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Winner v. Etkin & Company

February 28, 2008

JAMES E. WINNER, JR., PLAINTIFF,
v.
ETKIN & COMPANY, INC. DEFENDANT.



The opinion of the court was delivered by: Terrence F. McVerry United States District Court Judge

MEMORANDUM OPINION AND ORDER

Before the Court for consideration is DEFENDANT'S ETKIN & COMPANY'S MOTION TO COMPEL DISCOVERY PURUSANT TO F.R.C.P. 37 (Document No. 31). Plaintiff James E. Winner, Jr. ("Winner") has filed a response and ECI has filed a reply (Document Nos. 32, 33). The motion is ripe for decision.

This case arose out of ECI's efforts to secure a buyer for Winner Steel, Inc. ("Winner Steel"), which is allegedly controlled by Winner. On May 17, 2005, ECI and Winner Steel entered into an agreement (the "May 17, 2005 Agreement") that provided for a Success Fee to ECI if it found a buyer for Winner Steel. James Winner signed that agreement in his capacity as Chairman of the Company. The agreement contains an arbitration clause. ECI filed a claim in arbitration against the Company and James Winner in his individual capacity. Winner filed the instant suit, seeking a declaration that he is not bound to participate in the arbitration in his individual capacity. Thus, this federal litigation has a very limited scope.

"Arbitration is fundamentally a creature of contract. . . . [N]o party can be forced to arbitrate unless that party has entered into an agreement to do so." Kaplan v. First Options of Chicago, Inc., 19 F.3d 1503, 1512 (3d Cir. 1994). The only contract which contains an arbitration clause is the May 17, 2005 Agreement executed between ECI and the Winner Steel. ECI contends, nevertheless, that Winner can be compelled to participate in the arbitration in his individual capacity under the doctrines of third-party beneficiary, agency, alter ego and/or estoppel.

The instant dispute concerns ten document requests that ECI served on Winner. ECI contends that the requests are narrowly tailored to obtain documents directly relevant to its defenses in this action. Winner contends that ECI is attempting to use this case to obtain documents that are relevant only to the underlying arbitration proceeding. In particular, Winner contends that documents relating to the ultimate sale of Winner Steel to Duferco U.S. Investment Corp. ("Duferco") have no relevance to this litigation. Winner states that he has produced all the agreements, drafts, emails and correspondence relating to the May 17, 2005 Agreement. In addition, Winner assertedly has produced all the legally operative documents relating to the sale to Duferco. Winner objects to the production of documents and correspondence leading up to the sale to Duferco. The Court will address each of ECI's legal theories seriatim.*fn1

Third-Party Beneficiary

A third party beneficiary of a contract is bound by a contractual term requiring arbitration "where its claim arises out of the underlying contract to which it was an intended third party beneficiary." E.I. DuPont de Nemours and Co. v. Rhone Poulenc Fiber and Resin Intermediates, S.A.S., 269 F.3d 187, 195 (3d Cir.2001). Thus, ECI must establish that Winner, in his personal capacity, was a third-party beneficiary of the May 17, 2005 Agreement.

As summarized in Reibstein v. CEDU/Rocky Mountain Academy, 2000 WL 1858718 *7 (E.D. Pa. 2000) (emphasis added):

Under Pennsylvania law, a party is an intended third-party beneficiary if 'both parties to the contract express an intention to benefit the third party in the contract itself,' Stone v. Pennsylvania Merchant Group, LTD., 949 F.Supp. 316, 321 (E.D.Pa. Dec.16, 1996) (quoting Scarpitti v. Weborg, 609 A.2d 147 (1992)), or if 'recognition of a right to performance in the beneficiary is appropriate to effectuate the intentions of the parties and ... the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.' " Id. (quoting the Restatement (Second) of Contracts § 302(1)(b) (1979), which has been adopted as the law of Pennsylvania).

It is not sufficient for ECI to demonstrate that as a shareholder of 45% of the stock of Winner Steel, James Winner would ultimately benefit from the sale of the Company. Rather, ECI must point to a construction of the May 17, 2005 Agreement that evidences an intent to benefit Winner personally. The subsequent correspondence involving the sale to Duferco does not appear to be reasonably related to this inquiry.

Agency

The agency theory cannot succeed under the facts of this case and the law of this circuit. In Kaplan, the Court held that a president who signed a contract in his corporate capacity could not be compelled to participate in an arbitration in his individual capacity. As this Court noted earlier, Kaplan is not only on-point but also binding and thus, the agency theory cannot be successful under the facts of this case.

The Pritzker rule-that nonsignatory agents may invoke a valid arbitration agreement entered into by their principal -- might enable Winner to compel ECI to arbitrate, but it is not a two-way street. See Tracinda Corp. v. DaimlerChrysler AF, 502 F.3d 212, 224 (3d Cir. 2007) (explaining key distinction between cases permitting agents to invoke arbitration clauses against signatories and cases refusing to force nonsignatories ...


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