Pei Chuang v. OD Expense, LLC

243 F. Supp. 3d 553, 2017 WL 1095026, 2017 U.S. Dist. LEXIS 40913
CourtDistrict Court, D. Delaware
DecidedMarch 22, 2017
DocketCiv. No. 1:16-cv-00915-RGA
StatusPublished
Cited by1 cases

This text of 243 F. Supp. 3d 553 (Pei Chuang v. OD Expense, LLC) is published on Counsel Stack Legal Research, covering District Court, D. Delaware primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Pei Chuang v. OD Expense, LLC, 243 F. Supp. 3d 553, 2017 WL 1095026, 2017 U.S. Dist. LEXIS 40913 (D. Del. 2017).

Opinion

MEMORANDUM ORDER

Richard G. Andrews, United States District Judge

Pending 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.

BACKGROUND

Plaintiff 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”) pre-existing 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. (Id.).

The 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).

After 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 [555]*555his 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. (D.I. 11).

At 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).

Defendants argue that both of these provisions mandate arbitration of the dispute.

DISCUSSION

Neither the Operating Agreement nor the Supply Agreement mandate arbitration between Plaintiff and the named Defendants.

First, 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.”)).

Defendants 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.1 (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 deci[556]*556sions. 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.

Second, 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 Kaufman and Regeneration ’ Shanghai, and no evidence at " all of any relationship between the other Defendants and Regeneration Shanghai.

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243 F. Supp. 3d 553, 2017 WL 1095026, 2017 U.S. Dist. LEXIS 40913, Counsel Stack Legal Research, https://law.counselstack.com/opinion/pei-chuang-v-od-expense-llc-ded-2017.