AGCO Corporation v. Anglin, Max M. ( 2000 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 98-3373
Agco Corporation,
Plaintiff-Appellee,
v.
Max Anglin, et al.,
Defendants-Appellants.
Appeal from the United States District Court
for the Southern District of Indiana, Indianapolis Division.
No. IP98-0050-C-T/G--John Daniel Tinder, Judge.
Argued March 2, 1999--Decided June 9, 2000
Before Cudahy, Eschbach, and Coffey, Circuit Judges.
Cudahy, Circuit Judge. A farm equipment
dealership, Silver Lake Farm Service, Inc., and
its owners appeal from a district court order
denying their motion to vacate an arbitration
award and confirming an award for the farm
equipment manufacturer AGCO. This appeal presents
the question whether the arbitrators acted with
the authority conferred upon them by the parties’
agreement, or instead decided issues beyond those
which the parties had agreed to submit to
arbitration. Concluding that the arbitrators
exceeded their authority, we reverse.
I.
Max and Gary Anglin own Silver Lake Farm
Service, Inc., a farm implement store in Silver
Lake, Indiana. In 1987 Silver Lake became a
dealer of farm equipment for the Deutz-Allis
Corporation. Silver Lake bought inventory from
Deutz-Allis and sold it to farmers. In 1990 AGCO
acquired Deutz-Allis and assumed the dealership
agreement with Silver Lake.
In building its business, Silver Lake entered into
a series of financing agreements. First, to help
its customers obtain credit, it signed a Retail
Financing Agreement in 1989 with Agricredit
Acceptance Company, an equipment lease finance
company. At the same time, Agricredit required the
Anglins to execute separate personal guaranties of
Silver Lake’s liabilities under the Retail Finance
Agreement. Significantly, neither these personal
guaranties nor the Retail Finance Agreement
provides for arbitration.
On June 3, 1992, Silver Lake entered into a
Wholesale Financing Agreement with AGCO to obtain
financing to purchase inventory from AGCO. A
binding arbitration provision required the
Anglins and AGCO to arbitrate all disputes
arising under the Agreement. On the same day, Max
and Gary Anglin and their wives executed personal
guaranties (the "Guaranties") of Silver Lake’s
indebtedness to AGCO. Each of the Guaranties
(pre-printed, tiny-print forms drafted by AGCO)
contained the broad arbitration provision at
issue in this appeal:
BINDING ARBITRATION. Except as otherwise
specifically provided below, all actions,
disputes, claims and controversies heretofore or
hereafter arising out of or directly or
indirectly relating to (a) this Guaranty . . . ,
(b) any subsequent agreement entered into between
the parties hereto, (c) any previous agreement
entered into between the parties hereto, (d) any
relationship or business dealings between the
parties hereto, and/or (e) the transactions
contemplated by this Guaranty or any previous or
subsequent agreement between the parties hereto
. . . will be subject to and resolved by binding
arbitration . . . and judgment upon the award
rendered by the arbitrator may be entered in any
court having jurisdiction.
(Emphasis added.) As will become apparent, the
elusive meaning of the "directly or indirectly"
clause is what has given rise to this litigation.
The scope of the Guaranties is set forth in a
separate provision, which also incorporates the
"direct or indirect" wording:
In consideration of financing provided or to be
provided by you [AGCO] to Silver Lake Farm
Service, Inc. ("Dealer"), . . . we [the Anglins]
. . . guaranty to you [AGCO] . . . the immediate
payment of all current and future liabilities
owed by Dealer to you when due, whether such
liabilities are direct or indirect.
(Emphasis added.)
By late 1992 AGCO was forging a close
relationship with Agricredit. In November,
unknown to the Anglins, AGCO entered into an
Operating Agreement with Agricredit, under which
AGCO agreed to purchase any retail finance
contract on which the purchase price warranty had
been breached. Soon thereafter (the precise time
is not clear from the record), AGCO acquired
Agricredit./1
Some time in 1994, Silver Lake began receiving
complaints of irregularities in a number of
retail contracts with customers. Although the
record is sketchy, the circumstances surrounding
six contracts--all of which were signed between
1992 and 1994 and then assigned to Agricredit--
have given rise to charges of fraud against
Silver Lake. These charges are not before us in
this appeal. What is before us--according to
AGCO--are Silver Lake’s retail obligations to
Agricredit (the "Retail Obligations"), which AGCO
insists are covered by the broad arbitration
clause in the Guaranties. AGCO took assignment of
these Retail Obligations from Agricredit in July
and August 1995, several months after Silver
Lake’s default led AGCO to terminate the
dealership agreement and the Wholesale Finance
Agreement.
In October 1995 AGCO sought arbitration against
Silver Lake and the Anglins based upon the
arbitration provision contained in the
Guaranties. Asserting fraud and breach of
contract claims against a Silver Lake manager
(who the Anglins assert in their brief "has since
disappeared"), AGCO complained about the six
contracts executed by Silver Lake customers that
involved Agricredit financing. In its written
demand for arbitration, AGCO somewhat diffusely
characterized the nature of its dispute as a
"Claim under Dealer Contract for defaults/fraud
under recourse consumer financing agreements and
for unpaid wholegood sales; claims against
guarantors for payment of principal obligor’s
liabilities." The matter was submitted to an
arbitration panel of the American Arbitration
Association, which conducted a three-day hearing
in September 1997. No transcript was created.
In November 1997 the arbitration panel issued
its ruling. Although the arbitrators submitted no
findings of fact or law, they apparently
determined that the arbitration clause in the
Guaranties authorized them to consider the
disputed retail contracts, even though those
contracts involved not AGCO but Agricredit, a
nonsignatory to the Guaranties. The arbitrators
declared Silver Lake liable to AGCO for the debts
arising from five contracts; denied Silver Lake’s
counterclaim for wrongful termination of its
dealership; and awarded AGCO damages of $148,517
plus attorney’s fees.
In January 1998 AGCO petitioned the district
court under the Federal Arbitration Act, 9 U.S.C.
sec. 1 et seq., to confirm the award. The Anglins
promptly moved to vacate or modify the award
largely on the basis that the arbitrators
exceeded their powers by considering issues
outside the scope of the arbitration agreement.
The district court denied the Anglins’ motion and
confirmed the award. It held that the arbitration
provision in the Guaranties authorized AGCO to
arbitrate a dispute with the Anglins over Silver
Lake’s Retail Obligations to Agricredit because
that dispute directly or indirectly related to
the Anglins’ Guaranties:
[A] direct liability would be a liability of
Silver Lake to AGCO under the Wholesale Financing
Agreement or under the Dealer Agreement. An
indirect liability would be a liability of Silver
Lake to AGCO through a liability of Silver Lake
to Agricredit, AGCO’s wholly owned subsidiary,
under the Retail Financing Agreement.
(Dist. Ct. Order of 8/25/98, at 14.) This appeal
followed.
II.
We first consider whether the Anglins waived
any objection to the arbitrability of the Retail
Obligations when they consented to arbitration
and agreed to participate in the arbitration
hearing. If a party willingly and without
reservation allows an issue to be submitted to
arbitration, he cannot await the outcome and then
later argue that the arbitrator lacked authority
to decide the matter. See Jones Dairy Farm v.
Local No. P-1236, United Food & Commercial
Workers Int’l Union, AFL-CIO, 760 F.2d 173, 175-
76 (7th Cir. 1985). If, however, a party clearly
and explicitly reserves the right to object to
arbitrability, his participation in the
arbitration does not preclude him from
challenging the arbitrator’s authority in court.
International Ass’n of Machinists & Aerospace
Workers, Lodge No. 1777 v. Fansteel, Inc., 900
F.2d 1005, 1009 (7th Cir. 1990). The record
suggests that the Anglins have followed the
latter course.
Although no transcript was made of the
arbitration proceedings, it is undisputed that
counsel for the Anglins objected to arbitration
of the Retail Obligations. In the district court,
counsel recounted that he registered his
objections once the parties "discovered" on the
"first or second day of arbitration" that the
Anglins had also executed personal guaranties of
the Retail Financing Agreement:
At that point, on behalf of the Anglins, I moved
for one of two things: Either that the
arbitration be dismissed because there was no
basis for it under the retail guaranties; or,
that if AGCO wanted to proceed with the
[arbitration], they do so solely under the
Wholesale Guaranties and stipulate to no claim
based on the retail guaranties. [AGCO] stipulated
they were making absolutely no claim under the
retail guaranties and that those retail
guaranties were not to be considered by the
arbitrators.
(Tr. of Dist. Ct. Hearing of 3/6/98, at 26-27.)
Like the defendant in Fansteel, counsel for the
Anglins "carefully and explicitly, in unambiguous
language, made known to the arbitrator[s] and
[AGCO their] clear intention" to preserve their
objection to the arbitrability of the Retail
Obligations, even though they agreed to proceed
with the arbitration hearing. Fansteel, 900 F.2d
at 1009. The Anglins therefore did not waive
their right to object to the scope of the
arbitration.
We turn to the question whether the arbitrators
went beyond the scope of the authority conferred
upon them by the parties. Arbitrators have the
authority to decide only those issues actually
submitted by the parties. American Postal Workers
Union, AFL-CIO, Milwaukee Local v. Runyon, 185
F.3d 832, 835 (7th Cir. 1999). "[A]rbitration is
simply a matter of contract between the parties;
it is a way to resolve those disputes--but only
those disputes-- that the parties have agreed to
submit to arbitration." First Options of Chicago,
Inc. v. Kaplan, 514 U.S. 938, 943 (1995). Thus,
although the Federal Arbitration Act embodies a
clear federal policy favoring arbitration
agreements, Moses H. Cone Mem’l Hosp. v. Mercury
Constr. Corp., 460 U.S. 1, 24-25 (1983), such
agreements must not be so broadly construed as to
encompass claims that were not intended to be
arbitrated under the original contract. As with
any contract, the touchstone for interpreting an
arbitration clause must be the intention of the
parties. Grundstad v. Ritt, 106 F.3d 201, 204
(7th Cir. 1997); Matteson v. Ryder Sys. Inc., 99
F.3d 108, 114 (3d Cir. 1996). Therefore, while
keeping in mind the federal policy favoring
arbitration, we must consider whether the Anglins
and AGCO intended for their dispute over the
Retail Obligations to be arbitrated. Our review
is extremely limited: we may vacate an
arbitration award only in narrowly defined cases,
such as when "the arbitrators exceeded their
power." 9 U.S.C. sec. 10(a)(4). Further, we
review findings of fact for clear error and
decide questions of law de novo. Publicis
Communication v. True North Communications, Inc.,
206 F.3d 725, 728 (7th Cir. 2000).
In considering the circumstances surrounding the
signing of the Guaranties, we conclude that there
is strong evidence that the Anglins never
intended to have the arbitration clause cover the
present controversy. In reaching this conclusion,
we rely on essentially three factors. First, the
arbitration clause did not seek to incorporate by
reference any provisions of the Retail Financing
Agreement; it expressly limited itself to
disputes concerning either the Guaranties or
other transactions between the two parties.
Second, at the time the Anglins entered into the
Guaranties, on June 3, 1992, AGCO had not yet
agreed to repurchase Agricredit’s debt--such a
repurchasing agreement was not signed until five
months later, in November 1992. Third, the
Anglins signed their Guaranties before AGCO
acquired Agricredit as a subsidiary; because the
two companies shared no corporate identity as of
June 3, 1992, the Anglins had no reason to
suspect that their arbitration agreement with
AGCO would expand to encompass a dispute with
Agricredit, a nonsignatory. See, e.g., Kissun v.
Humana, 479 S.E.2d 751, 753 (Ga. 1997)
("[P]iercing the corporate veil results in
disregard for the separate existence of parent
and subsidiary.").
This case resembles Eljer Mfg., Inc. v. Kowin
Dev. Corp., 14 F.3d 1250 (7th Cir. 1994), in
which we held that an arbitrator exceeded his
power by arbitrating a dispute involving a third
party not a signatory to the arbitration
agreement. Eljer Manufacturing, Inc. was the
parent corporation of the Simonds Division, a
producer of metal files. Simonds entered into an
agreement with Kowin Development, Inc. to form a
company called Kowin-Simonds, Inc. that would
participate in a Chinese joint venture to
manufacture files in China. Both Kowin and
Simonds agreed to arbitrate "any dispute" arising
under their agreement. Id. at 1252 n.1. Some time
later, Simonds--to aid the joint venture project-
-sold equipment to the Bank of China, which in
turn leased the equipment back to the joint
venture. The joint venture subsequently failed,
and Kowin sued Eljer and Simonds for fraudulently
misrepresenting facts about the equipment they
sold. After Eljer successfully moved to compel
arbitration, an arbitrator awarded Kowin damages,
including the sum that Eljer recovered from the
Bank of China for the purchase of Simonds’
equipment. We held that the arbitrator exceeded
his powers because the arbitration clause did not
authorize him to arbitrate disputes between Eljer
and a third party, the Bank of China. Id. at
1257.
Like Eljer, the Anglins’ dispute involves a
third party, Agricredit, which is not a signatory
to the arbitration agreement. The arbitration
agreement contained in the Guaranties limited the
arbitrators’ authority to issues arising from
transactions between either AGCO and Silver Lake
or AGCO and the Anglins. Eljer demonstrates that,
despite the Guaranties’ broad arbitration
provision, the arbitrators were not authorized to
consider issues arising out of the Retail
Financing Agreement between Silver Lake and
Agricredit. The arbitrators exceeded their
authority when they considered the rights of
Agricredit asserted by AGCO as a result of
assignment. These rights, as the Anglins
correctly point out, are nothing more than "those
of a stranger to the arbitration agreement."
Moreover, it is a well-established principle of
Georgia law that an assignee of a contract
"stands in the shoes" of the assignor, has no
more rights under the contract than the assignor,
and is subject to all defenses which could have
been raised against the assignor. See Paulsen St.
Investors v. EBCO Gen. Agencies, 514 S.E.2d 904,
905 (Ga. Ct. App. 1999). Because AGCO acquired
its interests in the Retail Obligations through
assignment from Agricredit, it may assert claims
only to the extent of Agricredit’s rights. The
Retail Obligations do not provide for
arbitration. As an assignee of the Retail
Obligations, AGCO is subject to the Retail
Obligations’ limitations-- which include the
absence of an arbitration provision. AGCO may not
invoke the arbitration clause under the
Guaranties to arbitrate Retail Obligations that
are otherwise not arbitrable.
Besides addressing the contractual underpinnings
of arbitration and the nature of assignments, the
Anglins also express skepticism about the
expansive reach of the arbitration provision.
They liken the arbitration provision to an
unenforceable "dragnet" clause in a mortgage or
security agreement that secures an extensive
range of unanticipated debts, including those
that will arise in the future. The Anglins argue
that the arbitration provision, like an improper
dragnet clause, is unenforceable because it fails
to apprise them that it could encompass a dispute
over their subsequently assigned Retail
Obligations.
Georgia law, which expressly governs the
Guaranties, has long recognized and enforced
dragnet clauses. See, e.g., Hill v. Perkins, 127
S.E.2d 909 (Ga. 1962); Rose City Foods, Inc. v.
Bank of Thomas County, 62 S.E.2d 145 (Ga. 1950).
Unlike many jurisdictions that construe such
clauses narrowly, see Milton Roberts, Annotation,
Debts Included in Provision of Mortgage
Purporting to Cover All Future and Existing Debts
(Dragnet Clause)--Modern Status, 3 A.L.R. 4th 690
(1981 and Supp. 1999), Georgia is a "creditor’s
state" that has given dragnet clauses their
fullest effect. In Rose City Foods, for instance,
the Georgia Supreme Court broadly construed a
dragnet clause to reach preexisting obligations
that the creditor had obtained from a third
party. Dragnet clauses, the court observed, are
a "matter of private contract" that "courts
should always guard with jealous care" and "give
. . . full effect when it is possible to do so."
62 S.E.2d at 148. Significantly, however, the
Georgia legislature later enacted a mortgage
statute to restrict the reach of dragnet clauses
to "obligations arising . . . between the
original parties to the security instrument." Ga.
Code Ann. sec. 44-14-1(b) (formerly sec. 67-1316).
This restriction thus limits Rose City Foods, see
Commercial Bank v. Readd, 242 S.E.2d 25, 28 n.1
(Ga. 1978) (Hill, J., concurring); Bowen v.
Kicklighter, 183 S.E.2d 10, 12 (Ga. Ct. App.
1971); Federal Deposit Ins. Corp. v. Willis, 497
F. Supp. 272, 281 (S.D. Ga. 1980), and calls into
question the enforceability of the dragnet clause
in this case, in which AGCO obtained the Retail
Obligations through assignment after the
Guaranties were signed. Indeed, other courts have
disapproved of dragnet clauses encompassing debts
that were originally owed by the mortgagor to
third parties and subsequently assigned to the
mortgagee. See, e.g., Hudson v. Bank of
Leakesville, 249 So. 2d 371, 374 (Miss. 1971);
Wood v. Parker Square State Bank, 400 S.W.2d 898,
902 (Tex. 1966); Matter of E.A. Fretz Co., Inc.,
565 F.2d 366, 372 (5th Cir. 1978); Grant S.
Nelson & Dale A.Whitman, Real Estate Finance Law, sec.
12.8 at 900-902 (2d ed. 1985); 2 Grant Gilmore,
Security Interests in Personal Property 918 (1965).
Further, we are mindful that the Guaranties’
terms are construed against AGCO, which prepared
the document. Under Georgia law any ambiguity in
a guaranty is construed against the maker. See
Enterprise Fin. Corp. v. Ross White Enters.,
Inc., 441 S.E.2d 805, 806 (Ga. Ct. App. 1994);
St. Charles Foods, Inc. v. America’s Favorite
Chicken Co., 198 F.3d 815, 821 (11th Cir. 1999)
(applying Georgia law). Although the Guaranties
here speak opaquely of the debtor’s "direct or
indirect" liabilities, they do not mention
subsequent debts that have been obtained by
assignment from a third party. Like other
contracts, the arbitration clause in question
should be interpreted to reflect the parties’
actual expectations. Because AGCO did not obtain
assignment of the Retail Obligations until after
the signing of the Guaranties, we doubt that the
Anglins ever contemplated that their dispute with
Agricredit would find its way to the arbitration
table.
III.
Because the Anglins could not have contemplated
that their arbitration clause with AGCO would
encompass a dispute with a nonsignatory party, we
conclude that the arbitrators exceeded their
authority by arbitrating the Anglins’ Retail
Obligations to Agricredit. We REVERSE the district
court’s confirmation of the arbitration award,
and REMAND the case to the district court for
further proceedings consistent with this order.
/1 The parties’ briefs gloss over the timing of this
acquisition, and the record offers no
elaboration. The ambiguous chronology apparently
confused the district court, which traced
Agricredit’s subsidiary status as far back as
1989: "In 1989, Agricredit, a wholly owned
subsidiary of AGCO . . . and Silver Lake entered
into a Retail Finance Agreement, dated July 31,
1989." According to AGCO’s own website, however,
AGCO did not acquire Agricredit until 1993 and it
did not make Agricredit a wholly-owned subsidiary
until the following year. See
. The wholly-owned
subsidiary status was short lived. In late 1996
AGCO sold a majority stake in Agricredit to the
Dutch lending company Rabobank Nederland. See
id.; AGCO Completes Global Retail Finance Joint
Venture Agreement with Rabobank; Agricredit
Subsidiary Forms Global Alliance with AAA-Rated
Bank, PR Newswire, Nov. 4, 1996, available in
LEXIS database.