Attorneys for Appellants Attorneys for Appellee
Jeffrey R. Gaither John C. Hoard
T. Joseph Wendt R. Brock Jordan
Indianapolis, Indiana Indianapolis, Indiana
David J. Theising
Indianapolis, Indiana
________________________________________________________________________
In the
Indiana Supreme Court
_________________________________
No. 29S02-0308-CV-00366
ISP.com LLC and ISP.net LLC,
Appellants (Defendants below),
v.
David J. Theising, Receiver of
IQuest Internet, Inc.,
Appellee (Plaintiff below).
_________________________________
Appeal from the Hamilton Superior Court, No. 29D01-0202-PL-0104
The Honorable Steven R. Nation, Judge
_________________________________
On Petition To Transfer from the Indiana Court of Appeals, No. 29A02-0207-
CV-0610
_________________________________
March 4, 2004
Boehm, Justice.
The plaintiff is David J. Theising, as the receiver of IQuest
Internet, Inc. The defendants responded to his complaint with a motion to
compel arbitration of the dispute. The motion was based on an arbitration
clause in an agreement entered into between the defendants and IQuest
before IQuest was in receivership. The trial court refused to compel
arbitration and the Court of Appeals affirmed that order on interlocutory
appeal. We hold that the arbitration clause is enforceable against the
receiver as the successor in interest to IQuest.
Factual and Procedural Background
This case comes to us on interlocutory appeal from denial of a motion
to compel arbitration. As a result, we have the pleadings, which include
salient documents as exhibits, but no hearings or development of the
factual background. Our account of the facts is taken from the allegations
of pleadings, some court orders, and the documentation of the transactions
that gave rise to this dispute. There are significant gaps in the
information available to us, and we have no confidence that the facts will
prove to be as we currently understand them, or assume them to be. For
purposes of this appeal, however, the only material facts are the
allegations of the complaint and the relevant documents. We provide these
allegations because the nature of the claims is relevant to the only issue
before us, which is whether or not Theising is required to arbitrate his
dispute with ISP. Liability of other parties and arbitrability of disputes
among other parties are not at issue here. Except where indicated, the
following account is taken from the allegations of the complaint. They
remain to be proven.
Until January 2000, IQuest Internet, Inc., an Indiana corporation,
operated a “dial-up internet service” based in Hamilton County. Its
president and majority shareholder was one Robert Hoquim, about whom more
later. Four other individuals, John Carr, David Julius, Terry Meadors and
Thomas Neville, Jr., were also shareholders and participated in the
management of the company. On January 13, 2000, two Indiana limited
liability companies, ISP.com, LLC and ISP.net, LLC (collectively “ISP”[1]),
agreed to acquire the business. The form of the transaction was an asset
sale embodied in an “Asset Purchase Agreement” whereby ISP agreed to
purchase substantially all of the business assets of IQuest except cash and
receivables and to assume designated liabilities. The agreement contained
the lengthy list of warranties and representations usually found in an
asset acquisition of a going business. Among these was IQuest’s warranty,
joined by Hoquim, that IQuest was current with taxing authorities. IQuest
and Hoquim indemnified ISP against a variety of circumstances, including
breach of any representation or warranty in the agreement. The purchase
price was stated as $23 million cash, and the agreement called for ISP to
pay the price by wire transfer to an account designated by IQuest.
On February 16, 2000, the parties closed the sale, apparently without
further documentation. Rather than paying the entire purchase price to
IQuest, ISP paid $13.15 million of the purchase price directly to Hoquim in
the form of $12 million in two promissory notes and $1.15 million in
cash.[2] One note, for $2 million, matured in May of 2002, and apparently
substantial payments were made on that note. The second note was for $10
million and would mature in 2005. ISP and Hoquim executed a “Loan and
Security Agreement” securing ISP’s obligations to Hoquim under the $10
million note and providing that ISP could set off against its obligations
under the note any amounts Hoquim owed under the indemnity provisions of
the Asset Purchase Agreement. In effect, the Loan and Security Agreement
purported to permit ISP to invoke self-help to reduce the purchase price
for IQuest’s assets by the amount of any damages, at least up to $10
million, resulting from breaches of the seller’s representations,
undertakings or warranties. Another $3 million of the purchase price was
paid in the form of issuance of “ownership credits” in ISP[3] to Carr and
Neville, both IQuest officers, in the amounts of $2 million and $1 million,
respectively.
Hoquim died intestate in May 2000. The Court of Appeals tantalizingly
informs us that at the time of his death Hoquim was “a thirteen year
fugitive wanted by the Federal Bureau of Investigation whose real name was
John Paul Aleshe,”[4] but supplies no elaboration on this unusual
circumstance. There are other interesting gaps in the information
available to us. The record does not reveal the ownership of ISP before or
after the sale, so we are in the dark as to the relative equity position in
ISP the “ownership credits” represented. Nor are we told whether ISP had
an independent existence before the sale or was newly formed for purposes
of acquiring IQuest’s assets. We are given no indication of the
circumstances of Hoquim’s death, and, consistent with the many lacunae in
this record, we are not told whether his name was pronounced “hokum”, “ho-
KEEM” or something else. Whatever the answer to these mysteries, it seems
clear that IQuest was not without its problems. The receiver alleges that
neither IQuest since its inception in 1995 nor Hoquim for many years before
that had paid any federal or state taxes, and at the time of the sale
IQuest had a substantial liability to taxing authorities. If true, these
allegations would appear to establish a breach of the warranty in the Asset
Purchase Agreement.
As best we can make out, this appeal is taken in the fourth of four
separate but related legal proceedings. First, on December 15, 2000,
IQuest was thrown into receivership by its creditors and the Hamilton
Superior Court, in cause CP-668, appointed Theising as receiver. Second,
Hoquim’s Estate was opened at some point, apparently as a probate matter[5]
in Hamilton County as cause ES-44. Third, on January 16, 2001, Hoquim’s
Estate filed cause CP-75 in Marion Superior Court Room 11 to collect the
note from ISP.com and ISP.net and two individuals who guaranteed ISP’s note
to Hoquim.
On March 30, 2001, ISP moved to arbitrate the Marion County case.
While that motion was pending, on September 4, 2001, the Hamilton Superior
Court entered an order in Hoquim’s Estate finding that Theising was
entitled to the $10 million note and some $1.8 million in cash representing
the proceeds of ISP’s payments on the two notes before ISP stopped paying.
The basic reasoning of the court in the estate proceeding was that the
direct payments of the asset purchase price to Hoquim had been frauds on
creditors of IQuest. On September 21, 2001, the Marion Superior Court
ordered arbitration of the dispute before it.[6] In December 2001,
pursuant to the order of the Hamilton County probate court, Hoquim’s Estate
assigned the $10 million note from ISP to Theising, as receiver of IQuest,
and Theising was substituted for IQuest as plaintiff in the Marion County
case. Theising unsuccessfully filed a Motion to Correct Errors seeking to
overturn the order to arbitrate and has separately appealed the Marion
County order directing arbitration of the claim to collect the note.[7]
This appeal is taken from rulings of the trial court in a suit filed
in Hamilton Superior Court as PL-104. The defendants in this case are
ISP.com, ISP.net, and Carr, Neville, Julius and Meadors, who Theising
alleges were shareholders, officers and directors of IQuest at all relevant
times. On February 15, 2002, after obtaining the approval of the
receivership court, Theising filed the current complaint in Hamilton
Superior Court. In this lawsuit, which is separate from both the
receivership and the Estate, Theising alleges that the shift in method of
closing the asset sale to payment of the purchase price directly to Hoquim
and others amounted to a fraudulent transfer by IQuest in which ISP and the
four other individual defendants participated in various capacities and for
which each of them was liable. Theising claims, among other things, that
the closing left IQuest with insufficient funds to pay its debts. The
complaint alleges that IQuest was insolvent at the time of the sale and
also after the sale when the four individuals surrendered their IQuest
shares in exchange for substantially all of the cash IQuest received from
ISP. The complaint alleges that these exchanges, and the “ownership
credits” to Carr and Neville, were fraudulent conveyances that Theising, as
IQuest’s receiver, is entitled to set aside. The same basic facts are
alleged to support claims against these four individuals for negligent
mismanagement of IQuest, director liability for unlawful distributions from
an insolvent corporation, and breach of fiduciary duty to creditors of
IQuest.
In addition to the fraudulent conveyance claims, Theising’s complaint
also alleges that the four individuals acted on behalf of ISP in the
acquisition and knew of IQuest’s false representations in the Asset
Purchase Agreement. Theising contends that ISP is charged with this
knowledge and is therefore estopped from asserting breaches of those
representations and warranties as a setoff against ISP’s obligations on the
note.
On June 10, 2002, ISP moved in this proceeding in Hamilton County to
stay proceedings and compel arbitration of this dispute based on the
arbitration clause in the Asset Purchase Agreement. The trial court denied
ISP’s motion and the Court of Appeals affirmed. We now grant transfer and
reverse the trial court.
I. Receiver’s Obligation to Arbitrate
As already noted, in the estate proceeding, the court concluded that
Hoquim could not retain the note or the cash payments made under them
because their direct payment to Hoquim constituted a fraud on creditors of
IQuest. Fraud on creditors is essentially the same theory Theising now
pursues in attempting to recover from the individual defendants. Insofar
as the complaint seeks relief from ISP, however, Theising seeks more than
simple restitution of assets diverted from IQuest. Hoquim’s Estate
apparently did not seek to invoke arbitration, and the issues on this
appeal were not raised in the estate proceeding. Similarly, there appears
to be no claim raised here that the ruling of the Marion Superior Court
ordering arbitration of the note claim is res judicata or otherwise
precludes Theising from relitigating arbitrability in this case.
Accordingly, we address the contention that disputes between ISP and
Theising must be arbitrated as a freestanding issue.
A. Arbitrability of Fraud Claims
The Court of Appeals acknowledged the “general rule” that a receiver
for a corporation “‘takes only the rights of the corporation, such as could
be asserted in its own name.’” ISP.com, LLC v. Theising, 783 N.E.2d 1228,
1231 (Ind. Ct. App. 2003) (quoting Voorhees v. Indianapolis Car & Mfg. Co.,
140 Ind. 220, 239, 39 N.E. 738, 744 (1895)). However, the Court of
Appeals, again quoting Voorhees, noted an exception to this rule for “acts
. . . done in fraud on the rights of [creditors or shareholders], but which
are valid against the corporation itself.” Id. From this, the Court of
Appeals concluded that Theising may act to represent creditors who “are
charging that fraud has occurred,” and because the IQuest’s creditors were
not parties to the arbitration clause, Theising was free to bring his
claims in court to the extent they charge fraud. Id. The fraudulent
conveyance claims were claims of fraud, therefore no arbitration was
required.
We agree with these general propositions, but believe the Court of
Appeals has read them too broadly. Voorhees was a case where this Court
reversed a trial court ruling permitting a group of creditors to assert
claims on behalf of a corporation already in receivership. This Court
pointed out the chaos that could result from permitting each individual
creditor to exercise its own judgment as to potential claims by the
corporation. The passage quoted above appears in the course of discussing
that issue. For the proposition that the receiver stands in the shoes of
the corporation, the Court cited James L. High, Receivers, § 315, at 249
(2d ed. 1886), and Charles Fisk Beach, Commentaries on the Law of Receivers
§ 639 (1894). We agree that the receiver succeeds to the rights of the
corporation, and that the receiver is obligated to act in the interest of
the creditors. But that does not mean a receiver may pursue any fraud
action unfettered by the obligations of the corporation, and we do not read
the cited authorities to suggest that. Rather, the receiver is not barred
by defenses that may preclude recovery by the corporation if the acts
complained of constituted a fraud on shareholders or creditors. See
McCandless v. Furlaud, 296 U.S. 140, 159 (1935) (citing Casey v. Cavaroc,
96 U.S. 467, 488 (1877)); Am. Can Co. v. Erie Preserving Co., 171 F. 540,
542 (W.D.N.Y. 1909); Waslow v. Grant Thornton, LLP, 240 B.R. 486, 505
(Bankr. E.D. Pa. 1999); Marcovich v. O’Brien, 63 Ind. App. 101, 113, 114
N.E. 100, 104 (1916). But the fraud exception applies only to those claims
where the receiver’s interest is adverse to the corporation and where the
fraud is such that, as Voorhees put it, the receiver attacks acts that are
“valid against the corporation itself.” This exception permits a receiver
to assert claims free from defenses, such as in pari delicto, that might
bar the corporation. For example where the corporation was a tool of its
management in a scheme to defraud investors, the corporation’s receiver was
not precluded from recovering assets fraudulently stripped from the
corporation. See Scholes v. Lehmann, 56 F.3d 750, 754 (7th Cir. 1995).
The receiver is in some respects a new entity, untainted by the
corporation’s wrongdoing. He is not necessarily barred by in pari delicto.
Elimination of an in pari delicto defense permits the receiver to prevail
in asserting the corporation’s rights but it does not result in the
receiver’s asserting rights of creditors. Id. This doctrine eliminates
defenses to claims by the corporation. But we see no reason why it should
relieve the receiver generally of the contractual undertakings such as an
arbitration or forum selection clause, unless the clause itself is
fraudulently induced.
B. The Nature of the Receiver’s Claims
Here the thrust of much of the complaint is recovery of assets
diverted from IQuest to its shareholders, and the liability of those same
individuals for corporate mismanagement in their roles as officers and
directors. These seem to be classic examples of claims the corporation
itself could pursue, and therefore, although claims of fraud, do not fall
within the exception permitting the receiver to assert claims free from
defenses that might bar the corporation because he is essentially adverse
to the corporation. But the issue here is not arbitration of issues of
liability of the director-shareholders who received these assets or who ran
IQuest for several years. ISP alone seeks arbitration. The first
allegation against ISP appears in Count XI of Theising’s complaint,
following ten counts against the individuals. Theising there asserts
estoppel against ISP’s assertion of breach of IQuest’s warranty regarding
current taxes. This estoppel is alleged to arise from Theising’s
allegation that the four individuals acted for both IQuest and ISP in the
asset sale, and therefore their knowledge of IQuest’s failure to file tax
returns is chargeable to ISP, and precludes ISP’s reliance on the warranty
to reduce the purchase price. This theory of ISP’s complicity in the
wrongs alleged against IQuest’s management presents an entirely different
complex of issues from the liability of those individuals. It amounts to a
claim that ISP is chargeable with the actions of the director-shareholders
of IQuest. If that is the case, ISP’s liability is one for which IQuest
would have a remedy. If IQuest were not in receivership, there would be no
reason why it could not pursue such a claim against ISP and its former
directors. If the four individuals were still in charge of IQuest, a
shareholder derivative suit could assert such a claim. In either case,
however, the corporation’s agreement to arbitrate that dispute would be
enforceable. The receiver is bound by the undertakings of the corporation
unless the undertaking itself constitutes a fraud on creditors.
The facts alleged in these complaints, none of which have gone to
trial, suggest a wide range of possible scenarios. At one extreme, ISP is
composed of new investors who were victims of a scheme to sell off an
insolvent corporation at an exorbitant price. In that view, the creditors
were not harmed by the sale as long as the real purchase price, net of
offsets, is recovered from the selling shareholders for their benefit,
leaving the assets for creditors as they were before the sale. Or ISP
could be nothing more than a tool of IQuest’s management in an attempt to
bail out of a sinking operation at the expense of both IQuest’s creditors
and ISP’s financiers. Or ISP could be merely an alter ego of IQuest’s
former management in a scheme to reincorporate free of the liabilities
IQuest had accumulated. Or the sale could be in substance a reorganization
designed to cash out Hoquim but leave the rest of ownership and management
in place. We cannot evaluate whether, as Theising alleges, the management
of IQuest was on both sides of the table at the closing, or a number of
other questions that this incomplete record presents. We identify these
possibilities not because we suggest any of them reflect the facts of this
case, but to underscore the point that at this stage it is not easy to
separate the good guys from the bad guys, assuming there are some bad guys.
This further bolsters the conclusion that the receiver steps into the
shoes of the corporation, and should have no worse and no better hand to
play than his predecessor in dealing with this cast of potential victims
and perpetrators.
C. Assertion of Claims of Creditors
An arbitration clause, like any other contract, binds the parties to
the agreement and those in privity. Mislenkov v. Accurate Metal Detinning,
Inc., 743 N.E.2d 286, 289 (Ind. Ct. App. 2001); see OEC-Diasonics v. Major,
674 N.E.2d 1312, 1314-15 (Ind. 1996). Privity is found if a non-party
holds “a mutual or successive relationship with [a party] with regard to
property or that their interests are so identical as to represent the same
legal right.” Mislenkov, 743 N.E.2d at 289. A receiver of a corporation
is in privity with that corporation. Marion Trust Co. v. Blish, 170 Ind.
686, 693, 84 N.E. 814, 817 (1908); Federal Sav. & Loan Ins. Corp. v. Dir.
of Revenue, 650 F. Supp. 1217, 1223 (N.D. Ill. 1986); Buchanan v. Hicks,
136 S.W. 177, 180 (Ark. 1911); Armstrong v. Greenwich Motors Corp., 165 A.
598, 599 (Conn. 1933); Brooks v. Miami Bank & Trust Co., 156 So. 757, 759
(Fla. 1934). We agree with the Court of Appeals that creditors of a
corporation are not in privity with it. We disagree that a receiver
generally represents the creditors, in the sense that the receiver can
assert the creditors’ claims for them.
The Court of Appeals cited Capitol Life Ins. Co. v. Gallagher, 839 F.
Supp. 767, 768 (D. Colo. 1993), for the view that a receiver may assert
claims of creditors. We think that case supports the opposite conclusion
as applied to a state law receiver for a general business corporation like
IQuest. Gallagher was the Florida Insurance Commissioner who became the
receiver of GSL, an insolvent insurer. He sought the right to assert a
class action on behalf of GSL’s policyholders against Capitol Life, which
had a reinsurance agreement with GSL. The federal court permitted
Gallagher to present a class action claim on behalf of policyholders
directly, asserting their rights under the insurance contracts. Id. at 770.
The decision was driven by the unique legal framework that governs
insurance companies, which are not subject to bankruptcy laws, and are
liquidated or rehabilitated under state law. 11 U.S.C. § 109(b)(2) (2000);
Sims v. Fidelity Assurance Ass’n., 129 F.2d 442, 451 (4th Cir. 1942). It
does not apply to claims asserted as a receiver. As the federal district
court pointed out, it was “undisputed that Gallagher, as . . . receiver,
may be compelled to arbitrate . . . because Gallagher ‘stands in the shoes’
of GSL.” Capitol Life, 839 F. Supp. at 769 (quoting Phillips v. Lincoln
Nat’l Health & Cas. Ins. Co., 774 F. Supp. 1297, 1299 (D. Colo. 1991)).
This conclusion is fortified by the principal authority cited in Capitol
Life. Hays & Co. v. Merrill Lynch, Pierce Fenner & Smith, Inc., 885 F.2d
1149, 1155 (3d Cir. 1989), permitted a bankruptcy trustee to assert claims
on behalf of creditors of the bankrupt. Like the insurance commissioner in
Capitol Life, a bankruptcy trustee may assert claims on behalf of creditors
by reason of a unique statute. Id. Section 544(b) of the Bankruptcy Code
explicitly authorizes a bankruptcy trustee to void any transfer by the
debtor that “is voidable under applicable law by a creditor . . . .” 11
U.S.C. § 544(b). By reason of this provision, the Third Circuit held the
trustee could properly assert claims of creditors, but only those claims
that fell within § 544(b). Except for the claims specifically authorized
by 11 U.S.C. § 544(b), however, the Third Circuit, following a long line of
federal cases,[8] concluded that the claims the trustee sought to assert
were governed by the arbitration clauses in the debtor’s agreements.
Capitol Life, 885 F.2d at 1154. In short, in the absence of a statutory
authorization, a receiver of a corporation under Indiana law has no more
status to assert claims of others than the corporation had. IQuest had no
right to assert claims of creditors or other parties. The rights the
receiver has are only those the corporation had. The receiver, like the
corporation, is subject to the arbitration undertaking in its agreement,
subject only to whatever exceptions and limitations would be available to
IQuest itself. The receiver is of course obligated to protect the
interests of creditors. Deitrick v. Standard Sur. & Cas. Co., 303 U.S.
471, 483 (1938); Campbell Leasing, Inc. v. FDIC., 901 F.2d 1244, 1249 (5th
Cir. 1990); Marcovich v. O’Brien, 63 Ind. App. at 113, 114 N.E. at 104
(1916). But that does not mean the receiver can take over the claims of
creditors and assert them on his own. Rather the receiver succeeds to the
rights of the corporation as he finds it, and that includes any arbitration
obligations the corporation has incurred. If the receiver has a claim that
the arbitration clause is itself the product of fraud, then that claim can
be presented in a proper forum. Here, however, the receiver seeks to
embrace the asset sale and claim the proceeds, but disavow the arbitration
clause. That seems a difficult hill to climb, and Theising asserts no
claim that the entire Asset Purchase Agreement should be rescinded.
II. Application of the Arbitration Clause to These Claims
Whether a particular claim must be arbitrated is a matter of contract
interpretation. See First Options of Chicago, Inc. v. Kaplan, 514 U.S.
938, 944 (1995); AT&T Techs., Inc. v. Communications Workers of Am., 475
U.S. 643, 648 (1986); PSI Energy v. AMAX, Inc., 644 N.E.2d 96, 99 (Ind.
1994); Int’l Creative Mgmt. v. D & R Entm’t Co., 670 N.E.2d 1305, 1311
(Ind. Ct. App. 1996). Theising contends that even if his rights are
identical to IQuest’s, IQuest did not agree to arbitrate the claims he
asserts. The arbitration clause in question is found in Section 9.16 of
the Asset Purchase Agreement. It calls for arbitration of “any dispute
arising out of or relating to this Agreement, or the breach thereof.” The
claims asserted by Theising against ISP are described above. The claims
are stated in terms of ISP’s liability for the diversion of assets from
IQuest, ISP’s inability to set off the purchase price for warranty
breaches, and ISP’s liability for IQuest’s liability for past taxes by
reason of the transfer of IQuest’s assets for less than adequate
consideration rendering IQuest insolvent. All “relate to” the sale
agreement or its breach and are within the terms of the arbitration
agreement. Theising also seeks a declaration that taxing authorities can
pursue ISP for IQuest’s delinquencies. That contention may raise a number
of other issues as to which the tax authorities, not Theising, may be the
proper plaintiff, but to the extent the issue is a dispute between ISP and
Theising, it arises out of the asset sale and is required by the terms of
the agreement to be arbitrated.
Theising’s principal claim is that ISP continues to owe the full
amount of the contracted purchase price to IQuest, without setoff for any
claimed breaches of representations or warranties. He contends that that
issue is not required to be arbitrated because it arises under the note and
Loan Security Agreement, not the Asset Purchase Agreement. The Court of
Appeals agreed with Theising. We do not. For the reasons already given,
the arbitration clause in the Asset Purchase Agreement applies to the
claims Theising asserts. There is no requirement that an arbitration
clause be included in all potentially relevant documents to be binding if
it covers the dispute at hand. see R.J. O'Brien & Assoc. v. Pipkin, 64 F.3d
257, 261 (7th Cir. 1995) (contract did not need to contain an explicit
arbitration clause if it validly incorporated by reference an arbitration
clause in another document) (quoting Helen Whiting, Inc. v. Trojan Textile
Corp., 121 N.E.2d 367, 371 (N.Y. 1954); Imptex Int’l Corp. v. Lorprint,
Inc., 625 F. Supp. 1572, 1572 (S.D.N.Y. 1986) (“While an arbitration
agreement must be in writing to be enforceable, there is no requirement
that it be signed.”). As long as one agreement between two parties
includes an agreement to arbitrate, that is enough to bind both parties to
that undertaking. The issue is simply whether the Asset Purchase Agreement
arbitration clause includes an agreement to arbitrate the issues Theising
raises. If it does, then arbitration is required, whether or not other
documents include arbitration provisions, unless the other documents
supersede the arbitration commitment.
We do not find any affirmative intention in the loan documents to undo
the arbitration covenant found in the Asset Purchase Agreement. Theising
points out that the Loan and Security Agreement includes a forum selection
clause and a consent to jurisdiction in Marion County. He argues that
these demonstrate an intention not to arbitrate any dispute under the note
or Loan and Security Agreement. Again, we disagree. It is not uncommon to
find both arbitration and forum selection clauses in agreements. See,
e.g., Cortez Byrd Chips, Inc. v. Bill Harbert Constr. Co., 529 U.S. 193,
201 (2000); Jumara v. State Farm Ins. Co., 55 F.3d 873, 875 (3d Cir. 1995);
Pacemaker Plastics Co. v. AFM Corp., 163 F. Supp. 2d 795, 807 (N.D. Ohio
2001). Several considerations may lead to the inclusion of both. First,
and obviously, arbitration may be waived by the parties. Germany v. River
Terminal Ry. Co., 477 F.2d 546, 547 (6th Cir. 1973); Uwaydah v. Van Wert
County Hosp., 246 F. Supp. 2d 808, 810 (N.D. Ohio 2002); Miller Constr. Co.
v. First Baptist Church, Inc., 396 So. 2d 281, 282 (Fla. Dist. Ct. App.
1981); Shahan v. Brinegar, 181 Ind. App. 39, 44, 390 N.E.2d 1036, 1040
(1979). If they choose, they may prefer to litigate, but be required to do
so in a designated forum. Second, any claim of fraud in the inducement,
etc., may be presented to a court despite an arbitration clause. Prima
Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404 (1967); Phillips
v. Assocs. Home Equity Servs., 179 F. Supp. 2d 840, 845 (N.D. Ill. 2001);
Allied Sanitation, Inc. v. Waste Mgmt. Holdings, Inc., 97 F. Supp. 2d 320,
333 (E.D.N.Y. 2000). The forum selection provision may apply in that
circumstance, and is not surplusage for that reason also.
The Court of Appeals pointed out that the Loan and Security Agreement
includes an integration clause, providing that the Loan Agreement and Note
“constitute the complete agreement of the parties hereto and supersede all
previous understandings relating to the subject matter hereof.” There is
no arbitration clause in either the note or the Loan and Security
Agreement. However, both the note and the agreement provide for ISP to set
off any “Indemnity Obligation” under the Asset Purchase Agreement against
ISP’s obligations under the note. The Loan and Security Agreement defines
“Indemnity Obligation” as any “claim for indemnification that has been
finally determined in accordance with Article VIII of the Asset Purchase
Agreement.” Article VIII in turn includes a dispute resolution mechanism
that culminates in arbitration under section 9.16 quoted above. It seems
clear that this contemplates arbitration of any dispute over ISP’s right to
a setoff based on breaches of the Asset Purchase Agreement. Setoff is
permitted only if a claim for indemnity (which would include a claim for
breach of warranty) is “finally determined” under the procedure
contemplated by Article VIII, which ultimately requires arbitration under
section 9.16.
We think this elaborate structure evidences an agreement to arbitrate
disputes arising from the sale. Agreements for business acquisitions are
intended to flush out problems in the acquired business by requiring the
sellers to warrant that circumstances are as they seem, and accept the
consequences of a price reduction if that does not prove to be the case.
Refusal to give a requested warranty or representation is a red flag that
there may be a risk the seller is unwilling to accept, and both parties
understand that. Buyers also recognize that unless there is a mechanism to
gain, in effect, a refund of the purchase price, there may be significant
practical obstacles to collecting from the former shareholders of the
business being sold. For that reason, techniques to permit self-help or
automatically triggered relief, such as escrows or as in this case, setoffs
against seller financing, are frequently found in sales of going
businesses. If the note and Loan and Security Agreement did not
contemplate arbitration, a claim could never be “finally determined” under
Article VIII, and the entire rather elaborate mechanism for retroactive
price adjustment based on breaches of warranty would collapse. We do not
believe the parties intended that result, or if the sellers did, it was too
cute by half. In either case, the agreement to arbitrate was made and
should be enforced.
Conclusion
The order of the trial court denying the motion to compel arbitration
is reversed. This case is remanded with instructions to order the
plaintiff, ISP.com, LLC and ISP.net, LLC to arbitrate their dispute under
section 9.16 of the Asset Purchase Agreement.
SHEPARD, C.J., and DICKSON, SULLIVAN, and RUCKER, JJ., concur.
-----------------------
[1] ISP.com, LLC and ISP.net, LLC were the purchasers under the Asset
Purchase Agreement. Another entity, IQuest Internet, LLC is also a
defendant in the Marion County litigation referred to below, but there are
no allegations as to it, and we are uncertain whether it became a successor
in interest to the purchasers or had or has some other relation to this
situation. Except where indicated, “ISP” refers to all ISP entities at the
relevant time. The parties sometimes refer to the purchasers as “New
IQuest” and the seller as “Old IQuest.” That was too many IQuests for us,
so we designate the purchasers “ISP” and the seller “IQuest.”
[2] This is the allegation of the complaint. The Court of Appeals concluded
that $2 million was paid in cash to Hoquim. The complaint alleges that
$5.85 million was paid to IQuest at the closing, which would produce total
payments of $22 million ($5.85 to IQuest; $13.15 to Hoquim, and $3 to the
two others). Perhaps the different descriptions stem from the amounts paid
under the notes before ISP stopped making them. From this record we cannot
resolve or reconcile this discrepancy, but, like several others noted, it
is immaterial to the issues on this appeal.
[3] It is unclear from this record in what ISP entity or entities these
“credits” were given, and what their precise form was. All seem to agree
that whatever these were, they represented equity interests in the business
operated by IQuest before the sale and by ISP thereafter. For purposes of
this opinion, that is enough.
[4] For this proposition the Court of Appeals cited “WISH-TV, Secret
Identity (June 8, 2000), available at
http://www.wishtv.com/Global/story.asp?s=84881 (last visited Jan. 28,
2003).”
[5] This is an assumption we make based on the case number “ES-44”, and the
title of the proceeding “In the matter of the Estate of Robert P. Hoquim,
formerly known as [21 other names].” We have no record from that
proceeding, but an “Order Regarding Twelfth Petition For Instructions”
ruling on the Estate’s surrender of the note and proceeds to Theising is
before us as an exhibit in the record from the appeal in the Marion County
suit.
[6] A different panel of the Court of Appeals, following the Court of
Appeals ruling in this appeal, found the case not arbitrable and reversed
the Marion Superior Court judgment ordering arbitration. Transfer has been
sought in that case as well, and its record is now before us. Some of the
facts included in this opinion are drawn from the record in the Marion
County case. This is appropriate on appeal. Ind. Revenue Bd. v.
Hansbrough, 275 Ind. 426, 433, 417 N.E.2d 311, 315-16 (1981). See also De
Bearn v. Safe Deposit & Trust Co., 233 U.S. 24, 32 (1914); Westfall v.
Wait, 165 Ind. 353, 358, 73 N.E. 1089, 1091 (1905); Phelps v. Porter County
Office of Family & Children, 734 N.E.2d 1107, 1115 (Ind. Ct. App. 2000);
Studabaker v. Faylor, 52 Ind. App. 171, 173, 98 N.E. 318, 319 (1912).
[7] Today we affirm the order of the Marion Superior Court in Theising v.
ISP.com, LLC, __ N.E.2d ___ (Ind. 2004).
[8] Fallick v. Kehr, 369 F.2d 899, 904 (2d Cir. 1966); In re Morgan, 28
B.R. 3, 5 (B.A.P. 9th Cir. 1983); In re Guy C. Long, Inc., 90 B.R. 99, 102
(Bankr. E.D. Pa. 1988); Societe Nationale Algerienne Pour La Recherche v.
Distrigas Corp., 80 B.R. 606, 609 (Bankr. D. Mass. 1987); In re R.M.
Cordova Int’l, Inc., 77 B.R. 441, 450 (Bankr. D.N.J. 1987); Barber-Greene
Co. v. Zeco Co., 17 B.R. 248, 250 (Bankr. D. Minn. 1982); In re Cres Rivera
Concrete Co., 21 B.R. 155, 157 (Bankr. D.N.M. 1982).