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Inception Mining, Inc. v. Danzig, Ltd.

United States District Court, D. Utah, Central Division

April 23, 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 MOTION FOR PRELIMINARY INJUNCTION, OR ALTERNATIVELY A PERMANENT INJUNCTION

          DAVID NUFFER, DISTRICT JUDGE

         Plaintiffs assert claims for declaratory judgment 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 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]A Second Memorandum Decision determined the same regarding the Boston Arbitration.[6]However, the Second Memorandum Decision also determined that subject matter jurisdiction was lacking over Plaintiffs' claims that Defendants' claims under certain contracts are not subject to arbitration in the Boston Arbitration.[7]

         A Third Memorandum Decision determined that entry of a preliminary injunction was appropriate on Plaintiffs' claim that the Individual Plaintiffs are not proper parties to the SLC Arbitration.[8] But the Third Memorandum Decision stayed determination on Plaintiffs' claims concerning the Boston Arbitration pending resolution of a motion to dismiss filed in a related federal case in the Western District of North Carolina (the “North Carolina Case”).[9] The parties were directed to file a joint status report upon the issuance of a ruling on the motion to dismiss in the North Carolina Case.[10]

         On March 5, 2018, the parties filed a Joint Notice indicating that the motion to dismiss in the North Carolina Case was granted.[11] The Joint Notice also indicated that Defendants would not challenge that ruling.[12] Therefore, the stayed portions of Plaintiffs' Motion for Injunction are now ripe for determination.

         Plaintiffs' Motion for Injunction[13] is MOOT as to Plaintiffs' argument that Defendants' claims under certain contracts are not subject to arbitration in the Boston Arbitration.[14] However, because Plaintiffs have established the right to a preliminary injunction on their claim that the Individual Plaintiffs are not proper parties to the Boston Arbitration, Plaintiffs' Motion for Injunction[15] is GRANTED in part.

         Contents

         DISCUSSION ................................................................................................................................. 4

         Plaintiffs have shown a substantial likelihood of success on the merits of their claim that the Individual Plaintiffs are not proper parties to the Boston Arbitration .............. 4

         Utah law governs whether the Individual Plaintiffs may be required to arbitrate in the Boston Arbitration ..........................6

         The Individual Plaintiffs did not agree to arbitrate in the Boston Arbitration ........ 8

         The Individual Plaintiffs are not bound by the Danzig Agreement's arbitration clause through agency or estoppel ............. 9

         The Individual Plaintiffs will suffer irreparable injury if the Boston Arbitration is not stayed as to them ...........................21

         The threatened injury to the Individual Plaintiffs if the Boston Arbitration is not stayed outweighs any injury to Defendants by a stay ...................................................... 22

         Staying the Boston Arbitration as to the Individual Plaintiffs is not adverse to the public interest ......................................24

         No bond is required of Plaintiffs for the preliminary injunctive relief ............................. 24

         ORDER ............................... 25

         DISCUSSION

         “[B]ecause a preliminary injunction is an extraordinary remedy, the right to relief must be clear and unequivocal.”[16] “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.”[17] 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.[18]

         Plaintiffs have shown a substantial likelihood of success on the merits of their claim that the Individual Plaintiffs are not proper parties to the Boston 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.”[19] 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[.]”[20] “But, where the party has agreed to arbitrate, he or she, in effect, has relinquished much of that right's practical value.”[21]

         The Boston Arbitration involves claims relating to three contracts:[22]

• a consulting agreement entered between Gold American Mining Corp. and Danzig, Ltd. on February 25, 2013 (the “Danzig Agreement”);[23]
• an asset purchase agreement entered between Inception Resources, LLC and Gold American Mining Corp., Inception Development, Inc., and Brett Bertolami on February 25, 2013 (the “Asset Purchase Agreement”);[24] and
• a debt exchange agreement entered between Gold American Mining Corp. and Bret Bertolami on February 25, 2013 (the “Debt Exchange Agreement”).[25]

In the Boston Arbitration, Danzig, Ltd. alleges claims against Inception Mining Inc. and the Individual Plaintiffs for federal securities fraud; North Carolina securities fraud; breach of contract; unjust enrichment; common law fraud; breach of fiduciary duty; and negligent misrepresentation.[26]

         Plaintiffs argue that the Individual Plaintiffs are not proper parties to the Boston Arbitration because they did not execute the Danzig Agreement in a corporate or individual capacity and did not agree to be bound by the contract's arbitration clause.[27] Defendants acknowledge that the Individual Plaintiffs are not signatories to the Danzig Agreement, but argue that the Individual Plaintiffs are nevertheless bound by the arbitration clause based on common law principles of agency and estoppel.[28]

         Utah law governs whether the Individual Plaintiffs may be required to arbitrate in the Boston Arbitration

         “The question who may be bound to an arbitration provision is governed by state law relating to contracts in general.”[29] The Danzig Agreement is silent as to which state's laws govern the contract. Therefore, the choice of law provisions of the forum state-Utah-must be applied to resolve the choice of law question.[30]

         In Utah, “courts apply the ‘most significant relationship' analysis to determine the choice of law in a contract cause of action.”[31] Factors considered in applying this test include:

(1) the place of contracting; (2) the place of negotiation of the contract; (3) the place of performance; (4) the location of the subject matter of the contract; and (5) the domicile, residence, nationality, place of incorporation and place of business of the parties.[32]

         The Danzig Agreement is a consulting agreement wherein Gold American Mining Corp. engaged and retained Danzig, Ltd. as a business consultant for a term of six months.[33] Gold American Mining Corp. was a Nevada corporation and its operations were in Utah during the term of the Danzig Agreement.[34] Danzig, Ltd. is a North Carolina corporation with its principal place of business in Iredell County, North Carolina.[35] Gold American Mining Corp. was never registered, headquartered, or actively engaged in business in North Carolina.[36]

         The negotiations for the Danzig Agreement, and the two related simultaneously-entered contracts, [37] occurred over telephone and email.[38] These negotiations were primarily between Elliott Foxcroft on behalf of Brett Bertolami, and the Individual Plaintiffs.[39] Elliott Foxcroft is the principal of Danzig, Ltd. and is a North Carolina resident.[40] Mr. Foxcroft executed the Danzig Agreement on behalf of Danzig, Ltd.[41] Brett Bertolami was the president and majority shareholder of Gold American Mining Corp., and is a North Carolina resident.[42] Mr. Bertolami does business in Utah and with Utah companies, [43] and executed the Danzig Agreement on behalf of Gold American Mining Corp.[44] The Individual Plaintiffs are residents of Utah, and have no contacts with North Carolina other than their telephone and email communications during the contract negotiations.[45]

         Based on these facts, either Utah or North Carolina is the state having the most significant relationship to the Danzig Agreement. Plaintiffs argue that Utah law applies.[46]Defendants do not respond to this argument, effectively conceding the issue. Given this concession, and considering the above-listed factors, including that Danzig, Ltd.'s consulting services were for a term during which Gold American Mining Corp.'s operations were in Utah, [47] Utah has the most significant relationship to the Danzig Agreement. Therefore, Utah law governs whether the Individual Plaintiffs may be required to arbitrate in the Boston Arbitration.

         Under Utah law, “[i]n order to require a party to submit to arbitration, there must be an agreement to arbitrate.”[48] “The minimum threshold for enforcement of an arbitration agreement is direct and specific evidence of an agreement between the parties.”[49] “Direct and specific evidence requires non-inferential evidence [and] an agreement between the particular parties regarding arbitration of future disputes.”[50]

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

The Danzig Agreement contains the following arbitration clause:
All disputes in any manner relating to or arising out of this Agreement which the parties cannot resolve themselves shall be resolved first through mediation, and second through arbitration before a single experienced arbitrator, under the Commercial rules of Arbitration of the American Arbitration Association. The location of the arbitration shall be determined by Danzig[, Ltd.]. The decision or award of any arbitrator shall be binding upon the parties and shall be enforceable in a court having jurisdiction over the party against whom enforcement is sought. . . . Any arbitrator appointed under this Agreement shall have authority to order such equitable relief and such limited discovery as may be appropriate under the circumstances.[51]

         The Danzig Agreement identifies Gold American Mining Corp. and Danzig, Ltd. as parties.[52] No other entities or individuals are identified as parties to the contract. The Individual Plaintiffs' names do not appear in the contract, and neither of them executed the contract in their corporate or individual capacity. The Danzig 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 Danzig Agreement that the Individual Plaintiffs agreed to arbitration. Rather, under the plain language of the Danzig Agreement, only Gold American Mining Corp. and Danzig, Ltd. agreed to arbitrate their claims.

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

         “[N]o signature is required for a person to become party to a contract.”[53] Utah law recognizes that “under certain circumstances, a nonsignatory to an arbitration agreement can enforce or be bound by an agreement between other parties.”[54] “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.”[55] “Sometimes a sixth theory, third-party beneficiary, is added, but it is closely analogous to the estoppel theory.”[56]

         Defendants argue that agency and estoppel bind the Individual Plaintiffs-who are nonsignatories-to the Danzig Agreement's arbitration clause.[57] 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, 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 Danzig Agreement

         Defendants assert that “around the time that the parties entered into the Danzig Agreement, the Individual Plaintiffs were significant controlling players in the actions of [Gold American Mining Corp.]”[58] Defendants maintain that because of this, the Individual Plaintiffs were Gold American Mining Corp.'s agents and should be bound by the Danzig Agreement's arbitration clause.[59] Defendants misread the law and therefore misconstrue the legal effect of the Individual Plaintiffs' status as the company'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 Boston Arbitration are closely intertwined with the claims against Inception Mining, Inc.[60] 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.[61] 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.”[62] 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.”[63]

         The cases Defendants rely on are the inverse of our facts, where Danzig, Ltd., a signatory to the Danzig Agreement, is seeking to compel the Individual Plaintiffs, nonsignatory agents of Gold American Mining Corp., 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.”[64] 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.”[65] “[S]tatus as the CEO and CFO and agents of the defendant corporations is insufficient to personally bind [agents] to the [corporations'] arbitration agreements.”[66] “[O]nly the [signatory] corporation and not its individual directors[, ] officers [and agents are] bound by an arbitration agreement, because the directors[, ] officers [and agents have] not personally agreed to arbitrate.[67]

         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.”[68] 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.”[69]

         Defendants point to only a single case, Lee v. Chica, [70] 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.[71] 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.[72] The employee had not signed the customer agreement and did not appear or participate in the arbitration proceeding.[73] The arbitration panel awarded damages to the customer against both the corporation and the employee.[74] The award was confirmed by the district court.[75] 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.[76]

         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.”[77] Thus, the procedural posture and standard of review of Lee is distinguishable. In our case, the Boston Arbitration remains pending and Defendants seek to enforce the Danzig 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.”[78] 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.[79] And each case was in the securities setting.[80]

         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 “significant controlling players” or agents of Gold American Mining Corp. does not bind them to the Danzig Agreement's arbitration clause. While the claims against the Individual Plaintiffs in the Boston Arbitration may be intertwined with Danzig, Ltd.'s 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.”[81]

         The Individual Plaintiffs did not sign the Danzig Agreement in their individual capacity and did not personally agree to arbitrate. And there is no suggestion that Gold American Mining Corp.-with actual, implied, or apparent authority-entered the Danzig Agreement on behalf of the Individual Plaintiffs. Therefore, the Individual Plaintiffs are not bound by the Danzig 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.”[82] 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.”[83] The first two circumstances involve “cases where estoppel [is] implemented against a nonsignatory[.]”[84] 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.”[85] In the second, “[a] nonsignatory will . . . be estopped when it receive[d] a ‘direct benefit' from the contract which contains the arbitration clause.”[86] “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.”[87] 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.”[88] 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.”[89] And the third estops a signatory when a nonsignatory defendant seeks to resist litigation, but the signatory plaintiff resists arbitration.[90]

         The Individual Plaintiffs have not sued Defendants under the Danzig Agreement or asserted claims against Defendants in the Boston Arbitration. And they do not seek to compel Defendants to arbitrate in the Boston Arbitration. Rather, it is the signatory-Danzig, Ltd.-that has asserted claims in the Boston Arbitration under the Danzig 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 Danzig Agreement's arbitration clause.[91] 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[.][92]

         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 ...


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