MEMORANDUM OPINION AND ORDER
This cause is before the Court on the Plaintiffs’ motion for summary judgment [# 11] to compel arbitration. Because the Defendant Indian Gold has failed to raise a genuine issue of material fact that would prevent the Court from compelling its claims against Plaintiffs Amstar and Thompson to arbitration under the Grigson principal of equitable estoppel, the motion for summary judgment is granted as to Indian Gold’s claims. Because the Defendant Sharp has raised a genuine issue of material fact to prevent the Court from compelling him to arbitrate his claims against Amstar and Thompson under the Grigson principal of equitable estoppel, the motion for summary judgment is denied as to Sharp’s claims.
FACTUAL BACKGROUND
The underlying dispute in this case arises out of a developer’s attempt to finance the construction of a golf course in Lauderdale County, Mississippi. Indian Gold LLC (“Indian Gold”), the limited liability company attempting to build the course, sought approximately $8,500,000 to fund the project. The managing member of the LLC, Timothy K. Sharp (“Sharp”), represented Indian Gold for all purposes relevant to the suit. In early 2005, Sharp worked with several non-parties that eventually put him into contact with Amstar Mortgage Corporation (“Amstar”) to secure financing for the development.
On January 6, 2005, Indian Gold entered into a client-broker agreement (“the client-broker agreement”) with Amstar to arrange the loan. Amstar was represented at all times relevant to this suit by its agent Jerry R. Thompson (“Thompson”) of the Amstar Mortgage Commercial DM
On January 10, 2005, CMLC sent a “letter of intent to issue a standby forward commitment to provide a future loan” to confirm their participation in the financing. The letter, addressed to Indian Gold and Amstar, instructed Indian Gold to “deposit with the CMLC credit facility the sum of $42,500.00” as a good faith deposit before CMLC would fund the loan. Indian Gold made the preliminary payments to CMLC as requested.
On January 12, 2005, CMLC, Indian Gold, and Amstar signed a non-circumvention agreement, whereby Indian Gold agreed it would not circumvent any loan sources that CMLC introduced to Indian Gold. The agreement also stated that CMLC was not yet guaranteeing financing for the project, and that CMLC would be held harmless from any failure to provide the financing.
On January 21, 2005, the deal finally closed, as CMLC and Indian Gold signed a loan commitment agreement (“the loan agreement”) to provide a loan in the amount of $8,500,000.00. The agreement, signed by Sharp in his capacity as managing member of Indian Gold, contained an arbitration clause stating the following:
Commercial Mortgage Loan Corp., the Borrower, and any parties hereto agree that any and all disputes concerning fees or costs in connection with CMLC’s mortgage products and services shall be submitted to binding arbitration before a retired judge of the Orange County, California Superior Court, who is satisfactory to all parties.
Despite the commitment made by CMLC, the funding for the loan failed to materialize. On March 18, 2005, Thompson sent a letter to Sharp and Indian Gold to “confirm our company’s commitment to fund the above loan.” In that letter, Thompson identified CMLC as “our credit facility” and promised that the loan would close on or before April 29, 2005. Despite the repeated promises made by Amstar on behalf of CMLC, the loan was never funded.
After the loan failed to close, Indian Gold and Sharp filed the underlying proceeding styled
Indian Gold, LLC and Timothy K. Sharp v. Amstar Mortgage Corporation and Jerry Thompson,
2:07cv00084, against Amstar and Thompson, as well as current non-parties Michael Raybourn and his company Magnolia Financial Consultants. The complaint in the underlying proceeding alleges the follow
With the underlying suit still pending, Amstar and Thompson filed this action against Indian Gold and Sharp to compel arbitration under the Federal Arbitration Act. Amstar and Thompson then moved for summary judgment on the merits to compel Indian Gold and Sharp to arbitrate their claims raised in the underlying suit.
On August 20, 2007, this Court denied a motion to remand in the underlying suit by Indian Gold and Sharp, the plaintiffs in that action. Because the Court has determined that it can exercise jurisdiction over the underlying suit, it can now exercise jurisdiction over the complaint to compel arbitration.
Moses H. Cone Mem. Hosp. v. Mercury Const. Corp.,
STANDARD OF REVIEW
Summary judgment is warranted “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Fed.R.Civ.P. 56(c). To support a motion for summary judgment, “the moving party ... [has] the burden of showing the absence of a genuine issue as to any material fact.”
Burleson v. Tex. Dept. of Criminal Justice,
If the movant satisfies its initial burden, then the burden shifts back to the nonmoving party to produce evidence indicating that a genuine issue of material fact exists for each essential element of its case.
Rivera v. Houston Indep. Sch. Dist.,
The Federal Arbitration Act (“FAA”) was enacted to overcome judicial resistance to arbitration by establishing a national policy in favor of arbitration and placing arbitration agreements on the same footing as other contracts.
Buckeye Check Cashing, Inc., v. Cardegna,
In considering whether arbitration should be compelled under the FAA, courts conduct a two-step process.
Banc One Acceptance Corp. v. Hill,
367 F.3d
AGREEMENT TO ARBITRATE
Although the loan agreement contained an arbitration clause, only one Defendant in this action, Indian Gold, signed that agreement. The Plaintiffs in this action, Amstar and Thompson, did not sign the agreement containing the provision, and no agreement signed by Amstar or Thompson contains an arbitration clause. Moreover, Defendant Sharp did not sign any agreement, in his individual capacity, with an arbitration provision. As such, the only writing that can form the basis of the complaint to compel arbitration is the loan agreement, signed by Sharp as managing member of Indian Gold, and by an authorized representative of CMLC.
Because of the unique mix of signatories and non-signatories, this case requires the Court to answer two distinct questions. First, the Court will consider whether the non-signatories Amstar and Thompson can compel the signatory Indian Gold to arbitrate its dispute against them. Second, the Court will consider whether the non-signatories Amstar and Thompson can compel another non-signatory, Sharp, to arbitrate his dispute against them. The Court will examine whether Sharp or Indian Gold have raised any genuine issues of material fact that would prevent the Court from granting summary judgment and compelling their respective claims against Amstar and Thompson to arbitration.
Can the non-signatories Amstar and Thompson compel the signatory Indian Gold to arbitrate?
Arbitration is “a matter of contract between ... parties.”
First Options of Chicago, Inc. v. Kaplan,
The Fifth Circuit first articulated when a non-signatory could compel arbitration in
Grigson v. Creative Artists Agency, LLC,
The purpose of the
Grigson
test is to prevent the nonsignatory from being “liable pursuant to duties imposed by the agreement, which contains an arbitration provision, but, on the other hand, deny arbitration’s applicability because the defendant is a nonsignatory.”
Hill v. G.E. Power Sys., Inc.,
The Court first looks to the direct-benefits prong of
Grigson.
As stated, this case involves a non-signatory plaintiff attempting to compel arbitration against a signatory defendant. The claims asserted by the signatory defendant, Indian Gold, are premised entirely on the loan agreement that contained the arbitration provision.
5
Indian Gold asserts that it was due financing under the loan agreement, and that it suffered substantial losses when that money never materialized. These losses include the $42,500 fee paid to CMLC to secure the loan, as well as over $1 million expended by Indian Gold in reliance on the loan. Because the loan agreement creates the rights that Indian Gold claims were violated, the loan agreement does more than merely “touch matters” in the underlying dispute. In fact, Indian Gold “must rely on the terms of the written agreement in asserting its claims against the nonsignatory,” because without the agreement those claims would not exist.
Hill v. G.E. Power Sys., Inc.,
Indian Gold counters this Grigson direct-benefits analysis by arguing that its claims are premised exclusively on “Amstar and Thompson’s mortgage products and services” and not “CMLC’s mortgage products and services,” the focus of the arbitration provision. They further argue that the wording of the arbitration provision is too narrow to permit the application of equitable estoppel against Indian Gold. The Court finds their reasoning unpersuasive.
First, the narrow wording in the arbitration clause does not demonstrate that the parties meant to prevent the application of equitable estoppel. 7 Although equitable estoppel cannot give non-parties a greater right to arbitration that the parties themselves have, the more restrictive wording of the CMLC clause does not limit its application here. The terminology only suggests that Indian Gold and CMLC ensured that the agreement would apply to disputes between them, and does not suggest that they wanted to preclude their respective ability to estop a third-party from using the contract as both sword and shield. 8 By itself, such narrow wording cannot block the application of equitable estoppel under Grigson.
Next, the sum of Indian Gold’s allegations make their claim that they do not rely on the loan agreement untenable. Indian Gold has articulated no cognizable rights under its clientbroker agreement with Amstar or Thompson, distinct from the loan agreement, that would support an award of damages. The client broker agreement signed by Amstar and Thompson did not guarantee financing, so it could not support damages if financing fell through. And because the complaint is generally averred against all defendants, even though CMLC is not a named defendant, the Court cannot see these general allegations as being a complaint distinct or separate from CMLC’s mortgage products and services.
Finally, Indian Gold advances the theory that CMLC was “fabricated” by Amstar and Thompson to perpetuate a fraud, or was “concocted” by Amstar and Thompson for an illegal purpose. If CMLC was the
alter ego
of Amstar and Thompson, then
Finding the direct-benefits prong satisfied, the Court next applies the
Grigson
concerted misconduct prong.
9
As stated above, Indian Gold and Sharp raise allegations of substantially interdependent and concerted misconduct by the signatory CMLC and the non-signatories Amstar and Thompson. First, the complaint in the underlying action is generally averred against all defendants, making it impossible for the Court to separate out the culpable actor in each count.
10
Second, the complaint is littered with references of substantially interdependent and concerted misconduct by CMLC, Amstar, and Thompson, the latter two accused of colluding with the former for fraudulent purposes. Indian Gold goes even further than collusion in asserting that CMLC was “fabricated ... in furtherance of the fraud” against Indian Gold and Sharp.
11
Combining the above, the Court finds that the alleged activity of CMLC cannot be severed from that of Amstar or Thompson, and hence the concerted-misconduct prong of
Grigson
is satisfied.
See Brown v. Pacific Life Ins. Co.,
Although the two
Grigson
tests help the Court apply equitable estoppel, the Fifth Circuit has identified “fairness” as the “linchpin” of the inquiry.
Grigson,
Aside from the Grigson tests, the Defendants argue that allegations of fraud prevent the application of equitable estoppel to compel arbitration. First, they assert that the Plaintiffs in this ease come to the court with unclean hands, which precludes application of the equitable doctrine in their favor. Yet permitting allegations of fraud to undercut the arbitration provision would make the contract meaningless, as any allegation of fraud would prevent a signatory from being compelled to ever arbitrate their dispute with either a signatory or non-signatory. With no guidance from appellate courts on this issue, the Court cannot find it sufficient to undermine the Grigson application.
Moreover, the notion of denying arbitration based on the generic fraud claim cuts against consistent Supreme Court authority, holding that “unless the challenge is the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator in the first instance.”
Buckeye Check Cashing, Inc. v. Cardegna,
Can the non-signatories Amstar and Thompson compel to arbitration the claims of another non-signatory, Sharp?
Next, the Court must examine whether a non-signatory can compel another non-signatory to arbitration. Indian Gold and Sharp assert that a non-signatory cannot compel another nonsignatory to arbitration, and hence Sharp cannot be compelled to arbitrate his dispute with Amstar and Thompson. In response, Amstar and Thompson cite two cases that they claim stand for the proposition that a non-signatory can compel another non-signatory to submit their dispute to arbitration. Upon a careful analysis of this authority, the Court concludes that neither case is on point with the facts of this action. 13
But Bailey diverges from the current case in that the arbitration clause used there was significantly broader. That arbitration clause specifically encompassed “any third party involved” and claims or controversies between the lender, borrower, and “third parties who are not signatories to this loan agreement” to the extent permitted by law. The Bailey court did not discuss precisely how the non-signatory insurance companies were able to get their disputes into arbitration against the non-signatory wife, but this Court reads Bailey for the proposition that the broader arbitration clause permitted the appeals court to make the finding.
A similar analysis applies to the second authority cited by Amstar and Thompson,
Blinco v. Green Tree Servicing, LLC,
the language of the arbitration clause at issue is broad enough to permit both Green Tree entities to invoke it, regardless of their signatory status .... [b]e-cause the [non-signatory] claims derive from a ‘relationship’- that ‘results from’ the Note (i.e., loan servicing), the arbitration clause easily encompasses both Green Tree Servicing and Green Tree Investment as alleged servicers of the Note.
Id. at 1312.
The Court is aware of no authority on point that would permit it to compel Sharp’s claims against Amstar and Thompson to arbitration. In both
Blinco
and
Bailey,
the non-signatory that was attempting to compel arbitration against the
Moreover, in the same way that the fairness inquiry of
Grigson
permits the Court to apply equitable estoppel against Indian Gold, it makes it impossible to do the same with Sharp.
See Bridas,
The Court cannot say, at this stage of the proceedings, what claims Sharp has in his individual capacity against Amstar and Thompson that are distinct from Indian Gold’s claims arising out of the loan agreement. Therefore, it cannot say that his claims are solely those that arise out of the CMLC loan agreement. Second, Sharp did not sign the loan agreement containing the arbitration provision, and that provision was not broad enough to explicitly cover third-parties and their claims against the CMLC entities. Therefore, Sharp has successfully raised a genuine issue of material fact as to whether he should be forced to submit his claims against Amstar and Thompson to arbitration, making summary judgment on that issue improper.
THE DISPUTE FALLS WITHIN THE AGREEMENT
The claims asserted by Indian Gold fall squarely within the arbitration clause of the loan agreement. The clause encompasses “fees or costs in connection with CMLC’s mortgage products and services.” Despite being lodged only against Amstar and Thompson, the heart of the complaint deals with the alleged failure of CMLC to deliver financing for the Indian Gold project. Because the arbitration clause precisely covers these facts, the dispute falls within the arbitration agreement.
The Defendants are wrong to assert an automatic entitlement to a jury trial on the issue of arbitrability. The Fifth Circuit has held that “although the FAA permits parties to demand a jury trial to resolve factual issues surrounding the making of an arbitration agreement ... it is well-established that ‘[a] party to an arbitration agreement cannot obtain a jury trial merely by demanding one.’ ”
Amer. Heritage Life Ins. Co. v. Orr,
CONCLUSION
Although Amstar and Thompson were not signatories to the agreement containing the arbitration clause, the Court concludes that the principals of equitable estoppel as articulated in Grigson should be applied to compel Indian Gold to arbitrate its dispute against Amstar and Thompson. The defendant Indian Gold has not raised a genuine issue of material fact to prevent summary judgment on this issue.
However, the Court cannot extend the holding of Grigson to compel two non-signatories to arbitration, and hence cannot compel Sharp to arbitrate his dispute against Amstar and Thompson. The defendant Sharp has raised a genuine issue of material fact to prevent summary judgment on this issue.
IT IS THEREFORE ORDERED AND ADJUDGED that the Plaintiffs’ motion for summary judgment as to Defendant Indian Gold is granted.
IT IS FURTHER ORDERED AND ADJUDGED that the Plaintiffs’ motion for summary judgment as to Defendant Timothy Sharp is denied.
SO ORDERED AND ADJUDGED.
Notes
. As discussed infra, the Court remains unclear as to organization of CMLC and the relationship between CMLC and the named parties, particularly Amstar and Thompson. In the complaint in the underlying proceeding, CMLC is referred to as "a commercial lender located in San Juan Capistrano, California.” Indian Gold and Sharp later advanced the theory that CMLC is merely an alter ego of Amstar and Thompson, and the latter parties have not actively disputed this contention. Thompson has also referred to CMLC in correspondence as "our credit facility.” The Court interprets the evidence as submitted to determine that CMLC is a corporation closely affiliated with Amstar, and operates in concert with Amstar for purposes relevant to this action. The Court further determines that the precise corporate status of CMLC is immaterial for its consideration of the summary judgment motion.
. The Fifth Circuit has written that "an agreement to arbitrate is a waiver of valuable right's that are both personal to the parties and important to the open character of our state and federal judicial systems — an openness this country has been committed to from its inception.”
Westmoreland v. Sadoux,
. In
Grigson
the Fifth Circuit adopted a test espoused by the Eleventh Circuit in
MS Dealer Serv. Corp. v. Franklin,
. If neither basis to apply equitable estoppel exists, the Fifth Circuit has refused to permit district courts to do so.
Westmoreland v. Sadoux,
. When the claims alleged are not premised on the underlying agreement, other circuits have refused to apply equitable estoppel.
See Brantley v. Republic Mortg. Ins. Co.,
.The complaint alleges generally that the "Defendants breached their contractual agreement” to provide the $8.5 million in financing, and that the "Defendants fraudulently concealed from the Plaintiffs that they never had any intention of procuring and providing financing.” Both of these claims
. In
MS Dealer,
the Eleventh Circuit did not prevent application of equitable estoppel of tort claims against a non-signatory service corporation, when the provision limited disputes “between the buyer and Jim Burke Motors, Inc., arising out of or in connection with the purchase of this vehicle.”
MS Dealer Serv. Corp. v. Franklin,
. See
Meyer v. WMCO-GP, LLC,
. In a recent opinion, the Texas Supreme Court interpreted
Grigson
and its progeny in federal arbitration law to hold that only a showing of the concerted-misconduct prong is insufficient to compel arbitration.
In re Merrill Lynch Trust Co. FSB,
. This ambiguity is exacerbated by the failure of Indian Gold or Amstar to better define the relationship between Amstar and CMLC. Despite any attempt by Indian Gold to articulate a distinct or severable claim against Amstar unrelated to CMLC, the Court finds that “the heart of each claim is the plaintiff's allegation that all the defendants acted in concert to fraudulently” injure him.
Jureczki v. Banc One Texas, N.A.,
. The fact that Amstar or Thompson might be agents of CMLC is not itself enough to compel arbitration, as "a nonsignatory cannot compel arbitration merely because he is an agent of one of the signatories.”
Westmoreland v. Sadoux,
.When the claims do not involve concerted conduct, district courts have refused to compel arbitration under the
Grigson
analysis.
See Celanese Corp. v. Boc Grp. PLC,
. The application of equitable estoppel by a non-signatory against a signatory has been controversial since its inception.
See
Frank Z. LaForge,
Inequitable Estoppel: Arbitrating with Non-Signatory Defendants Under Grigson
v.
Creative Artists,
84 Tex. L.Rev. 225 (2005). The short history of the doctrine has seen its application expand beyond traditional contract principals and begin to threaten the basic principal that a party cannot be compelled
. The purpose of the FAA was "to place arbitration agreements on equal footing with other contracts ... [and] not [to] require parties to arbitrate when they have not agreed to do so.”
EEOC v. Waffle House, Inc.,