Case 3:11-cv-01402-N Document 148 Filed 11/29/12

Page 1 of 10 PageID 2014

IN THE UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF TEXAS DALLAS DIVISION MICHAEL V. PETRAS, Plaintiff, v. GARY MOLE, et al., Defendants. CIVIL ACTION NO. 3-11-CV-1402-N

PLAINTIFF MICHAEL PETRAS MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANT TOUCHDOWN PROPERTIES, LLCS MOTION TO COMPEL ARBITRATION AND STAY FURTHER PROCEEDINGS Plaintiff Michael V. Petras hereby submits his Memorandum of Law in Opposition to Defendant Touchdown Properties, LLCs Motion to Compel Arbitration and Stay Further Proceedings. MEMORANDUM OF LAW I. INTRODUCTION

Plaintiff Michael Petras (Petras) is suing Touchdown Properties, LLC (Touchdown) for conspiracy to defraud him. Through a convoluted series of arguments, Touchdown now argues that, when Petras agreed to arbitrate claims arising under an agreement between himself, Franklin Power Corporation (Franklin Power), and Allegra Family Limited Partnership (Allegra) concerning the termination of his employment (the Departure Agreement; attached to Touchdowns motion as Exhibit A-1), he in effect agreed to arbitrate this conspiracy claim against Touchdown. There is no valid legal or factual basis for Touchdown to claim that it is entitled to compel Petras to arbitrate his claim against it.
PLAINTIFF MICHAEL PETRAS MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANT TOUCHDOWN PROPERTIES, LLCS MOTION TO COMPEL ARBITRATION AND STAY FURTHER PROCEEDINGS - Page 1

Case 3:11-cv-01402-N Document 148 Filed 11/29/12

Page 2 of 10 PageID 2015

II. A.

ARGUMENT

Petras Claims Against Touchdown Do Not Come Within the Scope of the Arbitration Provision.

While there is indeed a strong policy favoring arbitration, arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit. United Steelworkers of America v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582 (1960). The Federal Arbitration Act does not require parties to arbitrate when they have not agreed to do so. Volt Info. Scis., Inc. v. Bd. of Trs. of the Leland Stanford Junior Univ., 489 U.S. 468, 485 (1989). For these reasons, [a] party attempting to compel arbitration must first establish that the dispute in question falls within the scope of a valid arbitration agreement. In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571, 573 (1999). As shown below, Petras agreement to arbitrate disputes with Franklin Power concerning his separation from the company cannot be recast as his agreement to arbitrate his claims against Touchdown. Stated differently, Petras has not in any way agreed to arbitrate his conspiracy or breach of fiduciary duty claims against Touchdown. B. California Law Governs This Motion.

This lawsuit contains claims for professional malpractice, negligence, breach of fiduciary duty, fraud, negligent misrepresentation, and conspiracy. Touchdown is a defendant only to the conspiracy and breach of fiduciary duty claims. When Petras left Franklin Power in January 2005, he signed two documents: a Departure Agreement clarifying the details of the termination of his employment with Franklin Power and a Stock Repurchase Agreement (the Repurchase Agreement; attached to Touchdowns motion as Exhibit A-1) specifying the terms for Franklin Powers repurchase of his stock in the company. The parties to these agreements were Franklin Power, Petras, and Allegra.
PLAINTIFF MICHAEL PETRAS MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANT TOUCHDOWN PROPERTIES, LLCS MOTION TO COMPEL ARBITRATION AND STAY FURTHER PROCEEDINGS - Page 2

Case 3:11-cv-01402-N Document 148 Filed 11/29/12

Page 3 of 10 PageID 2016

While Petras complaint references the Repurchase Agreement, he has not asserted a cause of action for its breach. Its most direct connection to this litigation is that: (1) certain defendants in this case fraudulently induced Petras to sell his interest in Franklin Power for $2 million, which they never intended to pay (Second Amended Complaint (SAC), para. 21, 25, and 26); and (2) that Defendant Charles Kaplan (Kaplan) had a conflict of interest in advising Petras not to retain independent counsel and instead to let Kaplan represent him in trying to collect money from Defendant Gary Mole (Mole) and Touchdown, both of whom Kaplan also represented (SAC, para. 29-31 and 55). Moreover, despite Touchdowns repeated references to the Repurchase Agreements arbitration clause, there is no arbitration clause in the Repurchase Agreement. The arbitration provision Touchdown focuses on is in the Departure Agreement, which describes the terms of Petras separation from Franklin Power. The Departure Agreement, which is not mentioned in Petras complaint, states in paragraph 13: This Agreement shall be interpreted under the laws of the State of Texas and any disputes hereunder shall be brought in Texas and settled by binding arbitration, by a single arbitrator, under the Commercial Rules of the American Arbitration Association. Each party shall bear its own costs in the arbitration proceeding and the parties shall equally bear the cost of the arbitration proceeding itself. Departure Agreement, para. 13 (emphasis added). The Departure Agreement contains a Texas choice of law provision for the disputes that are subject to binding arbitration. The Repurchase Agreement (the contract Touchdown relies on in its motion), however, states: This Repurchase Agreement shall be governed by the laws of

PLAINTIFF MICHAEL PETRAS MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANT TOUCHDOWN PROPERTIES, LLCS MOTION TO COMPEL ARBITRATION AND STAY FURTHER PROCEEDINGS - Page 3

Case 3:11-cv-01402-N Document 148 Filed 11/29/12

Page 4 of 10 PageID 2017

the State of California. Repurchase Agreement, para. 2.1. Therefore, California, not Texas, law governs interpretation of the Repurchase Agreement. C. Under California Law, Petras Cannot Be Compelled to Arbitrate His Claims Against Touchdown.

Under California law, pre-dispute arbitration agreements in contracts between employees and their employer must meet certain requirements. Two such requirements are: (1) providing for adequate discovery; and (2) limiting the costs of the arbitration payable by the plaintiff. See Armendariz v. Found. Health Psychcare Servs., Inc., 24 Cal.4th 83, 104-105 (2000) (discovery in arbitration is indispensable in vindicating statutory discrimination claims); Armendariz, 24 Cal.4th at 110-111 (when an employer imposes mandatory arbitration as a condition of employment, the arbitration agreement or arbitration process cannot generally require the employee to bear any type of expense that the employee would not be required to bear if he or she were free to bring the action in court.). The arbitration provision Touchdown seeks to enforce meets neither of these requirements. First, it does not provide for any discovery. Neither do the American Arbitration Associations rules for commercial disputes that it incorporates (except potentially for Large, Complex Commercial Cases). See Rule L-3 of the American Arbitration Association Commercial Arbitration Rules and Mediation Procedures (Including Procedures for Large, Complex Commercial Disputes), June 1, 2009. (Appx. at 38). Second, there is no limit on the employees forum costs, which can be substantial in arbitration and would deter employees from bringing meritorious claims. 24 Cal.4th at 113 (mandatory employment arbitration agreement that contains within its scope the arbitration of [Fair Employment and Housing Act] claims impliedly obliges the employer to pay all types of costs that are unique to arbitration); see also,

PLAINTIFF MICHAEL PETRAS MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANT TOUCHDOWN PROPERTIES, LLCS MOTION TO COMPEL ARBITRATION AND STAY FURTHER PROCEEDINGS - Page 4

Case 3:11-cv-01402-N Document 148 Filed 11/29/12

Page 5 of 10 PageID 2018

Mercuro v. Superior Court, 96 Cal.App.4th 167, 180 (2002) (applying Armendariz requirements to statutory fraud claim).. The arbitration provision is not enforceable because it does not satisfy the requirements of controlling California law. D. Even Under Texas Law, the Arbitration Provision Does Not Extend to Claims Against Touchdown.

While the Repurchase Agreement incorporated the Departure Agreement by reference, this does not change the fact that the arbitration provision is limited to disputes arising under the latter agreement. The arbitration provision cannot reasonably be read to extend to Petras claims against Touchdown. None of the Texas authorities cited by Touchdown change this result. In Coleman v. Qwest Commcns Corp., the plaintiff was suing for breach of a written contract while arguing that his lack of signature on the contract rendered its arbitration provision unenforceable. See 2003 WL 22388482, 2 (N.D. Tex., 2003). The court had no trouble concluding that under those circumstances, plaintiff was estopped from arguing that he was not bound by the arbitration provision. See Id. The issue here is not whether plaintiff agreed to arbitrate claims under the Departure Agreement he unquestionably did but whether he can be compelled to arbitrate claims with no connection to that agreement. In that regard, Coleman provides no help to Touchdown. Grigson v. Creative Artists Agency L.L.C. involved a contract with an arbitration provision that extended to allcauses of action (whether sounding in contract or in tort) arising out of or relating to this Agreement. 210 F.3d 524, 527 (C.A.5, 2000). In that case, the court concluded that the plaintiff could be compelled to arbitrate his claims for tortious interference with the agreement containing the arbitration clause even though the defendant was not a party to the agreement. See Id. The connection Touchdown attempts to draw here is far more attenuated.
PLAINTIFF MICHAEL PETRAS MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANT TOUCHDOWN PROPERTIES, LLCS MOTION TO COMPEL ARBITRATION AND STAY FURTHER PROCEEDINGS - Page 5

Case 3:11-cv-01402-N Document 148 Filed 11/29/12

Page 6 of 10 PageID 2019

Petras is not suing for breach of contract or tortious interference with any contract. Moreover, Petras claims against Touchdown have no connection to the Departure Agreement, and Touchdown does not even attempt to argue otherwise. Finally, the Departure Agreement required arbitration of disputes arising hereunder, which is significantly narrower than the arbitration agreement in Grigson, which extended allcauses of action [in contract or in tort] arising out of or relating to the agreement. Id. at 527. The analysis used by the court in Grigson, therefore, does not apply to the present facts. Ramasamy v. Essar Global Ltd. relied on Grigson in compelling a plaintiff to arbitrate his breach of contract claim. See 825 F.Supp.2d 466, 467 (S.D.N.Y., 2011). Although the plaintiff alleged breach of an oral contract concerning his compensation, the court concluded that that question necessarily required reference to an underlying written employment contract that contained an arbitration clause because the plaintiff claimed that the oral agreement was a substitute for the earlier written agreement. Id. at 470. There is no analogous connection here between the Departure Agreement and Petras claims against Touchdown. Meyer v. WMCO-GP, LLC is similarly distinguishable. After recognizing the general rule that arbitration of a claim cannot be compelled unless it falls within the scope of a valid arbitration agreement, the court recognized an exception that applied when a personseeks by his claim to derive a direct benefit from the contract containing the arbitration provision. 211 S.W.3d 302, 305 (Tex., 2006). In each of these cases, the connection between the contracts arbitration provision and the plaintiffs claims was much more direct than in the present case. This conclusion is reinforced by examining the intertwined claims standard that these cases rely on. As Grigson explains:

PLAINTIFF MICHAEL PETRAS MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANT TOUCHDOWN PROPERTIES, LLCS MOTION TO COMPEL ARBITRATION AND STAY FURTHER PROCEEDINGS - Page 6

Case 3:11-cv-01402-N Document 148 Filed 11/29/12

Page 7 of 10 PageID 2020

First, equitable estoppel applies when the signatory to a written agreement containing an arbitration clause must rely on the terms of the written agreement in asserting its claims against the nonsignatory. When each of a signatory's claims against a nonsignatory makes reference to or presumes the existence of the written agreement, the signatory's claims arise out of and relate directly to the written agreement, and arbitration is appropriate. Second, application of equitable estoppel is warranted when the signatory to the contract containing an arbitration clause raises allegations of substantially interdependent and concerted misconduct by both the nonsignatory and one or more of the signatories to the contract. Grigson, 210 F.3d at 527 (internal citations and quotations omitted; emphasis in original). Touchdown satisfies neither of these requirements. Petras need not rely on the terms of the Departure Agreement (or, for that matter, the Repurchase Agreement) to pursue his conspiracy claim against Touchdown. Nor is Petras bringing claims against Touchdown (a nonsignatory to the agreement) for substantially interdependent and concerted misconduct with one or more signatories to the agreement (Petras, Franklin Power, and Allegra). Touchdown is therefore unable to show that there are intertwined claims such that plaintiff should be equitably estopped from opposing arbitration with Touchdown. More importantly, Touchdown is unable to show that plaintiff agreed to arbitrate his claims against it. E. Even If There Were a Valid Arbitration Agreement, Touchdown Has Waived Its Right to Compel Arbitration.

While Touchdown is relatively new to this litigation, Mole (its principal) has been involved in this litigation from the outset. Furthermore, Touchdown is essentially Moles alter ego. In Castleberry v. Branscum, the landmark case in Texas for disregarding the corporate fiction, the Texas Supreme Court stated that [a]lter ego applies when there is such unity between corporation and individual that the separateness of the corporation has ceased. 721 S.W.2d 270, 272 (Tex. 1986). That is certainly the case here. In fact, Mole has previously

PLAINTIFF MICHAEL PETRAS MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANT TOUCHDOWN PROPERTIES, LLCS MOTION TO COMPEL ARBITRATION AND STAY FURTHER PROCEEDINGS - Page 7

Case 3:11-cv-01402-N Document 148 Filed 11/29/12

Page 8 of 10 PageID 2021

testified that Touchdown was [j]ust a holding company thatheld [his] shares in Franklin. and that Mole's ownership was through Touchdown. Deposition of Gary Mole in Prengler v. Glacial Energy Holdings, taken August 23, 2011, p. 71, lines 15-18 and p. 144 lines 8-10 (Appx. at 55-56). In Castleberry, the court held, [w]e disregard the corporate fiction, even though corporate formalities have been observed and corporate and individual property have been kept separately, when the corporate form has been used as part of a basically unfair device to achieve an inequitable result. Id. at 271. The court then went on to list certain types of inequitable results, two of which pertain to this case. The first is where the corporate fiction is resorted to as a means of evading an existing legal obligation. Id. at 272. In this case, Mole has an obligation to continue with the litigation he has so actively participated in for months. Now he tries to use Touchdown as a means of compelling arbitration to avoid this obligation. Such an inequitable result is exactly the type sought to be prevented by the Texas Supreme Courts holding in Castleberry. The second type of inequitable result specifically mentioned by the court in Castleberry that applies to the present case is where the corporate fiction is relied uponto justify wrong. Id. Permitting Mole to compel arbitration after months of litigation would certainly be wrong. Mole is merely attempting to justify this obvious hardship by hiding behind Touchdown as his alter ego. Again, this type of inequitable result is exactly the kind sought to be prevented by the Texas Supreme Courts holding in Castleberry. By litigating the matter in this Court for months (including attacking the pleadings as not complying with applicable federal law, filing a counterclaim for declaratory relief, conducting discovery, and moving for summary judgment), Mole has waived the right to now require that the dispute be arbitrated. Both individually and as the principal representative of Touchdown, Mole has taken steps inconsistent with an intent to invoke arbitration. St. Agnes Med. Ct.r v.

PLAINTIFF MICHAEL PETRAS MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANT TOUCHDOWN PROPERTIES, LLCS MOTION TO COMPEL ARBITRATION AND STAY FURTHER PROCEEDINGS - Page 8

Case 3:11-cv-01402-N Document 148 Filed 11/29/12

Page 9 of 10 PageID 2022

PacificCare of Cal., 31 Cal.4th 1187, 1196 (2003). [A] party who has actively participated in litigation . . . is necessarily in default, within the meaning of [9 U.S.C. 3; discussing right to stay of litigation pending arbitration]. Zuckerman Spaeder, LLP v. Auffenberg, 646 F.3d 919, 921-22 (D.C. Cir. 2011). Mole cannot simultaneously take advantage of the procedures available in court and argue, through a co-defendant he fully controls, that the matter belongs in arbitration. By doing so, he has waived any arguable right to arbitrate. Moreover, requiring Petras to begin the litigation process against Touchdown from the outset in a new forum would seriously prejudice Petras. He has been required to expend considerable resources to pursue this case in federal court. To now require him to start over in a new forum would cause him great prejudice. F. If the Court Orders Arbitration, It Should Only Stay the Proceedings Against Touchdown.

For the reasons set forth above, Petras contends that there is no basis for ordering him to arbitrate his claims against Touchdown. However, if the Court rules otherwise, plaintiff requests that he be allowed to proceed in this Court with his claims against the other defendants. III. CONCLUSION

As stated at the outset, arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit. United Steelworkers, 363 U.S. at 582 (1960). Because Petras did not agree, either explicitly or implicitly, to arbitrate his claims against Touchdown, the motion to compel arbitration must be denied. DATED: 29 November 2012.

PLAINTIFF MICHAEL PETRAS MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANT TOUCHDOWN PROPERTIES, LLCS MOTION TO COMPEL ARBITRATION AND STAY FURTHER PROCEEDINGS - Page 9

Case 3:11-cv-01402-N Document 148 Filed 11/29/12

Page 10 of 10 PageID 2023

Respectfully submitted,

/s/ Andrew Jee Andrew Jee Texas State Bar No. 24047532 JEE LAW, PLLC 3811 Turtle Creek Boulevard, Suite 1400 Dallas, Texas 75219 Telephone: (214) 965-0011 Facsimile: (214) 572-7297 Email: ajee@andrewjee.com Curtis E. Smolar California Bar No. 194700 FOX ROTHSCHILD, LLP 235 Pine Street, 15th Floor San Francisco, California 94104 Telephone: (415) 364-5540 Facsimile: (415) 391-4436 Email: csmolar@foxrothschild.com ATTORNEYS FOR PLAINTIFF, MICHAEL V. PETRAS

CERTIFICATE OF SERVICE I hereby certify that on the 29th of November 2012, a true and correct copy of the foregoing document was submitted to the Clerk of the Court of the U.S. District Court, Northern District of Texas, using the CM/ECF system, and was served upon all counsel that have appeared in this case through this Courts electronic filing system.

/s/ Andrew Jee Andrew Jee

PLAINTIFF MICHAEL PETRAS MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANT TOUCHDOWN PROPERTIES, LLCS MOTION TO COMPEL ARBITRATION AND STAY FURTHER PROCEEDINGS - Page 10