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Inception Mining, Inc. v. Danzig, Ltd.

United States District Court, D. Utah, Central Division

February 27, 2018

INCEPTION MINING, INC.; MICHAEL AHLIN; and TRENT D'AMBROSIO, Plaintiffs,
v.
DANZIG, LTD.; ELLIOT FOXCROFT; and BRETT BERTOLAMI, Defendants.

          MEMORANDUM DECISION AND ORDER GRANTING IN PART AND STAYING IN PART MOTION FOR PRELIMINARY INJUNCTION, OR ALTERNATIVELY A PERMANENT INJUNCTION

          David Nuffer District Judge.

         Plaintiffs assert claims for declaratory and injunctive relief relating to arbitration proceedings pending in Salt Lake City, Utah and Boston, Massachusetts (respectively, the “SLC Arbitration” and the “Boston Arbitration”; collectively, the “Arbitrations”).[1] Plaintiffs move for preliminary or permanent injunctive relief staying the Arbitrations until threshold issues of arbitrability are resolved in this court.[2] Specifically, Plaintiffs seek a stay of the Arbitrations until the resolution of their claims that (1) Plaintiffs Michael Ahlin and Trent D'Ambrosio (the “Individual Plaintiffs”) are not proper parties to the Arbitrations; and (2) Defendants' claims under certain contracts are not subject to arbitration in the Boston Arbitration.[3]

         Defendants previously sought dismissal of Plaintiffs' Complaint on jurisdictional grounds.[4] A Memorandum Decision determined that jurisdiction and venue are proper for this court to determine whether the Individual Plaintiffs may be required to arbitrate in the SLC Arbitration.[5] The Memorandum Decision also stayed determination on Plaintiffs' claims concerning the Boston Arbitration pending resolution of a motion to dismiss in a related federal case in the Western District of North Carolina (the “North Carolina Case”).[6]

         Because Plaintiffs have established the right to a preliminary injunction on their claim that the Individual Plaintiffs are not proper parties to the SLC Arbitration, Plaintiffs' Motion for Injunction[7] is GRANTED in part. However, for the same reasons identified in the Memorandum Decision on Defendants' Motion to Dismiss, [8] determination is STAYED on Plaintiffs' Motion for Injunction[9] as to Plaintiffs' claims concerning the Boston Arbitration.

         Contents

         DISCUSSION ................................................................................................................................. 3

         Plaintiffs have shown a substantial likelihood of success on the merits of their claim that the Individual Plaintiffs are not proper parties to the SLC Arbitration .................. 3

         The Individual Plaintiffs did not agree to arbitrate in the SLC Arbitration ............ 5

         The Individual Plaintiffs are not bound by the Foxcroft Agreement's arbitration clause through agency or estoppel .............................................................. 6

         The Individual Plaintiffs will suffer irreparable injury if the SLC Arbitration is not stayed as to them .............................................................................................................. 18

         The threatened injury to the Individual Plaintiffs if the SLC Arbitration is not stayed outweighs any injury to Defendants by a stay ...................................................... 19

         Staying the SLC Arbitration as to the Individual Plaintiffs is not adverse to the public interest ................................................................................................................... 20

         No bond is required of Plaintiffs for the preliminary injunctive relief ............................. 21

         Determination on Plaintiffs' Motion for Injunction concerning the Boston Arbitration is stayed .................................................................................................................... 22

         ORDER ......................................................................................................................................... 22

         DISCUSSION

         “[B]ecause a preliminary injunction is an extraordinary remedy, the right to relief must be clear and unequivocal.”[10] “To prevail on a motion for a preliminary injunction, the movant must establish that four equitable factors weigh in its favor: (1) it is substantially likely to succeed on the merits; (2) it will suffer irreparable injury if the injunction is denied; (3) its threatened injury outweighs the injury the opposing party will suffer under the injunction; and (4) the injunction would not be adverse to the public interest.”[11] The standard for a permanent injunction is essentially the same, with the exception that the movant must show actual success rather than a likelihood of success on the merits of its claim.[12]

         Plaintiffs have shown a substantial likelihood of success on the merits of their claim that the Individual Plaintiffs are not proper parties to the SLC Arbitration

         “[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.”[13] Therefore, “a party who has not agreed to arbitrate will normally have a right to a court's decision about the merits of its dispute[.]”[14] “But, where the party has agreed to arbitrate, he or she, in effect, has relinquished much of that right's practical value.”[15]

         The SLC Arbitration involves claims relating to a Consulting Agreement entered between Inception Mining, Inc. and Elliot Foxcroft on March 27, 2014 (the “Foxcroft Agreement”).[16] In the SLC Arbitration, Mr. Foxcroft alleges claims against Inception Mining Inc., Michael Ahlin, and Trent D'Ambrosio for: federal securities fraud; Utah securities fraud; breach of contract; unjust enrichment; common law fraud; breach of fiduciary duty; negligent misrepresentation; and breach of the implied covenant of good faith and fair dealing.[17]

         Plaintiffs argue that the Individual Plaintiffs are not proper parties to the SLC Arbitration because they did not execute the Foxcroft Agreement in their individual capacity or agree to be bound by it, and because the Foxcroft Agreement expressly states that only disputes between Inception Mining, Inc. and Mr. Foxcroft are subject to its arbitration clause.[18] Defendants argue that while the Individual Plaintiffs are not signatories to the Foxcroft Agreement, they are nevertheless bound by its arbitration clause based on principles of agency and estoppel.[19]

         “The question who may be bound to an arbitration provision is governed by state law relating to contracts in general.”[20] The Foxcroft Agreement provides that it “shall be governed by and construed under the laws of the State of Utah without regard to principals [sic] of conflicts of laws provisions.”[21] Therefore, Utah law governs whether the Individual Plaintiffs may be required to arbitrate in the SLC Arbitration.

         Under Utah law, “[i]n order to require a party to submit to arbitration, there must be an agreement to arbitrate.”[22] “The minimum threshold for enforcement of an arbitration agreement is direct and specific evidence of an agreement between the parties.”[23] “Direct and specific evidence requires non-inferential evidence [and] an agreement between the particular parties regarding arbitration of future disputes.”[24]

         The Individual Plaintiffs did not agree to arbitrate in the SLC Arbitration

         The Foxcroft Agreement contains the following arbitration clause:

In the event of any dispute between Company and Consultant arising under or pursuant to the terms of this Agreement, or any matters arising under the terms of this Agreement, the same shall be settled only by arbitration through American Arbitration Association located in Salt Lake City, Utah, in accordance with the Code of Arbitration Procedure published by the American Arbitration Association. The determination of the arbitrators shall be final and binding upon Company and Consultant and may be enforced in any court of appropriate jurisdiction.[25]

         The Foxcroft Agreement identifies Inception Mining, Inc. as the “Company” and Elliot Foxcroft as the “Consultant.”[26] No other entities or individuals are identified as parties to the contract. Michael Ahlin executed the Foxcroft Agreement, but on behalf of Inception Mining, Inc. as its “CEO, ” not in his individual capacity.[27] Trent D'Ambrosio did not execute the Foxcroft Agreement, and his name does not appear in the contract. The Foxcroft Agreement also contains no reference to rights or obligations of the Individual Plaintiffs under the contract, or benefits flowing from the contract to the Individual Plaintiffs in their individual capacity.

         There is no direct and specific evidence on the face of the Foxcroft Agreement that the Individual Plaintiffs agreed to arbitration. Rather, under the plain language of the Foxcroft Agreement, only Inception Mining, Inc. and Mr. Foxcroft agreed to arbitrate their claims.

         The Individual Plaintiffs are not bound by the Foxcroft Agreement's arbitration clause through agency or estoppel

         “[N]o signature is required for a person to become party to a contract.”[28] Utah law recognizes that “under certain circumstances, a nonsignatory to an arbitration agreement can enforce or be bound by an agreement between other parties.”[29] “Traditionally, five theories for binding [or allowing enforcement by] a nonsignatory to an arbitration agreement have been recognized: (1) incorporation by references; (2) assumption; (3) agency; (4) veil-piercing/alter ego; and (5) estoppel.”[30] “Sometimes a sixth theory, third-party beneficiary, is added, but it is closely analogous to the estoppel theory.”[31]

         Defendants argue that agency and estoppel bind the Individual Plaintiffs-who are nonsignatories-to the Foxcroft Agreement's arbitration clause.[32] But Defendants arguments, the selection of their cited authorities, and some of the authorities themselves overlook an important distinction between cases in which a nonsignatory seeks the benefit and protection of an arbitration clause and cases in which a signatory seeks to impose arbitration on a nonsignatory. When considering the five or six instances in which a nonsignatory may be benefitted or bound by an arbitration clause, the courts must remember the distinction between a nonsignatory seeking to enforce an arbitration clause and a signatory seeking to force a nonsignatory into arbitration.

         Principles of agency do not bind the Individual Plaintiffs to the Foxcroft Agreement

         Defendants maintain that the Individual Plaintiffs were Inception Mining, Inc.'s agents and should be bound by the Foxcroft Agreement's arbitration clause.[33] The Individual Plaintiffs were directors, officers, and controlling shareholders of Inception Mining, Inc. at the time relevant to the Foxcroft Agreement. Thus, they were agents. But Defendants misread the law and therefore misconstrue the legal effect of the Individual Plaintiffs' status as Inception Mining, Inc's agents. Defendants identify no persuasive authority that an agent is bound by its principal's agreement to arbitrate. Defendants cite only authority holding that agents may enforce their principal's agreement to arbitrate.

         Defendants correctly assert that the claims against the Individual Plaintiffs in the SLC Arbitration are closely intertwined with the claims against Inception Mining, Inc.[34] But Defendants rely on case law inapplicable to the posture of our case. The inapplicable case law holds, or states in dicta, that an agent who is a nonsignatory to its principal's arbitration agreement may compel arbitration of claims made against it by a signatory to the agreement.[35] In those instances, the nonsignatory compels the signatory to arbitrate.

         Defendants' cases stand for the proposition that “[u]nder the theory of agency, an agent can assume the protection of the contract which the principal has signed [and c]ourts have applied this principle to allow for non-signatory agents to avail themselves of the protection of their principal's arbitration agreement.”[36] This “prevent[s] . . . circumvention of valid arbitration agreements by [signatories]. If [signatories] could sue individual [non-signatory] defendants [whose principal had signed and opted for protection of arbitration agreements], they could too easily avoid the arbitration agreements that they signed with corporate entities.”[37]

         The cases Defendants rely on are the inverse of our facts, where Elliot Foxcroft, a signatory to the Foxcroft Agreement, is seeking to compel the Individual Plaintiffs, nonsignatory agents of Inception Mining, Inc., to arbitrate. While a nonsignatory agent may compel a signatory to arbitrate, a signatory may not use the agency relationship to compel a nonsignatory agent to arbitrate.

         Under the agency theory, “it matters whether the party resisting arbitration is a signatory or not.”[38] This is because “the fact that the defendant corporations entered into [arbitration agreements does] not cause their agents . . . who acted only as officers on behalf of the corporations, to be personally bound by those agreements.”[39] “[S]tatus as the CEO and CFO and agents of the defendant corporations is insufficient to personally bind [agents] to the [corporations'] arbitration agreements.”[40] “[O]nly the [signatory] corporation and not its individual directors and officers [are] bound by an arbitration agreement, because the directors and officers [have] not personally agreed to arbitrate.[41]

         Therefore, “an agent of a disclosed principal, even one who negotiates and signs a contract for her principal, does not become a party to the contract.”[42] And “under traditional agency principles, the only other way . . . that an agent can be bound by the terms of a contract is if she is made a party to the contract by her principal acting on her behalf with actual, implied, or apparent authority.”[43]

         Defendants point to only a single case, Lee v. Chica, [44] in which a nonsignatory agent that resisted arbitration was bound by its principal's arbitration agreement. But Lee is distinguishable and unpersuasive.

         In Lee, a customer opened a securities account with a corporation, and signed a customer agreement containing an arbitration clause.[45] After a dispute arose concerning the management of the account, the customer filed a demand for arbitration against the corporation and against the employee that was responsible for transactions in the customer's account.[46] The employee had not signed the customer agreement and did not appear or participate in the arbitration proceeding.[47] The arbitration panel awarded damages to the customer against both the corporation and the employee.[48] The award was confirmed by the district court.[49] The employee then appealed on grounds that he was not a proper party to the arbitration because he did not sign the customer agreement and state law would not enforce the terms of the contract against him.[50]

         The Eighth Circuit Court of Appeals upheld the district court's confirmation of the arbitration award against the employee. The opinion confirmed its factual setting: “[T]he present case is an action seeking to confirm an award already made by an arbitration panel in accordance with a provision in a contract. It is not an issue of validity, revocability or enforceability of the arbitration agreement within the contract.”[51] Thus, the procedural posture and standard of review of Lee is distinguishable. In our case, the SLC Arbitration remains pending and Defendants seek to enforce the Foxcroft Agreement's arbitration clause against the nonsignatory Individual Plaintiffs.

         Beyond the factual distinctions in Lee, the analysis in Lee is unpersuasive and distinguishable. The Eighth Circuit did state that “[f]ederal courts have found that an arbitration agreement between a customer and a brokerage firm can . . . be binding on the agent who represented or traded in the customer's account even if the agent had not signed the customer agreement.”[52] But in each of the cases cited for this proposition, the nonsignatory agent sought to compel arbitration of claims made against it by a signatory.[53] And each case was in the securities setting.[54]

         Lee's reliance on these cases glosses over the distinction between situations in which a nonsignatory is resisting, rather than seeking to enforce arbitration. Nonsignatory agents may compel, but may not be compelled. They may adopt the protection contracted by their principal, but may not be forced to arbitrate against their will. Putting aside Lee's post-award setting, Lee supported its single sentence with cases inapplicable to Lee's factual setting. Therefore, Lee is not persuasive authority.

         The Individual Plaintiffs' status as directors, officers, and controlling shareholders of Inception Mining, Inc. does not bind them to the contract's arbitration clause. While the claims against the Individual Plaintiffs in the SLC Arbitration may be intertwined with the claims against Inception Mining, Inc. this intertwining cannot compel the Individual Plaintiffs to arbitrate. This is because an intertwining claims analysis applies only when a nonsignatory seeks to compel a signatory to arbitrate, not when a signatory seeks to compel a nonsignatory to arbitrate. “[I]t matters whether the party resisting arbitration is a signatory or not.”[55]

         The Individual Plaintiffs did not sign the Foxcroft Agreement in their individual capacity and did not personally agree to arbitrate. And there is no suggestion that Inception Mining, Inc.-with actual, implied, or apparent authority-entered the Foxcroft Agreement on behalf of the Individual Plaintiffs. Therefore, the Individual Plaintiffs are not bound by the Foxcroft Agreement's arbitration clause through agency.

         Estoppel does not apply to the Individual Plaintiffs

         Defendants also urge application of estoppel. The estoppel theory is at times referred to as “nonsignatory estoppel.” However, use of this term can be problematic, as demonstrated by Defendants and some of their cited authorities' misreading of the law relating to the term. Nonsignatory estoppel is used to refer to situations where a nonsignatory is “estopped from avoiding arbitration when the nonsignatory seeks to benefit from some portions of the contract but avoid the arbitration provisions.”[56] But the term is also used to refer to situations where a nonsignatory is invoking estoppel against a signatory that is resisting arbitration. The applicability of the estoppel theory depends on the situation, i.e., whether the nonsignatory is suing or being sued and whether the nonsignatory is seeking to compel or resisting arbitration.

         “The Utah Supreme Court has recognized three circumstances in which nonsignatory estoppel applies.”[57] The first two circumstances involve “cases where estoppel [is] implemented against a nonsignatory[.]”[58] In the first, “the nonsignatory has sued a signatory on the contract [for a] benefit but [the nonsignatory seeks] to avoid the arbitration provision of the same contract.”[59] In the second, “[a] nonsignatory will . . . be estopped when it receive[d] a ‘direct benefit' from the contract which contains the arbitration clause.”[60] “This variety of nonsignatory estoppel [is] employed only when the nonsignatory sues the signatory on the agreement after [the nonsignatory] receiv[ed] ‘direct benefits' but [then] seeks to avoid arbitration.”[61] In both these factual settings, the nonsignatory either seeks to benefit or has already obtained a benefit from the contract-and thus is estopped from avoiding the contractual arbitration clause.

         The third “variety of nonsignatory estoppel [recognized in Utah] is that enforced by a nonsignatory when the signatory plaintiff sues a nonsignatory defendant on the contract but seeks to avoid the contract-mandated arbitration by relying on the fact that the defendant is a nonsignatory.”[62] In this factual setting, the signatory is estopped from denying the clause applies. The nonsignatory makes himself the beneficiary of the arbitration clause, and seeks to enforce the clause against the signatory.

         None of the three fact settings in which forms of nonsignatory estoppel have been recognized in Utah apply to our case-where a signatory plaintiff seeks to compel arbitration of its claims against a nonsignatory defendant. The first two fact scenarios “do[] not apply to . . . a nonsignatory who is not suing on the contract and who has not received direct benefits from the contract.”[63] And the third estops a signatory when a nonsignatory defendant seeks to resist litigation, but the signatory plaintiff resists arbitration.[64]

         The Individual Plaintiffs have not sued Defendants under the Foxcroft Agreement or asserted claims against Defendants in the SLC Arbitration. And they do not seek to compel Defendants to arbitrate in the SLC Arbitration. Rather, it is the signatory, Elliot Foxcroft, that has asserted claims in the SLC Arbitration under the Foxcroft Agreement against the nonsignatory Individual Plaintiffs, who are resisting that arbitration.

         Defendants argue for the application of two additional forms of nonsignatory estoppel that Utah has not recognized. Defendants argue these doctrines should bind the Individual Plaintiffs to the Foxcroft Agreement's arbitration clause.[65] The first comes from Thomas H. Oehmke's treatise on commercial arbitration, which states:

A nonsignatory (who is not otherwise subject to an arbitration agreement) will be compelled to arbitrate (i.e., equitably estopped from avoiding arbitration) when a signatory[:]
• must rely on a written agreement to assert its claims against the nonsignatory[;]
• asserts claims which are intimately founded in and intertwined with the underlying contract[;] or
• alleges substantially interdependent and concerted misconduct by the nonsignatory and another signatory and the allegations of interdependent misconduct are founded in or intimately connected with the obligations of the underlying agreement[.][66]

         The treatise relies on the Ninth Circuit Court of Appeals in Murphy v. DirecTV, Inc. But the treatise misstates the holding of Murphy.

         The paraphrased quote the treatise takes from Murphy says nothing about compelling a nonsignatory to arbitrate. The scenarios identified in Murphy are about a nonsignatory seeking to enforce an arbitration clause:

Where a nonsignatory seeks to enforce an arbitration clause, the doctrine of equitable estoppel applies in two circumstances: (1) when a signatory must rely on the terms of the written agreement in asserting its claims against the nonsignatory or the claims are intimately founded in and intertwined with the underlying contract, and (2) when the signatory alleges substantially interdependent and concerted misconduct by the nonsignatory and another signatory and the allegations of interdependent misconduct are founded in or intimately connected with the obligations of the underlying agreement.[67]

         The estoppel described in Murphy is applied against the signatory, not the nonsignatory.

         Murphy specifically notes that “[t]his rule reflects the policy that a [signatory] plaintiff may not, ‘on one hand, seek to hold the non-signatory liable pursuant to duties imposed by the agreement, which contains an arbitration provision, but, on the other hand, deny arbitration's applicability because the ...


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