Frederick v. Sun 1031, LLC

• Decision Date: 22 October 2012
• Docket Number: No. 30,967.,30,967.
• Citation: 293 P.3d 934
• Parties: Robert Bruce FREDERICK, Plaintiff–Appellant, v. SUN 1031, LLC, H. Ray Knight, and Nai The Vaughan Company, Defendants–Appellees, and Sun Byron, LLC, Sun Shelby, LLC, and Sun Tiffany, LLC, Third–Party Defendants–Appellees.
• Court: Court of Appeals of New Mexico

293 P.3d 934

Robert Bruce FREDERICK, Plaintiff–Appellant,

v. SUN 1031, LLC, H. Ray Knight, and Nai The Vaughan Company, Defendants–Appellees,andSun Byron, LLC, Sun Shelby, LLC, and Sun Tiffany, LLC, Third–Party Defendants–Appellees.

No. 30,967.

Court of Appeals of New Mexico.

Oct. 22, 2012.

Robert Bruce Frederick, Santa Fe, NM, Pro Se Appellant.

Beall & Biehler, Peter Grueninger, Gregory L. Biehler, Albuquerque, NM, for Appellee Sun 1031, LLC.

H. Ray Knight, Phoenix, AZ, Pro Se Appellee.

NAI The Vaughan Company, Albuquerque, NM, Pro Se Appellee.

Steve Henry, Corrales, NM, for Appellees Sun Byron, LLC, Sun Shelby, LLC, and Sun Tiffany, LLC.

OPINION

WECHSLER, Judge.

{1} Plaintiff Robert Frederick appeals two district court orders: (1) an order denying his motion to strike Defendant Sun 1031, LLC's (1031) third-party complaint and (2) an order granting 1031's and Third–Party Defendants' Sun Byron, LLC, Sun Shelby, LLC, and Sun Tiffany, LLC (collectively, Byron, Shelby, and Tiffany) motion to compel arbitration. Frederick argues that (1) the district court erred by denying his motion to strike 1031's third-party claim because the third-party complaint failed to state a valid claim under Rule 1–014(A) NMRA; (2) assuming the third-party complaint was proper, Byron, Shelby, and Tiffany have no right to compel arbitration between Frederick and 1031 under the purchase agreements because Rule 1–014 does not allow a third-party defendant to assert defenses that the defendant cannot assert against the plaintiff; (3) the district court erred in granting the motion to compel arbitration with 1031 because 1031 was not a party to the purchase agreements and did not otherwise have an arbitration contract with Frederick; and (4) alternatively, Frederick's claims are not within the scope of the purchase agreements' arbitration clause. We hold that the district court erred by denying Frederick's motion to strike because the third-party complaint did not adequately plead a claim for indemnity. Additionally, the district court erred by granting the motion to compel arbitration. Accordingly, we reverse both district court orders.

BACKGROUND

{2} Frederick commenced this action on March 27, 2009 by filing a complaint against H. Ray Knight (Knight), 1031, and NAI the Vaughan Company (Vaughan) (collectively, Defendants), alleging violations of state and federal securities laws, fraud, negligent misrepresentation, and civil conspiracy. Frederick thereafter amended his complaint to allege only violations of the New Mexico Securities Act of 1986, NMSA 1978, § 58–13B–1 to –57 (1986, as amended through 2004) (repealed 2010) (Securities Act).

{3} In the amended complaint, Frederick alleges that 1031, an Arizona limited liability company, offered certain investment packages to the public, that Knight served as 1031's broker, and that Vaughan is a New Mexico corporation that marketed the investment packages to sell to New Mexico buyers. The investment packages consisted of fractional, undivided, tenancy-in-common interests in income-producing real property coupled with other collateral arrangements that include property management, financing, market analysis, and other essential investment services for the properties. Frederick invested $450,000 total in three properties. As to each of the three properties, 1031 created a separate limited liability company to act as the seller of the real property. Frederick purchased interests in (1) the Byron Town Center in Minnesota from Sun Byron, LLC; (2) the Shelby Crossing Shopping Center in Tennessee from Sun Shelby, LLC; (3) the Tiffany Center in Missouri from Sun Tiffany, LLC.

{4} Frederick alleges that the investment packages are an “investment contract” under the Securities Act. Although Frederick acknowledges that the offer and sale of real estate, without more, does not constitute an investment contract under the Securities Act, he asserts that the investment packages in this case are investment contracts because they consist of a real property interest coupled with collateral arrangements including property management. He alleges that Defendants committed six violations of the Securities Act by: (1) acting as broker-dealers without being licensed, (2) acting as investment advisors without being licensed, (3) offering unlicensed securities (the investment contracts) for sale, (4) engaging in securities fraud by inducing Frederick to rely on information about the investment packages that was false, misleading, and incomplete, (5) making untrue statements of material fact and misleading omissions of material fact in offering the investment packages, and (6) collectively engaging in a conspiracy to commit these violations of the Securities Act.

{5} 1031 answered the amended complaint, asserting an affirmative defense that Frederick's claims were subject to the arbitration clauses in the purchase agreements. 1031 also filed a third-party complaint against Byron, Shelby, and Tiffany. Frederick moved to strike 1031's third-party claim, arguing that 1031 and Byron, Shelby, and Tiffany were in collusion and that 1031's third-party complaint failed to state a valid claim under Rule 1–014(A). 1031 filed a renewed motion to compel arbitration based on its third affirmative defense. Byron, Shelby, and Tiffany filed a joint answer to Defendant's third-party claim. Frederick thereafter filed a motion for summary judgment on 1031's third affirmative defense, arguing that 1031 could not compel arbitration under the arbitration clause in the purchase agreements. The district court granted the motion for summary judgment, but without prejudice, ruling that the issue was not ripe for determination until it ruled on Frederick's motion to strike 1031's third-party complaint and 1031's renewed motion to compel arbitration. The district court later denied 1031's motion to compel arbitration without prejudice, ruling that it did not have all the facts because Byron, Shelby, and Tiffany were not present at the hearing regarding the motion and had yet to be served.

{6} Thereafter Byron, Shelby, and Tiffany filed a motion to compel arbitration on all disputes, arguing that arbitration should be ordered because 1031 impleaded Byron, Shelby, and Tiffany for indemnity for claims “arising under, out of or relating to” the purchase agreements between Byron, Shelby, and Tiffany and Frederick. 1031 joined in the motion.

{7} The district court held a hearing and subsequently issued an order granting the motion to compel arbitration, stating that “[Frederick] is hereby ordered to arbitrate all of his claims in this matter against ... 1031 ... in accordance with the purchase agreements entered into by [Frederick] and [Byron, Shelby, and Tiffany].” Although the district court initially indicated that it was only sending the parties participating in the briefing and the hearing to participate in the arbitration, it later denied Frederick's motion for reconsideration, sending “ all parties into arbitration[,]” including Vaughan and Knight.

{8} On appeal, Frederick argues that the district court erred by denying its motion to strike 1031's third-party claim because Defendant's third-party complaint failed to state a valid claim under Rule 1–014(A). Frederick further argues that, assuming the third-party complaint was proper, Byron, Shelby, and Tiffany have no right to compel arbitration between Frederick and 1031 under the purchase agreements because Rule 1–014(A) does not allow a third-party defendant to assert defenses that the defendant cannot assert against the plaintiff. Next, Frederick argues that the district court erred in granting the motion to compel arbitration with regard to 1031 and all parties because Defendants were not parties to the purchase agreements and did not otherwise have an arbitration contract with Frederick. Alternatively, Frederick argues that his claims against Defendants are not within the scope of the purchase agreements' arbitration clause.

RULE 1–014Motion to Strike

{9} We first address Frederick's argument that the district court erred by denying the motion to strike 1031's third-party complaint because Defendant failed to state a valid claim against Byron, Shelby, and Tiffany under Rule 1–014(A). We review the failure of the district court to dismiss a third-party complaint under an abuse of discretion standard. See Yelin v. Carvel Corp., 119 N.M. 554, 558, 893 P.2d 450, 454 (1995) (stating that it is an abuse of discretion “[t]o refuse to dismiss a third-party complaint which [does] not meet the standards of Rule 1–014[ (A) ]” (first alteration in original) (internal quotation marks and citation omitted)).

{10} The relevant portions of Rule 1–014(A) provide that a defending party “may cause a summons and complaint to be served upon a person not a party to the action who is or may be liable to him for all or part of the plaintiff's claim against him.” However, the rule “does not authorize a defendant to bring into a lawsuit every party against whom he may have a claim arising from the transaction at issue between the defendant and the plaintiff.” Grain Dealers Mut. Ins. Co. v. Reed, 105 N.M. 586, 587, 734 P.2d 1269, 1270 (1987). In order for Rule 1–014 to apply, a third-party defendant must be secondarily liable to the defendant on a theory such as contribution or indemnity, in the event that the defendant is held liable to the plaintiff. Id.

{11} The relevant portions of the third-party complaint state that:

3. [Frederick] alleges in his [f]irst [a]mended [c]omplaint that the tenants-in-common interests purchased from ... Byron, ... Shelby and ... Tiffany are securities subject to statutory requirements under the ... Securities Act. [Frederick] further requests as relief that ... Defendants grant, assign and transfer all property, including his TIC interests to ... Defendants and pay to [Frederick] $450,000, plus interest from the date of his purchase of the TIC interests less any net...