Austin Air Systems, Limited v. Bank of America Corporation et al

Filing 27

DECISION AND ORDER GRANTING Defendants' 16 Motion to Dismiss; DISMISSING the Complaint; DIRECTING the Clerk of the Court to close this case. Signed by William M. Skretny, Chief Judge U.S.D.C. on 9/28/2012. (MEAL)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NEW YORK
AUSTIN AIR SYSTEMS, LIMITED,
Plaintiff,
v.

DECISION AND ORDER
12-CV-135S

BANK OF AMERICA CORPORATION, BANK
OF AMERICA, N.A., and BANC OF AMERICA
MERCHANT SERVICES, LLC,
Defendants.

I. INTRODUCTION
Plaintiff Austin Air Systems, Ltd., commenced this action seeking damages for
Defendants’ alleged breach of a credit card processing agreement and fraudulent
inducement of that contract. Presently before this Court is the motion of Defendants Bank
of America Corporation, Bank of America, N.A., and Banc of America Merchant Services,
LLC to either dismiss the complaint or stay the action and compel arbitration. This Court
finds the matter fully briefed and oral argument unnecessary. For the reasons that follow,
Defendants’ motion is granted and the complaint is dismissed.
II. BACKGROUND
Plaintiffs manufacture and sell commercial and consumer air purification systems.
(Compl. ¶ 8, Docket No. 1-1.) In August 2004, Defendants presented Plaintiff with a
proposal for credit card processing services. (Id. ¶ 14.) Based on that proposal, Plaintiff
entered into an agreement with Defendants on September 14, 2004. (Id. ¶ 16.) A one

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page Merchant Services Account Application, signed by Plaintiff’s president, contained the
following paragraph under the heading “Agreement Signatures”:
By signing below, the Merchant named above (1) certifies that all information
and documents submitted in connection with this Application are true and
complete; (2) acknowledges receipt of the Bank of America, N.A.
Merchant Services Agreement (“Agreement”); (3) agrees that Merchant
and each transaction submitted to Bank of America, N.A. (“Bank”) will be
bound by that Agreement; (4) agrees that Merchant will submit transactions
to Bank only in accordance with information in this Application and will
immediately inform Bank as required in the Notices section of the Agreement
if any information in this Application changes; (5) agrees that American
Express Travel Related Services Company, Inc. (“Amex”) will send a
Welcome Letter and the Terms and Conditions for American Express® Card
Acceptance to Merchant after Amex approves Merchant to accept the Amex
Card and other account access devices issued by Amex, or its subsidiaries
or affiliates or its or their licensees bearing the Amex name or an Amex
trademark, service mark or logo (“Card or Cards”), and that by accepting
Amex Cards, Merchant agrees to be bound by those terms and conditions;
(6) agrees to the Fee Schedule provided to the Merchant; and (7) agrees
that this application is subject to approval by Bank, and Amex. Your
signature authorizes Bank and Amex each to verify any of the information
given including credit references; to obtain credit reports on the business and
each of you individually, including Guarantors; and authorizes Bank to share
or provide this information with Bank’s affiliates.
(Stipulation1 ¶ 1, Ex. 1, Docket No. 26 (emphasis added); Compl. Ex. B.)
According to Defendants, the “Merchant Services Agreement” referenced in the
above paragraph refers to a separate 66-page document containing the following
arbitration clause:
Section 17. ARBITRATION AND WAIVER OF JURY TRIAL
Any claim or controversy (“Claim”) between you and us, whether arising in
contract or tort or by statute including, but not limited to, Claims resulting
from or relating to this Agreement shall, upon request of either party, be
resolved by binding arbitration in accordance with the Federal Arbitration Act

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Pursuant to this Court’s order, the parties’ filed a stipulation as to certain language contained in
the docum ents at issue, as the original exhibits filed were illegible.

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(Title 9, US Code). . . . By agreeing to binding arbitration, the parties
irrevocably and voluntarily waive any right they may have to a trial by jury in
respect of any Claim. Furthermore, if for any reason a Claim is not
arbitrated, the parties irrevocably and voluntarily agree to waive any right to
a trial by jury in respect of such Claim.
(Decl. of Sandra Turner Ex. A at 23, Docket No. 17.)
In contrast, Plaintiffs assert that the entirety of the agreement between the parties
consists of three pages, and that “Merchant Services Agreement” refers to a two-page
document entitled “MERCHANT SERVICES AGREEMENT” and subtitled “Fee Schedule.”
(Compl. Ex. B.; Pl’s Mem of Law in Opp’n at 4-5, Docket No. 22.) This document lists the
rates for processing fees, service fees, and product fees. (Compl. Ex. B.) The following
language appears under the heading “Pricing Acknowledgement” [sic] on page two:
I have reviewed the above fee structure of my Bank of America, N.A.
(“Bank”) merchant services account. I understand that the above stated
pricing for Visa/MasterCard is based on a minimum threshold of an average
transaction size of $281 and an annualized Visa/MasterCard sales volume
of $1,014,000. The rates and fees quoted by the Bank for acceptance of the
American Express Card and Discover Card/NOVUS Card brands are subject
to the terms and conditions for each respective Card Issuer.
I further understand that the Bank will review those assumptions after a
period of actual processing and that my rate could be increased if either the
average ticket or volume run rates are lower than the minimum thresholds.
In addition, the Bank may pass on charges imposed by credit card
associations, such as Visa and MasterCard, resulting from my failure to
comply with credit card regulations. Th[e] Bank may collect these charges
in the same way as other amounts owed by me under the Merchant Services
Agreement (“Agreement”). I acknowledge that the Agreement provides for
increases in fees. I understand that my application is subject to approval by
the Bank and by American Express and Discover Card/NOVUS Card Issuers
for processing their transactions.
(Stipulation ¶ 3, Ex. 2.) This document was also signed by Plaintiff’s president, as well as
a representative of Defendant Bank of America, N.A. (Id.)
Plaintiff commenced an action in New York State Supreme Court, Erie County, in
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January 2012, asserting causes of action for breach of contract and fraudulent inducement
to contract. Defendants removed the matter to this Court, asserting diversity jurisdiction,
and now move to either dismiss the complaint or stay the matter pending arbitration.2
III. DISCUSSION
“In the context of motions to compel arbitration brought under the Federal Arbitration
Act (‘FAA’), 9 U.S.C. § 4 (2000), the court applies a standard similar to that applicable for
a motion for summary judgment.” Bensadoun v. Jobe-Riat, 316 F.3d 171, 175 (2d Cir.
2003) (citing Par-Knit Mills v. Stockbridge Fabrics Co., 636 F.2d 51, 54 n. 9 (3d Cir.1980)).
“If there is an issue of fact as to the making of the agreement for arbitration, then a trial is
necessary.” Id. (citing 9 U.S.C. § 4). “Whether a dispute is arbitrable comprises two
questions: ‘(1) whether there exists a valid agreement to arbitrate at all under the contract
in question ... and if so, (2) whether the particular dispute sought to be arbitrated falls within
the scope of the arbitration agreement.’ ” Hartford Acc. & Indem. Co. v. Swiss Reinsurance
Am. Corp., 246 F.3d 219, 226 (2d Cir. 2001) (quoting National Union Fire Ins. Co. v. Belco
Petroleum Corp., 88 F.3d 129, 135 (2d Cir. 1996)). “While the interpretation of an
arbitration agreement is generally a matter of state law, the FAA imposes certain rules of
fundamental importance, including the basic precept that arbitration is a matter of consent,
not coercion.” Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., __ U.S. __, 130 S.Ct. 1758,
1773, 176 L. Ed. 2d 605 (2010) (internal citations and quotation marks omitted); Schnabel
v. Trilegiant Corp., __ F.3d __, 2012 WL 3871366, *6 (2d Cir. 2012) (existence of

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In support of their m otion (Docket No. 16), Defendants subm it the Declaration of Sandra Turner
with Exs. A-C (Docket No. 16) and a supporting Mem orandum of Law (Docket No. 18.) Plaintiffs
responded with the Affidavit of Richard Taylor with Exs. A-B (Docket No. 21) and an opposing
Mem orandum of Law (Docket No. 22). Defendants filed a reply Mem orandum of Law (Docket No. 23).

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agreement to arbitrate is question of state law). Specifically, a party may not be compelled
under the FAA to submit to arbitration “unless there is a contractual basis for concluding
that the party agreed to do so.” Stolt-Nielsen S.A., 130 S. Ct at 1775; Ross v. American
Exp. Co., 547 F.3d 137, 143 (2d Cir. 2008).
Here, a contractual basis exists for compelling arbitration if, as Defendants argue,
the 66-page document entitled ‘Merchant Services Agreement’ was incorporated by
reference into the documents signed by Plaintiff’s president. “Whether an extrinsic
document is deemed to be incorporated by reference is a matter of law.” Sea Trade Co.
Ltd. v. FleetBoston Fin. Corp., No. 03–CV–10254, 2007 WL 1288592, at *4 (S.D.N.Y. May
1, 2007).
Under New York law3 and the law of this Circuit, two essential elements must
be satisfied before a document will be deemed to have been incorporated by
reference into another instrument or agreement. First, the agreement must
specifically reference and sufficiently describe the document to be
incorporated, such that the latter “may be identified beyond all reasonable
doubt.” Second, “it must be clear that the parties to the agreement had
knowledge of and assented to the incorporated terms.”
Ryan, Beck & Co., LLC. v. Fakih, 268 F. Supp. 2d 210, 223 (E.D.N.Y. 2003) (quoting
PaineWebber Inc. v. Bybyk, 81 F.3d 1193, 1201 (2d Cir. 1996)(internal citations omitted
and emphasis removed)). “When a contract clearly identifies a single document, it
eliminates all reasonable doubt and thus qualifies as an effective incorporation.”
4Connections LLC v. Optical Comm’ns Group, Inc., 618 F. Supp. 2d 178, 183 (E.D.N.Y.

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In their supporting Mem orandum of Law, Defendants reference the choice of law provision found
in an am endm ent to the 66-page Merchant Services Agreem ent indicating that North Carolina law
governs. (Docket No. 18 at 9-10). In response to Plaintiff’s opposing argum ents, however, Defendants
rely on New York State law concerning incorporation by reference. (Docket No. 23.) This assum ption by
the parties that New York law controls this issue constitutes im plied consent, and is sufficient to establish
choice of law. Krum m e v. W estPoint Stevens Inc., 238 F.3d 133, 138 (2d Cir. 2000).

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2009). “A party's failure to read the terms of an incorporated document does not make
those terms any less binding.” Id. at 183-84 (citing PaineWebber Inc., 81 F.3d at 1201).
Plaintiff does not dispute that the Merchant Services Account Application signed by
its president incorporates by reference a separate document entitled Merchant Services
Agreement. (Pl’s Mem of Law in Opp’n at 10-11.) Plaintiff argues, however, that Account
Application references only the two-page document subtitled “Fee Schedule,” and
Defendants’ attempt to now substitute the terms of the 66-page agreement is an improper
‘bait-and-switch.’ (Id.) This Court disagrees. As argued by Defendants, the plain language
of the Account Application makes clear that the “Merchant Services Agreement” and the
“Fee Schedule” are two separate documents. By signing the Account Application, Plaintiff
was both “acknowledg[ing] receipt” of the former and agreeing to the rates set by the latter.
(Stipulation ¶ 1, Ex. 1.) This document also states that the Member Services Agreement
includes a “Notices section” that describes the requirements for submitting changes to the
information contained in the application. (Stipulation ¶ 1, Ex. 1.) The Fee Schedule,
despite the appearance of the words “Merchant Services Agreement” at the top, does not
contain a ‘Notices’ provision; instead, the information therein is limited to processing fee,
service fee, and product fee rates. (Compl. Ex. B.) Moreover, the Fee Schedule itself also
references a separate Merchant Services Agreement. In the section headed ‘Pricing
Acknowledgment,’ which Plaintiff does not dispute is part of the agreement between the
parties, it is stated that “[t]he Bank may collect these charges in the same way as other
amounts owed by [Plaintiff] under the Merchant Services Agreement (‘Agreement’).
[Plaintiff] acknowledge[s] that the Agreement provides for increases in fees.” (Stipulation
¶ 3, Ex. 2; Compl. Ex. B.) Thus, at the time these documents were signed, Plaintiff was
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clearly on notice of a third, separate document containing additional contractual terms.
Accordingly, the Court finds that the 66-page Merchant Services Agreement,
including the arbitration clause found therein, is incorporated by reference into the Account
Application and Fee Schedule.

Any failure to read the terms of that incorporated

agreement does not make them any less binding. 4Connections, 618 F. Supp. 2d at 183.
The question remains whether to dismiss the complaint or stay the action and
compel arbitration. “Although section 3 of the FAA requires a federal court to stay an
action to resolve a dispute subject to an arbitration agreement, courts have the discretion
to dismiss – rather than stay – an action when all of the issues in it must be arbitrated.”
Milgrim v. Backroads, Inc., 142 F.Supp.2d 471, 476 (S.D.N.Y.,2001), aff’d 91 Fed. Appx.
702 (2d Cir. 2002). There can be no question that Plaintiff’s breach of contract claim falls
within the broad scope of the arbitration clause at issue, which covers “[a]ny claim or
controversy. . . between you and us, whether arising in contract or tort or by statute
including, but not limited to, Claims resulting from or relating to this Agreement.” (Turner
Decl. Ex. A at 23.)

With respect to Plaintiff’s second cause of action, “the Supreme Court

has held that an agreement to arbitrate is effective with respect to claims of fraudulent
inducement that relate to the contract generally, but not to the agreement to arbitrate
specifically.” Merrill Lynch & Co. Inc. v. Allegheny Energy, Inc., 500 F.3d 171, 188 (2d Cir.
2007); see Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-404, 87 S.Ct.
1801, 18 L. Ed. 2d 1270 (1967). In contrast, “if 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.” Prima Paint Corp., 388 U.S. at 403-04
(emphasis added). Here, Plaintiff alleges that Defendants misrepresented their credit card
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processing fees. (Compl. ¶¶ 32-34.) Thus, the fraudulent inducement claim relates “to the
contract generally, but not to the agreement to arbitrate specifically.” Merrill Lynch & Co.
Inc., Inc., 500 F.3d at 188. Dismissal is therefore warranted. Milgrim, 142 F. Supp. 2d at
476.
IV. CONCLUSION
For the reasons stated above, this Court finds that the Merchant Services
Agreement containing the arbitration clause is incorporated by reference into the Account
Application and Fee Schedule signed by Plaintiff. Further, because all of Plaintiff’s claims
fall within the scope of the arbitration clause, this Court exercises its discretion to dismiss
the complaint.
V. ORDERS
IT HEREBY IS ORDERED that Defendants’ Motion to Dismiss (Docket No. 16) is
GRANTED and the complaint is dismissed;
FURTHER, that the Clerk of Court shall close this case.
SO ORDERED.
Dated: September 28, 2012
Buffalo, New York
/s/William M. Skretny
WILLIAM M. SKRETNY
Chief Judge
United States District Judge

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