Fahlstrom v. Jones

ILLINOIS OFFICIAL REPORTS
Appellate Court

Fahlstrom v. Jones, 2011 IL App (1st) 103318

Appellate Court GLENN FAHLSTROM, Plaintiff-Appellant, v. LAURENCE JONES
Caption and FAHLSTROM RESTAURANT GROUP, L.L.C., Defendants-
Appellees.

District & No. First District, Second Division
Docket No. 1–10–3318

Filed June 14, 2011

Held In an action arising from a dispute over the alleged sale of plaintiff’s
(Note: This syllabus interest in a restaurant to defendants, the trial court erred in denying
constitutes no part of the plaintiff’s motion to compel arbitration following the trial court’s entry
opinion of the court but of a preliminary injunction against defendants, notwithstanding
has been prepared by the defendants’ contentions that the sale of plaintiff’s interest by way of an
Reporter of Decisions for assignment to defendants was a separate contract that was not subject
the convenience of the to the arbitration clause in the operating agreement the parties entered
reader.) into when the restaurant business started and that a court, not an
arbitrator, should decide if the assignment was enforceable, since
plaintiff was challenging the validity of the assignment, not the
existence of the arbitration clause in the operating agreement, and the
validity of the assignment was within the scope of the operating
agreement’s arbitration clause and was a question for the arbitrator, not
the court; therefore, the cause was remanded with directions to compel
arbitration.
Decision Under Appeal from the Circuit Court of Cook County, No. 09–CH–15822; the
Review Hon. Stuart E. Palmer, Judge, presiding.
Judgment Reversed and remanded with directions.

Counsel on Cox, Oakes & Associates, Ltd., of Schaumburg (Christopher D. Oakes,
Appeal of counsel), for appellant.

Morrison & Morrison, P.C., of Waukegan (Joseph T. Morrison, of
counsel), for appellees.

Panel JUSTICE HARRIS delivered the judgment of the court, with
opinion.
Presiding Justice Cunningham and Justice Karnezis concurred in the
judgment and opinion.

OPINION

¶1 Plaintiff Glenn Fahlstsrom brought a complaint for declaratory judgment and injunctive
relief against defendants Laurence Jones and the Fahlstrom Restaurant Group, L.L.C.,
alleging defendants refused to arbitrate a dispute over the alleged sale of plaintiff’s interest
in the Restaurant Group to Jones. Following a hearing, the circuit court of Cook County
entered a preliminary injunction against defendants. Plaintiff then filed a motion to compel
arbitration, which the circuit court denied. Plaintiff filed this appeal. For the following
reasons, we reverse.

¶2 JURISDICTION
¶3 The circuit court’s interlocutory order denying plaintiff’s motion to compel arbitration
was entered on October 13, 2010. Plaintiff timely filed his notice of appeal from this order
on November 12, 2010. This court has jurisdiction pursuant to Supreme Court Rule 307(a)(1)
(eff. July 6, 2000), which allows interlocutory review of an order “granting, modifying,
refusing, dissolving, or refusing to dissolve or modify an injunction.” See, e.g., Bass v. SMG,
Inc., 328 Ill. App. 3d 492, 496 (2002) (motion to compel arbitration is analogous to motion
for injunctive relief).

¶4 BACKGROUND
¶5 In 2005, plaintiff and Jones formed Fahlstrom Restaurant Group, L.L.C. (LLC), a limited
liability company, for the purpose of operating a restaurant, Glenn’s Diner and Seafood
House, in Chicago. Plaintiff and Jones each had a 48.75% interest in the LLC, and the
restaurant’s chef, David Najman, had a 2.5% nonvoting interest. Under the LLC’s operating
agreement, plaintiff was to have day-to-day control and authority over the operation and

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 management of the restaurant.
¶6 The operating agreement contained a dispute resolution provision (section 7.9) under
which “[a]ny dispute among the members, and any dispute between the company and any one
or more of its members” was to be submitted to mediation, and subsequently, if mediation
was unsuccessful, to arbitration. Another provision in the agreement (section 3.5) spelled out
procedures for the purchase and sale of LLC membership interests in the event of a dispute
so serious it required a member to withdraw from the company. A third section (section 5.5)
prohibited the transfer or assignment of a member’s interest “to any person other than the
company without the unanimous consent of the members.”
¶7 On April 2, 2009, plaintiff and Jones participated in what was apparently a contentious
meeting at the restaurant. Accounts differed as to precisely what took place and what was
said. However, it is undisputed that plaintiff and Jones signed an agreement (membership
assignment) stating plaintiff was selling his interest in the LLC to Jones and waiving all
claims for $1,000. Plaintiff acknowledges Jones gave him a check for $1,000. Later in the
evening of April 2, plaintiff tore up the membership assignment in Jones’s presence.
¶8 On April 14, 2009, plaintiff filed his complaint for declaratory judgment and injunctive
relief claiming the membership assignment was invalid on grounds, inter alia, it failed to
comply with sections 3.5 and 5.5 of the LLC operating agreement, and the consideration was
grossly inadequate. Plaintiff sought preliminary injunctive relief to allow him to continue to
operate the restaurant during the pendency of the dispute over his ownership interest. He also
sought an order directing the parties to resolve the dispute pursuant to the mediation and
arbitration provisions of the LLC operating agreement.
¶9 Following a hearing, the circuit court entered a preliminary injunction against defendants,
enjoining them from interfering with plaintiff’s management of the restaurant. The court
found, among other things, that a fair question had been raised regarding the adequacy of
consideration. The court noted, for example, that plaintiff was owed “a significant amount
of deferred salary” (at least $90,000 to $100,000), and even Jones’s expert valued plaintiff’s
interest in the LLC at $33,000, “or 33 times the amount proposed by Jones to purchase
Plaintiff’s interest.”
¶ 10 Plaintiff subsequently filed a motion to compel arbitration pursuant to section 2(a) of the
Illinois Uniform Arbitration Act (Arbitration Act) (710 ILCS 5/2(a) (West 2008)). Jones
objected, arguing the April 2, 2009 membership assignment was a separate contract not
subject to the arbitration clause in the LLC operating agreement. Jones also claimed the
court, not an arbitrator, should decide if the membership assignment was enforceable. The
circuit court denied plaintiff’s motion to compel arbitration.

¶ 11 ANALYSIS
¶ 12 Initially, the parties dispute the applicable standard of review. Plaintiff argues the circuit
court’s order should be reviewed de novo. Plaintiff notes there was no evidentiary hearing
on the motion to compel arbitration and asserts the only question before the court was
whether plaintiff had a right to arbitration as a matter of law. Defendants, on the other hand,
argue the order should be reviewed for an abuse of discretion. Defendants note that plaintiff’s

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 interlocutory appeal is brought pursuant to Supreme Court Rule 307(a)(1), and they assert
such appeals are typically reviewed for an abuse of discretion. Defendants add that the circuit
court held an evidentiary hearing on plaintiff’s request for a preliminary injunction.
¶ 13 Where the circuit court does not make any factual findings or the underlying facts are not
in dispute, the court’s decision is based on a purely legal analysis, and the appellate court
reviews the circuit court’s denial of a motion to compel arbitration de novo. Cohen v.
Blockbuster Entertainment, Inc., 351 Ill. App. 3d 772, 776 (2004). Here, while there was an
evidentiary hearing on plaintiff’s request for a preliminary injunction, that is not the matter
under appeal. There was no evidentiary hearing on plaintiff’s motion to compel arbitration,
and there is no indication the circuit court made factual findings or relied upon its prior
preliminary injunction opinion in its decision to deny plaintiff’s motion to compel
arbitration. Accordingly, we review the circuit court’s denial of this motion de novo.
¶ 14 The Arbitration Act empowers courts, upon application of a party showing an agreement
to arbitrate, to compel or stay court action pending arbitration. 710 ILCS 5/2 (West 2008);
Bass, 328 Ill. App. 3d at 496. Plaintiff argues the dispute over the validity of the membership
assignment falls within the arbitration clause in the operating agreement, and the circuit court
therefore erred in denying his motion to compel arbitration of his claims. According to
plaintiff, section 7.9’s arbitration clause is broad and generic, and includes within its scope
the dispute at issue here.
¶ 15 Defendants counter that the dispute between the parties is not under the operating
agreement, but instead involves the validity of the membership assignment, a subsequent
agreement which contains no arbitration clause. In defendants’ view, the dispute thus falls
outside the arbitration clause in the operating agreement, and the circuit court correctly
denied plaintiff’s motion to compel arbitration.
¶ 16 The Arbitration Act “embodies a legislative policy favoring enforcement of agreements
to arbitrate future disputes.” Donaldson, Lufkin & Jenrette Futures, Inc. v. Barr, 124 Ill. 2d
435, 443 (1988). “ ‘[A]rbitration is a favored alternative to litigation by state, federal and
common law because it is a speedy, informal, and relatively inexpensive procedure for
resolving controversies arising out of commercial transactions.’ ” (Internal quotation marks
omitted.) Bass, 328 Ill. App. 3d at 497 (quoting Board of Managers of the Courtyards at the
Woodlands Condominium Ass’n v. IKO Chicago, Inc., 183 Ill. 2d 66, 71 (1998)).
¶ 17 In keeping with this policy favoring arbitration, courts have generally construed “generic”
arbitration clauses broadly, concluding that the parties are obligated to arbitrate any dispute
that arguably arises under an agreement containing a “generic” provision. Bass, 328 Ill. App.
3d at 498. Arbitration clauses which have been properly characterized as “generic” include
those demanding the arbitration of all claims or disputes “arising out of” or “arising out of
or related to” or “regarding” the agreement at issue. Bass, 328 Ill. App. 3d at 498; A.E. Staley
Manufacturing Co. v. Robertson, 200 Ill. App. 3d 725, 729 (1990); J&K Cement
Construction, Inc. v. Montalbano Builders, Inc., 119 Ill. App. 3d 663, 670 (1983). Here, the
relevant language in section 7.9 of the operating agreement demands arbitration of “[a]ny
dispute among the members, and any dispute between the company and any one or more of
its members.” While section 7.9 clearly applies to disputes under the operating agreement,

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 there is nothing expressly limiting it to disputes under that agreement. This language is at
least as broad as, if not broader than, “arising out of or related to” a specific agreement, and
is broad enough to be labeled “generic.”
¶ 18 Where an agreement contains a generic arbitration clause, that clause covers a dispute
arising under a subsequent agreement between the same parties if the original agreement and
the subsequent agreement concern the same subject matter. Staley, 200 Ill. App. 3d at 730-
31.
¶ 19 In Staley, an employee entered into a retirement benefits agreement with his employer.
The agreement contained a generic arbitration clause. Id. at 729. The employee later entered
into a second agreement with his employer providing for supplemental retirement benefits,
but which contained no arbitration clause. A dispute then arose under the second agreement.
The appellate court concluded the subject matter of both agreements was the same. Id. at
730. The court rejected the employer’s argument that the agreements were unrelated and
distinct, and concluded they must be read in conjunction with each other. Id. at 731.
Accordingly, the court held that under the broad scope of the generic arbitration clause, the
dispute under the second agreement was arbitrable. Id.
¶ 20 Here, the operating agreement contains provisions (section 3.5 and 5.5) dealing with sales
and transfers of member interests. Section 3.5, for example, spells out procedures for the
purchase and sale of LLC membership interests in the event of a dispute so serious it requires
a member to withdraw from the company. In challenging the validity of the membership
assignment, plaintiff claims it failed to comply with sections 3.5 and 5.5 of the operating
agreement. These provisions relate to the subject matter of the membership assignment,
which directly concerns a transfer of a member interest. The operating agreement and the
membership assignment thus concern the same subject matter, such that the dispute over the
validity of the membership assignment is within the scope of the arbitration clause in the
operating agreement. See Ozdeger v. Altay, 66 Ill. App. 3d 629, 632 (1978) (holding
subsequent oral agreement dealing with carpentry management was within scope of written
contract’s arbitration clause, which applied to “all disputes arising out of the subject matter
of the contract, that is, the construction of plaintiffs’ home”).
¶ 21 The dispute over the validity of the membership assignment is arbitrable, and the circuit
court erred in denying plaintiff’s motion to compel arbitration. See Donaldson, 124 Ill. 2d
at 445.
¶ 22 We are not persuaded by defendants’ argument that it is the circuit court which is the
proper forum to decide the validity of the membership assignment. Defendants assert the
validity of a contract is a question of law and argue it should be decided by the court, not an
arbitrator.
¶ 23 Defendants point to Coady v. Harpo, Inc., 308 Ill. App. 3d 153 (1999), which held that
a challenge to the validity of a confidentiality agreement which contained an arbitration
clause was a matter of law for the court to decide, not an arbitrator. Coady emphasized that
the plaintiff there challenged the underlying confidentiality agreement itself, not the
arbitration agreement contained within it. In the case at bar, defendants appear to argue that
because plaintiff does not attack the arbitration clause in the operating agreement, but instead

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 challenges the validity of the membership assignment, then just as the validity of the
underlying confidentiality agreement in Coady was a question for the court, so also the
validity of the membership assignment here is for the court, not an arbitrator, to decide.
¶ 24 Defendants’ reliance on Coady is misplaced. In our view, the reasoning in Diersen v. Joe
Keim Builders, Inc., 153 Ill. App. 3d 373 (1987), is persuasive. There, similar to Coady, the
plaintiffs’ claim was directed toward the underlying contract as a whole and not solely
against the arbitration clause contained within it.
¶ 25 In Diersen, the plaintiffs filed a complaint against a contractor alleging the defendant
misrepresented that a property was suitable for construction of a single-family home.
Diersen, 153 Ill. App. 3d at 375. The plaintiffs alleged fraud in the inducement and sought
rescission of the contract based on that claim. Id. The defendant filed a motion to compel
arbitration based on the terms of the contract, which required all claims or disputes relating
to the contract to be settled by arbitration. Id. at 374-75. The circuit court granted the
defendant’s motion, and the plaintiffs appealed, arguing it was error for the court to order
arbitration without first ruling on their rescission claim. Id. at 375.
¶ 26 The appellate court in Diersen noted that the Arbitration Act “requires the court to
determine whether an agreement to arbitrate exists, where a party denies its existence, before
ordering arbitration on the matter.” Id. In Diersen, however, the plaintiffs did not deny the
existence of the arbitration clause but, instead, asserted grounds to void the underlying
construction contract. The court was not required to consider the merits of that claim before
ordering arbitration. Id. The appellate court upheld the circuit court’s decision to compel
arbitration, noting that the plaintiffs’ fraud claim was directed toward the contract as a whole
and not solely against the arbitration clause. Id. at 376. The plaintiffs’ claim was within the
scope of the arbitration clause, and the circuit court was not required to resolve it before
ordering the parties to submit to arbitration. Id.
¶ 27 Here, similar to Diersen, plaintiff is challenging the validity of the membership
assignment, not the existence of the arbitration clause in the operating agreement. The issue
of the validity of the membership assignment is within the scope of section 7.9 of the
operating agreement, and is a question for the arbitrator, not the court.

¶ 28 CONCLUSION
¶ 29 Accordingly, for the foregoing reasons, we reverse the judgment of the circuit court
of Cook County and remand the cause with directions to compel arbitration.
¶ 30 Reversed and remanded with directions.

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