Rapaport v. Soffer

Filing 25

ORDER Denying 8 Defendant's Motion to Dismiss. Signed by Judge Kent J. Dawson on 5/12/11. (Copies have been distributed pursuant to the NEF - EDS)

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UNITED STATES DISTRICT COURT

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DISTRICT OF NEVADA

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EZRIEL RAPAPORT,

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Plaintiff,

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v.

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Case No. 2:10-CV-00935-KJD-RJJ

AVI E. SOFFER,

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ORDER

Defendant.

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Currently before the Court is Defendant’s Motion to Dismiss (#8). Plaintiff filed a

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Response in Opposition (#13), to which Defendant filed a Reply (#19). Defendant filed a

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Supplement to the Motion to Dismiss (#22), and Plaintiff filed a Response (#23) to which Defendant

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filed a Reply (#24).

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I. Background

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The instant case arises from a dispute between Ezriel Rapaport, as Trustee of the Rapaport

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2006 Grantor Trust (“Rapaport”), and Avi E. Soffer (“Soffer”), owner of the Watch Dealers Network

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(“WDN”). The dispute centers on a January 7, 2008, agreement (“the Agreement”) between Soffer

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and WDN on the one hand and Rapaport on the other. The Agreement creates a new company (“the

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Company”) controlled by a board with two members appointed by Rapaport and one by Soffer. The

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Company was to receive all of Soffer and WDN’s watch-related assets in exchange for $500,000

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from Rapaport and a 49% ownership share in the Company; the Company would then employ Soffer

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and others under certain terms and conditions. Over the course of the year, however, disagreements

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eventually arose between the parties concerning several issues under the Agreement.

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As per the arbitration clause in the Agreement, Rapaport initiated arbitration on October 16,

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2008, through the American Arbitration Association (“AAA”). Arbitration proceeded for several

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months, with each party paying their portion of the fees. Progress in the arbitration included a ruling

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by the arbitrator on May 27, 2009, that Martin Rapaport could be joined as a counter-defendant in the

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arbitration proceedings. At some point between May 27 and July 13, 2009, however, Soffer stopped

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paying his portion of the fees. The AAA asked whether Rapaport would be willing to pay Soffer’s

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portion in order to proceed with the arbitration; when Rapaport declined and Soffer still had not paid,

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the AAA terminated the arbitration on October 7, 2009.

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On June 16, 2010, Rapaport filed a Complaint in this Court, alleging breach of contract and

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several other claims against Soffer. On September 21, 2010, Soffer filed a Motion to Dismiss the

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Complaint because of improper venue, explaining that the case belongs in arbitration instead.

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Although Soffer’s Motion is labeled a Motion to Dismiss and uses the term “improper

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venue,” the issue of whether a claim belongs in arbitration rather than before a federal court is not a

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matter of venue. Instead, Soffer’s Motion is better understood as a Motion to Stay the Proceedings

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Pending Arbitration under Section 3 of the Federal Arbitration Act (“FAA”) and/or a Motion to

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Compel Arbitration under Section 4 of the FAA. 9 U.S.C. §§ 1–16. Since the Ninth Circuit has held

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that procedural requirements in litigation “should be more liberally construed for pro se litigants,”

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Abassi v. INS, 305 F.3d 1028, 1032 (9th Cir. 2002), we will construe Soffer’s Motion accordingly.

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II. Analysis

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A. Motion to Stay Pending Arbitration

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We may properly construe Soffer’s Motion as a Motion to Stay the Proceedings Pending

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Arbitration since Soffer argues that the Court should not consider this case because the Agreement

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“mandates that any disputes be heard by the [AAA]” and “[t]hose procedures have yet to be
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exhausted.” (Motion to Dismiss 5.) Under Section 3 of the FAA, a written arbitration agreement

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allows a party to request that this Court refer the issue to arbitration “until such arbitration has been

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had in accordance with the terms of the agreement, providing the applicant for the stay is not in

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default in proceeding with such arbitration.” 9 U.S.C. § 3.

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Both parties admit that the Agreement requires all disputes to be settled in arbitration with the

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AAA, so the only issue before this Court is whether Soffer is “in default in proceeding with such

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arbitration” or whether “such arbitration has been had in accordance with the terms of the

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agreement” already. If either of these conditions is met, the Court must deny the Motion.

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The arbitrator and the AAA “closed” or “terminated” the arbitration because they had “not

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received [Soffer]’s $16,650.00 to cover the neutral’s compensation and expenses for the hearings.”

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(Opposition to Defendant’s Motion to Dismiss, Exhibit 4, 1.) As Soffer himself admits, due to a lack

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of resources he was no longer paying “his portion of the arbitration fees.” (Motion to Dismiss 4.)

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Since it was Soffer’s failure to pay his portion of the fees that resulted in the termination of the

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arbitration, this Court finds that Soffer is “in default in proceeding with such arbitration” and Soffer

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therefore cannot bring a motion to stay pending arbitration under FAA Section 3.1

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Soffer argues that “[t]he arbitrator never entered or considered entering a default against the

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Defendant due to his inability to pay the arbitration fees” and that “[t]he arbitrator simply closed the

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arbitration because neither party paid the arbitration fees.” (Response to Plaintiff’s Opposition 3,

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emphasis in original.) Although neither party has seen fit to share with this Court additional

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documentation of the portion of the arbitration that took place prior to termination (beyond the single

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letter from the arbitrator regarding Martin Rapaport and the three emails from the AAA regarding the

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termination of the arbitration), it is evident from the limited record available that Soffer was

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supposed to pay an additional $16,650 toward the arbitration and that the termination resulted from

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his lack of payment, regardless of his reasons for doing so. Soffer may be correct that none of the

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Black’s Law Dictionary defines “default” as “[t]he omission or failure to perform a legal or contractual duty;
esp., the failure to pay a debt when due.” Black’s Law Dictionary “default” (9th ed. 2009).

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evidence indicates that the arbitrator had formally entered an order of default against him due to his

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inability to pay the arbitration fees. However, the Ninth Circuit has consistently found that the

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failure by a party to pay fees in arbitration will prevent that party from successfully moving to

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compel arbitration in the same case in the future. See Brown v. Dillard’s, Inc., 430 F.3d 1004, 1013

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(9th Cir. 2005) (“The American Arbitration Association could not compel Dillard’s to pay its share

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of the filing fee, and in the absence of the fee it could not proceed. Brown had no choice but to come

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to court.”); Sink v. Aden Enters., 352 F.3d 1197, 1198 (9th Cir. 2003) (moving party’s “failure to pay

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required costs of arbitration was a material breach of its obligations in connection with the

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arbitration” such that the moving party could not compel the Court to return the case to arbitration

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later). Lack of a formal ruling of default from the arbitrator does not change this reality.
Further, the fact that the AAA arbitration rules allow the arbitrator to ask Rapaport whether

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Rapaport would like to pay in order to prevent termination does not create an obligation for Rapaport

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to do so, nor does it change the fact that Soffer owed the unpaid fees. AAA Employment Arbitration

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Rules and Mediation Procedures (effective July 1, 2006), Rule 47. Soffer starts off by characterizing

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this part of the AAA rules as stating that “if one party cannot pay, the arbitrator shall ask the other

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party to pay the costs of arbitration in order for the arbitration to continue.” (Motion to Dismiss 4.)

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He later characterizes this part of the rules as stating that “in the event that one party cannot pay, the

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other party be called upon to pay the costs of arbitration,” implying that Rapaport was required by the

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rules to pay the portion of Soffer’s fees that he had not paid. (Response to Plaintiff’s Opposition 3.)

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This equivocation between whether the AAA rules require or merely allow Rapaport to pay the

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unpaid portion of Soffer’s fees in order to keep the arbitration going is not enough to shift the

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responsibility for termination away from Soffer. Finally, any claims that Rapaport is to blame for

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Soffer’s inability to pay the fees because Rapaport generated “unnecessary hearings and disputes” in

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arbitration in order to avoid a negative outcome in that setting, (Motion to Dismiss 4), were issues

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more properly addressed by the arbitrator than by this Court.

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B. Motion to Compel Arbitration
As stated above, this Court may also properly construe Soffer’s Motion as a Motion to

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Compel Arbitration, since Soffer argues that the Court should “direct that the Plaintiff . . . continue

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with arbitration if it wishes to pursue a case.” (Motion to Dismiss 6.) Under Section 4 of the FAA,

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“A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written

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agreement for arbitration may petition . . . for an order directing that such arbitration proceed in the

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manner provided for in such agreement.” Unlike Section 3, Section 4 of the FAA does not have an

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express requirement that the moving party not be “in default” in the arbitration.

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However, the Ninth Circuit has clearly held that “a party to an arbitration agreement may not

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compel arbitration of claims under FAA § 4 where a prior default in arbitration of those claims

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precludes that party from obtaining a stay of litigation pending arbitration under § 3.” Sink v. Aden

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Enters., 352 F.3d 1197, 1201 (9th Cir. 2003). Since this Court finds that Soffer is precluded from

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obtaining a stay by his prior default in arbitration under Section 3 of the FAA, Soffer may not compel

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arbitration in this case under Section 4 either.

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III. Conclusion

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Accordingly, IT IS HEREBY ORDERED that Defendant’s Motion to Dismiss (#8) is
DENIED.
DATED: May 12, 2011.

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_____________________________
Kent J. Dawson
United States District Judge

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