First Things First: There Must Be An Arbitration Agreement In Order To Compel Arbitration

sheet musicTwo courts recently refused to compel arbitration because the defendants could not prove that the parties had entered into an arbitration agreement at all.  Therefore, the musical accompaniment to this post is “Do Re Mi” from The Sound of Music.  “Let’s start at the very beginning, a very good place to start.  When you read, you begin with ABC,” [and I add]  “when you compel you begin with we agree.”

In Bellman v. i3Carbon, LLC, 2014 WL 2210739 (10th Cir. May 29, 2014), two plaintiffs sued for securities fraud, alleging that defendants had made misstatements when convincing plaintiffs to invest $600,000 in an energy company.  Defendants then moved to compel arbitration based an arbitration agreement in the (unsigned) Operating Agreement.   However, Defendants were unable to prove that there was any meeting of the minds with respect to an arbitration agreement, so the district court denied the motion and the appellate court affirmed the denial.  As the Tenth Circuit explained:

Defendants’ argument essentially boils down to their assertion that Plaintiffs’ mere investment in i3Carbon following their receipt of a binder containing an unsigned Operating Agreement somehow establishes that Plaintiffs agreed to, and accepted, the terms of the Operating Agreement, including its arbitration provision.  However… this argument is unpersuasive.

Because the plaintiffs had never signed the Operating Agreement at issue, nor was there any evidence that the parties understood the Operating Agreement to be necessary to the investment, the court found defendants had not created any genuine issue of material fact “as to whether or not there was a meeting of the minds” that would require a trial on the issue.  It affirmed the trial court’s denial of the motion to compel arbitration.  [The Tenth Circuit reiterated its recent guidelines for when formation issues can be decided on motion versus by a trial: the court may decide the existence of an arbitration agreement if "there are no genuine issues of material fact regarding the parties' agreement."  If such a genuine dispute exists, the court shall move to a summary trial."]

The Tenth Circuit also rejected the defendants’ argument that plaintiffs were equitably estopped from denying their acceptance of the Operating Agreement.  Importantly, plaintiffs were not claiming a breach of the Operating Agreement, nor trying to enforce any rights or remedies contained in the Operating Agreement.

Bank of the Ozarks, Inc. v. Walker, __S.W.3d__, 2014 WL 1946742 (Ark. May 15, 2014), reached a similar holding.  In that case, a putative class of customers sued a bank over overdraft fees, and the bank moved to compel arbitration.  The trial court denied the motion, finding the arbitration clause unconscionable, and the court of appeals reversed that decision.  The Supreme Court of Arkansas found both courts had jumped the gun.  In response, the plaintiffs argued that not all of the bank’s account agreements had arbitration clauses and the bank had waived any right it had to arbitrate by moving to dismiss.  However, the lower courts did not make any findings about whether arbitration agreements existed for all customers.  Therefore, the court “reverse[d] and remand[ed] to the [trial court] to determine, in the first instance, whether there is a valid agreement to arbitrate between the parties.”

 

Topics:  Arbitration, Arbitration Agreements, Mandatory Arbitration Clauses

Published In: Alternative Dispute Resolution (ADR) Updates, Civil Procedure Updates, General Business Updates, Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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