FASTENER CORPORATION OF AMERICA v. ASHEBORO ELASTICS CORP. et al

Filing 49

MEMORANDUM OPINION AND ORDER signed by JUDGE CATHERINE C. EAGLES on 06/25/2013; that: 1. Defendants' Motion to Compel Arbitration, (Doc. 18 ), is GRANTED. The parties shall consult as to whether a stay pending arbitration or dismissal is more appropriate and shall advise the Court within fifteen days. 2. Plaintiff's Motion to Remand, (Doc. 26 ), is DENIED. 3. Defendants' Motion to Dismiss for Failure to State a Claim, (Doc. 16 ), is DENIED without prejudice to renewal before the arbitrators. (Garland, Leah)

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

FASTENER CORPORATION OF
AMERICA,
Plaintiff,
v.
ASHEBORO ELASTICS CORP., ET AL.,
Defendants.

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1:12-CV-1296

MEMORANDUM OPINION AND ORDER
Catherine C. Eagles, District Judge.
The plaintiff, Fastener Corporation of America (“FCA”), filed suit in Davie County
Superior Court alleging that defendant Telas Elásticas, S. de R.L. (“TESA”) breached a broker’s
agreement with FCA after FCA successfully arranged a sale of TESA to defendant Asheboro
Elastics Corp. (“AEC”). FCA alleges that defendants AEC and Telas Elásticas Adquisición
Sociedad de Responsabilidad Limitada (“TESA Acquisitions”) are also liable for TESA’s breach
because TESA Acquisitions agreed to assume TESA’s liabilities under the Purchase Agreement
and because AEC’s assertion of complete ownership and control of TESA Acquisitions renders it
liable under the doctrine of piercing the corporate veil. (Doc. 7 at ¶¶ 20-21.) The defendants
removed the case to this Court and filed motions to compel arbitration and to dismiss. (Docs. 16
and 18.) FCA filed a motion to remand. (Doc. 26.) The motion to compel arbitration will be
granted because FCA is equitably estopped from avoiding the arbitration provision in the
Purchase Agreement. Consequently, the motion to remand will be denied because this Court has

federal question jurisdiction under 9 U.S.C. § 201 et seq., and the motion to dismiss will be left
for the arbitrators to decide.
There are a number of things the parties agree about, and the Court will set those out
without further citation to or discussion of the legal principles involved. The parties agree that
this Court has jurisdiction to decide the motion to compel arbitration pursuant to the Convention
on the Recognition and Enforcement of Foreign Arbitral Awards, as implemented by the Federal
Arbitration Act and codified at 9 U.S.C. § 201 et seq. The parties agree that if the motion to
compel arbitration is granted, then the motion to remand should be denied and the motion to
dismiss should be decided by the arbitrators. The parties agree that if the motion to compel
arbitration is denied, the Court must decide the fraudulent joinder issue in the motion to remand.
FACTS
The following facts are undisputed for purposes of these motions. In the spring of 2011,
TESA asked FCA if it would solicit potential buyers for TESA’s business. (Doc. 7 at ¶ 6.) On
April 15, 2011, TESA and FCA entered into a 90-day contract (“April Contract”), under which
FCA agreed to promote the sale of TESA to a list of three specific corporations that did not
include defendant AEC or any other defendant. (Id. at ¶ 7.) TESA agreed to pay FCA a 10percent commission if a sale was completed. (Doc. 20-1 at 5.) This contract was in writing and
contained an agreement to arbitrate any “disputes or disagreements in the interpretation,
compliance and performance” of the contract. (Id. at 9.) The contract also contained a provision
that it could only be extended in writing. (Id.)
The April Contract expired with no sale, (Doc. 7 at ¶ 8), and there is no evidence FCA
continued its efforts to sell TESA to any of the three named potential purchasers or anyone else.
Neither party sought to extend the contract, and it was not extended.

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About three months after the April Contract expired, TESA’s general manager and
president, Victor Wilson, sent an email to Charles Mays, the president of FCA, offering FCA a
5-percent commission if FCA promoted the sale of TESA to AEC. (Doc. 7 at ¶ 8; Doc. 20-2.)
Mr. Wilson was in Honduras and Mr. Mays was in North Carolina. From the language of the
email, one would infer that there had been some conversations between Mr. Wilson and Mr.
Mays about this beforehand, (see Doc. 20-2), but there is no evidence before the Court about any
such conversations. The email stated in its entirety:
charley, [sic]
By way of this email, I confirm that you are authorized to work with Raul Castillo
in approaching Ashboro [sic], PROVIDED YOU PROVIDED [sic]
CONFIRMATION OF THE FOLLOWING:
1. Your comission [sic] rate is reduced from the precious [sic] contractual
10% to 5%.
2. Expenses remain for your account unless otherwise approved.
3. You will coordinate your actions with myself and Raul Castillo.
Please provide confirmation for the following to Martha Arquijo in a manner
agreeable to her.
Thanks,
VW
(Id.)
By return email, Mr. Mays accepted on FCA’s behalf. (Id.) His response stated in its
entirety:
Victor,
Agreed to each point as of Wednesday Oct 26.
As stated in below email FCA will comply.
I need Mr. Castillo’s contact information to coordinate with him.
Thanks and best regards to all,
Charles Mays
President
FCA
(Id.)

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Neither email mentioned arbitration and neither explicitly adopted or incorporated the
terms of the April Contract. As noted supra, Mr. Wilson’s email did reference the reduction of
the commission “from the precious [sic] contractual 10% to 5%.” (Id.)
On April 20, 2012, TESA’s shareholders sold 80 percent of TESA’s stock to TESA
Acquisitions, a Honduran entity formed by AEC for the purpose of buying TESA’s stock, for
$1.00. (Doc. 20-3 at 5.) TESA Acquisitions also received an option to purchase the remaining
20 percent of TESA’s shares for $150,000 if and when certain conditions were met. (Id.) The
Purchase Agreement between TESA and TESA Acquisitions contained an arbitration provision.
(Id. at 14.) The parties agree that this transaction gave rise to a commission under the October
agreement between TESA and FCA, though the terms and conditions of that contract and its
form, as well as the amount of the commission due, are disputed.
ANALYSIS
A. The Motion to Compel Arbitration
Courts favor arbitration and interpret arbitration provisions broadly, especially in the
international context. See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S.
614, 631 (1985). However, a party cannot be required to arbitrate a dispute that it has not agreed
to submit to arbitration. AT&T Techs., Inc. v. Commc’ns Workers of Am., 475 U.S. 643, 648
(1986). “The burden of proving an agreement to arbitrate rests upon the party seeking
arbitration.” Silkworm Screen Printers, Inc. v. Abrams, 978 F.2d 1256 (table), 1992 WL 317187,
at *3 (4th Cir. Nov. 4, 1992). The law is well-settled as to what a party moving to compel
arbitration must show:
To state a claim to compel arbitration under the [Federal Arbitration Act],
[a party] must allege (1) the existence of a dispute between the parties, (2) a
written agreement that includes an arbitration provision which purports to cover
the dispute, (3) the relationship of the transaction, which is evidenced by the
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agreement, to interstate or foreign commerce, and (4) the failure, neglect or
refusal of [the opposing party] to arbitrate the dispute.
Whiteside v. Teltech Corp., 940 F.2d 99, 102 (4th Cir. 1 991).
The defendants rely on two written agreements to arbitrate: the April 2011 Contract and
the 2012 Purchase Agreement. As to each, FCA concedes the existence of the first, third, and
fourth elements but disputes the existence of the second element: a written agreement that
includes an arbitration provision which purports to cover the dispute.
1. The April 2011 Contract
a. Extension of the April 2011 Contract
The April Contract, wherein TESA and FCA agreed that FCA would attempt to sell
TESA to three listed potential buyers, contains an arbitration agreement. (Doc. 20-1 at 9.)
However, the defendants’ initial reliance on the April Contract is misplaced for two reasons:
first, the April Contract had expired, and second, the arbitration provision in the April Contract
does not cover the present dispute.
It is well-established that when a contract terminates by its own terms and the dispute
between the parties did not arise out of that contract, then the arbitration clause in that contract
does not come into play. See Va. Carolina Tools, Inc. v. Int’l Tool Supply, Inc., 984 F.2d 113,
117 (4th Cir. 1993); Nat’l R.R. Passenger Corp. v. Boston & Maine Corp., 850 F.2d 756, 762
(D.C. Cir. 1988) (“[P]arties must be able effectively to provide for the expiration or termination
of their obligation to arbitrate . . . .”). That is the case here.
By its own terms, the April Contract was in effect for 90 days, (Doc. 20-1 at 9), and
terminated in July 2011. (Doc. 7 at ¶ 7.) It specifically stated that “[t]his Agreement will be
legally terminated due to the expiration of the [90-day] term . . . , unless the request for an

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extension . . . is delivered and the extension agreement is executed by both parties.” (Doc. 20-1
at 8.) It is undisputed that no party requested extension, and thus the April Contract terminated.
The October emails did not extend the April Contract. By its terms the April Contract
had expired and the only method of extension authorized by the contract - stated twice, in
Paragraph 9 and again in Paragraph 12 - was not followed. (Id. at 8-9.)
Moreover, the April Contract did not cover a sale of TESA’s assets to the ultimate buyer,
TESA Acquisitions, or any other defendant. The arbitration agreement in the April Contract did
not purport to require arbitration of all disputes between the parties and was limited to “disputes
or disagreements in the interpretation, compliance and performance of this agreement.” (Id. at
9.) The April Contract only covered a sale to one of three other specifically named potential
buyers. (Id. at 4.) Because the current dispute did not in any way arise out of the April Contract,
which concerned other potential buyers and not AEC or TESA Acquisitions, the arbitration
provision in the April Contract does not cover the instant dispute.
b. Incorporation by Reference of the April Contract in the October Agreement
The defendants also contend that when the parties reached an agreement at the end of
October for FCA to attempt to broker a sale to AEC, the terms of the April Contract were
incorporated into that new agreement except as expressly modified by the October email
exchange. While FCA agrees that it entered into a contract with TESA in October, it contends it
had an oral contract, supplemented by the provisions of the October emails and the course of
dealing, and that the April Contract was not incorporated by reference. Thus, there is a dispute
between the parties as to the form and the terms of the October agreement.
“Incorporation by reference is proper where the underlying contract makes clear
reference to a separate document, the identity of the separate document may be ascertained, and

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incorporation of the document will not result in surprise or hardship.” Standard Bent Glass
Corp. v. Glassrobots Oy, 333 F.3d 440, 447 (3d Cir. 2003); see also 11 Richard A. Lord,
Williston on Contracts § 30:25 (4th ed. 2011) (“As long as the contract makes clear reference to
the document and describes it in such terms that its identity may be ascertained beyond doubt,
the parties to a contract may incorporate contractual terms by reference to a separate,
noncontemporaneous document, including a separate agreement to which they are not parties,
and including a separate document which is unsigned.”). On the other hand, the arbitration
clause must be validly incorporated by reference,1 and the defendants have cited no case for the
proposition that one can enforce an oral agreement to incorporate an arbitration provision from a
previous contract into a new contract, much less that one can enforce an implied agreement.
Arbitration agreements must be in writing to be enforceable under the Federal Arbitration
Act. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 25 n.2 (1991) (citing 9 U.S.C. §§ 2,
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This issue arises in a number of contexts, and the most common are not particularly
similar to the factual situation here. See, e.g., Logan & Kanawha Coal Co., LLC v. Detherage
Coal Sales, LLC, No. 12-1128, 2013 WL 1150490, at *4 (4th Cir. Mar. 21, 2013) (applying West
Virginia law to hold that clear reference to the contract containing an arbitration clause
incorporated the clause by reference despite minor differences between terms and conditions and
that prior course of dealings, including plaintiff’s use of the same arbitration provision on four
occasions, overcame concerns of any resulting surprise or hardship to defendant); R.J. O’Brien &
Assocs., Inc. v. Pipkin, 64 F.3d 257, 260 (7th Cir. 1995); Maxum Founds., Inc. v. Salus Corp.,
779 F.2d 974, 978 (4th Cir. 1985) (holding that in the construction law context an agreement to
arbitrate may be validly incorporated into a subcontract by reference to an arbitration provision
in a general contract); Rashid v. U.S. Fid. & Guar. Co., No. 2:91-0141, 1992 WL 565341, at *7
(S.D.W. Va. Sept. 28, 1992) (holding and collecting cases for the proposition that sureties on
construction performance bonds are bound by the arbitration provision in a general contract);
Park v. Merrill Lynch, 159 N.C. App. 120, 126, 582 S.E.2d 375, 380 (2003) (holding that
adoption agreement incorporated by reference IRA custodial agreement containing an arbitration
provision where investors signed the adoption agreements, acknowledged receiving agreements
that contained the arbitration provision, and stated that they agreed to arbitration); Nordin v.
Nutri/Sys, Inc., 897 F.2d 339, 345 (8th Cir. 1990) (holding that non-disclosure agreement
containing a covenant not to compete did not specifically incorporate by reference arbitration
clause in settlement agreement where the agreements were separate and independent documents
and the disputed covenant not to compete did not contain an arbitration clause).
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3). Here, the only possible writing is the October email exchange. Those emails, however, do
not explicitly adopt all or indeed any of the terms of the expired April Contract, and no mention
is made of arbitration. Thus, there is no written contract that includes an arbitration provision
which purports to cover the dispute at issue.
The defendants contend a trial is needed, pursuant to 9 U.S.C. § 4, to determine whether
there was an agreement to arbitrate. A trial is necessary to determine whether an agreement to
arbitrate exists only if “the making of the arbitration agreement or the failure, neglect, or refusal
to perform the same” is in issue. 9 U.S.C. § 4. Any oral agreement related to the incorporation
of the April Contract would not suffice to make the arbitration provision in the April Contract
enforceable. When there is “no genuine issue of fact concerning the formation” of the arbitration
agreement, a court may decide as a matter of law that no agreement to arbitrate covers the
disputed issue. Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., 636 F.2d 51, 54 (3d Cir. 1980).
Because there is no genuine issue of fact concerning whether the October email exchange
contains an arbitration clause, a trial is not required.
2. The Purchase Agreement
In April 2012, TESA and TESA Acquisitions entered into the written Purchase
Agreement, whereby TESA Acquisitions bought 80 percent of TESA’s shares. The Purchase
Agreement contained an arbitration provision. The Purchase Agreement also required TESA
Acquisitions to “assume and agree to pay, perform and discharge . . . those liabilities and
obligations . . . to be performed by [TESA].” (Doc. 20-3 at 4.)
In the complaint, FCA alleges that TESA Acquisitions is liable for TESA’s breach of
contract because under the Purchase Agreement, TESA Acquisitions assumed all of TESA’s
liabilities. (Doc. 7 at ¶ 20.) FCA further alleges in the complaint that AEC is liable for TESA’s

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breach because AEC asserted total ownership and control over TESA Acquisitions and
improperly used TESA Acquisitions to avoid paying the commission. (Id. at ¶ 21.) FCA
contends that this total ownership and control is sufficient to pierce AEC’s corporate veil.
Defendants contend that arbitration of the dispute with FCA is required because FCA is
relying on the terms of the Purchase Agreement for its claims against TESA Acquisitions and
AEC and that in those circumstances FCA is equitably estopped from refusing to comply with
the arbitration provision in the same contract it is trying to enforce. FCA contends that it did not
sign the Purchase Agreement and is not a party to that agreement, which it contends was
designed to cheat FCA out of its commission, and that under those circumstances estoppel is not
fair. It is undisputed that FCA is not a signatory to the Purchase Agreement.
There are five theories, “‘aris[ing] out of common law principles of contract and agency
law,’” that may bind a non-signatory to an arbitration agreement: “‘1) incorporation by
references; 2) assumption; 3) agency; 4) veil piercing/alter ego; and 5) estoppel.’” Int’l Paper
Co. v. Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d 411, 417 (4th Cir. 2000) (quoting
Thomson-CSF, S.A. v. Am. Arbitration Ass’n, 64 F.3d 773, 776 (2d Cir. 1995)). Equitable
estoppel precludes a party from relying on the terms of a contract when it is advantageous to do
so while simultaneously repudiating other terms of the contract that work to its detriment.
Wachovia Bank, Nat’l Ass’n v. Schmidt, 445 F.3d 762, 769 (4th Cir. 2006); see Long v. Silver,
248 F.3d 309, 320 (4th Cir. 2001) (holding that plaintiff was equitably estopped from claiming
benefits of shareholder status from a previous contract while at the same time seeking to avoid
enforcement of an arbitration clause in that same contract). In other words, when a nonsignatory seeks to deny the enforceability of an arbitration agreement, equitable estoppel
prevents that party from “asserting that the lack of [its] signature on a written contract precludes

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enforcement of the contract’s arbitration clause when [it] has consistently maintained that other
provisions of the same contract should be enforced” against the signatory. Int’l Paper, 206 F.3d
at 418; see also R.J. Griffin & Co. v. Beach Club II Homeowners Ass’n, 384 F.3d 157, 161, 165
(4th Cir. 2004).
In the complaint, FCA relies explicitly on the Purchase Agreement, which, as noted
supra, contains an arbitration provision, for its theory that TESA Acquisitions is liable for
TESA’s breach of contract. FCA alleges that “[u]nder the final terms of the Purchase
[Agreement], [TESA Acquisitions] assumed all of TESA’s liabilities, including TESA’s
contractual and equitable obligations to pay FCA.” (Doc. 7 at ¶ 20). FCA further alleges that
AEC is also liable, under the doctrine of piercing the corporate veil, “[b]ecause of AEC’s total
ownership and control of [TESA Acquisitions].” (Id. at ¶ 21.) This allegation also relies on the
Purchase Agreement because without TESA Acquisitions’ alleged assumption of TESA’s
liabilities under the Purchase Agreement, there is no corporate veil to pierce.
This is very similar to the facts in Riek v. Xplore-Tech Services Private Ltd., No.
1:08CV117, 2009 WL 891914 (M.D.N.C. Mar. 31, 2009), in which Riek, the former president of
Help Desk, had loaned money to Help Desk before Xplore-Tech agreed to purchase Help Desk
from DP Solutions. Under the purchase agreement, which contained an arbitration provision and
was signed by Xplore-Tech and DP Solutions, Xplore-Tech agreed to assume Help Desk’s
liabilities. Id. at *1. Riek sued for repayment of the loan and the defendants moved to compel
arbitration. Id. The defendants contended that Riek was equitably estopped from avoiding the
arbitration provision in the purchase agreement because in his complaint he alleged that
“pursuant to the Share Purchase Agreement between Xplore-Tech and DP Solutions, . . . XploreTech assumed the Loan and promised to repay it.” Id. at *5. Based on this allegation in the

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complaint, the court held that Riek was equitably estopped from avoiding arbitration because he
sought a direct benefit from the purchase agreement by attempting to enforce terms of the
agreement containing the arbitration provision in his claim for repayment. Id.
Similar to the allegations in Riek, FCA alleges that “[u]nder the final terms of the
Purchase [Agreement], [TESA Acquisitions] assumed all of TESA’s liabilities, including
TESA’s contractual and equitable obligations to pay FCA.” (Doc. 7 at ¶ 20.) As in Riek, FCA’s
allegations in the complaint seek a direct benefit from the Purchase Agreement that contains the
arbitration provision. The allegations in Paragraph 20 rely on the Purchase Agreement to
establish liability against TESA Acquisitions. The allegations in Paragraph 21 likewise rely on
the Purchase Agreement because they depend on TESA Acquisitions’ alleged assumption of
TESA’s liabilities. Thus, FCA seeks to benefit from the Purchase Agreement by using it to
establish liability against TESA Acquisitions and AEC. Stated another way, FCA can only
recover against TESA Acquisitions and AEC if the Purchase Agreement is enforced.
Accordingly, FCA is equitably estopped from “avoid[ing] the arbitration provision of the
Purchase Agreement and at the same time enforc[ing] another contract provision that operates to
his benefit.” Riek, 2009 WL 891914, at *5.
FCA contends that the Purchase Agreement was not a contract directly benefitting FCA,
but rather a sham transaction to avoid payment of the commission. FCA contends that because
of the nature of the transaction and because the arbitration agreement was designed to harm
FCA, it should not be equitably estopped from avoiding arbitration. However, this does not
distinguish this case from Riek. In each case, the plaintiff wanted to enforce certain terms of the
Purchase Agreement while avoiding that agreement’s arbitration provision. See id. In each case,
the plaintiff’s allegations seek a direct benefit from the purchase agreement. See id.

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Because FCA seeks a direct benefit from the Purchase Agreement by attempting to
enforce some of its terms against the defendants, FCA is equitably estopped from denying
enforcement of the arbitration provision in the Purchase Agreement. Thus, arbitration of the
underlying dispute is required, and Defendants’ Motion to Compel Arbitration is granted.
B. The Motion to Remand
Because FCA is equitably estopped from avoiding arbitration, this Court has federal
question jurisdiction pursuant to 9 U.S.C. § 201 et seq. Accordingly, FCA’s Motion to Remand
is denied.
C. The Motion to Dismiss
Because arbitration is required, Defendants’ Motion to Dismiss is for the arbitrators to
decide. It will be denied without prejudice.
It is ORDERED that:
1. Defendants’ Motion to Compel Arbitration, (Doc. 18), is GRANTED. The parties
shall consult as to whether a stay pending arbitration or dismissal is more appropriate
and shall advise the Court within fifteen days.
2. Plaintiff’s Motion to Remand, (Doc. 26), is DENIED.
3. Defendants’ Motion to Dismiss for Failure to State a Claim, (Doc. 16), is DENIED
without prejudice to renewal before the arbitrators.
This the 25th day of June, 2013.

__________________________________
UNITED STATES DISTRICT JUDGE

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