KATHLEEN M. TAFOYA, Magistrate Judge.
This matter comes before the court on "Plaintiff's Motion to Compel Compliance with ADR Provision Contained in McElliot, LLC Operating Agreement" (Doc. No. 10 [Mot.], filed September 12, 2012). Defendants filed their response on October 4, 2012 (Doc. No. 25 [Resp.]), and Plaintiff filed its reply on October 18, 2012 (Doc. No. 27 [Reply]). The motion is ripe for recommendation and ruling.
The following facts are undisputed for the purposes of this Motion. On July 1, 2005, Plaintiff Westminster Commons Development, LLC ("Westminster") became a member of McElliot, LLC ("McElliot"). (Doc. Nos. 10-1 and 10-2 [Operating Agreement].) On August 30, 2010, for reasons related to the prior existence of a loan default, Westminster and McElliot executed a Membership Interest Termination Agreement ("Termination Agreement"). (Id., Ex. B.) The Termination Agreement provided for the termination of Westminster's membership interest. (Id., Ex. B, ¶ 1.) The Termination Agreement also provided that, upon satisfaction of terms and conditions outlined therein, Westminster would have the right to reinstate its membership interest in McElliot. (Id., ¶ 4.)
Westminster contends that, by November 9, 2010, it had met the terms and conditions, and thereby earned the reinstatement of its membership interest, but that Defendants refused to accept Westminster's performance or reinstate the membership interest. (See Mot.) Westminster contends that the Operating Agreement should be interpreted and applied so as to recognize its membership interest (and allow sharing of profits and losses). (See id.) Defendants contend it should not. (See Resp.)
There is a strong federal policy favoring arbitration for dispute resolution, and this policy "requires a liberal reading of the arbitration agreements." Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 23 n.27 (1983). This means that any doubts concerning the scope of the arbitrable issues should be resolved in favor of arbitration. See id. at 24-25; Coors Brewing Co. v. Molson Breweries, 51 F.3d 1511, 1514 (10th Cir. 1995) ("all doubts are to be resolved in favor of arbitrability"). District courts must defer to arbitration "unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute." United Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582-83 (1960); see also Fuller v. Pep Boys-Manny, Moe & Jack of Del., Inc., 88 F.Supp.2d 1158 (D. Colo. 2000). Additionally, the Federal Arbitration Act, 9 U.S.C. § 1, et seq. ("FAA") codifies a strong federal policy favoring the enforcement of arbitration agreements. Sections 3 and 4 of the FAA permit a Court to compel arbitration when one party has failed or refused to comply with an arbitration agreement. 9 U.S.C. §§ 3-4.
The FAA applies to written arbitration agreements involving commerce. 9 U.S.C. § 2. Under the FAA, "commerce" means interstate commerce. 9 U.S.C. § 1. The FAA is not limited to the interstate shipment of goods; the Act applies to contracts relating to interstate commerce. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 401 n.7 (1967) (quoting H.R.Rep. No. 96, 68th Cong., 1st Sess. 1 (1924)). Where the scope of an agreement is to develop a commercial venture extending beyond state lines, the agreement is within the ambit of the FAA.
Section 3 of the FAA provides that if a suit is brought on the merits of a dispute covered by an arbitration agreement, "the Court in which the suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement . . . ." 9 U.S.C. § 3.
Defendants oppose the motion to compel arbitration on the grounds that (1) McElliot is not a "Member" of itself and therefore cannot be compelled to submit to the Operating Agreement's Alternative Dispute Resolution ("ADR") provision and (2) the ADR provision does not survive the expiration of the Operating Agreement. (See Resp.)
The ADR provision in the Operating Agreement provides that "[a]ny disputes between or among Members relating to the interpretation of the provisions of this Agreement shall, prior to the commencement of litigation, be settled according to the following procedures . . . ." (Doc. No. 10-2, § 11.16.) The procedures set forth include: Designation of Facilitators, Selection from Facilitator List, Dispute Notice, Mediation, Arbitration (under AAA rules), Standards of Conduct, and Costs. (Id. §11.16(a)-(h).)
The Defendants argue that the ADR provision applies only to "[a]ny disputes between or among Members," and because an LLC is not a member of itself, McElliott cannot be compelled to submit to ADR under the Operating Agreement. (Resp. at 4.) Plaintiff counters that, under Arizona law, an operating agreement signed by the members binds the LLC. (Reply at 3-4.)
Here, the Operating Agreement defines a "Manager" as "any Person or Persons who succeeds to the capacity of a manager of the Company pursuant to the provisions of Article 5 of [the] Agreement. Initially, Managers mean those persons identified in Section 5.3."
The Operating Agreement provides that management of the LLC is vested in the managers. (Doc. No. 10-1 at 20, § 5.1.) Managers have the power to:
(Id., § 5.1(d).) Thus, pursuant to Arizona's Limited Liability Company Act, the LLC is bound to the Operating Agreement because the managers signed the Operating Agreement.
In support of their position, and because there is no Arizona case addressing this situation, Defendants cite Mission Residential, LLC v. Triple Net Properties, LLC, 654 S.E.2d 888 (Va. 2008). In Mission, the court determined a derivative claim brought by the plaintiff belonged to the LLC, rather than the LLC member, and the member plaintiff was not the real party in interest. See Mission, 654 S.E. 2d at 891. Here, however, Plaintiff does not bring derivative claims on behalf of the LLC. In Elf Atochem North America, Inc. v. Jaffari, 727 A.2d 286 (Del. 1999), the court applied Delaware's statute governing LLCs to a case in which the members of an LLC, but not the LLC itself, signed the operating agreement. See Jaffari, 727 A.2d at 291-93. The court held that the LLC's failure to sign the operating agreement did not bar the defendants—the LLC and one of its members—from invoking the agreement's arbitration clause against a suit by the other member. 727 A.2d at 293. The court explained that the members of the LLC were the real parties in interest and that the LLC was simply their vehicle. Id. at 293. The court agrees with the reasoning in Jaffari and finds that here, where the plaintiff does not assert a derivative claim, the plaintiff is the real party in interest and can assert its claims against the LLC, whose managers signed the Operating Agreement.
Next, Defendants argue that the ADR provision does not survive expiration of the Operating Agreement because (1) the parties repudiated the ADR provision in the Operating Agreement by signing the Termination Agreement; and (2) the dispute between the parties does not arise under the Operating Agreement. (Resp. at 5-11.)
Defendants argue that after the parties terminated Plaintiff's membership interest in McElliot so that it would have no further force or effect, the parties terminated Plaintiff's status as a member of McElliot such that Plaintiff could no longer benefit from or invoke the ADR provision. (Mot. at 6.) Plaintiff argues, however, that under the clear language of the Operating Agreement, it remains a member. (Reply at 5-6.)
The Operating Agreement defines "Members" as those persons identified on Exhibit A to the Operating Agreement or any other persons who "succeeds" to that capacity.
Quoting the definition of "interest" from the Operating Agreement, Defendants also argue that the parties defined the term "interest" expansively, to encompass not just a member's financial ownership in McElliot, but a member's very status as a member. (Resp. at 6.) The Operating Agreement provides that
(Doc. No. 10-1 at 8, § 2.18.) Thus, Defendants argue that termination of Plaintiff's "membership interest" effected a withdrawal of Plaintiff as a member of McElliot. (Resp. at 6.) Plaintiff argues that the defendants have failed to follow the "basic rule of contract interpretation that `all parts of a contract must be read in harmony to determine its meaning.' " (Reply at 6 [quoting In re Bombay Realty Corp. v. Magna Carta, Inc., 790 N.E.2d 1163, 1165 (N.Y. 2003)].) Plaintiff also argues that Arizona's Limited Liability Company Act provides that a member's interest "means a member's share of the profits and losses . . . and the right to receive distributions of . . . assets." Ariz. Rev. Stat. § 29-601.13. Thus, the plaintiff contends that the Act's definition includes only economic benefits and obligations of a member, and that Defendants' attempts to include non-economic rights held by a member is too broad and contrary to law. (Reply at 7.)
Defendants acknowledge the Act's definition as consisting only of a member's share of profits and losses. (Resp. at 6, n.2.) However, Defendants argue that the Act gives members the freedom to "adopt an operating agreement containing provisions they deem appropriate," including "any provision that is not contrary to law and that relates to the business of the limited liability company . . . and the rights, duties, or powers of its members . . . ." (Id. [citing Ariz. Rev. Stat. § 29-682(A), (B)].) The court agrees with the defendants that the Act allows the members of a limited liability company to define the term "interest" more broadly than its own definition. Nevertheless, the fact remains that, under the express terms of the Operating Agreement, as explained supra, Plaintiff Westminster did not withdraw from the LLC under the conditions permitted in Sections 7.2 or 7.4 of the Operating Agreement. (Doc. No. 10-2 at 4, § 7.5.) Thus, Plaintiff remains a member of McElliot and can be compelled to arbitrate.
Defendants also argue that Plaintiff's claims relate to the Termination Agreement and not the Operating Agreement. (Resp. at 8-11.) Specifically, Defendants argue the only right at issue is a right Westminster allegedly obtained under the Termination Agreement because "the current dispute does not relate to any events that occurred prior to the parties' Termination Agreement . . . ." (Id. at 9-10.)
As previously noted, the ADR provision in the Operating Agreement provides that "[a]ny disputes between or among Members relating to the interpretation of the provisions of this Agreement shall, prior to the commencement of litigation, be settled according to the following procedures . . . ." (Doc. No. 10-2, § 11.16.) Plaintiff argues that, in the Complaint, it alleges Defendants' refusal to recognize rights, privileges, and benefits associated with its membership capacity and membership interest constitutes a breach of several duties, express or implied, that arise under the terms of the Operating Agreement. (Id.) Plaintiff argues these rights, privileges and benefits include (a) the right to enforce the ADR provision (Compl., ¶¶ 98-101); and (b) the right to enforce its economic interest in the LLC. (Id., ¶¶ 103-04.) Upon a review of the Complaint, the court agrees with Plaintiff. Plaintiff alleges (a) McElliot and the Managers' duties of good faith and fair dealing with regard to the exercise of powers and performance of duties owed under the Operating Agreement are owed or have been breached (id., ¶¶ 83-84, 86-87, and 119); and (b) the Managers' duties to refrain from negligence are owed or have been breached (id. ¶¶ 84, 87, 131-35; Operating Agreement §§ 5.3, 5.7(b), 5.9.) This court finds these allegations and claims — pleaded as part of the First, Second, Fourth, and Sixth Claims for Relief
Thus, because any doubts concerning the scope of the arbitrable issues should be resolved in favor of arbitration, Moses H. Cone Mem'l Hosp., 460 U.S. at 23 n.27, this court respectfully
Within fourteen days after service of a copy of the Recommendation, any party may serve and file written objections to the Magistrate Judge's proposed findings and recommendations with the Clerk of the United States District Court for the District of Colorado. 28 U.S.C. § 636(b)(1); Fed. R. Civ. P. 72(b); In re Griego, 64 F.3d 580, 583 (10th Cir. 1995). A general objection that does not put the district court on notice of the basis for the objection will not preserve the objection for de novo review. "[A] party's objections to the magistrate judge's report and recommendation must be both timely and specific to preserve an issue for de novo review by the district court or for appellate review." United States v. One Parcel of Real Prop. Known As 2121 East 30th Street, Tulsa, Okla., 73 F.3d 1057, 1060 (10th Cir. 1996). Failure to make timely objections may bar de novo review by the district judge of the magistrate judge's proposed findings and recommendations and will result in a waiver of the right to appeal from a judgment of the district court based on the proposed findings and recommendations of the magistrate judge. See Vega v. Suthers, 195 F.3d 573, 579-80 (10th Cir. 1999) (a district court's decision to review a magistrate judge's recommendation de novo despite the lack of an objection does not preclude application of the "firm waiver rule"); One Parcel of Real Prop., 73 F.3d at 1059-60 (a party's objections to the magistrate judge's report and recommendation must be both timely and specific to preserve an issue for de novo review by the district court or for appellate review); Int'l Surplus Lines Ins. Co. v. Wyo. Coal Ref. Sys., Inc., 52 F.3d 901, 904 (10th Cir. 1995) (by failing to object to certain portions of the magistrate judge's order, cross-claimant had waived its right to appeal those portions of the ruling); Ayala v. United States, 980 F.2d 1342, 1352 (10th Cir. 1992) (by their failure to file objections, plaintiffs waived their right to appeal the magistrate judge's ruling); but see, Morales-Fernandez v. INS, 418 F.3d 1116, 1122 (10th Cir. 2005) (firm waiver rule does not apply when the interests of justice require review).
