. F ¶¶ 4,
7; Lust Aff., Ex. L ¶¶ 4, 7.)
The court disagrees that the Letters of Understanding override the arbitration provision
contained in the Development Agreements. First, the Letter of Understanding attached to
Hughes’ declaration is not signed by Mr. Hughes, (see Hughes Decl., Ex. F), and there is no
other evidence suggesting that this Letter of Understanding was ever executed (see Hughes Aff.
¶¶ 20-21.) Because there is no evidence to suggest this Letter of Understanding ever became

wells. The court rejects this argument. The May 2007 letter agreements only established
Stewart’s participation in the drilling of the Ethel Lou and Donna Sue Wells—they do
not establish Stewarts’ interest in those wells. (See Lust Decl., Ex. I.) The 2007 Letter
Agreement is a separate agreement that is supported by consideration—namely the
creation of Stewart’s interest in the Ethel Lou and Donna Sue wells in exchange for his
prepayment of the drilling costs.
19

effective, it cannot negate the arbitration provision contained in the Development Agreement
signed by Hughes.
However, even if Hughes did sign the Letter of Understanding, as Lust did (see Lust Aff.,
Ex. L), these Letters of Understanding are insufficient to negate the arbitration provision
contained in the Development Agreements. “Under the federal common law of arbitrability, an
arbitration provision in a contract is held to survive the termination of that contract unless there
is clear evidence that the parties intended to override this presumption.” Encore Productions,
Inc. v. Promise Keepers, 53 F. Supp. 2d 1101, 1108 (D. Colo. 1999) (citing Nolde Bros., Inc. v.
Local No. 358, Bakery and Confectionary Workers Union, 430 U.S. 243, 255 (1977); Riley Mfg.
Co., 157 F.3d at 781. “This presumption in favor of continuing arbitrability can be rebutted if
the parties express or clearly imply an intent to repudiate arbitrability, or, if the dispute cannot be
said to arise under the original contract.” Id. at 1109.
In Encore Productions, the parties entered into a Service Contract that included an
arbitration provision. Id. at 1106. However, approximately a year later, the parties entered into a
Termination Agreement that purportedly terminated the original Service Contract in its entirety.
Id. at 1107.
The court rejected the plaintiff’s argument that the arbitration provision included in the
Service Contract no longer held any force or effect in the face of the Termination Agreement.
Instead, the court found that “even if the Termination Agreement effectively terminated the
entire Service Contract, including its arbitration provision, ‘when a dispute arises under an
expired contract that contained a broad arbitration provision, courts must presume that the parties
intended to arbitrate their dispute.’” Id. at 1108 (quoting Riley Mfg., 157 F.3d at 781). Further,
20

the court did not find any evidence to rebut this presumption because the Termination Agreement
had no express language regarding arbitration and there was no clear showing of an implied
intent to repudiate the arbitration clause in the Service Contract. Id. at 1109.
Here, unlike in Encore Productions, it does not appear that the Letters of Understanding
terminated the respective Development Agreements in their entirety. Instead, the Letter
Agreements both provide that Lust and Hughes retained both rights and obligations under the
Development Agreements with respect to the wells for which they did not relinquish and assign
their rights, titles and interests. (See Lust Decl., Ex. L ¶¶ 1-5; Hughes Decl., Ex. F ¶¶ 1-5.)
In any event, the court finds that the Letters of Understanding do not contain any express
or implicit language demonstrating that the parties intended to repudiate the arbitration clause
contained in the Development Agreements. Although the Letters of Understanding state
“[s]hould this Letter of Understanding conflict with any prior Agreement said Letter of
Understanding shall prevail” (Lust Decl., Ex. L ¶ 4; Hughes Decl., Ex. F ¶ 4), it does not include
any language or provision that actually conflicts with the Development Agreements or the
arbitration clauses contained therein. See, e.g., United Steelworkers of Am. v. Warrior Gulf and
Navigation Co., 363 U.S. 574, 585 (1960) (“In the absence of any express provision excluding a
particular grievance from arbitration, we think only the most forceful evidence of a purpose to
exclude the claim from arbitration can prevail, particularly where, as here, the exclusion clause is
vague and the arbitration clause quite broad.”) Furthermore, as discussed supra, the court finds
Plaintiffs’ claims in this matter “arise under” the Development Agreements. Accordingly, the
court finds that the Letters of Understanding signed by Lust and purportedly signed by Hughes
did not supersede the arbitration provision contained in the original Development Agreements.
21

5.

Unconscionability

Plaintiffs all argue that the arbitration provisions contained in the respective
Development Agreements are unconscionable and therefore unenforceable. The court disagrees.
Section 2 of the FAA provides that arbitration agreements are “valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity for the revocation of any
contract.” 9 U.S.C. § 2. Unconscionability is one such equitable consideration that may allow a
party to avoid its agreement to arbitrate. See AT&T Mobility LLC v. Concepcion, --- U.S. ----,
131 S.Ct. 1740, 1745-48 (2011). Under Colorado law, several factors inform the
unconscionability analysis, including,
(1) a standardized agreement executed by parties of unequal bargaining power;
(2) lack of opportunity to read or become familiar with the document before
signing it; (3) use of fine print in the portion of the contract containing the
provision; (4) absence of evidence that the provision was commercially
reasonable; (5) the terms of the contract; (6) the relationship of the parties,
including factors of assent, unfair surprise, and notice; and (7) all the
circumstances surrounding the formation of the contract.
Vernon v. Qwest Commc’ns Int’l, Inc., 925 F.Supp.2d 1185, 1194 (D.Colo.2013) (quoting Davis
v. M.L.G. Corp., 712 P.2d 985, 991 (Colo. 1986)). The burden is on Plaintiffs to prove that the
arbitration provisions contained in the Development Agreements are unconscionable. General
Steel Domestic Sales, LLC v. Rising Sun Missionary Baptist Church, Inc., Case No. 11-cv001332-DME-CBS, 2012 WL 1801955, at *2 (D. Colo. May 17, 2012). Importantly, Plaintiffs
must demonstrate both procedural and substantive unconscionability. Vernon, 925 F.Supp.2d at
1194–95.
The first, second, third, sixth, and seventh factors relate to procedural unconscionability.
As to the first factor, the court is not convinced that the Development Agreements were
22

standardized agreements presented on a take-it-or-leave-it basis. Although the Development
Agreements may have been drafted by Defendants and presented to Plaintiffs for their signatures,
there is nothing in the record to suggest that the terms were completely nonnegotiable—at best, it
appears that Plaintiffs simply did not ask about them. 8 Weller v. HSBC Mortg. Servs, Inc., 971
F. Supp. 2d 1072, 1080-81 (D. Colo. 2013). Moreover, although Defendants may have had more
experience than Plaintiffs in the oil and gas industry, Plaintiffs were not required to enter into the
Development Agreements with PenSa—they were always free to invest their money elsewhere.
See Jones v. Dressel, 623 P.2d 370, 375 (Colo. 1981) (no adhesion contract when services
provided by defendant could be obtained elsewhere); Clinic Masters, Inc. v. District Court for
the Cnty. of El Paso, 556 P.2d 473, (Colo. 1976) (fact that services could be purchased elsewhere
militates against finding of unconscionability).
As to the second factor, there is no evidence to suggest that Plaintiffs lacked an
opportunity to read or become familiar with the Development Agreements before signing them.
To the contrary, each Development Agreement includes the following provisions:
L.
Construction, Captions: Definition of “Including”: The parties
acknowledge that they have had an adequate opportunity to review each and every
provision contained in this Agreement and to submit the same to legal counsel for
review. Based on said review and consultation, the Parties agree with each and
every term contained in this Agreement
....
N.
Investment Representations: . . .
Prior to acquiring the interests, Second Party [i.e. Plaintiffs] have made an
investigation of PenSa and its business and have had made available to Second
Party all information with respect thereto which Second Party needed to make an

8

In fact, a number of the Development Agreements contain handwritten notations, which
suggest that the Development Agreements may indeed have been negotiable.
23

informed decision acquire the interest. Second Party considers itself to be an
entity possessing experience and sophistication as an investor which are adequate
for the evaluation of the merits and risks of Second Party’s investment in the
interest.
O.
Independent Investigation: Second Party represents that it is an
experience and knowledgeable investor and operator in the oil and gas business, is
aware of its risks, and is capable of independently evaluating the merits and risks
of the investment contemplated by this Agreement. Second Party acknowledges
that as to the working interest being acquired hereunder, Second Party is
acquiring all of the risks associated with oil and gas industry operations.
(See Am. Compl., Ex. 1-5 § L, N, & O, respectively.) A party “generally cannot avoid
contractual obligations by claiming that he or she did not read the agreement.” Vernon, 857 F.
Supp. 2d at 1152.
As to the third factor, the arbitration provisions featured in the Development Agreements
are featured in a separate paragraph with the bold-face title “Arbitration” and the text of the
provision is in the same-sized font as the other clauses in the contract. See Rocky Mountain
Chocolate Factory, Inc. v. SDMS, INc., No. 06-cv-01212-WYD-BNB, 2007 WL 4268962, at *7
(D. Colo. Nov. 30, 2007) (rejecting argument that provision was inconspicuous were it “was in
normal print consistent with other clauses in the contract”).
As to the sixth factor, Stewart and the Cooks argue that when the Pendletons provided
them a copy of the Operating Agreement between Bays Exploration and PenSa—which does not
include an arbitration provision and specifically contemplates that disputes be submitted to a
court of law—they led Stewart and the Cooks to believe that contract would govern their
investment in the Investment Prospects. (Stewart Resp. at 9; Cooks Resp. at 7.) This argument
is unpersuasive. First, Stewart and the Cooks never signed the Operating Agreement and did not
agree to the Operating Agreement, except for through the Development Agreements. More
24

importantly, Stewart and the Cooks both acknowledge that they ultimately acquired their
working interests in the Investment Prospects through the Development Agreements. (See
Stewart Decl., ¶ 6, Cook Decl. ¶ 17; Hughes Decl. ¶ 13.)
Stewart and Lust also argue that the volume of agreements they were required to sign
with respect to the Investment Prospects warrants a finding of procedural unconscionability.
(Stewart Resp. at 9-10; Lust Resp. at 9.) However, as already discussed, there is no evidence to
suggest that Stewart and Lust lacked an opportunity to review each of those agreements,
including the Development Agreements. Moreover, Plaintiffs have not submitted any case law
to support the proposition, nor is the court otherwise persuaded, that the number of agreements a
party is asked to sign, standing alone, equates to unfair surprise, or a lack of notice or assent.
This is particularly true given that Plaintiffs each invested hundreds of thousands, if not millions,
of dollars in the Investment Prospects over the course of these various contracts. See Bonanno v.
Quizno’s Franchise Co., No. 06-cv-02358-CMA-KLM, 2009 WL 1068744, at *22 (D. Colo.
Apr. 20, 2009) (noting that, where there is a significant amount of money involved, “one would
expect that plaintiffs entering into such a relationship would do so with a bit more cognizance
than a teenager purchasing a phone at the mall”).
The seventh factor is a “catchall that allows for consideration of all of the factors
surrounding formation of the contract.” Vernon, 925 F. Supp. 2d at 1195. For the reasons
already discussed, the court has not identified any circumstances in the formation of the
Development Agreements to render the arbitration clauses procedurally unconscionable.
Altogether, the court finds that Plaintiffs have failed to demonstrate that the Development
Agreements in general, or the arbitration provisions in particular, were executed under
25

procedurally unconscionable circumstances. 9 As such, the court finds Plaintiffs cannot avoid
arbitration based on unconscionability.
B.

Scope of the Arbitration Provision
Plaintiffs argue that even if the arbitration clauses contained in the respective

Development Agreements are valid, some of their claims do not fall within the scope of that
provision and therefore are not subject to arbitration. The court disagrees.
When a contract contains an arbitration clause, there is a general presumption of
arbitrability, and any doubts are to be resolved in favor of arbitration “unless it may be said with
positive assurance that the arbitration clause is not susceptible of an interpretation that covers the
asserted dispute.” AT&T Techs, 475 U.S. at 650. Where the arbitration clause is broad, only an
express provision excluding a specific dispute, or “the most forceful evidence of a purpose to
exclude the claim from arbitration, will remove the dispute from consideration in arbitration.”
Id.; Cummings v. FedEx Ground Package Sys., Inc., 404 F.3d 1258, 1261 (10th Cir. 2005)
(quoting Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc., 252 F.3d 218, 224 (2d
Cir. 2001)) (when an arbitration clause is broad, “there arises a presumption of arbitrability and
arbitration of even a collateral matter will be ordered if the claim alleged implicates issues of
contract construction or the parties’ rights and obligations under it”).
It does not appear that the Tenth Circuit has opined as to whether the language used in
the Development Agreements, i.e. “[a]ny dispute arising under this Agreement,” (See, e.g.,

9

Because a finding of unconscionability requires a showing of both procedural and substantive
unconscionability, the court does not address whether the arbitration provision is substantively
unconscionable.
26

Stewart Dev. Agmt. § XII, ¶ J (emphasis added)), warrants a broad or narrow construction.
Other circuits have reached different results on the proper construction of the phrase “arising
under.”
In an early case, the Second Circuit stated that the phrase “‘any dispute or difference
[arising] under the Charter’” only applied to claims relating to the interpretation or performance
of the contract. In re Kinoshita & Co., 287 F.2d 951, 953 (2d Cir. 1961). The Kinoshita court
reasoned that the phrase “arising under” is narrower in scope that the phrase “arising out of or
relating to,” the standard language recommended by the American Arbitration Association. Id.
Similarly, the Ninth Circuit has equated the phrase “arising hereunder” with “arising under,” and,
relying on Kinoshita, found that the language “‘arising hereunder’ is intended to cover . . . only
[disputes] relating to the interpretation and performance of the contract itself.” Mediterranean
Enters. Inc. v. Ssangyon Corp., 708 F.2d 1458, 1464 (9th Cir. 1983); see also Tracer Research
Corp. v. Nat’l Envtl. Servs. Co., 42 F.3d 1292, 1294-95 (9th Cir. 1994) (reaffirming
Mediterranean Enterprises narrow construction of “arising under”).
However, the Second Circuit has subsequently changed course and, although not
formally overruling Kinoshita, has severely confined its holding to the “its precise facts,” noting
that Kinoshita is inconsistent with the federal policy favoring arbitration. See ACE Capital Re
Overseas Ltd v. Cent. United Life Ins. Co., 307 F.3d 24, 33 (2d Cir. 2002) (“As a result of [later
Second Circuit cases], the authority of Kinoshita is highly questionable in this Circuit”); Louis
Dreyfus Negoce, 252 F.3d 218, 225-26 (2d Cir. 2001) (“In [Kinoshita ] . . . we intimated that the
use of the phrase ‘arising under’ an agreement, in an arbitration clause, indicated that the parties
intended the clause be narrowly applied. We have, however, since limited this holding to its
27

facts, declaring that absent further limitation, only the precise language in Kinoshita would
evince a narrow clause.”); S.A. Mineracao Da Trindade–Samitri v. Utah Int'l, Inc., 745 F.2d 190,
194 (2d Cir. 1984) (“We decline to overrule In re Kinoshita, despite its inconsistency with
federal policy favoring arbitration . . . because we are concerned that contracting parties may
have (in theory at least) relied on that case in their formulation of an arbitration provision.”)
Accordingly, in these later cases, the Second Circuit found that language similar (but not
identical) to the language in Kinoshita warranted a broad construction. See, e.g., ACE Capital,
307 F.3d at 31–34; Genesco, Inc., 815 F.2d at 854; S.A. Mineracao Da Trindade–Samitri, 745
F.2d at 194–195.
In addition, a majority of the other federal circuits have declined to follow Kinoshita
because of the strong federal policy in favor of arbitration. See, e.g., Battaglia v. McKendry, 233
F.3d 720, 727 (3d Cir. 2000) (“[W]hen phrases such as ‘arising under’ and ‘arising out of’
appear in arbitration provisions, they are normally given broad construction, and are generally
construed to encompass claims going to the formation of the underlying agreements.”); Gregory
v. Electro–Mech. Corp., 83 F.3d 382, 386 (11th Cir.1996) (broadly construing phrase “any
dispute . . . which may arise hereunder”); Highlands Wellmont Health Network v. John Deere
Health Plan, 350 F.3d 568, 578 (6th Cir. 2003) (holding “that ‘arising out of’ is broad enough to
include a claim of fraudulent inducement of a contract”); Sweet Dreams Unlimited, Inc. v. Dial–
A–Mattress Int'l, Ltd., 1 F.3d 639, 642 (7th Cir. 1993) (noting that “arising out of” covers all
disputes “having their origin or genesis in the contract, whether or not they implicate
interpretation or performance of the contract per se”); Mar–Len of Louisiana, Inc. v. Parsons–
Gilbane, 773 F.2d 633, 637 (5th Cir. 1985) (recognizing that Kinoshita is inconsistent with
28

federal policy favoring arbitration); Dialysis Access Ctr., LLC v. RMS Lifeline, Inc., 638 F.3d
367, 381 (1st Cir. 2011) (“We agree with the majority of federal circuits . . . that the analysis in
Kinoshita is not consistent with the strong federal pro-arbitration policy set forth by the FAA”).
It appears that the Ninth Circuit is the only federal circuit that continues to strictly adhere to the
analysis in Kinoshita.
The court believes the Tenth Circuit would follow the majority of the federal circuits and
give the phrase “arising under” a broad construction based on the strong federal policy in favor
of arbitration. See Cummings, 404 F.3d at 1262 (describing a “broad provision” as one that
“refers all disputes arising out of a contract to arbitration”); Viaero Wireless v. Nokia Solutions
Network U.S. LLC, Case No. 13-cv-00866-RM-CBS, 2013 WL 5366402, at *4-5 (D. Colo. Sept.
25, 2013) (relying on Cummings and giving a brad construction to provision of “any dispute
under this Agreement . . .”). Accordingly, the court considers whether, under that broad
construction, Plaintiffs’ claims arise under the Development Agreements.
C.

Whether Plaintiffs’ Claims “Arise Under” the Development Agreements
Plaintiffs argue that some of their claims are outside of the scope of the Development

Agreements. The court disagrees.
First, Plaintiff’s first and second claims—for breach of contract and the implied duty of
good faith and fair dealing—would be subject to arbitration even if the arbitration clause were
narrow in scope. See Mediterranean Enters. Inc., 708 F.2d at 1464 (narrow construction of
“arising hereunder” covered disputes relating to the interpretation and performance of the
contract itself).

29

Second, Plaintiff’s third, fourth, and seventh claims—for fraud, negligent
misrepresentation, and violations of the Colorado Securities Act, respectively—allege that
Defendants made material misrepresentations that induced Plaintiffs to invest funds pursuant to
the Development Agreements. Courts have routinely held that a broad arbitration clause, such as
the one here, covers claims for fraud in the inducement. See, e.g., Lee v. Grandcor Med. Sys.,
Inc., 702 F. Supp. 252 (D. Colo. 1988) (citing Prima Paint Corp. v. Flood & Conklin Mfg., 388
U.S. 395 (1967); Dialysis Access Ctr., 638 F.3d at 381 (collecting cases holding that a broad
arbitration provision covers claims for fraud in the inducement).
The court finds that each of Plaintiffs’ remaining claims arise under the Development
Agreements because, at the very least, they relate to collateral matters that implicate construction
of or the parties’ rights and obligations under the Development Agreements. Cummings, 404
F.3d at 1261. More specifically, Plaintiffs’ fifth and sixth claims, for breach of fiduciary duty
and constructive fraud, respectively, both rely on duties created by, or collateral to, the
Development Agreements. Similarly, Plaintiffs’ eighth, ninth, and tenth claims assert that
Defendants took or misappropriated funds that Plaintiffs invested or were owed under the
Development Agreements.
Accordingly, the court finds that each of Plaintiffs’ claims “arise under” the Development
Agreements.
D.

Arbitration of Claims against the Pendletons
Finally, Plaintiffs argue that even if their claims against PenSa are properly submitted to

arbitration, the court cannot compel arbitration against the Pendletons because they were not
signatories to the Development Agreements. The court disagrees.
30

It is true that courts typically have the authority to compel arbitration only between the
signatories of an arbitration agreement. See E.I. DuPont de Nemours & Co. v. Rhone Poulenc
Fiber & Resin Intermediates, S.A.S., 269 F.3d 187, 194 (3d Cir. 2001). However, a nonparty
may fall within the scope of an arbitration agreement under a theory of equitable estoppel where
there is a “close relationship” between one of the signatories and the nonsignatory and a
“signatory to the contract containing an arbitration clause raises allegations of substantially
interdependent and concerted misconduct by both the nonsignatory and one or more of the
signatories to the contract.” Cherry Creek Card & Party Shop, Inc. v. Hallmark Mktg. Corp.,
176 F. Supp. 2d 1091, 1098 (D. Colo. 2011); see also GATX Mgmt. Serv., LLC v. Weakland, 171
F.Supp.2d 1159, 1166 (D. Colo. 2001).
Here, there is plainly a close relationship between PenSa and the Pendletons, the sole
shareholders, directors, and employees of PenSa. (Am. Compl. ¶ 12.) In addition, Plaintiffs’
claims do not distinguish between the actions of PenSa and the Pendletons. Finally, Plaintiffs
seek to attach any liability of PenSa to the Pendletons under an alter ego theory of liability. (Id.
¶¶ 134-36.) Accordingly, because Plaintiffs’ allegations concern substantially (if not
completely) interdependent misconduct between PenSa and the Pendletons, the court may and
will compel Plaintiffs to arbitrate their claims against the Pendletons under a theory of equitable
estoppel.
Therefore, for the foregoing reasons, it is
ORDERED that “Defendants’ Motion and Brief to Compel Arbitration and Stay
Proceedings” (Doc. No. 15) is GRANTED. As soon as practicable the parties SHALL
PROCEED to arbitration on Plaintiffs’ claims asserted in this action. It is further
31

ORDERED that this case is STAYED 10 pending the outcome of the arbitration of
Plaintiffs’ claims. The parties shall file a Status Report no later than 14 days after completion of
arbitration.
Dated this 1st day of August, 2014.

10

The court notes that the District Court may elect to direct the Clerk of Court to
administratively close this case, subject to reopening for good cause. D.C.COLO.LCivR
41.2.
32