Opinion
CIVIL ACTION NO. 3:02-CV-1767-K
April 23, 2003
MEMORANDUM ORDER
Before the court are the following motions: (1) the motion of the defendants Vance Vinar, Sr. ("Vinar"), Barbara A. Vinar ("Barbara"), and Cable Connection Supply Company, Inc. ("Cable Connection") (collectively, "the defendants") for a plea in abatement pending arbitration; (2) the motions of the plaintiff Vetco Sales, Inc. ("Vetco") and the third-party defendant Troy Murphy ("Murphy") to dismiss the defendants' counterclaims for failure to state a claim or, in the alternative, for a more definite statement; and (3) the motion of Murphy to dismiss for failure to plead fraud with particularity. For the reasons discussed below, the motion of the defendants is DENIED. The motions of Vetco and Murphy to dismiss for failure to state a claim are also DENIED but their motions for a more definite statement are GRANTED. Murphy's remaining motion is DENIED as moot.
Factual Background
Vetco and Cable Connection sell telecommunication products. Vetco is owned by Murphy and Cable Connection is owned by Vinar and Barbara. On October 18, 1999, Murphy — hoping to secure additional capital — sold Vinar a 49% ownership interest in Vetco and gave Vinar a seat on the board of directors. According to Vetco, following the execution of the Shareholder Agreement, disputes arose among Vetco, Cable Connection, Vinar, and Murphy regarding the management, bookkeeping, and administration of Vetco.
Unable to resolve these disputes, Vetco, Murphy, Vinar, and Cable Connection agreed to end their business relationship. On April 26, 2002, Vinar sold his Vetco ownership interest back to Murphy and relinquished his seat on Vetco's board of directors. According to the plaintiffs, the defendants materially breached the Buyout Agreement by failing to provide adequate administrative services during a contractually defined transition period and by refusing to deliver certain records and other property. On July 19, 2002, Vetco sued in a Texas state court. On August 16, 2002, the defendants filed a counterclaim, removed this case to this Court, and moved to compel arbitration.
Defendants' Motion for Plea in Abatement Pending Arbitration Applicable Law
In considering whether a dispute is subject to binding arbitration, the first step a court must take "is to determine whether the parties agreed to arbitrate that dispute." Mitsubishi Motors Corporation v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985). In general, this determination is made by "applying the federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the [Federal Arbitration] Act." Id. (quoting Moses H. Cone Memorial Hospital v. Mercury Construction Corporation, 460 U.S. 1, 24 (1983)) (internal citations omitted). Here, the court sees no reason not to apply federal law in its analysis of whether this case is subject to arbitration. Neither party has argued that the Federal Arbitration Act ("FAA") does not apply to this dispute and the case appears to come within the FAA's purview. See 9 U.S.C. § 1, et seq.
Legal Standard
Federal law strongly favors arbitration. Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 56 (1995) (the FAA "declared a national policy favoring arbitration.") (quoting Southland Corporation v. Keating, 465 U.S. 1, 10 (1984)); Moses H. Cone Memorial Hospital, 460 U.S. at 24-25 ("The Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability."). Consequently, the FAA, by its terms, "leaves no place for the exercise of discretion by a district court, but instead mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed." Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218 (1985).
To decide whether parties should be compelled to arbitrate their dispute, the Fifth Circuit has developed a two-prong inquiry. OPE International LP. v. Chet Morrison Contractors, Inc., 258 F.3d 443, 445-46 (5th Cir. 2001). The first prong requires the court to determine whether "the parties agreed to arbitrate their dispute." Id. at 445. Two considerations guide the court in resolving this determination: (1) whether a valid agreement to arbitrate exists between the parties; and (2) whether the dispute is within the scope of the arbitration agreement. Id. Under the second prong, the court must ensure that no legal restraints external to the agreement have foreclosed arbitration. Id. If the court finds this two-prong inquiry is satisfied, arbitration is mandatory. Mitsubishi Motors, 473 U.S. at 628. Here, the court's analysis need only reach the first prong.
Agreement to Arbitrate their Dispute?
The determinative issue in the defendants' motion to compel arbitration is whether the arbitration clause contained in the Shareholder Agreement applies to Vetco's claims. Arguing in the affirmative, the defendants' motion to compel arbitration boldly quotes, without further support, the entire arbitration clause contained in the Shareholder Agreement. Vetco counters that its claims fall outside the scope of the arbitration clause and, moreover, that the arbitration clause was rendered inoperative by the Buyout Agreement, which itself does not contain an arbitration clause. Resolving this dispute is a matter of contract interpretation.
The court must interpret whether a contract's arbitration clause applies to a given dispute. ATT Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 649 (1986). The court's interpretative function must be carried out with appropriate deference to the federal policy that favors arbitration over litigation and requires arbitration clauses to be construed generously, in favor of arbitration. Southland Corporation v. Keating, 465 U.S. 1, 10-11 (1984); ASW Allstate Painting Construction Company, Inc. v. Lexington Insurance Company, 188 F.3d 307, 311 (5th Cir. 1999) ("[T]he party opposing arbitration bears the burden of proving that no valid arbitration agreement exists as to the dispute.") (construing Texas law). However, despite judicial deference to arbitration, a party may not be required to arbitrate a dispute it did not agree to arbitrate, Neal v. Hardee's Food Systems, Inc., 918 F.2d 34, 37 (5th Cir. 1990), and the controversy must come within the contract's arbitration provision before the court can order arbitration. Explo, Inc. v. Southern Natural Gas Company, 788 F.2d 1096, 1098 (5th Cir. 1986).
The defendants point to the arbitration clause in the Shareholder Agreement, which mandates arbitration of "[e]ach dispute, claim and controversy (whether arising during or after the term hereof) arising out of this Agreement or breach thereof (including but not limited to the validity of the agreement to arbitrate and the arbitrability of any matter) shall be settled, upon demand and written notice by an arbitrator agreed upon by the parties." Shareholder Agreement ¶ 8.1 (emphasis added). To assist in determining the scope of an arbitration clause, courts have distinguished between "narrow" and "broad" arbitration clauses. Pennzoil Exploration and Production Company v. Ramco Energy Limited, 139 F.3d 1061, 1067 (5th Cir. 1998) (citing Tracer Research Corp. v. National Envtl. Svcs. Co., 42 F.3d 1292, 1295 (9th Cir. 1994), cert. dismissed, 515 U.S. 1187 (1995)). When an arbitration clause requires arbitration of disputes "arising out of" the agreement, the arbitration clause is deemed narrow and correspondingly restricts arbitration to those disputes that literally arise from the contract. Pennzoil Exploration, 139 F.3d at 1067; see, e.g., Coffman v. Provost * Umphrey Law Firm, LLP, 161 F. Supp.2d 720, 725 (E.D. Tex. 2001) (holding that phrase "arising out of," absent broader language, requires arbitration of only those claims that literally arise under the contract); Beckham v. William Bayley Company, 655 F. Supp. 288, 291 (N.D. Tex. 1987) (ruling the absence of a standard broad arbitration clause demonstrates the parties' intent to limit arbitration to a narrow scope). Conversely, when an arbitration clause contains the language "in connection with" or "relating to," the arbitration clause is characterized as broad. Pennzoil Exploration, 139 F.3d at 1067. A broad arbitration clause encompasses "all disputes between the parties having a significant relationship to the contract regardless of the label attached to the dispute." Id. (footnote omitted); see, e.g., Bloxom v. Landmark Publishing Corporation, 184 F. Supp.2d 578, 583-84 (E.D. Tex. 2002).
Here, because the arbitration clause of the Shareholder Agreement employs only the language "arising out of" without the broader terms "in connection with" or "relating to," the arbitration clause is a narrow clause, applying only to those disputes that literally arise from the Shareholder Agreement. See United Offshore Company v. Southern Deepwater Pipeline Company, 899 F.2d 405, 409-410 (5th Cir. 1990). Because the parties intended the Shareholder Agreement's arbitration clause to have a narrow scope that applies only to those disputes related to the Shareholder Agreement's subject matter, the court must now determine whether Vetco's claims relate to that subject matter.
The Shareholder Agreement's arbitration clause is interpreted according to contract principles and enforced according to its plain meaning. See Neal, 918 F.2d at 37. The defendants assert that the Buyout Agreement arose out of the Shareholder Agreement and thus should be viewed as "inexorably intertwined with the Shareholders' Agreement." After a careful analysis of the entire Shareholder Agreement, however, the Court finds this agreement was executed solely to delineate the restrictions governing Vetco stock. See Neal, 918 F.2d at 37. Indeed, the Shareholder Agreement's preamble states, "Vinar and Murphy desire to enter into an agreement providing for the restrictions on [the] transfer of the shares of [Vetco] on the death of or sale by a shareholder, and to provide for the management and control of [Vetco]." This specific purpose, coupled with the narrow scope of the Shareholder Agreement's arbitration clause, limits the arbitration clause's applicability to only those disputes arising from restrictions governing Vetco stock. And a review of Vetco's claims in this case demonstrates that none of Vetco's causes of action implicate the restrictions imposed by the Shareholder Agreement. Compare Complaint ¶¶ 74-108, with Shareholder Agreement ¶ 8.1. Therefore, because the Shareholder Agreement's arbitration clause is a creature of contract and may not be stretched beyond the scope intended by the parties, see E.E.O.C. v. Waffle House, Inc., 534 U.S. 279, 294 (2002), this Court concludes that Vetco's claims fall outside the scope of the arbitration clause and are accordingly not subject to arbitration.
Vetco's and Murphy's Motion to Dismiss the Defendants' Counterclaims for Failure to State a Claim or, Alternatively for a More Definite Statement Standard for Dismissal Under Rule 12(b)(6)Federal Rule of Civil Procedure 12(b)(6) authorizes dismissal of a complaint for "failure to state a claim upon which relief can be granted." FED. R. CIV. P. 12(b)(6). However, a motion under Rule 12(b)(6) should be granted only if it appears beyond doubt that the plaintiffs could prove no set of facts in support of their claims that would entitle them to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Leffall v. Dallas Independent School District, 28 F.3d 521, 524 (5th Cir. 1994); see also Kaiser Aluminum Chemical Sales, Inc. v. Avondale Shipyards, Inc., 677 F.2d 1045, 1050 (5th Cir. 1982) (citing WRIGHT MILLER, Federal Practice and Procedure: Civil § 1357 at 598 (1969), for proposition that "the motion to dismiss for failure to state a claim is viewed with disfavor and is rarely granted"), cert. denied, 459 U.S. 1105 (1983). In determining whether dismissal should be granted, the court must accept all well-pleaded facts as true and view them in the light most favorable to the plaintiffs. See Capital Parks, Inc. v. Southeastern Advertising and Sales System, Inc., 30 F.3d 627, 629 (5th Cir. 1994); Norman v. Apache Corporation, 19 F.3d 1017, 1021 (5th Cir. 1994); Chrissy F. by Medley v. Mississippi Department of Public Welfare, 925 F.2d 844, 846 (5th Cir. 1991). Yet, if it appears that a more carefully drafted complaint might state a claim upon which relief could be granted, the court should give the plaintiff an opportunity to amend the complaint rather than dismiss it. Friedlander v. Nims, 755 F.2d 810, 813 (11th Cir. 1985); see also Dussouy v. Gulf Coast Investment Corporation, 660 F.2d 594, 597-99 (5th Cir. 1981).
Murphy and Vetco's Grounds for Dismissal
Although a pleading need only contain a "short and plain statement of the claim showing that the pleader is entitled to relief," FED. R. CIV. P. 8(a)(2), the defendants' counterclaim stretches the limits of even this liberal standard. The defendants' eighteen count counterclaim is supported by only four sentences. See Defendants' Original Answer and Counterclaim ("Counterclaim"), attached to Notice of Removal. The first two sentences set forth the closing dates for both the Shareholder Agreement and the Buyout Agreement. The third sentence recites Murphy's fiduciary duty as an officer of Vetco. The fourth and final sentence, in model conclusory language, asserts that "Murphy has mismanaged the affairs of Vetco and misallocated funds belonging to Vetco by various means including, without limitation, padding expense accounts, diverting funds and the like." Id. ¶ 7.
Even the most generous reading of this skeletal complaint cannot overcome the complete lack of any facts supporting the defendants' causes of action. See SW Enterprises, LLC. v. South trust Bank of Alabama, NA., No. Civ. A. 3:98-CV-2668-L, 2001 WL 238095, at *4 (N.D. Tex. Mar. 6, 2001) (Lindsay, J.); see also Balistreri v. Pacifica Police Department, 901 F.2d 696, 699 (9th Cir. 1990) ("Dismissal can be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory."). Accordingly, the Court finds the defendants have failed to state a claim upon which relief may be granted. However, the Court appreciates that dismissal should be avoided until the defendants have been afforded an opportunity to file an amended complaint. Hitt v. City of Pasadena, 561 F.2d 606, 608 (5th Cir. 1977); cf. DeLoach v. Woodley, 405 F.2d 496, 497 (5th Cir. 1968). Therefore, the motions of Vetco and Murphy to dismiss for failure to state a claim must be denied and the motions for a more definite statement granted. The defendants shall have leave to replead their counterclaims — if they can — to satisfy the pleading requirements of Rule 8(a)(2).
Conclusion
For the reasons discussed above, the motion of the defendants for a plea in abatement pending arbitration is DENIED. Vetco's and Murphy's motions to dismiss for failure to state a claim are DENIED but their motions for a more definite statement are GRANTED. The defendants shall have leave to file and serve, not later than May 23, 2003, an amended complaint to remedy the Rule 8(a)(2) deficiencies in their counterclaims against Vetco and Murphy; otherwise, those counterclaims will be deemed dismissed without further notice. If the defendants duly amend their counterclaim complaint, Vetco and Murphy may reassert their motions to dismiss if they believe the amended counterclaim complaint fails to cure the defects in the defendants' original counterclaim complaint. Murphy's motion to dismiss pursuant to Federal Rule of Civil Procedure 9(b) is DENIED as moot.