Virginia Lawyers Weekly VA Lawyers Weekly
Where defendants both knew of the right to arbitrate and acted inconsistently with that right during this litigation, their motion to compel arbitration was denied.
Background
On Dec. 20, 2020, SZY Holdings LLC and FarFromBoring Promotions.com LLC, or FFB, filed a complaint against IPF Sourcing LLC alleging breach of contract related to distribution agreements whereby IPF was to supply FFB’s retail customers with millions of bottles of hand sanitizer during the onset of the COVID-19 pandemic. FFB assigned its rights under the distribution agreements to SZY, which alleged that it had transmitted payment to IPF but that IPF failed to provide the hand sanitizer to FFB’s customers pursuant to the distribution agreements.
On May 27, 2022., plaintiffs filed their second amended complaint, asserting claims against Rico Garcia for fraud conveyance and against Garcia and Hamsa Holdings LLC for unjust enrichment. Defendants thereafter filed a motion to dismiss, on the basis that the claims were subject to binding arbitration, and for failure to state a claim. The court denied that motion on Aug 15, 2022. Defendants have now filed a motion for reconsideration.
Reconsider
Defendants urge this court to reconsider the August 15 order on two grounds. First, defendants argue that the court’s order erred when it ruled on the merits of the 12(b)(6) motion and “deferred ruling on Defendants’ motion for arbitration.” They contend that the court’s decision not to consider the IPF-Botani agreement or the arbitration clause within that agreement under Rule 12(b)(6) is out-of-step with some courts’ practice of looking outside the pleadings when considering motions to compel arbitration.
Defendants’ arguments are unconvincing, and this court will not depart from the order on the arbitration issue. Defendants have identified no new factual allegations or evidence that would change the analysis set forth in the order. Nor have defendants identified new controlling authority that has arisen since the August 15 order.
In fact, in its original briefing prior to the order, defendants never raised any arguments about either deciding arbitrability before reaching the merits or looking beyond the pleadings that it now advances in its motion for reconsideration. Because defendants never advanced these arguments, or ever affirmatively moved to compel arbitration, there is no basis to “reconsider” a ruling that was never sought or made.
This court also finds that the August 15 order’s ruling deferring ruling on arbitrability and declining to look beyond the pleadings was not “clearly erroneous” and would not “work manifest injustice” if left intact. Defendants only sought dismissal under Rule 12(b)(6) in their original motion; they could have, but did not, expressly move to seek to compel arbitration or to stay the proceedings pending arbitration. In similar instances, some courts have declined to construe such requests as ones seeking to compel arbitration. Additionally, courts have declined to look beyond the pleadings when a motion to dismiss under 12(b)(6) is made in favor of arbitration. Accordingly, the August 15 order’s rulings were neither clearly erroneous nor manifested any injustice.
Second, defendants argue that the court wrongly concluded that plaintiffs sufficiently alleged that SZY conferred a benefit upon defendants. There is no basis to depart from the order’s ruling on the unjust enrichment claim. As with the arbitration issue, defendants have identified no new evidence or factual allegations; they have failed to identify any new controlling authority with a contrary decision of law applicable to the issue; and the decision was neither clearly erroneous nor was manifestly unjust. In seeking reconsideration of the ruling, defendants merely rehash their arguments.
Arbitration
Defendants move, in the alternative, to compel arbitration. In response, plaintiffs argue that defendants are in default of any purported right to arbitrate because they have been delinquent in moving to compel arbitration.
Although the concept of prejudice has been central to the Fourth Circuit’s analysis of whether a party is in default of its right to arbitrate, the Supreme Court has recently concluded that a party arguing against arbitration need not show that it was prejudiced for a finding of default. Here, the court finds that defendants both knew of the right to arbitrate and acted inconsistently with that right during this litigation.
Defendant’s motion for reconsideration and to compel arbitration denied.
SZY Holdings LLC v. Garcia, Case No. 1:20-cv-01475, March 3, 2023. EDVA at Alexandria (Nachmanoff). VLW 023-3-109. 13 pp.
