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Tallakoy LP v. Black Fire Energy, Inc.

United States District Court, Sixth Circuit

October 29, 2013

TALLAKOY LP, et al., Plaintiffs,
v.
BLACK FIRE ENERGY, Inc., et al., Defendants.

MEMORANDUM OPINION AND ORDER

AMUL R. THAPAR, District Judge.

In this life, you make your own choices. The plaintiffs and the defendants executed a contract, requiring both parties to submit all disputes arising from the agreement to arbitration. After the relationship soured, the plaintiffs filed this lawsuit, alleging that the defendants breached the contract and defrauded them. Maybe so. But because the Court would have to refer to the agreement containing the arbitration clause to resolve each of the plaintiffs' claims, the Court must dismiss the case, and the parties must arbitrate their dispute.

BACKGROUND

This case is about a very bad investment. The plaintiffs are Jason Bedasse, Garth Myers, and four investment companies that they own (Tallakoy LP, Tallakoy GP, Inc., Tallawah, Inc., and Akoya Group, Ltd., collectively, "Tallakoy"). R. 54 at ¶¶ 2-7. The defendants are Nicholas Stodin, Gill Brown, and two mining companies that they own (Black Fire Energy, Inc., and Black Fire Mining LLC, collectively, "Black Fire"). Id. at ¶¶ 8-11. While seeking out investment opportunities, Bedasse and Myers met Stodin. Id. at ¶¶ 15-16. Stodin told the plaintiffs that he was a successful businessman, that he had developed profitable ventures before, and that he had a mining operation that needed funding-the "Heller Mine." Id. at ¶¶ 16-17. Stodin sent Bedasse and Myers some promotional materials, and the plaintiffs were hooked. Id. at ¶¶ 18-20. Tallakoy then agreed to invest with Black Fire. Id. at ¶¶ 20-21.

The parties executed two contracts. Tallakoy LP and Black Fire Energy signed a Revenue Participation Agreement ("Revenue Agreement"), R. 1-2 at 7, and Tallakoy LP and Black Fire Mining signed a Security Pledge Agreement ("Security Agreement"), R. 54-4 at 3. The Revenue Agreement outlined the parties' obligations. R. 1-2. The Security Agreement gave Tallakoy LP a security interest in various equipment Black Fire owned. R. 54-4. Crucially, for the purposes of these motions, the Revenue Agreement included an arbitration clause. R. 1-2 at 5. The clause provides that: "Any dispute arising from this Agreement... shall be settled through binding arbitration." Id.

As with most business relationships that become the subject of litigation, things did not go as planned. Tallakoy sunk nearly $1, 000, 000 into the project, losing all of it. R. 54 at ¶¶ 29-31. Why such miserable failure? Because, Tallakoy says, Black Fire was perpetrating a fraud the whole time. The promotional materials were lies, the contract was full of lies, and once the contract was signed, Black Fire continued to lie. Id. at ¶¶ 18, 22, 29. Indeed, Tallakoy alleges that Black Fire took Tallakoy's investment and used the money for other projects, keeping all resulting profits for Black Fire. Id. at ¶¶ 35, 39.

Tallakoy filed suit in this Court. The complaint alleges several claims against each defendant: (1) securities fraud, (2) common law fraud, (3) breach of contract, (4) negligent misrepresentation, (5) conversion, and (6) unjust enrichment. R. 54 at 11-16.[1] Black Fire moved to dismiss in favor of arbitration, R. 45, and for failure to a state claim, R. 64.

DISCUSSION

The Supreme Court has prescribed a two-step framework for analyzing motions to compel arbitration. Before ordering arbitration, the Court must decide whether: (1) the arbitration clause at issue is enforceable, and (2) the arbitration clause's scope encompasses the particular claim or claims that one party seeks to arbitrate. See Granite Rock Co. v. Int'l Bhd. of Teamsters, 130 S.Ct. 2847, 2856 (2010).

This case does not involve a challenge to the validity or enforceability of the Revenue Agreement's arbitration clause. Although Tallakoy makes allegations of fraud, R. 54 at ¶¶ 46-51, Tallakoy does not contend that the fraud voids the arbitration clause specifically or the contract generally, see R. 66 at 5-6. But see Granite Rock Co., 130 S.Ct. at 2858 (explaining that a court must enforce an arbitration clause according to its terms unless the party resisting arbitration specifically challenges the enforceability of the arbitration clause). Indeed, Tallakoy's breach of contract claim reflects its belief that the contract is enforceable. See R. 54 at ¶¶ 52-56. The only question presented, therefore, is which-if any-of Tallakoy's claims fall within the scope of the arbitration clause.

Where, as here, the parties have executed a valid arbitration agreement, the Federal Arbitration Act (the "Act") requires courts to resolve any ambiguities regarding the scope of the agreement in favor of arbitration. Granite Rock Co., 130 S.Ct. at 2858. The Act provides that written agreements to arbitrate "shall be valid, irrevocable, and enforceable." 9 U.S.C. § 2. The Act was designed to fix two problems: "the old common law hostility toward arbitration, and the failure of state arbitration statutes to mandate enforcement of arbitration agreements." Southland Corp. v. Keating, 465 U.S. 1, 14 (1984). Section 2 responded to those problems by creating a vast body of substantive federal law: "Section 2 is a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary. The effect of the section is to create a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act." Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983).

So what is required for an arbitration agreement to fall within the scope of the Act? Not much. If the agreement to arbitrate is in writing and contained in "a contract evidencing a transaction involving commerce, " then the Act applies. 9 U.S.C. § 2; Keating, 465 U.S. at 11. And where the Act applies, so too does the presumption in favor of arbitrability. See Moses H. Cone, 460 U.S. at 24-25.

This broad reading of § 2 has sweeping effect, preempting state law regarding arbitration. See Glazer v. Lehman Bros., Inc., 394 F.3d 444, 451 (6th Cir. 2005) (citing Keating, 465 U.S. at 10-11). The presumption in favor of arbitrability thus applies to every arbitration clause within the scope of the Act as a matter of federal law. See, e.g., NCR Corp. v. Korala Assocs., Ltd., 512 F.3d 807, 813 (6th Cir. 2008). Although it is easy to recite the presumption, explaining what the presumption requires can be tricky. In this Circuit, the key question is whether the Court "can resolve the instant case without reference to the agreement containing the arbitration clause." Id. at 814. "If such a reference is not necessary to the resolution of a ...


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