Asplundh Tree Expert Co. v. Bates

Decision Date14 December 1995
Docket NumberNo. 94-5563,94-5563
Citation71 F.3d 592
Parties, 11 IER Cases 361 ASPLUNDH TREE EXPERT COMPANY, Plaintiff-Appellant, v. Robert E. BATES, Defendant-Appellee.
CourtU.S. Court of Appeals — Sixth Circuit

V. Thomas Fryman, Jr. (briefed), Greenebaum, Doll & McDonald, Lexington, KY, Walter P. Loughlin (argued and briefed), Vincent P. Esposito, Jr., Geoffrey S. Berman, Jeffrey T. Wald, Mudge, Roes, Guthrie, Alexander & Ferdon, New York City, Phillip E. Tatoian, New York City, for Plaintiff-Appellant.

Thomas A. Carroll (argued and briefed), Owensboro, KY, for Defendant-Appellee.

Before: MILBURN and NORRIS, Circuit Judges; GRAHAM, District Judge. *

GRAHAM, District Judge.

Plaintiff-Appellant, Asplundh Tree Expert Co. ("Asplundh"), brought this action in the United States District Court for the Western District of Kentucky seeking to enjoin an arbitration proceeding commenced by the defendant Robert E. Bates ("Bates"). In May of 1990, Asplundh purchased all of the outstanding shares of Vanguard Meter Service, Inc. ("Vanguard") for seven million dollars. Bates was the controlling shareholder and chairman of the board of Vanguard. The stock sale agreement provided that the day-to-day management of the company would remain with the sellers for a period of five years. The agreement also contained representations that there were no undisclosed liabilities and no pending or anticipated legal actions, as well as the usual warranties regarding the accuracy of the corporation's financial statements. On the same date, May 22, 1990, Vanguard entered into an employment agreement with Bates ("first employment agreement"), employing him as the chief executive officer of Vanguard for a period of sixty months at a base salary of two hundred and forty thousand dollars per year, plus fringe benefits. The agreement required Bates to devote his entire working time to the affairs of Vanguard.

Approximately six months later, in January of 1991, the United States Attorney's Office for the Southern District of New York and the New York County District Attorney's Office commenced grand jury investigations of Vanguard and its management, including Bates, for possible violations of state and federal prevailing wage laws. This marked the beginning of serious financial problems for Vanguard. On August 20, 1991, Bates resigned as the chief executive officer of Vanguard and entered into a new employment agreement with Vanguard bearing that date (the "second employment agreement"). On the same date, Bates, Vanguard and Asplundh signed a letter (the "letter agreement") in which Vanguard promised, among other things, to pay Bates' legal fees in the defense of any criminal action unless he was convicted of a crime based upon willful actions outside the scope of his employment. The second employment agreement designated Bates as a consultant and stipulated that he would not be required to render employment services on a day-to-day basis. The second employment agreement maintained the original base salary of two hundred and forty thousand dollars per year but eliminated some of the fringe benefits. The second employment agreement, like the first, contained an arbitration clause which provided, inter alia:

[A]ll claims, disputes and other matters in question arising out of, or relating to this agreement, or the breach hereof, shall be decided by arbitration in accordance with the then current commercial arbitration rules of the American Arbitration Association.

On October 24, 1991, as a consequence of Vanguard's deteriorating financial condition and the government investigations, Bates and the other original shareholders of Vanguard executed a written amendment to the stock sale agreement yielding operational control of Vanguard to Asplundh. On November 5, 1991, a New York County grand jury returned a two hundred and six count indictment charging Bates, Vanguard and other former Vanguard officers with various criminal offenses, including fraud, grand larceny, perjury and filing of false instruments, based on Vanguard's alleged violation of the New York Labor Law.

On December 4, 1991, Asplundh commenced an action against Bates and the other sellers of Vanguard stock in the United States District Court for the Southern District of New York alleging securities fraud and other claims arising out of the stock purchase agreement. On December 3, 1991, Bates and the other sellers filed suit against Asplundh in the United States District Court for the Western District of Kentucky alleging that Asplundh mismanaged Vanguard and breached the stock sale agreement. This action was subsequently transferred to the Southern District of New York.

On December 27, 1991, Bates initiated an arbitration proceeding against Vanguard and Asplundh by filing an arbitration demand with the American Arbitration Association ("the AAA") alleging breach of the second employment agreement and the letter agreement by the failure to pay his salary, fringe benefits and the cost of his defense in the criminal action. On January 23, 1992, Vanguard filed a voluntary petition under Chapter 11 in the United States Bankruptcy Court for the Eastern District of New York. Bates then abandoned the arbitration demand he had filed against Vanguard but attempted to proceed with the arbitration against Asplundh. The bankruptcy court enjoined the arbitration proceeding against Asplundh. On August 12, 1993, after the Vanguard bankruptcy had been converted to a liquidation proceeding, the bankruptcy court dissolved its stay of the arbitration against Asplundh, and on November 16, 1993, the AAA notified Asplundh that pursuant to Bates' request it was proceeding with the administration of the arbitration. Asplundh then commenced the instant action on January 26, 1994.

In the court below, the district judge initially stayed the arbitration pending resolution of Asplundh's motion for a preliminary injunction. Bates moved to dismiss or in the alternative to stay the litigation and compel arbitration. After the motions were fully briefed, the district court, in an order dated March 30, 1994, granted Bates' motion to compel arbitration, denied Asplundh's motion for a preliminary injunction and dismissed the case. Asplundh filed a timely notice of appeal followed by a motion asking the district court to stay its order pending appeal. On June 8, 1994, the district court granted Asplundh's motion for a stay pending appeal. In this order, the district judge noted that her order of March 30, 1994 had failed to address the exclusionary clause to the United States Arbitration Act of 1925 ("Arbitration Act or Act") which appears in Sec. 1 thereof, 9 U.S.C. Sec. 1. She concluded that the exclusionary clause eliminates employment contracts from the coverage of the Act and that her previous order was in error, citing Willis v. Dean Witter Reynolds, Inc., 948 F.2d 305 (6th Cir.1991). She invited Asplundh to dismiss its appeal and file a motion for reconsideration which she said she would grant upon filing without need for further response or hearing. Asplundh denied this invitation and continued to prosecute its appeal, and the matter is now before this court for decision on the merits.

Asplundh argues that the district court erred in three respects: (1) by failing to consider and uphold Asplundh's claim that the arbitration clause is unenforceable because it is contained in an employment agreement; (2) by failing to address and uphold Asplundh's claim that disputes based on the letter agreement are not arbitrable because the letter agreement does not contain an arbitration clause; and (3) by finding that Asplundh as a guarantor is bound by the arbitration provision contained in the second employment agreement. We will address these arguments in reverse order.

I. APPLICABILITY OF THE ARBITRATION AGREEMENT TO ASPLUNDH AS A GUARANTOR

Asplundh argues that it was a guarantor and not a party to the second employment agreement, and that as a mere guarantor, it was not bound by the arbitration clause. Asplundh, however, was more than a mere guarantor. Indeed, we conclude that it was a party to the second employment agreement. The agreement provides that Asplundh shall have the right to make additions to, or impose limitations upon, Bates' responsibilities and privileges:

I. EMPLOYMENT

(a) Employer hereby employs Employee as a consultant with responsibilities, rights, and privileges as set forth herein, subject to the additions to, or limitations upon his responsibilities and privileges as may reasonably be prescribed by Employer's Board of Directors, the President of Vanguard Meter Service, Inc., or the Asplundh Tree Expert Co. Sponsor of Vanguard Meter Service, Inc. (Employment Agreement, Record p. 205).

Paragraph 1(a) of the agreement restricts Bates from seeking investments or associations during the term of the contract which would be competitive with Asplundh. Paragraph 2(a) of the agreement requires Bates to furnish consulting services and advice upon the request of Asplundh. In Paragraph 3(a), Asplundh guarantees payment of Bates' salary and benefits. In Paragraph 5(a) of the agreement, Asplundh is given the power to determine the reasonableness of reimbursable employee expenses incurred by Bates in the performance of his duties under the agreement. Paragraph 5(b) contains similar provisions regarding reimbursement for automobile expenses. The agreement concludes with this language:

IN WITNESS WHEREOF, the parties have executed this agreement, and employer has caused its corporate seal to be affixed hereto as of the day and year first hereinabove written.

Immediately beneath this language are the signatures of Bates and of Jill N. Asplundh as vice president of Vanguard and as vice president of Asplundh.

The arbitration clause of the second employment agreement requires arbitration of "all claims, disputes and other matters in question arising out of or...

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