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noting that plaintiff would be subject to irreparable harm by "depriving [it] of its right to avoid court proceedings in favor of arbitration and potentially depriving it of its business premises . . . ."
Summary of this case from Am Gen. Holdings LLC v. Renco Grp., Inc.Opinion
Civil Action No. 001-N.
April 8, 2004.
William E. Manning, Esquire Klett Rooney Lieber Schorling Wilmington, Delaware.
James S. Green, Esquire Seitz Van Ogtrop Green, P.A., Wilmington, Delaware.
Dear Counsel:
Pending before the Court is KL Golf, LLC's ("KL Golf") motion for a preliminary injunction enjoining Frog Hollow, LLC ("Frog Hollow") from pursuing an action for summary possession in the Justice of the Peace Court. For the reasons stated below, the Court will grant the motion.
I. BACKGROUND
KL Golf leases certain ground at a golf course operated by Frog Hollow (the "Premises") in Middletown, Delaware (the "Lease"). Section 41 of the Lease contains an arbitration clause (the "Arbitration Clause") that provides in relevant part:
The Lease is attached to Plaintiff's Motion for a Preliminary Injunction as Exhibit A.
All claims, demands, disputes, controversies, and differences that may arise between the parties, concerning any issue related to or generated by this Lease . . . shall be resolved by the resolution process set out in this provision. . . .
* * * *
(e) It is expressly understood and agreed by the parties that the provisions of this provision . . . shall be construed by a court of competent jurisdiction as preventing any party from maintaining an action at law or in equity in any court of competent jurisdiction to obtain any remedy to which such party may be entitled in the event of any breach or violation of this Lease.
On April 6, 2001, the parties began what evolved into an extended arbitration process. This process included two separate, but related, awards pertaining to Frog Hollow's obligations regarding a grill in the clubhouse of the golf course and KL Golf's failure to pay Frog Hollow $25,000 towards the construction of the clubhouse.
The arbitrator issued an award on April 19, 2002 (the "Final Award") that required Frog Hollow to "construct and open a grill operation of substantially the same kind and quality as grill operations at comparable golf courses" by June 1, 2002. The arbitrator also ordered KL Golf to pay $25,000 that it owed to Frog Hollow for the construction of the clubhouse within 45 days.
Final Award at 5. The Final Award is attached to Plaintiff's Motion for a Preliminary Injunction as Exhibit C.
Before beginning the arbitration proceedings, Frog Hollow provided KL Golf with written notice of the default under the Lease and a thirty (30) day opportunity to cure it as required under § 18(a) of the Lease. Fortunato Aff. Exs. B-D. The arbitrator later suspended or nullified the effect of the notices pending his final award.
The arbitration, however, did not end the disputes between the parties. KL Golf claimed that Frog Hollow failed to meet its obligations under the Lease and the duties imposed by the Final Award. In addition, KL Golf put the $25,000 into escrow, rather than paying it to Frog Hollow as ordered by the arbitrator. The parties then re-submitted their disputes to the arbitrator.
On October 8, 2003, the arbitrator issued a supplemental award (the "Supplemental Award") re-confirming KL Golf's obligation to pay the $25,000 due under the Lease. He also awarded KL Golf $182,000 as a result of Frog Hollow's failure to comply with the substance of the Final Award and awarded KL Golf possession of the clubhouse grill. KL Golf filed this action to confirm the Supplemental Award on October 17, 2003.
The Supplemental Award is attached to Plaintiff's Motion for a Preliminary Injunction as Exhibit B.
On January 14, 2004, Frog Hollow filed an action in Justice of the Peace Court No. 9 seeking summary possession of the Premises. Frog Hollow argued that KL Golf breached the Lease by failing to pay the $25,000 due under to section 2(c) of the Lease. KL Golf denies the existence of a breach, claiming that it is entitled to set off the $182,000 owed to it under the Supplemental Award against the $25,000 owed to Frog Hollow. KL Golf also contends that by filing the summary possession action, Frog Hollow violated the Arbitration Clause. The hearing in the Justice of the Peace Court is scheduled for April 12, 2004. KL Golf seeks a preliminary injunction prohibiting Frog Hollow from pursuing the summary possession proceeding in the Justice of the Peace Court.
The Lease does not explicitly prohibit either party from asserting a right of setoff. Plaintiff's Opening Brief at 4.
II. STANDARD
The standard for a preliminary injunction is well settled. KL Golf must demonstrate that: (1) it has a reasonable probability of success on the merits; (2) it will suffer irreparable harm if the preliminary injunction is not granted; and (3) the balance of the equities favor granting the preliminary injunction.
E.g., SI Mgmt. L.P. v. Wininger, 707 A.2d 37, 40 (Del. 1998); Cirrus Holding Co. Ltd. v. Cirrus Indus. Inc., 794 A.2d 1191, 1201 (Del.Ch. 2001).
As a threshold matter, Frog Hollow has raised the defense of lack of jurisdiction. Frog Hollow contends that this action is limited to KL Golf's motion to confirm the arbitration award. By filing an action for summary possession, however, Frog Hollow arguably has threatened this Court's ability to grant effective relief in this action. KL Golf contends it will be irreparably harmed if the summary possession action is not enjoined. Since a preliminary injunction is clearly equitable, this Court has subject matter jurisdiction pursuant to 10 Del. C. § 341.
III. ANALYSIS A. Likelihood of Success
KL Golf seeks an injunction in aid of the arbitration proceedings. In such a situation, "likelihood of success" must be examined at two levels: (1) the moving party's entitlement to arbitration; and (2) the merits of its arbitration claims. KL Golf has demonstrated a reasonable likelihood of success on the merits at both levels. First, KL Golf is likely to prevail on its claim that it is entitled to arbitrate the issues of default and the appropriate remedy. And second, KL Golf has a reasonable likelihood of success on its claim to a setoff as a result of the Supplemental Award to it of $182,000.
Kansas City Southern v. Grupo TMM, S.A., 2003 WL 22659332, at *2 (Del.Ch. Nov. 4, 2003) (citations omitted).
Frog Hollow contends that section 19 of the Lease authorizes it to seek summary possession in the Justice of the Peace Court notwithstanding the Arbitration Clause in section 41. KL Golf counters that section 19 is not an exception to section 41. According to KL Golf, Frog Hollow would have to submit the disputed issue of default to arbitration before it could seek to enforce an arbitration award by a summary possession proceeding, and the issue of default has not yet been presented to the arbitrator.
Section 19 provides that, in the event of default, KL Golf "shall immediately quit and surrender to [Frog Hollow] the Premises by summary proceedings, detainer, ejectment, or otherwise and remove itself and all other occupants thereof. . . ."
KL Golf is reasonably likely to succeed on its argument that the Arbitration Clause controls. The public policy of this State in favor of arbitration supports the rule of construction that, "[a]ny doubt as to arbitrability is to be resolved in favor of arbitration." Furthermore, to the extent that section 19 appears to conflict with section 41, the clauses can be reconciled. The lease reasonably can be interpreted to require the parties to submit all disputed issues to the arbitrator, including the issue of default, before seeking enforcement of the arbitrator's award by judicial action.
SBC Interactive, Inc. v. Corporate Media Partners, 714 A.2d 758, 761 (Del. 1998).
See Parfi Holding v. Mirror Image Internet, Inc., 817 A.2d 149, 155 (Del. 2002) ("If the arbitration clause is broad in scope [as it is here], the Court will defer to arbitration any issues that touch on contract rights or contract performance"); Pettinaro, 408 A.2d at 962 ("Where it is reasonable to construe a contract as requiring arbitration, Courts will do so in the view of the public policy encouraging arbitration.").
Frog Hollow conceded at oral argument that the substance of disputes such as those raised by its action for summary possession go to the arbitrator, and that only the enforcement of the arbitrator's decision can be presented to the courts for confirmation and implementation. Frog Hollow argues that KL Golf's default has already been submitted to and decided by the arbitrator. Therefore, Frog Hollow argues that it is entitled to use the summary possession proceedings of the Justice of the Peace Court to enforce its right to possession.
Although the Justice of the Peace Court has exclusive jurisdiction over claims for possession, that jurisdiction may be divested by an arbitration clause. See Carriage Realty P'ship v. All-Tech Automotives, Inc., 2001 WL 1526301, at *7 n. 30 (Del. Ch. Nov. 27, 2001) (noting that under 25 Del. C. Ch. 57 owners and landlords seeking to recover possession of property must bring a summary proceeding in the Justice of the Peace Court); and Pettinaro, 408 A.2d at 961 (noting that courts may be ousted of jurisdiction by an arbitration clause). Should the arbitrator determine that KL Golf defaulted and that Frog Hollow is entitled to possession, it may seek enforcement of that remedy in the Justice of the Peace Court.
Frog Hollow notes that the arbitrator determined that "there was no provision in the final award for escrows or setoffs. KL Golf is therefore in breach of the Final Award." Defendant's Answering Brief at 6. This quotation, however, is taken out of context. At the time the arbitrator made that determination, KL Golf had not been awarded any monetary damages and no right to any escrow or setoffs had been established. The arbitrator's analysis might have been different after the Supplemental Award in which he awarded KL Golf $182,000. See Supplemental Award at 16. The ruling in which the quoted language appears was also highly critical of Frog Hollow's conduct during this dispute. The arbitrator's characterizations of Frog Hollow's minimal attempts to honor its commitments to KL Golf and his prior final award suggest that he might very well find in KL Golf's favor if this issue were presented to him. See Supplemental Award at 5-9 (describing Frog Hollow's failure to honor the contract and the duties clarified in the Final Award with regard to the quality of the grill).
There is no dispute that the arbitrator determined that KL Golf owes Frog Hollow $25,000 under the Lease. Issues remain, however, that go beyond what the parties previously presented to the arbitrator. For instance, the arbitrator has not determined whether KL Golf's decision to put the $25,000 into escrow pending resolution of the issues presented in the proceedings leading to the Supplemental Award and this confirmation action constituted a default under the Lease. The arbitrator merely determined that at the time KL Golf put the money into escrow, which preceded the Supplemental Award, no right to escrow or setoff had been established. The arbitrator also has not decided whether the notices of default that Frog Hollow sent before the initial arbitration proceedings and that the arbitrator suspended or nullified became effective at some later date. The arbitrator likewise has not decided whether eviction is the appropriate remedy in light of KL Golf's (perhaps belated) offer to cure, KL Golf's potential setoff as a result of the Supplemental Award, and Frog Hollow's actions regarding the clubhouse and the grill throughout this dispute. Because these issues "relate to or [are] generated by the Lease," KL Golf is reasonably likely to succeed on its argument that the parties agreed to submit them to an arbitrator.
The arbitrator, as the author of the prior rulings, is in the best position to determine the purpose and effect of his various awards. This dispute and the resulting awards do not involve isolated incidents. Rather, the current dispute over possession is part of an ongoing process in a continuing dispute with interrelated awards. KL Golf has demonstrated a reasonable likelihood of success on its claims that the parties' broad Arbitration Clause prohibits the pending Justice of the Peace Court proceeding and that it is entitled to a setoff as a result of the Supplemental Award.
Although KL Golf focused on its right to arbitrate all disputes as a basis for its motion, it did point to authority suggesting that setoffs and recoupment are well recognized in Delaware law. Plaintiff's Opening Brief at 2-3 n. 5; see Victor B. Wooley, Practice in Civil Actions, §§ 492-506. Frog Hollow cited no contrary authority, and its reliance on the lack of a provision for a setoff in the lease is misplaced. Supra note 12. In an earlier action in this Court, the parties stipulated that they would re-submit their non-compliance issues to the arbitrator. See C.A. No. 19602, Docket No. 8. This submission resulted in the Supplemental Award under which KL Golf claims a setoff or recoupment is appropriate.
B. Irreparable Harm
KL Golf also has demonstrated that permitting the summary possession proceeding to move forward would subject it to irreparable harm by depriving KL Golf of its right to avoid court proceedings in favor of arbitration and potentially depriving it of its business premises in circumstances for which there is not likely to be an adequate remedy at law.KL Golf bargained for and obtained the right to arbitrate all disputes when it negotiated its Lease with Frog Hollow. The right to use alternative dispute resolution is an enforceable contract right in and of itself. Permitting the Justice of the Peace Court proceeding to go forward would deprive KL Golf of this important contract right and create complicated questions of issue and claim preclusion.
See, e.g., Pettinaro, 408 A.2d at 961-62.
If Frog Hollow were to be successful in obtaining summary possession in the Justice of the Peace Court, KL Golf would be put out of business, at least temporarily. Putting a party out of business has been found to constitute irreparable harm in other cases before this Court. KL Golf would not have a right to appeal to a higher court from a summary possession proceeding. This is particularly significant here where those proceedings could have an issue preclusive effect on the other disputes between the parties.
See, e.g., Formosa Plastics Corp. v. Wilson, 504 A.2d 1083, 1088 (Del. 1986); Jones v. Estep, 1982 WL 17837, at *2 (Del.Ch. Nov. 9, 1982).
See Bomba's Rest. Cocktail Lounge, Inc. v. Lord DeLaWarr Hotel, Inc., 389 A.2d 766, 769 (Del. 1978) (holding that there is no right to appeal a ruling by a Justice of the Peace in a summary proceeding to recover possession of premises).
Frog Hollow cites three cases to support its argument that the Court of Chancery should not enjoin the Justice of the Peace Court proceeding because KL Golf has an adequate remedy at law in that Court. But none of those cases involved a contract right comparable to the Arbitration Clause that the parties here agreed to in order to avoid expensive and time-consuming legal proceedings regarding the Lease. Furthermore, although neither party raised this issue, "[t]he Court of Chancery may grant injunctions staying actions at law . . . as there may be occasion." This includes jurisdiction to restrain proceedings involving landlord tenant disputes for possession in the Justice of the Peace Courts.
Exxon Corp. v. Truitt, 1985 WL 44695 (Jan. 25, 1985); Priestly v. Stoltz Mgmt. Co., 1984 WL 19489 (Del.Ch. May 21, 1984); Lisa's Sailboats, Inc. v. Dewey Beach Lions Club, 1991 WL 79479 (Del.Ch. Apr. 26, 1991).
See Lease § 41.
10 Del. C. § 343.
Butler v. Topkis, 63 A. 646 (Del.Ch. 1906).
C. Balancing of Hardships
As noted above, going forward with the Justice of the Peace Court proceeding would subject KL Golf to irreparable harm by depriving it of the benefit of the Arbitration Clause of the Lease and exposing it to the risk of losing its business premises. Damages would be difficult to quantify if KL Golf were evicted and later succeeded on its claim that it is entitled to a setoff, or that it was incorrectly brought to answer before the courts in violation of the Arbitration Clause.Permitting the summary possession action to proceed also would risk eviscerating the status quo pending a final decision on the merits of this dispute and the related Arbitration. In contrast, preliminarily enjoining the summary possession proceeding would preserve the status quo. Frog Hollow's argument that KL Golf would not suffer any harm until the Justice of the Peace Court decided the issue against it ignores the harm resulting from violation of the Arbitration Clause. The additional uncertainty created by the summary possession action compounds that harm.
This Court has enjoined parties to preserve the status quo pending arbitration or confirmation of an arbitration award. See, e.g., Kansas City Southern, 2003 WL 22659332 (preliminarily enjoining a party from taking actions pending outcome of arbitration proceedings); Delaware State College v. Delaware State College Chapter of the Am. Ass'n of Univ. Professors, 1987 WL 16509 (Del.Ch. Aug. 31, 1987) (preliminarily enjoining college from discharging professor pending action to confirm or set aside underlying arbitration award).
Notably, KL Golf has protected Frog Hollow's ability to collect the $25,000 that it is due by putting the money in escrow. Frog Hollow can seek interest on the $25,000 should KL Golf ultimately not be entitled to a setoff. Frog Hollow's right to and ability to collect $25,000 from KL Golf is fully protected. Furthermore, at oral argument, KL Golf offered to pay the $25,000 immediately to moot any need for the Justice of the Peace Court proceeding. Frog Hollow refused this overture. It also has not offered to provided KL Golf with similar protection for the $182,000 awarded in the Supplemental Award. The Court further notes that the $25,000 debt that forms the basis for the default claimed by Frog Hollow is minimal compared to the multimillion dollar venture between the parties.
Finally, the Court notes that KL Golf's motion to confirm the Arbitration Awards has now been fully briefed. A decision can be expected in a matter of months. Any harm to Frog Hollow is not only minor, but likely to be of short duration. In these circumstances, the balance of the hardships tips in favor of granting KL Golf's motion for a preliminary injunction.
IV. CONCLUSION
For the reasons stated above, KL Golf's motion for a preliminary injunction against Frog Hollow pursuing a summary possession action in the Justice of the Peace Court will be granted. An order will be entered consistent with this opinion.