     09-0581-cv
     Baker & Taylor Inc. v.
     AlphaCraze.com Corp.


 1                            UNITED STATES COURT OF APPEALS
 2                                FOR THE SECOND CIRCUIT
 3
 4                                      August Term 2009
 5
 6
 7   (Argued: October 22, 2009                                 Decided: April 28 , 2010)
 8
 9                                     Docket No. 09-0581-cv
10
11                             _____________________________________
12
13                                 BAKER & TAYLOR, INC.,
14                            BAKER & TAYLOR FULFILLMENT INC.,
15                                    Plaintiffs-Appellants,
16
17                                              -v.-
18
19                ALPHACRAZE.COM CORP., ALLAN R. AVERY,
20           LAURA M. AVERY, MICHAEL SHELTON, BRANDI SHELTON,
21                       MIGUEL JAIME, MATTHEW FOY,
22                             Defendants-Appellees.
23                     _____________________________________
24
25   Before:         KEARSE and LIVINGSTON, Circuit Judges, and MAUSKOPF,
26                   District Judge.*
27
28           Plaintiffs-Appellants brought federal court action alleging breach of

29   contract, breach of guaranty, unjust enrichment, quantum meruit, and

30   fraudulent conveyance arising from contracts and guaranties between Plaintiffs-

31   Appellants and various of Defendants-Appellees. The District Court for the



             *
           The Honorable Roslynn R. Mauskopf, of the United States District
     Court for the Eastern District of New York, sitting by designation.
 1   District of Connecticut (Bryant, J.) dismissed each of Plaintiffs-Appellants’

 2   claims in favor of arbitration despite the facts: (1) that neither signatory to the

 3   relevant arbitration agreement sought arbitration; and (2) that the nonsignatory

 4   Defendants-Appellees who did move to dismiss in favor of arbitration disclaimed

 5   any interest in participating in the arbitration or any obligation on their part to

 6   do so. Plaintiffs-Appellants timely appealed.

 7         Vacated and remanded.

 8                                  JOSEPH M. PASTORE III, Fox Rothschild
 9                                  LLP, Stamford, CT (FRANCES CODD
10                                  SLUSARZ, on the brief), for Plaintiffs-
11                                  Appellants.
12
13                                  THOMAS J. DONLON, Robinson & Cole LLP,
14                                  Stamford, CT (BRIAN E. MORAN & WILLIAM
15                                  J. KELLEHER, III, on the brief), for
16                                  Defendants-Appellees Allan R. Avery & Laura
17                                  M. Avery.
18
19                                  JENNIFER A. SADAKA, Gibson & Behman,
20                                  P.C., Middletown, CT, submitted a brief, for
21                                  Defendant-Appellee Miguel Jaime.
22
23   PER CURIAM:

24         Plaintiffs-Appellants Baker & Taylor, Inc. and Baker & Taylor Fulfillment,

25   Inc. (together, “Baker & Taylor”) appeal from an August 6, 2008 decision and

26   order of the United States District Court for the District of Connecticut (Bryant,

27   J.) dismissing their claims against Defendants-Appellees AlphaCraze.com Corp.

28   (“AlphaCraze”), Allan and Laura Avery (“Avery defendants”), Michael Shelton,

                                              2
 1   Brandi Shelton, Miguel Jaime (“Jaime”), and Matthew Foy in favor of

 2   arbitration. The district court erred in dismissing Baker & Taylor’s claims.

 3   Neither Baker & Taylor Fulfillment nor AlphaCraze, the only signatories to the

 4   arbitration agreement at issue here, sought arbitration.     The nonsignatory

 5   Defendants-Appellees who did move to dismiss in favor of arbitration, moreover,

 6   disclaimed any interest in participating in the arbitration and have stated that

 7   they cannot be compelled to arbitrate the Plaintiffs-Appellants’ claims.

 8   Whatever rights to arbitrate that these parties may once have asserted, such

 9   rights have now been waived. We vacate and remand for adjudication of the

10   Plaintiffs-Appellants’ claims against the Defendants other than the Sheltons.1

11                                  BACKGROUND

12         This appeal does not require us to review the district court’s decision on




           1
            Prior to the district court’s decision dismissing the complaint, the
     Shelton defendants filed a Chapter 7 bankruptcy petition, which remains
     pending. Although the district court’s decision stated that “[a]ll claims
     against all defendants must be dismissed,” and the final judgment stated that
     the claim of Baker & Taylor against the Avery defendants “and . . . all
     Remaining Claims” were dismissed, the court’s decision noted that, because of
     the bankruptcy proceeding, “[a]ny action to collect a debt from the Sheltons is
     stayed.” Baker & Taylor correctly acknowledges that it cannot pursue its
     claims against the Sheltons in this appeal in light of the bankruptcy
     proceeding. See, e.g., Commerzanstalt v. Telewide Sys., Inc., 790 F.2d 206,
     207-08 (2d Cir. 1986). The district court may proceed to adjudicate the claims
     of Baker & Taylor against the Sheltons when their bankruptcy proceeding
     has been concluded or when the bankruptcy court has lifted the automatic
     stay imposed by 11 U.S.C. § 362(c).

                                            3
 1   a dispositive motion, but rather presents the question whether the district court

 2   correctly held that Baker & Taylor’s claims should be heard in an arbitral forum.

 3   “Properly considered, this question takes no account of the merits of claims

 4   asserted in the complaint.” Ragone v. Atl. Video at the Manhattan Ctr., 595 F.3d

 5   115, 118 (2d Cir. 2010). The background facts are straightforward.

 6         AlphaCraze is an online retailer.      Baker & Taylor is in the Internet

 7   “fulfillment” business in that it supplies goods and services for companies like

 8   AlphaCraze by filling these companies’ customer orders for items such as books,

 9   calendars, audio products, and video games.           Baker & Taylor, Inc. and

10   AlphaCraze began their relationship as relevant to this dispute on February 1,

11   1999 when they entered into a Drop Ship agreement pursuant to which Baker

12   & Taylor, Inc. filled customer orders on behalf of AlphaCraze. On July 14, 1999,

13   AlphaCraze and Baker & Taylor, Inc. executed a Distribution Agreement that

14   replaced the Drop Ship Agreement and contained many of the same provisions.

15   Neither agreement contains an arbitration clause.

16         According to allegations in Baker & Taylor’s First Amended Verified

17   Complaint (the “Complaint”), including the attached exhibits, after execution of

18   the Distribution Agreement, Baker & Taylor, Inc. obtained guaranties from

19   officers, directors and affiliates of AlphaCraze to protect Baker & Taylor, Inc. “in

20   the event that AlphaCraze did not honor its obligations.”           Miguel Jaime,


                                              4
 1   AlphaCraze’s Chief of Operations, executed a personal guaranty without a

 2   monetary cap on July 16, 1999. Allan Avery, one of AlphaCraze’s directors,

 3   executed three personal guaranties on or before August 23, 2000, on May 17,

 4   2001, and on December 5, 2001 in the amounts of $250,000, $350,000, and

 5   $600,000 respectively. Laura Avery, Allan Avery’s spouse, was also a signatory

 6   on the December 5, 2001 Avery guaranty. The Avery guaranties, made in favor

 7   of Baker & Taylor, Inc., provide that they are given in consideration of that

 8   corporation’s   extension   of   credit   to   AlphaCraze   and   each   guarantor

 9   “unconditionally and absolutely guarantee[s]” AlphaCraze’s punctual payment

10   of obligations “now or hereafter incurred.”        Each guaranty states that it

11   represents “an absolute, present and continuing guaranty of payment . . . and is

12   in no way conditioned or contingent upon an attempt to collect from

13   [AlphaCraze].” The Jaime guaranty is similar, and states that Jaime “personally

14   guarantees the payment [by AlphaCraze] to Baker & Taylor, Inc. . . . of all

15   amounts due and owning now, and from time to time hereafter from

16   [AlphaCraze] to Baker & Taylor[, Inc.].” None of these various guaranties

17   includes an arbitration provision.

18         The Complaint alleges that Baker & Taylor, Inc. established a wholly-

19   owned subsidiary, Baker & Taylor Fulfillment, in 2002, partly for the purpose

20   of affording “lawful sales tax advantages to customers such as AlphaCraze.”


                                               5
 1   Baker and Taylor, Inc. next allegedly assigned “[a]ll prior Agreements between

 2   AlphaCraze and Baker & Taylor, Inc.” to Baker & Taylor Fulfillment. On

 3   September 22, 2004, Baker & Taylor Fulfillment and AlphaCraze executed the

 4   Fulfillment Agreement pursuant to which Baker & Taylor, Inc. thereafter

 5   provided goods and services to fulfill AlphaCraze’s online transactions, but

 6   provided those goods and services through its subsidiary, Baker & Taylor

 7   Fulfillment.

 8         The Fulfillment Agreement contains terms and conditions governing the

 9   relationship between Baker & Taylor Fulfillment and AlphaCraze. Relevant to

10   this dispute, the Fulfillment Agreement contains an arbitration provision

11   stating, in relevant part, as follows:

12         The parties agree to submit to mediation in Charlotte, North
13         Carolina any dispute, controversy or claim arising out of this
14         Agreement or the matters provided for in this Agreement and which
15         has not been resolved by the parties through an informal process
16         within fifteen (15) days after either party notifies the other that a
17         matter is in dispute. If the matter is not resolved through
18         mediation, within 45 days thereafter the parties will submit the
19         matter for arbitration and settlement in Charlotte, North Carolina
20         in accordance with the Rules of the American Arbitration
21         Association (the “Rules”).
22
23   The Fulfillment Agreement annexes two additional guaranties—a corporate

24   guaranty signed by AlphaCraze and a personal guaranty signed by Michael

25   Shelton, AlphaCraze’s President and Chief Executive Officer. Neither of these

26   guaranties, both drawn in favor of Baker & Taylor Fulfillment, has a monetary

                                              6
 1   cap and both provide that if AlphaCraze fails to pay any sums due to Baker &

 2   Taylor Fulfillment, “Guarantor will pay the same . . . together with interest on

 3   any overdue Obligation at the annual rate of eighteen percent (18%).” Like the

 4   other guaranties, neither of these new guaranties contains any arbitration

 5   provision.

 6         According to the Complaint, AlphaCraze became delinquent in its

 7   payments under the Fulfillment Agreement, and allegedly owes Baker & Taylor

 8   $2.7 million for the goods and services provided by Baker & Taylor Fulfillment

 9   between March 2006 and May 2007. Baker & Taylor filed a complaint in district

10   court on December 14, 2007, alleging claims of: (1) breach of the Fulfillment

11   Agreement by AlphaCraze; (2) breach of the Fulfillment Agreement by

12   AlphaCraze at the expense of third-party beneficiary Baker & Taylor, Inc.; (3)

13   breach of AlphaCraze’s guaranty; (4) unjust enrichment against AlphaCraze; (5)

14   quantum meruit against AlphaCraze; (6) breach of guaranty against Allen

15   Avery; (7) breach of guaranty against Laura Avery; (8) breach of guaranty

16   against Michael Shelton; (9) breach of guaranty against Miguel Jaime; (10)

17   fraudulent conveyance against Michael and Brandi Shelton, Michael’s spouse;

18   and (11) violation of the Uniform Fraudulent Transfer Act against Michael and

19   Brandi Shelton.

20         On February 5, 2008, a default entered against AlphaCraze. The Avery


                                            7
 1   defendants filed a motion to dismiss later that month, followed shortly by a

 2   substantially similar motion filed by Jaime. An amended complaint thereafter

 3   added creditor derivative claims for breach of fiduciary duty against AlphaCraze

 4   directors Allen Avery and Matthew Foy.

 5         The Averys and Jaime made numerous arguments in their motions to

 6   dismiss. They argued that Baker & Taylor had failed to state a claim, that their

 7   guaranties had lapsed, did not apply to AlphaCraze’s performance under the

 8   Fulfillment Agreement, or were void for lack of consideration, and that Baker &

 9   Taylor had waived any right to enforce the guaranties.     The motions did not

10   seek to compel arbitration of the breach of guaranty claims—indeed, the Averys

11   explicitly noted in their papers that they were not parties to the arbitration

12   provision in the Fulfillment Agreement and could not be compelled to arbitrate.

13   Instead, the Defendants-Appellees argued—as their final point—that the

14   Fulfillment Agreement required Baker & Taylor to arbitrate with AlphaCraze

15   and that the claims against the Avery defendants and Jaime should be dismissed

16   or stayed in favor of that arbitration.

17         The district court concluded, notwithstanding that neither AlphaCraze nor

18   Baker & Taylor nor, indeed, any other party sought arbitration, that the

19   Fulfillment Agreement’s arbitration provision required dismissal of all of Baker

20   & Taylor’s claims. The court concluded that these claims all “stem from the


                                               8
 1   same debt allegedly owed under the Fulfillment Agreement” and that the claims

 2   are therefore barred by the Fulfillment Agreement’s arbitration clause. Baker

 3   & Taylor, Inc. v. AlphaCraze.com Corp., 578 F. Supp. 2d 374, 379 (D. Conn.

 4   2008). Baker & Taylor timely appealed.

 5                                    DISCUSSION

 6         It is well-accepted that although the presumption in favor of arbitration

 7   is strong, “the obligation to arbitrate nevertheless remains a creature of

 8   contract.” Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc., 252

 9   F.3d 218, 224 (2d Cir. 2001); see also Opals on Ice Lingerie v. Body Lines, Inc.,

10   320 F.3d 362, 369 (2d Cir. 2003). The Federal Arbitration Act’s “‘proarbitration

11   policy does not operate without regard to the wishes of the contracting parties.’”

12   Opals on Ice Lingerie, 320 F.3d at 369 (quoting Mastrobuono v. Shearson

13   Lehman Hutton, Inc., 514 U.S. 52, 57 (1995)); see also MBNA Amer. Bank, N.A.

14   v. Boata, 926 A.2d 1035, 1040 (Conn. 2007). Moreover, “[t]here is . . . nothing

15   irrevocable about an agreement to arbitrate.” 1 Larry E. Edmonson, Domke on

16   Commercial Arbitration § 23:2, at 23-2 (3d ed. 2009) (internal quotation marks

17   omitted) [hereinafter “Domke on Commercial Arbitration”]. “Both of the parties

18   may abandon this method of settling their differences, and under a variety of

19   circumstances one party may waive or destroy by his conduct his right to insist

20   upon arbitration.” Id.


                                             9
 1         The instant matter differs from typical disputes regarding the arbitrability

 2   of claims. This case does not involve one party to an arbitration agreement who

 3   demands to arbitrate with another based on that agreement, and who seeks

 4   judicial enforcement of that demand.          See, e.g., Associated Brick Mason

 5   Contractors of Greater New York, Inc. v. Harrington, 820 F.2d 31, 34 (2d Cir.

 6   1987). Nor is this a situation in which a party to an arbitration agreement

 7   proffers that agreement, along with a demand for arbitration, as a defense in

 8   litigation initiated by the party who allegedly agreed to arbitrate their disputes.

 9   See, e.g., Arciniaga v. Gen. Motors Corp., 460 F.3d 231, 234 (2d Cir. 2006).

10   Finally, this is also not one of those less typical but still frequent cases in which

11   a nonsignatory to an arbitration agreement seeks to compel a signatory to

12   arbitrate a dispute between them. See, e.g., Astra Oil Co. v. Rover Navigation,

13   Ltd., 344 F.3d 276 (2d Cir. 2003). See also Local Union No. 38, Sheet Metal

14   Workers’ Int’l Ass’n v. Custom Air Sys., Inc., 357 F.3d 266, 267 (2d Cir. 2004)

15   (addressing situation in which signatory seeks to compel arbitration with

16   nonsignatory); Domke on Commercial Arbitration, supra § 22:1, at 22-2

17   (describing “typical patterns [that] arise from arbitration disputes”); id. § 13

18   (discussing effect of arbitration agreements on nonsignatories).

19         Here, although Baker & Taylor Fulfillment and AlphaCraze agreed by

20   contract to submit to arbitration disputes arising under the Fulfillment


                                              10
 1   Agreement, Baker & Taylor brought the instant suit, seeking to have its claims

 2   against AlphaCraze adjudicated in the district court. Rather than moving to

 3   compel arbitration, AlphaCraze instead defaulted.           It is only the Avery

 4   defendants and Jaime who espouse arbitration even though the only agreements

 5   signed by them—the guaranties—predate the Fulfillment Agreement and,

 6   unlike that Agreement, do not provide for arbitration. Moreover, although the

 7   Avery defendants and Jaime espouse arbitration between Baker & Taylor and

 8   AlphaCraze, they themselves have expressly declined to participate in any such

 9   arbitration, and view themselves as under no contractual obligation to

10   participate. We know of no authority holding that two parties can be forced to

11   arbitrate against their present wishes, even if they originally signed a contract

12   agreeing to arbitrate, when the only parties espousing arbitration are

13   nonsignatory parties who refuse to participate therein.

14         The Avery defendants argue that a nonsignatory may enforce an

15   arbitration agreement.      The cases on which they rely, however, involve

16   situations in which the nonsignatory has sought to compel a signatory to

17   arbitrate in a proceeding in which the nonsignatory intends to participate –

18   where, as we put it in JLM Indus., Inc. v. Stolt-Nielsen-SA, “a careful review of

19   the relationship among the parties, the contracts they signed . . . , and the issues

20   that had arisen among them discloses that the issues the nonsignatory is


                                              11
 1   seeking to resolve in arbitration are intertwined with the [arbitration]

 2   agreement that [an] estopped [signatory] has signed.” 387 F.3d 163, 177 (2d Cir.

 3   2004) (internal quotation marks omitted). See also Ross v. Am. Express Co., 547

 4   F.3d 137, 143 n.3 (2d Cir. 2008) (noting that where a nonsignatory moves to

 5   compel arbitration with a signatory, “it remains an open question in this Circuit

 6   whether the non-signatory may proceed upon any theory other than estoppel”);

 7   Spear, Leeds & Kellogg v. Cent. Life Assur. Co., 85 F.3d 21 (2d Cir. 1996)

 8   (articulating a third-party beneficiary theory in which a nonsignatory could

 9   invoke contractual arbitration rules of a securities exchange and compel

10   arbitration). Even assuming that the Averys and Jaime had some basis on

11   which to insist on arbitrating their dispute with Baker & Taylor—a matter on

12   which we express no opinion—their explicit disclaimer of any legal obligation to

13   arbitrate and their refusal to do so effectively waives any such claim. See

14   Leadertex, Inc. v. Morganton Dyeing & Finishing Corp., 67 F.3d 20, 24-27 (2d

15   Cir. 1995) (finding waiver of right to compel arbitration). If there might exist

16   circumstances in which a nonsignatory could insist that others arbitrate without

17   himself participating, moreover, neither the Averys nor Jaime have pointed to

18   any facts that would place them in such a group.

19         We conclude, in addition, that AlphaCraze has waived any right to compel

20   arbitration with Baker & Taylor. This case has proceeded in the district court


                                            12
 1   for nearly eight months, during which time Baker & Taylor sought and received

 2   discovery from other defendants and the parties engaged in motions practice

 3   going to the merits. AlphaCraze, which has not appeared or sought to defend

 4   itself in any way, never moved to compel arbitration, but instead defaulted.

 5   Baker & Taylor thereafter sought the entry of a default judgment, which

 6   AlphaCraze has in no way resisted. In such circumstances, AlphaCraze has

 7   waived its right to arbitrate both pursuant to this Court’s case law, see Louis

 8   Dreyfus Negoce S.A., 252 F.3d at 229, and pursuant to North Carolina law, see

 9   Servomation Corp. v. Hickory Constr. Co., 342 S.E.2d 853, 854 (N.C. 1986),

10   which governs the Fulfillment Agreement. See also Domke on Commercial

11   Arbitration, supra § 23:2, at 23-3 (“Often a party will waive the right to

12   arbitration . . . because that party took no affirmative action to commence

13   arbitration.”).

14         The district court determined that the arbitration clause in the Fulfillment

15   Agreement prevented it “from entering judgment against any defendants

16   appearing in this case, in default, or in absentia.” Baker & Taylor, Inc., 578 F.

17   Supp. 2d at 379 (emphasis added). Accordingly, it dismissed the claims against

18   all defendants, including AlphaCraze. Since AlphaCraze never moved to vacate

19   the default entered against it, this was, in effect, a sua sponte vacatur of that

20   default. The only basis for this vacatur was the district court’s erroneous view


                                            13
1   that arbitration was compelled. We therefore reverse the entry of that vacatur

2   as to AlphaCraze and instruct the district court to address Baker & Taylor’s

3   motion for entry of default judgment as to AlphaCraze.

4                                  CONCLUSION

5         For the foregoing reasons, we vacate the judgment of the district court and

6   remand for proceedings consistent with this opinion.




                                           14
