William Auclair v. Elmot Realty et al. (2014)

RULING ON DEFENDANTS' MOTION TO STAY (# 114)

On March 27, 2013, the plaintiff, William Auclair, filed a complaint against Elmot Realty Associates, LLC (“ERA I”), Elmot Realty Associates II, LLC (“ERA II”), John Auclair and Randolf Auclair, seeking judicial dissolution and other damages stemming from an alleged breach of fiduciary duties.   On October 22, 2013, the plaintiff filed a motion to cite in Electric Motion Company, Inc. (“EMC”) and Diane Beebe as additional party defendants.

On November 5, 2013, the court granted the plaintiff's motion to cite in additional party defendants and ordered the plaintiff to file and serve an amended complaint containing claims against EMC and Beebe.   The plaintiff filed the amended complaint on December 9, 2013.¹  According to the complaint, ERA I and ERA II, both of which are managed by defendant Randolf Auclair, lease property to EMC, which operates factories on those properties.   The plaintiff alleges that he and defendants John and Randolph Auclair (“Auclair defendants”) each have a one-third interest in EMC and each have an ownership interest in the real estate companies.

Counts eight through twelve include allegations concerning EMC, and allege breach of fiduciary duty, fraudulent misrepresentation, failure to timely reimburse legal fees, thwarted access to EMC property and failure to provide an audited inventory.   On November 13, 2013, under the terms of Section 9.8 of Article IX of the Stockholders' Agreement, entered into in 2005 by the plaintiff and the Auclair defendants, the Auclair defendants sent a formal demand notice to the plaintiff invoking an arbitration provision, Section 9.7 of Article IX, for all claims and disputes relating to EMC.

On November 14, 2013, EMC and the Auclair defendants (hereinafter, “the defendants”) filed a motion to stay the proceedings with respect to any claims or disputes related to EMC, along with a supporting memorandum of law and evidentiary support.   On December 12, 2013, the plaintiff filed an objection to the motion to stay, along with a supporting memorandum of law and evidentiary support.   The defendants filed a reply memorandum on December 23, 2013, to which the plaintiff filed a surreply on December 31, 2013, supplemented by evidentiary support filed on January 2, 2014.   This matter came before the court as a non-arguable motion on the January 6, 2014 short calendar.   The motion to stay is granted.

I

PARTIES' ARGUMENTSADefendants' Motion to Stay

The defendants move to stay the proceedings with respect to any claims or disputes related to EMC based on the arbitration clause set forth in the 2005 stockholders' agreement.   According to the defendants, they and the plaintiff are subject to the arbitration clause which requires that the stockholders arbitrate disputes concerning the ownership, management and transfer of capital assets of EMC. Article IX, Section 9.7 of the agreement states in relevant part:  “In the event of any dispute among any parties bound by the terms of this Agreement, such dispute shall be settled by arbitration in accordance with the rules of the American Arbitration Association ․” The defendants assert that certain of the plaintiff's claims fall under the purview of the 2005 agreement.   Finally, the defendants assert that they have expressed their clear willingness to arbitrate.

B

Plaintiff's Objection

The plaintiff objects to the motion to stay on four grounds.   First, the plaintiff asserts that the arbitration clause in the 2005 agreement was intended to arbitrate only conflicts attendant to that agreement.   According to the plaintiff, the agreement addresses one central issue, namely “the transfer of the stock of the three parties upon death, adjudication of incompetence or termination of employment from EMC.” The plaintiff contends that the 2005 agreement is unambiguous and its language limits the invocation of arbitration to the three conditions precedent, none of which has occurred.   The plaintiff argues that the arbitration clause does not encompass every dispute between EMC and the Auclair defendants.   Furthermore, the plaintiff contends that the intent of the 2005 agreement is clearly stated, and that intent was to establish a method for valuing stock for transfer purposes and to restrict transferability of the stock.   The plaintiff claims that there is no nexus between the disputes alleged in the complaint and the purpose and intent of the 2005 agreement.   Therefore, he argues, the arbitration clause is inapplicable because the disputes alleged in the complaint do not have their origin in the agreement.

Second, the plaintiff asserts that EMC, ERA I and ERA II are sister-brother corporations and the actions of the defendants have intertwined the three entities, permitting him to pierce the corporate veil.   As a result, the claim that EMC is separate from ERA I and ERA II should be disregarded.   Consequently, he claims, the arbitration clause is vitiated and voided by:  (1) the use of the dominated corporations outside EMC to create the disputes;  (2) the inability of the plaintiff to achieve equity and resolution of the disputes with EMC in the complaint with EMC as a defendant in open court;  and (3) the defendants have misused the three corporations and so cannot now claim that the arbitration clause is valid.

Third, the plaintiff argues that the defendants waived their recourse to the arbitration clause by their conduct.   According to the plaintiff, at no point since August 2012, when the dispute among the parties arose by virtue of a demand letter, did the defendants seek arbitration.   The plaintiff asserts that he scheduled and noticed depositions of parties and witnesses in September 2013, but the dates were avoided by cancellations and promises to reschedule.   At the point when the depositions could no longer be avoided or postponed, the arbitration request was made.   The plaintiff claims that the use of the arbitration clause is merely an attempt to avoid discovery, thwart equity and delay the ultimate disposition of the case.

Fourth, the plaintiff argues that the defendants have no standing to seek a stay on behalf of EMC as it is a nonappearing party.

C

Defendants' Reply

The defendants argue that the arbitration clause is a prototypical example of a broad arbitration clause, and a plain reading of it belies the plaintiff's interpretation that it is narrow.   The defendants argue that their interpretation is the more reasonable one because it gives the broad language in the arbitration clause appropriate effect.   Moreover, the defendants contend that their interpretation reflects the parties' intent when one compares the arbitration clause in the 2005 agreement with an arbitration clause contained in a superseded 1994 agreement.   The 1994 agreement contained an arbitration clause which limited arbitration to any controversy, claim or breach “arising out of or relating to this agreement.”   The arbitration clause in the 2005 agreement, however, removed this limiting language.   The defendants argue that this change to a broader arbitration clause evinces the parties' intent to apply arbitration to any dispute amongst them.   Furthermore, the plaintiff argues that the counts in the amended complaint that touch upon ownership and fiduciary duties resulting from ownership necessarily implicate the arbitration clause as the mechanism for resolving disputes.   The defendants also argue that the arbitration clause is not subject to veil piercing arguments, and the plaintiff has not offered any evidence to support why his arguments to pierce the corporate veil are applicable or relevant to the agreement.

Finally, the defendants argue that they have not waived their right to arbitration, as EMC did not become a party to this action until the plaintiff's motion to cite EMC in as a party defendant was granted and EMC was served with process.   EMC could not demand arbitration relative to a civil action until it was made a party to that action.   The defendants also argue that they have not used arbitration to thwart discovery.   Rather, they have filed numerous protective orders that allow testimony on matters relating to ERA I and ERA II, and have only sought to prevent testimony as to matters covered in the arbitration clause.

D

Plaintiff's Surreply

The plaintiff's surreply reiterates his prior arguments, but includes an additional statement that whether piercing the corporate veil can be used to vitiate an arbitration clause is an issue of first impression.   The plaintiff also argues that he brought a separate case against EMC (Docket No. LLICV136008381S) in March 2013, eight months before the arbitration demand, but there was no demand for arbitration at that time.

II

DISCUSSION

“Where a contract contains a stipulation that the decision of arbitrators on certain questions shall be a condition precedent to the right of action on the contract itself, such a stipulation will be enforced and, until arbitration has been pursued or some sufficient reason given for not pursuing it, no action can be brought on the contract ․ Whether an agreement makes arbitration a condition precedent to an action in court depends on the language of the arbitration clause.   While it is true that in the absence of express language a provision for arbitration may be construed, by implication, to be a condition precedent to suit that implication must be so plain that a contrary intention cannot be supposed.   It must be a necessary implication.   The mere agreement to arbitrate, standing alone, does not give rise to the necessary implication that arbitration is a condition precedent to an action in court.   For arbitration to be a condition precedent, the agreement to arbitrate must expressly so stipulate, or it must necessarily be implied from the language used.”   (Citation omitted.)  Multi–Service Contractors, Inc. v. Vernon, 181 Conn. 445, 447–48, 435 A.2d 983 (1980);  see Mark v. Neundorf, 147 Conn.App. 485 (2014).

This court possesses the discretionary authority to stay proceedings and to compel mediation where the parties contractually have agreed to mediate their disputes.   See generally, Park City Hospital v. Commission on Hospitals & Health Care, 210 Conn. 697, 701, 556 A.2d 602 (1989) (“the Superior Court's exercise of its equitable powers in [deciding whether to grant a stay] is in fact much broader” than that expressly conveyed by statute);  EJV Development, LLC v. CRC Real Estate Development, LLC, Superior Court, judicial district of Stamford–Norwalk at Stamford, Docket No. CV–08–5009105–S (March 12, 2009, Pavia, J.) (47 Conn. L. Rptr. 365, 365) (“[t]he court has the inherent power to stay proceedings before it in the interest of the just resolution of controversies” (internal quotation marks omitted)).

The issue now before the court is also addressed in General Statutes § 52–409 which provides:  “If any action for legal or equitable relief or other proceeding is brought by any party to a written agreement to arbitrate, the court in which the action or proceeding is pending, upon being satisfied that any issue involved in the action or proceeding is referable to arbitration under the agreement, shall, on motion of any party to the arbitration agreement, stay the action or proceeding until an arbitration has been had in compliance with the agreement, provided the person making application for the stay shall be ready and willing to proceed with the arbitration.”   See Success Centers, Inc. v. Huntington Learning Centers, Inc., 223 Conn. 761, 767, 613 A.2d 1320 (1992) (“[u]nder § 52–409, when an action is brought in the trial court by a party to a written agreement that includes provisions for arbitration, and the trial court is satisfied that an issue involved in the action is arbitrable, the court, on motion of any party to the agreement, shall stay the action until arbitration has been had in compliance with the agreement”).

“Our Supreme Court has for many years wholeheartedly endorsed arbitration as an effective alternative method of settling disputes intended to avoid the formalities, delay, expense and vexation of ordinary litigation ․ When arbitration is created by contract, we recognize that its autonomy can only be preserved by minimal judicial intervention.”  (Internal quotation mark omitted.)  Doctor's Associates, Inc. v. Windham, 146 Conn.App. 768, 774, 81 A.3d 230 (2013).

The 2005 stockholders' agreement is attached as exhibit A to the defendants' memorandum in support of their motion to stay.   The arbitration provision appears in Article IX, Section 9.7 and provides that “[i]n the event of any dispute among any parties bound by the terms of this Agreement, such dispute shall be settled by arbitration in accordance with the rules of the American Arbitration Association as then existing in Hartford County, Connecticut, and judgment upon the award rendered may be entered in any court having jurisdiction.”   The agreement, dated April 8, 2005, carries the signatures of the plaintiff and the Auclair defendants.   The defendants also accompanied their motion with a letter dated November 13, 2013, by which they served the plaintiff, through his counsel, with a demand for arbitration pursuant to the foregoing agreement.

The agreement itself is entitled “Stockholders' Agreement,” and makes clear that it is an agreement among the plaintiff and the defendants.   Its statement of facts indicates that the agreement is intended to provide for the orderly transfer of EMC stock, to provide a method for valuing such stock, and to restrict the transferability of such stock.   The defendants seek to stay proceedings relative to counts eight through twelve of the amended complaint in that those counts implicate claims against EMC.

The central question before this court is whether the arbitration provision at issue falls “within the grey area of arbitrability, employing the positive assurance test ․” (Citation omitted;  internal quotation marks omitted.)   New Britain v. AFSCME, Council 4, Local 1186, 304 Conn. 639, 652, 43 A.3d 143 (2012).   Under the positive assurance test, ‘judicial inquiry ․ must be strictly confined to the question whether the reluctant party did agree to arbitrate the grievance ․ An order to arbitrate the particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.   Doubts should be resolved in favor of coverage.”  (Internal quotation marks omitted.)  Id., 652–53.   It is with the foregoing principles in mind that the court will compare the allegations in the complaint with the arbitration agreement.

Count eight alleges, inter alia, that the defendants misrepresented the financial condition of EMC. This allegation is repeated in count nine.   In count ten, the plaintiff alleges that EMC delayed payment of a demand note and “misrepresented facts and intent” in the course of settlement negotiations with the plaintiff.   Count eleven alleges that the defendants have not provided the plaintiff with information “on the valuation of the inventory at EMC,” and asserts that EMC should be the subject of an audited inventory.   Count twelve alleges that defendant Randolph Auclair has denied the plaintiff access to EMC's accounting computer system and that “[t]he corporate veil is pierced” due to, inter alia, fraud by the defendants.   The prayer for relief seeks, inter alia, “[a]n order directing EMC to perform an audited inventory valuation performed by an independent CPA firm,” and “[a]n order returning accounting computer system access, complete access to the EMC facilities and a letter to the police rescinding the instruction to the [sic].”

Even if the agreement were to be read narrowly, serving only to provide for the orderly transfer of EMC stock, a method for valuing that stock for transfer purposes, and as a means for restricting the transferability of the stock, it is apparent to the court that the plaintiff's allegations implicate at least some of the foregoing concerns.   In multiple ways, the plaintiff's complaint challenges the manner in which EMC's finances have been handled, and the manner in which EMC was, and is, valued.   The plaintiff also claims to have been the victim of misrepresentations regarding the valuation of EMC. Issues pertaining to the valuation of EMC itself necessarily implicate the valuation of EMC stock.   See generally West Haven Sound Development Corp. v. West Haven, 201 Conn. 305, 329–30, 514 A.2d 734 (1986).   The latter conclusion is buttressed by the sweeping breadth of the arbitration section of the agreement, which provides for arbitration “[i]n the event of any dispute among any parties bound by the terms of this Agreement.”  (Emphasis added.)

The plaintiff disagrees with the foregoing conclusion, arguing, in part, that the court should refer to, and rely upon the 1994 agreement purportedly signed by the same individuals who signed the 2005 agreement.²  However, recourse to the 1994 agreement supports the defendants' position, not that of the plaintiff.   In the 1994 agreement, the arbitration element of the agreement was written more narrowly than the superseding 2005 agreement.   In 1994, the arbitration provision limited the obligation to arbitrate to “[a]ny controversy, claim or breach arising out of or relating to this Agreement ․” ³ The arbitration section of the 2005 agreement eliminates the language restricting the requirement of arbitration to disputes “arising out of or relating to this Agreement,” and instead requires arbitration relative to any dispute involving the signatories to the 2005 agreement.   Thus, in 2005, the parties agreed to broaden the reach of the existing arbitration agreement.

The court concludes that the plaintiff has failed to overcome the presumption of arbitrability.   The court has no doubt with regard to the latter conclusion, but even if such a doubt existed, our Supreme Court mandates that doubts should be resolved in favor of coverage.  New Britain v. AFSCME, Council 4, Local 1186, supra, 304 Conn. 653.

The court also disagrees with the plaintiff's claim that the defendants improperly delayed their motion and that they should have sought arbitration sooner than they did.   The defendants agree that the agreement does not implicate counts one through six of the complaint, and argue, correctly, that the agreement was only implicated when the plaintiff's motion to cite in EMC as a party defendant was granted on November 5, 2013.⁴  The motion to stay was filed only eight days later, on November 13, 2013.

The plaintiff asserts a wide ranging series of facts which, he claims, justify “piercing the corporate veil” and which, he claims, preclude invocation of the arbitration agreement.   Setting aside the question of whether “piercing the corporate veil” has any relevance to the motion to stay in order to enforce the arbitration agreement, the court concludes that it is improper, at this stage of the proceedings, to make factual findings relative to the “piercing the corporate veil” allegations set forth in counts thirteen, fourteen and fifteen of the plaintiff's complaint.   The plaintiff does not cite to any authority for the proposition that “piercing the corporate veil” has relevance to the issue now before the court.   Further, his argument is fatally flawed in that it depends upon the court making factual findings based on allegations as opposed to evidence.

III

CONCLUSION

The court concludes that the plaintiff and the defendants are parties to a written arbitration agreement;  at least one issue involved in the action sought to be stayed is referable to arbitration under the agreement;  and the defendants have established that they are ready and willing to proceed with the arbitration.   See Heritage Recruiting Group, LLC v. Penwest Pharmaceutic Co., Superior Court, judicial district of Danbury, Docket No. CV–08–5005183–S (November 24, 2008, Shaban, J.) (46 Conn. L. Rptr. 730, 731).   For the foregoing reasons, the defendants' motion to stay the proceedings pending arbitration is granted.

So ordered.

John A. Danaher III

FOOTNOTES

FN1. The complaint purports to allege fifteen counts, but the court notes that it does not contain a seventh count..  FN1. The complaint purports to allege fifteen counts, but the court notes that it does not contain a seventh count.

FN2. Pl's Mem. 14.   The court notes that the plaintiff, in the course of submitting the 1994 agreement as an exhibit did not include the signature page to that agreement.   However, the plaintiff did include the first page of that agreement, and that page asserts that it is an agreement involving EMC and Randolph, William and John Auclair.   See n.3, infra..  FN2. Pl's Mem. 14.   The court notes that the plaintiff, in the course of submitting the 1994 agreement as an exhibit did not include the signature page to that agreement.   However, the plaintiff did include the first page of that agreement, and that page asserts that it is an agreement involving EMC and Randolph, William and John Auclair.   See n.3, infra.

FN3. Pl.'s Mem., Ex. B at 15, § 14..  FN3. Pl.'s Mem., Ex. B at 15, § 14.

FN4. The amended complaint was served on EMC on December 3, 2013..  FN4. The amended complaint was served on EMC on December 3, 2013.

Danaher, John A., J.