Atcas v. Credit Clearing Corp. of America

• Decision Date: 25 February 1972
• Docket Number: No. 42832,42832
• Citation: 197 N.W.2d 448,292 Minn. 334
• Parties: Edward P. ATCAS, et al., Respondents, v. CREDIT CLEARING CORPORATION OF AMERICA, Appellant, Carl R. Zimmerman, Respondent, James Toney, et al., Defendants.
• Court: Minnesota Supreme Court

Page 448

197 N.W.2d 448

292 Minn. 334

Edward P. ATCAS, et al., Respondents, v. CREDIT CLEARING CORPORATION OF AMERICA, Appellant Carl R. Zimmerman, Respondent James Toney, et al., Defendants.

No. 42832.

Supreme Court of Minnesota.

Feb. 25, 1972.

Rehearing Denied May 31, 1972.

Syllabus by the Court

1. Basically, there is no conflict of law between the States of Florida and Minnesota concerning arbitration, since both states have enacted the Uniform Arbitration Act. The slight differences in the two acts, as adopted, do not affect the issues in this case.

2. In deciding the issue of whether fraud in the inducement should be determined by the court or by the arbitrators, the following factors shall be considered and determined:

A. If the language contained in the agreement evinces an intent of the parties to specifically arbitrate the issue of fraud in the inducement, as well as other issues or controversies, or if the language used is sufficiently broad to comprehend that the issue of fraudulent inducement be arbitrated, then that issue is a proper subject for arbitration. Conversely, if there is no such intent in the agreement or if the language used is not sufficiently broad to comprehend arbitration of that issue, the issue of fraud in the inducement will be decided by the court. In this case, there was no intent so expressed by both parties to arbitrate the issue of fraud in the inducement nor does the language used in the agreement comprehend arbitration of that issue.

B. Where the parties have not specifically agreed to arbitrate the issue of fraud in the inducement and the language used in the contract does not comprehend arbitration of that issue, upon commencement of an action based on fraud in the inducement, arbitration proceedings will be stayed until the issue of fraud has been determined by the court.

C. In order to stay arbitration proceedings on the grounds of fraud in the inducement of the contract, the party seeking such relief must properly proceed to avoid the agreement; that is, he must seek rescission but not damages, and he cannot rescind in part and affirm in part. His rescission of the contract must be in toto.

3. Plaintiffs' complaint adequately pleads a cause of action in fraud.

4. The arbitration clause is severable. Since fraud in the inducement goes to vitiate the entire contract, it is immaterial for the purpose of this appeal whether the clause is determined to be severable or inseverable.

Maslon, Kaplan, Edelman, Borman, Brand & McNulty and Charles Quaintance, Jr., Minneapolis, for appellant.

John E. Castor, Minneapolis, for Atcas and others.

Robert T. Stich, Minneapolis, for Zimmerman.

Heard before KNUTSON, C.J., and MURPHY, KELLY, and HACHEY, JJ.

RONALD E. HACHEY, Justice. ^*

This action for rescission of a contract and damages was commenced in the district court in June 1970. One of the defendants, Credit Clearing Corporation of America, thereafter moved that the court stay trial of the action and order arbitration of the dispute as provided in the contract. The trial court denied the motion and on August 31 ordered that trial be had on the issue of whether plaintiffs were fraudulently induced to enter the contract. A motion to reconsider that order was thereafter filed and heard. The trial court reaffirmed the order of August 31 in all respects on September 30 and this appeal followed.

The chief issues on appeal are whether the question of fraud in the inducement of the contract should be determined by the district court of Minnesota or by arbitration in the State of Florida; whether the laws of Minnesota or the laws of Florida are applicable; and whether or not the arbitration clause in the contract is severable.

As a result of a newspaper ad which appeared in the Minneapolis Star and Tribune, plaintiffs Edward P. Atcas and James H. Overholt entered into a franchise agreement with Credit Clearing Corporation (hereafter, defendant) on February 24, 1969, effective on February 25, 1969. All negotiations took place in Minneapolis, Minnesota. Defendant signed the agreement in Florida. On April 23, the parties entered into a superseding franchise agreement which, in effect, enlarged the territory to be covered by plaintiffs, originally the State of Minnesota, by adding the States of North Dakota and South Dakota thereto.

Plaintiffs contend that at no time during the contract negotiations, and not until some time after they had made payment in part pursuant to the terms of the agreement of February 24, 1969, was the subject of arbitration ever mentioned. Plaintiffs further contend that arbitration was first mentioned on April 24, 1969, by an agent of defendant, who pointed out that any controversy regarding performance of the master-franchise agreement was to be arbitrated in Florida, but said nothing about arbitration of any controversy which might arise by reason of representations made by or on behalf of defendant in order to obtain the signatures of plaintiffs and their payment of money pursuant to the contract.

In brief, the contract provided that during a certain period of time the individual plaintiffs were to procure a minimum of 200 'member-merchants,' for each of which plaintiffs agreed to pay defendant a $225 fee, or a total of $45,000. The sum of $33,750 was payable upon signing the agreement and the balance of $11,250 was to be paid November 25, 1969. Each member was to be charged a membership fee of which plaintiffs were to receive the major portion. Customers of the member-merchants who held a current credit card from defendant could be extended credit up to $100 per month. The member-merchants were then to forward credit accounts to defendant for collection, and defendant represented it would pay the merchants the amount of credit, up to $100, extended to customers, less a stipulated service discount. Plaintiffs were to receive 7 percent of all earned and collected discounts from all accounts in the territory. The contract further provided for the payment to plaintiffs of 50 percent of renewal membership fees and the providing by defendant of certain advertising material and merchant contract forms.

Paragraph 11 of the contract reads as follows:

'Each clause of this agreement shall be severable and in the event that any clause, sentence, word or portion of the agreement is declared unenforceable, the remainder of the agreement shall be effective and binding on the parties.'

Paragraph 14 of the contract reads as follows:

'This Agreement shall be governed by, and construed under the laws of Florida. Any controversy whatsoever, relating to this Agreement shall be settled by arbitration at Jacksonville, Florida, under the laws of the American Arbitration Association, before any action or proceeding can be brought or maintained. * * * Failure to enforce any of the provisions of this Agreement, by either party, shall not be construed as a waiver of those provisions.'

Plaintiffs contend, and allege in their complaint, that defendant's agent, in outlining the working arrangement, represented to plaintiffs that each member-merchant was to extend credit up to a $100-per-month limit to customers who held defendant's credit card; that the merchant would send the charge slips of sales to customers to defendant, who in turn would remit monthly to the merchants for amounts of said charge slips, less a service charge which would vary from 4 1/2 percent to 9 percent, depending upon volume; that defendant would undertake to collect from the customers; that defendant would provide complete training and guidance to plaintiffs; that defendant's employees were trained, knew defendant's service, and were bonded; that defendant would establish and train an effective sales force for plaintiffs and would have a leased phone line available for plaintiffs' use for guidance; that defendant would contact by mail some 10,000 merchants for possible leads for plaintiffs; that for each member-merchant that plaintiffs sold at $240 per 2-year contract, plaintiffs would receive $225 on the first 200 merchants sold and $180 per contract thereafter, plus 7 percent of the discount fee defendant charged the merchants, to be paid quarterly; that the loss experience of member-merchants in some 32 states was less than 2 percent; that defendant would furnish plaintiffs with financial statements of defendant's business which plaintiffs could use in inducing prospective member-merchants to join; and that defendant would furnish supplies, sales tools, and sales manuals at no cost to plaintiffs. Plaintiffs allege also that they relied upon such representations; that defendant knew the representations were false; and that plaintiffs expended a total of $36,291.95. Plaintiffs further allege that about February 15, 1970, they discovered that the representations of defendant were not true and have ever since treated the contract as void ab initio. Asserting that they have received nothing for the money they have paid, plaintiffs seek to rescind and ask for a return of the money they have parted with.

Plaintiffs' claim that the contract was void ab initio because of fraud in the inducement and defendant's contention that the matter should be submitted to arbitration raise several issues. We will consider: (1) Which law is applicable, that of Florida or that of Minnesota? (2) Is a claim of fraud in the inducement a proper subject for arbitration? (3) Have respondents adequately pleaded a claim of fraud in inducing the arbitration agreement? (4) Is the arbitration clause severable?

1. Basically, there is no conflict of law between the States of Florida and Minnesota concerning arbitration since both states have enacted the Uniform Arbitration Act. The slight differences in the two acts, as adopted, do not affect the issues in this case. Hence, the two should be interpreted similarly since uniformity of interpretation, as well as of statutory language, is the fundamental reason for...