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Dillon v. Typaldos

2006 WL 1381625 (N.J. Super. Ch. Div. 2006) (Unpublished)

ARBITRATION — By incorporating the rules of the American Arbitration Association, parties expressly agree that an arbitrator may determine issues of arbitrability.

A technology company was founded to develop and sell technology used to transmit internet broadband information over existing power transmission lines. Three individuals originally engaged by the technology company to manage the creation and marketing of the technology were later terminated. After their termination, the technology company was unable to raise sufficient financing. An individual loaned the technology company money pursuant to promissory notes secured by the assets of the company. The technology company then defaulted on its repayment obligations. The lenders’ assignee foreclosed on the pledged assets, which were sold at a public auction to a purchaser.

The three former employees filed a complaint against the foreclosure purchaser, seeking various relief. After the purchaser filed its responsive motions, the Court advised the former employees that their case had been administratively dismissed for lack of prosecution. The former employees moved to have the matter reinstated. The purchaser moved to dismiss the complaint and to compel arbitration.

First, the Court addressed whether to vacate the administrative dismissal previously entered. The Court explained that it adopts a bright line test that provides that there is a rebuttable presumption that good cause has been shown if restoration is sought within one year of the involuntary dismissal. The Court found that the former employee’s motion was filed within one year of the involuntary dismissal, therefore good cause has been demonstrated and, as the presumption of good cause has not been rebutted, the administrative dismissal was vacated. Notwithstanding, the Court dismissed the complaint and compelled the parties to participate in arbitration. The language of the company’s operating agreement required that the parties arbitrate the kind of claims before the Court. The Court held that even though the company was inactive, it was still technically operating because it had not been legally dissolved.

Next, the Court interpreted the operating agreement and the language of the Federal Arbitration Act (FAA) to determine the arbitrability of the issues in the complaint. It explained that the issue was governed by federal law and that the issue of substantive arbitrability needed to be determined by the arbitrator. However, the general rule is that the issue of substantive arbitrability is for the courts. The Court reasoned that the parties expressly agreed for an arbitrator to determine issues of arbitrability by incorporating the rules of the American Arbitration Association. Thus, the Court concluded that the parties would be bound by the findings of the arbitrator.

Lastly, the Court noted that although it was unnecessary to do so, it considered the purchaser’s cross-motion to dismiss the former employees’ claim for failure to state a claim. The Court explained that in deciding to dismiss a complaint for failure to state a cause of action, courts should search the complaint in depth and with liberality to ascertain whether the fundament of a cause of action may be gleaned even from an obscure statement of claim, opportunity being given to amend if necessary. The Court held that the test to be employed is whether the alleged facts “suggest” a cause of action. Applying those standards here, it found that the former employees failed to allege any facts in their complaint which, if proven, could establish creditor fraud on the part of the purchaser. Thus, the Court granted the purchaser’s motion to dismiss.

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