Klopfer et al v. Queens Gap Mountain, LLC et al
Filing
52
MEMORANDUM OF DECISION AND ORDER granting 24 the McCarthy Defts' Motion to Compel & to Stay, and 29 the Queens Gap Defts' Motion to Stay & to Compel and arbitration is hereby compelled and this action is STAYED; and denying as moot 44 Defts D. R. McCarthy Investments XVIII, LLC's; Queens Gap Holding Company, LLC's; Devin McCarthy's & Janis L. McCarthy's Motion for Reconsideration or, in the alternative, Deft Janis L. McCarthys Motion to Dismiss. Signed by District Judge Martin Reidinger on 9/14/11. (ejb)
THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF NORTH CAROLINA
ASHEVILLE DIVISION
CIVIL CASE NO. 1:10cv155
FRANK E. KLOPFER and wife KATHY M. KLOPFER;
and DUSTIN P. SWARTZ and wife KRISTIN H. SWARTZ,
)
)
)
Plaintiffs,
)
)
vs.
)
)
QUEENS GAP MOUNTAIN, LLC, a North Carolina limited
)
liability company; DEVINSHIRE LAND DEVELOPMENT,
)
LLC, a North Carolina limited liability company; QUEENS
)
GAP ACQUISITION, LLC, a Delaware limited liability
)
company; COVE CREEK, LLC, a North Carolina limited
)
liability company; D. F. McCARTHY INVESTMENTS XVIII,
)
LLC, an Ohio limited liability company; QUEENS GAP
)
HOLDING COMPANY, LLC, an Ohio limited liability company; )
DEVIN McCARTHY, individually and as Trustee of the DEVIN )
F. McCARTHY REVOCABLE TRUST, dated September 14,
)
1994; JANIS L. McCARTHY, individually and as Trustee
)
of the DEVIN F. McCARTHY REVOCABLE TRUST,
)
dated September 14, 1994; and KEITH VINSON, individually, )
)
Defendants.
)
)
MEMORANDUM OF DECISION
AND ORDER
THIS MATTER is before the Court on the following:
1.
The Motion to Compel Arbitration and to Stay Proceedings [Doc. 24] of
the Defendants D. F. McCarthy Investments XVIII, LLC; Queens Gap
Holding
Company,
LLC;
and
Devin
McCarthy (the
McCarthy
Defendants);
2.
The Motion to Stay this Action and Compel Arbitration [Doc. 29] of the
Defendants
Queens
Gap
Mountain,
LLC;
Devinshire
Land
Development, LLC; Queens Gap Acquisition, LLC; Cove Creek, LLC;
and Keith Vinson (the Queens Gap Defendants); and
3.
The Motion to Reconsider of Defendants D. R. McCarthy Investments
XVIII, LLC; Queens Gap Holding Company, LLC; Devin McCarthy and
Janis L. McCarthy or, in the alternative, Defendant Janis L. McCarthy’s
Motion to Dismiss [Doc. 44].
PROCEDURAL AND FACTUAL BACKGROUND
This action was initiated on July 27, 2010 and, by leave of Court, an
Amended Complaint was filed on February 28, 2011. 1 [Doc. 39]. In the
Amended Complaint, it is alleged that in 2007 the Plaintiffs purchased lots
from the Defendants in the Queens Gap Subdivision, a luxury planned
community in Rutherford and McDowell Counties, North Carolina. [Id.]. Each
of the Lot Purchase Agreements entered into by the parties included a section
entitled “Subdivison Improvements” in which the Seller, Queens Gap
1
The pending motions were filed prior to the amendment but are not affected by
the amended pleading.
2
Mountain, LLC (Queens Gap), agreed to make certain subdivision
improvements which would provide the infrastructure necessary for the
construction of residences, such as water and sewer, as well as a golf course
and other amenities. [Id.]. The infrastructure required for the Plaintiffs to
construct residences on their lots and these amenities have never been
completed and the Plaintiffs claim that this constitutes default by the
Defendants under the terms of the contracts. [Id.]. The Plaintiffs also claim
that as a result of the default, the value of the lots has decreased. [Id.]. In the
Amended Complaint, the following causes of action are alleged: (1) fraudulent
inducement to purchase the lots; (2) fraud; (3) breach of the implied warranty
that the lots would be suitable for use for residential purposes; (4) violations
of the Interstate Land Sales Full Disclosure Act (ILSFDA), 15 U.S.C. §§1701,
et seq.; (5) unfair and deceptive trade practices in violation of N.C. Gen. Stat.
§75-1.1; and (6) unjust enrichment and constructive trust. [Id.]. In their
Answers, the Defendants plead the mandatory arbitration clauses in the Lot
Purchase Agreements and based thereon have moved to stay this action and
to compel arbitration. [Doc. 46 at 34; Doc. 47 at 31-32].
The parties agree that the relevant contracts are the Lot Purchase
Agreements entered into by the Plaintiffs with the Defendant Queens Gap.
[Doc. 25 at 1; Doc. 28 at 6]. They also agree that the relevant language of
3
these contracts is as follows:
18.
Defaults and Remedies.
b.
c.
...
By Seller.
If Seller defaults under this
Agreement, Purchaser, at its election, may: (i)
avail itself of the arbitration rights contained
herein below ... [.] Purchaser hereby waives
the right to exercise any and all remedies at law
or in equity except as expressly stated in this
subsection.
Arbitration. At the option of Seller or Purchaser,
any dispute relating to a default under the terms
of this Agreement may be submitted to
arbitration.
(5)
...
In the event an arbitration demand
is elected, Purchaser agrees that it
shall refrain from commencing any
action at law or in equity against
Seller pursuant to a default by
Seller under the terms of this
Agreement, including but not limited
to, the commencement of an action
for specific performance[.] If
Purchaser maintains such an action
at law or in equity, ... Seller shall be
entitled to go before the presiding
judge of a court of competent
jurisdiction, ex parte, and obtain an
immediate order dismissing the
action[.]
NOTICE TO PURCHASER
THIS AGREEMENT PROVIDES THAT DISPUTES BETWEEN
PURCHASER AND SELLER MAY BE RESOLVED BY BINDING
ARBITRATION.
THIS MEANS THAT PURCHASER AND
4
SELLER GIVE UP THE RIGHT TO GO TO COURT TO ASSERT
OR DEFEND RIGHTS UNDER THIS AGREEMENT. THE
RIGHTS OF THE PARTIES WILL BE DETERMINED BY A
NEUTRAL ARBITRATOR AND NOT BY A JUDGE AND JURY.
SELLER AND PURCHASER ARE ENTITLED TO A FAIR
HEARING, BUT THE ARBITRATION PROCEDURES ARE
SIMPLER AND MORE LIMITED THAN THE RULES FOLLOWED
IN A COURT.
ARBITRATOR DECISIONS ARE AS
ENFORCEABLE AS ANY COURT ORDER AND ARE SUBJECT
TO VERY LIMITED REVIEW BY A COURT.
[Doc. 25-1 at 11-12; Doc. 28-1 at 1-2] (bold in original).
Each of the Plaintiffs in this lawsuit signed his and/or her initials after
this paragraph as did Michael McNamee as the attorney-in-fact for Devin
McCarthy (McCarthy), the manager of Queens Gap. [Doc. 25-1, at 12, 15;
Doc. 25-2, at 12, 15; Doc. 28-1, at 2, 4, 7]. In addition to the above quoted
language, the contracts contain detailed procedures for selection of an
arbitrator pursuant to the Commercial Arbitration Rules published by the
American Arbitration Association. [Doc. 25-1 at 11; Doc. 25-2 at 11].
The parties do not dispute that the Defendants, including Queens Gap,
have not provided the infrastructure necessary for the construction of
residences on the lots owned by the Plaintiffs.
STANDARD OF REVIEW
The Federal Arbitration Act (FAA) provides that any written provision to
resolve by arbitration a controversy arising pursuant to a contract involving
commerce “shall be valid, irrevocable, and enforceable, save upon such
5
grounds as exist at law or in equity for the revocation of any contract.”2 9
U.S.C. §2.
The parties do not dispute that the contracts at issue are
transactions involving commerce and that the FAA applies. See 15 U.S.C.
§1703(a). “As a result of th[e] federal policy [stated in the FAA] favoring
arbitration, ‘any doubts concerning the scope of arbitrable issues should be
resolved in favor of arbitration, whether the problem at hand is the
construction of the contract language itself or an allegation of waiver, delay,
or a like defense to arbitrability.’” Patten Grading & Paving, Inc. v. Skanska
USA Bldg., Inc., 380 F.3d 200, 204 (4 th Cir. 2004) (emphasis omitted) (quoting
Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103
S.Ct. 927, 941-42, 74 L.Ed.2d 765, 785 (1983)). The language of the statute
is clear; arbitration must be compelled if the parties have entered into a valid
arbitration agreement and the dispute falls within the scope thereof. Id. The
pertinent language of the FAA is as follows:
If any suit or proceeding be brought in any of the courts of the
United States upon any issue referable to arbitration under an
agreement in writing for such arbitration, the court in which such
suit is pending, upon being satisfied that the issue involved in
such suit or proceeding is referable to arbitration under such an
agreement, shall on application of one of the parties stay the trial
2
Although state law determines questions related to the validity and enforceability
of contracts generally, the FAA created a “body of federal substantive law of arbitrability,
applicable to any arbitration agreement within coverage of the Act.” International Paper
Co. v. Schwabedissen Maschinen & Anlagen GmbH, 206 F.3d 411, 417 n.4 (4th Cir.
2000).
6
of the action until such arbitration has been had in accordance
with the terms of the agreement[.]
9 U.S.C. §3.
In determining whether the dispute at issue is one which should be
resolved though arbitration, this Court “engage[s] in a limited review to ensure
that the dispute is arbitrable -- i.e., that a valid agreement to arbitrate exists
between the parties and that the specific dispute falls within the substantive
scope of that agreement.” Murray v. United Food and Commercial Workers
Int’l Union, 289 F.3d 297, 302 (4 th Cir. 2002).
DISCUSSION
The validity of the arbitration agreement.
The Plaintiffs first argue that no valid agreement to arbitrate was formed
by the parties.
“The essential thrust of the [FAA] ..., is to require the
application of contract law to determine whether a particular arbitration
agreement is enforceable; thereby placing arbitration agreements ‘upon the
same footing as other contracts.’” Raper v. Oliver House, LLC, 180 N.C.App.
414, 419-20, 637 S.E.2d 551, 554 (2006) (citation omitted); Granite Rock Co.
v. Int’l Bhd. of Teamsters,
U.S.
, 130 S.Ct. 2847, 177 L.Ed.2d 567
(2010); Murray, 289 F.3d at 302 (noting that court first must determine if an
agreement to arbitrate was formed, then must assess whether the dispute
falls within the scope of that agreement). “When making this determination,
7
[courts] should apply ‘ordinary state-law principles that govern the formation
of contracts.’” Gen. Elec. Capital Corp. v. Union Corp. Fin. Group, Inc., 142
F. App’x. 150, 152 (4 th Cir. 2005) (quoting First Options of Chicago, Inc. v.
Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 1924,131 L.Ed.2d 985, 994
(1995)).
“Under North Carolina law, a valid contract ‘requires offer,
acceptance, consideration, and no defenses to formation.’” Hightower v.
GMRI, Inc., 272 F.3d 239, 242 (4 th Cir. 2001) (quoting Koltis v. N.C. Dep’t of
Human Res., 125 N.C. App. 268, 271, 480 S.E.2d 702, 704 (1997)). The
parties here do not dispute that the Lot Purchase Agreements were valid
contracts. “At issue in the present case is whether there was mutual assent”
with regard to whether any dispute would be resolved by binding arbitration.
Id.
North Carolina has expressed strong support for utilizing
arbitration to settle disputes. This “strong public policy” has led
the North Carolina courts to conclude that “where there is any
doubt concerning the existence of an arbitration agreement, it
should be resolved in favor of arbitration.” Thus, North Carolina
law directs [this Court] to favor arbitration in cases in which the
facts support the conclusion that the parties formed an arbitration
agreement.
Id.
The Plaintiffs claim that no enforceable agreement to arbitrate was
formed because the language of the contract used the permissive word “may”;
e.g., “If Seller defaults under this Agreement, Purchaser, at its election, may:
8
(i) avail itself of the arbitration rights contained herein below;” “At the option
of Seller or Purchaser, any dispute relating to a default under the terms of this
Agreement may be submitted to arbitration;” “DISPUTES BETWEEN
PURCHASER AND SELLER MAY BE RESOLVED BY BINDING ARBITRATION.”
[Doc. 25-1, at 11; Doc. 25-2, at 11] (bold in original, other emphasis provided).
Thus, they argue the agreement was merely an illusory promise because
performance was optional. Bowman v. Hill, 45 N.C.App. 116, 117-18, 262
S.E.2d 376 (1980) (“An apparent promise which, according to its terms,
makes performance optional with the promisor no matter what may happen
or no matter what course of conduct in other respects he may pursue, is in
fact no promise.”).
The Defendants respond that, read as a whole, the contract language
requires mandatory arbitration if either party elects to arbitrate the disputes at
issue. Thus, performance was not unconditionally optional; if either party
elected to arbitrate, arbitration became mandatory.
The Defendants are correct that the phrases cited by the Plaintiffs may
not be read out of context from the entire contract. See Levin v. Alms and
Associates, Inc., 634 F.3d 260, 267 (4 th Cir. 2011) (“Our precedent instructs
that the contract must be read ‘as a whole.’”) (citation omitted). The use of the
permissive word “may” relates solely to the fact that either party might make
9
such an election. Wagoner v. American Family Life Assur. Co. of Columbus,
No. 1:08CV394, 2009 WL 1405524, at *4 (M.D.N.C. May 18, 2009) (enforcing
arbitration clause located in document directly above plaintiff’s signature
which read: “This contract contains an arbitration agreement which may be
enforced by the parties.”). The language also clearly states in prominent,
bold-faced and capitalized print that if either party elected arbitration, it would
be mandatory and binding, that it would be a faster process than access to the
courts, and that the dispute would be resolved by a neutral arbitrator.
See
Hightower, 272 F.3d at 242 (“North Carolina law directs us to favor arbitration
in cases in which the facts support the conclusion that the parties formed an
arbitration agreement.”); Raper, 180 N.C. App. at 416, 637 S.E.2d at 552
(noting plaintiff’s signature beneath “prominent, bold-faced print” which
contained arbitration clause). “It is a well-settled principle of legal construction
that it must be presumed the parties intended what the language used clearly
expresses, and the contract must be construed to mean what on its face it
purports to mean.” D.P. Solutions, Inc. v. Xplore-Tech Services Private Ltd.,
710 S.E.2d 297, 300 (2011) (quoting Self-Help Ventures Fund v. Custom
Finish, LLC, 199 N.C. App. 743, 747, 682 S.E.2d 746, 749 (2009), app.
dismissed, 363 N.C. 856, 694 S.E.2d 392 (2010)). “The interpretation of the
terms of an arbitration agreement are governed by contract principles and
10
parties may specify by contract the rules under which arbitration will be
[required].” Trafalgar House Construction v. MSL Enterprises, Inc., 128 N.C.
App. 252, 256, 494 S.E.2d 613 (1998). The language of the contract at issue
herein, taken as a whole, unambiguously shows the parties’ intention to
submit to binding arbitration upon election by either party. Moreover, even if
the language of the contract, read as a whole, did not clearly show the parties’
intent, the “FAA favors arbitration where the parties’ intent is unclear[.]”
Perdue Farms, Inc. v. Design Build Contracting Corp., 263 F. App’x. 380, 384
(4 th Cir. 2008).
The Plaintiffs alternatively argue that the contract was not mutually
beneficial to both sides, thus showing a lack of mutual assent. This argument
is based on language in the contract to the effect that the agreement to
arbitrate does not limit the rights and remedies available to the Seller in the
event of a default by the Purchaser. [Doc. 25-1 at 12]. This, however, does
not negate the agreement to arbitrate; instead, it preserved the Seller’s right
to terminate the contract and retain the deposit in the event of the Purchaser’s
default in the purchase of the lot. Moreover, there is no requirement that the
remedies contained within a contract for breach thereof be the same for both
parties. Fairview Developers, Inc. v. Miller, 187 N.C. App. 168, 173, 652
S.E.2d 365, 368 (2007), disc. rev. denied, 362 N.C. 176, 658 S.E.2d 484
11
(2008) (recognizing the ability to contractually limit remedies to which a party
otherwise might be entitled).
The Plaintiffs next claim that neither party has demanded arbitration.
Moreover, they argue, the Defendants did not provide notice to the Plaintiffs
of an election to arbitrate. This argument, however, is inconsistent with the
record. The Defendants sold lots to the Plaintiffs and received payment for
those lots. They had no reason to demand arbitration until Plaintiffs instituted
this action. The arbitration clause was raised in each of the Answers. Prior
to entry of a pre-trial order and case management plan, the McCarthy
Defendants moved to compel arbitration. These actions by the Defendants
clearly put the Plaintiffs on notice of their demand for arbitration, and such
action was timely. Murray, 289 F.3d at 300-01; In re Mirant Corp., 613 F.3d
584 (5 th Cir. 2010) (failure to demand arbitration does not alone constitute
waiver of that right but asserting an arbitration provision without moving to
compel for eighteen months constituted waiver); Forrester v. Penn Lyon
Homes, Inc., 553 F.3d 340, 343 (4 th Cir. 2009) (noting that even the failure to
assert an arbitration clause does not constitute default of right thereto); C.B.
Fleet Co., Inc. v. Aspen Ins. UK Ltd., 743 F.Supp.2d 575 (W.D.Va. 2010). In
any event, “questions of mere delay ... and untimeliness raised to defeat
compelled arbitration are issues of procedural arbitrability exclusively reserved
12
for resolution by the arbitrator.” Glass v. Kidder Peabody & Co., 114 F.3d
446, 456 (4 th Cir. 1997); Sakrete of North America, LLC v. Armtec Ltd., No.
3:11-CV-00165-GCM, 2011 WL 3204482, at *4 (W.D.N.C. Jul. 27, 2011)
(“Once it is determined that the parties agreed to submit the issue to
arbitration, delay will not defeat a motion to compel arbitration.”); Smith
Barney, Inc. v. Bardolph, 131 N.C. App. 810, 509 S.E.2d 255 (1998).
Plaintiffs’ argument appears to be that since the Defendants did not
demand arbitration by some document separate from the pleadings in this
action that the provision is waived. Plaintiffs, however, cite to no authority
supporting this proposition. The Court concludes this argument to be of no
merit.
The
Plaintiffs
next claim
that the
agreement to
arbitrate
is
unconscionable. The question of unconscionability is one of state law. Renta-Center, West, Inc. v. Jackson,
U.S.
, 130 S.Ct. 2772, 2785 n.7, 177
L.Ed.2d 403 (2010). Plaintiffs base this claim on the following facts: (1) the
Lot Purchase Agreements were drafted by attorneys for Queens Gap; (2) the
Plaintiffs received a cover letter concerning the purchase contracts which
directed them to initial the arbitration clause but failed to explain it; (3) the
Plaintiffs were not advised to retain counsel and did not do so; and (4) there
was a disparity in financial sophistication among the parties.
13
Unconscionability is an affirmative defense and the party asserting it has
the burden of proof. Tillman v. Commercial Credit Loans, Inc., 362 N.C. 93,
102, 655 S.E.2d 362 (2008).
A court will find a contract to be unconscionable only when the
inequality of the bargain is so manifest as to shock the judgment
of a person of common sense, and where the terms are so
oppressive that no reasonable person would make them on the
one hand, and no honest and fair person would accept them on
the other.
...
A party asserting that a contract is unconscionable must prove
both procedural and substantive unconscionability. ... [P]rocedural
unconscionability involves “bargaining naughtiness” in the form of
unfair surprise, lack of meaningful choice, and an inequality of
bargaining power. Substantive unconscionability, on the other
hand, refers to harsh, one-sided, and oppressive contract terms.
Id. at 102-03 (internal quotation marks and citations omitted).
In Tillman, the North Carolina Supreme Court addressed a situation
where the plaintiffs obtained loans from the defendant which included single
premium credit life and disability insurance as well as involuntary
unemployment insurance. The premiums were included in the principal loan
amounts and financed over the term of the loan.
The loan agreements
contained standard, boilerplate arbitration clauses about which the plaintiffs
had no opportunity to negotiate. The plaintiffs brought suit claiming that they
were not told the insurance was optional. The Court found the arbitration
provisions to be procedurally unconscionable, noting that the plaintiffs were
14
rushed through the loan closings by a loan officer who pointed out where the
plaintiffs were to sign and initial the loan documents. The insurance and
arbitration clauses of the documents were not discussed at closing. The
defendant admitted that it would have refused to make loans to the plaintiffs
if they had attempted to negotiate different terms. It was undisputed that the
plaintiffs were unsophisticated consumers contracting with corporate
defendants who drafted the loan documents.3 Id. at 103.
In this case, Plaintiff Frank Klopfer has provided an affidavit in which he
states the following: (1) he is retired “from the engineering field;” (2) his wife
continues to be employed as a planning manager for Verizon; (3) he and his
wife have previous experience in real estate transactions involving their
primary residences; (4) he and his wife purchased Lot 207 at Queens Gap for
$259,900.00 and $25,990.00 in earnest money was paid at the time the
agreement was signed [Doc. 25-1 at 2]; (5) Michael McNamee, the attorney
for Queens Gap Mountain, provided him with a copy of the purchase
agreement for review which contained information about the golf club
membership and restrictive covenants; (6) McNamee included tabs in the
agreement indicating the spot at which the Klopfers were to initial, signifying
3
The parties did not dispute that each plaintiff had limited financial resources and
that their homes, which were being financed, were their most significant asset. Id. at
94.
15
that they had read the arbitration clause; (7) the Klopfers had questions
concerning certain items contained within the package sent by McNamee and
spoke with him about those items which he explained; (8) the Klopfers did not
have their own attorney and were not advised by McNamee to obtain one; and
(9) the documents were drafted by counsel for Queens Gap. [Doc. 28-2].
Attached to the affidavit is the cover letter from McNamee in which he
provided explanations concerning each of the documents attached. [Doc. 28-2
at 4-6].
Plaintiff Dustin Swartz provided an almost identical affidavit in which he
disclosed that he purchased two lots. [Doc. 28-3]. The combined cost of
these two lots was $761,800.00 with $10,000.00 being paid in earnest money.
[Doc. 25-2; Doc. 28-3; Doc. 31 at 4]. Swartz did not disclose his occupation,
if any, and did not disclose his previous experience with real estate
transactions. [Id.]. The cover letter sent by McNamee to Swartz was identical
to the one sent to the Klopfers with the exception of references to the lot
numbers. [Doc. 28-3 at 1-9].
Based on these affidavits the Court is compelled to find that the Klopfers
and Swartz were not unsophisticated purchasers who were rushed through
a closing with no opportunity to question certain aspects of the closing
documents. The Klopfers had a telephone conversation with McNamee in
16
which they asked for and received explanations of certain aspects of the
closing documents. The fact that Swartz did not provide evidence as to
whether he asked such questions does not indicate in any way that he did not
read or understand the agreement. Biesecker v. Biesecker, 62 N.C. App. 282,
285, 302 S.E.2d 826 (1983) (A “person signing a written instrument is under
a duty to read it for his own protection, and ordinarily is charged with
knowledge of its contents.”).
The arbitration clause itself was printed in
capitalized, bold-faced lettering and each buyer initialed underneath that
clause indicating that they had read it. Id.; Raper, 180 N.C. App. at 421, 637
S.E.2d at 555 (“Persons entering contracts ... have a duty to read them and
ordinarily are charged with knowledge of their contents.”). The fact that
McNamee placed a sticker at the spot for the initials does not imply the
Plaintiffs had no choice but to sign. “A party may condition its willingness to
enter into a contract with another party upon the agreement to resolve any
dispute arising from their contractual relationship through arbitration. ... [T]he
inclusion of an agreement to arbitrate is [not, in and of itself] procedurally ...
unconscionable.” Id. at 420; Lacey v. EMC Mortgage Corp., No. 5:10-cv00173-RLV-DSC, 2011 WL 1337424, at *5 (W.D.N.C. Apr. 7, 2011)
(“procedural unconscionability does not automatically arise when one party
conditions its dealings with another party on the execution of an arbitration
17
agreement”). The amount of money involved in the purchase of these lots,
which Plaintiffs admit were not to be their primary residences, defies their
characterizations of themselves as unsophisticated purchasers. Raper, 180
N.C. App. at 421-22, 637 S.E.2d at 555 (evidence failed to show inequality of
bargaining power). The Klopfers are clearly sophisticated buyers, based on
their life and work experience. Id. Moreover, Swartz’s ability to purchase two
lots for in excess of $700,000.00 manifests some sophistication on his part.
Id.
Based on this evidence, presented by the Plaintiffs, they have clearly
demonstrated that no procedural unconscionability was present. “[W]hile the
presence of both procedural and substantive problems is necessary for an
ultimate finding of unconscionability, such a finding may be appropriate when
a contract presents pronounced substantive unfairness and a minimal degree
of procedural unfairness, or vice versa.” Tillman, 362 N.C. at 103, 655 S.E.2d
at 370.
Having found that the Plaintiffs have not shown procedural
unconscionability in any degree, the Court finds it unnecessary to address the
issue of substantive unconscionability.4
4
The Court notes briefly that the Plaintiffs failed in any event to show substantive
unconscionability. The Purchase Lot Agreements provided that the Seller could avail
itself of remedies at law and equity whereas the Purchaser was limited to arbitration.
This fact, previously addressed, does not show an agreement so one-sided as to be
unconscionable. Fairview Developers, 187 N.C. App. at 173, 652 S.E.2d at 369 (parties
are free to limit remedies for breach of contract). And, while the agreements provided
18
The Plaintiffs have not challenged whether this dispute falls within the
scope of the arbitration clause and thus the issue is conceded. The language
of the arbitration clause, nonetheless, clearly shows that all disputes between
the parties were to be submitted to arbitration. The disputes at issue fall
within that broad scope. The Court therefore finds and concludes that the
parties entered into a valid and binding agreement to arbitrate and that the
disputes at issue fall within the scope of that agreement.
The ability of non-signatories to demand arbitration.
The Plaintiffs’ final argument is that none of the Defendants except
Queens Gap have standing to demand or participate in arbitration because
they were not signatories to the Lot Purchase Agreements.
As previously noted, at the time the motions to compel arbitration were
filed, leave to amend the Complaint had not been granted. As a result,
although McCarthy had been sued individually, his wife, Janis L. McCarthy
(Janis), had not been named as a Defendant. Suit had also not been brought
against either McCarthy or Janis in their capacities as Trustees of the Devin
F. McCarthy Revocable Trust. On February 25, 2011, the Magistrate Judge
allowed the motion to amend and these non-signatory Defendants were
for the possibility of cost-shifting to the non-prevailing party at arbitration, the Plaintiffs
have offered no evidence that they would be unable to pay such fees. Tillman, 362
N.C. at 104-05, 655 S.E.2d at 371; Bradford v. Rockwell Semiconductor Sys., Inc., 238
F.3d 549, 558 (4th Cir. 2001).
19
added. [Doc. 39]. On March 14, 2011, after having filed an Answer [Doc. 47],
the McCarthy Defendants, including McCarthy as Trustee of the Devin F.
McCarthy Revocable Trust and Janis, individually and as Trustee of the Devin
F. McCarthy Revocable Trust, filed Notice of Adoption of Previously Filed
Motion to Compel Arbitration and to Stay Proceedings. [Doc. 48]. They have
thus joined in the motion to stay this action and to compel arbitration.
[A]rbitration is a matter of contract interpretation and a party
cannot be required to submit to arbitration any dispute which he
has not agreed so to submit. It is well-established, however, that
a nonsignatory to an arbitration clause may, in certain situations,
compel a signatory to the clause to arbitrate the signatory’s claims
against the nonsignatory despite the fact that the signatory and
nonsignatory lack an agreement to arbitrate.
One such situation exists when the signatory is equitably
estopped from arguing that a nonsignatory is not a party to the
arbitration clause. Equitable estoppel precludes a party from
asserting rights he otherwise would have had against another
when his own conduct renders assertion of those rights contrary
to equity. In the arbitration context, the doctrine recognizes that
a party may be estopped from asserting that the lack of another’s
signature on a written contract precludes enforcement of the
contract’s arbitration clause when the party has consistently
maintained that other provisions of the same contract should be
enforced to benefit him.
Applying these concepts, [the Fourth Circuit] ha[s] announced the
following test for determining when equitable estoppel applies
against a signatory to an arbitration clause:
Equitable estoppel applies when the signatory to a
written agreement containing an arbitration clause
must rely on the terms of the ... agreement in
asserting its claims against the nonsignatory. When
20
each of a signatory’s claims against a nonsignatory
makes reference to or presumes the existence of the
written agreement, the signatory’s claims arise out of
and relate directly to the written agreement, and
arbitration is appropriate.
Because this legal test examines the nature of the signatory’s
underlying allegations against the nonsignatory, courts should
examine the underlying complaint to determine whether estoppel
should apply.
American Bankers Ins. Group, Inc. v. Long, 453 F.3d 623, 626-27 (4 th Cir.
2006) (internal quotation marks and citations omitted).
The allegations set out in the Amended Complaint are determinative of
this issue.5 Id. The Plaintiffs concede that Queens Gap is a signatory to the
contracts at issue. [Doc. 28 at 17]. Both Queens Gap and Devinshire Land
Development, LLC (Devinshire) were wholly owned by Queens Gap Holding,
LLC (Holding) from February 2007 through May 2009. [Doc. 39 at 3]. From
May 2009 through the filing of the Amended Complaint, Queens Gap and
Devinshire have been wholly owned by Queens Gap Acquisition, LLC
5
As will be discussed later, the Plaintiffs’ final argument is that equitable estoppel
must be determined pursuant to North Carolina law. They are correct that in Arthur
Andersen LLP v. Carlisle,
U.S. , 129 S.Ct. 1896, 1902, 173 L.Ed.2d 832 (2009),
the Supreme Court stated that “traditional principles of state law allow a contract to be
enforced by or against nonparties to the contract through ... estoppel.” Plaintiffs fail to
note, however, that North Carolina’s law of equitable estoppel is the same as Fourth
Circuit law. Ellen v. A.C. Schultes of Md., Inc., 172 N.C. App. 317, 321, 615 S.E.2d
729, 732 (2005), rev. denied, 360 N.C. 575, 635 S.E.2d 430 (2006) (citing and following
Fourth Circuit law as to equitable estoppel but noting claims in that case did not arise
out of the contracts containing the arbitration clause).
21
(Acquisition). [Id.]. Acquisition is owned by Defendant Keith Vinson (Vinson).
[Id. at 6].
McCarthy acquired much of the land which later became the Queens
Gap subdivision. [Id. at 4]. McCarthy personally managed the development
and marketing of the venture and as the manager of Queens Gap, he
executed over one hundred deeds through his attorney-in-fact, McNamee.
[Id.].
Holding, which owned Queens Gap and Devinshire until May 2009, is
wholly owned by and is part of the corpus of the Devin F. McCarthy
Revocable Trust dated September 14, 1994. [Id.]. McCarthy is the sole
beneficiary of that Trust. [Id.]. McCarthy and Janis, as the Trustees of the
Devin F. McCarthy Revocable Trust dated September 14, 1994 (the
Revocable Trust), are the members and managers of Holding. [Id.].
D.F. McCarthy Investments XVIII, LLC (Investments) has three
members, McCarthy as Trustee of the Revocable Trust, Janis as Trustee of
the Revocable Trust, and Shawn McCarthy as Trustee under the McCarthy
Family Irrevocable Trust Agreement, dated December 20, 1998. [Doc. 18 at
2]. Holding and Investments are each a Purchase Money Beneficiary under
Purchase Money Deeds of Trust recorded in the Register of Deeds,
22
Rutherford County, North Carolina. [Id. at 5]. The Plaintiffs claim that these
deeds of trust are the only assets of Investments and Holding. [Doc. 39 at 5].
Cove Creek, LLC (Cove Creek) was the owner of tracts of land which
were to be used as the site for a lodge within the Queens Gap development.
[Id. at 6]. The lodge was one of many amenities promised to be in the
development. [Id.]. Cove Creek is owned by Acquisition which in turn is
owned by Vinson. [Id. at 7].
In the Amended Complaint, it is alleged that McCarthy, acting through
the limited liability companies identified above, acquired over 3,500 acres for
the Queens Gap development at a cost of $12,000,000.00.
[Id. at 18].
Queens Gap sold over $40,000,000.00 worth of lots in the development but
the infrastructure required for residential construction was never completed.
In the first two causes of action, Queens Gap, Devinshire,6 and
[Id.].
McCarthy are alleged to have induced the Plaintiffs to sign the Lot Purchase
Agreements through fraud by misrepresenting and concealing material facts
concerning the progress of construction of the infrastructure, including water
and sewer systems and amenities such as a Jack Nicklaus golf course. [Id.
at 42-46]. They also are alleged to have participated in a fraudulent scheme
6
At the time alleged, Devinshire was owned by Holding, which in turn was owned
by McCarthy and Janis.
23
to transfer ownership of the development to Vinson, who, like his
predecessors, failed to provide the necessary infrastructure and amenities
called for by the Lot Purchase Agreements while continuing to promise
completion. [Id.]. These claims of the Plaintiffs make reference to or presume
the existence of the Lot Purchase Agreements. Therefore, they arise out of
and relate directly to those written agreements. Plaintiffs cannot assert such
rights against the non-signatories based upon the Lot Purchase Agreements
and deny the non-signatories’ rights to demand arbitration in accord with
those agreements. See American Bankers, 453 F.3d at 626-27.
In addition, “equitable estoppel is warranted when the signatory to the
contract containing the arbitration clause raises allegations of substantially
interdependent and concerted misconduct by both the nonsignator[ies] and
one or more of the signatories to the contract.” Brantley v. Republic Mortgage
Ins. Co., 424 F.3d 392, 396 (4 th Cir. 2005). Queens Gap was a signatory to
the contracts and in the Amended Complaint is alleged to have engaged in
concerted misconduct with McCarthy, Devinshire and Vinson. Id.
In the third claim for breach of an implied warranty, Queens Gap is
alleged to have breached an implied warranty contained within a restrictive
covenant which provided that the lots were for residential purposes only, [Id.
at 46-47], which the Plaintiffs contend impliedly warrants that the lots would
24
be supported by infrastructure sufficient for residential construction. Plaintiffs
openly assert that Queens Gap is a signatory to that warranty. Plaintiffs also
assert the claims against Holding, McCarthy and Janis based on their
ownership of Queens Gap. When allegations against “a parent company and
its subsidiary are based on the same facts and are inherently inseparable, a
court may refer claims against the parent to arbitration even though the parent
is not formally a party to the arbitration agreement.” J.J. Ryan & Sons v.
Rhone Poulenc Textile, S.A., 863 F.2d 315, 321 (4 th Cir. 1988). For these
reasons the Plaintiffs are estopped from denying the rights of Holding,
McCarthy and Janis to compel arbitration pursuant to the terms of the
agreements despite their positions as non-signatories. Id.
In the fourth cause of action, it is alleged that Queens Gap and
Devinshire registered the Queens Gap Subdivision with the Office of Interstate
Land Sales Registration, as required by ILSFDA, and filed property reports.
McCarthy, Devinshire, Queens Gap and Vinson are alleged to have been
developers pursuant to the ILSFDA who violated that statute by falsely
promoting the sale of lots; making misrepresentations about the construction
of water and sewer systems; misrepresenting that amenities would be built
which would increase the value of the lots; emphasizing that McCarthy would
use his personal fortune to assure the construction of the necessary
25
infrastructure; and finally executing a “sham transaction” whereby the
development was transferred to Vinson. [Id. at 48-50]. These allegations
either directly reference the Lot Purchase Agreements or presume their
existence and thus, this claim arises out of and relates directly to the Lot
Purchase Agreements. Plaintiffs are therefore estopped from denying the
rights of these non-signatories to compel arbitration. See American Bankers,
453 F.3d at 626-27. Furthermore, although the claim is based on a federal
statute, it nonetheless arises out of the Lot Purchase Agreements and the
Plaintiff may not use artful pleading to avoid assertions of claims based on
that contract. Id.. If the Plaintiffs had never entered into those agreements,
they would have no claims based on the ILSFDA against the non-signatories.
Id.; Thomas v. Matrix System Automotive Finishes, LLC, No. 6:09-2169-HFF,
2010 WL 147956, at *8 (D.S.C. Jan. 14, 2010). Moreover, the Amended
Complaint contains allegations of substantially interdependent and concerted
misconduct by Queens Gap as the signatory and McCarthy, Devinshire and
Vinson. See Brantley, 424 F.3d at 396 (noting that allegations of concerted
misconduct among signatories and non-signatories may satisfy second means
of obtaining equitable estoppel although not finding same in that case); Tattoo
Art, Inc. v. Tat Intern., LLC, 711 F.Supp.2d 645, 653-54 (E.D.Va. 2010).
26
The fifth cause of action, which is asserted against Queens Gap,
McCarthy, Devinshire, and Holding, sets forth multiple alleged violations of the
North Carolina Unfair and Deceptive Trade Practices Act in connection with
the development. [Id. at 50-53]. Claims are also stated against Acquisition,
Investments, Vinson and Cove Creek. [Id. at 53-54].
These include
allegations that between 2007 and 2009 the Plaintiffs were induced to sign the
Lot Purchase Agreements and to purchase the lots because the Defendants
1) misrepresented that they intended to complete the infrastructure when the
Defendants had no intention of doing so; 2) inflated the prices of the lots by
the promises of the infrastructure, promising that the infrastructure would be
completed through the use
of personal funds from
McCarthy; 3)
misrepresented the adequacy of the water supply and sewer capacity; 4)
participated in a sham transaction with Vinson; 5) sold off the tracts on which
the amenities were to be built, including the Cove Creek lodge; and 6)
performed limited, inappropriate construction solely to preclude enforcement
of the subdivision bonds of which the Plaintiffs are the beneficiaries. [Id.].
Again, these claims relate directly to the contracts at issue. See American
Bankers, 453 F.3d at 626-27. If the Plaintiffs had never entered into those
agreements, they would have no claims based on the North Carolina statute
against these non-signatories. Id.; Thomas, 2010 WL 147956, at *8. The
27
Amended Complaint also contains allegations of substantially interdependent
and concerted misconduct by Queens Gap as the signatory and each of the
other Defendants named in this cause of action. See Brantley, 424 F.3d at
396.
In the Sixth Cause of Action, all of the named Defendants, including
McCarthy and Janis (individually and their capacities as Trustees), are alleged
to have been unjustly enriched by the conduct described in the Amended
Complaint. [Id. at 54-55]. As a result, it is alleged that the Plaintiffs are
entitled to a constructive trust on the assets of the Defendants. [Id.]. Lastly,
Plaintiffs present a claim for punitive damages against each Defendant based
on the conduct described in the Amended Complaint which purportedly
constituted fraud as well as willful and wanton conduct. [Id. at 55].
All of these claims arise out of and relate directly to the Lot Purchase
Agreements while also alleging concerted misconduct.
“[T]he plaintiff[s]
ha[ve] asserted claims in the underlying suit that, either literally or obliquely,
assert a breach of a duty created by the contract containing the arbitration
clause.” American Bankers, 453 F.3d at 629. Arbitration is appropriate as to
the non-signatories because but for the existence of these contracts, the
Plaintiffs would have no claims against the Defendants. Kirsh v. Finova
Group, Inc., No. 07-1582, 2007 WL 4481158 (4 th Cir. Dec. 20, 2007)
28
(nonsignatory unjustly enriched by manipulating company to sell notes to
unsuspecting individual swindled out of investments; arbitration compelled).
The legal principle underlying the theory of equitable estoppel
rests on a simple proposition: it is unfair for a party to rely on a
contract when it works to its advantage, and repudiate it when it
works to its disadvantage. To be equitably estopped from
denying the applicability of an arbitration clause, therefore, the
signatory need not necessarily assert a cause of action against
the nonsignatory for breach of the contract containing the
arbitration clause. Instead, estoppel is appropriate if in substance
the signatory’s underlying complaint is based on the
nonsignatory’s alleged breach of the obligations and duties
assigned to it [by] the agreement, regardless of the legal label
assigned to the claim.
American Bankers, 453 F.3d at 627-28 (internal quotation marks and citations
omitted). In other words, if the Lot Purchase Agreements had never been
entered into by the Plaintiffs and Queens Gap, the Plaintiffs “would have no
basis for recovery against” any of the Defendants. Id. at 630.
The Plaintiffs’ final argument is that the Defendants’ citation to federal
law concerning the doctrine of equitable estoppel is erroneous because it
must be determined according to North Carolina law rather than federal law,
citing Arthur Anderson, LLP v. Carlisle,
U.S.
, 129 S.Ct. 1896, 1902, 173
L.Ed.2d 832, 839-40 (2009). The argument is of no moment, however, since
North Carolina law on this issue is no different from the law as articulated by
the Fourth Circuit. North Carolina courts have held in the context of contracts
containing arbitration clauses that:
29
[t]he obligation and entitlement to arbitrate does not attach only to
one who has personally signed the written arbitration provision.
Rather, well-established common law principles dictate that in an
appropriate case a nonsignatory can enforce, or be bound by, an
arbitration provision within a contract executed by other parties.
Ellen, 172 N.C.App. at 320, 615 S.E.2d at 732 (quoting Washington Square
Securities, Inc. v. Aune, 385 F.3d 432, 435 (4 th Cir. 2004)). A non-signatory
to a contract may invoke arbitration on the grounds of equitable estoppel
where the plaintiff has consistently maintained that other provisions of the
same contract should be enforced. Ellen, 172 N.C. App. at 321, 615 S.E.2d
at 732 (but noting in that case plaintiff had not done so); Raper, 180 N.C. App.
at 422-23, 637 S.E.2d at 556; LSB Financial Services, Inc. v. Harrison, 144
N.C. App. 542, 548 S.E.2d 574 (2001). Moreover, even in this context, there
is a presumption in favor of arbitration. Washington Square, 385 F.3d at 436.
Such is the case here, and the McCarthy and Queens Gap Defendants may
compel the Plaintiffs to arbitrate the dispute.7
The motion to reconsider.
The McCarthy Defendants and Janis moved for reconsideration of the
Magistrate Judge’s Order allowing the Complaint in this matter to be
amended. [Doc. 44].
They subsequently filed a Notice of Adoption of
7
It is also worth noting that three state court judges in four different state court
actions have granted motions to compel arbitration made by the same defendants
arising out the Lot Purchase Agreements involved in this case. [Doc. 51].
30
Previously Filed Motion to Compel Arbitration and to Stay Proceedings.8 [Doc.
48]. Because the Court will compel arbitration as to all parties and claims, this
motion is moot.
ORDER
IT IS, THEREFORE, ORDERED as follows:
1.
The Motion to Compel Arbitration and to Stay Proceedings [Doc. 24] of
the Defendants D. F. McCarthy Investments XVIII, LLC; Queens Gap
Holding Company, LLC and Devin McCarthy (the McCarthy Defendants)
is hereby GRANTED and arbitration is hereby compelled;
2.
The Motion to Stay this Action and Compel Arbitration [Doc. 29] of the
Defendants
Queens
Gap
Mountain,
LLC;
Devinshire
Land
Development, LLC; Queens Gap Acquisition, LLC; Cove Creek, LLC;
and Keith Vinson (the Queens Gap Defendants) is hereby GRANTED
and arbitration is hereby compelled; and
3.
The Motion to Reconsider of Defendants D. R. McCarthy Investments
XVIII, LLC; Queens Gap Holding Company, LLC; Devin McCarthy and
Janis L. McCarthy or, in the alternative, Defendant Janis L. McCarthy’s
Motion to Dismiss [Doc. 44] is hereby DENIED as moot.
8
Janis joined in the motion without waiving her pending motion in the event that
arbitration was not compelled. [Doc. 48 at 3 n.1].
31
4.
Because the Court has compelled arbitration as to all issues, this action
is hereby STAYED.
IT IS SO ORDERED.
Signed: September 14, 2011
32
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