The Defendants, Subway Sandwich Shops, Inc. ("SSSI") and Doctor's Associates, Inc. ("DAI") (collectively, the "Defendants") have moved for an order to dismiss this action or, in the alternative, to stay this action in favor of arbitration.
The Plaintiffs, Hal E. Wilson ("Wilson") and Robert L. Abbott, Jr. ("Abbott") (collectively, the "Plaintiffs"), have cross-moved for an order imposing sanctions against the Defendants pursuant to Rule 11, Fed. R. Civ. P.
For the reasons set forth below, the Defendants' motion is denied and the Plaintiffs' motion is denied.
Wilson is an individual who is a citizen and resident of the State of North Carolina.
Abbott is an individual who is a citizen and resident of the State of New York.
SSSI is a corporation organized and existing under the laws of the State of Connecticut.
DAI is a corporation organized and existing under the laws of the State of Florida. Prior to July 1991, DAI was a corporation organized under the laws of the State of Connecticut ("DAI Connecticut"). On July 1, 1991, DAI of Florida merged with DAI Connecticut, and the former emerged as the surviving corporate entity.
This is a diversity action on a money judgment against SSSI rendered in the State of South Carolina. Specifically, it is premised on the following alleged facts: first, a judgment was entered against SSSI and the Plaintiffs on February 18, 1991 in favor of a third party in the State of South Carolina; second, SSSI failed to satisfy the judgment for more than two years; third as a direct result of this failure on SSSI's part, post-judgment execution proceedings were commenced against the Plaintiffs; and fourth, as a direct result of those proceedings, the Plaintiffs were caused to sustained damages which they seek to recover in this present action.
DAI is the national franchisor of Subway restaurants. It sells the right to operate a Subway restaurant which grants a franchisee a license to use nationally-known and federally-registered Subway trademarks. SSSI is a real estate leasing company allegedly affiliated with DAI.
On or about July 14, 1986, the Plaintiffs entered into a franchise agreement (the "Agreement") with DAI Connecticut for the purpose of operating a Subway restaurant (the "Restaurant") in South Carolina. On or about November 26, 1986, SSSI and Cypress Square Associates ("Cypress") entered into a contractual agreement (the "Lease") whereby the former as tenant leased certain property (the "Premises") from the latter as landlord, which was located in Florence, South Carolina. Days earlier, on or about November 18, 1986, the Plaintiffs had signed the Lease as personal guarantors of the performance of the obligations undertaken by the tenant of the Lease.
On or about December 16, 1986, the Plaintiffs and SSSI entered into a contractual agreement (the "Sublease") whereby the former sublet the Premises from the latter for the purpose of locating the Restaurant there.
The Plaintiffs operated the Restaurant in Florence, South Carolina, from about November 1986 to about March 1990. The Plaintiffs then decided to move the Restaurant to a new location.
On or about May 15, 1990, Cypress commenced an action against SSSI and Plaintiffs in the Court of Common Pleas, Twelfth Judicial District, State of South Carolina ("Action"), to recover damages allegedly arising from the breach of the Lease. Both the Plaintiffs and SSSI appeared by counsel and fully participated in the Action.
The Plaintiffs and SSSI answered Cypress' Complaint, and SSSI cross-claimed against the Plaintiffs and the Plaintiffs against SSSI, each alleging that if any recovery were obtained by Cypress, the other should provide indemnification with regard thereto. See Cypress Square Assoc. v. Subway Sandwich Shops, Inc., No. 90-CP-21-586, [slip op.] at 1-2 (S.C. Ct. C.P. Feb. 18, 1991).
After a trial on the merits, the court rendered a decision granting Cypress a judgment against SSSI and the Plaintiffs in the amount of $ 70,422.00 (the "Judgment"). See [slip op.] at 5. With regard to SSSI's cross-claim against the Plaintiffs, the Judgment held that "Subway shall hold harmless Wilson and Abbott from and against any recovery of [Cypress] herein against [Wilson and Abbott]" by Cypress in connection with Cypress' claims. [slip op.] at 6.
While DAI was neither named in the action nor a party to certain mutual releases agreed to by SSSI and the Plaintiffs on or about March 2, 1990 ("Mutual Release"),
the Plaintiffs' Complaint seeks relief against DAI on the theory that, as the South Carolina court observed, SSSI and DAI engaged in improper and fraudulent practices:
to wit, the leasing of property from individual owners by a no-asset corporation, whose sole function is to insulate from liability thereon the entity deriving the exclusive benefit from the operation of restaurants operated on the leased property. . . . It appears that little, if any, justification exists for any legal determination of separateness between [SSSI] and [DAI].
[slip op.] at 7.
The Plaintiffs allege that, despite repeated demands between February 18, 1991 and January 1993, SSSI refused to pay Cypress or satisfy the judgment. Having failed in its collection efforts against SSSI, Cypress entered the Judgment in the State of New York and, contemporaneously therewith, brought a post-judgment execution action against Abbott. On or about December 11, 1992, Cypress served upon Abbott's employer, Bear Stearns & Co., Inc. ("Bear Sterns"), a Restraining Notice to Garnishee With Information Subpoena, thereby restraining all of Abbott's accounts at Bear Sterns.
Abbott is an Associate Director in the Bear Stearns High Yield/Bankruptcy Group. The Plaintiffs allege that in December 1992, as a direct result of SSSI's failure and refusal to satisfy the Judgment, all of Abbott's accounts held by Bear Stearns were frozen. They assert further that this development has cause Abbott considerable professional embarrassment and damage to his business reputation.
The Plaintiffs have subsequently vacated the Restraining Notice served on Abbott, stayed the New York Judgment, and brought this action asserting five grounds upon which relief may be granted. In the First and Second Claims for Relief, Abbott and Wilson, respectively, seek damages for SSSI's violation of the Judgment, subsequently converted into the New York State Judgment, which expressly ordered SSSI to pay Cypress.
The Third and Fourth Claims for Relief seek damages for SSSI's failure to honor and perform according to the terms and conditions of the Mutual Release. Shortly after Cypress commenced the Action against SSSI and the Plaintiffs, SSSI cross-claimed against the Plaintiffs seeking the rent payments from them in direct contravention of the Mutual Release. In light of this cross-claim, the South Carolina court held that the Mutual Release was binding, see Cypress, No. 90-CP-21-586, slip. op. at 4, and the Plaintiffs now assert the Third and Fourth Claims for Relief in this action to recover damages for SSSI's breach.
In the Fifth Claim for Relief, the Plaintiffs seek damages for SSSI's alleged intentional and malicious acts which, they contend, have resulted in the injury to their credit reputation and credit standing in excess of $ 1,000,000.
The Plaintiffs name DAI as a defendant in this action on the theory that, as the alter ego of SSSI, it is liable for any obligations SSSI toward them.
The Defendants bring their present motion on the ground that the relationship between the Plaintiffs and DAI is governed by the arbitration clause set forth in the Agreement. In light of this clause, the Defendants contend that this action must be stayed in favor of arbitration or dismissed altogether.
The Defendants filed their motion on February 8, 1993. The Plaintiffs requested the imposition of sanctions against the Defendants in a letter received by the Court on February 9, 1993, which was treated as a motion. Oral argument was heard on both motions on March 5, 1993, and the motions are considered submitted as of that date.
I. The Defendants Are Not Entitled To Dismissal Or A Stay
A. The Legal Standards to Compel Arbitration
A valid arbitration agreement is governed by the Federal Arbitration Act., 9 U.S.C. § 1 et seq., which establishes a "federal policy favoring arbitration." Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 74 L. Ed. 2d 765, 103 S. Ct. 927 (1983). This policy requires that courts "rigorously enforce agreements to arbitrate." Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 221, 84 L. Ed. 2d 158, 105 S. Ct. 1238 (1985); see also Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 226, 96 L. Ed. 2d 185, 107 S. Ct. 2332 (1987); McDonnell Douglas Fin. Corp. v. Pennsylvania Power & Light Co., 858 F.2d 825, 830 (2d Cir. 1988); Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626, 87 L. Ed. 2d 444, 105 S. Ct. 3346 (1985).
As this Court has noted, when considering a motion to stay litigation in favor of arbitration, a court must first determine whether an agreement to arbitrate exists and then decide whether the dispute before it arises under the agreement and is arbitrable. See Cook Chocolate Co. v. Salomon, Inc., 684 F. Supp. 1177, 1181 (S.D.N.Y. 1988); see also Prudential Lines, Inc. v. Exxon Corp., 704 F.2d 59, 64 (2d Cir. 1983); B.V.D. Licensing Corp. v. Maro Hosiery Corp., 688 F. Supp. 961, 963 (S.D.N.Y. 1988). Moreover, in making such determinations, a court is to employ ordinary contract principles, see Conway v. Icahn & Co., 787 F. Supp. 340, 344 (S.D.N.Y. 1990); Kyung Sup Ahn v. Rooney, Pace Inc., 624 F. Supp. 368, 369 (S.D.N.Y. 1985), and "as with any other contract, the parties' intentions control, but those intentions are generously construed as to issues of arbitrability," Mitsubishi Motors, 473 U.S. at 626.
Despite the preference Congress and the courts have given to arbitration, it is, nonetheless, critical that the parties have explicitly agreed to arbitrate their disputes before such arbitration is compelled by a court. When it is clearly not the intention of the parties to place a given matter within the ambit of the arbitration agreement, a court may not force arbitration upon them. See Chevron U.S.A. Inc. v. Consolidated Edison Co., 872 F.2d 534, 537 (2d Cir. 1989); Gestetner Holdings, PLC v. Nashua Corp., 784 F. Supp. 78, 80 (S.D.N.Y. 1992).
In attempting to determine the scope of arbitration clauses, courts have distinguished clauses that are "broad" in nature from those that are "narrow." See McDonnell Douglas, 858 F.2d at 832. The former purport to refer all disputes arising out of a contract to arbitration, while the latter confine arbitration to specific kinds of disputes. See 758 F. Supp. at 938; Stena Line (U.K.) Ltd. v. Sea Containers Ltd., 758 F. Supp. 934, 938 (S.D.N.Y. 1991).
B. The Plaintiffs' Claims Do Not Arise Under The Arbitration Clause Of The Agreement
The first task of determining whether an agreement to arbitrate exists between the parties is easily accomplished by looking to the Agreement between the Plaintiffs and DAI Connecticut. The arbitration clause set forth in the Agreement states that:
Any controversy or claim arising out of or relating to this contract or the breach thereof shall be settled by Arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association at a hearing to be held in Bridgeport, Connecticut and judgment upon an award rendered by the Arbitrators may be entered in any court having jurisdiction thereof. The commencement of arbitration proceedings by an aggrieved party to settle disputes arising out of or relating to this contract is a condition precedent to the commencement of legal action by either party. The cost of such a proceeding will be borne equally by the parties.