SBRMCOA, LLC v. Bayside Resort, Inc. , 707 F.3d 267 ( 2013 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
No. 07-2436
No. 07-2678
___________
SBRMCOA, LLC, Individually and on behalf
of its members,
Appellant/Cross-Appellee
v.
BAYSIDE RESORT, INC., a corporation; TSG
TECHNOLOGIES, INC., a corporation; TSG CAPITAL,
INC., a corporation; BEACHSIDE ASSOCIATES, LLC
Appellees/Cross-Appellants
__________
On Appeal from the District Court
of the Virgin Islands
(D.C. No. 06-cv-00042)
District Judge: Honorable Curtis V. Gomez
___________
Argued December 6, 2012
Before: SMITH, HARDIMAN and ROTH, Circuit Judges.
(Filed: February 11, 2013)
James M. Derr [ARGUED]
P.O. Box 664
Charlotte Amalie, St. Thomas
USVI, 00804-0000
USVI
Attorneys for Appellant/Cross-Appellee
Neil D. Goldman [ARGUED]
Goldman & Van Beek
510 King Street
Suite 416
Alexandria, VA 22314-0000
Gregory H. Hodges
Dudley, Topper & Feuerzeig
1000 Frederiksberg Gade
P.O. Box 756
St. Thomas, VI 00804
Attorneys for Appellee/Cross-Appellants
____________
OPINION OF THE COURT
____________
HARDIMAN, Circuit Judge.
This appeal arises out of a dispute at the Sapphire
Beach Resort and Marina on the island of St. Thomas. The
case pits a condominium association against its initial sponsor
and some of the sponsor’s creditors. The District Court for
2
the Virgin Islands ordered the parties to arbitrate their
dispute. For the reasons that follow, we will affirm in part,
vacate in part, and remand.
I
The Sapphire Beach Resort and Marina Condominium
Association, LLC (Condominium Association) was initially
sponsored by Bayside Resort, Inc. in 1998. The declaration
of condominium (Declaration) required Bayside to provide
fresh water and wastewater treatment services to the
Condominium Association at a reasonable rate to be
determined by several factors. The Declaration also made all
of the water facilities common property of the Condominium
Association.
In 1999, Bayside contracted with TSG Technologies,
Inc. and TSG Capital, Inc. (collectively, TSG) to construct,
operate, and maintain a water treatment system to fulfill its
obligation under the Declaration to provide potable water to
the members of the Condominium Association. From the
contract’s inception until 2005, TSG charged Bayside
approximately $0.02 per gallon of potable water.
By 2001, Bayside became delinquent in its obligations
to creditors. The financial situation worsened and, by early
summer of 2005, Bayside owed millions of dollars to various
creditors including TSG, the Condominium Association, and
its members. In addition to the aforementioned unsecured
creditors, Bayside owed more than $9 million to Beachside
Associates, LLC, which held a mortgage on some of
Bayside’s property and had already filed a foreclosure action.
3
In the summer of 2005, Bayside, TSG, and Beachside
reached an agreement pursuant to which Bayside assigned to
TSG its exclusive right under the Declaration to supply water
to the Condominium Association. The agreement permitted
TSG to increase the price of water from $0.02 per gallon to
$0.05 per gallon, which would generate a windfall that TSG
could use to pay down the debt of Bayside before paying any
remainder to Bayside’s secured lender, Beachside. Under this
plan, TSG could be paid ahead of Bayside’s secured creditors
while Beachside could recover some of its debt as well.
Before the agreement could be implemented, however,
the Condominium Association had to consent to Bayside’s
assignment of its water provision rights to TSG. To obtain
that consent, Bayside and TSG threatened to cease providing
water and wastewater treatment services to the Condominium
Association’s members even though it was not feasible for
them to obtain those services elsewhere.
Yielding to those threats, the Condominium
Association’s Board signed a water supply agreement (Water
Supply Agreement) and consented to the assignment of the
water provision rights to TSG. The Water Supply Agreement
not only required the Condominium Association to pay $0.05
per gallon of water, but also provided that Bayside, rather
than the Condominium Association, owned all of the water
facilities except for a water plant. The Water Supply
Agreement also contained an arbitration clause.
After 2005, TSG continued to threaten to shut off the
Condominium Association’s water unless it paid $0.05 per
gallon. In January 2006, after not receiving the payment
mandated by the Water Supply Agreement, TSG temporarily
4
stopped producing potable water for the Condominium
Association.
In March 2006, the Condominium Association filed
suit in the District Court of the Virgin Islands against
Bayside, TSG, and Beachside, asserting five claims. Count
One alleged that Defendants committed criminal extortion in
violation of the Racketeer Influenced Corrupt Organizations
Act (RICO). Count Two alleged that Bayside and TSG
breached their obligations under the Declaration. In support
of this claim, the Condominium Association claimed the 2005
Water Supply Agreement was void both because it was
coerced and because its Board lacked the authority to sign it.
(Count Four sought a declaratory judgment voiding the Water
Supply Agreement on the same grounds). 1 In Count Three,
the Condominium Association sought a declaratory judgment
that it owned the water treatment systems and associated
facilities. Finally, in Count Five, the Condominium
Association sought specific performance of the Declaration,
i.e., an order compelling Bayside to convey its water system
to the Condominium Association.
In April 2006, all three Defendants filed separate
motions to dismiss, claiming, inter alia, that the case had to
be arbitrated pursuant to the arbitration clause of the Water
Supply Agreement. Finding all five counts of the complaint
within the scope of the arbitration clause, the District Court
1
To maintain consistency with the District Court’s
opinion and the parties’ submissions, we will refer to the
Condominium Association’s argument that the Board lacked
the authority to enter into the Water Supply Agreement as the
ultra vires argument.
5
granted Defendants’ motions, dismissed the complaint, and
entered an order compelling arbitration. In addition, the
District Court rejected the Condominium Association’s ultra
vires argument on the merits with respect to Count Two, but
referred both Count Two as a whole, and the Condominium
Association’s same ultra vires argument with respect to
Count Four, to arbitration. The Condominium Association
appealed. 2
II
The District Court had subject matter jurisdiction over
the RICO claims under 28 U.S.C. § 1331 and 48 U.S.C. §
1612(a) and supplemental jurisdiction over the state law
claims under 28 U.S.C. § 1367(a) and 48 U.S.C. § 1612(a).
We have jurisdiction over the appeal under 28 U.S.C. § 1291,
even though the District Court’s order compelled arbitration.
Nationwide Ins. Co. v. Patterson, 953 F.2d 44, 45–46 (3d Cir.
1991).
We review the District Court’s order de novo. See
Kaneff v. Del. Title Loans, 587 F.3d 616, 620 (3d Cir. 2009).
We review any factual findings the District Court made in
interpreting the relevant contract for clear error. See State
2
Bayside and Beachside also filed a cross-appeal, No.
07-2678. However, on August 17, 2012, their counsel
advised that he would move to dismiss the cross-appeal for
mootness although no such motion was filed. In any event,
Bayside and Beachside abandoned their cross-appeal by not
addressing it in their opening brief. See Free Speech Coal.,
Inc. v. Att’y Gen., 677 F.3d 519, 545 (3d Cir. 2012).
Therefore, we will dismiss the cross-appeal. See Seufert
Bros. Co. v. United States, 249 U.S. 194, 198 (1919).
6
Farm Mut. Auto. Ins. Co. v. Coviello, 233 F.3d 710, 713 (3d
Cir. 2000). The District Court’s order compelling arbitration
is treated as a summary judgment, so the “party opposing
arbitration is given the benefit of all reasonable doubts and
inferences that may arise.” Kaneff, 587 F.3d at 620 (internal
quotation marks omitted). “Only when there is no genuine
issue of fact concerning the formation of the agreement
should the court decide as a matter of law that the parties did
or did not enter into such an agreement.” Par-Knit Mills, Inc.
v. Stockbridge Fabrics Co., Ltd., 636 F.2d 51, 54 (3d Cir.
1980).
III
The Condominium Association’s ultra vires argument
is not arbitrable and must be decided by the District Court.
Under the Prima Paint rule, if a contract contains an
arbitration clause, challenges to the validity of the contract as
a whole are for the arbitrator to decide. See Prima Paint
Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403–04
(1967). But challenges to the formation of a contract are
“generally for courts to decide.” See Granite Rock Co. v.
Int’l Bhd. of Teamsters, 130 S. Ct. 2847, 2855–56 (2010); see
also Buckeye Check Cashing v. Cardegna, 546 U.S. 440, 444
n.1 (2006) (distinguishing between challenges to a contract’s
validity and challenges to its formation).
We have held that a challenge to a contract on the
grounds that the signatory was unauthorized to sign it must be
decided by a court, even if the contract contains an arbitration
clause, because it is a challenge to a contract’s formation
rather than its validity. Sandvik AB v. Advent Int’l Corp., 220
7
F.3d 99, 100–01 (3d Cir. 2000). 3 Sandvik teaches that the
court must adjudicate any claim that a contract was beyond a
signatory’s authority or ultra vires, even if that contract
contains an arbitration clause. Therefore, we will vacate the
District Court’s order compelling arbitration so it can first
decide the ultra vires argument on the merits.
A
The District Court rejected the Condominium
Association’s ultra vires argument with respect to Count Two
based on the fact that the Board approved the Water Supply
Agreement. In doing so, the District Court erred by
conflating the authority of the Condominium Association
itself with the more limited authority of its Board. Under the
Condominium Association’s by-laws, the Board “shall have
the powers and duties necessary for the administration of the
affairs of the Condominium and may do all such acts and
things except those which by law or by the Declaration or by
3
Our approach is consistent with five of the six other
courts of appeals to have addressed this issue. See Solymar
Invs., Ltd. v. Banco Santander S.A., 672 F.3d 981, 989–90
(11th Cir. 2012); Telenor Mobile Commc’ns. AS v. Storm
LLC, 584 F.3d 396, 406 n.5 (2d Cir. 2009); Banc One
Acceptance Corp. v. Hill, 367 F.3d 426, 429–30 (5th Cir.
2004); Sphere Drake Ins. Ltd. v. All Am. Ins. Co., 256 F.3d
587, 589–90 (7th Cir. 2001); Three Valleys Mun. Water Dist.
v. E.F. Hutton & Co., Inc., 925 F.2d 1136, 1140 (9th Cir.
1991); but see Bd. of Cnty. Comm’rs of Lawrence Cnty. v. L.
Robert Kimball & Assocs., 860 F.2d 683, 685 (6th Cir. 1988)
(arbitrators can decide ultra vires challenge); cf. Koch v.
Compucredit Corp., 543 F.3d 460, 464 (8th Cir. 2008) (court
can decide challenge to whether a contract was assigned).
8
these By-Laws may not be delegated to the Board of
Directors.”
One of the Declaration’s limitations is that it “may be
amended by the vote of at least 67% in common interest of all
Unit Owners, cast in person or by proxy at a meeting duly
held in accordance with the provisions of the By-Laws.” This
straightforward provision requires a 67% vote before the
Declaration may be amended and Appellees do not argue that
the Board even sought, much less obtained, the requisite vote.
Whether such a vote was necessary turns on whether the
Water Supply Agreement constituted an amendment to the
Declaration.
The Condominium Association argues that the Water
Supply Agreement amended the Declaration in two respects:
(1) by changing the rates charged for water; and (2) by
converting an individual expense into a common charge.
As for the first argument, the Declaration requires
Bayside to set a “reasonable” rate for water considering
“among other things, its cost of . . . the equipment necessary.”
According to the complaint: “Bayside breached its obligations
to [the Condominium Association] by refusing to continue to
provide water treatment and wastewater treatment services at
rates determined in accordance with the Declaration”; the
Water Supply Agreement resulted in TSG charging “rates far
in excess of historical rates”; TSG refused to provide water
treatment in accordance with its obligations under the
Declaration unless the Condominium Association paid “an
arbitrarily set charge for said services”; and the fixed $0.05
rate was an unreasonable rate designed to extort funds from
the Condominium Association in excess of what the
Declaration allowed.
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As for the second argument, the Declaration states that
each member is individually responsible for paying water
charges, but the Water Supply Agreement requires the
Condominium Association to collect water charges from the
members as a common charge.
The District Court did not address these arguments.
Rather, it found that the Water Supply Agreement was not
ultra vires because the Condominium Association was
authorized to enter into the Agreement. In doing so, the
District Court did not recognize that the authority of the
Condominium Association’s Board of Directors is narrower
than the authority of the Condominium Association as a
whole. See, e.g., Waggoner v. Laster, 581 A.2d 1127, 1133–
35 (Del. 1990) (finding a corporation’s board of directors
lacked the authority to issue stock with special voting rights
because the certificate of incorporation did not grant them
such authority, even though the corporation was authorized to
do so). Therefore, we will remand so the District Court can
determine whether the Board was, in fact and law, authorized
to execute the Water Supply Agreement.
B
The Condominium Association also argues that the
District Court should have allowed additional discovery on
the ultra vires argument. In light of our decision to remand
the case, we agree that additional discovery is warranted. The
District Court granted Defendants’ motion to dismiss in part
by relying on the affidavit of Myron Poliner, a Board member
of the Condominium Association. In doing so, the District
Court converted the motion to dismiss into a motion for
summary judgment. See Fed. R. Civ. P. 12(d). Therefore, the
District Court was required to “provide[] notice of its
10
intention to convert the motion and allow[] an opportunity to
submit materials admissible in a summary judgment
proceeding.” Ford Motor Co. v. Summit Motor Prods., Inc.,
930 F.2d 277, 284 (3d Cir. 1991) (citation omitted). Of
course, if no prejudice accrued from the District Court’s
failure to do so, it would be harmless error. Id. at 285.
Because the District Court conflated the authority of
the Board with the authority of the Condominium
Association, it is unclear whether it concluded that Poliner
had the authority to sign the Water Supply Agreement on
behalf of the Condominium Association as a whole, or merely
on behalf of the Board. Regardless of how we read the
District Court’s opinion, the Condominium Association is
entitled to conduct additional discovery and submit materials
on the question of whether the Water Supply Agreement was
beyond the authority of the Board.
If the District Court relied on Poliner’s affidavit to
conclude that he had the authority to sign the Water Supply
Agreement on behalf of the Condominium Association as a
whole, then it committed reversible error because that issue is
the crux of this entire case. Therefore, the Condominium
Association is entitled to “an opportunity to submit materials
admissible in a summary judgment proceeding.” See Ford
Motor Co., 930 F.2d at 284–85; Fed. R. Civ. P. 12(d).
If, on the other hand, the District Court concluded
merely that Poliner was authorized to sign the Water Supply
Agreement on behalf of the Board, its error would be
harmless because the Condominium Association’s own
complaint acknowledges as much. Of course, as we have
explained, such a conclusion begs the question as to whether
the Board was authorized to sign the Water Supply
11
Agreement on behalf of the Condominium Association as a
whole. Additional discovery would still be required on that
question, which is the dispositive issue in this case. 4
IV
We next address the District Court’s finding that the
Condominium Association’s coercion claim was arbitrable. 5
4
Appellees raise two procedural challenges to the
Condominium Association’s discovery request. First, they
argue that the Condominium Association waived its discovery
request because it did not request discovery with respect to
the arbitration clause specifically. We disagree because the
Condominium Association made the request “to adequately
refute the claims asserted by Beachside Associates, LLC in its
motion to dismiss,” which contained a request for arbitration.
Second, Appellees argue that the Condominium Association
is estopped from seeking discovery because it asserted below
that arbitrability is a legal question. Appellees’ argument
misreads the Condominium Association’s argument below,
which was that the Condominium Association was entitled to
have the arbitrability issue decided by the District Court
before the case could be sent to arbitration, not that the
Condominium Association was entitled to have the
arbitrability issue decided without reference to facts.
Therefore, the Condominium Association is not estopped
from seeking discovery.
5
Appellees argue that the Condominium Association
waived its coercion argument. We disagree because the
Condominium Association alleged coercion in its complaint.
The District Court understood that the Condominium
Association raised a coercion argument, and addressed it.
12
Although we have never squarely addressed whether coercion
claims are arbitrable, we drew a distinction in Sandvik
between claims that a contract is void, which are not
arbitrable, and claims that a contract is voidable, which are
arbitrable. See 220 F.3d at 106–07. Because coercion
renders a contract voidable rather than void, see Restatement
(Second) of Contracts § 7, cmt. b., Sandvik suggests that the
Condominium Association’s coercion claim is arbitrable.
The question is not so straightforward, however,
because it is unclear whether the void/voidable distinction we
noted in Sandvik survived the Supreme Court’s subsequent
decision in Buckeye Check Cashing. There, the Supreme
Court rejected the notion that the application of the Prima
Paint rule depends on state law distinctions between void and
voidable contracts. 546 U.S. at 446. Rather, the relevant
distinction is between challenges to a contract’s validity,
which are arbitrable, and challenges to a contract’s formation,
which generally are not. Id. at 444 n.1; see also Granite
Rock, 130 S. Ct. 2847, 2855–56. Indeed, Buckeye Check
Cashing itself held that a challenge to a contract’s legality
was arbitrable, even though illegality would have rendered
that contract void rather than voidable. 546 U.S. at 442, 449.
On the other hand, Buckeye Check Cashing left open the
question whether mental capacity challenges to a contract are
arbitrable, 546 U.S. at 444 n.1 (citing Spahr v. Secco, 330
F.3d 1266 (10th Cir. 2003) (finding that an Alzheimer’s
patient’s mental capacity challenge could be decided by a
Therefore, the argument was not waived. See Singleton v.
Wulff, 428 U.S. 106, 120 (1976) (“It is the general rule, of
course, that a federal appellate court does not consider an
issue not passed upon below.” (emphasis added)).
13
court)), even though mental capacity challenges render
contracts voidable rather than void. See Weird by Gasper v.
Estate of Ciao, 556 A.2d 819, 824 (Pa. 1989); see also
Restatement (Second) of Contracts § 7, cmt. b (challenge
based on infancy).
Even under the Buckeye Check Cashing formulation,
however, the Condominium Association’s coercion claim is
arbitrable because it is a challenge to the validity (rather than
the formation) of the Water Supply Agreement. The
Condominium Association’s coercion claim is that TSG
threatened to stop providing it with a service unless it
consented to the assignment and agreed to pay a higher price.
Although such economic duress implies that the
Condominium Association’s Board was bargaining from a
position of weakness when it signed the Water Supply
Agreement, it does not mean that the Condominium
Association’s capacity to consent was so diminished that no
contract was ever formed or that the Condominium
Association was necessarily unable to consent to the
arbitration clause. See AT&T Mobility LLC v. Concepcion,
131 S. Ct. 1740, 1750 (2011) (upholding arbitration clauses in
consumer contracts of adhesion). Therefore, we hold that the
Condominium Association’s coercion challenge is arbitrable. 6
This holding accords with both of the federal appellate courts
to have squarely considered the issue. See Simula, Inc. v.
Autoliv, Inc., 175 F.3d 716, 726 (9th Cir. 1999) (“[F]raud in
the inducement and economic duress of the 1995 Agreement
6
However, if the District Court on remand finds that
the Board lacked the authority to enter into the Water Supply
Agreement in the first place, any disagreement about whether
the Water Supply Agreement was coerced would be moot.
14
as a whole . . . are questions for the arbitrator.”); Merrill
Lynch, Pierce, Fenner & Smith, Inc. v. Haydu, 637 F.2d 391,
398 (5th Cir. 1981) (plaintiff’s claim that “she was distracted
and coerced by the high pressure sales talk of the Merrill
Lynch representatives,” id. at 394 n.2, was arbitrable).
V
Finally, to assist the District Court on remand, we
address the Condominium Association’s argument that there
is an inconsistency between the Consent to Assignment,
which referenced a “Water Supply Agreement between . . .
Bayside and the COA dated August ____, 2005” and the
Water Supply Agreement attached to Bayside’s motion,
which was “dated June ____, 2005.” We agree with
Appellees that the Condominium Association is judicially
estopped from pursuing this argument. In a prior proceeding
before the Virgin Islands Superior Court, the Condominium
Association attached the same Water Supply Agreement
dated June 2005 to its complaint in which it averred that
“two agreements [were] signed in August 2005 . . . COA
Water Supply Agreement . . . dated ‘June __, 2005’ [sic]”
(emphasis added). Having alleged in another legal
proceeding that the June 2005 date on the Water Supply
Agreement was merely a typographical error, the
Condominium Association is estopped from arguing
otherwise in this case. See Macfarlan v. Ivy Hill SNF, LLC,
675 F.3d 266, 272 (3d Cir. 2012).
* * *
The Condominium Association has raised a bona fide
question as to whether its Board possessed the authority to
enter into the Water Supply Agreement. Because this
15
question goes to the formation of the contract rather than its
validity, it requires a judicial determination. Accordingly, we
will vacate the order of the District Court and remand for
additional discovery regarding that question. Also, for the
reasons stated, we will affirm the District Court’s holding that
the Condominium Association’s coercion claims are
arbitrable.
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