Nature's 10 Jewelers v. Gunderson

• Decision Date: 10 July 2002
• Docket Number: No. 21962.,21962.
• Citation: 2002 SD 80,648 N.W.2d 804
• Parties: NATURE'S 10 JEWELERS, A Sam Savage Company, Inc., and Sam Savage, Individually, Plaintiffs and Appellants, v. Brian GUNDERSON, Defendant and Appellee, and Nature's 10, Inc., a South Dakota Corporation; Mylan Ventures, Ltd., a North Dakota Corporation; Frank Barnes; Jerry Haack; and Barney Schumacher, Defendants.
• Court: South Dakota Supreme Court

648 N.W.2d 804

2002 SD 80

NATURE'S 10 JEWELERS, A Sam Savage Company, Inc., and Sam Savage, Individually, Plaintiffs and Appellants, v. Brian GUNDERSON, Defendant and Appellee, and Nature's 10, Inc., a South Dakota Corporation; Mylan Ventures, Ltd., a North Dakota Corporation; Frank Barnes; Jerry Haack; and Barney Schumacher, Defendants.

No. 21962.

Supreme Court of South Dakota.

Argued January 10, 2002.

Reassigned on March 1, 2002.

Decided July 10, 2002.

Rehearing Denied August 13, 2002.

Ronald A. Parsons, Jr., Steven M. Johnson of Johnson, Heidepriem, Miner, Marlow and Janklow, Sioux Falls, South Dakota and Matthew McCaulley of Hynes & McCaulley, LLC, Sioux Falls, South Dakota, Attorneys for plaintiffs. and appellants.

Tina M. Hodne of Berenstein, Moore, Berenstein, Heffernan & Moeller, LLP, Sioux City, Iowa, Attorneys for defendant Brian Gunderson.

GORS, Acting Justice (on reassignment).

[¶ 1.] Sam Savage (Savage) and Rossi Fine Jewelers (Rossi) each separately sued Nature's 10, Inc. (Nature's 10), and various directors and officers. In both cases, the trial court ruled that federal law and the contracts between the parties mandated arbitration in both cases. We hold that the contract between Savage and Nature's 10 is void, and therefore compulsory arbitration is not required. We reverse. (In a separate decision, we decide that the same arbitration clause in the contract between Rossi and Nature's 10 is valid and requires compulsory arbitration.)

FACTS

[¶ 2.] Defendant Nature's 10 was incorporated in South Dakota in 1995. In 1996, defendant Mylan Ventures, Ltd., (Mylan) a Wyoming corporation, purchased Nature's 10. The remaining defendants, Mike Alvano, Frank Barnes, Kirk Gardner, Brian Gunderson, Jerry Haack, Barney Schumacher and Randy Slaybaugh were either directors or officers of Nature's 10 or Mylan during the time of the transactions described here. Some of the individual defendants appeared in circuit court, yet only Brian Gunderson responded to the plaintiff's appeal.

[¶ 3.] Nature's 10 held itself out as a franchiser offering potential franchisees an opportunity to participate in retail sales of various articles of jewelry at discounted prices. Nature's 10 stores were advertised as marketing diamonds obtained from Nature's 10's own mines, cut in its own facilities and offered at lower prices to franchisers. Nature's 10 was registered to sell franchises with the South Dakota Division of Securities.

[¶ 4.] On August 27, 1997, the South Dakota Division of Securities notified the defendants that the Nature's 10 franchise registration had expired. Then on October 1, 1997, the Division withdrew the company's registration number effective July 29, 1997. Defendants were warned that the company "will no longer be engaged in the offer or sale of franchises in South Dakota."

[¶ 5.] Plaintiff Sam Savage (Savage), a Florida resident, had previously been in the jewelry business and was interested in operating a jewelry franchise store. Savage negotiated with Nature's 10 and signed a franchise agreement with the company on December 19, 1997—more than four months after Nature's 10 was no longer authorized to sell franchises.¹ After signing the franchise agreement, Savage made additional, substantial investments and opened his Nature's 10 franchise store in Naples, Florida in April of 1998. On May 14, 1998, Nature's 10 was formally dissolved as a corporation by the South Dakota Secretary of State. Savage closed his store in January of 1999 after losing several hundred thousand dollars.

[¶ 6.] Nature's 10 offered "manufacturer-direct purchasing" with "a continuous supply of discounted wholesale diamonds from the company's own mines" cut in their own facilities. Nature's 10 promised the following to Savage:

• Nature's 10 would allow Savage to provide diamonds to insurance companies that were replacing jewelry lost by or stolen from their insureds.

• Nature's 10 would provide Savage initial training in the operation of a franchise.

• Nature's 10 would develop and administer a corporate awards program.

• Savage would receive company-administered updates and maintenance for a computerized inventory catalog of jewelry designs.

• Nature's 10 would establish a toll free telephone service number to provide information and assistance.

• Nature's 10 would provide training for bookkeeping, accounting, inventory control and other procedures for the operation of a franchise.

[¶ 7.] Nature's 10 had no diamond mines, no cutting facilities and no diamonds. There was no insurance jewelry replacement program, no coordinated advertising and strategies, no franchise training, no corporate awards program, no computerized inventory catalog of jewelry designs, no toll free service number, no training and support for bookkeeping, accounting, inventory control and other procedures. Nature's 10 provided none of the guaranteed franchise products and services. In short, the things that Nature's 10 promoted did not exist and the things that Nature's 10 promised were not provided. Savage was forced to close his business at a substantial loss.

[¶ 8.] In his lawsuit, Savage alleged breach of contract, failure of consideration, breach of implied duty of good faith and fair dealing, actual fraud, constructive fraud, deceit, misrepresentation in the sale of a franchise, piercing the corporate veil to impose personal liability on the directors and officers, and three additional counts alleging specific franchise statute violations. Rossi filed a similar lawsuit. On October 6, 2001, Savage and Rossi moved to consolidate their actions. The parties then stipulated that the actions would be consolidated for discovery purposes. Defendants moved for compulsory arbitration in accordance with a clause in the franchise agreements. Although Savage opposed the motion, the trial court entered an order requiring arbitration. Savage appeals.

[¶ 9.] The franchise agreement between Nature's 10 and Savage contained the following arbitration clause:

Any monetary claim arising out of or relating to this Agreement, or any breach thereof ... shall be submitted to arbitration in [Union] County, South Dakota, in accordance with the rules of the American Arbitration Association and judgment upon the award may be entered in any court having jurisdiction thereof and shall be final, binding and unappealable....²

The trial court held that this provision and federal law required compulsory arbitration.

STANDARD OF REVIEW

[¶ 10.] Written contracts are reviewed without any presumption in favor of the trial court's interpretation. Thunderstik Lodge, Inc. v. Reuer, 1998 SD 110, ¶ 12, 585 N.W.2d 819, 822. Contract interpretation is a question of law. Id.

ANALYSIS AND DECISION

[¶ 11.] This Court has consistently favored the resolution of disputes by arbitration, Thunderstik Lodge at ¶ 14, as we have done in Rossi v. Nature's 10, 2002 SD 82, ¶ 14, 648 N.W.2d 812, which is the companion to this case. The purpose of arbitrating disputes is to provide a relatively quick and inexpensive resolution without the cost and delay that may come with legal proceedings. Rossi at ¶ 8; Thunderstik Lodge at ¶ 14. There is an overriding policy favoring arbitration when a contract provides for it. Id. In addition, South Dakota has adopted the Uniform Arbitration Act. SDCL 21-25A-1 provides:

A written agreement to submit any existing controversy to arbitration or a provision in a written contract to submit to arbitration any controversy thereafter arising between the parties is valid, enforceable, and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract.

If there is doubt whether a case should be resolved by traditional judicial means or by arbitration, arbitration will prevail. Thunderstik Lodge, 1998 SD 110 at ¶ 15, 585 N.W.2d at 822 (citing City of Hot Springs v. Gunderson's, Inc., 322 N.W.2d 8, 10 (S.D.1982)).

[¶ 12.] However, in this case, there was no valid contract. The franchise agreement, which was entered into between Savage and Nature's 10 several months after the franchise registration expired, was void, not voidable. A void contract is invalid or unlawful from its inception. It is a "mere nullity, and incapable of confirmation or ratification." Black's Law Dictionary at 1573 (6th ed.1990). A voidable contract, on the other hand, is a valid contract that can be "legally voided at the option of one of the parties." Id. at 1574. Here, the franchise agreement between Savage and Nature's 10 was signed in violation of SDCL 37-5A-6. This statute provides that "[n]o person may offer or sell any franchise ... unless there is an effective registration statement on file...." Because there was no effective registration statement on file, the agreement between Nature's 10 and Savage was unlawful from its inception. SDCL 53-9-1. An unlawful contract is void. SDCL 53-5-3 and 20-2-2; Green v. Mt. Diablo Hosp. Dist., 207 Cal.App.3d 63, 254 Cal. Rptr. 689, 697 (1989) (stating "illegality serves to void the entire contract").

[¶ 13.] While there may be a policy favoring arbitration when a contract provides for it, you cannot arbitrate a felony. In Party Yards, Inc. v. Templeton, the Fifth District Florida Court of Appeals said: "A claim that a contract is illegal and, as in this case, criminal in nature, is not a matter which can be determined by an arbitrator. An arbitrator cannot order a party to perform an illegal act." 751 So.2d 121, 123 (Fla.Dist.Ct.App.2000). In this case, the defendants contracted with Savage in violation of state law. None of the promises were fulfilled. The corporation evaporated. This Court will not permit the individuals who committed the illegal acts on behalf of the corporation to benefit from the arbitration clause in the illegal contract.

[¶ 14.] GILBERTSON, Chief Justice, and AMUNDSON, Justice, concur.

[¶ 15.] SABERS and KONENKAMP, Justices, dissent.

[¶ 16.] ZINTER, Justice, not having been a member of...