AAL Investments, LLC v. Tsioles, N. ( 2015 )

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NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37
AAL INVESTMENTS, LLC, IN THE SUPERIOR COURT OF
PENNSYLVANIA
Appellant
v.
NICHOLAS TSIOLES AND THEODORE
TSIOLES,
Appellee No. 799 MDA 2014
Appeal from the Order Entered April 7, 2014
In the Court of Common Pleas of Luzerne County
Civil Division at No(s): 2013-4649
BEFORE: BENDER, P.J.E., OLSON AND OTT, JJ.
MEMORANDUM BY OLSON, J.: FILED APRIL 01, 2015
Appellant, AAL Investments, LLC, appeals from an order entered on
April 7, 2014 in the Civil Division of the Court of Common Pleas of Luzerne
County. The April 7, 2014 order sustained preliminary objections filed on
behalf of Appellees, Nicholas Tsioles and Theodore Tsioles, which alleged
that Appellant’s complaint was subject to compulsory arbitration. In
addition, the order dismissed Appellant’s complaint without prejudice. We
quash but remand with directions to the trial court, upon motion of a party,
to reinstate Appellant’s complaint and stay the action pending the resolution
of the arbitration proceeding.
The trial court aptly summarized the relevant facts as follows:
In 2008, [Appellant] and Nicholas Tsioles entered into an [a]sset
[p]urchase and [s]ale [a]greement that was signed by Nicholas
Tsioles and [Appellant]. Theodore Tsioles did not execute the
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[a]greement. According to the [a]sset [p]urchase and [s]ale
[a]greement, [Appellant] agreed to purchase a Curry Donut from
Nicholas Tsioles. [Appellant] also agreed to purchase the
machinery, equipment, furniture and fixtures for one hundred
thousand ($100,000[.00]) dollars. [Nicholas] Tsioles was to
deliver a bill of sale and assignment for assets to [Appellant].
Thereafter, [Appellant] was to execute a judgment note and the
parties agreed to enter into a [l]ease and [f]ranchise
[a]greement. The agreements were to be executed
simultaneously at the closing.
At the time of closing, [Appellant] executed a [p]romissory
[n]ote and entered into a [l]ease [a]greement with Tsioles,
however, the parties never entered into a [f]ranchise
[a]greement.
Trial Court Opinion, 9/10/14, 2-3.
On April 15, 2013, Appellant filed a complaint alleging that Appellees
committed fraud and violated the Pennsylvania Unfair Trade Practices and
Consumer Protection Law (UTPCPL). Count I of Appellant’s complaint
alleged that Appellees made false and fraudulent representations to induce
Appellant to enter into the asset purchase and sale agreement and the lease
agreement. Count II of the complaint alleged that Appellees engaged in
unfair means of competition and deceptive acts in violation of the UTPCPL.
Appellees filed preliminary objects, together with a brief in support, on May
13, 2013. Among other things, Appellees argued that Appellant’s complaint
should be dismissed under Pa.R.C.P. 1028(a)(6) for failure to submit claims
to arbitration pursuant to paragraph nine of the asset purchase and sales
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agreement.1 On May 29, 2013, Appellant filed preliminary objections to
Appellees’ preliminary objections.
By agreement of counsel, the parties waived oral argument and
submitted the matter for a decision on the briefs. Letter from Counsel for
Appellees to Trial Court, 2/11/14. On April 7, 2014, the trial court sustained
Appellees’ preliminary objections and dismissed Appellant’s complaint
without prejudice. Trial Court Order, 4/7/14. Specifically, the trial court
held that it lacked jurisdiction to entertain the parties’ dispute under the
arbitration clause found in the asset purchase and sale agreement.
Appellant timely filed this appeal on April 28, 2014. After Appellant filed its
court ordered concise statement of errors complained of on appeal, the trial
court issued its opinion on September 10, 2014.
Appellant raises a single question for our review:
Did the [trial court] err in failing to adjudicate [Appellant’s] fraud
in the formation of the contract claim and as such attempted to
enforce an arbitration clause within the contract itself?
Appellant’s Brief at 4.
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1
The arbitration clause provides as follows:
9. Dispute. Any dispute under this [a]greement shall be settled
by arbitration in Luzerne County, Pennsylvania, under the rules
of the American Arbitration Association. The decision of the
arbitrators shall be final and binding on the parties.
Asset Purchase and Sale Agreement, 2008, Paragraph 9.
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On appeal, Appellant challenges an order that dismissed its complaint
without prejudice on grounds that the presence of an arbitration clause in
the parties’ contract defeated jurisdiction in the court of common pleas. “An
order directing arbitration, whether statutory or common law, is an
interlocutory order and is not immediately appealable.” Schantz v.
Dodgeland, 830 A.2d 1265, 1266 (Pa. Super. 2003), quoting Rosy v.
National Grange Mut. Ins. Co., 771 A.2d 60, 61 (Pa. Super. 2001). Trial
court orders that direct enforcement of arbitration clauses do not address
the merits of a case but merely transfer the respective matters to another
forum. See Fastuca v. L.W. Molnar & Assoc., 950 A.2d 980, 986 (Pa.
Super. 2008), aff’d, 10 A.3d 1230 (Pa. 2011). Hence, such orders are not
final and appeals from them are not subject to immediate appellate review.
Schantz, 830 A.2d at 1266.
Appellant’s efforts to avoid enforcement of the arbitration clause in the
parties’ agreement are unavailing. Appellant does not allege that his claims
in the present case fall outside the scope of the arbitration clause found in
the parties’ asset purchase and sales agreement. Instead, Appellant cites
various pre-contractual promises that Appellees allegedly failed to fulfill2 and
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2
Appellant relies on the following promises: 1) Appellees’ alleged
agreement to furnish a franchise contract giving Appellant exclusive rights to
operate a “Curry Donuts” shop within Pittston City in Luzerne County; 2)
Appellees’ agreement to supply new equipment for on-site production of
donuts and related products; and, 3) Appellees’ agreement to allow
(Footnote Continued Next Page)
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argues that we should deem the parties’ contract void ab initio, not merely
voidable. Because the contract is void, Appellant reasons that all aspects of
the agreement, including an embedded arbitration clause, are
unenforceable. See Appellant’s Brief at 16-17, citing FDA Packaging, Inc.
v. Advance Personnel Staffing, Inc., 73 Pa. D & C 4th 420, 429 (Pa. Com.
Pl. Berks County). These contentions lack merit.
The doctrine of severability requires enforcement of an arbitration
clause included in a voidable contract but does not permit enforcement when
the contract is void ab initio.3 Id. The distinction between a contract that is
void, and one that is merely voidable, turns on whether there has been fraud
in the execution of the agreement (also referred to as fraud in the factum)
_______________________
(Footnote Continued)
Appellant to use the Curry Donuts name at a satellite location. See
Appellant’s Brief at 11-12.
3
Pennsylvania law incorporates this principle by statute. Section 7303 of
the Judicial Code, which addresses the validity of an agreement to arbitrate
claims, states in relevant part:
§ 7303. Validity of agreement to arbitrate
A written agreement to subject any existing controversy to
arbitration or a provision in a written agreement to submit to
arbitration any controversy thereafter arising between the
parties is valid, enforceable and irrevocable, save upon such
grounds as exist at law or in equity relating to the validity,
enforceability or revocation of any contract.
42 Pa.C.S.A. § 7303.
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or fraud in the inducement. The District Court for the Eastern District of
Pennsylvania succinctly articulated the difference between these principles:
Courts “classically” distinguish between two types of fraud, fraud
in the factum and fraud in the inducement. 26 Samuel Williston,
A Treatise on the Law of Contracts § 69:4 (Richard A. Lord ed.,
4th ed.1990); see also 7 Arthur Linton Corbin, Corbin on
Contracts § 28.22 (Joseph M. Perillo ed., rev. ed. 1993)
(distinguishing between fraud in the factum and fraud in the
inducement). In cases where one party's assent has been
procured by fraud in the factum, courts treat the agreement as
void and legally ineffective. See, e.g., Resolution Trust Corp.
v. Koock, 867 F.Supp. 284, 287 (E.D. Pa. 1994) (Robreno, J.)
(“[F]raud in the factum ... would render the [agreement] void
....”); see also Restatement (Second) of Contracts § 163
(1981). When, however, there is fraud in the inducement, the
agreement is voidable at the option of the defrauded party.
See, e.g., Langley v. FDIC, 484 U.S. 86, 94, 108 S.Ct. 396, 98
L.Ed.2d 340 (1987) (recognizing that “fraud in the inducement
... renders [a contract] voidable but not void”); see also
Restatement (Second) of Contracts § 164 (1981).
* * *
Fraud in the factum occurs when “fraud ... procures a party's
signature to an instrument without knowledge of its true nature
or contents.” FDIC v. Deglau, 207 F.3d 153, 171 (3d Cir.
2000) (quoting Langley v. FDIC, 484 U.S. 86, 93, 108 S.Ct.
396, 98 L.Ed.2d 340 (1987)); see also Restatement (Second) of
Contracts § 163 & cmt. a (1981) (defining fraud in the factum as
“a misrepresentation as to the character or essential terms of a
proposed contract”). “Fraud in the inducement, on the other
hand, does not involve terms omitted from an agreement, but
rather allegations of oral representations on which the other
party relied in entering into the agreement but which are
contrary to the express terms of the agreement.” Dayhoff Inc.
v. H.J. Heinz Co., 86 F.3d 1287, 1300 (3d Cir.1996); see also
Restatement (Second) of Contracts § 164.
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Giannone v. Ayne Institute, et al., 290 F.Supp.2d 553, 561 (E.D. Pa.
2003).4
Appellant’s claims in the present case assert only fraud in the
inducement, not fraud in the execution. Hence, the parties’ agreement is
merely voidable, not void. Appellant’s complaint attaches the parties’ asset
purchase and sale agreement, but does not allege that the attached
agreement was not intended to consummate the parties’ transaction.
Appellant makes no claim that the arbitration clause was procured by fraud
or was inserted after its review. The thrust of Appellant’s position is that
Appellees fraudulently misrepresented their intent to comply with the terms
of the parties’ agreement. See Complaint, 4/15/13, at ¶¶ 4-31 (setting
forth Appellant’s fraud allegations); Asset Purchase and Sales Agreement,
2008, at 1, 2, and 4 (¶¶ 1 and 4(d)) (listing items conveyed under the
agreement and setting forth terms relating to execution of franchise
agreement). As such, we conclude that Appellant’s complaint sought relief
for “oral representations on which [Appellant] relied in entering into the
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4
The Restatement goes on to explain that void contracts generally arise in
cases of forgery of a party's name or unauthorized execution of an
agreement on behalf of another party. See e.g., Restatement (Second) of
Contracts §7 cmt. a. Whereas, voidable contracts involve agreements that
allegedly are tainted by unconscionability, duress, misrepresentation, fraud,
or other bad faith conduct. See e.g., Restatement (Second) of Contracts §7
(1981).
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agreement but which [were] contrary to the express terms of the
agreement. See Giannone, 290 F.Supp.2d at 561-562. Thus, no relief is
warranted. Id. at 560 (“courts should adjudicate issues involving fraud in
the inducement of an arbitration clause, but arbitrators should determine
whether there has been fraud in the inducement of an entire contract”).
Although the trial court correctly determined that Appellant’s claims
are subject to compulsory arbitration, we discern an error in the trial court’s
dismissal of Appellant’s claims without prejudice. We confronted a similar
situation in Schantz, supra. In that case, we observed:
[The a]ppellant argues that he has effectively been put out of
court because the trial court dismissed his complaint. Such
action was improper. In Maleski v. Mutual Fire, Marine and
Inland Ins. Co., 633 A.2d 1143 (Pa. 1993), our Supreme Court
considered the appeal of the state insurance commission which
sought review of an order granting the appellees, insurance
companies', motion to compel arbitration and dismissing the
appellant's complaint. The Supreme Court began by noting that
an appeal from an order directing arbitration is interlocutory;
thus, the appeal had to be quashed. However, it further held
that the original court action should have been stayed pending
arbitration. The Court found a stay was required pursuant to
Section 7304[(d)] of the Pennsylvania Arbitration Act, 42
Pa.C.S.A. § 7304. It provides in part that an action “involving an
issue subject to arbitration, shall be stayed if a court order to
proceed with arbitration has been made.” Id. The Supreme
Court ruled that a stay of the court action pending arbitration
was required by statute which made the order appealed from
interlocutory. The Court then quashed the appeal.
Shantz, 830 A.2d at 1266 (parallel citations omitted).
In this case, the trial court held that Appellant’s claims should proceed
to arbitration, yet the court dismissed Appellant’s claims without prejudice.
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Section 7304(d) of the Pennsylvania Arbitration Act requires a stay of
judicial proceedings where an issue is referred to arbitration. A stay is
necessary, among other reasons, to preserve Appellant’s claims in the event
the limitations period were to close while the arbitration proceedings
remained ongoing. Thus, in accordance with Maleski, Schantz, and 42
Pa.C.S.A. § 7304(d), we conclude the trial court improperly dismissed the
proceedings before it after referring the matter to arbitration. We thus
direct the trial court, upon motion of a party, to reinstate Appellant's
complaint and stay the action pending the resolution of the arbitration
proceeding.
Appeal quashed. Jurisdiction relinquished.
Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 4/1/2015
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