PINNACLE REALTY GROUP, INC. v. HI POINT APARTMENTS PHASE III LTD. and CLEAR CREEK PROPERTIES, INC.
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RENDERED: May 15, 1998; 2:00 p.m.
NOT TO BE PUBLISHED
NO. 97-CA-0049-MR
PINNACLE REALTY GROUP, INC.
and F. W. SCHNEIDER, JR.
v.
APPELLANTS
APPEAL FROM SHELBY CIRCUIT COURT
HONORABLE WILLIAM F. STEWART, JUDGE
CIVIL ACTION NO. 96-CI-000393
HI POINT APARTMENTS
PHASE III LTD. and
CLEAR CREEK PROPERTIES, INC.
APPELLEES
OPINION
AFFIRMING IN PART - REVERSING IN PART
* * * * *
BEFORE:
GUIDUGLI, KNOX and MILLER, Judges.
GUIDUGLI, JUDGE.
Pinnacle Realty Group, Inc. (Pinnacle), and F.
W. Schneider, Jr. (Schneider), the sole shareholder of Pinnacle,
appeal from an order of the Shelby Circuit Court entered December
13, 1996, which denied their motion to stay proceedings pending
arbitration.
We affirm in part and reverse in part.
On October 17, 1994, Clear Creek Properties, Inc.
(Clear Creek) entered into a contract with Pinnacle for the
construction of four apartment buildings at the Hi Point
Apartment complex.
Hi Point Apartments Phase III Ltd. (Hi Point)
entered into a similar contract with Pinnacle for the
construction of three buildings at the same complex on October 2,
1995 (the 1995 contract).
In addition to the 1995 contract,
Schneider, Pinnacle and Hi Point entered into an undated
agreement whereby the parties agreed that a "unique checking
account" would be established to "pay vendors and subcontractors
working on the Hi Point Phase III project[.]"
Schneider also
executed a guaranty where he personally undertook to guarantee
the performance of Pinnacle pursuant to the terms of the 1995
contract.
Both contracts were the 1987 edition of the Standard
Form of Agreement Between Owner and Contractor and both contracts
incorporated the 1987 edition of the General Conditions of the
Contract for Construction.
Pursuant to Section 4.5.1 of the
General Conditions, the parties agreed that all controversies or
claims "arising out of or related to the Contract, or the breach
thereof," would be resolved through arbitration.
On September 16, 1996, Clear Creek and Hi Point filed
suit in the Shelby Circuit Court against Pinnacle and Schneider.
The complaint contained allegations of breach of both contracts,
misrepresentation of material facts, and breach of fiduciary duty
by Pinnacle and Schneider.
Paragraph 5 of the complaint alleges
that the claims against Pinnacle and Schneider arise from the
construction of the apartment buildings at the Hi Point complex.
Prior to being served with the appellees' complaint,
Pinnacle filed a mechanic's lien on the Hi Point complex to
secure payment of funds allegedly owed to Pinnacle for work
performed at the Hi Point complex.
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The appellees responded by
amending the complaint to include an allegation that Pinnacle's
mechanic's lien was void and as such constituted a slander of
title, malicious prosecution, and abuse of process.
On October 21, 1996, Pinnacle filed a motion to dismiss
and to stay proceedings.
Pinnacle argued that the proceedings
should be either dismissed or stayed pending arbitration of the
claims.
Pinnacle argued that the arbitration clauses contained
in the contracts are enforceable under the Federal Arbitration
Act (FAA).
The trial court denied Pinnacle's motion without
explanation and this appeal followed.
Initially, the appellees contend that this Court must
affirm the trial court's order because Pinnacle took no steps to
initiate arbitration under the terms of the contract.
The
appellees point out that at the time Pinnacle and Schneider moved
to stay the proceedings there had been no action on their part to
institute arbitration and argue that pursuant to the terms of the
Federal Arbitration Act (FAA) Pinnacle is not entitled to a stay.
Section 3 of the FAA provides:
If any suit or proceeding be brought in any
of the courts of the United States upon any
issue referable to arbitration under an
agreement in writing for such arbitration,
the court in which such suit is pending, upon
being satisfied that the issue involved in
such suit or proceeding is referable to
arbitration under such an agreement, shall on
application of one of the parties stay the
trial of the action until such arbitration
has been had in accordance with the terms of
the agreement, providing the applicant for
the stay is not in default in proceeding with
such arbitration.
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9 U.S.C. § 3.
The default provision of § 3 has been construed by
the federal courts to "refer to a party who, when requested, has
refused to go to arbitration or who has refused to proceed with
the hearing before the arbitrators once it has commenced."
Kulukundis Shipping Co., S/A v. Amtorg Trading Corp., 126 F.2d
978, 989 (2nd Cir. 1942).
The federal courts have also
recognized that a party to a contract which contains an
arbitration clause who elects to sue as opposed to arbitrate is
himself in default as opposed to the defendant.
Shanferoke Coal
& Supply Corp. v. Westchester Service Corp., 70 F.2d 297, 299
(2nd Cir. 1934).
Kentucky has recognized that arbitration is contractual
in nature and as such is capable of being waived.
Valley
Construction Co., Inc. v. Perry Host Management Co., Inc., Ky.
App., 796 S.W.2d 365, 367 (1990).
However, waiver will not be
inferred lightly, and the mere filing of a pleading in a legal
action will not act as a waiver of a contractual arbitration
provision.
Valley Construction, 796 S.W.2d at 367.
Thus, we do
not find Pinnacle to be in default by failing to request
arbitration.
"It was the plaintiff who declared the contract to
be at an end; and with that the defendant was contented.
If the
plaintiff meant to proceed further and enforce a claim for
damages, the initiative [to commence arbitration] rested on
it[.]"
Shanferoke Coal, 70 F.2d at 299.
We now address Pinnacle's claim that the trial court
erred in refusing to grant its motion to stay.
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The standard of
review in the federal appellate court of a district court's
refusal to stay a proceeding pending arbitration is de novo.
See
In Re Solomon Inc. Shareholder's Derivative Litigation 91
CIV.5500 (RRP), 68 F.3d 554, 557 (2nd Cir. 1995).
We see no
reason for not applying the same standard.
Under § 2 of the FAA, a written provision in a contract
involving interstate commerce which provides that all disputes
arising out of the contract are to be settled by arbitration is
"valid, irrevocable, and enforceable, save upon such grounds as
exist at law or in equity for the revocation of any contract."
U.S.C. § 2.
9
The United States Supreme Court has ruled that the
FAA pre-empts state law, thus state courts cannot use state
statutes to invalidate agreements to arbitrate.
Southland Corp.
v. Keating, 465 U.S. 1, 15-16, 104 S.Ct. 852, 860-861, 79 L.Ed.2d
1, ___ (1984).
Furthermore, the Kentucky Supreme Court has
recognized that there is no public policy in Kentucky which would
prevent enforcement of a private agreement to arbitrate pursuant
to the FAA.
Kodak Mining Co. v. Carrs Fork Corp., Ky., 669
S.W.2d 917, 921 (1984).
See also, Fite & Warmath Construction
Co., Inc. v. Mys Corp., Ky., 559 S.W.2d 729 (1977) (recognizing
that FAA applies in state court where suit involves contract
evidencing transaction in interstate commerce).
Pinnacle maintains that where the claims made in a
complaint fall within the scope of the arbitration agreement the
trial court is required to stay the proceedings pending
arbitration.
Pinnacle further argues that all of the issues
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raised by the complaint arise out of or relate to the two
contracts and are thus subject to the arbitration clauses.
We
begin by noting that any doubts concerning the scope of an
arbitration issue are to be decided in favor of arbitration.
Hill v. Hilliard, Ky. App., 945 S.W.2d 948, 951 (1996).
See
also, Moses H. Cone Memorial Hospital v. Mercury Construction
Corp., 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983).
We are
to compel arbitration pursuant to a written arbitration clause
unless we are able to find with absolute assurance that the
arbitration clause cannot be interpreted in such a fashion as to
cover the dispute.
See S+L+H S.p.A. v. Miller-St. Nazianz, Inc.,
988 F.2d 1518, 1524 (7th Cir. 1993; Kansas Gas & Electric Co. v.
Westinghouse Electric Corp., 861 F.2d 420, 423 (4th Cir. 1988);
Explo, Inc. v. Southern Natural Gas Co., 788 F.2d 1096, 1098 (5th
Cir. 1986).
As the appellees maintain that their claims fall
outside the scope of the arbitration agreement, they bear the
burden of proof.
Hill, 945 S.W.2d at 950.
We will examine each
claim separately.
Count 1
In Count 1, the appellees allege that:
(1) Pinnacle
"breached the Phase II Agreement by failing to achieve
substantial completion...in accordance with the terms of the
Phase II Agreement"; (2) substantial portions of the work done by
Pinnacle were not in compliance with applicable specifications;
(3) Pinnacle diverted funds paid to it by Clear Creek to other
obligations, failed to satisfy timely claims of project
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subcontractors, and falsely represented to unpaid subcontractors
that it had not received payment from Clear Creek; and (4)
Pinnacle failed to satisfy claims of subcontractors, laborers,
and vendors out of payments made by Clear Creek to Pinnacle.
The
appellees do not address Count 1 in their brief on appeal, and we
agree with Pinnacle that the claims contained in Count 1 of the
complaint clearly come within the scope of the arbitration
clauses.
Counts 2 and 5
In Counts 2 and 5 of its complaint, the appellees claim
that Schneider, acting individually and as Pinnacle's agent, gave
Clear Creek an "Unpaid Subcontractor List" which he represented
to be a complete and accurate list of all unsatisfied obligations
relating to the project and falsely represented to Hi Point that
it had paid its obligations with respect to the project.
The
appellees allege that Schneider acted fraudulently in maintaining
that the list was complete and accurate, and further that they
relied on the false statements and was damaged.
On appeal, the
appellees maintain that it is the allegedly fraudulent conduct of
Schneider which forms the basis of its claim, and not the
"tangential relationship to the contract."
The federal courts have recognized that a party will
not be permitted to avoid compliance with a contractual agreement
to arbitrate by framing a cause of action as a tort.
See Sweet
Dreams Unlimited, Inc. v. Dial-A-Matters International, Inc., 1
F.3d 639 (7th Cir. 1993); In Re Oil Spill by the "Amoco Cadiz,
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659 F.2d 789, 794 (7th Cir. 1981).
"Were the rule otherwise, a
party could frustrate any agreement to arbitrate simply by the
manner in which it framed its claims."
at 794.
"Amoco Cadiz", 659 F.2d
In determining whether claims sounding in tort are
arbitrable, we are to consider the relationship of the claim to
the arbitration clause.
Sweet Dreams, 1 F.3d at 643.
Like the claims of fraud and misrepresentation made in
Sweet Dreams, Counts 2 and 5 raise neither questions of contract
interpretation, performance, or validity.
However, we believe
that "they clearly have their genesis in the Agreement."
Dreams, 1 F.3d at 643.
Sweet
We agree with Pinnacle that any
statements made by Schneider pertaining to payments made to
subcontractors, suppliers, and laborers arise out of the
contracts.
We do not accept the appellees' argument that this
interpretation of the arbitration clauses at issue is "so broad
as to implicate nearly any event involving both Clear Creek and
one or more appellants."
Both federal and state law clearly
evidence a strong policy in favor of arbitration.
We cannot say
with complete assurance in regard to Counts 2 and 5 that the
arbitration clauses at issue are incapable of being interpreted
in a manner which would not cover these claims.
Therefore,
arbitration of these issues is warranted.
Count 3
In Count 3, the appellees allege that Pinnacle breached
the October 2, 1996 contract by:
(1) failing to provide proper
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manpower and equipment to ensure substantial completion as
outlined by the terms of the agreement; (2) failed to achieve
substantial completion as outlined by the terms of the contract;
(3) failed to ensure that the work performed was in compliance
with applicable specifications; and (4) diverting funds received
from Clear Creek to other obligations and failed to timely
satisfy claims of subcontractors with funds received from Hi
Point.
The appellees also allege that Schneider is personally
liable for all damages described in Count 3 in accordance with
the terms of the Guarantee.
As to the appellees' claims against Pinnacle in Count
3, they are essentially the same as those raised in Count 1.
As
such, they are clearly arbitrable for the reasons discussed
supra.
As to the claims against Schneider individually, the
appellees maintain that Schneider cannot reap the benefits of the
arbitration agreement because he was not an individual party to
the contracts.
They rely on Sierra Rutile Limited v. Katz, 937
F.2d 743 (2nd Cir. 1991) for the proposition that a corporate
officer, such as Schneider, of a company which is a party to an
arbitration agreement is not considered to be a party to the
arbitration agreement.
Based on Sierra, Clear Creek maintains
that Schneider is not entitled to a stay of litigation of the
claims against him pending the outcome of arbitration between the
appellees and Pinnacle.
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If Schneider was trying to force arbitration of the
claims against him pursuant to the terms of the contracts, we
would be persuaded by Clear Creek's argument.
However, the
appellees overlook the fact that Schneider's liability to them
pursuant to the terms of the guaranty agreement cannot be
determined until it is found that Pinnacle has breached the terms
of the contracts.
"The litigation against [Schneider]...is an
attempt by the plaintiffs to evade the agreed-upon resolution of
their disputes in the arbitration forum by introducing the
identical controversy in a judicial forum against a party who is
ultimately liable for the arbitrating party's acts.
[Schneider],
as a party to litigation involving issues subject to an
arbitration agreement, is entitled to a stay under section 3 of
the FAA regardless of its status as a party to the arbitration
agreement."
Morrie Mages and Shirlee Mages Foundation v. Thrifty
Corp., 916 F.2d 402, 407 (7th Cir. 1990).
Count 4
The allegations contained in Count 4 arise from the
execution of the escrow agreement.
The appellees allege that
Pinnacle and Schneider neither opened the checking account or
complied with the terms of the agreement.
Count 4 also alleges
that Schneider and Pinnacle failed to account for payments,
disbursements, and incurred obligations with respect to the
project, and that Schneider made false representations to Hi
Point concerning Pinnacle's satisfaction of outstanding
obligations.
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With respect to the appellees' allegations against
Pinnacle and Schneider regarding false representations and
failure to account for payments and obligations incurred with
respect to the project, those claims are subject to arbitration
for the same reasons set forth in the above section dealing with
Counts 2 and 5 of the complaint.
The allegations concerning the
purported escrow agreement are, however, a different matter.
Pinnacle contends that under Asplundh Tree Expert Co.
v. Bates, 71 F.3d 592 (6th Cir. 1995), the escrow agreement acts
as a modification of the earlier contract and is incorporated by
reference thus making it subject to the contractual arbitration
clause.
We disagree.
In Asplundh the second agreement
specifically referenced the contract containing the arbitration
clause and was deemed by the court to be part of the original
contract.
In this case, the escrow agreement makes no mention of
the original contract and there is nothing in it which evidences
an intent by the parties to incorporate the terms of the contract
by reference.
As such, any conflict arising from the escrow
agreement is not subject to arbitration.
Counts 6 and 7
In Counts 6 and 7, which were contained in the amended
complaint, the appellees contend that Pinnacle is not entitled to
assert or recover by means of a mechanic's lien and that the
filing of the lien constitutes slander of title, abuse of
process, and malicious prosecution.
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Again, we believe the appellees' claims in these areas
fall under the scope of the arbitration clause.
Again, we are
not prepared to say with absolute certainty that the arbitration
clause cannot be interpreted in such a fashion as to not cover
the appellees' allegations.
In closing, we note that the arbitration clause
contained in the two contracts was very broad.
The appellees
argue on appeal that to interpret the arbitration clause as we
have done opens the door to a whole parade of troubles which
would have to be settled by arbitration.
In those cases, we
would be able to say that the arbitration clause could not be
interpreted in favor of arbitration.
case before us.
However, that is not the
The contracts were entered into voluntarily by
sophisticated and knowledgeable parties and the appellees have
not persuaded us that their claims are not covered by the scope
of the arbitration clauses.
See Fite & Warmath, 559 S.W.2d at
735.
Having considered the parties' arguments on appeal, the
decision of the Shelby Circuit Court is reversed except as to
appellees' claims pertaining to the escrow agreement as raised in
Count 4, and this matter is remanded to the Shelby Circuit Court
for further proceedings in accordance with this opinion.
ALL CONCUR.
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BRIEF FOR APPELLANT:
BRIEF FOR APPELLEES:
William C. Hurt, Jr.
John W. Hays
Lexington, KY
Charles D. Webb, Jr.
Bradford L. Cowgill
Lexington, KY
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