Atlantic Community Bank v. Daniels, C. ( 2015 )

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NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37
ATLANTIC COMMUNITY BANKERS BANK, IN THE SUPERIOR COURT OF
INC., AND JON EVANS PENNSYLVANIA
Appellees
v.
CHARLES DANIELS AND IMRAN DALVI
Appellants No. 635 MDA 2014
Appeal from the Order Entered March 20, 2014
In the Court of Common Pleas of Cumberland County
Civil Division at No(s): 14-250
BEFORE: BOWES, J., MUNDY, J., and JENKINS, J.
MEMORANDUM BY JENKINS, J.: FILED MARCH 18, 2015
Charles Daniels and Imran Dalvi filed an action in the American
Arbitration Association against Atlantic Community Bankers Bank (“ACBB”)
and Jon Evans, ACBB’s president and CEO, for unjust enrichment and breach
of New Jersey’s Conscientious Employee Protection Act (“CEPA”). 1 ACBB and
Evans filed a petition to stay arbitration in the Court of Common Pleas of
Cumberland County (“lower court”). The lower court granted the petition
and entered an order permanently staying arbitration, and Daniels and Dalvi
____________________________________________
1
N.J.S.A. 34:19–1 et seq. CEPA, New Jersey’s whistleblower act, protects
employees from retaliation for, inter alia, disclosing or threatening to
disclose to a supervisor or to a public body any activity, policy or practice of
the employer that the employee reasonably believes is criminal or
fraudulent.
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filed a timely appeal to this Court. Daniels and Dalvi have complied with
Pa.R.A.P. 1925, as has the lower court. After careful review, we affirm.
We begin by sketching the proper standard of review. The Uniform
Arbitration Act, 42 Pa.C.S. § 7301 et seq., provides in relevant part that
“[o]n application of a party to a court to stay an arbitration proceeding
threatened or commenced the court may stay an arbitration on a showing
that there is no agreement to arbitrate.” 42 Pa.C.S. § 7304(b). In an
appeal from an order enjoining arbitration, we review whether a valid
arbitration agreement was entered into and, if so, whether the agreement
covers the dispute in question. PBS Coal, Inc. v. Hardhat Mining, Inc.,
632 A.2d 903, 905 (Pa.Super.1993); see also Sanitary Sewer Authority
of the Borough of Shickshinny v. Dial Associates Construction Group,
Inc., 532 A.2d 862, 863 (Pa.Super.1987) (“[I]n determining whether such
an arbitration stay request should be granted, a court must limit its inquiry
to the question of whether the parties agreed that the claim would be
determined by arbitration”). The interpretation of an arbitration agreement,
like the interpretation of any contract, is a question of law, so we need not
defer to the conclusions of the trial court and are free to draw our own
inferences. Humberston v. Chevron U.S.A., Inc., 75 A.3d 504, 509-10
(Pa.Super.2013).
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The allegations2 underlying this dispute are as follows: ACBB is a
“bankers bank”, i.e., a bank owned by 350 smaller banks that have pooled
their resources into one large bank.3 Daniels and Dalvi have experience in
working with telecommunications and technology startups.4 Evans spoke
with Daniels and Dalvi about creating a business plan for a
telecommunications company that would be a subsidiary of ACBB and would
supply ACBB’s community banks with converged networking and IP
telephone technologies.5 Daniels and Dalvi determined that they could
____________________________________________
2
We should emphasize that this appeal only involves a question of law as to
the appropriate forum for Daniels’ and Dalvi’s claims against ACBB and
Evans. We do not accept as true any of the parties’ factual allegations
concerning the parties’ backgrounds or conduct. We summarize the parties’
allegations only to provide additional context for our decision on the question
of law before us. It remains for the trier of fact on remand to determine
which factual allegations to accept concerning the parties’ background and
conduct.
3
Petition Of ACBB and Evans For Stay Of Arbitration (“ACBB Petition”), ¶ 7;
Answer of Daniels and Dalvi to ACBB Petition (“Answer”), ¶ 7.
4
Memorandum Of Daniels and Dalvi In Support Of Answer To ACBB Petition
(“Memorandum”), p. 2.
5
Memorandum, p. 2. Daniels and Dalvi allege that ACBB was interested in
their services for two reasons:
At the time, national banks such as Bank of America
had begun to experience significant savings in
networking and telecommunications costs by keeping
these services in house. It was intended that the
proposed subsidiary [the entity in which Daniels and
Dalvi would provide services to the Bank] would help
ACBB’s community banks to realize similar savings.
(Footnote Continued Next Page)
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devise an in-house networking system that would create significant savings
for ACBB’s community banks, and they presented their business plan to
ACBB’s Board of Directors.6 The Board approved the formation of a
telecommunications subsidiary, ACBB-BITS, LLC (“BITS”), to implement
Daniels’ and Dalvi’s business plan.7 Pennsylvania’s Department of Banking
approved the formation of BITS.8
Several documents were then executed: an operating agreement
between ACBB and BITS, and employment agreements between Daniels and
Dalvi on one hand and BITS on the other. We review these documents
below.
_______________________
(Footnote Continued)
Additionally, by selling networking and
telecommunications services through the subsidiary,
ACBB hoped to develop a steady stream of revenue
to supplement the revenue from the commercial
lending prong of its business.
Brief For Appellants, p. 8.
6
Memorandum, p. 2.
7
Memorandum, p. 2. According to Daniels’ and Dalvi’s brief on appeal,
Pennsylvania’s Department of Banking approved the formation of BITS, but
we do not see any support for this claim in the record. This omission,
however, does not affect our ability to decide the central issue of whether
this dispute belongs in arbitration or in the trial court.
8
Daniels and Dalvi’s Complaint, Court of Common Pleas of Cumberland
County (“Complaint”), ¶¶ 18-23.
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BITS’ operating agreement with ACBB states on the first page that
ACBB is BITS’ managing member9 but later refers to Evans as BITS’
managing member.10 This minor discrepancy is immaterial to whether the
present case belongs in arbitration. For convenience, we will refer to Evans
as BITS’ managing member. The operating agreement provides that at the
close of each fiscal year, Evans, as BITS’ Managing Member, must distribute
90% of BITS’ annual net income in cash on a pro rata basis to each BITS
member while keeping 10% of annual net income in reserve for BITS.11
Daniels’ and Dalvi’s employment agreements (1) designate Daniels
and Dalvi as BITS’ CEO and CFO, respectively, (2) make Daniels and Dalvi
employees of BITS, not ACBB,12 and (3) designate Evans as BITS’ managing
member.13 Each employment agreement states that any amendment to the
____________________________________________
9
Operating Agreement, p. 1.
10
Operating Agreement, p. 11.
11
Operating Agreement, p. 11.
12
Daniels Employment Agreement, pp. 2, 5; Dalvi Employment Agreement,
pp. 2, 4.
13
Daniels Employment Agreement, p. 4; Dalvi Employment Agreement, p. 4.
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90-10% arrangement spelled out in the operating agreement would
constitute constructive termination of Daniels and Dalvi.14
Each employment agreement expressly designates ACBB as a third-
party beneficiary and authorizes ACBB to enforce any provisions that are
applicable to ACBB.15 ACBB receives numerous benefits under each
employment agreement, e.g., covenants prohibiting BITS from (1) disclosing
confidential information; (2) soliciting clients, employees, officers, and
agents; and (3) competing with ACBB.16 Furthermore, each agreement
provides that Daniels and Dalvi will receive the same health, pension and
fringe benefits that ACBB provides to its own management.17
Finally, each employment agreement includes the following arbitration
clause: “Any dispute or controversy arising out of or relating to this
agreement or any claimed breach thereof shall be settled, at the request of
____________________________________________
14
Daniels Employment Agreement, p. 3; Dalvi Employment Agreement, pp.
2-3.
15
Daniels Employment Agreement, p. 13; Dalvi Employment Agreement, p.
13.
16
Daniels Employment Agreement, pp. 8-9; Dalvi Employment Agreement,
p. 8-9.
17
Daniels Employment Agreement, p. 7; Dalvi Employment Agreement, p. 7.
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either party, by an arbitration proceeding conducted in accordance with the
rules of the [American Arbitration Association]. . .”18
On or about March 1, 2005, Daniels and Dalvi signed their respective
employment agreements, and Evans signed each agreement both on behalf
of ACBB and as BITS’ Managing Member.19
In December 2010, ACBB’s board of directors voted to change the 90-
10% arrangement from a requirement to a target.20 Daniels and Dalvi told
Evans that they intended to exercise their right of constructive termination if
ACBB did not rectify this issue.21 Evans asked Daniels and Dalvi to give
ACBB time to rectify the problem. Through several amendments to the
operating agreement, Daniels and Dalvi agreed to extend the constructive
termination deadline to May 22, 2013.22
On March 1, 2013, Daniels told a Board member that he believed that
ACBB’s management of BITS constituted a breach of ACBB’s representations
____________________________________________
18
Daniels Employment Agreement, p. 14; Dalvi Employment Agreement, pp.
13-14.
19
Daniels Employment Agreement, p. 16; Dalvi Employment Agreement, p.
16.
20
Complaint, ¶ 98.
21
Complaint, ¶ 103.
22
Complaint, ¶¶ 100-110.
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to bank regulators at the time ACBB sought approval to form BITS.23
Specifically, Daniels said that loans from ACBB to BITS exceeded BITS’ debt
limit, thus subjecting ACBB to regulatory penalties and liability. 24 ACBB
agreed to a meeting to discuss this issue, but instead of holding the
meeting, it issued letters of termination to Daniels and Dalvi.25
On December 6, 2013, Daniels and Dalvi filed the aforementioned
action against ACBB and Evans in the American Arbitration Association.26
Daniels and Dalvi alleged that ACBB violated CEPA by terminating them in
retaliation for declaring their intent to report ACBB’s violations of banking
regulations.27 Daniels and Dalvi further alleged that ACBB was liable for
unjust enrichment because ACBB retained profits that it was supposed to
pass on to Daniels and Dalvi.28
____________________________________________
23
Daniels’ and Dalvi’s AAA Arbitration Demand (“Arbitration Demand”), p.
12.
24
Arbitration Demand, pp. 11-12.
25
Arbitration Demand, pp. 12-13.
26
It appears that Daniels and Dalvi demand recovery under CEPA on the
ground that they worked in New Jersey and were protected by New Jersey
law. ACBB and Evans have not asserted that Pennsylvania courts lack
subject matter jurisdiction over the CEPA claim.
27
Arbitration Demand, pp. 14-16.
28
Arbitration Demand, pp. 16-18. To elaborate, Daniels and Dalvi alleged:
(Footnote Continued Next Page)
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_______________________
(Footnote Continued)
BITS was created so that ACBB could supplement its
volatile commercial lending revenue stream with a
more stable source of income, and this goal has been
accomplished as BITS is generating more profits
each year, including a gross profit of over
$7,000,000 in 2012 that yielded a positive net
income of over $700,000. The early success of BITS
was dependent upon its unique interdependent
structure whereby savings and profits were intended
to adhere largely to BITS customers, employees, and
shareholders.
Once it became clear to ACBB that the BITS model
was going to succeed, ACBB immediately set about
altering the founding vision of the company so that it
could retain profits for itself rather than pass savings
and revenue to the intended parties. First, in 2006,
ACBB significantly reduced the number of Class A
membership units available for sale from 2,500,000
to 1,500,000 and then changed the parameters of
the agreement again in 2007 when it decided to fund
BITS with debt instead of capital in contravention of
the Letter of Non-Objection and the Operating
Agreement. Funding BITS with debt allowed ACBB to
hoard membership units that it otherwise would have
sold and also laid the groundwork for the 2009/2010
amendments to the Operating Agreement. Pursuant
to these amendments, ACBB was able to avoid
paying bonuses and distributions to shareholders and
employees that by prioritizing the repayment of
loans that it improperly made to BITS. During this
period, ACBB also was able to use its loan as a tax
deduction while collecting more than $1,000,000 in
principle and interest payments from BITS from 2009
through 2012. . .
There is little justice in the retention by ACBB of the
significant monetary benefits it received as a result
of its own decision to put over $4,600,000 of debt
into BITS and its subsequent unilateral action to
prioritize repayment of this debt at the expense of
(Footnote Continued Next Page)
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_______________________
(Footnote Continued)
the BITS employees and members. BITS was
created, and its success depended upon, the
interdependent model whereby the customers and
employees that took on risk and used their expertise
to make the company profitable would be rewarded
for their efforts and loyalty. The top talent that BITS
was able to attract was wholly the result of this
model, and ACBB’s persistence in undermining this
model to its own benefit constitutes unjust
enrichment.
Additionally, by firing [Daniels and Dalvi], ACBB has
set itself up to recoup the 600,000 membership units
owned by Mr. Dalvi and the 2,500,000 membership
units owned by Mr. Daniels in 2015 and 2017,
respectively. Despite the fact that Claimants
accepted their positions at BITS for below-market
salaries based on the promise of receiving bonuses
and distributions once the company became
profitable, ACBB’s postponement of BITS profitability
resulted in a scenario where Claimants held the
membership units when they were basically
worthless and ACBB will take them back at the
precise time at which the units will begin to yield
substantial distributions of annual net income.
Mr. Daniels and Mr. Dalvi built a successful and
profitable company for ACBB. While it was always
contemplated that ACBB would realize a profit from
the BITS operation, ACBB’s willingness to deceive
the regulators, BITS executives, and employees, has
caused it to recognize a profit that has been and will
be significantly larger than its intended share.
Arbitration Demand, pp. 16-18.
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On January 14, 2014, ACBB and Evans filed a petition to stay
arbitration in the lower court. On March 20, 2014, the lower court ordered a
permanent stay of arbitration on the ground that ACBB and Evans were not
parties to Daniels’ or Dalvi’s employment agreements with BITS and
therefore were not subject to the arbitration clauses in these agreements.
The court reasoned:
ACBB and Evans are not parties to the respective
Employment Agreements between [BITS], Charles
Daniels, and lmran Dalvi. . .ACBB and Evans have
not agreed to arbitrate the disputes set forth in the
Arbitration Demand, and. . .the disputes in the
Arbitration Demand are not within the scope of the
arbitration provisions of the aforementioned
Employment Agreements. Each Employment
Agreement includes ACBB only as a third-party
beneficiary, while Evans only signed each document
in his official capacity as an agent of the respective
entity. Neither [ACBB nor Evans] [is] included as a
party to the Employment Agreement, which is
expressly between [BITS], LLC, and [Daniels and
Dalvi]. Finally, the Arbitration Demand involves
claims by [Daniels and Dalvi] against [ACBB and
Evans] who, as non-parties to the contract, are not
beholden to the obligations of the contract.
Trial Court Opinion, p. 2. This appeal followed.29
____________________________________________
29
After filing this appeal, Daniels and Dalvi filed a writ of summons in the
lower court against ACBB and Evans. Subsequently, Daniels and Dalvi filed
a complaint in the lower court alleging unjust enrichment and violation of
CEPA. ACBB and Evans do not argue that the filing of a writ of summons
and complaint moot this appeal. We have the discretion, but not the
obligation, to raise the issue of mootness sua sponte. Rendell v.
(Footnote Continued Next Page)
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Daniels and Dalvi raise three issues in this appeal:
1. Whether ACBB and Evans are parties to the
Employment Agreements of Charles Daniels and Imran
Dalvi and are thereby bound by the arbitration clause
contained therein.
2. Whether ACBB and Evans are bound by the arbitration
clause as third-party beneficiaries to the Employment
Agreements.
3. Whether the claims set forth by Daniels and Dalvi in
their Demand for Arbitration are within the scope of
the arbitration clause contained in the Employment
Agreements.
Brief For Appellants, p. 5. We find the third issue dispositive.
Based on the plain language of Daniels’ and Dalvi’s employment
agreements, we agree with the lower court’s order granting ACBB’s and
Evans’ petition. “When construing agreements involving clear and
unambiguous terms, this Court need only examine the writing itself to give
effect to the parties’ understanding. This Court must construe the contract
only as written and may not modify the plain meaning under the guise of
interpretation.” Humberston v. Chevron U.S.A., Inc., 75 A.3d 504, 509–
10 (Pa.Super.2013).
Under the plain language of the employment agreements, Daniels and
Dalvi may demand arbitration only for “[a] dispute or controversy arising out
_______________________
(Footnote Continued)
Pennsylvania State Ethics Commission, 983 A.2d 708, 718 (Pa.2009).
Since we conclude that the lower court’s decision to stay arbitration was
proper, we do not find it necessary to address the question of mootness.
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of or relating to this agreement or any claimed breach thereof.”30 The CEPA
count in Daniels’ and Dalvi’s arbitration demand falls well outside of this
category. The CEPA count asserts that ACBB and Evans retaliated against
Daniels and Dalvi for declaring their intent to report ACBB’s violations of
banking regulations. This count does not arise out of, relate to or claim a
breach of covenants in the employment agreements that are intended to
protect ACBB, i.e., covenants prohibiting BITS from (1) disclosing
confidential information, (2) soliciting clients, employees, officers, and
agents, and (3) competing with ACBB. Nor does this count arise out of,
relate to or claim a breach of ACBB’s duty under the employment
agreements to provide Daniels and Dalvi with the same health, pension and
fringe benefits that ACBB provides to its own management. Nor does this
count implicate Evans, since he does not possess any rights or duties
individually under the employment agreements.
Similarly, the unjust enrichment count in Daniels’ and Dalvi’s
arbitration demand falls outside the scope of the arbitration clause. The
unjust enrichment claim alleges that ACBB diverted profits to itself that
should have gone to BITS and its executives, Daniels and Dalvi, under the
operating agreement between ACBB and BITS. While this claim implicates
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30
Daniels Employment Agreement, p. 14; Dalvi Employment Agreement, pp.
13-14.
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the operating agreement, it clearly does not involve “[a] dispute or
controversy arising out of or related to [the employment agreements] or any
claimed breach thereof. . .” Stated another way, this claim has nothing to
do with the covenants in the employment agreements that protect ACBB or
with ACBB’s duty under the employment agreements to provide Daniels and
Dalvi with health, pension and fringe benefits. Nor does this count implicate
Evans, since he does not possess any rights or duties individually under the
employment agreements.
In short, neither of the claims in Daniels’ and Dalvi’s arbitration
demand are subject to arbitration. Daniels and Dalvi must bring these
claims in the appropriate court of law. We express no opinion on whether
the lower court is an appropriate forum for the parties’ dispute, because we
limit our focus to whether ACBB and Evans must submit to AAA arbitration.
Daniels and Dalvi rely on two decisions -- Miller v. Allstate
Insurance Co., 763 A.2d 401 (Pa.Super.2000), and Highmark Inc. v.
Hospital Service Association of Northeastern Pennsylvania, 785 A.2d
93 (Pa.Super.2001) – for the proposition that ACBB must submit to
arbitration. We find these decisions inapposite. Miller and Highmark hold
that when an agreement (1) provides rights to a third-party beneficiary, and
(2) provides that disputes relating to the agreement must go to arbitration,
the third party beneficiary must proceed to arbitration to enforce its own
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rights under the agreement.31 This is because “a third-party beneficiary’s
rights and limitations in a contract are the same as those of the original
contracting parties.” Miller, supra, 763 A.2d at 405 n. 1. In this case,
ACBB is not attempting to enforce its own rights under the employment
agreements. Instead, Daniels and Dalvi attempt to prosecute claims against
ACBB that do not pertain to ACBB’s rights under the employment
agreements (or, for that matter, to ACBB’s duty to provide adequate
benefits).32
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31
In Miller, a passenger injured in a car accident sought compensation from
the car owner’s insurer as a third-party beneficiary to the car owner’s policy.
Miller, 763 A.2d at 402. The policy included an arbitration agreement that
purported to extend the time for challenging an arbitration award in court
beyond the time provided by statute. Id. at 404. This Court held that the
arbitration agreement was unenforceable to the extent it conflicted with a
Pennsylvania statute, because parties cannot expand a court’s jurisdiction by
contract. Id. We added a footnote that “[u]nder Pennsylvania law, a third-
party beneficiary’s rights and limitations in a contract are the same as those
of the original contracting parties.” Id. at 405 n. 1. Similarly, in
Highmark, this Court held that a third-party beneficiary with rights under a
contract could enforce the contract’s arbitration clause. Highmark, 785
A.2d at 99. See also Smay v. E.R. Stuebner, Inc., 864 A.2d 1266, 1272
(Pa.Super.2004) (third-party beneficiary that wanted to assert same claim
as contracting party had to comply with same arbitration requirement,
because that was contracting parties’ intent).
32
Moreover, even if ACBB were not a third-party beneficiary because it has
duties under the employment agreements as well as rights, the result would
be the same, because the subject matter of Daniels’ and Dalvi’s claims does
not require arbitration under the plain language of the arbitration clause in
the employment agreements.
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For these reasons, the lower court properly enjoined Daniels and Dalvi
from prosecuting an action against ACBB and Evans in the American
Arbitration Association.
Order affirmed.
Judge Mundy joins the memorandum.
Judge Bowes files a dissenting memorandum.
Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 3/18/2015
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