Cd Partners, LLC v. Grizzle

• Decision Date: 23 September 2005
• Docket Number: No. 03-3831.,03-3831.
• Citation: 424 F.3d 795
• Parties: CD PARTNERS, LLC; CD Developers, LP, Appellees, v. Jerry W. GRIZZLE, acting in scope of his employment as Chief Executive Officer of CDWI [CD Warehouse, Inc.]; Doyle E. Motley, acting within the scope of his employment as Chief Financial Officer of CDWI [CD Warehouse, Inc.]; Gary Johnson, acting within the scope of his employment as Chief Operating Officer of CDWI [CD Warehouse, Inc.], Appellants.
• Court: U.S. Court of Appeals — Eighth Circuit

424 F.3d 795

CD PARTNERS, LLC; CD Developers, LP, Appellees, v.Jerry W. GRIZZLE, acting in scope of his employment as Chief Executive Officer of CDWI [CD Warehouse, Inc.]; Doyle E. Motley, acting within the scope of his employment as Chief Financial Officer of CDWI [CD Warehouse, Inc.]; Gary Johnson, acting within the scope of his employment as Chief Operating Officer of CDWI [CD Warehouse, Inc.], Appellants.

No. 03-3831.

United States Court of Appeals, Eighth Circuit.

Submitted: March 14, 2005.

Filed: September 23, 2005.

COPYRIGHT MATERIAL OMITTED

Thomas P. Howell, argued, Oklahoma City, OK, (J. Clay Christensen, Jay P. Moisant of Oklahoma City, OK, and Paul D. Burns of Cedar Rapids, IA, on the brief), for appellant.

Earl A. Payson, argued, Davenport, IA, for appellee.

Before MURPHY, BYE, and SMITH, Circuit Judges.

BYE, Circuit Judge.

Jerry Grizzle, Doyle Motley and Gary Johnson, three principals in a corporation called C.D. Warehouse, Inc.(CDWI), appeal the district court's order denying their motion to compel arbitration of the tort lawsuit C.D. Partners, L.L.C., filed against them.The lawsuit accuses the three of negligence, negligent misrepresentation, and fraudulent misrepresentation arising out of four franchise agreements between CDWI (franchisor) and C.D. Partners (franchisee).The district court denied the motion on the grounds the three principals were not signatories to the franchise agreements between the two corporations, and the tort lawsuit was not covered by the agreements' arbitration clauses.We reverse and remand for further proceedings.

I

Between 1997 and 1999, CDWI and C.D. Partners signed four franchise agreements¹ to operate retail stores under the name CD Warehouse.The purpose of the agreements was to sell new and used music compact discs (CDs).Each franchise agreement contained an identical arbitration clause which stated, in relevant part: "Except as provided in this Agreement, Franchisor and Franchisee agree that any claim, controversy or dispute arising out of or relating to Franchisee's operation of the Franchised business under the Agreement . . . which cannot be amicably settled shall be referred to Arbitration in accordance with the Rules of the American Arbitration Association."In addition, each franchise agreement provided "nothing in this Agreement is intended, nor shall be deemed, to confer upon any Person or legal entity other than Franchisee, Franchisor, Franchisor's officers, directors, and employees . . . any rights or remedies under or by reason of this Agreement."In each instance, the agreements were signed by David Gott on behalf of C.D. Partners and Jerry Grizzle on behalf of CDWI.

In April 2000, a contractual dispute arose between the two corporations.C.D. Partners filed suit against CDWI in Iowa state court.CDWI removed the action to federal district court, where it was subsequently stayed pending arbitration pursuant to the arbitration clauses in the parties' franchise agreements.The arbitration was never held, however, because CDWI filed for bankruptcy.

In May 2003, C.D. Partners filed this suit in Iowa state court.Whereas the first suit sounded in contract and was brought directly against the corporation CDWI, the second suit sounded in tort and was brought directly against the three individuals who comprised CDWI's primary management — Jerry Grizzle, its president and Chief Executive Officer (CEO); Doyle Motley, its Chief Financial Officer (CFO); and Gary Johnson, its Chief Operating Officer (COO).The complaint alleged negligence, negligent misrepresentation, and fraudulent misrepresentation.

The complaint alleged Grizzle was negligent in nine specific ways, all related to the operation of the franchises (for example, failing to protect the exclusive territories under the franchise agreements, failing to make improvements to point-of-sale software, failing to provide suitable and timely financing for capital improvements to the stores).Similarly, the negligence allegations against Motley and Johnson all related to the operation of the franchises.The negligent misrepresentation count alleged all three defendants provided C.D. Partners with false information to influence the franchise transactions between the parties, which caused damage to C.D. Partners.The fraudulent misrepresentation count alleged all three defendants knew certain representations they made were false, and that they intended to deceive C.D. Partners.

The three principals removed the case to federal district court and filed a motion to compel arbitration pursuant to the franchise agreements between C.D. Partners and CDWI.They argued they could enforce the arbitration clauses between the two corporations — notwithstanding the fact they were not signatories to the agreement — because the tort allegations against them arose from the contractual relationship between the two corporations, and the claims against them arose from the duties they performed while acting as officers of the signatory, CDWI.C.D. Partners resisted the motion, contending the three principals could not enforce the arbitration clauses because they were not signatories and the tort claims against the officers did not fall within the scope of the arbitration clauses.

The district court denied the motion to compel arbitration concluding "neither the claims nor damages sought in this case are the same as those sought against the corporation in that earlier lawsuit."Grizzle, Motley and Johnson filed this timely appeal.

II

We review de novo the denial of a motion to compel arbitration.Telectronics Pacing Sys., Inc. v. Guidant Corp.,143 F.3d 428, 430(8th Cir.1998)."[A]ny doubts raised in construing contract language on arbitrability `should be resolved in favor of arbitration.'"Id. at 430-31(quotingMoses H. Cone Mem'l Hosp. v. Mercury Constr. Corp.,460 U.S. 1, 24-25, 103 S.Ct. 927, 74 L.Ed.2d 765(1983)).Grizzle, Motley and Johnson contend they can enforce the arbitration clauses in the franchise agreements between CDWI and C.D. Partners despite their status as nonsignatories.We agree.

A nonsignatory can enforce an arbitration clause against a signatory to the agreement in several circumstances.One is when "the relationship between the signatory and nonsignatory defendants is sufficiently close that only by permitting the nonsignatory to invoke arbitration may evisceration of the underlying arbitration agreement between the signatories be avoided."MS Dealer Serv. Corp. v. Franklin,177 F.3d 942, 947(11th Cir.1999)(quotingBoyd v. Homes of Legend, Inc.,981 F.Supp. 1423, 1432(M.D.Ala.1997)).Another is "when the signatory to a written agreement containing an arbitration clause `must rely on the terms of the written agreement in asserting [its] claims' against the nonsignatory."Id.(quotingSunkist Soft Drinks, Inc. v. Sunkist Growers, Inc.,10 F.3d 753, 757(11th Cir.1993))."When 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."Id.(internal quotations omitted).

We believe both circumstances are present here.The relationship between signatory CDWI and the nonsignatory appellants is a close one.The tort allegations against the three appellants all arise out of their conduct while acting as officers of CDWI.Evisceration of the underlying arbitration agreement will be avoided only by allowing the three principals to invoke arbitration.Similarly, C.D. Partners's claims against the three appellants rely upon, refer to, and presume the existence of the written agreement between the two corporations.Thus, arbitration is appropriate.

The authority cited by C.D. Partners is inapposite.For example, Flink v. Carlson,856 F.2d 44(8th Cir.1988), involved a signatory attempting to force a nonsignatory into arbitration.Seeid. at 46-47(affirming district court's stay of arbitration of a brokerage house's claims against the individual representative who was not a signatory to the agreements in question);see alsoMerrill Lynch Inv. Managers v. Optibase, Ltd.,337 F.3d 125, 131-32(2d Cir.2003)(affirming district court's grant of a preliminary injunction enjoining an investor from proceeding with arbitration against fund advisor who had not agreed to arbitration).

This is not such a case.This is a case where a nonsignatory with a close relationship to a signatory wants the other signatory to arbitrate a claim.The test for determining whether a nonsignatory can force a signatory into arbitration is different from the test for determining whether a signatory can force a nonsignatory into arbitration:

[I]t matters whether the party resisting arbitration is a signatory or not. . . .[A] willing nonsignatory seeking to arbitrate with a signatory that is unwilling may do so under what has been called an alternative estoppel theory which takes into consideration the relationships of persons, wrongs, and issues, [b]ut a willing signatory seeking to arbitrate with a non-signatory that is unwilling must establish at least one of the five theories described in [Thomson-CSF, S.A. v. Am. Arbitration Ass'n,64 F.3d 773, 776(2d Cir.1995)].

Merrill Lynch,337 F.3d at 131(internal citations and quotations omitted).The courts clearly recognize a nonsignatory's ability to force a signatory into arbitration under the "alternative" estoppel theory when the relationship of the persons, wrongs and issues involved is a close one.See, e.g., Astra Oil Co. v. Rover Navigation, Ltd.,344 F.3d 276, 279-80(2d Cir.2003)(holding a nonsignatory may compel arbitration against a signatory to an arbitration agreement because of nonsignatory's close affiliation with the other signatory party to the agreement).

The dissent relies upon a case not cited by C.D. Partners, McCarthy v. Azure, 22 F.3d 351(1st Cir.1994), arguing...