Volkswagen of America v. Sud's of Peoria

• Citation: 474 F.3d 966
• Decision Date: 29 January 2007
• Docket Number: No. 05-3276.,05-3276.
• Parties: VOLKSWAGEN OF AMERICA, INCORPORATED, Plaintiff-Appellee, v. SUD's OF PEORIA, INCORPORATED, doing business as Volkswagen and Sud's Audi, an Illinois Corporation, Gian C. Sud, an Illinois Resident, Harish C. Sud, an Illinois Resident, et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

474 F.3d 966

VOLKSWAGEN OF AMERICA, INCORPORATED, Plaintiff-Appellee, v. SUD's OF PEORIA, INCORPORATED, doing business as Volkswagen and Sud's Audi, an Illinois Corporation, Gian C. Sud, an Illinois Resident, Harish C. Sud, an Illinois Resident, et al., Defendants-Appellants.

No. 05-3276.

United States Court of Appeals, Seventh Circuit.

Argued May 8, 2006.

Decided January 29, 2007.

James R. Vogler, Steven J. Yatvin (argued), Barack, Ferrazzano, Kirschbaum, Perlman & Nagelberg, Chicago, IL, for Plaintiff-Appellee.

Philip M. O'Donnell, Kingery, Durree, Wakeman & Ryan, Peoria, IL, Richard M. Karr (argued), Gordon & Karr, Chicago, IL, for Defendants-Appellants.

Before BAUER, RIPPLE and ROVNER, Circuit Judges.

RIPPLE, Circuit Judge.

Volkswagen of America, Inc. ("Volkswagen") brought this diversity action against one of its car dealerships, Süd's of Peoria, Inc. ("Süd's"), for breach of contract. Invoking the Federal Arbitration Act, 9 U.S.C. §§ 1-16, Süd's moved to stay the entire action pending arbitration. The district court denied the motion in part; Süd's now has appealed. See id. § 16. For the reasons set forth in the following opinion, we affirm the judgment of the district court.

I BACKGROUND

A. Facts

In the summer of 2003, Süd's, through its three principal owners, contracted with Volkswagen to open an authorized Volkswagen vehicle dealership. At the time negotiations began, Süd's was conducting its operations in a vehicle showroom in Peoria, Illinois. In the 2003 agreement, in exchange for the right to sell Volkswagen automobiles, Süd's agreed to redesign its existing facility according to Volkswagen's uniform design specifications. Additionally, the parties' arrangement contemplated that Süd's soon would move its operations to a new site in nearby Pekin, Illinois.

The parties signed three additional agreements. First, a "Facility Construction Agreement" ("Construction Agreement") outlined a timetable and general design specifications for the construction of the new facility. According to the terms of the Construction Agreement, Süd's had twenty-one months from the date on which it acquired the new property to complete construction of the facility and have it ready for use. The agreement set intermediate deadlines for Süd's to complete a land survey, to prepare design plans and to furnish a warranty deed for the new property. The Construction Agreement also contained the following arbitration clause:

In the event of any dispute concerning any matter arising under this Agreement, the parties consent to mandatory binding arbitration to be held in Oakland County, Michigan, under the auspices of a nationally recognized arbitration service reasonably mutually acceptable to the parties.

R.5, Ex.F at 5.

The parties also entered into a financing arrangement to fund construction of the new facility. Under the terms of a "Memorandum of Understanding-Capital Loan Agreement" (the "Loan Agreement"), Volkswagen agreed to extend to Süd's a $500,000 loan at an interest rate of 4.25%. In paragraph two of the Loan Agreement, Süd's, in turn, promised to service the loan with monthly interest payments and to repay the principal in five annual installments of $100,000 due at the end of each year. In paragraph four of the Loan Agreement, Süd's also agreed to execute and comply fully with the terms of the Construction Agreement. Failure to do so, the provision stated, required immediate repayment of the loan balance and accumulated interest.

Lastly, the parties agreed to a "Performance Incentive Program" (the "Incentive Program"), which allowed Süd's to earn five, annual "incentive" payments of $100,000 from Volkswagen, in addition to a $60,000 bonus incentive at the end of the five-year period. The incentive payments were timed to coincide with Süd's loan obligations so that Süd's could use its yearly $100,000 earned incentive to make its annual, $100,000 loan payment. To earn the incentives, Süd's was required to comply with the minimum requirements of the Volkswagen Dealer Operating Standards, a component of the parties' franchise agreement that governed the general design and operations of authorized Volkswagen dealerships. Additionally, the earning of incentives depended on Süd's execution of, and full compliance with, the Construction Agreement. If Süd's violated the Construction Agreement in year one, it would not earn the incentive payment for that year and also would be disqualified from earning future payments. As construction of the new facility began, Volkswagen paid Süd's a $20,000 advance to be earned later under the Incentive Program.

B. District Court Proceedings

On September 7, 2004, Volkswagen filed this diversity action for breach of contract against Süd's and its three principal owners, each of whom had executed guarantees on Süd's performance. After several failed attempts to resolve their differences amicably, Volkswagen filed an amended complaint on March 11, 2005, reasserting its breach of contract claims. At the heart of the complaint were allegations that Süd's had failed to meet the time line set forth in the parties' Construction Agreement; Süd's allegedly did not begin construction on time, failed to acquire property for the new facility and did not tender the construction plans required by that agreement. According to Count I of the complaint, this breach of the Construction Agreement placed Süd's in default of its loan obligations; Count I also asserted, in the alternative, that Süd's had defaulted on its loan obligations by failing to remit its first annual payment on time. Volkswagen sought full repayment of the $500,000 loan principal.

Count II of the complaint alleged breach of the Incentive Program and sought recovery of the $20,000 advance. According to Count II, Süd's had violated the Incentive Program in two ways. First, Süd's allegedly had disqualified itself from earning incentives by violating the terms of the Construction Agreement. Second, Süd's allegedly had not complied with the franchise agreement's Dealer Operations Standards, a precondition to receiving incentives, because it failed "to order, install, or display at its current dealership premises a Volkswagen facade dealer nameplate that complies with [Volkswagen's] current corporate identity standards." R.17 at 8.

Relying upon the Construction Agreement's arbitration provision, Süd's notified Volkswagen of its intent to submit the matter to arbitration. It then moved, under the FAA, to stay the action in the district court pending an arbitrator's resolution of the dispute. The district court granted the motion in part and denied it in part. Addressing Count I of Volkswagen's complaint — breach of the Loan Agreement — the court stayed the issues related to Süd's compliance with the Construction Agreement because of that contract's arbitration clause. However, the court refused to stay the question of whether Süd's had made its loan payments on time. In the court's view, the Loan Agreement did not provide for arbitration and did not incorporate the Construction Agreement's arbitration clause for matters unrelated to construction.

With respect to Count II — breach of the Incentive Program — the court also stayed one issue but not the other. The court held that failure to install a dealer nameplate was non-arbitrable because the Motor Vehicle Franchise Contract Arbitration Fairness Act of 2002 ("Fairness Act"), 15 U.S.C. § 1226, requires the parties to arbitrate disputes only if both parties assent to arbitration after a controversy arises under a dealer franchise agreement. The district court held that the nameplate issue arose under a franchise agreement within the meaning of the statute. Because only Süd's, not Volkswagen, had agreed to proceed to arbitration after the dispute had arisen, the issue could not be sent to arbitration. With respect to the alternate theory, however, the court held that Volkswagen's theory that Süd's had breached the Incentive Program because it failed to comply with the Construction Agreement was arbitrable because of the Construction Agreement's arbitration clause.

In short, all issues related to Süd's performance of the Construction Agreement were stayed pending arbitration, but the balance of the case was set to move forward in the district court.

II DISCUSSION

A.

The Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1-16, provides the starting point for our analysis. The FAA was enacted in 1925 against the backdrop of "centuries of judicial hostility to arbitration agreements." Shearson/ American Express, Inc. v. McMahon, 482 U.S. 220, 225, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987) (internal quotation marks omitted). This hostility was a vestige of the English common law, in which courts, protective of their own jurisdiction, had refused to enforce specific agreements to arbitrate; this practice persisted in the United States well into the twentieth century. Eventually, Congress reversed the common law trend and, in enacting the FAA, attempted "to place arbitration agreements `upon the same footing as other contracts.'" Scherk v. Alberto-Culver Co., 417 U.S. 506, 511, 94 S.Ct. 2449, 41 L.Ed.2d 270 (1974) (quoting H.R.Rep. No. 96, at 1, 2 (1924)). The FAA accomplishes this goal by providing that binding arbitration agreements "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. Thus, if one party to a contract containing an arbitration clause attempts to avoid arbitration and files suit in the district court, the other party may move to stay or dismiss the action on the ground that the FAA requires the arbitration clause of the contract to be enforced. See id. § 3 (authorizing a motion to stay); id. § 4 (authorizing a petition to compel arbitration).

Although reflecting a "liberal federal policy favoring arbitration agreements," Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460...