Mid-South Maint. Inc. v. Paychex Inc., No. W2014-02329-COA-R3-CV

CourtCourt of Appeals of Tennessee
Writing for the CourtJ. STEVEN STAFFORD, JUDGE
Docket NumberNo. W2014-02329-COA-R3-CV
Decision Date14 August 2015


No. W2014-02329-COA-R3-CV


June 9, 2015 Session
August 14, 2015

Appeal from the Chancery Court for Shelby County
Jim Kyle, Chancellor

This is an arbitration case, wherein plaintiffs and the defendant-signatory expressly agreed to arbitrate any disputes arising from the contract and further agreed that the contract would be governed by New York law. Plaintiffs later filed suit against the defendant-signatory, as well as one of the defendant's employees, who had not signed the arbitration agreement, for breach of fiduciary duty, negligence, and aiding and abetting conversion. Defendants filed a motion to compel arbitration. The trial court denied the motion to compel arbitration on the ground that the plaintiff's claims were outside the scope of the arbitration agreement, citing Tennessee law. We hold that, pursuant to federal and New York law, because of the delegation clause contained in the arbitration agreement, the arbitrator is the proper tribunal to determine issues regarding the scope and unconscionability of the arbitration agreement. We also hold that because plaintiffs' claims against the non-signatory employee are intertwined with the claims against the signatory defendant, all disputes regarding the arbitrability of claims against the non-signatory employee must also be resolved by the arbitrator. Reversed and remanded.

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Reversed and Remanded

J. STEVEN STAFFORD, P.J., W.S., delivered the opinion of the Court, in which Arnold B. Goldin, J., and Brandon O. Gibson, J., joined.

Michael E. Keeney and Casey Shannon, Memphis, Tennessee, for the appellants, Paychex, Inc., and Robert Cunningham.

Bruce S. Kramer and Anne E. Kutsikovich, Memphis, Tennessee, for the appellees, Mid-

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South Maintenance, Inc., an Oklahoma corporation, Mid-South Maintenance, Inc., a Tennessee corporation, and Worldwide Steel Works, Inc., an Oklahoma corporation.



Plaintiffs/Appellees Mid-South Maintenance, Inc. (Oklahoma), Mid-South Maintenance, Inc. (Tennessee), and Worldwide Steel Works, Inc. (Oklahoma) (collectively, "Appellees")1 hired Kimberly Burk to serve as a bookkeeper in October 2005. Thereafter, Appellees assert that Ms. Burk convinced Appellees to enter into several contracts ("the Agreements") over the course of a year with Defendant/Appellant Paychex, Inc., ("Paychex")2 for Paychex to provide payroll, "taxpay[,]" workers' compensation, and 401(k) services for the Appellees and their employees. In return for these services, Paychex was paid certain agreed-upon fees. Defendant/Appellant Robert Cunningham (together with Paychex, "Appellants") served as a client services representative with Paychex and was the primary contact between Appellees and Appellants. Mr. Cunningham worked out of Paychex's Tennessee office.

According to Appellees, from 2007 to 2011, Ms. Burk manipulated the Paychex system to embezzle $1.8 million from the Appellees. Accordingly, on April 25, 2014, Appellees filed a complaint in the Shelby County Chancery Court against Paychex and Mr. Cunningham for breach of fiduciary duty, negligence, and aiding and abetting conversion. According to the complaint, Mr. Cunningham was the primary contact between Ms. Burk and Paychex, and that he, either negligently or intentionally, provided information to Ms. Burk that she used to embezzle funds. Appellees asserted that Paychex negligently supervised Mr. Cunningham, negligently failed to detect the manipulation of its services, failed to employ proper safeguards, and failed to inform Appellees of the theft although their employees had knowledge of it and/or turned a blind eye to the misconduct. The complaint sought compensatory and punitive damages, as well as reimbursement for "all costs and expenses charged against [Appellees] by Paychex during the term of the Agreements." Attached to the complaint were copies of several contracts between the parties. Although the contracts all indicate that they span four pages, only pages one and three of each contract were attached to the complaint.

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On May 27, 2014, Appellants filed a motion to compel arbitration based upon the various contracts between the parties. Appellants included with their motion what they alleged was the missing page four of the parties' contracts, which included an arbitration clause. Specifically, this clause provided, in relevant part:

19. Governing Law and Arbitration. The Agreement shall be governed by the laws of the State of New York. Except as provided herein, any dispute arising out of, or in connection with the Agreement shall be determined by binding arbitration in Rochester, New York, in accordance with the commercial rules of the American Arbitration Association [(hereinafter, "AAA Rules")]. Any dispute arising under the agreement shall be brought within two (2) years of when the claim accrued. The arbitrator shall not be authorized to award exemplary or punitive damages. Paychex may, in its sole discretion, commence an action in any court of competent jurisdiction within the County of Monroe, State of New York, for any monies due and owing from Client to Paychex.

(Emphasis in original).

On June 23, 2014, Appellees responded in opposition, asserting several reasons for opposing arbitration. First, Appellees asserted that they were never provided full copies of the Agreements, specifically the pages that referenced arbitration. Next, Appellees argued that Tennessee law controlled because the complaint's torts claims were outside the scope of the arbitration provision. Appellees also argued that the agreements were unconscionable contracts of adhesion and that the arbitration provisions should not be enforced. Finally, Appellees asserted that the trial court, rather than the arbitrator, was the proper authority to determine these questions.

Appellants filed a reply to Appellees' response on September 25, 2014. In their reply, Appellants contended that all of the Agreements entered into between Appellees and Paychex contained the arbitration provision above and that, therefore, the arbitration provisions should be enforced. Further, Appellants argued that based upon the plain language of the arbitration clause, New York law controlled because of the choice of law provision contained in the parties' agreement and the fact that Paychex's headquarters is located in New York. Accordingly, Appellants argued that the trial court was bound to follow New York caselaw holding that when considering arbitration provisions that incorporated the AAA Rules, issues of enforceability are to be determined by the arbitrator. Appellants further argued that the

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contracts are not unconscionable, that the claims asserted by the Appellees fell within the scope of the arbitration agreement, and that the claims against Mr. Cunningham individually were also subject to binding arbitration.

The trial court held a hearing on the motion to compel arbitration on October 3, 2014. On October 24, 2014, the trial court entered an order denying the motion to compel arbitration on the basis that the claims asserted by Appellees were torts, rather than breaches of contract. Specifically, the trial court stated:

Whether the parties have an enforceable arbitration agreement is an issue the Court must decide. Taylor v. Butler, 142 S.W.3d 277, 284 (Tenn. 2004). The [Appellees] contend that the arbitration clause in the Agreements between the parties requires arbitration of the [Appellees'] claims. . . .

As the Court stated at the October 3, 2014, hearing on the [Appellants'] Motion to Compel Arbitration, the Court finds that the [Appellees'] lawsuit is grounded in tort and therefore the disputes between the parties do not "arise out of or in connection with the Agreement" and the [Appellants'] Motion to Compel Arbitration should therefore be denied.

Appellants appealed.

Issues Presented

Appellants raise two issues on appeal, which are taken, and slightly restated, from their appellate brief:

1. Whether the trial court committed reversible error in denying Appellees' Motion to Compel Arbitration, finding that the scope of the arbitration provisions of the Agreements do not include Appellees' tort claims?
2. Whether the Agreements and their arbitration provision should be enforced and the parties ordered to arbitrate Appellees' claims?

As discussed in detail, infra, Appellees did not raise any affirmative issues on appeal.

Standard of Review

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When ruling on the appeal of a denial of a motion to compel arbitration, we follow the standard of review that applies to bench trials. Spann v. Am. Express Travel Related Servs. Co., 224 S.W.3d 698, 706-07 (Tenn. Ct. App. 2006). Accordingly, our review of the trial court's findings of fact is "de novo upon the record of the trial court, accompanied by a presumption of the correctness of the finding, unless the preponderance of the evidence is otherwise." Tenn. R. App. P. 13(d). Questions of law are likewise reviewed de novo without a presumption of correctness. Johnson v. Johnson, 37 S.W.3d 892, 894 (Tenn. 2001).

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