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Nelson v. Brown

United States District Court, E.D. Pennsylvania

April 24, 2018

MICHAEL R. NELSON
v.
DAVID L. BROWN, ET AL.

          MEMORANDUM

          JOHN R. PADOVA, JUDGE.

         Plaintiff Michael R. Nelson has filed the instant action seeking to compel the mediation or arbitration of certain disputes arising out of the dissolution of the law firm of Nelson Levine de Luca & Hamilton, LLC (the “Firm”) in accordance with the procedures set forth in the Pennsylvania Bar Association's Lawyer Dispute Resolution Program Rules (the “PBA Program”). Two of the Defendants, William O. Krekstein and David L. Brown, have filed Answers to the Amended Complaint. The remaining Defendants have filed Motions to Dismiss the Amended Complaint. In response, Plaintiff has filed a Cross-Motion to Compel Arbitration. For the following reasons, we deny all of the Motions.

         I. FACTUAL BACKGROUND

         The Amended Complaint alleges the following facts. The parties were all members of the Firm, which is a Pennsylvania limited liability company. (Am. Compl. ¶ 16.) The rights and obligations of the parties, who were members of the Firm, are governed by the Amended and Restated Limited Liability Company Operating Agreement (the “Operating Agreement”) and the Amended and Restated Buy-Sell Agreement (the “Buy-Sell Agreement”). (Id. ¶ 2, Exs. A, B.) Both of the Agreements require the parties to “resolve all claims and disputes arising under or relating to” the Agreements through mediation and, if necessary, through arbitration under the PBA Program. (Id. ¶ 2; Ex. A § 9.13; Ex. B § 7.13.) Defendants have received notices and demands for mediation and arbitration from Plaintiff and the Pennsylvania Bar Association (“PBA”), but have refused to participate in the PBA dispute resolution process. (Id. ¶ 3.)

         Plaintiff seeks to mediate, and if necessary arbitrate, claims against Defendants arising from the following:

(a) the repayment of a $4 million line of credit with First Niagara Bank. Plaintiff Nelson has had to contribute more than his proportionate share to repay that line of credit, and he has also had to pay income taxes on certain sources of income used for the repayment. This implicates the Defendants' duty, pursuant to Section III of the Operating Agreement and paragraph 3.1.1 of the Buy-Sell Agreement, to contribute capital. Plaintiff Nelson further seeks indemnification from the Defendants for the amounts he has paid beyond his proportionate share of liability.
(b) Defendants taking advance draws that exceeded their entitlement to distributions for 2014, in violation of Section IV of the Operating Agreement. Despite demand, Defendants have refused to repay the excess advance draws that they received and, instead, Defendants have tried to characterize those advance draws as guaranteed payments. This has diluted Nelson's interest. In addition to constituting breaches of the Operating Agreement, this conduct by Defendants also constitutes breaches of the fiduciary duties that the Defendants owe to Plaintiff Nelson. This conduct, and the fact that all of the Defendants left the firm without giving proper notice, also implicates the winding-up process set forth at Section VII of the Operating Agreement, by placing undue burdens on Nelson.
(c) While all Defendants took advance draws to which they were not entitled, Defendants Clark, de Luca, and Levine took advance draws in 2014 simultaneously with planning and preparing to launch their (respective) new, competing law firms, at a time when they were supposed to be devoting all of their professional time and efforts to the law firm they shared with Plaintiff Nelson. This conduct violates paragraph 5.3 of the Operating Agreement and also constitutes additional breaches of fiduciary duty by these Defendants.

(Id. ¶ 18.)

         The parties agreed, in both the Operating Agreement and the Buy-Sell Agreement, that “‘any and all claims, controversies and disputes . . . arising under or relating to [the Agreements] shall be settled through mediation conducted in accordance with the then-existing rules of the [PBA Program].'” (Id. ¶ 20 (quoting Operating Agreement § 9.13); see also id. ¶ 21 (quoting Buy-Sell Agreement § 7.13.) They further agreed that “‘[a]ny DISPUTE not resolved through such mediation shall be submitted to binding arbitration conducted in accordance with the then existing rules of the [PBA Program].'” (Id. ¶ 20 (quoting Operating Agreement §9.13; see also id. ¶ 21 (quoting Buy-Sell Agreement § 7.13).)

         On January 23, 2017, Plaintiff invoked the mediation and arbitration process under the PBA Program by sending a notice to the PBA and Defendants of the existence of disputes among members of the Firm that require resolution. (Id. ¶ 24, Ex. D.) On February 6, 2017, the PBA sent a letter to Defendants notifying them of the request for dispute resolution under the PBA Program and asking that they sign a standard mediation agreement and pay the required fee. (Id. ¶ 25, Ex. E.) None of the Defendants has signed the mediation agreement or paid the fee. (Id. ¶ 26.) All of the Defendants have thus failed and refused to participate in mediation and arbitration under the PBA Program. (Id. ¶ 27.)

         The Complaint asserts two claims for relief. Count I asks the Court to compel mediation and, if necessary, arbitration, pursuant to § 4 of the Federal Arbitration Act, 9 U.S.C. §§ 1-14 (the “FAA”). Count II asks the Court to require the parties to participate in mediation and, if necessary, arbitration, pursuant to the Pennsylvania Uniform Arbitration Act, 42 Pa. Cons. Stat. Ann. § 7304. Defendant John M. Clark has filed a Motion to Dismiss for lack of standing pursuant to Federal Rule of Civil Procedure 12(b)(1) and for failure to state a claim upon which relief can be granted pursuant to Rule 12(b)(6). Defendants Kenneth T. Levine and Daniel J. de Luca have filed a Motion to Dismiss for failure to state a claim upon which relief can be granted pursuant to Rule 12(b)(6). Defendants Claudia D. McCarron and John F. Mullen have also filed a Motion to Dismiss for failure to state a claim upon which relief can be granted pursuant to Rule 12(b)(6). Defendant Michael A. Hamilton has filed a Motion to Dismiss for failure to join an indispensable party pursuant to Rule 12(b)(7). Plaintiff has, in turn, filed a Motion to Compel Arbitration.

         II. THE ARBITRATION ACT

         The Amended Complaint seeks an order pursuant to Section 4 of the FAA compelling the mediation and, if necessary, arbitration of the claims described in Paragraph 18 through the PBA Program. Section 4 of the FAA provides as follows:

A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement.

9 U.S.C. § 4. When it enacted the FAA, “Congress ‘expressed a strong federal policy in favor of resolving disputes through arbitration.'” Flintkote Co. v. Aviva PLC, 769 F.3d 215, 219 (3d Cir. 2014) (quoting Century Indem. Co. v. Certain Underwriters at Lloyd's, London, 584 F.3d 513, 522 (3d Cir. 2009)). “[W]hen a party resists arbitration under an existing arbitration clause . . . the FAA allows a district court to compel, or enjoin, arbitration as the circumstances may dictate.” John Hancock Mut. Life Ins. Co. v. Olick, 151 F.3d 132, 136 (3d Cir. 1998) (citing 9 U.S.C. §§ 3, 4; PaineWebber, Inc. v. Hartmann, 921 F.2d 507, 511 (3d Cir. 1990)).

         When we decide “whether a party may be compelled to arbitrate under the FAA, we first consider ‘(1) whether there is a valid agreement to arbitrate between the parties and, if so, (2) whether the merits-based dispute in question falls within the scope of that valid agreement.'” Flintkote, 769 F.3d at 220 (quoting Century Indem., 584 F.3d at 527). At this stage of the litigation, none of the Defendants disputes that the Operating Agreement and Buy-Sell Agreement contain valid agreements to mediate and, if necessary, to arbitrate under the PBA Program. When a court is “deciding whether the parties have agreed to submit a particular grievance to arbitration, [the] court is not to rule on the potential merits of the underlying claims.” AT & T Techs., Inc. v. Commc'ns Workers of Am., 475 U.S. 643, 649 (1986). Thus, we “have no business weighing the merits of the grievance, considering whether there is equity in a particular claim, or determining whether there is particular language in the written instrument which will support the claim.” Id. at 650; see also Silfee v. Automatic Data Processing, Inc., 696 Fed.Appx. 576, 577 (3d Cir. 2017) (stating that, when it decides whether to compel arbitration, “the role of the court ‘is strictly limited to determining arbitrability and enforcing agreements to arbitrate, leaving the merits of the claim and any defenses to the arbitrator'” (quoting Republic of Nicaragua v. Standard Fruit Co., 937 F.2d 469, 478 (9th Cir. 1991))). When we decide whether the dispute “in question falls within the scope of [a] valid [arbitration] agreement, ” Flintkote, 769 F.3d at 220, “‘there is a presumption of arbitrability[:] an order to arbitrate the particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.'” Century Indem., 584 F.3d at 524 (alteration in original) (quoting AT&T Techs., 475 U.S. at 650).

         III. THE MOTIONS TO DISMISS

         A. R ...


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