McCarthy v. Azure

CourtUnited States Courts of Appeals. United States Court of Appeals (1st Circuit)
Citation22 F.3d 351
Docket NumberNo. 93-1842,93-1842
PartiesWalton W. McCARTHY, Plaintiff, Appellee, v. Leo L. AZURE, Jr., Defendant, Appellant. . Heard
Decision Date05 January 1994

David R. Goodnight, with whom Patrick D. McVey, Howard A. Coleman, Riddell, Williams, Bullitt & Walkinshaw, Seattle, WA, D. Donald Dufresne, and Devine, Millimet & Branch, Manchester, NH, were on brief, for appellant.

Charles A. Szypszak, with whom Richard B. Couser and Orr and Reno, P.A., Concord, NH, were on brief, for appellee.

Before SELYA, CYR and BOUDIN, Circuit Judges.

SELYA, Circuit Judge.

This appeal presents intriguing questions anent the rights of a corporate officer who, having signed an agreement containing an arbitration clause in his official capacity, seeks to compel arbitration of claims lodged against him as an individual. The district court refused to order arbitration under these circumstances. We affirm.


For purposes of this appeal, the facts can be taken essentially as alleged. In 1987, plaintiff-appellee Walton W. McCarthy, a renowned inventor of underground shelter technology, incorporated T.H.E.T.A. Technologies, Inc. (Theta I), a New Hampshire corporation, for the purpose of manufacturing underground storage tanks and personal shelters. McCarthy owned fifty percent of the corporation's stock and served as its principal operating officer. Three passive investors held the remaining shares.

In the fall of 1989, McCarthy met defendant-appellant Leo L. Azure, Jr., a member of a Montana-based religious organization, Church Universal & Triumphant (C.U.T.). Azure soon entered into negotiations for the acquisition of both McCarthy's company and patented technology. Azure formed a Washington corporation, Theta Corporation (Theta II), to serve as a vehicle for the planned purchase.

On December 29, 1989, McCarthy, Theta II, and others entered into a contract (the Purchase Agreement). 1 Azure signed the Purchase Agreement on behalf of Theta II, but he did not sign it in his personal capacity. Leaving to one side special arrangements with various creditors, see supra note 1, this contract delineated a two-phase transaction: McCarthy was to sell his equity interest, including the patents, to the passive investors, and transfer certain residual rights to Theta II; then, Theta II was to buy all the outstanding stock of Theta I for cash, payable over a period of no more than three years. The Purchase Agreement expressly provided that "[d]isputes arising under this Agreement shall be resolved by arbitration...." Though not mentioned in the Purchase Agreement, the parties apparently understood that Theta II, in addition to paying McCarthy a prescribed sum of money for the transferred rights, would offer him employment under a separate long-term contract.

On January 11, 1990, McCarthy and Theta II executed a second agreement (the Confidentiality Agreement). Azure signed the Confidentiality Agreement, as he had signed the Purchase Agreement, on behalf of Theta II, but not otherwise; indeed, neither document contained a line for Azure's personal signature. Pursuant to the Confidentiality Agreement, McCarthy promised to keep all past and future information pertaining to the patents in the bosom of the lodge, and to take certain related actions on behalf of Theta II. This agreement included a somewhat more expansive arbitration clause, which stated that "[a]ny controversy or claim arising out of or relating to this Agreement, or breach hereof, shall be settled by arbitration...." At a closing held the next day, Theta II delivered a letter (the Employment Letter) engaging McCarthy as its president, chief engineer, and chief executive officer at a stipulated annual salary. The Employment Letter also provided for stock options. It did not include an arbitration clause.

A little over two weeks after the closing, matters took a turn for the bizarre (or, at least, for the mystical). On January 28, 1990, Elizabeth Clare Prophet, Azure's spiritual leader, informed him, on the advice of a "dead ascended master" of C.U.T., that his newly acquired business was incompatible with his "divine plan" and that he should not devote further energy to the enterprise. Azure dutifully directed McCarthy to cashier all the employees of Theta II, and then proceeded to terminate McCarthy's employment. McCarthy never obtained any ownership interest in Theta II, notwithstanding the promises contained in the Employment Letter.

Apparently, Azure's religious convictions took him so far, and no further. He not only continued operating the Theta corporations, but also formed a third company, Omega Corporation. In October of 1990, after Azure merged Theta I into Theta II, Omega acquired the surviving entity. The following July, it began selling shares to the public. For all intents and purposes, Omega's business seemed indistinguishable from that of Theta I and Theta II; Omega styled itself as a leader in underground storage and marketed tanks manufactured pursuant to McCarthy's patented technology.

Unwilling to turn the other cheek, McCarthy sued Azure, Theta II, Omega, C.U.T., and Prophet in the United States District Court for the District of New Hampshire. 2 Azure, Theta II, and Omega filed a motion to stay proceedings pending arbitration, contending that the serial agreements obligated plaintiff to arbitrate all claims. The district court granted the motion with respect to Theta II, but denied it as to the remaining movants. Azure appeals the district court's order refusing to stay the action against him. We have jurisdiction by virtue of 9 U.S.C. Sec. 16(a)(1) (Supp.1992).


The court below reasoned that the source of appellant's purported right to compel arbitration must be found, if at all, in the Purchase Agreement. 3 It then denied appellant's motion to stay on the ground that he was not a party to the Purchase Agreement and, therefore, could not compel arbitration of claims lodged against him personally, whether or not those claims related to that agreement. Azure's appeal tests this thesis. Because the appeal presents a question of law, appellate review is plenary. See United States v. Gifford, 17 F.3d 462, 471 (1st Cir.1994); Liberty Mut. Ins. Co. v. Commercial Union Ins. Co., 978 F.2d 750, 757 (1st Cir.1992).

A. General Principles.

We start with bedrock: "arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." AT & T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 648, 106 S.Ct. 1415, 1418, 89 L.Ed.2d 648 (1986), quoting United Steelworkers v. Warrior & Gulf Navig. Co., 363 U.S. 574, 582, 80 S.Ct. 1347, 1352-53, 4 L.Ed.2d 1409 (1960). Thus, a party seeking to substitute an arbitral forum for a judicial forum must show, at a bare minimum, that the protagonists have agreed to arbitrate some claims.

This imperative is in no way inconsistent with the acknowledged "federal policy favoring arbitration." Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983); see also Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 226, 107 S.Ct. 2332, 2337, 96 L.Ed.2d 185 (1987). The federal policy presumes proof of a preexisting agreement to arbitrate disputes arising between the protagonists. Once that agreement has been proven and the protagonists identified, cases such as Cone and McMahon instruct courts to use a particular hermeneutical principle for interpreting the breadth of the agreement; that is, if the contract language chosen by the parties is unclear as to the nature of the claims to which an agreement to arbitrate extends, a "healthy regard" for the federal policy favoring arbitration requires that "any doubts concerning the scope of an arbitrable issue be resolved in favor of arbitration." Moses H. Cone, 460 U.S. at 24-25, 103 S.Ct. at 941. The federal policy, however, does not extend to situations in which the identity of the parties who have agreed to arbitrate is unclear. See Painewebber, Inc. v. Hartmann, 921 F.2d 507, 511 (3d Cir.1990) (holding that "[a]s a matter of contract, no party can be forced to arbitrate unless that party has entered into an agreement to do so"). Thus, requiring that arbitration rest on a consensual foundation is wholly consistent with federal policy.

The requirement also makes perfect sense. Subject matter jurisdiction over an action or series of claims can be conceptualized as conferring a personal right on the parties to have that action, or those claims, adjudicated in a judicial forum. See, e.g., Pacemaker Diag. Clinic of America, Inc. v. Instromedix, Inc., 725 F.2d 537, 541 (9th Cir.1984) (en banc) (recognizing that the "federal litigant has a personal right, subject to exceptions in certain classes of cases, to demand Article III adjudication of a civil suit"); accord Glidden Co. v. Zdanok, 370 U.S. 530, 536, 82 S.Ct. 1459, 1465, 8 L.Ed.2d 671 (1962). Though a person may, by contract, waive his or her right to adjudication, see 9 U.S.C. Sec. 2, there can be no waiver in the absence of an agreement signifying an assent.

B. Framing the Issue.

Viewed against this backdrop, the question before us reduces to a matter of contract interpretation: Did plaintiff, in executing the Purchase Agreement, agree to arbitrate disputes he might have with Azure personally concerning Theta-related transactions? 4 This question, which involves the interpretation of an arbitration provision touching upon matters of interstate commerce, must be resolved according to federal law. See McGregor v. Industrial Excess Landfill, Inc., 856 F.2d 39, 46 n. 2 (6th Cir.1988); Letizia v. Prudential Bache Securities, Inc., 802 F.2d 1185, 1187 (9th Cir.1986); see also 9 U.S.C. Sec. 2. As under general principles of contract law, the final answer to such a question is ordinarily a function of the parties' intent as...

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