Port Erie Plastics, Inc. v. Uptown Nails, LLC
| Decision Date | 18 November 2004 |
| Docket Number | Civil Action No. 03-370 Erie. |
| Parties | PORT ERIE PLASTICS, INC., Plaintiff, v. UPTOWN NAILS, LLC, Larry G. Kapfer, Jr., Jim Gleeson, Frank Bruno, and American Arbitration Association, Defendants. |
| Court | U.S. District Court — Western District of Pennsylvania |
William J. Kelly, Jr., Erie, PA, for Plaintiff.
Thomas V. Incantalupo, Esq., Mitchell & Incantalupo, Forest Hills, NY, John W. McCandless, Esq., Quinn, Buseck, Leemhuis, Toohey & Kroto, Inc., Erie, PA, for Defendants.
This action presents a question concerning the arbitrability vel non of a dispute arising out of the operation of Uptown Nails, LLC, a New York limited liability company (the "Company"). Perceiving that the Plaintiff had breached contractual obligations and engaged in tortious conduct, Defendants filed a demand for arbitration with the American Arbitration Association pursuant to an arbitration clause contained in the Company's operating agreement. The Plaintiff then commenced a declaratory judgment action in the Court of Common Pleas for Erie County, Pennsylvania seeking a declaration that the Defendants' claims were not actionable in light of certain hold harmless language contained in the agreement. The action was removed to this Court on the basis of diversity of citizenship jurisdiction. See 28 U.S.C. § 1332(a)(1).1 Plaintiff has filed a motion for summary judgment and Defendants have countered with a "Cross-Motion For Summary Judgment To Compel Arbitration." For the reasons set forth below, we will deny the Plaintiff's motion and grant the Defendants' motion to compel arbitration.
Summary judgment is only appropriate when the pleadings, depositions, answers to interrogatories and admissions on file, together with any affidavits, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Sameric Corp. of Delaware, Inc. v. City of Philadelphia, 142 F.3d 582, 590 (3d Cir.1998). When deciding a motion for summary judgment, a court must draw all reasonable inferences in the light most favorable to the nonmovant. Big Apple BMW, Inc. v. BMW of North America Inc., 974 F.2d 1358, 1363 (3d Cir.1992). A court may not consider the weight or credibility of the evidence in deciding a motion for summary judgment, even if the quantity of the moving party's evidence far outweighs that of its opponent. Id. But a party opposing summary judgment must do more than just rest upon mere allegations, general denials, or vague statements. Saldana v. Kmart Corp., 260 F.3d 228, 232 (3d Cir.2001). Moreover, a genuine dispute as to a factual issue exists only if the evidence is such that a reasonable jury could return a verdict for the non-movant. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
Plaintiff Port Erie Plastics, Inc. ("Port Erie") is an injected molded plastics manufacturer with a principal place of business located in Harborcreek, Pennsylvania. Defendants Larry G. Kapfer, Jr., Jim Gleeson, and Frank Bruno are individuals residing in New York City.
In the Fall of 1999, Kapfer and principals of Port Erie discussed the possibility of entering into a business venture involving the design, manufacturing, and wholesale distribution of cosmetic fingernails. Negotiations ensued and culminated in the formation of a New York limited liability company, Defendant Uptown Nails, LLC, to carry out the business venture. The Company's members included Plaintiff and Defendants Kapfer, Gleeson and Bruno as well as another individual (not a party to this action) by the name of Craig Arnold. Since its inception, Defendant Kapfer has served as the Company's general manager. Defendants Gleeson and Bruno are passive investors. Port Erie was to be the Company's guaranteed exclusive supplier of cosmetic nails during the first five years of operations.
On May 17, 2000, the members of Uptown Nails, LLC entered into an agreement relative to the operation of the Company (the "Operating Agreement") which sets forth various rights, privileges, duties and obligations of the Company's members. The following paragraph was incorporated into the Operating Agreement under the section entitled "Personal Services":
(c) The Company will use [Port Erie] exclusively as the injection molder for UPTOWN NAILS artificial nails, quick stick and nail organizer for the period covering the beginning of this agreement through June 30, 2005. [Port Erie] will honor the previously agreed upon prices for such product for the period covered exclusive of changes in material/resin costs. At the conclusion of the five (5) year period ending June 30, 2005 continued use of [Port Erie] will be predicated on receiving the most competitve [sic] costs, highest possible quality and timely deliveries.
(Uptown Nails, LLC Operating Agreement, Art. V, ¶ 5 (emphasis supplied).)
In addition, the Operating Agreement contains a "hold harmless" provision, which reads as follows:
5. Liability and Indemnification.
(a) The General Manager shall not be liable, responsible, or accountable, in damages or otherwise, to any Member, to the Company, or for any of the Company's liabilities as a result of any act performed by the General Manager within the scope of the authority conferred on the General Manager by this Agreement, except for actions or omissions constituting fraud, gross negligence, or an intentional breach of this Agreement or applicable law. Likewise, a Member shall have no personal liability hereunder except if otherwise set forth herein.
(b) The Company shall indemnify the General Manager for any act performed by the General Manager within the scope of the authority conferred on the General Manager by this Agreement, except for actions or omissions constituting fraud, gross negligence, or an intentional breach of this Agreement or applicable law. The Company shall promptly notify the Members whenever the General Manager has been so indemnified by the Company. A member may not be personally liable as either a Member or as General Manager for the liabilities of the Company. The failure of the Company to observe any formalities or requirements relating to the exercise of its powers or management of its business or affairs under this Agreement or the Act shall not be grounds for imposing personal liability on the Members or General Manager for the liabilities of the Company.
(c) The Company shall indemnify the Members for all costs, losses, liabilities, and damages paid or accrued by such Member in connection with the business of the Company to the fullest extent provided or allowed by the laws of New York.
(Uptown Nails, LLC Operating Agreement, Art. V, ¶ 5 (emphasis supplied).)
The agreement also contains a choice-of-law provision and an arbitration clause which provide, respectively:
5. Applicable Law. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY, AND INTERPRETATION OF THIS AGREEMENT AND THE PERFORMANCE OF THE OBLIGATIONS IMPOSED BY THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.
* * *
8. Jurisdiction and Venue. Any dispute arising out of this agreement shall be resolved by binding arbitration to be administered pursuant to and in accordance with the American Arbitration Association.
(Operating Agreement, Art. IX, ¶¶ 5 and 8.)
Disputes arose in the course of business operations and, on or around August 29, 2003, Uptown Nails served an arbitration demand upon Plaintiff. The demand form lists the "nature of the dispute" as "Breach of operating agreement; Breach of Fiduciary duty; Breach of contract; Failure to supply custom goods; Negligence; Tortious interference with contract; Prima facie tort." By way of relief, Uptown Nails asserted damages in the amount of $3 million for loss of individual member investments, $9.21 million for loss of past business profits, and $12.43 million for loss of future earnings. It is Defendants' theory that the cosmetic nails supplied by Port Erie were substantially nonconforming and inferior in quality, resulting in widespread customer dissatisfaction and, ultimately, the company's demise. Defendants maintain that this case, including Plaintiff's defense based upon the hold-harmless clause, should be referred to arbitration consistent with Article IX, ¶ 8 of the Operating Agreement.
Not surprisingly, Plaintiff sees matters a bit differently. For one, Plaintiff maintains that it supplied cosmetic nails to the Company consistent with the stated design parameters and that the losses suffered by Uptown Nails resulted from factors unrelated to product quality, such as mismanagement on the part of Kapfer and his associates. Plaintiff avers that, almost from the beginning, the Company fell substantially in arrears with its payments to Port Erie, causing Port Erie to incur losses and, ultimately, to stop manufacturing and delivering product to Uptown Nails. Regardless, Plaintiff contends that it cannot be held liable under any of the theories delineated in the Defendants' demand for arbitration by virtue of the language in the hold harmless clause. Most significant for present purposes, Plaintiff insists that there is no dispute capable of being referred to arbitration because the hold harmless clause, according to Plaintiff, bars Defendants' claims on their face. Fundamentally, then, we must determine the appropriate forum for resolution of these issues.
Although neither side has focused its analysis on the Federal Arbitration Act, we begin by considering the Act's applicability to this case. Section 2 — the Act's primary substantive provision — states that "[a] written provision in any ... contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or...
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...rules in a choice of law clause if they intend to contract out of the FAA. Id. at 296-97; see also Port Erie Plastics, Inc. v. Uptown Nails LLC, 350 F.Supp.2d 659, 664 (W.D.Pa.2004)("the mere presence of a generic choice-of-law provision does not, by itself, evidence an intent by the partie......