In re Morrison
| Decision Date | 26 October 2009 |
| Docket Number | Bankruptcy No. 05-45926.,Adversary No. 08-03260. |
| Citation | 419 B.R. 314 |
| Parties | In re F. Joseph MORRISON; aka Morrison Unlimited; aka Relief Physicians of Texas, et al, Debtor(s). F. Joseph Morrison, et al, Plaintiff(s) v. Amway Corporation, et al, et al, Defendant(s). |
| Court | U.S. Bankruptcy Court — Southern District of Texas |
J. Craig Cowgill, Attorney at Law, Houston, TX, Timothy Allen Tyler, Attorney at Law, Bellaire, TX, for Debtor(s).
Edward L. Ripley, King & Spalding LLP, Pamela Gale Johnson, Baker & Hostetler LLP, Houston, TX, Trustee.
Nancy Lynne Holley, U.S. Trustee, Houston, TX, U.S. Trustee.
For the reasons set forth below, the Court grants in part and denies in part Defendants' Motions to Dismiss or Alternatively, Motions for Summary Judgment ("Motions to Dismiss") (docket nos. 76 and 77).1
Plaintiffs are former distributors for Amway Corporation ("Amway"). Distributors sold Amway's line of household products and recruited additional distributors. Distributors derived profits from their individual sales and from the sales of their recruited distributors. Recruited distributors are called "down-liners" and recruiting distributors are called "up-liners."
All distributors had to execute a Distributorship Agreement Application. Under the Distributorship Agreement, distributors agreed to abide by Amway's Regulations and Rules of Conduct for Distributors, and any amendments to those Rules and Regulations. Distributors were required to renew the agreement annually by signing either an automatic renewal agreement or an annual "Intent to Continue" form.
In September of 1997, Amway announced it was instituting a new arbitration program. Amway required distributors to sign an "Acknowledgment Form" or "Intent to Continue Form" containing a new arbitration provision. The arbitration provision required mandatory arbitration of "any . . . claim or dispute arising out of or relating to [an] Amway distributorship, the Amway Sales and Marketing Plan, or the Amway Rules of Conduct (including any claim against another Amway distributor, or any such distributor's officers, directors, agents or employees, or against Amway Corporation, or any of its officers, directors, agents or employees)." However, the Acknowledgment Form also stated that the arbitration provision "automatically became part of your agreement with Amway." Most Plaintiffs did not sign the Acknowledgment Form.
In January of 1998, Plaintiffs filed a state court lawsuit alleging that Amway, related entities, and up-liners ("Defendants")2 were improperly calculating distributions. Plaintiffs' claims ranged from defamation to RICO. Defendants removed the lawsuit to the Federal District Court and sought to stay the lawsuit to enforce a purported arbitration clause in their contracts with Plaintiffs.3
In the Federal District Court, Plaintiffs challenged the enforceability of the arbitration provision. Plaintiffs alleged that only one-third of Plaintiffs had executed the Acknowledgment Form and that even if Plaintiffs had executed an agreement that incorporated the arbitration provision, the provision was unconscionable and therefore, unenforceable. The District Court rejected Plaintiffs' arguments and issued a memorandum opinion and order staying the lawsuit pending arbitration. Morrison v. Amway Corp., 49 F.Supp.2d 529 (S.D.Tex.1998). The District Court found that Plaintiffs had agreed to the arbitration provision through execution of the Distributorship Agreements. Id. at 533. The District Court noted that the Distributor Agreements required distributors to abide by Rules of Conduct and other rules, requirements, and regulations, as amended from time to time. Id. The District Court reasoned that the arbitration provision constituted a rule, requirement, or regulation under the Distributor Agreement. Id.
The District Court also held that the arbitration provision was not unconscionable. Id. at 533-34. The District Court found that Plaintiffs failed to demonstrate that Amway coerced the arbitration provision upon Plaintiffs through excessive bargaining power or greater sophistication. Id. at 534. Nor did Plaintiffs demonstrate that the substance of the arbitration provision was without any legitimate commercial purpose such that no reasonable person would agree to such a provision. Id.
The parties pursued arbitration from 2001 to 2004. After three weeks of evidentiary hearings and post-hearing briefing, the arbitrator found for Plaintiffs on Defendants' counterclaims and for Defendants on Plaintiffs' claims. Accordingly, the arbitrator found that both Plaintiffs and Defendants were prevailing parties entitled to legal fees. After an evidentiary hearing on legal fees, the arbitrator awarded legal fees of approximately $1,000,000.00 to Plaintiffs and legal fees of approximately $7,000,000.00 to Defendants. The arbitrator awarded Defendants a judgment in the amount of the difference, approximately $6,000,000.00. Plaintiffs were held jointly and severally liable for the $6,000,000.
Plaintiffs filed a motion to vacate the $6,000,000.00 judgment, alleging that the arbitrator had an impermissible conflict because she was trained by Defendants. On September 15, 2005, the District Court issued an order denying the motion. Morrison v. Amway, Civil Action No. H98-0352 (S.D.Tex. Sept. 15, 2005). The District Court reasoned that Plaintiffs knew or should have known that the arbitrator was selected and trained by Defendants. Id. Because Plaintiffs knew or should have known of a potential conflict before the arbitrator awarded the judgment, the District Court held that Plaintiffs waived their objections. Id.
Numerous Plaintiffs filed individual bankruptcy petitions in response to the judgment. Amway or its successor in interest, Alticor, filed proofs of claim in the individual bankruptcies for the full amount of the judgment.
Plaintiffs appealed the District Court orders staying litigation and denying the motion to vacate. On February 6, 2008, the Fifth Circuit reversed the District Court's orders. Morrison v. Amway Corp., 517 F.3d 248 (5th Cir.2008). The Fifth Circuit held that the arbitration provision was unenforceable because Amway could unilaterally amend the provision and make amendments retroactive. Id. at 254-57. The Fifth Circuit remanded the lawsuit to the District Court. Id. at 258.
The Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334. Venue is proper in this District pursuant to 28 U.S.C. § 1409.
Plaintiffs filed this adversary proceeding on July 21, 2008 (docket no. 1). On October 23, 2008, Defendants responded with Motions for Withdrawal of Reference (docket nos. 15 and 17) and Motions to Dismiss (docket nos. 16 and 18). On June 26, 2009, the Court issued its Order and Memorandum Opinion denying Defendants' Motions to Dismiss (docket nos. 60 and 61) and its Recommendation to the District Court to deny Defendants' Motions for Withdrawal of Reference (docket no. 59). The District Court adopted the Court's Report and Recommendation and denied Defendants' Motions for Withdrawal of Reference on July 1, 2009. Morrison v. Amway, 409 B.R. 384 (S.D.Tex.2009). Defendants have appealed this Court's June 26, 2009 Order and Memorandum Opinion denying their Motions to Dismiss (docket nos. 66 and 67).
In the Court's June 26, 2009 Memorandum Opinion, the Court reserved judgment on certain issues until Plaintiffs filed an amended complaint (docket nos. 60 and 61). The Court ordered Plaintiffs to file an amended complaint that addressed standing issues, Rule 8 and Rule 9 pleading requirements, and personal jurisdiction issues. Plaintiffs filed their Second Amended Complaint on July 27, 2009 (docket no. 75) and Defendants filed their new Motions to Dismiss on August 17, 2009 (docket nos. 76 and 77). On September 11, 2009, the Court heard oral arguments on Defendants' new Motions to Dismiss and ordered the parties to submit post-hearing briefs. This Memorandum Opinion addresses Defendants' new Motions to Dismiss Plaintiffs' Second Amended Complaint.
In Plaintiffs' Second Amended Complaint, Plaintiffs allege that Defendants:
• Conspired to insulate themselves from liability to Plaintiffs by establishing an arbitration scheme that ensured Plaintiffs' claims would be denied.
• Selected and indoctrinated the arbitrator to ensure a favorable ruling.
• Failed to disclose the true nature of the selection or training process or the fact that Plaintiffs could be held liable for Defendants' arbitration costs.
Plaintiffs allege that if they had known these undisclosed facts, they would have dismissed their claims rather than pursuing them in arbitration. After the arbitrator awarded the judgment, Plaintiffs allege that Defendants' attempts to enforce the judgment caused Plaintiffs' individual bankruptcy filings and associated financial losses. Plaintiffs allege that Defendants offset the now-vacated judgment by refusing to pay Plaintiffs' down-line sales commissions and thereafter refusing to renew Plaintiffs' Distributor Agreements.
Based on Defendants' alleged scheme to defraud Plaintiffs of their claims and the Defendants' subsequent attempts to enforce the vacated arbitration judgment, Plaintiffs assert causes of action for fraud, misrepresentation, negligent misrepresentation, breach of contract, breach of fiduciary duty, breach of duty of the duty of good faith and fair dealing, civil conspiracy, joint enterprise, and conversion. Plaintiffs seek actual damages, legal fees and costs, and exemplary damages.
Defendants4 seek dismissal on several grounds:
1. Standing;
2. Statute of...
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...of [f]acts and circumstances sufficient to warrant the pleaded conclusion that fraud has occurred." Morrison v. Amway Corp. (In re Morrison), 419 B.R. 314, 324 (Bankr. S.D. Tex. 2009) (quoting In re Haber Oil Co., 12 F.3d 426, 439 (5th Cir. 1994)). "Put simply, Rule 9(b) requires the 'who, ......