The Kentucky Supreme Court reversed the trial court and Kentucky Court of Appeals ordering arbitration based on the appropriate documents actually controlling the dispute. The Assumption Agreement between the Bank and its joint obligors was not the source of resolution of the dispute between the jointly liable obligors. The Asset Purchase Agreement between the jointly liable obligors applied to the joint obligors’ dispute among themselves. The Asset Purchase Agreement required arbitration of the joint obligors’ liability to the Bank. The Bank’s claim against the joint obligors arises from the Assumption Agreement, which does not contain arbitration.
In November 2006, Traveler Coal, LLC and its sole owner, Barry Hall, borrowed $6.3 million for a business loan from Community Trust Bank, Inc. of Pikeville (“Bank”.) In 2007, North Fork Collieries, LLC (an affiliate of Prospect Capital Corporation) approached Travelers and Hall about acquiring their business. In February 2008, an Asset Purchase Agreement and Employment Agreement were executed between Traveler, Hall, and North Fork. To obtain the Bank’s consent, an Assumption Agreement was executed, whereby Hall and Traveler agreed to continue to be bound on the original loan as guarantor and primary obligor, respectively, and North Fork agreed to add itself as an additional primary obligor. North Fork and Traveler promised the Bank to “jointly and severally assume and be bound as . . . joint and several primary obligor along with [the other].” All agreements were executed on February 11, 2008.
In August 2009, North Fork notified the Bank of its intent to default and did default on the loan. Hall and Traveler filed suit in Pike Circuit Court against both North Fork and the Bank relying on the Assumption Agreement and Employment Agreement, but not the Asset Purchase Agreement. Both the Employment Agreement and Asset Purchase Agreement contained a New York choice of forum and arbitration provisions. North Fork moved to have the complaint dismissed or stayed in favor of arbitration. The motion was denied in October 2009.
North Fork appealed to the Kentucky Court of Appeals. While the appeal was pending, Hall dismissed his claim based on the employment agreement, without prejudice. The move was an effort to limit his complaint into the Assumption Agreement, which did not have an arbitration clause. The Court of Appeals upheld the trial court on the basis that the Assumption Agreement “arguably superseded the documents [the Employment Agreement and the Asset Purchase Agreement] which did contain arbitration clauses.”
The Kentucky Supreme Court disagreed and reversed. The Assumption Agreement could not reasonably have superseded the Employment Agreement and Asset Purchase Agreement when it was only four pages long and the other two agreements were over 40 pages, collectively. More importantly, Traveler and Hall’s claims against North Fork arose and were controlled primarily by the Asset Purchase Agreement, which did contain an arbitration clause. The Assumption Agreement (and other documents) controlled the liability of North Fork, Travelers and Hall to the Bank.
Both the trial court and appellate court relied on injunctive relief legal standards when deciding the legal standard for a motion to compel arbitration. The Supreme Court rejected that approach and instead analyzed the substantive and procedural differences between motions to compel arbitration and injunctive relief motions. Motions to compel arbitration are a matter of specific performance of an asserted contract right. The court does not weigh the equities of the situation, assess the merits of the controversy or analyze whether “irreparable harm” exists. Instead, the court simply applys ordinary contract law to determine if an agreement to arbitrate actually exists and if so, does it applies to the claims in the complaint. The discretion allowed the trial court is the correct application of the law. The appellate review examines the trial court’s construction of the contract, a pure legal issue.
The Supreme Court concluded that the Assumption Agreement dealt with the promises of North Fork, Travelers and Hall to the Bank. Even if Travelers and Hall were third party beneficiaries of North Fork’s promise to the Bank, the only benefit to Hall under the Assumption Agreement is that North Fork is also jointly and severally liable for the loan debt. The Assumption Agreement concerns North Fork and Hall’s relationship with the Bank, not with each other or which of North Fork, Hall and Travelers ultimately owes what is paid to the Bank. Instead the Asset Purchase Agreement and Employment Agreement govern the relationship between North Fork, Travelers and Hall. In fact, Hall’s complaint identifies the Asset Purchase Agreement as a source of North Fork’s obligation to Traveler and Hall to repay the Bank and to indemnify Traveler and Hall.
Finally, the Supreme Court upheld the arbitration provision in spite of the allegation it was ambiguous. The arbitration provision, included with the forum selection, stated:
Each party hereto consents and agrees that the state or federal courts located in New York County, New York, shall have exclusive jurisdiction to hear and determine any claims or disputes between or among any of the parties hereto pertaining to this agreement, the transaction, and investigation, litigation, or proceeding relating to or arising out of any such matters, any course of conduct, course of dealing, statements (whether verbal or written) or actions of any party to this agreement provided that the parties hereto acknowledge that any appeals from these courts may have to be heard by a court located outside of such jurisdiction and that any such dispute must first be submitted to binding arbitration.
The Court decided that “any such dispute must first be submitted to binding arbitration” was sufficient. The reference to litigation as well as arbitration did not render the provision ambiguous. The parties could have waived arbitration in favor of litigation invoking those provisions, but if the parties opt for arbitration, then the litigation would only take the form of enforcement or challenge to the arbitration award.
The Court also rejected the argument that the Bank is a necessary party to the dispute between Hall and North Fork. The Bank could proceed to recoup its balance against any of the joint primary obligors or guarantors without addressing their priority among themselves or against each other. The Bank’s claim has no bearing on the arbitrability of Traveler and Hall’s claim against North Fork.
The Supreme Court’s opinion clarifies the legal analysis when faced with a motion to compel and adds weight to the enforcement of arbitration provisions when set forth in documents applicable to the dispute between certain of the parties and not others – even when the plaintiff attempts to avoid reliance on the applicable document. The Bank was not a party to any agreement with its joint obligors containing any arbitration provision. Whether the Bank’s claim against the obligors for payment of the loan, which the Supreme Court clearly stated was independent of the obligors dispute among themselves, is now allowed to proceed remains for the trial court to sort out anew.