Unpublished Disposition, 936 F.2d 578 (9th Cir. 1991)

MEMORANDUM^* 

Clarendon Group, Ltd., Clarendon Insurance Company (Bermuda) Ltd., Clarendon America Insurance Company, and Atlantic Capital Corporation (collectively "Clarendon") appeal denial of a motion to compel arbitration. We affirm the district court.

* The sole question presented by this appeal is whether Melahn's complaint concerns a dispute that falls within the scope of the arbitration clauses in the Aggregate Stop Loss Agreements ("ASL") and Surety Bond Agreement ("SBA"). Although we recognize the strong federal preference for enforcement of arbitration agreements, see Three Valleys Mun. Water Dist. v. E.F. Hutton, 925 F.2d 1136, 1139 (9th Cir. 1991), we believe that our holding in Mediterranean Enters. v. Ssangyong Corp., 708 F.2d 1458 (9th Cir. 1983), supports a determination that this dispute is not arbitrable.

The arbitration clause at issue in Mediterranean provided that " [a]ny disputes arising hereunder ... shall be settled through binding arbitration." Id. at 1461. Construing this as a narrow arbitration clause, Judge Nelson, writing for the court, concluded that it only required arbitration for disputes "relating to the interpretation and performance of the contract itself." Id. at 1464.

The dispute in that case arose out of a joint venture contract between plaintiff Mediterranean Enterprises, Inc. ("MEI") and Ssangyong to develop modular housing projects in Saudi Arabia. When the joint venture was not formed, MEI sued, charging Ssangyong with breach of contract and fiduciary duty (contract claims), as well as inducing and conspiring to induce breach of contract, quantum meruit, and conversion (the non-contract claims). We held that because the non-contract claims raised issues "predominantly unrelated to the central conflict over the interpretation and performance of the Agreement," they were non-arbitrable. Id. Resolution of the non-contract claims did not require inquiry into contract interpretation or performance, so those claims were not within the scope of the arbitration agreements.

II

Clarendon's efforts to distinguish Mediterranean are not persuasive. Melahn's complaint charges that Transit and Clarendon entered into the ASL and SBA for a fraudulent purpose. Evaluating whether the agreements had a legitimate purpose or were simply part of an effort to create a false financial picture does not involve an inquiry into the terms of the contract as contemplated by Mediterranean. Where the purpose of an agreement is to perpetrate a fraud, the existence or absence of that fraud does not require inquiry into the terms of the contract. It is not the performance on the contract that is at issue--it is the existence of the fraudulent scheme itself. Cf. Washburn v. Societe Commerciale de Reassurance, 831 F.2d 149, 151 (7th Cir. 1987) ("The litigation does not involve a controversy arising under the agreement itself, but rather a conspiracy in which the conspirators used the reinsurance agreement ... and several other devices ... to drive [the bankrupt company] further into insolvency").

III

Under Mediterranean, the agreements in this case are not subject to arbitration. Where the agreements containing arbitration clauses are part of an allegedly fraudulent scheme, determining whether the defendants participated in a conspiracy to defraud is non-arbitrable. Furthermore, the reasons for enforcing arbitration agreements are not present where, as here, the party seeking to avoid arbitration (Melahn) did not participate in the allegedly fraudulent scheme. One reason for enforcing arbitration agreements is to require the parties to abide by their agreements. Here, to compel arbitration would allow Clarendon to benefit from its allegedly fraudulent acts, to the detriment of Transit's creditors. Melahn stands in entirely different shoes than a party to a contract who seeks to escape from an arbitration agreement to which he subscribed. Melahn represents the interests of Transit's creditors--innocent parties who were not signatories to the arbitration agreements. Where the policies behind strong enforcement of arbitration agreements are not applicable, as in the present case, and the scope of the agreement is ambiguous at best, we will not compel arbitration to the detriment of innocent creditors.

AFFIRMED.