United States District Court, D. Delaware
before the Court is Defendants' motion to compel
arbitration and stay this action. (D.I. 11). Plaintiff
opposes arbitration. (D.I. 14). For the reasons set forth
below, Defendants' motion is DENIED.
Pei Chuang entered into two separate agreements in connection
with what he believed was the purchase of pre-initial public
offering shares in the Chinese company OD Dragon Corporation
("OD Dragon"). (D.I. 1 at ¶¶ 20-21). In
actuality, Plaintiff obtained shares in a different company,
OD Expense, LLC ("OD Expense"). (Id. at
¶ 24). OD Expense was created to raise funds to pay off
Defendant Regeneration Capital Group, LLC's
("RCG") preexisting expense obligations to OD
Dragon. (Id. at ¶¶ 34-35). Plaintiffs
ownership interest in OD Expense only allowed him to receive
shares in OD Dragon upon a successful initial public offering
("IPO") of OD Dragon. (7c?.).
first agreement, a Class C Membership Interest Subscription
Agreement (the "Subscription Agreement"), was
executed on October 10, 2013 between Plaintiff and Defendant
Richard Kaufman, acting on behalf of Defendant OD Expense.
(D.I. 1-3 at 4). The Subscription Agreement provided for the
issuance of 796 shares in OD Expense for an aggregate price
of $398, 000. (Id.). Attached to the Subscription
Agreement was the Operating Agreement of OD Expense (the
"Operating Agreement"). (D.I. 1-3 at 5). The second
agreement, a Supply of Consulting Services Agreement (the
"Supply Agreement"), was executed on October 10,
2013 between Plaintiff and Kaufman, acting on behalf of
non-party Regeneration Capital Group LLC Shanghai Office
("Regeneration Shanghai"). (D.I. 1-4 at 13).
Pursuant to the Supply Agreement, Regeneration Shanghai was
to provide Plaintiff with "comprehensive investment
consulting services ... for the purpose of conducting due
diligence on potential investments in Chinese
businesses." (Id. at 3).
the agreements were executed, Plaintiff wired $100, 000 to OD
Expense pursuant to the terms of the Subscription Agreement.
(D.I. 12 at 5). Plaintiff also wired within China 1, 822, 737
renminbi, which was the equivalent of $298, 000, to
Regeneration Shanghai pursuant to the terms of the Supply
Agreement. (Id.). Following these transfers,
Plaintiff received updates on the status of the potential
IPO, but was ultimately informed that there would be no IPO.
(D.I. 1 at ¶¶ 39-41). On July 3, 2014, Plaintiff
sought a refund of his investment. (Id. at ¶
44). Kaufman stated that a refund was not possible at that
time, and on September 21, 2016, Plaintiff learned that OD
Expense had spent all of his money on due diligence.
(Id. at ¶¶ 44, 49). Plaintiff then
commenced this action on October 7, 2016 against the named
defendants seeking to recover $398, 000. (D.I. 1). In
response, Defendants filed a motion to compel arbitration and
stay this action pending the outcome of those arbitrations.
issue are the arbitration clauses contained in the Operating
Agreement and the Supply Agreement. Section 11.10 of the
Operating Agreement states, "Except as otherwise
provided in this Agreement, any dispute arising out of this
Agreement shall be submitted to the American Arbitration
Association for resolution. The arbitration shall be
scheduled to take place in New York, New York ... ."
(D.I. 1-3 at 20). Section 19 of the Supply Agreement requires
good faith negotiation between the parties to resolve
disputes arising in connection with the Supply Agreement, and
further states, "If both parties fail to settle the
dispute through such negotiation, either party may submit the
dispute to China International Economic and Trade Arbitration
Commission, Shanghai Sub-commission ("CIETAC") for
arbitration in Shanghai in accordance with its rules and
regulations then effective." (D.I. 1-4 at 11).
argue that both of these provisions mandate arbitration of
the Operating Agreement nor the Supply Agreement mandate
arbitration between Plaintiff and the named Defendants.
the arbitration provision in Section 11.10 of the Operating
Agreement is ambiguous and therefore cannot be enforced as
written. The Third Circuit has held that arbitration clauses
must be clear and unequivocal in order to force parties to
arbitrate their disputes. See Sandvik AB v. Advent
Int'l Corp., 220 F.3d 99, 106 (3d Cir. 2000)
(quoting Par-Knit Mills, Inc. v. Stockbridge Fabrics
Co., 636 F.2d 51, 54 (3d Cir. 1980) ("Before a
party to a lawsuit can be ordered to arbitrate and thus be
deprived of a day in court, there should be an express,
unequivocal agreement to that effect.")).
argue that Section 11.10 mandates arbitration as the
exclusive means of dispute resolution. (D.I. 12 at 14-15).
Section 11.10 of the Operating Agreement, however, states,
"Except as otherwise provided in this
Agreement, any dispute arising out of this Agreement
shall be submitted to the American Arbitration Association
for resolution." (D.I. 1-3 at 20) (emphasis added).
Defendants have not offered a convincing explanation for the
italicized qualifying language. Plaintiff points to the
jurisdiction and venue clause of Section 11.8 as the
exception referenced in Section 11.10, arguing that the
Operating Agreement intended to allow parties to litigate in
Delaware. (D.I. 14 at 11-12). This is a reasonable
interpretation of the qualifying language in Section 11.10.
Defendants assert that Section 11.8 does not mandate all
disputes be heard in the courts of Delaware, but instead
specifies where motions relating to enforcing or vacating
arbitration decisions should be filed. (D.I. 12 at 15).
Defendants, however, drafted the Operating Agreement, and had
they wanted this interpretation to govern, they should have
specifically stated in the Operating Agreement that Section
11.8 applies only to enforcement of arbitration decisions.
Instead, Defendants phrased Section 11.8 to apply to
"any action arising out of a dispute under or in
connection with this Agreement." (D.I. 1-3 at 20).
Section 11.8 makes no reference to the arbitration clause in
Section 11.10. If it were to be so limited as Defendants
suggest, it might be expected that it would say so.
the arbitration clause in the Supply Agreement does not cover
these Defendants. The arbitration provision in Section 19 of
the Supply Agreement is clear by its terms; however, it
cannot be enforced because Regeneration Shanghai is not a
party to this litigation and Kaufman's relationship to
Regeneration Shanghai is unclear. Defendants assert that even
though none of them are signatories to the Supply Agreement,
they may compel arbitration because Kaufman acted as an agent
of Regeneration Shanghai when he signed the Supply Agreement
on its behalf. (D.I. 15 at 9). Other than the signature page
of the Supply Agreement, though, Defendants present no
evidence of an agency relationship between Kaufmann and
Regeneration Shanghai, and no evidence at all of any
relationship between the other Defendants and Regeneration
also argue they have standing to enforce the arbitration
provision in Section 19 because the Supply Agreement was
incorporated by reference into the Subscription Agreement,
which OD Expense signed. (Id.). This argument is
unpersuasive because the Supply Agreement was only referenced
in the recitals portion of the Subscription Agreement and the
Subscription Agreement lacked an incorporation by reference
clause. Although the Third Circuit in Standard
Bent Glass Corp. v. Glassrobots Oy permitted
incorporation by reference in the absence of an express
incorporation by reference clause, that case is
distinguishable on its facts because the intent to
incorporate by reference was clear. 333 F.3d 440 (3d Cir.
2003). In Standard Bent Glass, the agreement between
the parties stated that "matter[s] shall be submitted to
arbitration as set out later in this Agreement."
Id. at 447. The agreement then specified that the
document containing the arbitration clause would apply
"[a]s to the other conditions" in the agreement.
Id. Additionally, the ...