FOR PUBLICATION
ATTORNEYS FOR APPELLANTS: ATTORNEYS FOR APPELLEE:
WAYNE C. TURNER MICHAEL A. WUKMER
JOHN F. MCCAULEY BRIAN D. GWITT
MICHAEL R. LIMRICK Ice Miller
McTurnan & Turner Indianapolis, Indiana
Indianapolis, Indiana
IN THE
COURT OF APPEALS OF INDIANA
MARK POLINSKY and ALLEN SUTKER, )
)
Appellants-Defendants, )
)
vs. ) No. 09A05-0310-CV-538
)
FRANK VIOLI, )
)
Appellee-Plaintiff. )
APPEAL FROM THE CASS SUPERIOR COURT
The Honorable Julian L. Ridlen, Special Judge
Cause No. 09D01-0305-PL-17
February 18, 2004
OPINION-FOR PUBLICATION
BAKER, Judge
Appellants-defendants Mark Polinsky and Allen Sutker (collectively,
the appellants) appeal the trial court’s denial of their motion to compel
arbitration between TotalEMS and appellee-plaintiff Frank Violi.
Specifically, the appellants argue that they are in privity with TotalEMS
and that Violi’s claims against them arise solely from TotalEMS’s alleged
breach of Violi’s Employment Agreement (“Agreement”), which requires him to
arbitrate “all disputes” that arise from his employment terms. Finding
that the appellants stand in privity with TotalEMS and that these disputes
arise out of the Agreement, we reverse the decision of the trial court.
FACTS
On March 22, 2002, Violi entered into the Agreement with TotalEMS, a
closely-held corporation with its principal place of business in
Logansport, providing that he would be employed for three years as the
President and Chief Executive Officer of TotalEMS. The Agreement provided
that upon termination without cause, TotalEMS was obligated to purchase
Violi’s shares in TotalEMS. Appellant’s App. p. 15. The Agreement also
contained an arbitration provision, which states in pertinent part, “If any
controversy or claim between the parties hereto arises out of this
Agreement, such disagreement or dispute shall be submitted to binding
arbitration in Chicago, Illinois, under the Commercial Arbitration Rules of
the American Arbitration Association (the ‘AAA’).” Appellant’s App. p. 21
(emphasis in original). Neither of the appellants, who together own
approximately 72% of the outstanding stock of TotalEMS, signed the
Agreement.
Violi was terminated within the first year of his employment, but the
parties disagree as to the exact timing of and reason for Violi’s
termination. Violi brought suit against TotalEMS and its members seeking
approximately $300,000 in severance from TotalEMS. TotalEMS has refused to
pay that amount, arguing that it does not owe severance and that, even if
it did, the amount would be much lower. In addition to his claims seeking
recovery of wages and the repurchase of his shares in TotalEMS, Violi also
asserted claims against the appellants for breach of fiduciary duty to
Violi in his capacity as a minority shareholder.
On June 27, 2003, the appellants filed a Motion to Compel Arbitration
and for Stay, asserting that they are in privity with TotalEMS, that all of
the claims arose out of the terms of the Agreement, giving them a right to
enforce the arbitration agreement. The trial court denied that motion on
September 22, 2003, stating only that the appellants “are nonparties to the
identified arbitration provision . . . .” Appellant’s App. p. 70.
Polinsky and Sutker now appeal.
DISCUSSION AND DECISION
Initially, we note that when reviewing a trial court’s denial of a
motion to compel arbitration, our standard of review is de novo. Showboat
Marina Casino P’ship v. Tonn & Blank Constr., 790 N.E.2d 595, 597 (Ind. Ct.
App. 2003). Indiana recognizes a strong policy favoring enforcement of
arbitration agreements. Indiana CPA Society, Inc. v. GoMembers, Inc., 777
N.E.2d 747, 750 (Ind. Ct. App. 2002).
Under Indiana contract law, the party seeking to compel arbitration
has the burden of demonstrating the existence of an enforceable
arbitration agreement. When determining whether the parties have
agreed to arbitrate a dispute, we apply ordinary contract principles
governed by state law. In addition, when construing arbitration
agreements, every doubt is to be resolved in favor of arbitration, and
the parties are bound to arbitrate all matters, not explicitly
excluded, that reasonably fit within the language used. However,
parties are only bound to arbitrate those issues that by clear
language they have agreed to arbitrate; arbitration agreements will
not be extended by construction or implication.
Showboat Marina Casino, 790 N.E.2d at 597-98 (internal citations omitted).
I. Privity
The party seeking to compel arbitration must establish the existence
of an enforceable arbitration agreement and that the parties intended to
arbitrate the issue in dispute. Mislenkov v. Accurate Metal Detinning,
Inc., 743 N.E.2d 286, 289 (Ind. Ct. App. 2001). Parties to a contract or
those in privity with the parties have rights under the contract. OEC-
Diasonics, Inc. v. Major, 674 N.E.2d 1312, 1314 (Ind. 1996). This
principle applies to contracts requiring arbitration of claims. Mislenkov,
743 N.E.2d at 289. The concept of privity is most frequently applied in
the equitable estoppel context, but it is also applied in contract cases,
where privity has been described as a “mutual or successive relationship as
to the same right of property, or an identification of interest of one
person with another as to represent the same legal right.” Id.
Furthermore, according to comments to the Restatement (Second) of Judgments
§ 59(3), “[f]or the purposes of providing a day in court on issues
contested in litigation, however, there is no good reason why a closely
held corporation and its owners should be ordinarily regarded as legally
distinct.”
The record reveals here that the appellants together own
approximately 72% of TotalEMS’s outstanding stock. Appellant’s App. p. 1-
2. Moreover, Violi alleged in his complaint that the appellants “control
the operations of TotalEMS” and that “TotalEMS is merely the alter ego or
instrumentality of Polinsky and Sutker, as the controlling shareholders who
directed the company from its inception.” Appellant’s App. p. 2, 8. Not
only do these facts alone demonstrate that the appellants have an
identification of interest with TotalEMS, Violi himself has admitted as
much in his complaint. As such, Violi may not now claim that the
appellants do not stand in privity with TotalEMS. See Doctor’s Assoc.,
Inc. v. Hollingsworth, 949 F. Supp. 77, 83-84 (D. Conn. 1996) (one cannot
allege that a company is the alter ego of the defendants, then claim that
the arbitration agreement with the company does not also apply to the
defendants) (citing Doctor’s Assoc., Inc. v. Distajo, 66 F.3d 438, 453 (2d
Cir. 1995); Mosca v. Doctor’s Assoc., Inc., 852 F. Supp. 152, 155 (E.D.N.Y.
1993)).
II. Arbitration of this Dispute
Having decided that the appellants are in privity with TotalEMS, the
question now becomes whether these claims are within the scope of the
Agreement. Violi argues that because he asserted a claim for breach of
fiduciary duty as a minority shareholder against the appellants as majority
shareholders, it is outside the scope of the Agreement and therefore cannot
be forced into arbitration.
Shareholders in a close corporation have fiduciary duties to each
other, and as such are required to “deal fairly, honestly, and openly with
the corporation and their fellow shareholders.” Barth v. Barth, 659 N.E.2d
559, 561 (Ind. 1995). A closely held company, such as TotalEMS, is one
with few shareholders and shares that are not typically traded in the
general securities market. W.& W Equip. Co., Inc. v. Mink, 568 N.E.2d 564,
570 (Ind. Ct. App. 1991).
In his complaint, Violi asserted a breach of fiduciary duty in the
following paragraph:
Polinsky and Sutker as the controlling shareholders, as well as
members of the Board of Managers, have breached their fiduciary duties
owed to Violi as a minority shareholder of TotalEMS. Polinsky and
Sutker failed to deal fairly, openly and honestly with Violi. As
described above, Polinsky and Sutker devised a scheme to oust Violi
from the company under a pretextual and false basis in order to avoid
paying Violi the monies due and owing him under the
Agreement. Violi has not requested that the Board of Managers take
any action because such a request would be future [sic], as Polinsky
and Sutker have usurped the authority of the Board of Managers and, as
shown below, have caused the Board of Managers not to exist or
function as intended.
Appellant’s App. p. 7. An examination of this allegation reveals that this
claim is predicated upon Violi’s success against TotalEMS in arbitration
over the Agreement. The facts alleged that support Violi’s claim of the
breach of fiduciary duty are that “Polinsky and Sutker devised a scheme to
oust Violi from the company . . . in order to avoid paying Violi the monies
due and owing him under the Agreement.” Appellant’s App. p. 7. To prove
this, Violi must first prove that TotalEMS breached the Agreement.
Moreover, the whole of the “monies due” result from the alleged breach of
the Agreement. These issues rest squarely with the arbitrator.
Were we to permit such “artful pleading” to carry the day, no party
would be bound to arbitrate against a closely-held company so long as that
party also claimed that individual members, shareholders, officers, and/or
directors caused the entity’s misconduct through their breach of a
fiduciary duty and that the defendants are not parties to the arbitration
agreement who can enforce it. This would undermine the purpose of
arbitration, which is “to entertain consideration of disputed matters and
to reach an acceptable decision and award, without having to undertake
often ponderous and costly judicial proceedings. Sch. City v. E. Chicago
Fed’n of Teachers, 622 N.E.2d 166, 169 (Ind. 1993). The instant case is a
prime example in that much time and money has already been spent in trial
and appellate courts when the issues rightfully belonged before an
arbitrator.
The decision of the trial court is reversed and remanded with
instructions to order this cause to arbitration.
Reversed and remanded.
NAJAM, J., and MAY, J., concur.
