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CVD Equipment Corp. v. Development Specialists, Inc

Court of Chancery of Delaware

July 23, 2015

CVD Equipment Corp.
Development Specialists, Inc.

Submitted: July 23, 2015.

Vernon Proctor, Esquire Aaron Nelson, Esquire Proctor Heyman Enerio LLP.

Christopher A. Ward, Esquire, Christopher M. Coggins, Esquire, Polsinelli PC.

Dear Counsel:

This matter arises in a peculiar procedural posture.[1] Plaintiff CVD Equipment Corporation (the "Seller") entered into a purchase agreement with Stion Corporation (the "Buyer") for the sale of certain equipment (the "Purchase Agreement"), which Purchase Agreement included an arbitration clause. Eventually, the Buyer became insolvent and assigned its assets for the benefit of creditors, under California law, to Defendant Development Specialists, Inc. (the "Assignee"). The Assignee sold the Buyer's tangible assets but retained choses in action. According to the Assignee, the Seller was in breach of the Purchase Agreement, and the Assignee brought a complaint in arbitration, seeking damages for the breach. The Seller challenged the Assignee's standing and, relatedly, the arbitrator's jurisdiction to hear the matter; it reserved, however, the right to raise the same issues in this Court. The arbitrator, E. Norman Veasey, Esquire, determined that the Assignee had standing to bring the action and that the Purchase Agreement conferred jurisdiction upon him to hear the matter. The Seller brought this action seeking to enjoin the arbitration and has moved for such injunctive relief.[2] The Assignee asks me to dismiss this matter for lack of subject matter jurisdiction, arguing that the Purchase Agreement provides a remedy before the arbitrator. I agree with the latter proposition, and accordingly grant the Assignee's Motion to Dismiss.

The facts before me are not in dispute, and the parties agree that the Seller is entitled to a de novo determination of the jurisdiction/standing question. The parties also agree that the Purchase Agreement contains a broad arbitration clause and incorporates the rules of the American Arbitration Association, and that normally under those circumstances, pursuant to our Supreme Court's decision in James & Jackson, LLC v. Willie Gary, LLC, [3] questions of substantive arbitrability are for the arbitrator to determine.[4] Nevertheless, the Seller argues that here I must rule, as a matter of law, that it has no contractual duty to arbitrate with the Assignee, a stranger to the Purchase Agreement between the Seller and the Buyer. It argues that the question of whether there is a contract to arbitrate between these parties is a predicate question that must be resolved by this Court, and not a matter of substantive arbitrability to be presented to the arbitrator. For its part, the Assignee asks that I find, as a matter of law, that an assignee for the benefit of creditors under California law stands in the shoes of the assignor and therefore may, as a matter of law, exercise any contractual right that could have been exercised by the assignor.[5] Because this case can be decided more narrowly, I decline both of these invitations.

The peculiar factual predicate to this case is significant: the Seller agreed with the Buyer in the Purchase Agreement that "[a]ny claim or controversy arising out of or relating to this Purchase Agreement or the breach of this Purchase Agreement shall be resolved by binding arbitration in or around the State of Delaware by a single arbitrator under the commercial rules of the American Arbitration Association then in effect."[6] The Assignee seeks to present a claim for breach of contract to the arbitrator that is clearly within this broad arbitration language. The Seller, therefore, is signatory to and bound by a contract under which it is compelled to arbitrate the issue which the Assignee has placed before the arbitrator. The standing and jurisdictional questions that the Seller seeks to raise, in that context, are questions of scope: Was the arbitration provision drafted broadly enough to include disputes arising from the Purchase Agreement brought not by a signatory to that contract, but by an assignee of that signatory pursuant to an assignment for the benefit of creditors? The Seller concedes, consistent with Willie Gary, that it agreed in the Purchase Agreement that questions of substantive arbitrability would be decided by the arbitrator. The question of scope described above, is just such a question.[7]

In light of this context, the only issue I must, and may, decide is whether the Assignee's position-that an action for breach of contract brought by an assignee for the benefit of creditors is within the scope of the agreement to which the Seller is bound-constitutes a non-frivolous legal claim.[8] The Seller contends that the Assignee's position is frivolous for two reasons. First, the Seller points out that there is a provision in the Purchase Agreement entitled "No Assignments, " and argues that, since that clause does not expressly grant the Buyer the right to assign rights and responsibilities under the Purchase Agreement, the underlying action for breach of contract is not maintainable by the Assignee, in arbitration or elsewhere. The Assignee counters with a non-frivolous argument that the clause by its language grants, not restricts, specific assignment rights, and that nothing in the language of the clause prohibits assignment of any rights by the Buyer.[9] In fact, the Assignee asserts that the only evidence of an attempt to restrict assignability is the title of the clause, "No Assignments, " and that even that title is merely an artifact of an entirely different version of the clause that the parties changed in the drafting process.[10]

Next, the Seller contends that it cannot have intended via the Purchase Agreement to agree to arbitrate with an entity it was not aware of at the time of contracting, and that the Assignee should be limited to proceeding on its assigned claim in a court, rather than before an arbitrator. The Assignee, on the other hand, maintains that its status as an assignee for the benefit of creditors attempting to vindicate the Purchase Agreement through a money judgment leaves the Seller and the Assignee in the precise positions they would have assumed without the Buyer's insolvency, if the Buyer itself were pursuing the claim. The Assignee further argues that by contracting, broadly, to arbitrate "all claims" arising from the Purchase Agreement, the Seller did manifest its intent to be bound to arbitrate under the circumstances here.

The Assignee's position, in my view, is not frivolous. Given that, I must resist any temptation to decide the matter and leave the decision to the arbitrator. Since the Seller contractually agreed to be bound on questions of substantive arbitrability by the arbitrator, a complete contractual remedy exists in arbitration, and I am without jurisdiction.

For the foregoing reasons, the Assignee's Motion to Dismiss is granted, and the Seller's request for injunctive relief is moot. IT IS SO ORDERED.


Sam Glasscock III Vice ...

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