Alafabco, Inc. v. Citizens Bank

• Decision Date: 30 August 2002
• Citation: 872 So.2d 798
• Parties: ALAFABCO, INC. v. The CITIZENS BANK et al.
• Court: Alabama Supreme Court

872 So.2d 798

ALAFABCO, INC. v. The CITIZENS BANK et al.

1010703.

Supreme Court of Alabama.

August 30, 2002.

Rehearing Denied November 27, 2002.

Daniel E. Boone, Florence, for appellant.

Robert V. Wood, Jr., and Ruth O. Priest of Spurrier, Rice, Wood & Hall, Huntsville, for appellee The Citizens Bank.

WOODALL, Justice.

Alafabco, Inc., appeals from the trial court's order granting the motion of The Citizens Bank and its employees to compel arbitration of this dispute. We reverse and remand.

I. Factual Background

The relationship between the parties and the genesis of this dispute were briefly summarized in a complaint filed on November 15, 2000, by Alafabco, Inc., and three of its officers or employees, namely, Donnie Cottingham, Joann Beck, and Weston Beck, against the Bank and a number of its employees, including Doug Alexander, Roger Campbell, and Wayne Gentry (hereinafter referred to collectively as "the Bank"). In pertinent part, the complaint alleged:

"6. In 1986, the plaintiffs and defendants entered into a quasi-contractual relationship wherein the plaintiffs secured construction contracts and the defendants provided the necessary operating capital to complete the project. Upon completion of a project, the plaintiffs repaid the funds, together with accrued interest, to the defendants.[¹]

"7. The plaintiffs continued to operate under the implied agreement until 1998, at which time the defendants encouraged plaintiffs to bid on a large project [for Champion International (the full and correct name of this company is not clear from the record) at its facilities in Courtland, Alabama,] and then, when plaintiffs' bid was accepted and plaintiffs began work, the defendants refused to provide the necessary operating capital for the completion of the contract. As a result of the defendants' breach of the agreement, the plaintiffs began to incur massive debt."

According to Alafabco, it attempted to compensate for the alleged breach by "using the monies provided by The Bank in the prior funding." Appellant's Brief, at 4. Nevertheless, it "became delinquent in repaying its existing obligations to [the] Bank." Appellant's Brief, at 4. Subsequently, the parties negotiated an agreement, pursuant to which "all of the loans with the Plaintiffs were restructured and redocumented through various notes dated May 3, 1999." Appellees' Brief, at ix. Along with the "renewal notes" executed as a result of these negotiations, the parties signed a document containing the following pertinent provisions:

"AGREEMENT TO ARBITRATE. The Citizens Bank (`Lender') and the undersigned agree that all disputes, claims, or controversies (`Disputes') between them, whether individual, joint, or class in nature, including contract and tort disputes and any other matter at law or equity, shall be resolved by arbitration upon request of either party at any time, notwithstanding the prior filing by either party of any legal action, except as otherwise indicated in this Agreement or agreed to in writing by the parties. In an arbitration, an arbitrator, who is an independent, neutral party, gives a decision after hearing the positions of the parties. It is understood and agreed that arbitration pursuant to this agreement shall be binding upon both parties and that both parties are waiving their respective rights to a jury trial. However, nothing in the loan documents or this agreement shall preclude any party from seeking equitable relief from a court of competent jurisdiction.

"....

"GOVERNING LAW. The Federal Arbitration Act shall apply to the construction, interpretation, and enforcement of this arbitration agreement. The arbitration of any dispute shall be governed by the Rules of the American Arbitration Association. If there is an inconsistency between these rules and this Agreement, this Agreement shall govern."

Subsequently, Alafabco defaulted on its payments under the "renewal notes," and, it alleges, the Bank published notices of foreclosure on its property. Consequently, Alafabco sought bankruptcy protection in the United States Bankruptcy Court for the Northern District of Alabama. That action was settled and Alafabco's petition in bankruptcy was dismissed.

However, that settlement involved a second debt restructuring, evidenced by a second set of renewal notes executed December 10, 1999. At that time, the amount allegedly due the Bank was approximately $430,000. The debt restructuring involved a note of the individual plaintiffs, secured by a mortgage on commercial real estate owned by Cottingham and the Becks; a note of Alafabco, secured by accounts receivable, inventory and supplies, fixtures, machinery and equipment, and motor vehicles; and a mortgage on Cottingham's house. That same day, the parties also executed an arbitration agreement containing provisions functionally identical to the arbitration agreement signed on May 3, 1999 (the May 3, 1999, arbitration agreement and the December 10, 1999, arbitration agreement are hereinafter referred to collectively as "the Arbitration Agreements").

The plaintiffs' 18-count complaint, filed nearly a year after the execution of the second set of renewal notes, sought compensatory and punitive damages under multiple theories, including breach of contract, fraud, breach of fiduciary duties, defamation, conspiracy, intentional infliction of emotional distress, and interference with a contractual or business relationship. The Bank moved to compel arbitration of the dispute, based on the Arbitration Agreements. The trial court granted the motion, and Alafabco appealed.

II. Discussion

On appeal, Alafabco contends that the Arbitration Agreements are unenforceable because, it argues, the transaction at issue does not have a nexus with interstate commerce sufficient to invoke the Federal Arbitration Act, 9 U.S.C. § 1 et seq. ("the FAA"). The Bank's first response is that the agreements are enforceable whether or not the transaction has a connection with interstate commerce. This is so, because, it argues, this case involves postdispute agreements, which, it contends, are not contrary to state law. More specifically, it states: "[T]he Plaintiffs entered into the Arbitration Agreements after they had already defaulted on their various obligations to the Bank.... As a material consideration to the restructuring of [their] obligations, the plaintiffs agreed to submit any dispute heretofore or thereafter arising ... to binding arbitration." Appellees' Brief, at 2 (emphasis added). "Therefore," the Bank continues, "the Arbitration Agreements ... were executed after a dispute had already arisen and were not subject to the [interstate-commerce] restriction" as would be the case had they been executed before the dispute. Appellees' Brief, at 4. We disagree with the Bank—not with its characterization of the chronology of events,² but with its conclusions.

Unlike predispute arbitration agreements, which contravene Ala.Code 1975, § 8-1-41(3), postdispute arbitration agreements are enforceable in Alabama, either under the Alabama Arbitration Act, Ala.Code 1975, §§ 6-6-1 to -16 ("the AAA"), or at common law. Ala.Code 1975, § 6-6-16; Fuerst v. Eichberger, 224 Ala. 31, 33, 138 So. 409, 410 (1931); Rodney Max, "Arbitration—the Alternative to Timely, Costly Litigation," 42 Ala. Lawyer 309, 317-18 (1981). However, there is no evidence in this case of an agreement to proceed under the AAA or the common law. On the contrary, the Arbitration Agreements provided: "The Federal Arbitration Act shall apply to the construction, interpretation, and enforcement of this Agreement." (Emphasis added.)

Moreover, the Bank did not propose in the trial court to arbitrate outside the framework of the FAA. On the contrary, it based its "Motion to Stay Action and Compel Arbitration" on the FAA, stating: "An Agreement which contains specific provisions requiring parties to Arbitrate disputes involving or [a]ffecting interstate commerce is specifically enforceable under the Federal Arbitration Act, 9 U.S.C. Section 1, et seq.; Allied-Bruce Terminix Companies v. Dobson, 513 U.S. 265 (1995)." It then cited various examples of how, in its view, "the dealings of the parties... substantially contemplated and impacted upon interstate commerce."

It repeated those contentions in its "Brief in Support [of the Motion] to Compel Arbitration." There, it also argued that this case is distinguishable from Sisters of the Visitation v. Cochran Plastering Co., 775 So.2d 759 (Ala.2000), in which this Court determined, applying a five-part test, that the transaction at issue there did not substantially affect interstate commerce, and, therefore, that an arbitration agreement was not enforceable under the FAA. In this case, neither the motion nor the supporting brief refers to the AAA or to arbitration under the rules of common law. Clearly, the parties did not contemplate arbitration under the authority of the AAA or the common law of Alabama.

Consequently, arbitration of this dispute must proceed, if at all, under the FAA.

The FAA preempts Alabama law disfavoring predispute arbitration agreements only if the dispute is subject to a written arbitration agreement "relating to a transaction substantially affecting interstate commerce." Ex parte Greenstreet, Inc., 806 So.2d 1203, 1209 (Ala.2001); see also F.A. Dobbs & Sons, Inc. v. Northcutt, 819 So.2d 607 (Ala.2001). The proponent of arbitration bears the burden of proving a sufficient connection with interstate commerce, Brookfield Constr. Co. v. Van Wezel, 841 So.2d 220, 222-23 (Ala.2002); Tran-South Fin. Corp. v. Bell, 739 So.2d 1110 (Ala.1999), applying the five-part test set forth in Sisters of the Visitation.

In an attempt to carry this burden, the Bank presented the affidavit of Roger Campbell, its "president and chief executive officer." He recited the following factors as bearing on the interstate-commerce question:

"The Citizens Bank is a lending institution which routinely

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