This opinion will be unpublished and
may not be cited except as provided by
Minn. Stat. § 480A.08, subd. 3 (2000).
IN COURT OF APPEALS
SHAL, LLC, Walter S. Clay, et al.,
Robert K. Eddy, and Darrel Westrum,
Filed October 22, 2002
Reversed and remanded
Hennepin County District Court
File No. 01-13046
Frank A. Taylor, Charles B. Rogers, Janel E. LaBoda, Julie H. Firestone, Briggs and Morgan, 2400 IDS Center, Minneapolis, MN 55402 (for appellant SHAL)
Mark J. Briol, Joseph Musilek, Briol and Associates, 3700 IDS Center, 80 South Eighth Street, Minneapolis, MN 55402 (for appellants Clay and Dahl)
Roger J. Magnuson, Dean C. Eyler, Dorsey and Whitney, 50 South Sixth Street, Suite 1500, Minneapolis, MN 55402 (for appellant Eddy)
Donald R. McNeil, Coleman, Hull and Van Vliet, 8500 Normandale Lake Boulevard, Suite 2110, Minneapolis, MN 55437 (for appellant Westrum)
Joseph W. Anthony, Randy G. Gullickson, Janel M. Dressen, Anthony Ostlund and Baer, 3600 Wells Fargo Center, 90 South Seventh Street, Minneapolis, MN 55402 (for respondent)
Considered and decided by Randall, Presiding Judge, Harten, Judge, and Schumacher, Judge.
U N P U B L I S H E D O P I N I O N
This is an appeal from the district court's determination that the parties were not required to arbitrate their claims under Minnesota law. At issue is whether (1) the Federal Arbitration Act applies to this case and preempts Minnesota arbitration law; (2) arbitration is required under either the Federal Arbitration Act or Minnesota law. Since respondent is required to arbitrate its claims under Minnesota law, we reverse and remand.
Respondent Onvoy is a privately held Minnesota telecommunications corporation that supplies local telephone providers with access to fiber-optic cable. Appellant SHAL is a Minnesota limited liability company, comprised of several local telephone exchange companies, which constructs fiber-optic communication lines and transport facilities. Each of the companies that comprise appellant SHAL is a shareholder of respondent Onvoy. Appellant Clay is a member of the SHAL board of governors and is chairman of Onvoy's finance and audit committee. Appellant Eddy is also a member of the SHAL board of governors and is chairman of Onvoy's network committee. Appellant Dahl is the general manager of Hutchinson Telephone Company, a member/owner of SHAL, and a member of Onvoy's network committee.
In 1997 and 1998, Onvoy was considering plans to purchase or lease a new fiber-optic network running from Plymouth, Minnesota to Moorhead, Minnesota. Onvoy then issued a request for proposal (RFP) inviting fiber-optic providers to submit bids for portions of the proposed network. SHAL submitted multiple proposals, and on or about September 1, 1999, the Onvoy board of directors approved moving forward to negotiate a lease with SHAL. Onvoy and SHAL executed a lease on or about October 25, 1999. On September 9, 1999, Onvoy entered into a stock purchase agreement with two corporations involved with the Soros Equity Investment Fund. This investment resulted in changes to Onvoy's articles of incorporation, adding the provision that Soros would have the right to elect three members of Onvoy's board. The amended articles of incorporation also provided that Onvoy was authorized to undertake certain specified corporate actions only with the approval of a majority of the board of directors, including at least one Soros elected director.
Following the execution of the lease and the stock purchase by related companies of Soros Equity Investment Fund, the Onvoy board attempted to renegotiate the lease with SHAL. Included in the lease was a mediation and arbitration clause stating:
Mediation and Arbitration. Any unresolved disputes arising under this lease shall be first submitted to mediation. Unless the dispute is resolved after consultation between the liaisons of each party, a mediator shall be selected by agreement of the chief operations officers of each party. In the event that a dispute cannot be resolved by mediation, then the parties agree that the dispute shall be submitted to arbitration under the rules of the American Arbitration Association.
In 2001, Onvoy chose to pursue litigation rather than arbitration. Onvoy's lawsuit seeks monetary damages and rescission of the contract. The leases in question were not approved by the Onvoy board, including a Soros director. The amended articles of incorporation required such approval for Onvoy to enter into or amend any material contract. The district court, responding to a motion by SHAL to compel arbitration, ruled that Onvoy was not required to arbitrate its claims, and could continue with litigation in district court.
Onvoy presses the argument that in this case, as the Federal Arbitration Act and Minnesota arbitration law conflict, federal law preempts, and arbitration should not be compelled. On these facts, we disagree.
"[T]he basic purpose of the Federal Arbitration Act is to overcome courts' refusals to enforce agreements to arbitrate." Allied-Bruce Terminix Co., Inc. v. Dobson, 513 U.S. 265, 270, 115 S. Ct 834, 838 (1995); see also Volt Info. Scis., Inc. v. Bd. of Tr. of Leland Stanford Junior Univ., 489 U.S. 468, 474, 109 S. Ct. 1248, 1253 (1989). Both Federal and Minnesota law favor arbitration as an alternative to litigation. Moses H. Cone Mem'l Hosp. v. Mercury Const. Corp., 460 U.S. 1, 24, 103 S. Ct. 927, 941 (1983); Minn. Teamsters Union & Law Enforcement Employees' Union, Local No. 320 v. County of St. Louis, 611 N.W.2d 355, 358 (Minn. App. 2000). Here, the only issue in which federal and Minnesota arbitration law conflict is in Onvoy's claim of an ultra vires transaction. The United States Supreme Court has stated that the FAA should preempt state law "to the extent that [state law] stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." Volt, 489 U.S. at 477 (citation omitted). The Court has struck down laws restricting the rights of the parties to arbitrate using the FAA and the Supremacy Clause. See Southland Corp. v. Keating, 465 U.S. 1, 12 (1984) (holding a California provision invalid that required the resolution of statutory disputes exclusively in the courts rather than arbitration).
In this case, we believe the general purpose of the Federal Arbitration Act, namely to compel arbitration in situations where states refuse, argues against preemption, as the determination of arbitrability under Minnesota arbitration law favors arbitration on these facts.
In Minnesota, when determining whether parties agreed to arbitrate an issue, the court analyzes whether a valid arbitration agreement exists and "whether the dispute falls within the scope of the arbitration agreement." Amdahl v. Green Giant Co., 497 N.W.2d 319, 322 (Minn. App. 1993). In making that determination, courts generally apply state law principles that govern contract formation, to ascertain the parties' intent. First Options of Chicago, Inc., v. Kaplan, 514 U.S. 938, 944 (1995).
In Atcas v. Credit Clearing Corp. of Am., 197 N.W.2d 448 (Minn. 1972), the Minnesota Supreme Court set guidelines for a court to use in determining whether the parties intended to arbitrate a dispute:
(1) If the parties evinced a clear intent to arbitrate a controversy arising out of specific provisions of the contract, the matter is for the arbitrators to determine and not the court.
(2) If the intention of the parties is reasonably debatable as to scope of the arbitration clause, the issue of arbitrabilty is to be initially determined by the arbitrators. * * *
(3) If no agreement to arbitrate exists, either in fact or because the controversy sought to be arbitrated is not within the scope of the arbitration clause of the contract, the court may interfere and protect a party from being compelled to arbitrate.
Atcas, 197 N.W.2d at 452.
Here, Onvoy argues, and the district court held, that because Onvoy claimed fraud in the inducement of the contract, they cannot be compelled to arbitrate. We disagree.
In Atcas, the Minnesota Supreme Court, examining the arbitrability of fraud in the inducement claims, stated:
[F]raudulent inducement will not be arbitrated where the party asserting the fraud seeks to rescind the contract containing the arbitration clause, but will be arbitrated where the party seeks not rescission but damages for the loss caused him by the fraud. * * * [T]he party seeking such relief must seek rescission but not damages, and he cannot rescind in part and affirm in part. His rescission of the contract must be in toto.
Id. at 456.
In its amended complaint, Onvoy claims damages for fraud in the inducement of the contract. However, in this portion of the complaint, Onvoy does not claim, as it does in other portions of the complaint, that the proper remedy is rescission of the lease under Minn. Stat. § 302A.65 (2000), and recovery of all payments made under the lease; instead, in its fraud in the inducement claim, Onvoy claims that "as a direct and proximate result of defendant's material misrepresentations and/or omissions, Onvoy has been damaged in an amount in excess of Fifty Thousand Dollars." By this claim, respondent requests monetary damages and not mere rescission of the contract. According to the Atcas rule, Onvoy should arbitrate this claim.
Onvoy claims that as the complaint alleges an ultra vires transaction (no valid contract ever existed), arbitration cannot be compelled. We understand Onvoy's argument, but disagree.
Here, sophisticated parties entered into a complex lease agreement. Both parties operated under and substantially performed the contract for nearly three years. During this time millions of dollars changed hands between the parties and neither evinced, up until now, any indication that a contract "never existed." Essentially, Onvoy's claims sound in damages. Those are claims that can properly be decided by an arbitrator.