Morrie Mages and Shirlee Mages Foundation v. Thrifty Corp.

• Citation: 916 F.2d 402
• Decision Date: 19 October 1990
• Docket Number: No. 89-2354,89-2354
• Parties: The MORRIE MAGES AND SHIRLEE MAGES FOUNDATION, Morris H. Mages, Shirlee G. Mages, Laurence F. Mages, and Lili Ann Mages Zisook, Plaintiffs-Appellees, v. THRIFTY CORPORATION, a California corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 402

916 F.2d 402

The MORRIE MAGES AND SHIRLEE MAGES FOUNDATION, Morris H Mages, Shirlee G. Mages, Laurence F. Mages, and Lili Ann Mages Zisook, Plaintiffs-Appellees, v. THRIFTY CORPORATION, a California corporation, Defendant-Appellant.

No. 89-2354.

United States Court of Appeals Seventh Circuit.

Argued Feb. 14, 1990.

Decided Oct. 19, 1990.

Richard G. Schultz, Carmen D. Caruso, Foran, Wiss & Schultz, Chicago, Ill., for plaintiffs-appellees.

Peter C. Woodford, Seyfarth, Shaw, Fairweather & Geraldson, Chicago, Ill., for defendant-appellant.

Before BAUER, Chief Judge, WOOD, Jr., and KANNE, Circuit Judges.

HARLINGTON WOOD, Jr., Circuit Judge.

Defendant Thrifty Corporation ("Thrifty") appeals from the district court's order denying Thrifty's motion for a stay of proceedings pending arbitration. This court has jurisdiction over this appeal under section 15(a)(1)(A) of the Federal Arbitration Act, 9 U.S.C. Sec. 15(a)(1)(A).

I. FACTUAL BACKGROUND

Michigan Sporting Goods Distributors, Inc. ("MC") purchased the sporting goods business owned by the Mages, Morrie Mages Sporting Goods, in 1987. The parties' agreement is set forth in an Agreement for Purchase ("Agreement") dated July 16, 1987, a Promissory Note ("Note") executed contemporaneously with the Agreement, and a Guaranty dated July 20, 1987, which the Mages required as a condition of sale, from MC's parent corporation, Thrifty. The Agreement included an arbitration clause that required the parties to the Agreement to submit to arbitration any "controversy or claim arising out of or relating to [the] contract, or the breach thereof."

Because the Mages' business was privately held and did not have audited financial statements, the parties agreed that the purchase price in the principal sum of $6,050,000 would be subject to adjustment. MC paid the Mages $5,000,000 at the time of closing in July 1987 and delivered the Note to the Mages for the balance of the purchase price. The Note provided that on specified dates MC was to make payments of principal and interest to the Mages; the first payment was due on October 1, 1987. The Agreement and the Note both provided that MC had a right to claim set-offs against the Note based upon the accounting reviews or other inaccuracies in the Mages' financial statements.

The Note also contained a default clause providing that if MC "defaulted" in the payment of any installment of principal or interest when due, and the default continued for thirty days after the Mages provided notice of default to MC or Thrifty, the entire $1,050,000 obligation, plus interest, would become immediately due and payable. Thrifty's Guaranty provided that in the event of an uncured default by MC on the Note, Thrifty would be absolutely liable for MC's indebtedness.

Subsequent to the closing, MC determined that the value of the inventory and assets of the Mages' business had been overstated by approximately $1,000,000. A post-sale accounting of the Mages' books and records also suggested an adjustment to the purchase price of at least an additional $100,000. MC's post-closing review of the Mages' business and records therefore indicated that after an adjustment of the purchase price, it might not owe any portion of the amount recited in the Note. Thrifty maintains that the Mages contributed to the uncertainty regarding the amount of MC's remaining debt when they neglected to present their accountants' post-closing report in a timely manner as required in the Agreement.

As a result of the indefiniteness of the amount of MC's debt and the Mages' failure to submit timely accounting reports, MC withheld the October 1, 1987, payment and entered into discussions with the Mages to determine the amount owing under the Note. The Mages then declared MC in default and demanded that MC immediately pay the Mages $1,050,000, which was the full amount of the note without adjustment. MC refused to make any accelerated payment until the dispute over the amount due under the Note was resolved. The Mages and MC continued their attempts to amicably resolve their differences until the Mages filed this lawsuit against Thrifty for breach of the Guaranty on August 30, 1988. Because the Mages did not seek arbitration of the dispute, MC filed a demand for arbitration within thirty days of the filing of the Mages' suit against Thrifty.

On October 5, 1988, Thrifty moved for a stay of the case in district court pending the outcome of the arbitration between MC and the Mages. The district court issued an order denying Thrifty's motion on May 31, 1989. The district court essentially held that Thrifty had failed to incorporate an arbitration clause into its Guaranty and that Thrifty and MC were in default in proceeding with arbitration. The district court found that Thrifty's liability under the Guaranty was for the full amount of the Note due to MC's "default"--MC's failure to make its payments to the Mages.

Thrifty asserts that the district court's denial of its motion for a stay will allow the Mages to avoid the parties' agreed-upon remedy of arbitration and subject Thrifty to potentially inconsistent results between the MC-Mages arbitration and the Thrifty-Mages litigation. Thrifty argues that it has an absolute right to a stay because it was a party to the arbitration agreement. Moreover, Thrifty maintains that regardless of its status as a party to the arbitration agreement, it was entitled to a stay because section 3 of the Federal Arbitration Act, 9 U.S.C. Sec. 3, requires that a district court stay litigation where issues presented in the lawsuit are subject to arbitration. In the event that we find Thrifty did not have an absolute right to a stay, Thrifty alternatively urges us to rule that the district court abused its discretionary power in not staying the case. As a preliminary matter, we must examine the district court's finding that neither MC nor Thrifty was entitled to arbitrate their dispute with the Mages because their belated request for arbitration resulted in a "default" or "waiver" of their arbitration rights.

II. WAIVER OF ARBITRATION RIGHTS

The Mages and the district court identified several aspects of MC and Thrifty's conduct that resulted in a waiver of their right to arbitration. Like the district court, we will assume for the sake of argument that Thrifty had a right to arbitration that it could waive.

The Mages alleged and the district court found that both MC and Thrifty waived their arbitration rights when MC failed to make its payments under the Note and neither Thrifty nor MC cured the "default." The Mages and the district court, however, confused MC's possible "default" under the Note in paying the Mages with the sense in which the word "default" is used to signify that a party has waived its arbitration right by acting inconsistently with that right. When a party moves to stay judicial proceedings and compel arbitration, a court "may consider only issues relating to the making and performance of the agreement to arbitrate." Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404, 87 S.Ct. 1801, 1806, 18 L.Ed.2d 1270 (1967). The district court did more than construe the arbitration agreement, it considered matters that the parties had contracted to refer to an arbitrator. Whether MC defaulted under the Note and the extent of its debt to the Mages were issues the parties agreed to arbitrate under the Agreement, which broadly stated that "[a]ny controversy or claim arising out of or relating to this contract, or the breach thereof, will be settled by arbitration...." Thrifty does not dispute that it is absolutely liable under the Guaranty for MC's indebtedness once the arbitrator resolves the dispute concerning the purported default and amount of MC's set-off. The preliminary issue of waiver of arbitration rights, however, is a different inquiry than that conducted by the district court.

The district court declared MC's failure to pay to be a default under the Note and stated that Thrifty became absolutely liable when there was no cure within the passage of time specified in the Guaranty. The parties had agreed, however, that any controversy concerning the contract would be settled by an arbitrator. Due to the broad arbitration agreement, the district court was precluded from characterizing MC's conduct as a default and declaring Thrifty absolutely liable under the Guaranty unless MC waived its right to have such issues decided in the agreed-upon forum.

Arbitration is a waiveable contract right, Ohio-Sealy Mattress Mfg. Co. v. Kaplan, 712 F.2d 270, 273 (7th Cir.), cert. denied, 464 U.S. 1002, 104 S.Ct. 509, 78 L.Ed.2d 698 (1983); Dickinson v. Heinold Securities, Inc., 661 F.2d 638, 641 (7th Cir.1981), but a "waiver of arbitration is not lightly to be inferred." Midwest Window Systems, Inc. v. Amcor Indus., Inc., 630 F.2d 535, 536 (7th Cir.1980). The party seeking to prove a waiver of arbitration rights has a "heavy burden." Ohio-Sealy, 712 F.2d at 273. There is no rigid rule as to what constitutes a waiver of an arbitration agreement; the crucial question is whether, under the circumstances of the particular case, the defaulting party acted " 'inconsistently' with the arbitration right." Midwest Window, 630 F.2d at 537 (quoting Shinto Shipping Co. v. Fibrex & Shipping Co., 572 F.2d 1328, 1330 (9th Cir.1978)); see also Ohio-Sealy, 712 F.2d at 273. One of the relevant circumstances is the prejudice suffered by the objecting party as a result of the acts purportedly constituting waiver. Dickinson, 661 F.2d at 641 n. 5 (citing Midwest Window, 630 F.2d at 537).

We noted in Dickinson that

[p]reliminary negotiations concerning a settlement are not sufficient to waive arbitration. Southwest Industrial Import & Export Inc. v. Wilmod Co., 524 F.2d 468, 470 (5th Cir.1975). Significant periods of delay prior to the onset of litigation are often necessary to allow the parties to engage in good faith efforts to resolve the...