Opinion
Civil No. 02-2925 (JRT/FLN), Civil No. 02-2924 (JRT/FLN)
April 15, 2003
Thomas L Nuss, DORSEY WHITNEY, Minneapolis, MN, for plaintiff.
Ronald K. Gardner, Jr., and Sarah A. Johnston, DADY GARNER, Minneapolis, MN, for defendants.
MEMORANDUM OPINION AND ORDER DENYING DEFENDANTS' MOTIONS TO DISMISS OR STAY
Plaintiff Ford Motor Credit Company filed these actions against defendants U.S. Leasing Sales, Inc. and Loren Backlund, and defendants Midwest Diesel Service, Inc. and Gerald and Karen Reiter ("defendants") to collect payments allegedly due on financing contracts between plaintiff and defendants. Defendants moved to stay or dismiss the case, pending arbitration. For the reasons discussed below, the Court denies defendants' motions.
BACKGROUND
Defendants operate motor vehicle dealerships in Minnesota and were authorized dealers of Bering-branded commercial trucks, parts, and services. Plaintiff provided financing for defendants' purchase of inventory of Bering-brand trucks and parts. Defendants and Bering Truck Corporation ("Bering") entered distributorship agreements that contained a broadly worded arbitration clause.
In pertinent part, the clause provides:
Resolution of disputes.
(A) Any claim by Dealer pertaining to or arising from the exercise of Distributors rights under Article 15 of this Addendum, or any claim by Dealer that Distributor did not have good cause for termination of this Agreement pursuant to Article 11, or has failed to act in good faith, or has acted improperly in terminating this Agreement under the laws of the state in which Dealer is located or under the Vehicle Dealers' Day in Court Act, 15 U.S.C. § 1221 et seq., shall be submitted to arbitration in the following manner:
[The specifics of the arbitration — timing, location, etc. are then discussed].
(B) All other disputes in which the parties cannot resolve among themselves shall be decided, at Dealer's option, either by binding arbitration or by litigation. . . . If Distributor institutes litigation and Dealer elects to proceed with arbitration, the dispute shall be transferred to arbitration in the location set out in this Subsection.
Bering asked its dealers, including defendants, to maintain high inventories of parts and trucks. Because dealers borrow to finance the purchase of their inventory, they must pay insurance on inventory, in addition to paying interest on the borrowed funds. Maintenance of large inventories, therefore, often leads to high interest and insurance charges. As an incentive for defendant dealers to maintain these inventories, Bering agreed to pay one year of interest fees and insurance charges, and then to remove any unsold vehicles remaining at the end of the one-year period. In this way, the defendant dealers could maintain large inventories without being subjected to excessive interest and insurance charges. Apparently, these were verbal agreements between Bering and the defendant dealers. There is some evidence that plaintiff knew about this arrangement, but there is no indication that plaintiff was a party to the verbal agreement.
To obtain this large inventory, Bering suggested that defendants obtain financing through plaintiff, and defendants did so. Plaintiff and defendants entered into "Wholesale Financing and Security Agreements" ("financing agreements") under which plaintiff granted defendants lines of credit by which defendants could obtain funds to purchase vehicles that would later be sold or leased to consumers from defendants' retail sales establishments. The financing agreement provided that defendants would pay monthly interest charges on money advanced, and would also pay insurance charges. The financing agreement does not contain an arbitration clause. During this time, plaintiff had a separate relationship with Bering as Bering's primary financer and secured creditor.
At the time, plaintiff FMCC was doing business as Bering Financial Services. Plaintiff operates under various private labels and plaintiff argues that the name does not indicate any interest in Bering Truck Corporation.
Bering paid the insurance and finance charges to plaintiff, but stopped making those payments before the one-year period expired. Despite Bering's failure to pay, plaintiff did not attempt to collect the interest or insurance charges from defendants or from Bering for several months. Bering dissolved shortly after it stopped making the finance payments, and all Bering assets were transferred to plaintiff, to whom Bering referred as "our secured lender." Several months after Bering dissolved, plaintiff began attempting to collect the interest and insurance charges from defendants.
ANALYSIS
In Minnesota, relationships between dealers of heavy equipment and the manufactures of that equipment are governed by the Minnesota Heavy and Utility Equipment and Manufacturers and Dealers Act ("MHUEMDA"). Minn. Stat. §§ 325E.068 et seq. MHUEMDA clearly governs the relationship between Bering and defendants. At issue in this dispute is whether MHUEMDA's definition of "successor in interest" transforms the financing dispute between plaintiffs and defendants into a dispute between defendants and Bering. In other words, the Court must determine whether plaintiff is a successor in interest to Bering, and if so, if plaintiff's status as successor in interest necessitates arbitration of the financing dispute based on the arbitration agreement in the distributorship agreements.
The Court does not address whether other aspects of the parties' relationship might be governed by MHUEMDA.
I. Standard of Review
The Federal Arbitration Act ("FAA") governs the arbitration clause in the distributorship agreement. See Moses H. Cone Memorial Hospital v. Mercury Const. Corp., 460 U.S. 1, 24 (1983) (the FAA governs controversies involving interstate commerce). The FAA, 9 U.S.C. § 1-16, was enacted "to reverse the longstanding judicial hostility to arbitration agreements . . . and to place arbitration agreements upon the same footing as other contracts." Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991). The FAA requires a court to enforce a written arbitration agreement as it would any other contract. 9 U.S.C. § 2 ("A written provision . . . to settle by arbitration a controversy . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.").
Despite the strong federal preference for arbitration, see, e.g., Volt Info. Sciences v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468 (1989), a party cannot be compelled to arbitrate unless there is a contractual agreement to do so. Matter of Talbott Big Foot, Inc., 887 F.2d 611, 614 (5th Cir. 1989). To succeed on a motion to compel arbitration, the moving party must show (1) that there is a valid arbitration agreement in effect between the parties, and (2) that the present dispute is within that agreement. Fleet Boston Robertson Stephens v. Innovex, Inc., 264 F.3d 770, 773 (8th Cir. 2001); Lebanon Chem. Corp. v. United Farmers Plant Food, Inc., 179 F.3d 1095, 1100 (8th Cir. 1999). As the Court undertakes this analysis, any doubts concerning the scope of the coverage of an arbitration clause are resolved in favor of arbitration. A.T.T. Technologies, Inc. v. Communication Workers of Am., 475 U.S. 643, 650 (1986); Teamsters Local Union No. 688 v. Industrial Wire Products, Inc., 186 F.3d 878, 882 (8th Cir. 1999).
II. MHUEMDA
Defendants argue that the arbitration clause in the distributorship agreement should be enforced against plaintiffs, because plaintiffs are a successor in interest to Bering. Understanding defendants' argument is an exercise in logic, which proceeds as follows: Under MHUEMDA's definition of "successor in interest," plaintiff is a successor in interest to Bering. Pursuant to a verbal agreement between Bering and defendants, Bering was responsible for paying the finance and interest charges to plaintiff, therefore disputes about the insurance and interest charges are really disputes between Bering and defendants. All disputes between Bering and defendants must be arbitrated. Because this is a dispute about the insurance and interest charges, defendants claim, it is really a dispute between Bering and defendants and must be arbitrated.
Central to this argument is the proposition that MHUEMDA defines "successor in interest" broadly enough to reach the parties' relationship based on the financing agreements. The Court therefore turns to the statutory scheme to determine if the statute fairly supports such an interpretation.
The Court does not have the benefit of a significant body of case law interpreting the MHUEMDA, and no reported case has addressed this specific question. See e.g., Astleford Equip. Co. v. Navistar Int'l Transp. Corp., 632 N.W.2d 182 (Minn. 2001) (recognizing without discussion that defendant manufacturer was a "successor in interest"). Minnesota Courts have held, however, that the purpose of MHUEMDA is to "protect the dealer, who is often in a weaker bargaining position than the [manufacturer] who inherently has superior economic power in the negotiation of dealerships." Astleford Equip. Co., 632 N.W.2d at 191 (agreeing with purpose stated in Midwest Great Dane Trailers, Inc. v. Great Dane Partnership, 977 F. Supp. 1386, 1392 (D.Minn. 1997)). The Court therefore interprets the statute in light of this expressed purpose.
Defendants cite the following definition section of MHUEMDA:
Subd. 3. Heavy and utility equipment manufacturer. "Heavy and utility equipment manufacturer," "heavy equipment manufacturer," or "equipment manufacturer" means a person, partnership, corporation, association, or other form of business enterprise engaged in the manufacturing, assembly, or wholesale distribution of heavy and utility equipment as defined in subdivision 2. The term also includes a successor in interest of the heavy and utility equipment manufacturer, including a purchaser of assets or stock, a surviving corporation resulting from a merger or liquidation, a receiver or assignee, or a trustee of the original equipment manufacturer.
Minn. Stat. § 325E.068 (emphasis added).
The section clearly contemplates an expansive definition of "heavy and utility equipment" dealers, and includes "successors in interest" in that definition. A "successor in interest" is typically defined as one who follows another in ownership or control of property. Black's Law Dictionary 1431-32 (6th ed. 1990); see also Fletcher Cyclopedia of the Law of Private Corporations, § 7203. Mere assignees are not typically considered successors in interest, see Black's Law Dictionary 1431-32 (6th ed. 1990); MHUEMDA, however, expressly includes assignees and receivers.
Although MHUEMDA expansively defines the term "successor in interest," the Court is not persuaded that MHUEMDA was intended to transform every financer of equipment manufacturers into "successors in interest" for every purpose. Such a reading would inhibit necessary financing for manufacturers, and would extend liability well beyond general principles of corporate liability. If the legislature had intended such a dramatic effect, it would have said so more plainly, perhaps by explicitly including the term "secured creditor" in the definition of successor in interest.
However, even if "successor in interest" includes plaintiffs for some purposes, it does not necessarily follow that all aspects of the parties' relationships are encompassed by the arbitration clause. The aspect of the parties' relationship in dispute here is the independent financing arrangement between plaintiff and defendants. Bering certainly influenced that relationship, but was not a party to the financing agreements. The dispute here is derivative of the independent relationship between plaintiff and defendants; it is not derivative of the relationship between Bering and defendants. The Court notes that defendants indicate that their likely counterclaims are, in fact, derivative of the Bering-defendants relationship. It is not appropriate, however, for the Court to order arbitration based on "likely" or anticipated counterclaims. Instead, the Court must base its decision on the record before it. In sum, the current dispute is not subject to the arbitration clause contained in the contract between Bering and defendants.
III. Alternate ground for successor liability
If plaintiff is not a successor in interest, there is no basis on which to compel arbitration. The Uniform Commercial Code provides that "[t]he existence of a security relationship . . . without more, does not subject a secured party to liability in contract . . . for the debtor's acts or omissions." See Minn. Stat. § 336.9-402 (adopting Article 9 of the Uniform Commercial Code). In limited circumstances, secured creditors will be held to have assumed the liabilities of the predecessor corporation. Those exceptions include instances in which (1) the successor has agreed to assume liabilities, (2) the transaction is a de facto merger; (3) the successor is a "mere continuation" of the predecessor, or (4) the transaction was fraudulent. United States v. Mexico Feed and Seed Co., 980 F.2d 478, 487 (8th Cir. 1992). None of those exceptions apply in this case.
Defendants' expressed concern that manufacturers might attempt to avoid the strictures of MHUEMDA by simply transferring assets to third party corporations. The Court acknowledges the concern, but notes that there is no allegation in this case that such avoidance was attempted. Rather, the record and arguments reveal that plaintiff was a legitimate financer of Bering, and had a relationship with defendants independent from its relationship with Bering.
The Court might have reached a different result had Bering, rather than plaintiff, entered the financing agreement and if it was Bering, rather than plaintiff, seeking to enforce the financing agreement. In Neal v. Hardee's Food Sys., Inc., 918 F.2d 34 (5th Cir. 1990), the defendant franchise sought to compel arbitration pursuant to an arbitration clause in the parties' licensing agreement. The franchisee's claims, however, were brought pursuant to the parties' purchase agreement, which did not contain an arbitration clause. Id. at 36. Nonetheless, the Court ruled that the arbitration clause controlled, reasoning that "separate agreements executed contemporaneously by the same parties, for the same purposes, and as part of the same transaction, are to be construed together." Id. at 37. Those criteria, however, are not met here.
IV. Conclusion
The Court finds that plaintiffs are not parties to the arbitration agreement for the purposes of resolving the dispute based on the financing agreement. The Court does, however, note that the language in the arbitration agreement is quite broad, as is MHUEMDA's definition of successor in interest. The Court reserves the question of whether the defendants' anticipated counterclaims are subject to the arbitration agreement.
ORDER
Based upon the foregoing, the submissions of the parties, the arguments of counsel and the entire file and proceedings herein, IT IS HEREBY ORDERED that defendants' motions to dismiss or stay [Civ. Nos. 02-2924 and 02-2925] are DENIED.