NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
This opinion shall not "constitute precedent or be binding upon any court." Although it is posted on the
internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R. 1:36-3.
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-5388-17T4
WELLS FARGO BANK, NA,
Plaintiff-Respondent,
v.
SUBARU 46, LLC,
DCN AUTOMOTIVE
LIMITED LIABILITY COMPANY,
and JDN AA, LLC,
Defendants-Appellants.
Argued May 30, 2019 – Decided June 25, 2019
Before Judges Koblitz, Currier, and Mayer.
On appeal from the Superior Court of New Jersey, Law
Division, Middlesex County, Docket No. L-2270-18.
Rosaria A. Suriano argued the cause for appellants
(Brach Eichler LLC, attorneys; Rosaria A. Suriano, of
counsel and on the briefs; Kent D. Anderson, on the
briefs).
Joseph Lubertazzi, Jr. argued the cause for respondent
(McCarter & English, LLP, attorneys; Joseph
Lubertazzi, Jr., of counsel and on the brief; Peter M.
Knob, of counsel and on the brief).
PER CURIAM
In this matter arising out of a series of loan transactions between the
parties, we review the trial court's order compelling arbitration of the parties'
dispute. Because we conclude the arbitration clause in the controlling credit
agreement sufficiently advised these sophisticated commercial entities of their
waiver of rights, and the asserted dispute falls squarely within the scope of the
arbitration agreement, we affirm.
Defendants Subaru 46, LLC (Subaru), DCN Automotive Limited Liability
Company (DCN), and JDN AA, LLC (JDN) are three car dealerships who have
separate franchise agreements with their respective car manufacturers, requiring
them to obtain a floor plan financing line of credit (floor plan line) with a lender
in order to purchase cars. In 2013, plaintiff Wells Fargo Bank, N.A. became
that lender when it entered into a credit agreement with Subaru.1
1
The dealerships are all owned by the same principals. JDN, an Audi
dealership, and DCN, a Hyundai dealership, were added as borrowers in
modified credit agreements in 2015.
A-5388-17T4
2
The credit agreement, secured by a floor plan note, required Subaru to
maintain a "[t]rading [a]sset [e]quity" of $1.5 million. 2 The agreement contained
an arbitration provision where the parties agreed "to submit to binding
arbitration all claims, disputes and controversies between or among them . . . in
any way arising out of or relating to (a) any credit subject hereto, or any of the
[l]oan [d]ocuments . . . or (b) requests for additional credit."
Because the floor plan line was only in effect for one year, the credit
agreement underwent periodic modifications. In 2014, the agreement was
modified twice to reflect changes to the floor plan line. In both modified
agreements, the parties affirmed that the "terms and conditions of the Note and
Credit Agreement remain[ed] in full force and effect, without waiver or
modification." When JDN was added to the credit agreement in 2015, the floor
plan line was increased and the "[t]rading [a]sset [e]quity" provision was
replaced with a clause entitled "Liquidity." 3
2
This financial condition was determined at the end of each fiscal quarter by
conducting a detailed calculation of the accounts receivable, vehicle inventory,
customer deposits and the unpaid principal balances on the loans.
3
The new clause required a trading asset equity of $2 million or a "[t]rading
[a]sset [e]quity [m]argin not less than [twenty percent]." As in the prior
agreement, both conditions were defined.
A-5388-17T4
3
The 2015 modified credit agreement included a more extensive arbitration
clause. In pertinent part, it stated:
ARBITRATION. Upon demand of any party hereto,
whether made before or after institution of any judicial
proceeding, any claim or controversy arising out of or
relating to the Loan Documents between the parties
hereto (a "Dispute") shall be resolved by binding
arbitration conducted under and governed by the
Commercial Financial Disputes Arbitration Rules (the
"Arbitration Rules") of the American Arbitration
Association (AAA) and the Federal Arbitration Act.
Disputes may include, without limitation, tort claims,
counterclaims, a dispute as to whether a matter is
subject to arbitration, or claims arising from documents
executed in the future, but shall specifically exclude
claims brought as or converted to class actions. A
judgment upon the award may be entered in any court
having jurisdiction. Notwithstanding the foregoing,
this arbitration provision does not apply to disputes
under or related to swap agreements. . . . Preservation
and Limitation of Remedies. Notwithstanding the
preceding binding arbitration provisions, the parties
agree to preserve, without diminution, certain remedies
that any party may exercise before or after [an]
arbitration proceeding is brought. The parties shall
have the right to proceed in any court of proper
jurisdiction or by self-help to exercise or prosecute the
following remedies, as applicable: (i) all rights to
foreclose against any real or personal property or other
security by exercising a power of sale or under
applicable law by judicial foreclosure including a
proceeding to confirm the sale. . . . Any claim or
controversy with regard to any party's entitlement to
such remedies is a Dispute.
A-5388-17T4
4
The next page of the agreement, just above the parties' representatives'
signatures, provides:
Waiver of Jury Trial. THE PARTIES
ACKNOWLEDGE THAT BY AGREEING TO
BINDING ARBITRATION THEY HAVE
IRREVOCABLY WAIVED ANY RIGHT THEY MAY
HAVE TO JURY TRIAL WITH REGARD TO A
DISPUTE AS TO WHICH BINDING ARBITRATION
HAS BEEN DEMANDED.
In 2015, the parties also entered into a security agreement, in which
defendants granted and transferred to plaintiff a security interest in all of
defendants' assets for valuable consideration. The collateral secured "all [of
defendants'] present and future indebtedness" to plaintiff.
When the credit agreement was modified to add DCN as a borrower in
July 2015, the arbitration provision was not changed. A December 2016
modified credit agreement (December 2016 credit agreement) changed the floor
plan line amount (decreased to $25 million), provided a $3.5 million term loan,
and required a $5 million trading asset equity. There were no changes to the
A-5388-17T4
5
arbitration provision. The term loan set the interest rate at three percent above
the London Inter-Bank Offered Rate (LIBOR).4
In January 2017, the parties entered into an International Swap Dealers
Association, Inc. Master Agreement (swap agreement), and a Schedule to the
Master Agreement. The swap agreement affected the December 2016 term
loan's interest rate.5
The maturity date of the floor plan line under the December 2016 credit
agreement was December 31, 2017, or an earlier date demanded by plaintiff. In
July 2017, plaintiff's auditors reviewed defendants' books and records. Plaintiff
contends its audit revealed that defendants did not have the required $5 million
trading asset equity for the fiscal quarter.
4
LIBOR is "the average interest rate at which major global banks borrow from
one another." LIBOR, Investopedia,
https://www.investopedia.com/terms/l/libor.asp (last updated May 17, 2019).
5
Under the swap agreement, defendants had a fixed interest rate of 4.43%, while
plaintiff maintained a floating interest rate that was 3% above the LIBOR. If
the floating interest rate rose above the fixed interest rate, defendants would pay
the difference of the floating interest and the fixed rate of interest. For example,
if the floating interest rate was 5%, a person calculating defendants' interest rate
for that month would subtract the defendants' fixed rate of 4.43% from the 5%
floating interest rate to get an interest rate of 0.57% for that month. However,
if the fixed rate was higher than the floating rate, then defendants would pay the
full fixed rate of 4.43%.
A-5388-17T4
6
Plaintiff informed defendants' principal of the violation of the contractual
covenant and advised it would not renew the floor plan line. On October 31,
2017, plaintiff served defendants with a Notice of Default and Reservation of
Rights on all loans in order to "memorialize [defendants'] financial covenant
defaults." The notice claimed defendants defaulted for failing to maintain the
minimum trading asset equity and for not "deliver[ing] true, complete and
correct financial statements" to plaintiff as required under the credit agreement. 6
Plaintiff set the "Maturity Date [of] Default" for December 31, 2017. As
a result of the default, defendants had to pay all sums due under the loan
documents by that date. When defendants did not repay the loans, plaintiff
advised, in a January 2018 letter, that defendants were "in default for failing to
satisfy all sums due under the [l]oan [d]ocuments" on or before the maturity
date. The letter stated further:
As a result of the Maturity Date [of] Default,
[defendants] are liable for interest at the default rate,[7]
plus all expenses incurred by [plaintiff], including
attorneys' fees, related to the [l]oan [d]ocuments.
....
6
Plaintiff alleges defendants reported inaccurate numbers at the end of the fiscal
quarter on June 30, 2017, which was discovered in the July 2017 audit.
7
The default interest rate is four percent above the LIBOR.
A-5388-17T4
7
Further, the Maturity Date [of] Default results in
defaults under other loan documents to which [plaintiff]
and [defendants] are parties, in addition to resulting to
defaults under the Swap Documents. [Plaintiff]
reserves all rights and remedies related to such defaults.
On April 18, 2018, plaintiff filed a demand for arbitration with the AAA,
seeking to collect "all sums owed under loan agreements, notes and guaranties"
from defendants. In an amended demand for arbitration, filed May 30, 2018,
plaintiff sought "an award for all sums due under the Floor Plan Line, Term
Loan, notes evidencing these loans and [Floor Plan Line] Loan Documents at
the time of the arbitration hearing, less any [c]ollateral recovered in the [s]tate
[c]ourt [a]ction."
On April 19, 2018, plaintiff also filed a verified complaint against
defendants in Superior Court, for replevin and foreclosure of the collateral that
secured the loans as agreed upon in the security agreement. In conjunction with
the complaint, plaintiff applied for an order to show cause with temporary
restraints.
In a May 8, 2018 order, the trial court granted plaintiff permission to enter
defendants' premises and inspect records and documentation regarding the
collateral. That same day, defendants filed an answer and counterclaim.
A-5388-17T4
8
In June 2018, plaintiff moved to compel arbitration of defendants'
counterclaims, and to stay defendants' counterclaims in the state court action or
dismiss them under Rule 4:6-2(a). The next day, defendants presented an order
to show cause, seeking temporary restraints to stay the arbitration proceedings
until further ordered by the trial court and preliminary injunctive relief to
dismiss the demand for arbitration.
On June 15, 2018, the trial court conducted a hearing on defendants' order
to show cause and plaintiff's motion to compel arbitration. Defendants argued
plaintiff's claims were not arbitrable because they related to the swap agreement,
and the arbitration provision in the December 2016 credit agreement excluded
from arbitration "disputes under or related to swap agreements." Plaintiff
contended that the amended demand for arbitration was limited to the term loan
and the floor plan loan. There was no request to arbitrate the swap agreement.
Plaintiff also pointed out that the credit agreement permitted an expedited
replevin action outside of the arbitration proceeding.
In an oral opinion issued on the same date, the trial court stated it had to
"decide whether or not an arbitration is appropriate in this case." The judge
noted defendants were a "sophisticated party" and the agreements and
modifications were not "contract[s] of adhesion."
A-5388-17T4
9
After reviewing the credit agreements and subsequent modifications, the
judge noted all of the documents contained an arbitration clause. He, therefore,
found the parties had negotiated numerous agreements, requiring their disputes
to be resolved in an arbitration forum. He stated, "[Defendants] had waived
[their] right to proceed and obtain judicial relief." In addressing the swap
agreement, the trial court found:
[The swap agreement was] truly just an amortization
schedule[]. . . .
It does not go to the heart of either the credit
agreement or the floor plan agreement, it's essentially a
financial document setting forth rates of pay and
interest and things of that sort. And it's clearly divisible
from the credit and floor plan agreement, . . . which is
at the heart of this particular dispute.
Because the judge concluded the arbitration provision was applicable to
the parties' dispute, he ordered the parties to submit their claims, including any
counterclaims, to arbitration. The order also stayed plaintiff's replevin action
and "all remaining outstanding matters." In an August 2, 2018 order, the trial
court stayed the arbitration proceedings during the pendency of the appeal. 8
8
Since the filing of the appeal, both the Subaru and DCN dealerships were sold.
The principal balance, non-default interest for the term loans, and both floor
plan lines were repaid. Defendants continue to make principal and interest
payments on the floor plan line for the JDN franchise.
A-5388-17T4
10
On appeal, defendants argue: 1) plaintiff's claim is not arbitrable because
it relates to the swap agreement; 2) the December 2016 credit agreement is
ambiguous, making it unenforceable; 3) the arbitration provision does not advise
defendants they are forfeiting their right to seek relief in a judicial forum; a nd
4) plaintiff waived its right to arbitrate by filing and litigating this action in
Superior Court. Plaintiff asserts it is not seeking any relief under the swap
agreement, disputes the ambiguity of the arbitration clause, and contends it did
not waive its right to proceed to arbitration.
Because the validity of an arbitration agreement is a question of law, we
review an order allowing arbitration to proceed de novo. Barr v. Bishop Rosen
& Co., Inc., 442 N.J. Super. 599, 605 (App. Div. 2015) (citing Hirsch v. Amper
Fin. Servs., LLC, 215 N.J. 174, 186 (2013)). "In interpreting an arbitration
clause, we rely upon basic contract principles." Alamo Rent A Car, Inc. v.
Galarza, 306 N.J. Super. 384, 390-91 (App. Div. 1997) (citation omitted). In
determining whether an arbitration provision governs a particular dispute, a
court's "goal is to discover the intention of the parties[,]" which requires it to
consider the "contractual terms, the surrounding circumstances, and the purpose
of the contract." Marchak v. Claridge Commons, Inc., 134 N.J. 275, 282 (1993)
(citations omitted).
A-5388-17T4
11
Here, the December 2016 credit agreement contains the controlling
arbitration provision. It provides that an arbitrable dispute is "any claim or
controversy arising out of or relating to the Loan Documents between the
parties." "Loan Documents" are defined as the credit agreement and the note.
These documents establish the amount of money plaintiff will lend to defendants
during the loan period and the consequences of defendants' failure to satisfy its
obligations.
Following an audit of defendants' finances, plaintiff believed defendants
violated the minimum trading asset equity covenant in the credit agreement.
Therefore, plaintiff filed a demand for arbitration, seeking to collect the sums
defendants owed under the defaulted loans.
The addendum to the amended demand detailed that defendants defaulted
on the floor plan line and term loan, and delineated the specific sums owed on
those loans. Plaintiff also sought interest, default interest, attorney's fees and
expenses. The addendum continued, "[Plaintiff] seeks an award for all sums due
under the [f]loor [p]lan [l]ine, [t]erm [l]oan, notes evidencing these loans and
[floor plan line] [l]oan [d]ocuments . . . less any [c]ollateral recovered in the
[s]tate [c]ourt [a]ction."
A-5388-17T4
12
In according the December 2016 credit agreement's terms "their plain and
ordinary meaning[,]" as we must, we see no ambiguity in the arbitration clause.
M.J. Paquet, Inc. v. N.J. Dep't of Transp., 171 N.J. 378, 396 (2002). The crux
of the parties' dispute is whether defendants defaulted under the loan documents.
If the answer is yes, then plaintiff must establish the amounts owed to it under
the agreements and notes. Whether a default occurred requires a scrutiny of the
December 2016 credit agreement and an analysis of defendants' compliance with
the trading asset equity requirement and its provision of accurate financial
statements.
Defendants assert that any calculation of amounts due to plaintiff requires
the use of the interest rate formula in the swap agreement. Since the swap
agreement is excluded from arbitrable claims under the arbitration clause,
defendants contend plaintiff cannot arbitrate any of its claims. We disagree.
The arbitration clause excludes certain claims from arbitration,
specifically any claims "under or related to" the swap agreement and those that
seek equitable remedies. Relief for those disputes lies in a court with
appropriate jurisdiction. Here, the parties' dispute arises out of the credit
agreement and its modifications. The controlling arbitration provision was
included in the third, fourth, and fifth modifications of the original credit
A-5388-17T4
13
agreement. As defendants agreed to this provision on three separate occasions,
it is evident that the parties intended to be bound by its terms. Furthermore, six
days after the parties executed the December 2016 credit agreement, they
entered into the swap agreement. The record does not evidence any intention of
the parties to nullify the arbitration provision agreed to several days earlier and
in three prior loan and credit agreement modifications. Finally, plaintiff does
not seek to collect any payments from defendants under the swap agreement.
Plaintiff does not dispute that a resolution of the owed interest payments
will require a calculation using the rates and formula denoted in the schedule
attached to the swap agreement. But the figures in the schedule are incidental
to the actual dispute plaintiff has presented to arbitration – a determination of
whether defendants defaulted under the December 2016 credit agreement and
associated loan documents. The swap agreement itself is not the subject of a
dispute by either party.
Defendants generally assert on appeal that the arbitration provision does
not meet the standards enunciated in Atalese v. U.S. Legal Servs. Grp., L.P., 219
N.J. 430 (2014), therefore rendering it unenforceable. Defendants do not claim
they did not understand what rights they were relinquishing, nor do they claim
ignorance of a binding arbitration process.
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14
We are satisfied that defendants' principals, as owners of three
dealerships, and represented by counsel during the multiple financial
transactions, can be deemed sophisticated business persons.9 We also note the
common use of binding arbitration clauses in vehicle purchase agreements
requiring the consumer to bring any dispute concerning the purchase in an
arbitration forum. Although we find it unnecessary to make a sweeping
generalization about the applicability of Atalese to a commercial contract with
sophisticated parties, we are confident this clause, under the presenting
circumstances, met the objectives expressed by the Atalese Court. See generally
219 N.J. at 442-48.
We are unpersuaded by defendants' argument that plaintiff waived its right
to arbitration as defendants have presented no evidence to establish a waiver.
Plaintiff filed a demand for arbitration the day before it filed an action in
Superior Court. The court action, grounded in replevin, is authorized under the
credit agreement. It also seeks different relief than that demanded in arbitration.
9
One of the principals presented a twenty-page certification in opposition to
plaintiff's order to show cause, describing in detail the intricate transactions
between his dealerships and plaintiff. He stated he met with or spoke weekly
with a senior vice president at Wells Fargo "on matters related to the parties'
lending relationship." The principal did not reference the arbitration clause or
any lack of understanding regarding it.
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15
Moreover, the court action was stayed pending the completion of the arbitration
proceedings. Therefore, defendants are able to pursue their counterclaims in
both the arbitration forum and in the court action.
Because we find the parties' dispute falls squarely within the scope of the
arbitration clause in the December 2016 credit agreement, we affirm the trial
court's order compelling arbitration. The order staying the arbitration
proceedings is vacated.
Affirm.
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16