Hodge et al v. Top Rock Holdings, Inc et al
Filing
22
MEMORANDUM AND ORDER -....IT IS HEREBY ORDERED that defendants' Joint Motion to Dismiss and Compel Arbitration is GRANTED. IT IS FURTHER ORDERED that plaintiffs' First Amended Complaint is dismissed without prejudice. granting 10 Motion to Dismiss Case Signed by Magistrate Judge Frederick R. Buckles on 4/20/2011. (MRC)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
EASTERN DIVISION
VANCE C. HODGE, Trustee of the
Vance C. Hodge Revocable Trust,
et al.,
Plaintiffs,
v.
TOP ROCK HOLDINGS, INC., et al.,
Defendants.
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No.
4:10CV1432 FRB
MEMORANDUM AND ORDER
Presently pending before the Court is defendants’ Joint
Motion to Dismiss and Compel Arbitration (Doc. #10).
All matters
are pending before the undersigned United States Magistrate Judge,
with consent of the parties, pursuant to 28 U.S.C. § 636(c).
Plaintiffs are Missouri residents who bring this cause of
action as owners and/or beneficiaries of partnership interests in
SRC #01 Partners, LLP, a Colorado
limited liability company.
Defendant Top Rock Holdings, Inc., a Colorado corporation, is the
general partner of SRC #01 Partners.
Defendant Ralph Nagel, a
resident of Colorado, controls Top Rock Holdings.
involves
leased
property
(the
“Property”)
of
This matter
which
defendant
Seventy-Three Ninety-Three Partners, LLP (“7393 Partners”), is the
tenant.
7393 Partners is a Colorado limited liability partnership
managed by a separate corporation, Legan Holdings, Inc., which is
controlled by defendant Ralph Nagel.
The partnership of SRC #01
Partners was formed in 1979 for the purpose of acquiring rights
under a sublease (the “Sublease”) from 7393 Partners and to provide
equity for the construction of a building on the leased property
for further sub-subleasing.
SRC #01 Partners then entered into a
sub-sublease
(the
“Sub-Sublease”)
Enterprises,
Inc.,
which
was
with
later
Clayton
replaced
by
Racquetball
Vic
Tanny
International of Missouri, Inc. (now known as Bally Total Fitness
of Missouri, Inc. (“Bally Total Fitness”)).
In the instant cause of action, plaintiffs allege that in
January 2003, the Sub-Sublease between SRC #01 Partners and Bally
Total Fitness was amended, which had the effect of extending the
term of the Sub-Sublease and increasing the amount of rent due
thereunder. Plaintiffs allege that, although the original Sublease
between SRC #01 Partners and 7393 Partners was not amended, nor did
the January 2003 amendment to the Sub-Sublease affect the terms of
the original Sublease, defendant Nagel nevertheless unilaterally
implemented changes to the terms of the Sublease whereby an amount
of rents due and owing to SRC #01 Partners under the Sublease was
diverted to 7393 Partners.
Plaintiffs allege that, as a result of
this action, 7393 Partners has collected excess rental payments
since 2003 in an amount exceeding $1 million to which it was not
entitled under the Sublease.
Correspondingly, plaintiffs allege
that SRC #01 Partners has been deprived of over $1 million in rents
due and owing it under the Sublease.
In their First Amended Complaint, plaintiffs bring claims
of breach of fiduciary duty and unjust enrichment, and also seek a
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declaratory judgment to properly allocate future rents according to
the
Sublease
and
Sub-Sublease.
Plaintiffs
also
request
an
accounting to determine the nature of defendant Nagel’s handling of
the financial affairs of SRC #1 Partners.
Defendants now move to dismiss this action and compel
arbitration, arguing that the Partnership Agreement entered into
and existing between the parties contains a mandatory arbitration
agreement encompassing plaintiffs’ claims in this cause of action,
thereby depriving this Court of subject matter jurisdiction over
the claims. Defendants also contend that, to the extent plaintiffs
argue that such claims are not subject to arbitration under the
terms of the Partnership Agreement, the question of arbitrability
itself is to be resolved by an arbitrator.
For the following
reasons, defendants’ motion is well taken.
I.
Background
On July 19, 1979, the parties to this cause executed a
Partnership Agreement (“Agreement”) whereby the limited partnership
of SRC #01 Partners was formed for the purpose of acquiring and
holding the Sublease to the Property, to build improvements upon
the
Property,
improvements.
and
to
sub-sublease
the
Property
(Defts.’ Exh. A, Agreement at p. 2.)
and
its
In accordance
with the Agreement, the general partner of SRC #01 Partners, and
signatory to the Agreement, was Ralph J. Nagel and Associates,
Inc., the predecessor to Top Rock Holdings, Inc.
The limited
partners of SRC #01 Partners, and signatories to the Agreement,
-3-
included the plaintiffs here.
The terms of the Agreement provided for SRC #01 Partners
to acquire the Sublease and to use financing and capital to develop
the
Property
and
construct
improvements.
The
terms
of
the
Agreement also provided authority to the general partner to, inter
alia, authorize, negotiate, enter into, and execute leases in
behalf of the Partnership.
The Agreement also provided that the
general partner would not be liable, responsible or accountable in
damages or otherwise
to any other partner, including limited
partners, “for any acts performed by him within the scope of the
authority conferred on him by this Agreement, except for acts of
malfeasance or misfeasance.” (Defts.’ Exh. A, Agreement at p. 11.)
As arbitration clause is contained within the Agreement
at Section 10.4:
Any dispute or controversy
Arbitration:
arising under, out of, in connection with, or
in relation to this Agreement, and any
amendment thereof, or the breach thereof, or
in connection with the formation, operation,
or dissolution of the Partnership, shall be
determined and settled by arbitration in St.
Louis County, Missouri, in accordance with the
Rules of the American Arbitration Association.
. . . A decision of the arbitration will be a
condition precedent to the commencement of
litigation with respect to any such dispute or
controversy.
(Defts.’ Exh. A, Agreement at pp. 21-22.)
On July 1, 1979, the parties executed a Subscription
Agreement which governed capital contingencies surrounding the
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contemplated execution of the Sublease and Sub-Sublease at issue.
The
terms
of
the
Subscription
Agreement
provided
for
the
Partnership Agreement to be incorporated therein. (Defts.’ Exh. A,
Subscription Agreement at p. 1.)
On May 1, 1996, the parties entered into a Limited
Liability
Limited
Partnership
Agreement
(“LLLP
Agreement”),
whereupon the Missouri partnership of SRC #01 Partners merged into
a Colorado limited liability limited partnership, SRC #01 Partners,
LLP.
The
general
partner
partnerships were the same.
and
limited
partners
of
the
two
The merged partnership was known as
SRC #01 Partners, LLP, and was governed under the terms of the LLLP
Agreement.
The purpose of the partnership remained, that is “to
acquire and hold the Sublease, to build the Improvements and to
sublease the Real Property and the Improvements.” (Defts.’ Exh. B,
LLLP Agreement at p. 8.)
The terms of the July 1979 Partnership
Agreement were expressly incorporated into the LLLP Agreement to
the
extent
such
were
(Id. at p. 31.)
Agreement.
Agreement,
terms
the
laws
of
the
not
inconsistent
with
the
LLLP
Pursuant to the terms of the LLLP
State
of
Colorado
apply
to
the
construction of the Agreement and to the rights and liabilities of
the parties.
(Id. at p. 30.)
II.
A.
Discussion
Choice of Law
As an initial matter, the undersigned notes plaintiffs to
argue that the Federal Arbitration Act (FAA) is not applicable here
-5-
inasmuch as the Agreements at issue do not affect interstate
commerce.
Plaintiffs contend, therefore, that only State law
applies to the arbitration clause in this case, and specifically
Missouri law; and that, under Missouri law, the arbitration clause
is unenforceable on its face.1
Plaintiffs’ claim is without merit.
The FAA provides that arbitration agreements in contracts
involving interstate commerce are presumptively valid:
“A written
provision in any . . . contract evidencing a transaction involving
commerce to settle by arbitration a controversy thereafter arising
out
of
such
contract
or
transaction
.
.
.
shall
be
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. The Supreme Court has interpreted the term “involving commerce”
in the FAA as the functional equivalent of the more familiar term
“affecting commerce” — a term which signals Congress's intent to
invoke the broadest permissible exercise of its Commerce Clause
power.
Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56 (2003).
That broad power “may be exercised in individual cases without
showing any specific effect upon interstate commerce if in the
aggregate the economic activity in question would represent a
general practice . . . subject to federal control . . . and that
general
practice
.
.
.
bear[s]
1
on
interstate
commerce
in
a
Other than arguing that the FAA does not apply to the
arbitration clause, plaintiffs provide no argument as to why the
State law to be applied is that of Missouri and not Colorado. The
law of the State of Colorado was designated in the LLLP Agreement
as the choice of law governing the Agreement.
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substantial way.”
Id. at 56-57 (internal citations and quotation
marks omitted).
Here,
the
activity
in
question
affects
interstate
commerce to a sufficient degree as to bring the instant Agreements
within the rubric of the FAA.
First, the parties to the Agreements
at issue are residents of different States.
The purpose of the
Agreements is to manage the Property located in the State of
Missouri, with such management being directed by an entity in the
State of Colorado, and with such Property being ultimately leased
to a corporation headquartered in the State of Illinois.2
In
addition, millions of dollars in rental and other payments relating
to the Property — which is the subject of the Agreements — have
traversed interstate lines throughout the course of the Agreements.
In sum, the Court has little trouble concluding that the interstate
investment in property located in Missouri, owned by persons in
Missouri and Colorado, managed by an entity in Colorado, leased to
an entity headquartered in Illinois, and from which proceeds and
profits are distributed to persons in Colorado and Missouri,
involves interstate commerce.
See Wolff v. Westwood Mgmt., LLC,
503 F. Supp. 2d 274, 280 (D.D.C. 2007).
Therefore, to the extent
plaintiffs
not
contend
that
the
FAA
is
applicable
to
the
arbitration clause at issue, such contention is without merit and
2
The Sub-Sublease provides for all notices, requests,
documents, and correspondence to be sent to tenant/lessee Bally
Total Fitness at its Property Management Department and Office of
General Counsel in Chicago, Illinois. (First Amd. Compl., Exh. 2
at pp. 2-3.)
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should be denied.
B.
Arbitrability of Claims
Plaintiffs argue that the claims raised in this cause of
action are not subject to arbitration inasmuch as they sound in
tort rather than in contract, and because such claims involve only
the application of the Sublease and not the Partnership or LLLP
Agreements. Defendants contend that the question as to whether the
claims are subject to arbitration is itself a question to be
resolved
by
an
arbitrator.
Upon
careful
consideration,
the
undersigned determines the parties to have clearly and unmistakably
agreed that questions of arbitrability under the Agreements are to
be determined by an arbitrator.
A court may not rule on the merits of any claim the
parties have agreed to arbitrate.
St. Paul Fire & Marine Ins. Co.
v. Courtney Enters., Inc., 270 F.3d 621, 624 (8th Cir. 2001)
(citing A T & T Tech. v. Communications Workers, 475 U.S. 643, 64950 (1986)); General Drivers & Helpers Union, Local No. 554 v. MidContinent Bottlers, Inc. (Omaha Div.), 767 F.2d 482, 485 (8th Cir.
1985).
However, in deciding whether to compel arbitration, the
court must first determine whether the dispute is arbitrable, that
is, within the scope of the agreement to arbitrate, “unless the
parties have clearly agreed to leave that issue to the arbitrator.”
St. Paul Fire, 270 F.3d at 624.
Under the FAA, there is a general presumption that the
issue of arbitrability should be resolved by the courts. See First
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Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944-46 (1995).
Indeed, the question of arbitrability is for judicial determination
unless the parties clearly and unmistakably provide otherwise. See
Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002).
incorporation
determine
of
rules
giving
arbitrators
the
authority
The
to
their own jurisdiction is a clear and unmistakable
expression of the parties’ intent to reserve the question of
arbitrability for the arbitrator and not the courts.
Fallo v.
High-Tech Inst., 559 F.3d 874, 878 (8th Cir. 2009).
Here, the arbitration clause of the 1979 Partnership
Agreement (and incorporated into the LLLP Agreement) explicitly
states that any arbitration shall be conducted “in accordance with
the Rules of the American Arbitration Association.”
At the time
the parties entered into the 1979 Partnership Agreement, and upon
the incorporation of this Agreement into the LLLP Agreement in
1996, Rule 1 of the Rules of the American Arbitration Association
provided:
“These rules and any amendment of them shall apply in
the form obtaining at the time the demand for arbitration or
submission
is
received
by
the
AAA.
The
parties
by
written
agreement may vary the procedures set forth in these rules.”
The
parties have presented nothing to the Court demonstrating that, by
written agreement, they varied the procedures set forth in the AAA
Rules.
Rule 7(a) of the current AAA Rules provides that “[t]he
arbitrator
shall
jurisdiction,
have
including
the
power
any
to
rule
objections
-9-
on
with
his
or
her
own
respect
to
the
existence,
scope
or
validity
of
the
arbitration
agreement.”
Defendants argue that, by virtue of the incorporation of AAA Rule
1 when the Agreements were entered into, the current Rule 7(a)
applies to this cause, and that therefore an arbitrator is to
determine the arbitrability of the claims raised here.
Defendants’ argument is persuasive.
See Brandon, Jones,
Sandall, Zeide, Kohn, Chalal & Musso, P.A. v. MedPartners, Inc.,
203
F.R.D.
677,
684
(S.D.
Fla.
2001);
JSC
Surgutneftegaz
v.
President & Fellows of Harvard Coll., 167 Fed. Appx. 266 (2d Cir.
2006);
Congress
3:05CV1665
Const.
(MRK),
2005
Co.,
WL
Inc.
3657933
v.
(D.
Geer
Woods,
Conn.
Dec.
Inc.,
29,
No.
2005)
(applying analogous AAA Construction Rules); see also Commonwealth
Edison Co. v. Gulf Oil Corp., 541 F.2d 1263, 1273 (7th Cir. 1976).
Plaintiffs’ only response is to argue that the current Rule 7(a)
does not apply here because the Partnership Agreement was formed in
1979, and its incorporation into the LLLP Agreement was in 1996,
and that Rule 7(a) was not a part of the AAA Rules until 2000.
This argument is without merit.
As set out above, Rule 1 of the AAA, which was operative
in 1979 and in 1996 at the time the Partnership and LLLP Agreements
were executed, states “[t]hese rules and any amendment of them
shall apply in the form obtaining at the time the demand for
arbitration or submission agreement is received by the AAA.”
If
any of the parties wanted to carve out this provision from the
arbitration clause so that it would not operate to validate any
- 10 -
subsequent amendments to the AAA Rules, they could have done so.
Such was not done, however.
As such, by designating the AAA Rules
in the arbitration clause, and not designating any alternate set of
procedural rules or expressing any limitation on the applicability
of Rule 1 which was in effect at the time of the execution of the
Agreements, the parties contracted via a theory of incorporation
that the current Rules of the AAA would govern arbitration matters
MedPartners, Inc., 203
at the time arbitration was demanded.
F.R.D. at 684-85.
When parties incorporate the AAA Rules into
their arbitration clause without exception, such incorporation
includes Rule 1, which demonstrates the parties to have “clearly
contracted to be bound by any amendments to the AAA Rules.”
Commonwealth Edison Co., 541 F.2d at 1273.
The AAA Rules, amended
since
7(a)
1979
and
1996,
now
include
Rule
and
provide
the
arbitrator with authority to determine his or her own jurisdiction,
including any objections with respect to the existence, scope or
validity of the arbitration agreement.
of
whether
the
claims
raised
in
the
Accordingly, the question
instant
litigation
are
arbitrable under the arbitration clause is one to be determined by
an arbitrator and not this Court.
This clear and unmistakable intent of the parties is
further demonstrated by additional and specific language contained
in the arbitration clause itself:
“A decision of the arbitration
will be a condition precedent to the commencement of litigation
with respect to any such dispute or controversy.” (Defts.’ Exh. A,
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Agreement at pp. 21-22.)
Because such language contemplates all
questions to initially go to an arbitrator before court action is
commenced, it necessarily follows that questions of arbitrability
are to be first determined by an arbitrator.
C.
Disposition of Action
Defendants
request
that
in
addition
to
compelled
arbitration, the Court dismiss the action in its entirety inasmuch
as all questions are to be determined by an arbitrator.
As
discussed above, however, an arbitrator is to first determine
whether the claims raised in the instant cause of action are in
fact subject to arbitration.
Although the issue of arbitrability
is one for the arbitrator to resolve, a finding in plaintiffs’
favor as to this procedural issue could conceivably prompt the
return of the parties to this Court to determine any non-arbitrable
claims. Because there has not yet been a determination as to which
forum is to consider the merits of plaintiffs’ claims, it would be
premature to say that all claims raised in the instant litigation
will be determined by arbitration.
Nevertheless, a plain reading of the arbitration clause
shows that the agreed-to condition precedent to litigation has not
yet occurred, that is, there has been no arbitration decision to
trigger the commencement of litigation.
ripe
for
adjudication,
thereby
As such, the matter is not
precluding
maintaining jurisdiction over the cause.
the
Court
from
See Dealer Computer
Servs., Inc. v. Dub Herring Ford, 547 F.3d 558, 560-61 (6th Cir.
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2008).
See also Wax’n Works v. City of St. Paul, 213 F.3d 1016,
(8th Cir. 2000) (dismissal should be for lack of subject matter
jurisdiction where case is not ripe for adjudication); Oil, Chem.
& Atomic Workers Int’l Union, AFL-CIO v. Gillette Co., 905 F.2d
1176, 1177-78 (8th Cir. 1990) (federal court should not pass upon
issues that are not ripe for review).
As such, the matter, in its
present posture, should be dismissed for lack of subject matter
jurisdiction.
Accordingly, for all of the foregoing reasons,
IT IS HEREBY ORDERED that defendants’ Joint Motion to
Dismiss and Compel Arbitration (Doc. #10) is GRANTED.
IT IS FURTHER ORDERED that plaintiffs’ First Amended
Complaint is dismissed without prejudice.
UNITED STATES MAGISTRATE JUDGE
Dated this
20th
day of April, 2011.
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