Hartford Fin. Systems v. Fla. Software Serv., Inc.

• Decision Date: 02 November 1982
• Docket Number: Civ. No. 81-0184-P.
• Citation: 550 F. Supp. 1079
• Parties: HARTFORD FINANCIAL SYSTEMS, INC. and Martin Marietta Corporation, Plaintiffs, v. FLORIDA SOFTWARE SERVICES, INC., Florida Computer Service, Inc. and Depositors Trust Company, Defendants.
• Court: U.S. District Court — District of Maine

550 F. Supp. 1079

HARTFORD FINANCIAL SYSTEMS, INC. and Martin Marietta Corporation, Plaintiffs, v. FLORIDA SOFTWARE SERVICES, INC., Florida Computer Service, Inc. and Depositors Trust Company, Defendants.

Civ. No. 81-0184-P.

United States District Court, D. Maine.

November 2, 1982.

Gordon T. Walker, Boston, Mass., Michael T. Healy, Portland, Me., Edmund S. Muskie, Washington, D.C., Rose G. MacAulay, Vice Pres. Legal & Contracts, Bethesda, Md., for plaintiffs.

Frank Chapman, Augusta, Me., William Kayatta, Jr., Portland, Me., John Curtin, Jr., Boston, Mass., Timothy Askew, Jr., Atlanta, Ga., for defendants.

MEMORANDUM DECISION AND ORDER

CYR, District Judge.

This diversity action for declaratory and injunctive relief was brought by Hartford Financial Systems, Inc. Hartford and by Martin Marietta Corporation Martin, Connecticut and Maryland corporations respectively. The defendants are Florida Software Services, Inc. FSS, its wholly owned subsidiary Florida Computer Services, Inc. FCS, both Florida corporations, and Depositors Trust Company Depositors, a Maine corporation.

Depositors moved on July 31, 1981 to stay these proceedings pending arbitration. At the hearing held August 25, 1981, the plaintiffs and the Florida defendants advised the Court that they would not submit to arbitration unless compelled. Whereupon, Depositors brought a motion to compel arbitration by all parties to the present action.

I FACTS

The pleadings, affidavits and documents submitted by the parties demonstrate the following undisputed facts.

On November 21, 1978, Depositors entered into a contract, entitled Resource Management Agreement R.M.A., with Financial Industry Systems FIS, a Connecticut partnership with Hartford and Martin as sole general partners, calling for FIS to provide data processing services to Depositors for a period of six years. By its own terms the R.M.A. is to be "governed by, subject to, and construed according to the laws of the State of Maine," and the rights and obligations thereunder are rendered non-assignable by either party. (R.M.A. ¶¶ 18, 21.) The R.M.A. contains an arbitration clause, (R.M.A. ¶ 19) which provides, in part, as follows:

Any controversy arising out of, or related to, this Agreement, or the transaction to which it relates, will be settled by arbitration conducted by a panel of three (3) arbitrators under the then-current rules of the American Arbitration Association, those arbitrators to be chosen from a panel of persons supposed to be knowledgeable in data processing by computers.

Within a few months of the execution of the R.M.A., both parties expressed dissatisfaction with their contractual relationship. By letter dated July 18, 1980, Depositors asserted certain deficiencies in the services rendered by FIS. FIS promptly suggested renegotiation of the terms of the R.M.A.

On July 31, 1980 Hartford and Martin entered into an "Agreement to Enter Into Partnership" Partnership Agreement with defendant FSS, whereby FSS, Hartford and Martin were to form a limited partnership, "Martford", which would become a general partner in FIS; FSS would become the sole general partner in Martford; Hartford and Martin would become limited partners in Martford; and FSS would essentially become the sole general partner in FIS by virtue of its position as an individual partner in FIS and its position as the sole general partner in Martford, the only other "partner" in FIS.¹ Prior to making the agreed transfers, FSS assigned its interest in the Partnership Agreement to its wholly owned subsidiary, the defendant FCS. When all of these transfers were finally consummated on August 6, 1980, FIS consisted of FCS and Martford, which was, in turn, composed of FCS, Hartford, and Martin. As a result of the transfer by Hartford and Martin of their FIS partnership interests,² FCS obtained a 99.8% interest in FIS and Hartford and Martin each retained a .1% interest in FIS, as limited partners in Martford. The restructuring of FIS is diagramed in Appendix A.

Article VI of the Partnership Agreement provides for indemnification between Hartford and Martin on the one hand and FCS, as assignee of FSS, on the other, for costs and expenses incurred in connection with liabilities and obligations of FIS, depending on whether the liabilities and obligations arose before or after the closing of the Partnership Agreement.

An ancillary agreement among FIS, Hartford, Martin and FCS, the so-called Performance Agreement of July 31, 1980, entitles Hartford and Martin to investigate any customer claims of default by FIS in its performance under any service contract. Hartford and Martin were given the right to cure any FIS default and either to be reimbursed by FIS or to collect any amount due FIS from the customer.

Upon being informed of the intended transfers, Depositors declared its intention to continue to look to Hartford and Martin to ensure adequate performance by FIS under the R.M.A. Depositors, which viewed the restructuring of FIS as a maneuver by Hartford and Martin to divest themselves of their obligations under the R.M.A. by circumventing its anti-assignment clause, reiterated in letters of December 3, and December 19, 1980 that it would continue to look to Hartford and Martin for performance under the R.M.A.

In December, 1980, FIS began issuing invoices to Depositors for "supplemental expenses" under the R.M.A., including "supplemental services" rendered as far back as August 14, 1979, prior to the restructuring of FIS. Depositors refused to pay the invoices. As a result, on April 6, 1981 FIS declared Depositors in default and later notified Depositors that it was exercising its right to terminate the R.M.A. due to the failure of Depositors to satisfy the invoices.

On May 6, 1981, Depositors wrote to FIS, Hartford, and Martin advising that it considered the termination of the R.M.A. by FIS to be an "irreversible breach forcing Depositors to secure substitute services on or about May 31, 1981," and explaining that to demand continued performance by FIS would be "futile."³ Depositors had been negotiating prior to this time and, on June 1, 1981, it entered into a contract with another data processing agency for substitute services.

On May 22, 1981, Depositors wrote to the chief executive officers of Hartford, and Martin, providing a copy to FIS, purporting to refer a number of its R.M.A. disputes with FIS to these officials as a prelude to a demand for arbitration. On May 29, 1981, Hartford and Martin instituted this action for declaratory and injunctive relief. On June 5, 1981, Hartford and Martin, considering themselves no longer obligated under the R.M.A., refused to recognize Depositors' referral of May 22 as proper compliance with the R.M.A. arbitration clause.⁴ On June 24, 1981, Depositors again attempted a prearbitration referral, this time to the chief executive officer of FIS. On July 30, 1981, Depositors filed a written demand for arbitration with the American Arbitration Association (Appendix B), in response to which the plaintiffs and the Florida defendants moved, on August 19, 1981, for an order staying arbitration pending a determination of the proper parties and issues for arbitration, which motion was granted by an order of this Court entered August 26, 1981.

II MOTION TO STAY PROCEEDINGS PENDING ARBITRATION

On July 31, 1981, Depositors renewed its previously denied motion to stay these judicial proceedings pending arbitration, thereby invoking those provisions of the Federal Arbitration Act which apply where there is "a written provision in ... a contract evidencing a transaction in commerce among the several states to settle by arbitration a controversy thereafter arising out of such contract or transaction...." 9 U.S.C. § 2. There is no dispute that the R.M.A. involves transactions in interstate commerce.

Section 3 of the Act provides:

If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.

The requested stay must be granted provided the arbitration agreement covers the issues presented and Depositors is not in default in proceeding with arbitration.

Hartford and Martin argue that Depositors is estopped from arbitrating the R.M.A. disputes because (1) Depositors has "inflated" its damage claims for the alleged breaches by FIS, by seeking substitute services before demanding arbitration, thus precluding Hartford and Martin from taking any action to reconcile FIS and Depositors and avoid the need for substitute services; (2) Depositors did not seek arbitration when the disputed invoices were received; and (3) Depositors did not seek arbitration when FIS was restructured.

These arguments ignore the "effect of waiver" clause of the R.M.A., which provides that the "waiver or failure of either party to exercise in any respect any right provided for in this Agreement shall not be deemed a waiver of any further or future right hereunder." (R.M.A. ¶ 22.) Moreover, these arguments present defenses in the nature of mitigation of damages, laches, and estoppel, which are for arbitration. In re Mercury Construction Corp., 656 F.2d 933, 940 (4th Cir.1981); Halcon International, Inc. v. Monsanto Australia, Ltd., 446 F.2d 156, 160-163 (7th Cir.1971).⁵

Having determined that Depositors is not estopped from seeking a stay of these proceedings pending arbitration, it is necessary to examine the issues raised by the various claims in this action, to determine which, if any, are...