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Elegant Moments, Inc. v. Dimick

September 7, 2006


The opinion of the court was delivered by: Magistrate Judge Blewitt


I. Procedural History

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. This Court has diversity jurisdiction 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 ("DC"). 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 Affirmative Defenses and a Counterclaim. (Doc. 20).*fn3

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 was briefed.

(Docs. 27, 30 & 31). On February 7, 2006, the Court issued a Memorandum and Order in which Plaintiffs' Motion to Dismiss Defendants' Counterclaim was granted. (Doc. 32). Thereafter, discovery ensued. Defendants submitted to Plaintiffs a Request for Admissions, Interrogatories and a Request for Production of Documents. Defendants state that they seek discovery in support of their unclean hands defense, and regarding Plaintiffs' conduct after execution of the DC, i.e., whether Plaintiffs' conduct amounted to bad faith and constituted a breach of the DC. (Doc. 39, pp. 1-2). Defendants claim that their broader discovery requests are permissible and seek relevant information since they are attempting to show that Plaintiffs breached the DC, thus allowing them to raise the doctrine of unclean hands as a defense. Defendants state that they also seek discovery of facts after the DC was executed including whether Plaintiffs ratified the DC. (Id.). Defendants contend that their discovery requests are directly related to their defenses. Defendants also note that they have agreed to narrow their discovery requests as well as their deposition questions to Plaintiffs "to questions involving only the territory covered by the Agreement [DC]." (Id., p. 2, n. 2).

Plaintiffs have objected to Defendants' stated discovery requests, which they felt did not relate to their Declaratory Judgment action, and filed the present Motion for Protective Order (Doc. 35), seeking the Court to limit the scope of Defendants' deposition questions to them to the events which occurred before the DC was executed. (Doc. 38, pp. 7-8). Plaintiffs argue that the only relevant issues presented in their Complaint is whether Plaintiff Eugene Newton was fraudulently induced into signing the DC. Plaintiffs contend that to the extent Defendants' discovery requests (as well as Defendants' anticipated deposition questions posed to Plaintiffs) seek to obtain information not related to the issues raised in the Complaint, such as whether the DC was breached, these requests are not relevant to this action and only serve to assist Defendants in preparing for their arbitration. (Id.).

Both parties acknowledge that Defendants will be deposing the Plaintiffs, but they do not agree on the scope of the area of inquiry that is relevant to this case. To this end, Plaintiffs have flied their instant Motion for a Protective Order. To date, the Defendants have not filed a motion to compel Plaintiffs to fully respond to their written discovery requests mentioned above. The Court conducted a telephone conference with counsel for the parties on June 22, 2006, in order to try and resolve the discovery disputes stated above. The Court directed counsel to brief the Plaintiffs' Motion for a Protective Order, as well as the relevancy of Defendants' written discovery requests to which Plaintiffs have objected, without requiring Defendants to file a Motion to Compel. The Court indicated that the disposition of Plaintiffs' Motion will delineate the scope of discovery between the parties thus alleviating the need for Defendants to file a Motion to Compel.

As directed, Plaintiffs filed their Brief on July 6, 2006 (Doc. 38), and Defendants filed their Brief on July 24, 2006. (Doc. 39). Thereafter, on August 7, 2006, Plaintiffs filed a Reply Brief. (Doc 40).*fn4

II. Background

As Plaintiffs recount in their Brief (Doc. 38, pp. 1-4), we have detailed the factual history of this case in our October 6, 2005, Report and Recommendation, Doc. 16, pp. 3-5, in which we stated as follows:

On or about November 1, 2003, Eugene Newton, Sr., as President of Elegant Moments, Inc., a Pennsylvania corporation, signed a Distributor Contract ("DC"). The Distributor Contract was entered into between Elegant Moments, Inc. as Manufacturer and Lingerie 4 You International, Inc. ("LFYI"), referred to as Distributor, with its principal place of business in Las Vega, Nevada. (Doc. 1, Ex. A). Both Defendants Dimick and Lasky signed the Distributor Contract, the former as President and the latter as Vice President of Lingerie 4 You International, Inc. (Id., p. 10). Neither Dimick nor Lasky signed the DC in their individual capacities. Plaintiffs aver that at all relevant times, they believed that Lingerie 4 You International, Inc. was a legal and operating corporation. Under the DC, Elegant Moments, as manufacturer, was to provide LFYI with intimate apparel and LFYI, as distributor, was in turn to distribute, to promote, and to sell the apparel to customers in Japan.

After the DC was executed, Defendants claimed that Plaintiffs breached the agreement and filed suit against them in the United States District Court for Nevada on February 3, 2005. This case captioned as Nancy Dimick, et al. v. Elegant Moments, Inc., et al., was docketed to Civil No. 05-0134, D. NV. Plaintiffs were served with Defendants' Nevada suit and subsequently, Plaintiffs advised Defendants that since Defendants were signatories to an arbitration clause in the DC they (Plaintiffs) would file a motion to compel arbitration if the Nevada suit was not dismissed as to them (Plaintiffs). (Doc. 8, Ex. A, pp. 1-2). Defendants then dismissed the Nevada suit against Plaintiffs on March 16, 2005.

On or about March 24, 2005, Defendants filed a demand for Arbitration with the AAA, alleging that Plaintiffs breached the DC. (Doc. 1, Ex. B). On May 2, 2005, Plaintiffs filed their answer to the arbitration demand of Defendants. (Doc. 1, Ex. C). Plaintiffs responded in part that the Claimants, Dimick and Lasky were not parties to the DC and thus were not proper parties to the Arbitration, and that "Lingerie 4 You" was not a party to the DC and thus not a proper claimant in the Arbitration. Plaintiffs asserted that only Lingerie 4 You, Inc. ("LFYI") and Elegant Moments, Inc. were parties to the DC. (Doc. 1, Ex. C). The Arbitration case then proceeded to an administrative conference and selection of an arbitrator. (Doc. 8, Ex. A, p. 3).

On May 2, 2005, counsel for Defendants in the Arbitration case faxed a letter to Plaintiffs' counsel indicating that Defendants' arbitration demand incorrectly named Lingerie 4 You as a claimant and indicated that the proper claimants in the Arbitration case were LFYI and Dimick and Lasky, its principals. (Doc. 1, Ex. D). The fax letter also identified LFYI as a "Nevada general partnership" and not as a Nevada corporation. (Id.).

During the pendency of the Arbitration case, Plaintiffs instituted this Declaratory Judgment action in this Court and Petition to Stay the Arbitration. Plaintiffs seek this Court to determine if there exists a valid and enforceable contract between the parties named herein, notwithstanding their agreement in the DC to resolve contract disputes through arbitration and their invocation of the arbitration clause in the DC when the Defendants filed suit against them for breach of contract in Nevada District Court. As mentioned, it is the Defendants' position that Arbitration is the recognized and agreed to method to determine if a breach of the DC occurred, and not this declaratory judgment action Plaintiffs filed with this Court. Defendants state that the Arbitration action has already been filed with the AAA pursuant to the binding provision in the DC with identical issues to the instant case and is proceeding, and that this arbitration action can provide Plaintiffs with all of the relief which they are seeking in the present case, including a declaratory judgment. Defendants point out that Plaintiffs themselves have already previously invoked the arbitration provision of the DC, which resulted in the Defendants' dismissal of the their federal action in Nevada and the commencement of the Arbitration case with the AAA.

Plaintiffs concede that they would have compelled arbitration pursuant to the DC in Defendants' Nevada federal suit against them for breach of contract, but argue that at the time, they thought that LFYI was an operating legal corporation. Plaintiffs state that only after Defendants discontinued their federal suit in Nevada and filed their Arbitration demand with the AAA, i.e. when they received the referenced May 2, 2005 fax letter from Defendants' Arbitration counsel, did they (Plaintiffs) discover that LFYI was not incorporated and was a fiction. Plaintiffs argue that they would never had signed the DC with Defendants if they knew that LFYI was not a legal corporate entity and that Defendants fraudulently misrepresented to them that LFYI was indeed a legal corporation in order to dupe them into signing the DC. (Doc. 12, Ex. A, Newton Affidavit, ¶ 19.). Thus, Plaintiffs contend that the Defendants intentionally misrepresented the essential terms of the DC (i.e. fraud in the execution) and that Mr. Newton, as president of Elegant Moments, signed the DC without knowing material facts at the time. Therefore, Plaintiffs argue that the DC, which they claim was executed without knowledge of the fraud perpetrated upon them by Defendants, is null and void. Hence, according to Plaintiffs, if the DC is null and void ab initio, then the Arbitration clause contained therein is also null and void and not enforceable against them. (Doc. 1, p. 7, ¶ 25.). Plaintiffs filed the present Declaratory Judgment action for precisely this reason, i.e. ...

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