Cornerworld Corporation v. Timmer et al

Filing 121

OPINION ; signed by Judge Robert Holmes Bell (Judge Robert Holmes Bell, kcb)

Cornerworld Corporation v. Timmer et al

Doc. 121

UNITED STATES DISTRICT COURT F O R THE WESTERN DISTRICT OF MICHIGAN S O U T H E R N DIVISION

C O R N E R W O R L D CORPORATION, P l a in tif f , F ile No. 1:09-CV-1124 v. H O N . ROBERT HOLMES BELL N E D TIMMER, D e f e n d a n t. / OPINION O n October 8, 2010, the Special Master filed his Second Dispute Resolution R e c o m m e n d a tio n , recommending that the Court: (1) conclude that Defendant has waived h is right to arbitrate Earn Out Agreement disputes with the American Arbitration Association (" A A A " ), and (2) issue an order stating that Defendant shall not issue a notice of default c o n c ern in g Plaintiff's failure to provide its shareholder list unless and until Defendant p ro d u c e s a reasonable basis for needing Plaintiff's complete shareholder list to enforce his rig h ts under the Secured Debenture. (Dkt. No. 108.) Defendant Ned Timmer filed Plaintiff

o b je c t io n s to the Recommendation on October 15, 2010. (Dkt. No. 109.)

C o rn e rw o rld filed a brief in response on October 22, 2010. (Dkt. No. 110). For the reasons th a t follow, the Court will adopt the recommendation in part and reject it in part.

Dockets.Justia.com

I. T im m e r has objected only to the recommended finding that he has waived his right to submit his dispute under the parties' Earn Out Agreement to the AAA for arbitration. The Special Master concluded that Timmer waived AAA arbitration by: 1) allowing t h e litigation to proceed for seven months before raising the arbitration clause, 2) filing a c o u n ter c laim agreeing that this Court was the proper venue for this dispute, 3) failing to re q u e st arbitration in his answer or affirmative defenses, and 4) filing a state court claim and d e liv e ry action alleging violations of the Earn Out Agreement. The Special Master further f o u n d that CornerWorld would suffer actual prejudice if the Earn Out dispute were referred to arbitration at this stage, since it has invested in litigating the matter in this Court and has w o n certain victories that could be undone by beginning again with an AAA arbitrator. T h e Federal Arbitration Act requires the arbitration of disputes "involving interstate c o m m e rc e " where the parties have agreed to do so through a contractual arbitration clause. 9 U.S.C. § 2. Where a dispute subject to arbitration is presented to a court, and the making o f the agreement for arbitration or the failure to comply therewith is not in issue, "the court s h a ll make an order directing the parties to proceed to arbitration in accordance with the te rm s of the agreement . . . ." 9 U.S.C. § 4. The Court must examine arbitration language in a contract in light of "the strong federal policy in favor of arbitration, resolving any doubts a s to the parties' intentions in favor of arbitration." Hurley v. Deutsche Bank Trust Co. A m e ric a s, 610 F.3d 334, 338 (6th Cir. 2010) (citing Albert M. Higley Co. v. N/S Corp., 445

2

F .3 d 861, 863 (6th Cir. 2006)). Because of the presumption in favor of arbitration under the F e d e ra l Arbitration Act, courts do not lightly infer a party's waiver of its right to arbitration. I d . (citing O.J. Distrib., Inc. v. Hornell Brewing Co., 340 F.3d 345, 355 (6th Cir. 2003)). " [ A ] party may waive an agreement to arbitrate by engaging in two courses of conduct: (1) tak in g actions that are completely inconsistent with any reliance on an arbitration agreement; a n d (2) `delaying its assertion to such an extent that the opposing party incurs actual p re ju d ic e .'" Id. (citing O.J. Distrib. 340 F.3d at 356). In Hurley, the Sixth Circuit found a w a iv e r where the defendant failed to assert the right to arbitration for 26 months and sought a rb itra tio n only after the court had entered a default judgment against it. 610 F.3d at 338-39. S e e also Manasher v. NECC Telecom, 310 F. App'x 804, 806 (6th Cir. 2009) (finding that th e defendant waived its right to arbitration by failing to plead arbitration as an affirmative d e f e n se and by actively participating in litigation for almost a year without asserting that it h ad a right to arbitration). II. T h e parties' intention to present disputes regarding the Earn Out Agreement to a rb itra tio n is clear. The Earn-Out Agreement between Timmer and Woodland Holdings p ro v id e s in pertinent part: If any dispute or difference of any kind whatsoever shall arise between the p a rtie s to this Agreement (each a "Disputing Party") in connection with or arisin g out of this Agreement, or the breach, termination or validity thereof (a " D is p u te " ), then, on the demand of any Disputing Party, the Dispute shall be f in a lly and exclusively resolved by arbitration in accordance with the C o m m e rc ia l Arbitration Rules of the AAA . . . . 3

(D k t. No. 6, Ex 12, ¶ 15.) In examining the issue of waiver, the Court notes that the Earn Out Agreement is only o n e of the many alleged defaults alleged in Timmer's counterclaim and in his claim and d e liv e ry action, Timmer v. Woodland Holdings Corp., Case No. 1:10-CV-793 (W.D Mich.), a n d it is the only transaction document that has an arbitration provision. The Court also observes that the Earn Out Agreement was not at issue when Timmer c o m m e n c e d his first action against CornerWorld. See Timmer v. CornerWorld, 1:09-CV1 1 3 1 (W.D. Mich. Dec. 15, 2009) (Dkt. No. 1, Compl.) The Earn Out Agreement did not b e c o m e an issue in this case until March 24, 2010, when Timmer asserted in his counterclaim th a t Plaintiff had defaulted on its obligations under the Secured Debenture by, among other th in g s, failing to account properly for various expenses under the Earn Out agreement. (Dkt. N o . 41, Countercl. ¶ 25(d).) Because the Earn Out Agreement was not at issue in January, 2 0 1 0 , when Timmer filed his answer and affirmative defenses to CornerWorld's amended co m p lain t, his failure to to mention arbitration in those pleadings is not evidence of waiver. C o rn e rW o rld has insisted from the beginning that Timmer's claim under the Earn Out A g ree m en t is subject to binding arbitration. (Dkt. No. 45, Pl.'s Br. 16; Dkt. No. 60, Pl.'s R e p ly Br. 8-10.) Timmer did not challenge this assertion. He agreed that "[a]s to arbitration, th e Court should order the Parties to arbitrate the one claim that is subject to arbitration." (D k t . No. 58, Def.'s Resp. 1.) Timmer further asserted that "[d]isputes arising out of the

4

E a rn Out Agreement are subject to binding Arbitration that is to take place in New York." (Id . at 13.) Timmer then indicated that failure to pay under the Earn Out Agreement is also a n Event of Default under § 6(a)(iii) of the Debenture 1 and that arbitration does not apply to e n f o rc e m e n t of a default under the Debenture and Security agreements. Id. O n July 30, 2010, Timmer filed an action for claim and delivery in the Ottawa County C ir c u i t Court that was removed to this Court. Timmer v. Woodland Holdings Corp., Case N o . 1:10-CV-793 (W.D. Mich. removed Aug. 10, 2010). Among the defaults alleged by T im m e r in that action was the failure to make payment under the Earn Out Agreement. Id. (D k t. No. 1, Notice of Removal, Ex. 1C1, Compl. ¶ 25(B).) On August 26, 2010, the d e f en d a n ts in Case No. 1:10-CV-793 2 filed a motion to dismiss asserting again that an a lle g e d breach under the Earn Out Agreement does not constitute a "default" under the S e c u re d Debenture because any dispute under the Earn Out agreement is subject to m an d atory, binding arbitration. (Case No. 1:10-CV-793, Dkt. No. 7, Defs.' Br. 11.) In response, Timmer asserted that the Earn Out Agreement's arbitration provision sp e c if ica lly provides for legal proceedings in aid of arbitration: By agreeing to arbitration, the Disputing Parties do not intend to deprive any c o u rt of its jurisdiction to issue a pre arbitral injunction, pre arbitral

The Secured Debenture defines an "event of default" to include a default under any o f the Transaction Documents. (Dkt. No. 6, Ex. 8, Secured Debenture § 6(a)(iii).) The defendants in Case No. 1:10-CV-793 are Woodland Holdings Corp., Woodland W ire le s s Solutions, Ltd., S. Squared, LLC, West Michigan Co-Locations Services, LLC, T w T V , LLC and IU Investments, LLC. 5
2

1

a tta c h m e n t, or other order in aid of arbitration proceedings and the e n f o rc e m e n t of any award. (E a rn Out Agrm't ¶ 15.) According to Timmer, the claim and delivery action is a pre arbitral m e c h an i s m of the sort intended by this provision. (Case No. 1:10-CV-793, Dkt. No. 9, at 1 2 .) As the Special Master correctly noted, although an action for claim and delivery in c lu d e s a provision for possession pending judgment, Mich. Ct. R. 3.105(E), the action itself is not merely to preserve the status quo because it seeks the final relief of repossession and d a m a g e s . Mich. Ct. R. 3.105(A). Because Timmer has repeatedly affirmed the need to arbitrate disputes under the Earn O u t Agreement, the Court must consider whether Timmer's belief that he could s im u lta n e o u s ly pursue disputes under the Earn Out Agreement in arbitration at the same time a s he litigated violations of the Earn Out Agreement in this Court amounts to a waiver of his rig h t to arbitration. Upon review, the Court concludes that Timmer's actions in this Court a re not "completely inconsistent with any reliance on an arbitration agreement." Timmer has n e v e r denied that disputes over the Earn Out Agreement are subject to arbitration. He has m e re ly presented an argument that the failure to abide by the Earn Out Agreement is also an e v e n t of default under the Secured Debenture. Based upon the language of the transaction d o c u m e n ts , this is at least an arguable position. Furthermore, the Court finds that Timmer's delayed request for arbitration has not re su lte d in prejudice to CornerWorld. As recently as August, 2010, CornerWorld asserted 6

t h a t the dispute over the Earn Out Agreement was subject to arbitration. In September, T im m e r himself requested a determination from the Special Master as to whether he could b rin g the Earn Out Agreement to AAA arbitration. CornerWorld has not suggested that it w a s prejudiced by anything that occurred during the month that elapsed between C o rn e rW o rld 's assertion of the right to arbitrate disputes under the Earn Out Agreement and T im m e r's request for arbitration. Moreover, unlike the situation in Hurley, supra, this Court h a s made no rulings on the Earn Out Agreement, and the rulings the Court has entered would n o t be affected by arbitration of the Earn Out Agreement. Accordingly, the Court concludes th a t the parties' dispute over the Earn Out Agreement should be sent to arbitration. For the reasons stated herein, the Court declines to adopt the Special Master's re c o m m e n d a tio n regarding waiver of AAA arbitration, but the Court adopts his re c o m m e n d a tio n regarding notice of default. The Court will also issue an order directing the p a rtie s to arbitrate their disputes under the Earn Out Agreement in accordance with the C o m m e rc ial Arbitration Rules of the AAA as contemplated in the Earn Out Agreement. A n order consistent with this opinion will be entered.

Dated: November 12, 2010

/s/ Robert Holmes Bell ROBERT HOLMES BELL UNITED STATES DISTRICT JUDGE

7