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Sherrock Brothers, Inc. v. Daimlerchrysler Motors Co. LLC

October 12, 2006


The opinion of the court was delivered by: Judge Caputo


Presently before the Court is Sherrock Brothers, Inc.'s (Petitioner) Petition to Vacate Arbitration Award and Remand to Arbitration. (Doc. 1-1.) Also before the Court is DaimlerChrysler Motors Company LLC's (Respondent) Cross-Petition to Confirm Arbitration Award. (Doc. 11-1.) For the reasons set forth below, the Court will deny Petitioner's Petition to Vacate Arbitration Award and grant Respondent's Cross-Petition to Confirm Arbitration Award. The Court has jurisdiction over this matter pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq., as well as 28 U.S.C. § 1332(a).


The factual and procedural history of this matter, as described by the American Arbitration Association Panel ("Panel") in its Arbitration Award (Resp.'s Ex. 2), is as follows. On October 22, 2003, Petitioner filed a Demand for Arbitration ("Demand") with the American Arbitration Association ("AAA"). In Petitioner's Demand, Petitioner disputed the validity of the termination of its dealership agreement with Respondent, which occurred on December 12, 2002. Prior to the termination, Petitioner was an authorized Dodge dealer in Hazelton, Pennsylvania. In response to the termination of its dealership, on December 23, 2002, Robert V. Rinaldi ("Rinaldi"), in the name and on behalf of Petitioner, instituted a petition against Respondent before the State Board of Motor Vehicle Manufacturers, Dealers, and Sales Persons for the Commonwealth of Pennsylvania ("Board"). In the petition, Petitioner alleged that: (1) Rinaldi had acquired all of its voting stock; (2) Respondent had been advised in writing of Rinaldi's stock ownership; (3) Rinaldi injected additional capital into Petitioner; (4) on November 11, 2002, Theodore and Edward Sherrock ("the Sherrocks"), as officers of Petitioner, informed Respondent by letter that Petitioner intended to voluntarily terminate its Dodge dealership agreement with Respondent; (5) the letter of voluntary termination was "ultra vires, unauthorized, ineffective, unlawful and legally void ab initio . . ."; and (6) Respondent had notified Petitioner that the voluntary termination would become effective December 12, 2002.

On June 13, 2003, the Board issued an order dismissing Petitioner's petition. The Board ruled that Petitioner was not entitled to relief under the Board of Vehicles Act ("BVA"), 63 PA. CONS. STAT. § 818.1 et seq., because Petitioner's dealership was voluntarily surrendered by the dealer, and not unfairly terminated by the manufacturer. 63 PA. CONS. STAT. § 818.13 (providing that "[i]t shall be a violation of this act for any manufacturer or distributor, officer, agent or any representative whatsoever to unfairly, without due regard to the equities of said dealer and without just cause, terminate or fail to renew the franchise of any vehicle dealer"). The Board noted that it was without the authority and the expertise to address the issue of the alleged ultra vires nature of the actions of the Sherrocks, Petitioner's corporate officers, instead stating that Petitioner's proper avenue for relief was a court action against the Sherrocks themselves. The Board denied Petitioner's motion for reconsideration on July 15, 2003.

Rinaldi, again on behalf of Petitioner, filed a Petition for Review with the Commonwealth Court of Pennsylvania averring, inter alia, that "[n]otwithstanding its knowledge of Rinaldi's equity position, its prior dealings with him, and without any inquiry and/or evidence of proper corporate authorization by its dealer . . . [Respondent] accepted Ted Sherrock's letter [of intent to terminate the dealership agreement] and advised the Board of Vehicles by letter dated December 12, 2002, that it was immediately terminating the Sherrock Dodge dealer Agreement." Rinaldi again alleged that the voluntary termination was "legally ineffective, ultra vires, improper, unlawful and void ab initio." Rinaldi further argued that Respondent could not legally rely, nor act for that matter, upon Ted Sherrock's termination letter based upon the facts and circumstances as pleaded by Rinaldi in his Petition for Review, particularly the alleged facts concerning Respondent's knowledge of Rinaldi's equity position and Rinaldi's prior dealings with Respondent. On January 8, 2004, the Commonwealth Court issued an opinion affirming the Board's decision as not clearly erroneous. Rinaldi v. Bd. of Vehicle Mfrs., 843 A.2d 418 (Pa. Commw. Ct. 2004) (Simpson., J.). Specifically, the Commonwealth Court held that section 13 of the BVA "applies only when the manufacturer terminates a franchise 'unfairly, without due regard to the equities of said dealer and without just cause.'" Id. at 421. The Commonwealth Court also upheld, as supported by sufficient evidence in the record, the Board's factual finding of a voluntary franchise surrender. Id. The Commonwealth Court observed that Rinaldi admitted the Sherrocks were corporate officers, and, based on corporation and agency law, Respondent was entitled to rely upon the representations made by the Sherrocks and conclude that their letter constituted a voluntary termination of the franchise. Id. The Commonwealth Court concluded that "[b]ecause [Respondent] knew of limitations on Rinaldi's authority but did not know of limitations on the authority of Dealership officers, there is nothing in the record to preclude summary relief founded on apparent authority." Id. On February 26, 2004, Rinaldi's application for reargument/reconsideration before the Commonwealth Court en banc was denied.

On March 29, 2004, Rinaldi, again on behalf of Petitioner, petitioned the Supreme Court of Pennsylvania for an Allowance of Appeal. Rinaldi argued the same issues of lack of corporate authority on the part of the Sherrocks and lack of good faith on the part of Respondent as he had before the Board and the Commonwealth Court. On August 5, 2004, the Supreme Court of Pennsylvania denied Rinaldi's petition.

Collateral to the proceedings before the Board and the Commonwealth Court, on or about October 1, 2003, Rinaldi also instituted an Action in Equity in the Court of Common Pleas of Luzerne County, Pennsylvania, seeking declaratory and injunctive relief against the Sherrocks and Respondent. On October 17, 2003, Rinaldi caused this action to be discontinued without prejudice as to all Defendants.

In none of the proceedings before the Board, the Commonwealth Court, the Supreme Court of Pennsylvania, or the Court of Common Pleas, Luzerne County, did Rinaldi or Petitioner ever claim that they had a right to arbitrate under the provisions of the dealership agreement.

Before the AAA Panel, composed of three (3) arbitrators, Respondent moved for summary judgment on the grounds of res judicata and collateral estoppel, asserting that the adjudications by the Board, the Commonwealth Court, and the Supreme Court of Pennsylvania precluded the Panel from reaching the merits of this dispute. Respondent alternatively argued that, by choosing the Board and Pennsylvania Appellate Courts as its forums, Rinaldi and Petitioner waived their contractual right to arbitration. Conversely, Petitioner argued that the doctrines of res judicata and collateral estoppel did not apply because of (1) a lack of identity of the claims and issues; and (2) either a lack of a decision on the merits or an inability to fully and fairly litigate the claim or issue on the merits. Petitioner contended that the Board and the Pennsylvania Appellate Courts never reached the issues of the ultra vires nature of Sherrock's termination letter, nor the alleged bad faith on the part of Respondent in accepting and relying on the unauthorized letter in terminating the dealership agreement while allegedly knowing of Rinaldi's ownership interest and after allegedly having dealt with him on prior occasions.

On November 18, 2005, the Panel, by a two (2) to one (1) vote, issued its Arbitration Award, granting summary judgment in favor of Respondent. The Panel held that the doctrines of res judicata, collateral estoppel and waiver all precluded the Panel from deciding the merits of Petitioner's Demand.

As to the application of the doctrines of res judicata and collateral estoppel, the Panel reasoned, first, that, in holding that the termination of the dealership agreement was a voluntary surrender, the Board necessarily found, counter to Petitioner's contention, that the action of the Sherrocks, as corporate officers, was not void ab initio. The Panel next found that Rinaldi and Petitioner presented the same ultra vires and bad faith arguments to the Board as contained in the Demand, and that the Commonwealth Court "specifically dealt with the ultra vires and bad faith contentions in regard to [Petitioner's] assertion that those concepts negate[d] the Board's finding that the termination was voluntary." The Panel also observed that the Supreme Court of Pennsylvania "denied allowance of an appeal on the same grounds that are advanced in this arbitration." Consequently, the Panel expressly held "that the Commonwealth Court adjudicated on the merits the exact claims [Petitioner] now wishes to pursue before us." The Panel specifically rejected Petitioner's argument that it did not have a full and fair opportunity to litigate its ultra vires and bad faith contentions before the Board and Commonwealth Court, noting that the Commonwealth Court considered and rejected it.

The Panel also found, by clear and convincing evidence, that Rinaldi and Petitioner waived the contractual right to arbitration in "seeking relief through its Petition to the Board and subsequent Appellate Court review" and "never reserv[ing] its right to arbitrate in its Petitions to the Board and the Appellate Courts." The Panel concluded that it would not permit Petitioner "to utilize the Board process and then retreat to arbitration if it loses."

Lastly, the Panel addressed the issue of whether summary judgment was an appropriate remedy in the context of this arbitration. The Panel reasoned that, because it was ruling on the grounds of res judicata, collateral estoppel and waiver, no factual issues were present to necessitate an evidentiary hearing. Therefore, the Panel concluded, summary judgment was an acceptable means of disposing of the demand.

The dissenting arbitrator argued that Petitioner was never afforded a full and fair opportunity to litigate, nor was even afforded an evidentiary hearing on, its claims concerning the ultra vires nature of the Sherrocks' action and bad faith on the part of Respondent. Indeed, the dissent asserted that the Board "summarily determined" that it had no jurisdiction to hear Petitioner's claims "because there was no 'adversarial notice of termination' in the limited record before it." And in the dissent's view, the Commonwealth Court "simply affirmed the Board's determination that it had no jurisdiction," with the portion of the court's opinion devoted to the issue of voluntary surrender being mere dicta.

On February 16, 2006, Petitioner filed with this Court its Petition to Vacate the Arbitration Award. (Doc. 1-1.) On March 31, 2006, Respondent filed a Cross-Petition to Confirm the Arbitration Award. (Doc. 11-1.) Briefs and exhibits were submitted by both parties and oral argument was conducted. Consequently, these petitions are ripe for disposition.


I. Petitioner's Contentions

Petitioner now asks this Court to vacate the arbitration award entered in favor of Respondent. Petitioner presents three arguments it believes support vacatur of the award: (1) the Panel majority committed a manifest disregard of the law in finding that Petitioner's ultra vires and bad faith claims were precluded pursuant to the doctrines of res judicata, collateral estoppel and waiver; (2) the Panel majority exceeded their powers, in violation of 9 U.S.C. ยง 10(a)(4), in using the procedure of summary judgment to dispose of Petitioner's arbitration demand; (3) the Panel majority is guilty of misconduct, under 9 ...

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