Isp. com LLC. v. Theising

• Decision Date: 04 March 2004
• Docket Number: No. 29S02-0308-CV-00366.,29S02-0308-CV-00366.
• Parties: ISP.COM LLC and ISP.net LLC, Appellants (Defendants below), v. David J. THEISING, Receiver of IQuest Internet, Inc., Appellee (Plaintiff below).
• Court: Indiana Supreme Court

805 N.E.2d 767

ISP.COM LLC and ISP.net LLC, Appellants (Defendants below), v. David J. THEISING, Receiver of IQuest Internet, Inc., Appellee (Plaintiff below).

No. 29S02-0308-CV-00366.

Supreme Court of Indiana.

March 4, 2004.

Rehearing Denied June 1, 2004.

Jeffrey R. Gaither, T. Joseph Wendt, Indianapolis, IN, Attorneys for Appellants.

John C. Hoard, R. Brock Jordan, David J. Theising, Indianapolis, IN, Attorneys for Appellee.

ON PETITION TO TRANSFER FROM THE INDIANA COURT OF APPEALS, NO. 29A02-0207-CV-0610.

BOEHM, Justice.

The plaintiff is David J. Theising, as the receiver of IQuest Internet, Inc. The defendants responded to his complaint with a motion to compel arbitration of the dispute. The motion was based on an arbitration clause in an agreement entered into between the defendants and IQuest before IQuest was in receivership. The trial court refused to compel arbitration and the Court of Appeals affirmed that order on interlocutory appeal. We hold that the arbitration clause is enforceable against the receiver as the successor in interest to IQuest.

Factual and Procedural Background

This case comes to us on interlocutory appeal from denial of a motion to compel arbitration. As a result, we have the pleadings, which include salient documents as exhibits, but no hearings or development of the factual background. Our account of the facts is taken from the allegations of pleadings, some court orders, and the documentation of the transactions that gave rise to this dispute. There are significant gaps in the information available to us, and we have no confidence that the facts will prove to be as we currently understand them, or assume them to be. For purposes of this appeal, however, the only material facts are the allegations of the complaint and the relevant documents. We provide these allegations because the nature of the claims is relevant to the only issue before us, which is whether or not Theising is required to arbitrate his dispute with ISP. Liability of other parties and arbitrability of disputes among other parties are not at issue here. Except where indicated, the following account is taken from the allegations of the complaint. They remain to be proven.

Until January 2000, IQuest Internet, Inc., an Indiana corporation, operated a "dial-up internet service" based in Hamilton County. Its president and majority shareholder was one Robert Hoquim, about whom more later. Four other individuals, John Carr, David Julius, Terry Meadors and Thomas Neville, Jr., were also shareholders and participated in the management of the company. On January 13, 2000, two Indiana limited liability companies, ISP.com, LLC and ISP.net, LLC (collectively "ISP"¹), agreed to acquire the business. The form of the transaction was an asset sale embodied in an "Asset Purchase Agreement" whereby ISP agreed to purchase substantially all of the business assets of IQuest except cash and receivables and to assume designated liabilities. The agreement contained the lengthy list of warranties and representations usually found in an asset acquisition of a going business. Among these was IQuest's warranty, joined by Hoquim, that IQuest was current with taxing authorities. IQuest and Hoquim indemnified ISP against a variety of circumstances, including breach of any representation or warranty in the agreement. The purchase price was stated as $23 million cash, and the agreement called for ISP to pay the price by wire transfer to an account designated by IQuest.

On February 16, 2000, the parties closed the sale, apparently without further documentation. Rather than paying the entire purchase price to IQuest, ISP paid $13.15 million of the purchase price directly to Hoquim in the form of $12 million in two promissory notes and $1.15 million in cash.² One note, for $2 million, matured in May of 2002, and apparently substantial payments were made on that note. The second note was for $10 million and would mature in 2005. ISP and Hoquim executed a "Loan and Security Agreement" securing ISP's obligations to Hoquim under the $10 million note and providing that ISP could set off against its obligations under the note any amounts Hoquim owed under the indemnity provisions of the Asset Purchase Agreement. In effect, the Loan and Security Agreement purported to permit ISP to invoke self-help to reduce the purchase price for IQuest's assets by the amount of any damages, at least up to $10 million, resulting from breaches of the seller's representations, undertakings or warranties. Another $3 million of the purchase price was paid in the form of issuance of "ownership credits" in ISP³ to Carr and Neville, both IQuest officers, in the amounts of $2 million and $1 million, respectively.

Hoquim died intestate in May 2000. The Court of Appeals tantalizingly informs us that at the time of his death Hoquim was "a thirteen year fugitive wanted by the Federal Bureau of Investigation whose real name was John Paul Aleshe,"⁴ but supplies no elaboration on this unusual circumstance. There are other interesting gaps in the information available to us. The record does not reveal the ownership of ISP before or after the sale, so we are in the dark as to the relative equity position in ISP the "ownership credits" represented. Nor are we told whether ISP had an independent existence before the sale or was newly formed for purposes of acquiring IQuest's assets. We are given no indication of the circumstances of Hoquim's death, and, consistent with the many lacunae in this record, we are not told whether his name was pronounced "hokum", "ho-KEEM" or something else. Whatever the answer to these mysteries, it seems clear that IQuest was not without its problems. The receiver alleges that neither IQuest since its inception in 1995 nor Hoquim for many years before that had paid any federal or state taxes, and at the time of the sale IQuest had a substantial liability to taxing authorities. If true, these allegations would appear to establish a breach of the warranty in the Asset Purchase Agreement.

As best we can make out, this appeal is taken in the fourth of four separate but related legal proceedings. First, on December 15, 2000, IQuest was thrown into receivership by its creditors and the Hamilton Superior Court, in cause CP-668, appointed Theising as receiver. Second, Hoquim's Estate was opened at some point, apparently as a probate matter⁵ in Hamilton County as cause ES-44. Third, on January 16, 2001, Hoquim's Estate filed cause CP-75 in Marion Superior Court Room 11 to collect the note from ISP.com and ISP.net and two individuals who guaranteed ISP's note to Hoquim.

On March 30, 2001, ISP moved to arbitrate the Marion County case. While that motion was pending, on September 4, 2001, the Hamilton Superior Court entered an order in Hoquim's Estate finding that Theising was entitled to the $10 million note and some $1.8 million in cash representing the proceeds of ISP's payments on the two notes before ISP stopped paying. The basic reasoning of the court in the estate proceeding was that the direct payments of the asset purchase price to Hoquim had been frauds on creditors of IQuest. On September 21, 2001, the Marion Superior Court ordered arbitration of the dispute before it.⁶ In December 2001, pursuant to the order of the Hamilton County probate court, Hoquim's Estate assigned the $10 million note from ISP to Theising, as receiver of IQuest, and Theising was substituted for IQuest as plaintiff in the Marion County case. Theising unsuccessfully filed a Motion to Correct Errors seeking to overturn the order to arbitrate and has separately appealed the Marion County order directing arbitration of the claim to collect the note.⁷

This appeal is taken from rulings of the trial court in a suit filed in Hamilton Superior Court as PL-104. The defendants in this case are ISP.com, ISP.net, and Carr, Neville, Julius and Meadors, who Theising alleges were shareholders, officers and directors of IQuest at all relevant times. On February 15, 2002, after obtaining the approval of the receivership court, Theising filed the current complaint in Hamilton Superior Court. In this lawsuit, which is separate from both the receivership and the Estate, Theising alleges that the shift in method of closing the asset sale to payment of the purchase price directly to Hoquim and others amounted to a fraudulent transfer by IQuest in which ISP and the four other individual defendants participated in various capacities and for which each of them was liable. Theising claims, among other things, that the closing left IQuest with insufficient funds to pay its debts. The complaint alleges that IQuest was insolvent at the time of the sale and also after the sale when the four individuals surrendered their IQuest shares in exchange for substantially all of the cash IQuest received from ISP. The complaint alleges that these exchanges, and the "ownership credits" to Carr and Neville, were fraudulent conveyances that Theising, as IQuest's receiver, is entitled to set aside. The same basic facts are alleged to support claims against these four individuals for negligent mismanagement of IQuest, director liability for unlawful distributions from an insolvent corporation, and breach of fiduciary duty to creditors of IQuest.

In addition to the fraudulent conveyance claims, Theising's complaint also alleges that the four individuals acted on behalf of ISP in the acquisition and knew of IQuest's false representations in the Asset Purchase Agreement. Theising contends that ISP is charged with this knowledge and is therefore estopped from asserting breaches of those representations and warranties as a setoff against ISP's obligations on the note.

On June 10, 2002, ISP moved in this proceeding in Hamilton County to stay proceedings and compel arbitration of this dispute based on the arbitration clause in the Asset Purchase Agreement. The trial court denied ISP's motion and the Court of Appeals ...