ROBERT BRUCE FREDERICK, Plaintiff-Appellant, v. SUN 1031, LLC, H. RAY KNIGHT, and NAI THE VAUGHAN COMPANY, Defendants-Appellees, and SUN BYRON, LLC, SUN SHELBY, LLC, and SUN TIFFANY, LLC, Third-Party Defendants-Appellees.
Docket No. 30,967
IN THE COURT OF APPEALS OF THE STATE OF NEW MEXICO
October 22, 2012
2012-NMCA-118
APPEAL FROM THE DISTRICT COURT OF BERNALILLO COUNTY, Clay Campbell, District Judge
Santa Fe, NM
Pro Se Appellant
Beall & Biehler
Peter Grueninger
Gregory L. Biehler
Albuquerque, NM
for Appellee Sun 1031, LLC
H. Ray Knight
Phoenix, AZ
Pro Se Appellee
NAI The Vaughan Company
Albuquerque, NM
Pro Se Appellee
Steve Henry
Corrales, NM
for Appellees Sun Byron, LLC, Sun Shelby, LLC, and Sun Tiffany, LLC
OPINION
WECHSLER, Judge.
{1} Plaintiff Robert Frederick appeals two district court orders: (1) an order denying his motion to strike Defendant Sun 1031, LLC‘s (1031) third-party complaint and (2) an order granting 1031‘s and Third-Party Defendants’ Sun Byron, LLC, Sun Shelby, LLC, and Sun Tiffany, LLC (collectively, Byron, Shelby, and Tiffany) motion to compel arbitration. Frederick argues that (1) the district court erred by denying his motion to strike 1031‘s third-party claim because the third-party complaint failed to state a valid claim under
BACKGROUND
{2} Frederick commenced this action on March 27, 2009 by filing a complaint against H. Ray Knight (Knight), 1031, and NAI the Vaughan Company (Vaughan) (collectively, Defendants), alleging violations of state and federal securities laws, fraud, negligent misrepresentation, and civil conspiracy. Frederick thereafter amended his complaint to allege only violations of the New Mexico Securities Act of 1986,
{3} In the amended complaint, Frederick alleges that 1031, an Arizona limited liability company, offered certain investment packages to the public, that Knight served as 1031‘s broker, and that Vaughan is a New Mexico corporation that marketed the investment packages to sell to New Mexico buyers. The investment packages consisted of fractional, undivided, tenancy-in-common interests in income-producing real property coupled with other collateral arrangements that include property management, financing, market analysis, and other essential investment services for the properties. Frederick invested $450,000 total in three properties. As to each of the three properties, 1031 created a separate limited liability company to act as the seller of the real property. Frederick purchased interests in (1) the Byron Town Center in Minnesota from Sun Byron, LLC; (2) the Shelby Crossing Shopping Center in Tennessee from Sun Shelby, LLC; (3) the Tiffany Center in Missouri from Sun Tiffany, LLC.
{4} Frederick alleges that the investment packages are an “investment contract” under the Securities Act. Although Frederick acknowledges that the offer and sale of real estate, without more, does not constitute an investment contract under the Securities Act, he asserts that the investment packages in this case are investment contracts because they consist of a real property interest coupled with collateral arrangements including property management. He alleges that Defendants committed six violations of the Securities Act by: (1) acting as broker-dealers without being licensed, (2) acting as investment advisors without being licensed, (3) offering unlicensed securities (the investment contracts) for sale, (4) engaging in securities fraud by inducing Frederick to rely on information about the investment packages that was false, misleading, and incomplete, (5) making untrue statements of material fact and misleading omissions of material fact in offering the investment packages, and (6) collectively engaging in a conspiracy to commit these violations of the Securities Act.
{5} 1031 answered the amended complaint, asserting an affirmative defense that Frederick‘s claims were subject to the arbitration clauses in the purchase agreements. 1031 also filed a third-party complaint against Byron, Shelby, and Tiffany. Frederick moved to strike 1031‘s third-party claim, arguing that 1031 and Byron, Shelby, and Tiffany were in collusion and that 1031‘s third-party complaint failed to state a valid claim under
{6} Thereafter Byron, Shelby, and Tiffany filed a motion to compel arbitration on all disputes, arguing that arbitration should be ordered because 1031 impleaded Byron, Shelby, and Tiffany for indemnity for claims “arising under, out of or relating to” the purchase agreements between Byron, Shelby, and Tiffany and Frederick. 1031 joined in the motion.
{7} The district court held a hearing and subsequently issued an order granting the motion to compel arbitration, stating that “[Frederick] is hereby ordered to arbitrate all of his claims in this matter against . . . 1031 . . . in accordance with the purchase agreements entered into by [Frederick] and [Byron, Shelby, and Tiffany].” Although the district court initially indicated that it was only sending the parties participating in the briefing and the hearing to participate in the arbitration, it later denied Frederick‘s motion for reconsideration, sending “all parties into arbitration[,]” including Vaughan and Knight.
{8} On appeal, Frederick argues that the district court erred by denying its motion to strike 1031‘s third-party claim because Defendant‘s third-party complaint failed to state a valid claim under
RULE 1-014
Motion to Strike
{9} We first address Frederick‘s argument that the district court erred by denying the motion to strike 1031‘s third-party complaint because Defendant failed to state a valid claim against Byron, Shelby, and Tiffany under
{10} The relevant portions of
{11} The relevant portions of the third-party complaint state that:
3. [Frederick] alleges in his [f]irst [a]mended [c]omplaint that the tenants-in-common interests purchased from . . . Byron, . . . Shelby and . . . Tiffany are securities subject to statutory requirements under the . . . Securities Act. [Frederick] further requests as relief that . . . Defendants grant, assign and transfer all property, including his TIC interests to . . . Defendants and pay to [Frederick] $450,000, plus interest from the date of his purchase of the TIC interests less any net income received by him.
4. . . should [Frederick] recover on any of the claims he makes, . . . 1031 . . . is entitled to indemnity from . . . Byron, . . . Shelby and . . . Tiffany as the sellers of the tenants-in-common interests at issue in
this matter and entities which received payment from [Frederick].
1031 characterizes its claim against Byron, Shelby, and Tiffany as one seeking proportional indemnification, a theory recognized by our Supreme Court in In re Consol. Vista Hills Retaining Wall Litig., 119 N.M. 542, 551, 893 P.2d 438, 447 (1995) and Yelin, 119 N.M. at 556, 893 P.2d at 452, or, alternatively, as one seeking traditional equitable indemnification.
{12} 1031 argues that its claim for proportional indemnification is valid in that it seeks indemnification to the extent that Byron, Shelby, and Tiffany sold the real property interests to Frederick and received the consideration paid by Frederick for his alleged securities. It characterizes its proportional indemnification claim as “seek[ing] no more than a comparative assignment of any liability for [Frederick‘s] claims between [1031] and [Byron, Shelby, and Tiffany].” As stated during oral argument, 1031 alleges that if the sale was improper, Byron, Shelby, and Tiffany should be liable for their part in it.
{13} Generally “proportional indemnification allows a defendant to seek partial recovery from another for his or her fault.” N.M. Pub. Sch. Ins. Auth. v. Arthur J. Gallagher & Co., 2008-NMSC-067, ¶ 23, 145 N.M. 316, 198 P.3d 342. In In re Consol. Vista Hills Retaining Wall Litig., 119 N.M. at 551, 893 P.2d at 447, our Supreme Court noted that “[p]roportional indemnification has its genesis in jurisdictions that did not adopt a system of contribution among tortfeasors” and “[i]n most cases the adoption of proportional indemnification has followed [the] adoption of comparative fault.” Id. The Court adopted proportional indemnification in limited circumstances and held that “proportional indemnification applies only when contribution or some other form of proration of fault among tortfeasors is not available.” Id. at 552-53, 893 P.2d at 448-49. Under these principles, a properly-pled proportional indemnification claim must allege that the indemnitee caused some harm and is partially liable for claims made against the indemnitor. See Christus St. Vincent Reg‘l Med. Ctr. v. Duarte-Afara, 2011-NMCA-112, ¶ 14, 267 P.3d 70 (stating that, in order to state a claim for proportional indemnification, “the indemnitor must be at least partly liable to the original plaintiff for his or her injuries” (internal quotation marks and citation omitted)), cert. granted, 2012-NMCERT-__, __ P.3d __ (No. 33,166, Oct. 12, 2011).
{14} 1031 also appears to argue that its third-party complaint stated a complaint for traditional equitable indemnification. See N.M. Pub. Sch. Ins. Auth., 2008-NMSC-067, ¶ 23 (stating that New Mexico recognizes “both traditional and proportional equitable indemnification“). “Traditional indemnification grants the person who has been held liable for another‘s wrongdoing an all-or-nothing right of recovery from a third party, such as the primary wrongdoer.” Christus St. Vincent Reg‘l Med. Ctr., 2011-NMCA-112, ¶ 14 (internal quotation marks and citation omitted). “[O]ur Supreme Court has explained that [in order] to state a claim for equitable indemnification, the indemnitor must be at least partly liable to the original plaintiff for his or her injuries. In other words, a properly pled indemnity claim must allege that the defendant [or indemnitor] caused some direct harm to a third party and that the plaintiff or [indemnitee] discharged the resulting liability from this harm.” Id. (alteration, internal quotation marks, and citations omitted).
{15} In this case, 1031‘s third-party complaint did not state an adequate claim for proportional or traditional indemnification against Byron, Shelby, and Tiffany. The third-party complaint does not allege that Byron, Shelby, and Tiffany are wholly or partially liable to Frederick for the violations of the Securities Act that Frederick alleges against Defendants in the complaint. The only allegations contained in the third-party complaint are that Byron, Shelby, and Tiffany were the sellers of the real property interests that, when coupled with the investment packages, comprised the alleged securities sold to Frederick, and that, as a result, Defendants are entitled to indemnity. The third-party complaint does not allege the manner in which Byron, Shelby, and Tiffany are liable to Frederick for his Securities Act
Defenses Available to Byron, Shelby, and Tiffany
{16} Although we conclude that Byron, Shelby, and Tiffany were not proper parties in this action, we address Frederick‘s argument that Byron, Shelby, and Tiffany‘s motion to compel arbitration was improper because it was based on an affirmative defense unavailable to 1031 and the other Defendants. In Frederick‘s view, a third-party defendant under
{17} “When construing our procedural rules, we use the same rules of construction applicable to the interpretation of statutes.” Allen v. LeMaster, 2012-NMSC-001, ¶ 11, 267 P.3d 806. “We first look to the language of the rule.” In re Michael L., 2002-NMCA-076, ¶ 9, 132 N.M. 479, 50 P.3d 574. “If the rule is unambiguous, we give effect to its language and refrain from further interpretation. We also seek guidance from the rule‘s language, history, and background.” Allen, 2012-NMSC-001, ¶ 11 (internal quotation marks and citations omitted). Further, we look to interpretations of
{18} We begin by examining the plain language of
[t]he third-party defendant may assert against the plaintiff any defenses which the third-party plaintiff has to the plaintiff‘s claim. The third-party defendant may also assert any claim against the plaintiff arising out of the transaction or occurrence that is the subject matter of the plaintiffs claim against the third-party plaintiff. The plaintiff may assert any claim against the third-party defendant arising out of the transaction or occurrence that is the subject matter of the plaintiffs claim against the third-party plaintiff, and the third-party defendant thereupon shall assert his defenses . . . and his counterclaims and cross-claims[.]
{19} Frederick did not assert any claims against Byron, Shelby, and Tiffany, and they did not assert any claims against Frederick. Thus,
{20} Our reading is consistent with the derivative nature of impleader under
{21} Our reading is also consistent with the purposes of
{22} Although our New Mexico appellate courts have yet to consider the extent that a third-party defendant can assert a defense to the plaintiffs claim that is not available to the defendant, several federal courts and other states with analogous rules have concluded that a third-party defendant is limited to defenses available to the defendant under procedural rules similar to
{23} Similarly, in Minnesota Landmarks v. M.A. Mortenson Co., 466 N.W.2d 413, 415 (Minn. Ct. App. 1991), the court addressed a comparable provision to
{24} Based on the plain language of
1031‘S INDEPENDENT RIGHT TO COMPEL ARBITRATION
{25} Defendants argue that even if “[Byron, Shelby, and Tiffany‘s] arbitration defense is only available if it is available to . . . 1031, such a defense is available to . . . 1031” under an equitable estoppel theory. “[W]e review the applicability and construction of a provision requiring arbitration de novo.” Santa Fe Techs., Inc. v. Argus Networks, Inc., 2002-NMCA-030, ¶ 51, 131 N.M. 772, 42 P.3d 1221; see also Murken v. Suncor Energy, Inc., 2005-NMCA-102, ¶ 5, 138 N.M. 179, 117 P.3d 985 (“We review a district court‘s grant of a motion to compel arbitration de novo.“).
{26} Generally, a third-party who is not a signatory to an arbitration agreement is not bound by the agreement and therefore is not subject to, and cannot compel, arbitration. Horanburg v. Felter, 2004-NMCA-121, ¶ 16, 136 N.M. 435, 99 P.3d 685. However, as we recognized in Horanburg, a “line of federal cases finds exceptions to the general rule that a non-signatory cannot compel arbitration based on principles of equitable estoppel under two circumstances: (1) when a signatory to the agreement must rely on the terms of the agreement in making a claim against a non-signatory; or (2) when a signatory alleges [substantial interdependence] and concerted misconduct by both another signatory and a non-signatory, making arbitration between signatories meaningless.” Id. ¶ 17. However, because the facts in Horanburg did not support the application of either exception, we declined to decide whether New Mexico recognizes equitable estoppel to compel arbitration. Id. ¶ 18.
{27} 1031 argues that the first exception discussed in Horanburg applies because “Frederick‘s claims are clearly intertwined
{28} Although we agree with 1031 that the purchase of real property is essential to Frederick‘s claim that the investment package is a security, the terms of the purchase agreements or even the existence of the purchase agreements are not essential to prove the sale of the property. Courts that have applied equitable estoppel to allow a non-signatory to compel arbitration have required a closer nexus between the claims and the arbitration agreement‘s terms. For example, in Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524, 526 (5th Cir. 2000), the agreement containing the arbitration clause was a distribution agreement for the distribution rights to a film. The plaintiff, the trustee for the owners of the film, sued the distributor after the distributors gave the film a limited distribution. Id.. The distributor sought to compel arbitration under the distribution agreement, and the plaintiff voluntarily dismissed his suit. Id.. A few months later, the plaintiff again filed suit, this time joined by the distributor and producers, against an actor and his agency firm. Id.. The defendants moved to compel arbitration, even though they were non-signatories to the distribution agreement. Id.. The Fifth Circuit held that arbitration was proper because the “claims are intertwined with, and dependent upon, the distribution agreement, including, but not limited to, [the d]efendants [and a signatory defendant] being charged with interdependent and concerted misconduct.” Id. at 531. According to the Fifth Circuit, the claims were intertwined because the ultimate success of the complaint “turns on the meaning of the distribution agreement‘s numerous—often intricate—provisions[.]” Id. at 530. In other words, the cause of action required that the case be resolved by referencing and interpreting the distribution agreement.
{29} In this case, the terms of the purchase agreements are not relevant to Frederick‘s claims. The alleged Securities Act violations do not hinge on the terms of, or require the interpretation of, the purchase agreements. Indeed, Frederick could prove that the investment package is a security under the Securities Act without entering the purchase agreement into evidence, as long as he adequately proves the sale of the real estate interests, because Frederick‘s claims in this case are not derived from or intertwined with the agreement containing the arbitration clause; and, equitable estoppel does not apply. See Horanburg, 2004-NMCA-121, ¶ 18 (holding that equitable estoppel was not appropriate because the “[p]laintiff‘s claims . . . are not alleged to be derived from the agreement” containing the arbitration clause).
{30} Further, the second exception discussed in Horanburg, when a signatory alleges substantial interdependence and concerted misconduct by both another signatory and a non-signatory, does not apply under the facts of this case. See id. ¶ 17. The courts that have applied this exception have generally required that the party being estopped from denying arbitration have alleged substantial and concerted misconduct by another signatory and non-signatory. For example, in MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942, 944 (11th Cir. 1999), abrogated on other grounds as recognized by Lawson v. Life of the South Ins. Co., 648 F.3d 1166 (11th Cir. 2011), the plaintiff entered into a buyer‘s order to purchase a vehicle from a dealership. The buyer‘s order contained an arbitration clause. Id.. The plaintiff sued the dealership and a company not a party to the buyer‘s order (non-signatory) with which the dealership required the plaintiff to enter into a service contract. Id.. The complaint alleged that the dealership and the non-signatory “improperly cooperated, conspired and otherwise colluded” to defraud the plaintiff by charging an excessive fee for the service contract. Id. at 945. The Eleventh Circuit held that the plaintiff was estopped from avoiding arbitration with the non-signatory and therefore compelled arbitration. Id. at 947. It reasoned that the plaintiffs claims alleged a conspiratorial relationship between
{31} In this case, Frederick‘s complaint does not allege any interdependent or concerted misconduct between 1031 and Byron, Shelby, and Tiffany. Even assuming that 1031 alleged collusion with Byron, Shelby, and Tiffany in its third-party complaint, the allegations in 1031‘s third-party complaint are not relevant to the claims between 1031 and Frederick for purposes of this exception. See Murken, 2005-NMCA-102, ¶ 11 (holding that conduct “alleged by the plaintiffs . . . is not relevant” in determining whether there was substantially interdependent and concerted misconduct between the third-party defendant and the defendant in a case in which the third-party defendant moved to compel arbitration).
{32} Equitable estoppel does not provide a means for 1031 to compel arbitration with Frederick. The district court erred by granting Byron, Shelby, and Tiffany‘s and 1031‘s motion to compel arbitration.
CONCLUSION
{33} The district court erred by denying Frederick‘s motion to strike because the third-party complaint did not adequately plead an indemnity claim. Additionally, the district court erred by granting Defendant‘s and Byron, Shelby, and Tiffany‘s motion to compel arbitration. Accordingly, we reverse both district court orders.
{34} IT IS SO ORDERED.
JAMES J. WECHSLER, Judge
WE CONCUR:
MICHAEL D. BUSTAMANTE, Judge
RODERICK T. KENNEDY, Judge
Topic Index for Frederick v. Sun 1031, LLC, No. 30,967
APPEAL AND ERROR
Standard of Review
CIVIL PROCEDURE
Arbitration
Civil Procedure, General
Estoppel
Third-party Actions
CIVIL PROCEDURE
Arbitration
REMEDIES
Arbitration
STATUTES
Interpretation
Legislative Intent
Rules of Construction