CORCHADO et al v. FOULKE MANAGEMENT CORP. et al

Filing 38

MEMORANDUM OPINION. Signed by Chief Judge Jerome B. Simandle on 2/14/2017. (TH, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY

MICHELE RENN CORCHADO and
JONATHAN MUSSO,
Plaintiffs,

HONORABLE JEROME B. SIMANDLE

Civil Action
No. 15-6600 (JBS/JS)

v.
FOULKE MANAGEMENT CORP., et
al.,

MEMORANDUM OPINION

Defendants.

SIMANDLE, Chief Judge:
This matter comes before the Court on Defendants’ Foulke
Management Corp. and Wells Fargo Dealer Services appeal [Docket
Item 34] of Magistrate Judge Joel Schneider’s May 6, 2016
Opinion and Order [Docket Item 25], which the Third Circuit has
instructed be considered as a Report & Recommendation on a
dispositive motion, denying without prejudice Defendants’
motions to compel arbitration and granting limited discovery
regarding arbitrability. The principal issue to be decided is,
when parties opposing arbitration contest the existence of an
enforceable arbitration agreement by presenting non-frivolous
evidence that the agreement was induced by fraud, whether the
determination of the existence of an enforceable arbitration
agreement is to be made by the court or by the arbitrator.
Because the answer to this question – that it is a threshold

matter for the court – has been squarely decided by binding
precedent, Judge Schneider’s determination was correct. For the
reasons that follow, the Court will adopt Judge Schneider’s
Report & Recommendation and will deny Defendants’ appeal of the
Opinion. The Court finds as follows:
1.

Background. Plaintiffs are two individuals who

purchased, or attempted to purchase, used cars at two different
stores owned by Defendant Foulke Management Corp. (“Foulke”).
(See Complaint [Docket Item 1].) Generally, Plaintiffs aver that
Foulke employees fraudulently induced them to sign contracts for
cars other than the ones each Plaintiff wished to buy, without
permitting them a chance to read or receive copies of the
documents. (See generally id.) Plaintiffs assert claims against
Foulke, a number of the company’s employees, and Wells Fargo
Dealer Services (“Wells Fargo”), alleging violations of the New
Jersey Consumer Fraud Act, common law fraud, the Holder in Due
Course Rule, the New Jersey Truth-in-Consumer Contract Warranty
and Notice Act, the New Jersey Plain Language Act, and the
federal Truth-in-Lending Act.
2.

Plaintiffs initially filed this case in the Superior

Court, Law Division, Camden County, which Foulke timely removed.
Foulke, and later Defendant Wells Fargo, both moved to dismiss
the complaint and compel arbitration pursuant to arbitration
agreements that both Plaintiffs signed with Foulke. [Docket
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Items 3 & 14.] Both motions to compel arbitration were referred
to Magistrate Judge Joel Schneider. Plaintiffs opposed the
motions on the ground that the arbitration agreements were
unenforceable because they were obtained by fraud and were not
knowingly entered into by Plaintiffs. [Docket Item 16.]
Following oral argument, Judge Schneider denied without
prejudice Defendants’ motions to compel arbitration and ordered
limited discovery to resolve the issue of whether the parties
mutually assented to arbitration. [Docket Item 25.]1 Defendants
appealed Judge Schneider’s May 6, 2016 Opinion and Order to the
Third Circuit Court of Appeals [Docket Item 29], which appeal
was dismissed by the Court of Appeals for lack of jurisdiction.
The Court of Appeals found that, because the parties had not
consented to have Judge Schneider decide their case pursuant to
28 U.S.C. § 636(c), his May 6, 2016 Opinion and Order was the
equivalent of a Report & Recommendation on a dispositive motion
under 28 U.S.C. § 636(b)(1)(C) and not a final order. [Docket
Item 33.] This objection to Judge Schneider’s May 6, 2016
Opinion and Order followed.
3.

In their appeal, Defendants argue that Judge Schneider

incorrectly found that he, rather than an arbitrator, should

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Judge Schneider also ordered that Plaintiff Musso’s case should
be severed from Plaintiff Corchado’s [Docket Item 26], but that
Order was stayed while Defendants pursued their appeal to the
undersigned.
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decide the gateway issue of arbitrability under the Supreme
Court’s rule in Rent-A-Center, West Inc. v. Jackson, 561 U.S. 63
(2010), and that there is an issue of fact as to whether
Plaintiffs agreed to arbitrate their claims under the Third
Circuit’s rule in Guidotti v. Legal Helpers Debt Resolution,
L.L.C., 716 F.3d 764 (3d Cir. 2013). Plaintiffs oppose on the
grounds that Judge Schneider correctly applied Rent-A-Center and
Guidotti to find that compelling arbitration at this stage would
be premature.
4.

Standard of Review. The Magistrates Act, 28 U.S.C. §

636(b), Fed. R. Civ. P. 72(b), and L. Civ. R. 72.1c(2) provide
that a District Court shall review de novo a Magistrate Judge’s
report and recommendation upon objections by the parties. De
novo review does not require an additional hearing, United
States v. Raddatz, 447 U.S. 667, 674-76 (1980), but rather that
the court, “at its discretion, may rely on the record developed
by the magistrate judge, or it may conduct a new hearing,
receive further evidence, recall witnesses, or send the matter
back to the magistrate judge with additional instructions.”
Cataldo v. Moses, 361 F. Supp. 2d 420, 426 (D.N.J. 2004); see
also L. Civ. R. 72.1(c)(2).
5.

In the Third Circuit, when a party moves to compel

arbitration based on the terms of an agreement, courts apply a
two-tier standard of review. See Guidotti v. Legal Helpers, 716
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F.3d 764 (3d Cir. 2013). Where it is apparent on the face of the
complaint, or in documents relied upon in the complaint, that
the claims at issue in the case are subject to arbitration, the
case is considered under a motion to dismiss standard, Fed. R.
Civ. P. 12(b)(6). Id. at 774-76. However, where the complaint
does not establish on its face that the parties have agreed to
arbitrate, or where the party opposing arbitration has come
forward with reliable evidence that it did not intend to be
bound by an arbitration agreement, then the parties are entitled
to limited discovery on the question of arbitrability before a
renewed motion to compel arbitration is decided on a summary
judgment standard. Id.
6.

Discussion. For the reasons that follow, the Court

agrees with and adopts Judge Schneider’s recommendations that a
court, and not an arbitrator, must make the gateway
determination of the existence of an agreement to arbitrate, and
that limited discovery is necessary to determine the
enforceability of such arbitration agreements contained therein.
7.

The Federal Arbitration Act (“FAA”), 9 U.S.C. § 1 et

seq., reflects a federal policy favoring arbitration. Moses H.
Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24
(1983). Pursuant to § 2 of the FAA, “[a] written provision in
any . . . contract . . .

to settle by arbitration

. . . shall

be valid, irrevocable and enforceable, save upon such grounds as
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exist at law or in equity for the revocation of any contract.” 9
U.S.C. § 2; see also Rent-A-Center, West, Inc. v. Jackson, 561
U.S. 63, 68 (“Like other contracts, however, [arbitration
agreements] may be invalidated by generally applicable contract
defenses, such as fraud, duress, or unconscionability.”).
“Before compelling a party to arbitrate pursuant to the FAA, a
court must determine that (1) there is an agreement to arbitrate
and (2) the dispute at issue falls within the scope of that
agreement.” Century Indem. Co. v. Certain Underwriters at
Lloyd’s, London, 584 F.3d 513, 523 (3d Cir. 2009). Only after a
court finds that an agreement to arbitrate claims exists and
covers the parties’ dispute may it compel arbitration. 9 U.S.C.
§ 4.
8.

The question of whether the parties agreed to

arbitrate is governed by state law principles regarding
formation of contracts. First Options of Chicago, Inc. v.
Kaplan, 514 U.S. 938, 944 (1995). “An agreement to arbitrate,
like any other contract, must be the product of mutual assent,
as determined under customary principles of contract law.”
Atalese v. United States Legal Services Group, L.P., 99 A.3d
306, 312-13 (N.J. 2014) (citing NAACP of Camden Cnty. E. v.
Foulke Mgmt., 24 A.3d 777, 790 (N.J. App. Div. 2011)). As is the
case with any contract, parties are free to contract for nearly
anything -- including, as is relevant here, agreeing “to
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arbitrate ‘gateway’ questions of ‘arbitrability,’ such as
whether the parties have agreed to arbitrate or whether their
agreement covers a particular controversy.” Rent-A-Center, 561
U.S. at 69. In order to avoid arbitration in the face of such a
contractual provision, a party must challenge the validity of
the arbitration agreement itself, and not, broadly, the contract
as a whole. “[I]f the claim is fraud in the inducement of the
arbitration clause itself – an issue which goes to the ‘making’
of the agreement to arbitrate – the federal court may proceed to
adjudicate it. But the [FAA] does not permit the federal court
to consider claims of fraud in the inducement of the contract
generally.” Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388
U.S. 395, 403-04 (1967); see also Rent-A-Center, 561 U.S. at 71
(“If a party challenges the validity under § 2 of the precise
agreement to arbitrate at issue, the federal court must consider
the challenge before ordering compliance with that agreement
under § 4.” (emphasis added).)
9.

This was precisely the record before Judge Schneider:

Plaintiffs asserted a defense of fraud in the inducement of
their respective stand-alone arbitration agreements in
opposition to Defendants’ motions to compel arbitration,
supported by sworn statements. The undersigned agrees with Judge
Schneider’s recommendation that such a challenge, under existing

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law, requires judicial determination of the gateway issue of
arbitrability.
10.

Similarly, the undersigned adopts Judge Schneider’s

recommendation that factual questions over the enforceability of
the parties’ arbitration agreements require limited discovery,
under Guidotti. The Third Circuit has held that where the party
opposing arbitration can “come forth with reliable evidence that
is more than ‘a naked assertion . . . that it did not intend to
be bound’ by the arbitration agreement” sufficient to put the
enforceability of the agreement at issue, limited discovery is
necessary to determine whether a valid arbitration agreement
exists. Guidotti, 716 F.3d at 774. Here, Plaintiffs take the
position that their signatures on the arbitration agreements
were “procured by fraud” because the arbitration agreements were
“covered by either the hands of the defendants or other
documents” (Pl. Opp. to Motion to Compel Arbitration [Docket
Item 16]), and submitted sworn declarations from themselves and
at least one third-party witness to that effect. [See Docket
Items 16-2 through 16-7.] Such supporting affidavits are more
than a “naked assertion” and are sufficient “in most cases . . .
to require a jury determination on whether there had in fact
been a ‘meeting of the minds.’” Guidotti, 716 F.3d at 778
(citing Par-Knit Mills, 636 F.3d 51, 55 (3d Cir. 1980)).

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Accordingly, a court cannot make a determination about mutual
assent on the present record alone without discovery.
11.

Defendants’ appeal of Judge Schneider’s May 6, 2016

Opinion and Order is denied, and the Court will adopt the
entirety of Judge Schneider’s recommendations in that Opinion &
Order. The accompanying Order will be entered.

February 14, 2017
Date

s/ Jerome B. Simandle
JEROME B. SIMANDLE
Chief U.S. District Judge

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