The opinion of the court was delivered by: Magistrate Judge Blewitt
This action was filed on May 12, 2005 by Plaintiffs Elegant Moments, Inc., Eugene Newton, Sr. and Susan Newton against Defendants Nancy Dimick and Karen Lasky. Diversity jurisdiction is alleged under 28 U.S.C. § 1332(a). (Doc. 1, p. 2). Plaintiffs seek a Declaratory Judgment pursuant to 28 U.S.C. §§ 2201-2202 concerning the rights, obligations and liabilities of the parties under a Distributor Contract. The Defendants had previously instituted an arbitration proceeding against Plaintiffs with respect to the Distributor Contract which was pending before the American Arbitration Association ("AAA"). Plaintiffs, in addition to their Complaint for Declaratory Judgment, also petitioned this Court to stay the arbitration commenced by Defendants against them. (Doc. 1, p. 1).*fn1
Defendants filed a Motion to Dismiss in response to the Complaint. On October 27, 2005, the District Court denied Defendants' Motion and stayed the Arbitration. (Doc. 17).*fn2
Defendants then filed their Answer to the Complaint, which also contained a Counterclaim. (Doc. 20).
On December 4, 2005, Plaintiffs filed a Motion to Dismiss Defendants' Counterclaim, arguing that it merely replicated the claims that Defendants raised in the Arbitration which was stayed by the District Court. (Doc. 24). Plaintiffs' Motion has been briefed and is ripe for disposition. (Docs. 27, 30 & 31).
As we indicated in our prior Report and Recommendation (Doc. 16):
Essentially, Plaintiffs request this Court to determine that a valid and enforceable contract does not exist between the parties. Plaintiffs also request this Court to stay all proceedings in the Arbitration case until the Court adjudicates the merits of their declaratory judgment action. Plaintiffs contend that if the contract with Defendants is void, then the arbitration clause embedded therein is also void.
This matter was originally assigned to United States District Judge James M. Munley and referred to the undersigned for pretrial management. Subsequently, the parties consented to proceed before the undersigned for all matters pursuant to 28 U.S.C. s 636(c). (Docs. 28 & 29).
Also, as we previously indicated, Doc. 16, pp. 1-2:
Basically, Plaintiffs assert that this Court should determine if there exists a valid and enforceable contract between the parties under the Distributorship Agreement or Contract ("DC"). Defendants claim that this issue is subject to the Arbitration case involving the parties which is already pending with the AAA and that Plaintiffs' present declaratory judgment action should be dismissed. Plaintiffs claim that Defendants fraudulently misrepresented them into believing that Lingerie 4 You International, Inc. ("LFYI") was a legal corporation when it never was a lawful entity and that this fraud in the execution voided the DC, including the arbitration clause, thus barring Defendants from compelling arbitration of this case under the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1-16. The issues with which we are now presented are whether the alleged fraudulent conduct of Defendants, which Plaintiffs claim preclude Defendants from compelling arbitration since this conduct rendered the DC void ab initio, should be considered by this Court and not by the arbitrator, and whether this determination should be made by this Court prior to the arbitration case proceeding any further. As discussed below, we find that the Plaintiffs' claim that the DC was rendered void ab initio must be resolved by this Court, and therefore, we shall recommend that Defendants'
Motion to Dismiss be denied, that Plaintiffs' Motion for Injunction be granted, and that the Court stay the pending Arbitration proceedings until this Court adjudicates the declaratory judgment action.
As Plaintiffs state in their Brief (Doc. 27, pp. 3-5), we have detailed the factual history of this case in our Report and ...