FLETCHER MACHINE COMPANY, INC. et al v. TRENT CAPITAL MANAGEMENT, INC. et al

Filing 43

RECOMMENDED RULING - MAGISTRATE JUDGE signed by MAG/JUDGE P. TREVOR SHARP on 2/9/2010 that Defendant Leggette & Company's motion to stay and to compel arbitration (Docket No. 18 ) be granted in part as set out above, and that this action be stayed for six months. (Lee, Lisa)

IN THE UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF NORTH CAROLINA

FLETCHER MACHINE COMPANY, INC., MARION RAY FLETCHER, and CAROLYN Y. SMITH,

) ) ) ) Plaintiffs, ) ) v. ) ) TRENT CAPITAL MANAGEMENT, ) INC., and LEGGETTE & COMPANY, ) INC. d/b/a LEGGETTE ACTUARIES, ) INC., ) ) Defendants. )

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R E C O M M E N D A T I O N OF UNITED STATES MAGISTRATE JUDGE T h is matter comes before the Court on the motion of Defendant Leggette & Company (L e g g e tte) to stay and to compel arbitration. (Docket No. 18.) The motion has been fully b rie f ed , and the Court heard argument on the motion on October 20, 2009. For the reasons s ta te d herein, the Court recommends that Defendant Leggette's motion to compel arbitration b e granted as to Fletcher Machine Company's claims against Leggette, and otherwise denied, a n d that this action be stayed for six months to afford Plaintiff Fletcher Machine Company th e opportunity to initiate the arbitration process against Leggette.

A.

F a c ts and Claims P la in tif f Fletcher Machine Company (Fletcher Machine) was a corporation that

m a n u f a c tured woodworking equipment. (Docket No. 7, First Amended Complaint ("1st Am. C o m p l." ) ¶ 8; Docket No. 20, Def. Leggette's Br. in Supp. of Mot. to Stay and to Compel A rb itra tio n , at 1.) It also was the plan sponsor and plan administrator of the Fletcher M a c h in e Co., Inc. Savings and Retirement Plan (the "plan"), an ERISA plan. (1st Am. C o m p l. ¶ 1; Docket No. 20 at 1.) The two individual Plaintiffs, Marion Ray Fletcher and C aro lyn Y. Smith, were plan participants. (1st Am. Compl. ¶¶ 2-3; Docket No. 20 at 1.) In J u ly 2008, Fletcher Machine sold its assets and terminated all of its employees. (1st Am. C o m p l. ¶ 14; Docket No. 20 at 1.) This action arises out of the termination of the plan later in 2008. Plaintiffs allege that Defendants delayed liquidating the plan assets to cash which re s u lte d in a loss in excess of $100,000. (1st Am. Compl. ¶¶ 28-32.) In March 2003, Fletcher Machine and Leggette entered into a "Recordkeeping S e rv ic e s Agreement" in connection with Fletcher Machine's plan. (Docket No. 18, Ex. 1.) T h is agreement enumerates twenty tasks that Leggette would perform on behalf of the plan. (Id .) Plaintiffs contend that Leggette exercised discretionary control over the plan assets in c o n n e c t io n with the plan termination in the Fall of 2008 and thereby became plan fiduciaries. (1st Am. Compl. ¶¶ 11, 13.) Plaintiffs further contend that Leggette breached its fiduciary d u tie s in connection with the termination of the plan. (Id. ¶¶ 45-46.) Leggette denies these a lle g a tio n s , denies that it was an ERISA fiduciary, and further contends that its conduct was -2-

lim ite d to the ministerial tasks enumerated in the contract. (Docket No. 22, Answer.) The o th e r Defendant, Trent Capital Management, Inc. (Trent), was the investment advisor for the p la n . (1st Am. Compl. ¶ 12.) T h e Fletcher Machine-Leggette recordkeeping agreement (the "agreement") contains a n arbitration clause. (Docket No. 18, Ex. 1.) The parties agree to arbitrate "[a]ny

c o n tro v e rs y or claim arising out of or relating to this Agreement, or the breach thereof." (Id. a t 5.) The arbitration is to be administered by the American Arbitration Association in a c c o rd a n c e with its rules. (Id.) The place of the arbitration is to be Dallas County, Texas. ( I d .) The parties may enforce their rights to arbitration in any court of competent

ju ris d ic tio n . (Id.) P la in tif f s' First Amended Complaint raises six causes of action. (Docket No. 7.) The c a u s e s of action against Trent (Claims 1 and 6) are not at issue in this motion. Plaintiffs' sec o n d cause of action is by all Plaintiffs against Leggette for its alleged breach of fiduciary d u t y pursuant to 29 U.S.C. § 1104. (Id. at 11-13.) Plaintiffs' third cause of action is by F le tc h e r Machine against Leggette for breach of the recordkeeping agreement. (Id. at 13.) P la in tif f s' fourth cause of action is by Fletcher Machine against Leggette for professional n e g lig e n c e and malpractice. (Id. at 13-14.) Finally, Plaintiffs' fifth cause of action is by all P la in tif f s against Leggette for negligent misrepresentation. (Id. at 14-15.) B. G o v e r n in g Law T h e Federal Arbitration Act provides that: -3-

A written provision in any . . . contract evidencing a transaction in v o lv in g commerce to settle by arbitration a controversy thereafter arising out o f such contract or transaction, or the refusal to perform the whole or any part th e re o f , or an agreement in writing to submit to arbitration an existing c o n tro v e rs y arising out of such a contract, transaction, or refusal, shall be v a lid , 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. In addition, 9 U.S.C. § 3 provides that if suit is brought in federal court "upon any issue referable to arbitration under an agreement in writing for such arbitration," the court u p o n being satisfied that the issue involved in the suit is referable to arbitration under the a g re e m e n t, "shall on application of one of the parties stay the trial of the action until such a rb itra tio n has been had in accordance with the terms of the agreement." 9 U.S.C. § 3. If an action involves both arbitrating and non-arbitrating parties, the decision whether to stay litigation among the non-arbitrating parties pending the outcome of the arbitration is l e f t to the court's discretion in controlling its docket. Moses H. Cone Mem'l Hosp. v. M e rc u ry Constr. Corp., 460 U.S. 1, 21 n.22 (1983). C. A n a ly sis 1. A r b itr a tio n of Claims of Fletcher Machine

F le tc h e r Machine raises four claims against Leggette. These are: (1) the second cause o f action for breach of fiduciary duty under ERISA; (2) the third cause of action for breach o f the recordkeeping agreement; (3) the fourth cause of action for professional negligence

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a n d malpractice; and (4) the fifth cause of action for negligent misrepresentation. (1st Am. C o m p l.) F le tc h e r Machine is a signatory to the recordkeeping agreement containing the a rb itratio n clause with Leggette. (Docket No. 18, Ex. 1.) The parties agreed to arbitrate " [ a ]n y controversy or claim arising out of or relating to" the agreement. (Id at 5.) Fletcher M a c h i n e does not contend that its claims do not arise out of or relate to the recordkeeping a g re e m e n t. (See Docket No. 27, Pls.' Resp. in Opp'n to Def. Leggette's Mot. to Compel A rb itra tio n .) Rather, it argues first that the provision of the arbitration clause requiring a rb itr a tio n in Dallas County, Texas causes the clause to be void and unenforceable. (Id. at 4 -1 0 .) Fletcher Machine contends that the "analysis of an arbitration clause designating a s p e c if ic arbitration forum is treated like any other forum selection clause." (Id. at 4-5.) It re lie s upon James C. Greene Co. v. Great Am. E & S Ins. Co., 321 F. Supp. 2d 717 (E.D.N.C. 2 0 0 4 ), in which the court applied the tests developed to determine if forum selection clauses in general are unreasonable under the circumstances. (Id. at 721.) This approach has been re jec ted because unlike the run-of-the-mill forum selection clause, a choice of forum to a rb itra te "has the additional force of the Congressional imprimatur found in" the Federal A rb itr a tio n Act. See Sam Reisfeld & Son Imp. Co. v. S.A. Eteco, 530 F.2d 679, 680-81 (5th C ir. 1976) (the Bremen unreasonableness test inapplicable to arbitration clauses); Al-Salamah A r a b i a n Agencies Co. v. Reece, 673 F. Supp. 748, 751 (M.D.N.C. 1987) (The " `u n re a so n a b le n e ss of situs' cases relied upon by plaintiffs are inapplicable in determining -5-

th e enforcibility [sic] of arbitration clauses."); Spring Hope Rockwool, Inc. v. Indus. Clean A ir , Inc., 504 F. Supp. 1385, 1389 (E.D.N.C. 1981) (rejecting inconvenience argument and a p p lyin g exclusively provisions of Arbitration Act requiring enforcement of arbitration p ro v is io n unless arbitration clause itself is voidable for fraud, coercion, or such grounds as e x is t at law or in equity for the revocation of any contract). The arbitration agreement at issue is valid and enforceable unless Fletcher Machine s h o w s "grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. F letc h e r Machine's arguments attempting to show that the forum selection clause is inco n v en ie n t and unfair fail to establish a ground to revoke the contract. The Supreme Court h a s stated, by way of example, that "an arbitration or forum-selection clause in a contract is n o t enforceable if the inclusion of that clause in the contract was the product of fraud or c o e rc io n ." Scherk v. Alberto-Culver Co., 417 U.S. 506, 519 n.14 (1974). There is no such sh o w ing by Fletcher Machine in this case. Accordingly, the Court rejects Fletcher Machine's a r g u m e n t that the selection of the forum for arbitration in Texas causes the arbitration clause to be void and unenforceable. F le tc h e r Machine also argues that it is not required to arbitrate its fiduciary breach c la im s against Leggette because it signed the recordkeeping agreement as plan sponsor rather th a n as plan administrator. (Docket No. 27 at 10-12.) The plan sponsor is not a fiduciary as is the plan administrator, according to Fletcher Machine, and therefore it "is not obligated to arbitrate any claim with regard to fiduciary breach as Plan Sponsor because it has no such -6-

c la im ." (Id. at 11.) The logic of this argument is troublesome because it is Fletcher M a c h in e 's claim of fiduciary breach against Leggette that is potentially subject to arbitration. N e v e rth e le s s, the Court finds that Fletcher Machine was acting as a fiduciary when it c o n tra c te d with Leggette to become the recordkeeper of the plan. F letc h e r Machine's argument that it was not a fiduciary when contracting with L e g g e tte is based upon the first paragraph of the recordkeeping agreement which shows that F letch er Machine is contracting with Leggette as the "plan sponsor," and upon the signature lin e of the agreement which shows that Carolyn Smith signed the agreement for "Fletcher M a c h in e Company, Inc. Plan Sponsor." (Id. at 10; Docket No. 18, Ex. 1 at 7.) However, it is well-settled that whether a party is acting as a fiduciary depends not upon how it believes it is acting but upon whether it is making fiduciary decisions. See, e.g., Pegram v. Herdrich, 5 3 0 U.S. 211, 225 (2000) (employer-fiduciary must wear fiduciary hat when making fid u ciary decisions). U n d e r 29 U.S.C. § 1002(21)(A), a person is a fiduciary "to the extent" that he " e x erc is e s any discretionary authority or discretionary control respecting" plan management o r exercises any authority or control respecting management or disposition of plan assets, or " h e has any discretionary authority or discretionary responsibility in the administration of s u c h plan." In Coyne & Delany Co. v. Selman, 98 F.3d 1457, 1465 (4th Cir. 1996), the F o u r th Circuit found that the employer/plan sponsor acted as a fiduciary when it appointed se p a ra te entities as the plan administrator and plan supervisor and retained the power to -7-

a p p o in t, retain, and remove plan fiduciaries. Similarly, in this case Fletcher Machine acted a s a fiduciary when it exercised its discretion to contract with Leggette 1 to be responsible for p la n recordkeeping. See Larson v. Northrop Corp., 21 F.3d 1164, 1169 (D.C. Cir. 1994) (pro ce ss of choosing an annuity contract to insure pension fund's termination is fiduciary f u n c tio n ). Pursuant to the recordkeeping contract, Fletcher Machine retained the power to re m o v e Leggette as the plan recordkeeper. E n g a g e m e n t." ) A c c o rd in g ly, Fletcher Machine should be held to its agreement to arbitrate all of its c la im s against Leggette. See 9 U.S.C. § 3. 2. A rb itra tio n of Claims of Marion Ray Fletcher and Carolyn Y. Smith (Docket No. 18, Ex. 1 at 4 "Term of

T h e individual Plaintiffs, Marion Ray Fletcher and Carolyn Y. Smith, are n o n s ig n a to rie s to the Fletcher Machine-Leggette recordkeeping agreement.2 The analysis o f whether Mr. Fletcher and Ms. Smith should have to arbitrate their claims for breach of

Plaintiffs allege in their Complaint that Leggette was a fiduciary of the plan. (1st A m . Comp. ¶ 11.) Carolyn Smith signed the agreement for Fletcher Machine, and there is no indication in the contract or elsewhere that she signed in an individual capacity or that she assumed in t h e contract individual obligations. See Whitney Nat'l Bank v. Air Ambulance by B & C F lig h t Mgmt., Inc., Civil Action No. H-04-2220, 2006 WL 3741903, slip op. at *4-*5 (S.D. T e x . Dec. 15, 2006) (stating Texas law (pursuant to which Fletcher Machine and Leggette a g re e d the recordkeeping agreement would be construed) does not impose corporate o b lig a tio n s on individual who signed only in corporate capacity). -82

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f id u c ia ry duty and negligent misrepresentation against Leggette therefore differs from the a n a lys is employed for Fletcher Machine. " G e n e ra lly, `arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which [it] has not agreed' to arbitrate." R.J. Griffin & Co. v. Beach C lu b II Homeowners Ass'n, 384 F.3d 157, 160 (4th Cir. 2004) (quoting Int'l Paper Co. v. S c h w a b e d is s e n Maschinen & Anlagen GMBH, 206 F.3d 411, 416 (4th Cir. 2000)). A party m a y agree to submit to arbitration by means other than personally signing an arbitration c la u s e , however. R.J. Griffin, 384 F.3d at 160. This occurs when "`theories arising out of c o m m o n law principles of contract and agency law' are used to bind nonsignatories to a rb itra tio n agreements." Id. (quoting Thomson-CSF v. Am. Arbitration Ass'n, 64 F.3d 773, 7 7 6 (2d Cir. 1995)). L e g g e tte argues that estoppel is "one of several" theories which require arbitration in th is case.3 (Docket No. 31, Def. Leggette's Reply Br. in Supp. of Motion to Stay and to C o m p e l Arbitration, at 3.) Under this theory, Leggette contends that because the individual P lain tiff s received a direct benefit from the recordkeeping agreement, specifically Leggette's p e rf o rm a n c e of the enumerated tasks in the agreement, Plaintiffs are estopped from denying th e applicability of the arbitration clause in the agreement. (Id. at 4.) Leggette also argues th a t the incorporation into the underlying facts of the obligation of Leggette to initiate

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Leggette does not identify these other theories, however. (Docket No. 31 at 3.) -9-

d is trib u tio n s the day after an application was received shows that Plaintiffs are seeking a b e n e f it under the contract.4 (Id. at 4-5.) In Griffin, the general contractor of a condominium complex filed suit in federal court to force the condominium homeowners' association into arbitration on claims of defective c o n stru c tio n that the association had sued on in state court. The owner of the condominium c o m p le x had entered into an agreement with the contractor for construction of the c o n d o m in iu m s , and this agreement contained an arbitration clause. However, the

h o m e o w n e rs ' association was not a party to that contract. 384 F.3d at 159. In arguing for a rb itra tio n , the contractor relied on the fact that the contract provided a part of the factual f o u n d a tio n for the complaint of the homeowners' association. Id. at 161. The contractor c o n ten d e d that this showed that the nonsignatory association was seeking a direct benefit f ro m the contract and therefore should be bound by the arbitration clause. Id. However, the F o u r th Circuit disagreed. It found that the association made two claims against the

c o n tra c to r: for negligence in constructing the condominiums and for breach of the implied w a rr a n ty of good workmanship. Id. at 162. Neither of these causes of actions was dependent o n the terms of the general contract. Id. The court acknowledged that the formation of the c o n tra c t benefitted the association, however, because the "basis for the" association's claims

Leggette also points out that the third cause of action is a claim for breach of the re c o rd k e e p in g agreement. (Docket No. 31 at 4.) However, because only Fletcher Machine a ss e rts that claim, it is not a basis to force the individual Plaintiffs into arbitration. -10-

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w a s not the contract, the association was not seeking a direct benefit from the contract. Id. M o re o v e r, the inclusion of a discrete allegation in the complaint based on the contract, that th e contractor failed to follow the plans and specifications set forth in the contract, failed to s h o w that the association was seeking a direct benefit. Id. at 163. The doctrine of equitable e s to p p e l could not be used to force the association to arbitrate its claims. Id. at 164. T h e reasoning of Griffin precludes Leggette's argument that Plaintiffs claimed a direct b e n e fit from the recordkeeping agreement by alleging in their Complaint that Leggette was o b lig a te d to begin distributions the day after an application was received. In addition, Griffin s h o w s that any benefit received by the individual Plaintiffs pursuant to the record-keeping a g re e m e n t was only an indirect benefit. The bases for the Plaintiffs' claims are not the c o n tr a c t. Rather, the bases are ERISA and the tort of negligent misrepresentation.

T h e re f o re , the individual Plaintiffs are not seeking a direct benefit from the recordkeeping a g re e m e n t, and they cannot be forced into arbitration under a theory of equitable estoppel. L e g g e tte also argues that opinions from five circuit courts (outside of the Fourth C ir c u it) "mandate that these actions are brought by the named plaintiffs on behalf of the class o f unnamed participants in the ERISA plan," and therefore the signature of the plan fiduciary o n the contract is sufficient to bind the nonsignatory Plaintiffs. (Docket No. 31 at 5-6.) Even if under case law from other circuits the nonsignatory Plaintiffs could be bound to arbitrate, th is court must follow the Fourth Circuit's case law which, as shown by Griffin, does not f o rc e these Plaintiffs to arbitrate. -11-

In addition, the cases relied upon by Leggette do not convince this Court that the in d iv id u a l Plaintiffs should be required to arbitrate. In Williams v. Imhoff, 203 F.3d 758, 760 (1 0 th Cir. 2000), each plaintiff had signed a form which contained an arbitration clause. T h e re f o re , that case does not inform the decision whether nonsignatories should be bound b y an arbitration agreement. In Arnulfo P. Sulit, Inc. v. Dean Witter Reynolds, Inc., 847 F.2d 4 7 5 (8th Cir. 1988), the court considered whether "Sulit can litigate ERISA claims relating to the pension and profit sharing accounts in federal court despite the fact Sulit signed a g re e m e n ts requiring arbitration of those claims." Id. at 477. This case also fails to inform th e decision whether nonsignatories should be forced to arbitrate. In Kramer v. Smith B a r n e y , 80 F.3d 1080 (5th Cir. 1996), Dr. Kramer had signed customer agreements with S m ith Barney which contained arbitration clauses. Id. at 1082. He was suing as an in d iv i d u a l and as trustee of two pension plans for the benefit of himself and his employees. Id . The court does not discuss whether a nonsignatory should be bound by the arbitration c la u s e s . In Pritzker v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 7 F.3d 1110 (3d Cir. 1993), th e plaintiff trustees of a pension sharing plan sued Merrill Lynch and related entities. The tru st e e s had signed agreements containing arbitration clauses with Merrill Lynch when it o p e n e d cash management accounts. Id. at 1112. Belinda Stewart was a Merrill Lynch f in a n c ia l consultant named also as a defendant. The court first concluded that Stewart was b o u n d by Merrill Lynch's arbitration agreement because as its employee Stewart was -12-

" in te g ra l to, if not directly responsible for, the alleged statutory violations of the principal c o rp o ra tio n ." Id. at 1122. Second, the court found that claims against Merrill Lynch Asset M an ag em e n t, the corporate sister and possible alter ego of Merrill Lynch, Pierce, Fenner & S m ith , fell within the scope of the arbitration agreement. Id. Neither of these theories for h o ld in g nonsignatories to an arbitration agreement is applicable in this action. F in a lly, Leggette relies upon Bird v. Shearson Lehman/American Express, Inc., 926 F .2 d 116 (2d Cir. 1991). In that action, the court found that the nonsignatory, individual plan p a rti c ip a n t plaintiff should be required to arbitrate her claims because her interests and c la im s were "essentially identical" to those of the signatory and, under such circumstances, re q u irin g her to arbitrate did "not work an injustice." Id. at 121. That was the extent of the c o u rt's discussion of the decision to require the nonsignatory to arbitrate. The court did not d is c u ss whether the nonsignatory was receiving or seeking a direct or indirect benefit under th e agreement containing the arbitration clause, as the Fourth Circuit examined in Griffin. T h e re f o re , Bird does not persuade the Court that Mr. Fletcher and Ms. Smith should be re q u ire d to arbitrate their claims against Leggette. 3. S t a y of Case

B e c au s e if this Recommendation is accepted, this case will include both arbitrating a n d non-arbitrating parties, the decision whether to stay the non-arbitrable claims is left to th e court's discretion. Moses H. Cone Mem'l Hosp., 460 U.S. at 21 n.22. This action should

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b e stayed for six months from the date of an Order accepting this Recommendation. After th a t period, the parties should be required to provide updates to the Court every 60 days. C o n c lu s io n F o r the foregoing reasons, IT IS RECOMMENDED that Defendant Leggette & C o m p a n y's motion to stay and to compel arbitration (Docket No. 18) be granted in part as s e t out above, and that this action be stayed for six months.

/s/ P. Trevor Sharp United States Magistrate Judge

D a te: February 9, 2010

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