Opinion
2008-2865.
Decided June 25, 2010.
McDONOUGH ARTZ, P.C., By: Kevin F. McDonough, Esq., Attorneys for Plaintiffs, Binghamton, New York.
D'AMATO LYNCH, LLP, By: David A. Boyar, Esq., Attorneys for Defendants, New York, New York.
JAMPOL SCHLEICHER JACOBS PAPADAKIS, LLP, By: Steven M. Jampol, Esq., Attorneys for Defendants, Alpharetta, GA.
AMERICAN ARBITRATION ASSOCIATION, By: Amanda Jackson, Case Manager, Atlanta, GA.
This proceeding arises from the sale by one of the petitioners, Windsor United Industries, LLC (WU), a Georgia limited liability company, of a manufacturing business located in Georgia to Windsor Fixtures, Inc. (WF), a Georgia corporation, on March 31, 2008. Petitioners commenced an action in New York on June 12, 2008, contending that William Healey, the president and principal shareholder of WF, and James Heavern and Michael Heavern, former members of WU employed by WU prior to the sale and by WF thereafter, conspired to defraud petitioners, in a scheme principally involving intentional misrepresentation of the value of the inventory included in the sale ( Windsor United Industries, LLC v Healey, Broome County Index No. 2008-1619; herein the related action). The related action was dismissed by decision and order dated June 24, 2010.
On or about October 17, 2008, WF filed a demand for arbitration in Atlanta, Georgia, under the commercial arbitration rules of the American Arbitration Association, to fix the value of inventory post-closing in accordance with article two of the contract. Petitioners promptly commenced this proceeding, pursuant to CPLR 7503(b), seeking that arbitration be stayed, contending that the inventory issue which respondent seeks to arbitrate is the fundamental issue at stake in the related action. A temporary restraining order was granted staying arbitration pending further order of this court. Respondent argues that the petition should be denied for lack of personal jurisdiction and on the basis that the parties' dispute is subject to arbitration.
PERSONAL JURISDICTION
In the related action, the court determined that Healey is subject to personal jurisdiction in New York, pursuant to CPLR 302 (a)(1), based on undisputed evidence showing that he was present in New York on two separate occasions to discuss the potential transaction prior to execution of the final asset purchase agreement at closing on March 31, 2008 ( see decision and order in the related action dated June 24, 2010). Inasmuch as he was acting on behalf of WF with respect to the transaction that is also at issue in this proceeding, his contacts with New York render WF amenable to personal jurisdiction in New York in this proceeding ( see Stardust Dance Prods., Ltd. v Cruise Groups Intl., Inc. , 63 AD3d 1262 ; Giant Group v Arthur Anderson LLP , 2 AD3d 189 ; Fabrikant Sons v Adrianne Kahn, Inc., 144 AD2d 264).
ARBITRABILITY OF THE PARTIES' DISPUTE
The parties agreed to a purchase price of $1,750,000, based on an estimate that the saleable inventory transferred to WF at closing would have a value of $800,000. They further agreed that the purchase price would be adjusted by the difference between $800,000 and the actual inventory value determined after closing based on a physical inventory count to be completed prior to closing, to be effectuated by adjustment of the balance due on the promissory note given by WF to WU in partial payment of the purchase price (asset purchase agreement [the contract], § 2.2). Respondent claims that the value of the inventory at closing was $369,000 ( see complaint in related action, ¶ 56), and seeks arbitration to fix the value of inventory post-closing in accordance with section 2.2 of the contract, pursuant to section 11.14 of the contract, which provides that "[a]ny dispute arising out of this Agreement, or its performance or breach, shall be resolved by final and binding arbitration in the Atlanta, Georgia metropolitan area, under the Commercial Arbitration Rules (AAA Rules') of the American Arbitration Association (AAA')."
As respondent narrowly frames the issue — the need to complete post-closing valuation of the inventory in accordance with the detailed procedure specified in article two of the contract — the parties' dispute would clearly be subject to arbitration under the broad arbitration clause. However, the court must also consider whether petitioners may be compelled to arbitrate their broader claim of fraudulent misrepresentation of inventory values by Healey and Heaverns — who are not signatories to the arbitration agreement.
The business which was the subject of the contract — the Georgia plant and assets sold by WU to WF — engaged in interstate commerce by installing products in many states, such as Texas, California, Nebraska, Iowa, and others ( see Affidavit of Dennis C. Garges, sworn to September 30, 2008, filed in the related action, at ¶ 5). Accordingly, the Federal Arbitration Act, 9 USC § 1 et seq. (FAA), governs the parties' agreement to arbitrate ( Prima Paint Corp. v Flood Conklin Mfg. Co., 388 US 395, 401). Under the FAA, the parties' choice of law provisions will be enforced ( Volt Information Sciences, Inc. v Bd. of Trustees of Leland Stanford Junior Univ., 489 US 468, 474 — 475 [1989]). Here, the parties agreed that "[t]his agreement shall be governed by the laws of the State of Georgia without reference to its principles of conflicts of laws" (contract, § 11.7).
Under Georgia law, issues of fraud in the inducement of an arbitration clause are to be decided by the courts, while issues of fraud in the inducement of the entire contract are to be decided by the arbitrators ( Harris v SAL Fin. Servs., Inc., 270 Ga App 230, 231; see also Prima Paint Corp. v Flood Conklin Mfg. Co., 388 US at 403 — 404 [same under federal law]). Here, the substance of petitioners' claim is that they would not have entered into the contract had they known that the value of the inventory was less than $700,000 (petition, ¶ 8; petition, Exhibit 1 [complaint in the related action], ¶¶ 17, 57 — 61); they have not alleged that they were fraudulently induced to agree to resolution of disputes by arbitration, or shown that arbitration of any potential claims arising from the contract was a necessary component of the alleged fraudulent scheme. Accordingly, petitioners' allegations constitute a claim of fraud in the inducement of the entire contract, which is an issue to be determined by the arbitrator ( see Order Homes, LLC v Iverson, 300 Ga App at 336 — 337; Robinson-Humphrey Co., Inc. v Williams, 193 Ga App 892, 893; see also Campaniello Imports, Ltd. v Saporiti Italia, S.p.A., 117 F3d 655 [2nd Cir 1997] [same under federal law]; cf. Harris v SAL Fin. Servs., Inc., 270 Ga App at 231 [issue of whether party acted improperly by binding a trust to arbitration while acting as an agent of both parties to the contract containing the arbitration agreement was for the court]).
That New York law — which provides that the issue of fraud in the inducement of the contract is to be resolved by the courts ( see Stellmack A.C. Refrig. Corp. v Contractors Mgt. Sys. of NH, 293 AD2d 956 [2002]; Utica Mut. Ins. Co. v Gulf Ins. Co., 306 AD2d 877 [2003], lv denied 1 NY3d 565 [2003]) — may lead to a different result is of no moment because there is no basis for application of New York law. As previously noted, the arbitration agreement is governed by the FAA, which requires enforcement of the parties' agreement to be governed by Georgia law. In addition, if applied, New York's own conflicts of laws principles would similarly require that the parties choice of law provision be honored, in light of Georgia's direct relationship to the parties and the transaction at issue, namely the sale, by a Georgia limited liability company, of assets located in Georgia to a Georgia corporation ( see Welsbach Elec. Corp. v MasTech N. Am., Inc. , 7 NY3d 624 [2006]; Eastern Artificial Insemination Coop. v La Bare, 210 AD2d 609, 610 [1994]).
The court further notes that petitioners' claims of fraudulent inducement — although asserted against Healey and Heaverns, who are not signatories to the contract — are subject to arbitration under Georgia law because they arise out of, and are directly related to, the transaction contemplated by the contract ( Price v Ernst Young, LLP, 274 Ga App 172; see also Order Homes, LLC v Iverson, 300 Ga App 332, 338 — 339 [2009]).
Accordingly, all issues related to valuation of the inventory, including petitioners' claims of fraudulent inducement based on misrepresentations of its value, are subject to arbitration in accordance with the procedure specified in § 11.14 of the contract. The temporary restraining order contained in the order to show cause signed on October 28, 2008 is vacated, and this proceeding is dismissed.
This decision constitutes the order and judgment of the court. The transmittal of copies of this decision, order and judgment by the court shall not constitute notice of entry.