INDIANA CPA SOCIETY INC. v. GoMembers, Inc.

• Decision Date: 30 October 2002
• Docket Number: No. 49A04-0205-CV-214.,49A04-0205-CV-214.
• Parties: INDIANA CPA SOCIETY, INC., Appellant-Plaintiff, v. GOMEMBERS, INC., Appellee-Defendant.
• Court: Indiana Appellate Court

777 N.E.2d 747

INDIANA CPA SOCIETY, INC., Appellant-Plaintiff, v. GOMEMBERS, INC., Appellee-Defendant.

No. 49A04-0205-CV-214.

Court of Appeals of Indiana.

October 30, 2002.

Kent M. Frandsen, Parr, Richey, Obremskey & Morton, Lebanon, IN, Attorney for Appellant.

Robert C. Bruner, Paul A. Logan, Bruner & Traylor, Indianapolis, IN, Attorneys for Appellee.

OPINION

KIRSCH, Judge.

Indiana CPA Society, Inc. ("Society") appeals the trial court's dismissal of its action against GoMembers, Inc. in its claim for breach of contract, arguing that the contractual term requiring the parties to submit any grievances to arbitration does not preclude it from filing suit and that the cause should be stayed rather than dismissed pending arbitration. GoMembers counterclaims for appellate attorney's fees, contending that Society's appeal is frivolous and taken in bad faith.

We affirm.

FACTS AND PROCEDURAL HISTORY

Society and GoMembers entered into a contract for GoMembers to design an e-commerce function for Society's web site. The parties' contract contained a clause requiring the parties to submit any complaints to arbitration for resolution and provides: "Disputes under this Agreement shall be submitted to binding arbitration in accordance with the procedures of the American Arbitration Association." Appellant's Appendix at 12. Without submitting the dispute to arbitration, Society filed suit for breach of contract in the Marion Superior Court. GoMembers filed a motion to dismiss, arguing that the arbitration clause removed the controversy from the court's jurisdiction and that Society's complaint failed to state a claim.

The trial court granted GoMembers' motion to dismiss. Society now appeals.

DISCUSSION AND DECISION

Society contends that the trial court erred in granting GoMembers' motion to dismiss. GoMembers' motion was based on Ind. Trial Rule 12(B)(1) and (6) and urged dismissal based on the trial court's lack of subject matter jurisdiction and the failure of Society's complaint to state a claim upon which relief could be granted.

The parties first debate whether the law of Indiana or Illinois applies to the present controversy. The parties' contract contained a clause which stated that the substantive law of Illinois governed the "construction, interpretation and performance" of the contract. Appellant's Appendix at 15. However, the instant controversy does not require the construction or interpretation of the parties' contract. Rather, we are called upon to determine whether Society's suit should be dismissed or stayed. Laws which merely prescribe the manner in which individual rights and responsibilities may be exercised and enforced in a court are procedural. Mounts v. State, 496 N.E.2d 37, 39 (Ind.1986). Because this controversy may be resolved by procedural law without resort to substantive law, the contractual provision does not govern this dispute, and we apply Indiana law. Ashley v. State, 757 N.E.2d 1037, 1040 (Ind.Ct.App.2001) (noting that procedural and remedial matters are governed by law of forum state).

GoMembers argues that the trial court was required to dismiss Society's action under T.R.12(B)(1) because it lacked subject matter jurisdiction. However, in JKL Components Corp. v. Insul-Reps, Inc., 596 N.E.2d 945, 948-49 (Ind.Ct.App.1992), trans. denied, this court held that an Indiana court of general jurisdiction had subject matter jurisdiction over a breach of contract action between two parties whose contract contained an arbitration clause, even when the plaintiff had not submitted to arbitration prior to filing suit.

Likewise, here the Marion Superior Court, a court of general jurisdiction, had subject matter jurisdiction over a breach of contract action between Society and GoMembers, even though the parties' contract contained an arbitration clause and Society did not submit its complaint to arbitration prior to filing its action.

Society argues that the trial court erred in granting GoMembers' motion to dismiss under T.R. 12(B)(6). When reviewing a T.R.12(B)(6) motion to dismiss for failure to state a claim upon which relief can be granted, we accept as true the facts as alleged in the complaint. City of Anderson v. Weatherford, 714 N.E.2d 181, 184 (Ind.Ct.App.1999), trans. denied. A T.R. 12(B)(6) motion to dismiss tests the legal sufficiency of the complaint. Id. When reviewing such a motion, we view the pleadings in the light most favorable to the non-moving party and draw every reasonable inference in favor of that party. Id. We will affirm the denial of a T.R. 12(B)(6) motion unless it is apparent that the facts alleged in the complaint are incapable of supporting relief under any set of circumstances. Id.

Indiana recognizes a strong policy favoring enforcement of arbitration agreements. Homes By Pate, Inc. v. DeHaan, 713 N.E.2d 303, 306 (Ind.Ct.App.1999); Chesterfield Mgmt., Inc. v. Cook, 655 N.E.2d 98, 101-02 (Ind.Ct.App.1995), trans. denied (1996). Once satisfied that the parties contracted to submit their disputes to arbitration, the court is required by statute to compel arbitration. Homes By Pate, Inc., 713 N.E.2d at 306 (citing IC XX-XX-X-X(a)). However, the statute does not specify the proper disposition of the litigation upon such a determination. Society argues that the trial court erred in dismissing its case because the proper remedy was to stay the proceedings pending arbitration.

This case presents an issue of first impression in Indiana. Courts analyzing this issue in other jurisdictions generally take one of two analytical approaches. Exemplary of the first approach is Shribman v. Miller, 60 N.J.Super. 182, 158 A.2d 432 (1960), where the court evaluated whether it should stay the plaintiff's action pending submission of the disputed matters to arbitration. In that case, a state statute explained that if an action is brought, and the court finds that the issue is referable to arbitration, it should stay the action pending the outcome of the arbitration. Id. The court examined the common law regarding arbitration and noted that contractual arbitration clauses can be, but are not necessarily, conditions precedent to a resort to court actions. The court concluded that if the contractual term was phrased as a condition precedent to suit, then dismissal is the proper remedy for a suit filed prior to arbitration. Alternatively, if the contract provides for arbitration but does not make it a condition precedent, then a stay of litigation pending arbitration is the appropriate remedy. The court explained that condition precedent language would include an expression that "the parties may not resort to the courts for the resolution of those disputes, unless and until the submission of the disputes to arbitration, and the determination thereof by the arbitration." Id. at 438. By comparison, "where the covenant to arbitrate future disputes arising under an executory contract merely provides that any and all such disputes shall be submitted to arbitration and determined thereby, but does not say in effect and in substance that `no suit shall be brought in the courts until after arbitration,' or `no suit shall be brought in the courts, except to enforce an award made by the arbitrators', then it is held that the covenant is not a condition precedent to `a resort to the courts.'" Id. at 438. See also Smith v. Dugan & Meyers Constr. Co., 18 Ohio Misc.2d 5, 480 N.E.2d 830 (Common Pleas 1984) (holding that the proper remedy for a failure to arbitrate an issue referable to arbitration was a stay rather than dismissal based on statute).

In Charles J. Rounds Co. v. Joint Council of Teamsters, 4 Cal.3d 888, 95 Cal.Rptr. 53, 484 P.2d 1397 (1971), another court took a second approach when the issue in controversy should have been referred to arbitration. It examined the issue of whether the pending litigation should have been dismissed or stayed pending the outcome of the arbitration. The court referred to a United States Supreme Court opinion, Transcontinental & Western Air v. Koppal, 345 U.S. 653, 660, 73 S.Ct. 906, 97 L.Ed. 1325 (1953), in which the Court characterized contractual arbitration in a railway worker's employment contract as "an administrative remedy that must be exhausted before seeking judicial relief." Charles J. Rounds Co., 95 Cal.Rptr. 53, 484 P.2d at 1401. However, California also had at that time a statute analogous to the New Jersey statute. The court concluded as follows:

"where the only issue litigated is covered by the arbitration clause, and where plaintiff has not first pursued or attempted to pursue his arbitration remedy, it should be held that (1) plaintiff has impliedly waived his right to arbitrate, such that defendant could elect to submit the matter to the jurisdiction of the court; (2) defendant may also elect to demur or move for summary judgment on the ground that the plaintiff has failed to exhaust arbitration remedies; and (3) defendant may also elect to move for a stay of proceedings pending arbitration if defendant also moves to compel arbitration. Plaintiff may of course sue preliminarily to enforce its arbitration rights.

Where plaintiff has attempted to exhaust its arbitration remedy or raises issues not susceptible to arbitration or not covered by the arbitration agreement, defendant may not merely assert failure to arbitrate an issue as an affirmative defense; a stay rather than dismissal of the suit is then proper. Defendant must therefore demand arbitration if it seeks such a stay."

Id. at 1404. See also Drake Bakeries, Inc. v. Local 50, Am. Bakery and Confectionery Workers Intern., AFL-CIO, 370 U.S. 254, 264-65, 82 S.Ct. 1346, 1352, 8 L.Ed.2d 474 (1962) (referring to cases in which disputes have been held arbitrable; noting those suits were stayed pending arbitration); The Anaconda v. American Sugar Refining Co., 322 U.S. 42, 44-45, 64 S.Ct. 863, 865, 88 L.Ed. 1117 (1944) (relying on Federal Arbitration Act, discussing...