ABU NASER HOSSAIN v. JMU PROPERTIES, LLC , 147 A.3d 816 ( 2016 )

District of Columbia
Court of Appeals
No. 15-CV-145
OCT 20 2016
ABU NASER HOSSAIN, et al.,
Appellants,
v. CAB-8692-12
JMU PROPERTIES, LLC, et al.,
Appellees.
On Appeal from the Superior Court of the District of Columbia
Civil Division
BEFORE: FISHER and BLACKBURNE-RIGSBY, Associate Judges; and KING,
Senior Judge.
JUDGMENT
This case came to be heard on the transcript of record and the briefs filed,
and was argued by counsel. On consideration whereof, and as set forth in the
opinion filed this date, it is now hereby
ORDERED and ADJUDGED that the judgment is vacated and the case
is remanded for further proceedings consistent with this opinion.
For the Court:
Dated: October 20, 2016.
Opinion by Senior Judge Warren R. King.
Notice: This opinion is subject to formal revision before publication in the
Atlantic and Maryland Reporters. Users are requested to notify the Clerk of the
Court of any formal errors so that corrections may be made before the bound
volumes go to press.
DISTRICT OF COLUMBIA COURT OF APPEALS
No. 15-CV-145 10/20/16
ABU NASER HOSSAIN, et al., APPELLANTS,
V.
JMU PROPERTIES, LLC., et al., APPELLEES.
Appeal from the Superior Court of the
District of Columbia
(CAB-8692-12)
(Hon. Maurice A. Ross, Trial Judge)
(Argued March 24, 2016 Decided October 20, 2016)
Brian P. Murphy for appellants.
Alex Chanthunya for appellees.
Before FISHER and BLACKBURNE-RIGSBY, Associate Judges, and KING,
Senior Judge.
KING, Senior Judge: Following a bench trial, appellants Profound Radiance,
Inc. (“PRI”) and Abu Naser Hossain were found liable on a counter-claim and 3rd-
party complaint for breaching a commercial lease, breaching a franchise
agreement, and fraud, for which the trial court entered a $391,640.82 judgment in
appellees’ favor. They now claim the trial court erred by denying their motion to
2
enforce an arbitration clause in a franchise agreement between the parties,
erroneously entering judgment on behalf of Mickey Sood (“Sood”) and on behalf
of a 3rd-party (“JMU Tax”) not named in the original complaint, and entering
judgment on behalf of a party (“JMU Properties”) for damages under a franchise
agreement to which it was not a party.
We conclude that the trial court did not err in entering a judgment in
appellee Mickey Sood’s name because the circumstances surrounding both the
lease and franchise agreement clearly show he was an intended 3rd-party
beneficiary of both agreements. However, we also conclude that the judgment
should be reformed consistent with the instructions set forth infra. We are also
satisfied that the trial court did not err in issuing an order, based on waiver,
denying appellants’ motion to stay the proceedings and compel arbitration, which
was entered after the evidentiary phase of the trial was completed and several
months before the entry of judgment.1
1
Appellants raise no additional challenges to the judgment in appellees’
favor other than those discussed, infra.
3
I.
Mickey Sood is the president and managing member of the company known
as JMU Properties, LLC (“JMU Properties”) and the vice president and owner of a
company known as JMU Tax & Preparation Services (“JMU Tax”). Abu Naser
Hossain (“Hossain”) is the President and owner of Profound Radiance, Inc.
(“PRI”), a company that performs tax preparation services. On January 1, 2008,
Hossain, in his capacity as owner of PRI, executed a five-year lease for the office
space located at 1933 18th Street, N.W. (“18th Street office”) with Sood, who
signed as President of JMU Properties. On January 28, 2008, now acting as Vice
President and owner of JMU Tax, Sood executed a franchise agreement with
Hossain, who was again acting on behalf of PRI.
PRI fell behind in its rent obligations under the lease, and stopped making
payments in November 2011. By November 2012, PRI had failed to pay rent for
twelve months. Acting on behalf of JMU Properties, Sood changed the locks at the
18th Street office. On November 14, 2012, PRI filed a wrongful eviction action
against JMU Properties and Sood. In March 2013, JMU Properties and Sood filed
4
a counter-claim against PRI and a 3rd-party complaint against Hossain2 for, among
other claims, breach of both the lease and the franchise agreement.
On March 22, 2013, nearly a year before the trial began, PRI moved 3 for
dismissal, or alternatively for summary judgment, arguing that the real party in
interest for claims arising under the franchise agreement—JMU Tax—was not
named as a party in the counter-claim and 3rd-party claim. The trial court denied
that motion on April 26, 2013. On April 17, 2013, while PRI’s motion for
2
In their brief, appellants PRI and Hossain incorrectly argue that “a third-
party complaint can only be filed by [sic] a party that was not an original parties
[sic] to the case.” The applicable rule provides, however, that “a defending party
[here, Sood and JMU Properties], as a 3rd-party plaintiff, may cause a summons
and complaint to be served . . . upon a person [here, Hossain] not a party to the
action who is or may be liable to the 3rd-party plaintiff for all or part of the
plaintiff’s claim against the 3rd-party plaintiff.” Sup. Ct. Civ. R. 14 (a). See also
R. 7 (a).
The wrongful eviction complaint was brought by PRI (not Hossain) against
Sood and JMU Properties. Because Hossain was not a party to the original action,
he was not subject to a counter-claim. However, he could be brought before the
court by the filing of a 3rd-party complaint, as was done here.
3
The motion is captioned Profound Radiance, Inc. (PRI) v. JMU Properties;
however, the first line of the motion inaccurately states: “COMES NOW, the
counterclaim Defendant Abu Naser Hossain . . . and move the court to dismiss the
counterclaim . . . or, in the alternative, for summary judgment.” We note that PRI
was the sole plaintiff in the original action filed claiming wrongful eviction, but
was not named as a party in the body of this motion as such. Further, Hossain was
not the counter-claim defendant (PRI was the counter-claim defendant). Hossain,
however, was named as the 3rd-party complaint defendant.
5
dismissal/summary judgment was pending, JMU Properties and Sood filed a
motion to stay the proceedings and compel arbitration. PRI opposed that motion
on May 20, 2013, arguing that its suit only implicated the lease agreement, which
had no arbitration clause.4 On June 3, 2013, the trial court denied JMU Properties
and Sood’s motion to stay and compel arbitration because it found that there was
no enforceable arbitration provision.
On February 25, 2014, the parties proceeded to a bench trial. On March 7,
2014, PRI moved to stay the proceedings and compel arbitration. On March 9,
2014, PRI and Hossain moved to file an answer to the 3rd-party complaint, which
had been filed nearly a year earlier. The court did not decide either motion while it
allowed the trial to resume.
The evidence phase of the trial concluded on March 13, 2014, and the trial
court took the matter under advisement to allow for submission of proposed
findings of fact and conclusions of law. On April 15, 2014, the trial court denied
PRI’s motion to compel, holding that PRI “repeatedly waived his right to
4
We note, however, that the counter-claim and 3rd-party claim, which were
filed before the motion to compel arbitration, sought damages under the franchise
agreement, which indisputably includes an arbitration provision. In its motion to
compel arbitration, JMU Properties/Sood argued that “the franchise agreement and
lease agreement are inextricably related.”
6
arbitration. . . .” The trial court did, however, grant PRI’s and Hossain’s motion
for leave to file an answer to the 3rd-party complaint.
On September 17, 2014, the trial court entered a $391,640.82 judgment 5 in
favor of JMU Properties and Sood on their counter-claim and 3rd-party complaint.6
Before us, neither PRI/Hossain nor JMU Properties/Sood challenges the amounts
awarded. On October 1, 2014, PRI and Hossain moved the trial court to amend or
alter that judgment arguing that it opposed the earlier attempt by JMU
Properties/Sood to compel arbitration because there was no arbitration clause in the
commercial lease agreement and no relationship between the named parties to the
suit—JMU Properties and Sood—and JMU Tax. They further argued that Sood
was not an intended beneficiary of the franchise agreement. On January 7, 2015,
the trial court denied PRI’s and Hossain’s motion to alter judgment. It reiterated
5
Based on the lease and the franchise agreement, the trial court found
PRI/Hossain liable on a number of grounds, including unpaid rent plus interest,
fraud, attorneys’ fees, franchise fee costs, and commissions. The exact amounts
for each are set forth in the trial court’s order, totaling $391,640.82.
6
The trial court also entered a $100.00 judgment on behalf of PRI and
Hossain on the original claim for wrongful eviction. None of the parties challenge
this award.
7
its original finding7 that Sood was the intended beneficiary of both the lease and
the franchise agreement and that the two documents were intended to function
together. It also found that under the totality of the circumstances, PRI’s and
Hossain’s behavior was inconsistent with a right to arbitrate, resulting in waiver.
This appeal follows.
II.
We first address the relationship between Sood, JMU Properties and JMU
Tax. Interpretation of a contract is a legal question this court reviews de novo.
Fort Lincoln Civic Ass’n, Inc. v. Fort Lincoln New Town Corp., 944 A.2d 1055,
1063 (D.C. 2008) (quoting Unfoldment, Inc. v. District of Columbia Contract
Appeals Bd., 909 A.2d 204, 209 (D.C. 2006)). In interpreting a contract, we must
determine how a reasonable person in the position of parties would understand the
disputed provision and honor their expressed intentions. Id. at 1064.
7
That finding can be inferred from the trial court’s April 26, 2013, order
denying the motion to dismiss or for summary judgment under circumstances in
which PRI/Hossain argued that Sood was not the real party in interest. The order
does not elaborate the basis for the denial; however, it certainly can be read as
rejecting the argument that Sood was not the real party in interest.
8
“A third party to a contract ‘may sue to enforce its provisions if the
contracting parties intend the third party to benefit directly thereunder.’” Fields v.
Tillerson, 726 A.2d 670, 672 (D.C. 1999) (quoting Johnson v. Atl. Masonry Co.,
693 A.2d 1117, 1122 (D.C. 1997)). This intent can be shown expressly or by
implication, Fort Lincoln Civic Ass’n, Inc., supra, 944 A.2d at 1064, but only an
intended beneficiary can sue to enforce a contract existing “between two others.”
District of Columbia v. Campbell, 580 A.2d 1295, 1302 (D.C. 1990); see also Fort
Lincoln Civic Ass’n, 944 A.2d at 1064-65 (incidental beneficiaries not eligible to
enforce contractual terms that might benefit them). “To be intended, a beneficiary
need not be named in the contract, as long as he or she is ascertainable from the
contract and the circumstances of the contract.” Kitty Hawk Aircargo, Inc. v.
Arthur D. Little, Inc., 934 F. Supp. 16, 20 (D. Mass. 1996) (interpreting District of
Columbia law) (citing W. Union Tel. Co. v. Massman Constr. Co., 402 A.2d 1275,
1277 (D.C. 1979)); see also Needham v. Hamilton, 459 A.2d 1060, 1061-63 (D.C.
1983) (citations omitted) (discussing the need to limit liability of contracting
parties to intended beneficiaries to limit those eligible to bring future causes of
action). This Court will read the contract as a whole to determine whether “the
third party’s benefit . . . is intended or incidental.” W. Union Tel. Co., supra, 402
A.2d at 1277 (cited with approval in Jahanbein v. The Ndidi Condo. Unit Owners
Ass’n, Inc., 85 A.3d 824, 831 (D.C. 2014)).
9
We agree with the trial judge’s finding that Sood was an intended 3rd-party
beneficiary of the franchise agreement with PRI and Hossain. It is beyond dispute
that Sood was the sole owner of both JMU Properties and JMU Tax, and clearly
stood to benefit from any commercial arrangements involving those entities. The
record also shows that Sood negotiated and signed both the lease and franchise
agreement in his capacity as the owner of the respective companies. We note, as
did the trial court, that Sood signed the franchise agreement using the title “Vice
President” of JMU Tax, making his involvement plainly ascertainable from the
four corners of the contract. W. Union Tel. Co., supra, 402 A.2d at 1277.
Moreover, the trial court found that the franchise agreement referred back to the
terms of the lease, a finding which appellants do not now challenge. This, along
with Sood’s testimony that he would not have leased the 18th Street office space to
a non-JMU Tax franchisee, which the trial court credited, demonstrates that the
parties intended the lease and franchise agreement to enable one another. And,
since Sood is an ascertainable 3rd-party beneficiary of the franchise agreement, he
was entitled to counter-claim and bring a 3rd-party suit in his own name to enforce
its terms. Fields, supra, 726 A.2d at 672; W. Union Tel. Co., supra, 402 A.2d at
1277.
10
III.
We next consider PRI and Hossain’s contention that the trial court erred in
denying PRI’s motion to stay the proceedings and compel arbitration on the basis
that PRI had “repeatedly waived [its] right to arbitration and, in fact, rigorously
fought arbitration until the second day of trial.” In Woodland Ltd. P’ship v. Wulff,
this court relied on the Supreme Court’s decision in Howsam v. Dean Witter
Reynolds, Inc., 537 U.S. 79, 84 (2002), to clarify the “allocation of decision-
making between court and arbitrator.” 868 A.2d 860, 864 (D.C. 2005). Because
“the arbitrator’s authority derives from the consent of the parties,” preliminary
“gateway dispute[s] about whether the parties are bound by a given arbitration
clause raise[] . . . question[s] of arbitrability for the court to decide.” Id. (citing
Howsam, supra, 537 U.S. at 84). Once the court has settled the basic contractual
question, “it is for the arbitrator to resolve other ‘gateway’ matters that the parties
would likely expect that the arbitrator would decide, including procedural
questions which grow out of the dispute and bear on its final disposition . . . and
allegations of waiver, delay, or a like defense to arbitrability.” Id. at 865 (internal
quotation marks and citations omitted). See also Menna v. Plymouth Rock Assur.
Corp., 987 A.2d 458, 465 (D.C. 2010); D.C. Code § 16-4406.
11
Neither Howsam, Woodland nor Menna, however, addresses the issue before
us: who decides the question of “waiver by litigation conduct” in the circumstances
presented here. Cf. Howsam, supra, 537 U.S. 79; Menna, supra, 987 A.2d 458;
Woodland, supra, 868 A.2d 860. An increasing number of state supreme courts
and federal circuit courts have interpreted Howsam in a way that holds that “waiver
by litigation conduct” is of a different nature than other waiver inquiries
exclusively allocated to the arbitrator’s authority. See, e.g., Hong v. CJ CGV Am.
Holdings, Inc., 166 Cal. Rptr. 3d 100, 113 (Cal. Ct. App. 2013) (citing federal
circuit court and state supreme court cases that hold that waiver by litigation
conduct should be decided by the court as opposed to an arbitrator). In particular,
the First, Third, Sixth, and Eleventh Circuits have carved out an exception to
Howsam’s general presumption: that when the inquiry is waiver by litigation
conduct, the court should decide. Grigsby & Assocs. Inc. v. M Sec. Inv., 664 F.3d
1350 (11th Cir. 2011); JPD, Inc. v. Chronimed Holdings, Inc., 539 F.3d 388 (6th
Cir. 2008); Ehleiter v. Grapetree Shores, Inc., 482 F.3d 207 (3d Cir. 2007); Marie
v. Allied Home Mortg. Corp., 402 F.3d 1 (1st Cir. 2005).
The Third Circuit points out that Howsam “upset” the traditional general
presumption that courts—not arbitrators—decide issues of waiver. Ehleiter, supra,
482 F.2d at 217-18. In particular, the Third Circuit focuses a portion of its analysis
12
on the comment section of the Revised Uniform Arbitration Action (RUAA).8 Id.
(citing RUAA § 6(c) 7 U.L.A. (Supp. 2002) (Revised Uniform Arbitration Act)).
In reaching its holding, Howsam cited RUAA Section 6 stating “[an] arbitrator
shall decide whether a condition precedent to arbitrability has been fulfilled,” and
“in the absence of an agreement to the contrary, issues of substantive
arbitrability . . . are for a court to decide and issues of procedural arbitrability, i.e.,
whether prerequisites such as time limits, notice, laches, estoppel, and other
conditions precedent to an obligation to arbitration have been met, are for the
arbitrators to decide.” Id. (citing Howsam at 85 (quoting RUAA § 6(c) cmt. 2
(Supp. 2002)). However, the comment to RUAA Section 6 also states that “waiver
is one area where courts, rather than arbitrators, often make the decision as to
enforceability of an arbitration clause.” Id. (quoting RUAA § 6 cmt. 5 (Supp.
2004)).
The First Circuit puts forth other compelling arguments for this
interpretation, such as the fact that waiver of the right to arbitrate “heavily
implicates judicial procedures,” Marie, supra, 402 F.3d 1 (internal quotation marks
8
The District of Columbia adopted the RUAA in 2008. D.C. Code §§ 16-
4401, -4432 (2008) (Revised Uniform Arbitration Act).
13
omitted), and “the trial judge, having been directly involved in the entire course of
the legal proceedings is better positioned to determine [the waiver issue].”
Ehleiter, supra, 482 F.3d at 218 (citing Marie, supra, 402 F.3d at 13) (“The court
should remain free to ‘control the course of proceedings before it and to correct
abuses of those proceedings’ rather than being required to defer to the findings [of]
an arbitrator with no previous involvement in the case.”). Additionally, the First
Circuit stresses that it would be inefficient for a trial court to send a waiver
determination to an arbitrator, who subsequently may have to return the case right
back to the trial court if waiver were found. Marie, supra, 402 F.3d at 13.
We note, however, that the Eighth Circuit has held in the contrary with
respect to waiver by litigation conduct. See Nat’l Am. Ins. Co. v. Transamerica
Occidental Life Ins. Co., 328 F.3d 462, 466 (8th Cir. 2003). But, the underlying
facts in that case involve waiver mostly from prior arbitration proceedings.
Essentially, the facts of Transamerica are the inverse of the case before us: an
arbitration panel already familiar with the parties’ case was favored to decide the
issue of waiver as opposed to a trial judge with no prior involvement in the case.
Id. The Third Circuit persuasively distinguishes the Eighth Circuit’s opinion by
explaining “[to] the extent that Transamerica may be understood as a case
involving waiver by prior arbitration conduct, rather than by prior litigation
14
conduct, the case is plainly distinguishable from ours on this basis.” Ehleiter,
supra, 482 F.3d at 220.
Obviously, the facts of each case will present different permutations of
activities that may constitute “litigation conduct.” Although the specific facts of
our case are not mirrored in any of the circuit courts’ opinions, PRI’s original
opposition to arbitration and its subsequent motion to compel arbitration fall under
the general “litigation conduct” umbrella since these activities were conducted in
court—i.e., they were more in the nature of actions for a court to decide than an
arbitrator. The Third Circuit sets forth a number of cases that have held that the
“litigation conduct” that allows the trial judge to determine waiver can occur prior
to trial. Ehleiter, supra, 482 F.3d at 223. However, we need not decide today
whether an action invoked earlier than the beginning of trial can constitute
“litigation conduct”9 since trial had clearly commenced in this case before PRI
filed its motion to compel arbitration. It is eminently clear that once trial has
begun, significant “litigation conduct” has taken place.
9
We note that in Woodland, supra, 868 A.2d at 864, we held that the
arbitrator should decide the waiver issue where the defense had “filed an answer
and counter-claim, participated in discovery, and filed various [unspecified]
motions.”
15
Thus, for the reasons stated, we are persuaded that the trial judge can
properly decide whether there has been a “waiver by litigation conduct” in
circumstances like those presented here. In finding waiver, the trial judge properly
relied on the standard that the District of Columbia Circuit has traditionally used: a
“totality of the circumstances” test as to whether the party has acted
“inconsistently” with arbitration. Nat’l Found. for Cancer Research v. A.G.
Edwards & Sons, 261 U.S. App. D.C. 284, 286, 821 F.2d 772, 774 (1987). The
D.C. Circuit has “held that one example of conduct inconsistent with the right to
arbitrate is active participation in a lawsuit.” Id. at 287 (citing Cornell & Co. v.
Barber & Ross Co., 123 U.S. App. D.C. 378, 379, 360 F.2d 512, 513 (1966)).
Although other Circuits rely on a prejudice-based test, see, e.g., Hoxworth v.
Blinder, Robison & Co., 980 F.2d 912, 925 (3d Cir. 1992), the D.C. Circuit has
never required a finding of prejudice, although it has stated that prejudice may be a
relevant consideration. Khan v. Parsons Global Servs., Ltd., 380 U.S. App. D.C.
320, 521 F.3d 421, 425 (2008); Nat’l Found., supra, 821 F.2d at 777. Here, the
trial judge held that PRI/Hossain acted inconsistently with arbitration by “actively
participating” in litigation by commencing a trial. (“And what could be a more
active participation in litigation than a trial itself?”). The trial judge was further
persuaded by a showing of prejudice, which although not necessary, is a factor that
can be taken into account. We think that the judge’s findings are well-supported
16
by the evidence and that the judge correctly ruled that PRI/Hossain waived
arbitration by its litigation conduct. Accordingly, we affirm the trial judge’s
finding of waiver.
IV.
Finally, we remand the case to the trial court and direct the court to enter a
reformed judgment stating that, on the counter-claim of breach of lease, judgment
is in favor of JMU Properties and Sood. On the counter-claim of breach of
contract and fraud, the judgment is in favor of JMU Tax and Sood. The total
award of $391,640.82 should accordingly be recalculated and allocated based on
whether the damages arose out of appellants’ breach of the lease, breach of
contract, or fraud.
The trial court addressed JMU Tax’s standing and amended the counter-
claim nunc pro tunc in order to add JMU Tax as a party. Consistent with that
ruling and the trial court’s finding that Sood is the “sole owner of both JMU Tax
Service and JMU Properties, LLC” and thus the “real party in interest,” we include
JMU Tax as a party here.
17
We agree with the trial court that appellants are not prejudiced by the
addition of JMU Tax as a party as “there are no witnesses, documents, or other
discoverable materials to which [appellants] could plausibly claim to have been
denied access as a result of JMU Tax Services not being named on the initial
pleading.”
For the foregoing reasons, the judgment is vacated and the case10 is
remanded for further proceedings consistent with this opinion.
10
See Bell v. United States, 676 A.2d 37, 40-41 (D.C. 1996) (explaining the
difference between a “record” remand and a “case” remand).