Moody v. PNE Media Holdings, LLC, 1:02cv24-T (W.D.N.C. 4/23/2002)
| Decision Date | 23 April 2002 |
| Docket Number | 1:02cv24-T. |
| Court | U.S. District Court — Western District of North Carolina |
| Parties | FRANK A. MOODY, II, Plaintiff, v. PNE MEDIA HOLDINGS, LLC.; LARS SWANSON; BRIAN McNEILL, JAMES A. EATRIDES; THOMAS C. PARSONS; FRANK J. NATARO; and ASHOKA VARMA, Defendants. |
THIS MATTER is before the court upon defendants' Motion to Compel Arbitration and to Stay the Proceedings. The undersigned has considered defendants' motion and brief, plaintiff's response, and defendants' reply.
Plaintiff filed this action on January 28, 2002, pursuant to this court's original jurisdiction over federal questions. 28 U.S.C. § 1331. According to the allegations of the complaint, this matter arises under 15, United States Code, Section 78J, and SEC Rule 10b-5. In such complaint, plaintiff asserted causes of action for (1) securities fraud and (2) breach of contract.
In his first cause of action for securities fraud, plaintiff contends that he entered into a stock-purchase/capital-contribution agreement ("purchase agreement") with defendants. Complaint, ¶ 17. In accordance with the terms of the purchase agreement, plaintiff exchanged all of his interest in his own outdoor-advertising company for one "Class E Unit" in defendant PNE Media Holdings, LLC ("PNE"), which appears to be an outdoor-advertising conglomerate. Complaint, ¶ 18. The "Class E Unit" was authorized and issued to plaintiff pursuant to the "sixth amendment" to defendants' "LLC Operating Agreement." Id. According to plaintiff, Article 7 of the LLC Operating Agreement made his Class E Unit negotiable and entitled him to distributions. Plaintiff further alleges that PNE is a member-managed LLC, but while a member of the LLC, he was never made a member of the "Board of Managers," which maintains exclusive control over the affairs of PNE. Complaint, at ¶¶ 19-20.
Plaintiff further contends that the Class E Unit that he owns is a security subject to the Securities Exchange Act of 1934 and that the purchase agreement is an investment contract that is governed by the Act, making both the agreement and the security issued subject to the rules of the Commission, including Rule 10b-5. Complaint, at ¶¶ 21-22. In addition, plaintiff claims that the consideration he gave for his interest in defendants' company, i.e., his stock in Able Outdoor, Inc., is also subject to the Act and the same rules.
It is plaintiff's contention that the individual defendants, who are alleged to be managing members of the LLC, committed securities fraud by violating SEC Rule 10b-5 by and through the making of false and misleading representations concerning the financial condition and stability of PNE on which plaintiff allegedly relied when he entered into the alleged investment contract and purchased the alleged security offered. Plaintiff outlines 13 omissions of alleged material fact that he contends should have been disclosed by defendants. See Complaint, at ¶ 37. Plaintiff claims he has suffered damages in excess of 1.7 million dollars.
In his second cause of action for breach of contract, plaintiff alleges that PNE failed to make the distribution allegedly required by Section 7.2.2.5 of Article 7 of the LLC Operating Agreement. Plaintiff claims that PNE sold the "Able division" to a third-party, thereby triggering his entitlement to a distribution under the agreement. According to plaintiff, that failure to make payment in accordance with the agreement was a material breach, entitling him to damages in the amount of 1.7 million dollars.
On March 15, 2002, defendants filed their Motion to Compel Arbitration and to Stay the Proceedings, contending that the parties were bound by the terms of their agreement to arbitrate any dispute in Boston, Massachusetts. Defendants argue in their supporting memorandum that plaintiff is obligated to submit both of his claims to binding arbitration pursuant to the terms of the LLC Operating Agreement, which provides in relevant part, as follows:
[A]ny controversy or dispute arising out of this Agreement, the interpretation of any of the provisions hereof, or the action or inaction of any Member hereunder shall be submitted to arbitration in Boston, Massachusetts before the American Arbitration Association. . . .
LLC Operating Agreement, at § 17.5. Defendants contend that plaintiff subjected himself to the terms of such agreement upon his execution of the sixth amendment thereto, which made him a member of the LLC, and that the agreement is enforceable in this forum in accordance with 9, United States Code, Sections 1, et seq., the Federal Arbitration Act ("FAA").
In what appears to be an initial response to defendants' motion to enforce the agreed-to arbitration, plaintiff filed a "Notice of Partial Voluntary Dismissal Without Prejudice," citing Rule 41(a)(1)(i), Federal Rules of Civil Procedure. Through such pleading, plaintiff attempted to dismiss his claim for breach of contract. In Gahagan v. North Carolina Hwy. Patrol, 1:00cv52 (W.D.N.C. Oct. 25, 2000), the district court held, as follows:
Rule 41 . . . speaks only to the dismissal of "actions." Plaintiff does not seek, at this juncture, to dismiss the entire action; rather, as stated supra, he wishes to dismiss certain claims within this action . . . . Rather than a Rule 41 dismissal, the Plaintiff should seek to amend his complaint by meeting the requirements of Rule 15. "A plaintiff wishing to eliminate particular claims or issues from the action should amend the complaint under Rule 15(a) rather than dismiss under Rule 41(a)." Moore's Federal Practice 3d, § 41, 21[2] (citing Skinner v. First Am. Bank of Virginia, 64 F.3d 659 (table), 1995 WL 507264 (4th Cir. 1995).
Id., at 3-4 (citations omitted).1 Based on the decision in Gahagan, it would appear that plaintiff's "Notice of Partial Voluntary Dismissal" is ineffectual, because it sought to dismiss less than the action in its entirety.
Assuming that the plaintiff's attempted partial dismissal has no effect, defendants' Motion to Compel Arbitration and to Stay the Proceedings should be summarily granted, for there is no doubt that plaintiff's breach-of-contract claim arises out of the LLC Operating Agreement, which contains the binding arbitration agreement.
Assuming that the district court would allow plaintiff an opportunity to correct his procedural misstep by filing an appropriate amendment to his complaint that eliminates the second cause of action, the questions become complex: Absent the breach-of-contract claim, is plaintiff's claim of securities fraud subject to binding arbitration anticipated by the parties in the LLC Operating Agreement? If so, can this court require the parties to arbitrate in a forum outside this district?
Without doubt, the chicken came before the egg in this case. First, the parties entered into a purchase agreement on February 3, 1999. Nine days later, on February 12, 1999, the purchase agreement was consummated when plaintiff executed the sixth amendment to the LLC Operating Agreement and thereby became a member of the LLC and received his Class E Unit in exchange for his interest in Able Outdoor, Inc.
In the context of an arms-length transaction, this court does not hesitate to enforce a bargained-for arbitration agreement. Indeed, prompt court enforcement of arbitration agreements is the linchpin of Title 9, United States Code, Section 2.
Although the arbitrability of disputes is governed by Title 9, the initial question for this court is whether the arbitration provision asserted has any relation to plaintiff's claim of securities fraud. Section 2 of Title 9 governs the effect of a IV contractually agreed-upon arbitration provision," but state law prevails on general principles concerning contract formation. Supak & Sons Mfg. Co., Inc. v. Pervel Indus. Inc., 593 F.2d 135 (4th Cir. 1979). In the 20 years since Supak, both the United States Supreme Court and the Court of Appeals for the Fourth Circuit have indicated a strong preference for arbitration:
Whether a party has agreed to arbitrate an issue is a matter of contract interpretation: "[A] party cannot be required to submit to arbitration any dispute which it has not agreed so to submit." Nevertheless, the Supreme Court has announced its "Healthy regard for the federal policy favoring arbitration" and has explained that the Federal Arbitration Act . . . "establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability."
American Recovery Corp. v. Computerized Thermal Imaging, Inc., 96 F.3d 88, 92 (4th Cir. 1996) (). Interpretation of the contract is governed by state law, and federal law requires that ambiguities or doubts in a contract be construed in favor of arbitration. McKee v. Home Buyers Warranty Corp. II, 45 F.3d 981, 984 (5th Cir. 1995).
North Carolina substantive law reveals that it takes very little to create a valid arbitration contract. In Howard v. Oakwood Homes, Inc., 516 S.E.2d 879 (N.C. App. 1999), the North Carolina Court of Appeals held, as follows:
We note at the outset that North Carolina "`has a strong public policy favoring the settlement of disputes by arbitration,'" and that "[o]ur Supreme Court has held that where there is any doubt concerning the existence of an arbitration...
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