Lrn Holding Inc. v. Windlake Capital Advisors Llc

• Decision Date: 09 May 2011
• Docket Number: No. 3–10–0194.,3–10–0194.
• Citation: 949 N.E.2d 264,350 Ill.Dec. 776,409 Ill.App.3d 1025
• Parties: LRN HOLDING, INC., and David P. Ransburg, Plaintiffs–Appellants,v.WINDLAKE CAPITAL ADVISORS, LLC, Defendant–Appellee.
• Court: United States Appellate Court of Illinois

409 Ill.App.3d 1025

949 N.E.2d 264

350 Ill.Dec. 776

LRN HOLDING, INC., and David P. Ransburg, Plaintiffs–Appellants,

v.WINDLAKE CAPITAL ADVISORS, LLC, Defendant–Appellee.

No. 3–10–0194.

Appellate Court of Illinois, Third District.

May 9, 2011.

Robert M. Riffle (argued), Elias, Meginnes, Riffle & Seghetti, P.C., Peoria, for LRN Holdings, Inc.David G. Lubben (argued), Davis & Campbell, L.L.C., Peoria, Philip E. Ruben, David S. Wayne, Arnstein & Lehr, Chicago, for Windlake Capital Advisors, LLC.

[350 Ill.Dec. 777 , 409 Ill.App.3d 1026] OPINION

Justice SCHMIDT delivered the judgment of the court, with opinion.

Plaintiffs, LRN Holding, Inc. (LRN), and David Ransburg, brought this declaratory judgment action against defendant, Windlake Capital Advisors, LLC, seeking a declaration that a contract entered into by the parties is void. As such, plaintiffs claimed they were entitled to recover fees associated with the sale of LRN. Defendant, Windlake Capital Advisors, LLC, moved to dismiss the action or, in the alternative, to stay the action and compel arbitration. The trial court granted defendant's motion to stay the proceeding and ordered the matter to proceed to arbitration. Plaintiffs appeal from that order.

FACTS

Plaintiffs' complaint alleges that they entered into a contract with defendant which stated that defendant would act as the exclusive brokerage agent seeking to secure a purchaser of the assets or stock of LRN. The contract called for plaintiffs to pay defendant a $35,000 engagement fee upon the signing of the contract and a success fee of “$200,000 + 2% of all consideration” upon the closing of the transaction.

Plaintiffs' complaint acknowledges that defendant successfully brokered a transaction through which Robert Bosch Tool Corporation purchased LRN assets. Defendant received $1,226,340 in compensation for its services. The complaint contains no allegations suggesting defendant's services were in any way inadequate or that the transaction somehow harmed plaintiffs.

Plaintiffs' complaint alleges, however, that their contract with defendant should be declared void as defendant failed to

[350 Ill.Dec. 778 , 949 N.E.2d 266]

properly register its services with the State of Illinois. As such, plaintiffs claim they are entitled to collect defendant's $1,226,340 fee, as well as interest on those monies and attorney fees. Attached to the complaint is a photocopy of an “LLC File Detail Report” from the Illinois Secretary of State, the agreement between the parties, and photocopies of two pages associated with a “broker search” from the Illinois Secretary of State's Web site.

Defendant never answered plaintiffs' complaint but instead filed a “Motion to Dismiss or Stay Proceedings and to Compel Arbitration” pursuant to section 2–619 of the Code of Civil Procedure. 735 ILCS 5/2–619(a)(9) (West 2008). In its memorandum in support of its motion, defendant noted the agreement between it and plaintiffs contained an arbitration provision mandating that any controversy between the parties relating to this agreement shall be resolved by binding arbitration.

Defendant submitted that arbitration was mandated by both the Federal Arbitration Act (9 U.S.C. § 1 et seq. (2006)) and the Illinois Uniform Arbitration Act (710 ILCS 5/1 et seq. (West 2008)). The trial court agreed and granted defendant's motion to stay the proceedings and compel arbitration. Plaintiffs appeal.

ANALYSIS

The sole issue raised on appeal is whether the trial court erred when granting defendant's motion. “[T]he decision whether to compel arbitration is not discretionary. Where there is a valid arbitration agreement and the parties' dispute falls within the scope of that agreement, arbitration is mandatory and the trial court must compel it. [Citation.] * * * On the other hand, where there is no valid arbitration agreement or where the parties' dispute does not fall within the scope of that agreement, the trial court may not compel it. [Citation.] * * * Accordingly, we will employ a de novo standard of review * * *.” Travis v. American Manufacturers Mutual Insurance Co., 335 Ill.App.3d 1171, 1175, 270 Ill.Dec. 128, 782 N.E.2d 322 (2002).

While our standard of review is de novo, our supreme court has clearly indicated that when a trial court is “presented with a motion to stay litigation pending arbitration under section 3 of the FAA, the court's inquiry is limited to whether an agreement to arbitrate exists and whether it encompasses the issue in dispute.” Jensen v. Quik International, 213 Ill.2d 119, 123–24, 289 Ill.Dec. 686, 820 N.E.2d 462 (2004).

Plaintiffs make numerous arguments to support their claim that the trial court improperly compelled arbitration. The plaintiffs' first argument centers on their assertion that no contract existed between them and defendant. As such, plaintiffs suggest, “Illinois case law clearly mandates that the court, and not an arbitrator, make the determination regarding whether a contract with an unlicensed professional is void.” Intertwined with this theory is plaintiffs' assertion that the “Illinois Arbitration Act applies to this case, and requires that the court determine that the purported agreement is void, notwithstanding federal cases interpreting the Federal Arbitration Act.”

The gravamen of plaintiffs' initial argument is that an Illinois statute renders the agreement between plaintiffs and defendant void ab initio. As such, no enforceable arbitration clause existed and, therefore, the trial court erred in compelling arbitration. To support this proposition, plaintiffs direct our attention to the Illinois Business Brokers Act of 1995 (Brokers Act) (815 ILCS 307/10–5.10 et seq. (West 2008)),

[350 Ill.Dec. 779 , 949 N.E.2d 267]

Aste v. Metropolitan Life Insurance Co., 312 Ill.App.3d 972, 245 Ill.Dec. 547, 728 N.E.2d 629 (2000), and Kaplan v. Tabb Associates, Inc., 276 Ill.App.3d 320, 212 Ill.Dec. 720, 657 N.E.2d 1065 (1995).

Defendant disagrees with the plaintiffs, claiming even a broad challenge to the agreement as a whole must be decided in arbitration. To support its position, defendant cites to the Federal Arbitration Act (FAA) (9 U.S.C. § 1 et seq.) and numerous cases that interpret it.

A. The Agreement, Brokers Act and FAA

The arbitration provision in the agreement between the parties reads as follows:

“Arbitration. Any controversy, dispute, or claim between the parties relating to this Agreement shall be resolved by binding arbitration in accordance with the rules of the American Arbitration Association, as amended from time to time. The parties agree that the venue for any such arbitration shall be Chicago, Illinois.”

Section 10–10 of the Brokers Act mandates that every “person engaging in the business of business brokering” register with the Illinois Secretary of State. 815 ILCS 307/10–10 (West 2008). It further notes that if “a business broker commits a material violation of Section 10–10, 10–20, or 10–30 of this Act, in connection with a contract for business brokering services, the contract is void, and the prospective client is entitled to receive from the business broker all sums paid to the business broker, with interest and any attorney's fee required to enforce this Section.” 815 ILCS 307/10–60 (West 2008). Plaintiffs' allegations that defendant is a business broker and never properly registered under the Brokers Act must be taken as true. See 735 ILCS 5/2–619 (West 2008); Fremont Compensation Insurance Co. v. Ace–Chicago Great Dane Corp., 304 Ill.App.3d 734, 237 Ill.Dec. 709, 710 N.E.2d 132 (1999). Nevertheless, we hold the trial court did not err in compelling arbitration, as an agreement to arbitrate existed and it encompassed this dispute.

In Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006), the United States Supreme Court reviewed a matter in which the Florida Supreme Court held that the issue of whether an underlying contract between the parties was illegal and, therefore, void ab initio, must be decided by the trial court before arbitration of other disputes could be compelled. Cardegna v. Buckeye Check Cashing, Inc., 894 So.2d 860 (Fla.2005). The Florida Supreme Court reasoned that to enforce an agreement to arbitrate in a contract challenged as unlawful “could breathe life into a contract that not only violates state law, but also is criminal in nature.” Cardegna, 894 So.2d at 862. Reaffirming its holdings in Southland Corp. v. Keating, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984), and Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967), the Buckeye Check Cashing Court reversed, holding that the challenge to the validity of the contract should “be considered by an arbitrator, not a court.” Buckeye, 546 U.S. at 446, 126 S.Ct. 1204.

The Buckeye Court noted that section 2 of the FAA allows for challenges “ ‘upon such grounds as exist at law or in equity for the revocation of any contract’ ” which can take two forms. Buckeye, 546 U.S. at 444, 126 S.Ct. 1204 (quoting 9 U.S.C. § 2). “One type challenges specifically the validity of the agreement to arbitrate.” Buckeye, 546 U.S. at 444, 126 S.Ct. 1204 (citing Southland Corp., 465 U.S. at 4–5, 104 S.Ct. 852). That type of challenge is not at issue in this matter as plaintiffs' complaint seeks a declaration that the contract as a whole is void ab initio.

[949 N.E.2d 268 , 350 Ill.Dec. 780]

“The other challenges the contract as a whole, either on a ground that directly affects the entire agreement (e.g., the agreement was fraudulently induced), or on the ground that the illegality of one of the contract's provisions renders the whole contract invalid.” Buckeye, 546 U.S. at 444, 126 S.Ct. 1204. The Court noted that in Southland Corp., it held that the FAA created a body of federal substantive law applicable to both state and federal courts alike. Buckeye, 546 U.S. at 445, 126 S.Ct. 1204 (quoting Southland, 465 U.S. at 12, 104...