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O’Rourke v. Kestler

A-5651-06T3 (N.J. Super. App. Div. 2008) (Unpublished)

ARBITRATION — Just because the same parties hold interests in two related companies does not mean that where one ownership agreement calls for arbitration and the other does not, that the parties are required to arbitrate disputes solely involving the business entity with the agreement that did not require arbitration.

Three individuals each held a one-third interest in two companies. One, a corporation, was a manufacturing concern. It leased real property from the other, a limited liability company. Although a shareholder agreement for the manufacturing company had been prepared, it was never executed. The limited liability company, on the other hand, had an operating agreement and it required that “controversies or claims arising out of or related to this Agreement ...” be subject to arbitration.

Two of the manufacturing corporation’s shareholders terminated the third’s employment. The third shareholder filed a demand for arbitration. The other two filed an objection to arbitration, contending that the arbitrator “did not have jurisdiction of the dispute.” When the arbitrator “determined that it had the power to decide jurisdictional issues,” the two shareholders sued and obtained an order to show cause. The lower court then enjoined the arbitration proceeding, finding that “the gravamen of [the fired employee-shareholder’s] claim was his termination of his employment with” the manufacturing corporation. On appeal, the Appellate Division held that there was never an agreement “to arbitrate any dispute concerning the ownership, management and operation of” the manufacturing corporation. It recognized that the parties “had agreed to arbitrate disputes concerning the ownership and management of the realty company but [the fired employee-shareholder’s] dispute was unrelated to the ownership or operation of that entity.”

The Court also agreed with the lower court “that the submission of an objection to arbitration could not be considered a waiver of [the objector’s] right to a judicial determination of the appropriate forum to resolve the wrongful termination dispute or an implicit submission of the dispute to the arbitrator.” The lower court, again with the Appellate Division’s approval, “held that the cases requiring a non-signatory to arbitrate a dispute, ..., were inapplicable because [the two remaining shareholders] were neither agents nor the beneficiaries of a signatory to an arbitration agreement.”

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