Melendez v. Horning

908 N.W.2d 115

Raymond MELENDEZ, Plaintiff and Appellee

v. Merritt Charles HORNING III a.k.a. Chad Horning; Riggers Store Holdings, LLC; Riggers Store 1, LLC; Chase Merritt Management, Inc; Chase Merritt, LP, a limited partnership; and Racers Store Management, LLC, Defendants and AppellantsandGregory Dalton Bradford, Defendant and Appellee

No. 20170183

Supreme Court of North Dakota.

Filed March 8, 2018

Charles L. Neff, Williston, N.D., for plaintiff and appellee.

Kip M. Kaler (argued) and Asa K. Burck (on brief), Fargo, N.D., for defendants and appellants.

Michael L. Gust (on brief) and Matthew D. Kirschenmann (appeared), Fargo, N.D., for defendant and appellee.

Tufte, Justice.

[¶ 1] Merritt Charles Horning III; Riggers Store Holdings, LLC; Riggers Store 1, LLC; Chase Merritt Management, Inc.; Chase Merritt, LP; and Racers Store Management, LLC (collectively the "Horning defendants") appeal from a district court order denying their motion to compel arbitration of Raymond Melendez’s lawsuit against them. The issues in this appeal involve whether Melendez’s claims against the Horning defendants concerning the operation of a convenience store in Williston are arbitrable under an arbitration clause in an operating agreement for Riggers Store Holdings. We conclude the district court erred in deciding Melendez’s claims are not arbitrable, and we reverse the order denying arbitration and remand for entry of an order compelling arbitration.

I

[¶ 2] The resolution of the issues raised in this appeal requires a description of the relationship of the entities involved in the proceeding. Melendez, Greg Bradford, and Chase Merritt, LP, a Delaware limited partnership, are the three sole members of Riggers Store Holdings, a Delaware limited liability company. Chase Merritt Management, a Delaware corporation, is the manager of Riggers Store Holdings. Horning is a limited partner of Chase Merritt, LP, and is the president and owns all the stock of Chase Merritt Management. Riggers Store Holdings is the sole member of Riggers Store 1, a Delaware limited liability company and convenience store located in Williston. Riggers Store Holdings appointed Chase Merritt Management as the manager of Riggers Store 1, and Chase Merritt Management contracted with Racers Store Management, a Delaware limited liability company, to operate Riggers Store 1.

[¶ 3] Melendez, Bradford, and Chase Merritt, LP, as the members, and Chase Merritt Management, as the manager, executed an operating agreement for Riggers Store Holdings. The operating agreement stated that it "shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware" and that the "rights and obligations of the Members and the Manager, and the formation, operation, administration and termination of the Company shall be governed by the laws of the State of Delaware." The operating agreement also included an arbitration clause requiring arbitration governed by the California Arbitration Act "[i]f any controversy or dispute arises between or among the Members or the Manager or their respective representatives concerning any provision of this Agreement or the rights and duties of any person or entity in relation thereto."

[¶ 4] Melendez claimed that Horning, through his ownership and control of the interrelated companies, controlled four convenience stores in Williston, Minot, and Stanley, including Riggers Store 1 in Williston, and that Horning converted assets and cash belonging to Riggers Store 1 for his personal benefit and the benefit of the other convenience stores. Melendez had a minority ownership interest in Riggers Store 1 through his interest in Riggers Store Holdings, but he did not have an ownership interest in the other three convenience stores. Melendez sued the Horning defendants and Bradford, alleging that Horning, individually and through his ownership and control of the companies, had a fiduciary duty of good faith and fair dealing to the minority owners of Riggers Store Holdings and that Horning and his companies had a duty to comply with all applicable operating agreements and documents involving Riggers Store Holdings and Riggers Store 1. Melendez specifically alleged that Horning, through his control of the companies, unlawfully converted and commingled inventory, cash, and other assets belonging to Riggers Store Holdings and Riggers Store 1. Melendez sought: (1) the appointment of a new managing member for Riggers Store 1 and Riggers Store Holdings; (2) a declaration of the ownership interests of the members of Riggers Store Holdings; (3) an accounting of commingled and converted assets and cash; and (4) a determination that Horning’s conduct constituted actual and constructive fraud.

[¶ 5] Riggers Store 1 and Racers Store Management moved for a preliminary injunction under N.D.C.C. ch. 32–06, alleging Melendez had forcibly taken control of Riggers Store 1 and seeking an order directing Melendez and anyone acting at his behest or control to immediately remove themselves from the operation of Riggers Store 1. The district court described the status quo as Melendez having assumed management and control of the convenience store, and the court concluded the movants had not shown a substantial probability of succeeding on the merits and denied their motion for a preliminary injunction.

[¶ 6] Horning, Chase Merritt Management, and Chase Merritt, LP, thereafter moved to dismiss Melendez’s complaint for lack of personal jurisdiction. All the Horning defendants also moved to dismiss Melendez’s complaint for failure to state a cause of action and alternatively sought an order compelling arbitration of his claims.

[¶ 7] The district court denied the motions, ruling that it had personal jurisdiction over Horning and that Melendez’s lawsuit stated a cause of action. The court ruled it lacked authority to compel Horning, Riggers Store 1, and Racers Store Management to arbitrate, because they were not signatories to the Riggers Store Holdings operating agreement. The court held the arbitration clause in that operating agreement did not compel arbitration of Melendez’s claims, because those claims did not arise out of the interpretation or enforcement of the operating agreement or touch on contractual rights or performance under that agreement. The court explained the operating agreement did not implicate the Horning defendants’ fiduciary duties and the arbitration clause did not bar Melendez from seeking judicial relief. The court concluded that because Melendez’s claims did not arise from the operating agreement, he could not be compelled to arbitrate those claims.

II

[¶ 8] Under N.D.C.C. § 32–29.3–28(1)(a), "[a]n appeal may be taken from ... [a]n order denying a motion to compel arbitration." We apply a de novo standard of review to decisions denying or granting a motion to compel arbitration, unless the district court’s decision is based on factual findings, in which case we apply the clearly erroneous standard to the factual findings. See Kramlich v. Hale , 2017 ND 204, ¶ 7, 901 N.W.2d 72 ; 26th St. Hosp., LLP v. Real Builders, Inc. , 2016 ND 95, ¶ 11, 879 N.W.2d 437 ; Schwarz v. Gierke , 2010 ND 166, ¶ 11, 788 N.W.2d 302. In considering arbitration claims, the United States Supreme Court has recognized four generally applicable principles: (1) arbitration is a contractual matter and parties cannot be compelled to arbitrate disputes that they have not agreed to submit to arbitration; (2) the question of whether the parties agreed to arbitrate is decided by a court unless the parties clearly and unmistakenly require an arbitrator to decide arbitrability; (3) a court may not rule on the potential merits of claims that the parties have agreed to submit to arbitration; and (4) any doubts about the applicability of an arbitration clause should be resolved in favor of a strong public policy for arbitration. AT&T Techs., Inc. v. Commc’ns Workers of Am. , 475 U.S. 643, 648–50, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986). Our decisions also recognize those same principles. See generally Kramlich , at ¶¶ 7, 13, 15 ; 26th St. Hosp. , at ¶¶ 13, 21, 23–25 ; Schwarz , at ¶¶ 11, 16–17.

III

[¶ 9] The Horning defendants argue the district court should have compelled arbitration of Melendez’s claims. They argue the court erred in ruling it lacked authority to compel Horning, Riggers Store 1, and Racers Store Management to arbitrate because they were not signatories to the Riggers Store Holdings operating agreement. They argue nonsignatories may compel signatories to arbitrate claims when the nonsignatories consent to arbitration and the claims are founded on and intertwined with the underlying contractual obligations.

[¶ 10] The Riggers Store Holdings operating agreement stated that the limited liability company was formed under Delaware law, that the rights and obligations of the members and manager and the operation and administration of the company were governed by Delaware law, and that the operating agreement was governed by and construed and enforced in accordance with Delaware law. An arbitration clause in the operating agreement also said that any controversy or dispute concerning any provision of the agreement or the rights and duties of any person or entity in relation thereto shall be submitted to arbitration governed by the California Arbitration Act.

[¶ 11] Decisions in both California and Delaware have held that a signatory plaintiff may be estopped from denying arbitration if the plaintiff sues a nonsignatory affiliated with a signatory entity and the plaintiff’s claims are based on facts that are intertwined with arbitrable claims. See Rowe v. Exline , 153 Cal.App.4th 1276, 63 Cal.Rptr.3d 787, 794–98 (Cal. Ct. App. 2007) (holding nonsignatories entitled to compel signatory to arbitrate under equitable estoppel when signatory’s claims are inherently inseparable from or intertwined with arbitrable claims); McLaughlin v. McCann , 942 A.2d 616, 627 nn.42, 43 (...