Holmes v. Coverall North America, Inc.

BISHOP, Judge. Appellants, Ronald T. Holmes (“Holmes”) and Holmestar Corporation doing business as Coverall of Baltimore, Inc. (“Holmestar”), filed a complaint in the Circuit Court for Howard County against Appellees, Coverall North America, Inc. (“Coverall”), Shahyar Alex Zayanderoudi also known as Alex Roudi (“Roudi”), and the attorney and other individual officers, directors, and employees of Coverall, alleging violations of the Maryland Franchise Act (Count I), fraud in the inducement (Count II), negligent misrepresentation (Count III), and professional malpractice (Count IV). Coverall then filed a Petition for Order of Arbitration and for Stay of Action Pending Arbitration or for Dismissal of Action. The trial court granted the petition and ordered that the case be submitted to arbitration pursuant to the franchise agreement and that the action be stayed pending the outcome of arbitration.

Appellants filed a Motion to Alter or Amend Judgment along with a Petition to Stay Arbitration. The trial court struck its order compelling arbitration, and instead, granted Appellants’ Petition to Stay Arbitration. Coverall then filed a Request for Clarification of the court’s order. In response to that request, the trial court reinstated its original order staying the action and ordering that arbitration proceed in accordance with the franchise agreement.

Appellants filed a timely notice of appeal to this Court. Upon Appellees’ motion, we dismissed Appellants’ appeal pursuant to Rule 8-602(a)(l) because the court’s order was not a final appealable judgment. Appellants then filed a Petition for Writ of Certiorari, which the Court of Appeals granted. The Court of Appeals, in a per curiam order, vacated this ⁵²² Court’s judgment and remanded the case for consideration of the merits of the appeal, 330 Md. 114 , 622 A.2d 744 .

Issues Appellants raise three issues, which we shall consolidate into the following two issues: I. Whether the circuit court erred when it ordered arbitration and stayed the action.

II

Whether the legislative findings and intent enunciated in the Maryland Franchise Act, and the judicial powers and civil rights and remedies granted in that Act, compel the conclusion that the circuit court exceeded its jurisdiction when it ordered arbitration and stayed the action. Facts In the case sub judice, the trial court ordered arbitration and stayed the underlying action pending the outcome of arbitration, based solely on the averments in Appellants’ complaint, Coverall’s petition, and Appellants’ response to that petition. The trial court did not conduct a hearing, and the parties did not supply the court with affidavits or a stipulation of facts. Because the trial court’s function in ruling on Coverall’s petition was similar to the function performed by a court when considering a motion to dismiss, we shall “assume the truth of all well-pleaded facts in [Appellants’] complaint, as well as inferences which may reasonably be drawn from those well-pleaded faets[,]” when determining whether the court erred when it ordered arbitration and stayed the action.

Lee v. Denro, Inc., 91 Md.App. 822, 828 , 605 A.2d 1017 (1992). We shall also consider those facts included in Coverall’s petition that Appellants admitted in their response. Coverall is engaged in the business of offering and selling franchises related to commercial janitorial and building cleaning services. In October 1987, Holmes read an advertisement for Coverall franchises in a magazine and wrote for and received material about the company.

Holmes had several conversations with Roudi — Coverall’s president, chief financial ⁵²³ officer, and sole shareholder — and visited two Coverall regional franchises and the Coverall headquarters in San Diego, California. During the trip to San Diego, Roudi gave Holmes comparison costs and profit projections for several future Coverall franchise sites, including Baltimore. Based on those business forecasts and other data about the franchise that Coverall provided, Holmes decided to purchase a Coverall franchise in the Baltimore area. On February 22, 1988, Holmes met with Roudi in Coverall’s Philadelphia office, signed a Coverall service franchise agreement (“the Agreement”) to purchase a Coverall franchise in Maryland, and gave Roudi a check for $10,000 as a deposit for the franchise.

The Agreement provided for the payment of a $140,000 franchise fee, together with monthly royalty payments of up to four percent of gross revenues and monthly business development fees of one and one-half percent of gross revenues, beginning in the sixth month of franchise operations. The Agreement also contained the following relevant provisions: 11. Franchisee’s Obligations Upon Termination B. The termination of this Agreement for any reason shall not be deemed to release the Franchisee from any and all sums due or to become due hereunder or from its obligations regarding noncompetition and such other obligations as set forth herein. 20. Arbitration Any claim or controversy arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration, in accordance with the rules then prevailing of the American Arbitration Association.

The parties agree that the arbitrator or arbitrators may grant injunctive relief as well as damages to the prevailing party. Judgment upon an ⁵²⁴ award by the aforementioned arbitrator(s) filed in a court of competent jurisdiction shall be binding. On March 15,1988, Holmes paid Roudi an additional $48,000 and signed an $82,000 promissory note payable to Coverall. In late March or early April 1988, Holmes met with Roudi in Baltimore and Roudi helped him negotiate a lease for office space in Jessup, Maryland.

On April 23, 1988, Holmestar — a corporation established by Holmes — signed the lease. Operations were scheduled to begin on May 23, 1988, but when the space was not ready on time, the opening of the franchise office was delayed until July 1, 1988. On July 6, 1988, Roudi arrived in Baltimore to train Holmes in the operations of the franchise. On July 12, 1988, Roudi told Holmes: We have to have some more paperwork signed.

Since the Maryland office did not open on time, you have to sign a new agreement because that’s what the girl uses to put the information into the computer. We have to change your completion of training and agreement dates. Otherwise, if she enters the information from the old agreement (i.e. the agreement signed on February 22, 1988) into the computer they will start billing you for the loan payments and royalties on October 10, 1988, instead of January 10, 1989. On July 12, 1988, based on Roudi’s representations and at his request, Holmes signed a new agreement to purchase a Coverall franchise in Maryland and gave it to Roudi.

At the same time, Roudi told Holmes to give him a “new check” for $58,000, and Roudi, in turn, returned the $58,000 that Holmes had previously paid him in February and March 1988. Holmes subsequently obtained a copy of the second franchise agreement from Roudi and noticed that Roudi had dated the agreement May 12, 1988, not July 12, 1988. Approximately a year later, Holmes learned for the first time that the Maryland Securities Commissioner did not approve the Coverall offering prospectus for Maryland until May 6, 1988, and thus, Coverall had not been registered to sell franchises in Maryland as required by Art. 56, § 347(a) when ⁵²⁵ it sold a service franchise to Holmes on February 22, 1988. This information had not been disclosed to Holmes when he signed the second franchise agreement.

In addition, Holmes contends that Roudi and Coverall should have offered to rescind the Agreement and return the partial franchise fee of $58,000 and all other monies Appellants paid, or to make restitution to Appellants for damages they sustained as a result of the transaction, but they did not do so. On August 3, 1989, Coverall terminated the Agreement as a result of Holmestar’s default thereunder. On August 14, 1989, Appellants notified Coverall that, due to Coverall’s violations of the Maryland Franchise Act, Holmestar was rescinding the Agreement. Holmestar then assigned and transferred to Coverall all of its contracts, leases, and assets.

To date, Coverall has failed to reimburse and compensate Appellants for moneys paid and damages proximately sustained in connection with the Agreement transaction. Discussion I In Gold Coast Mall, Inc. v. Larmar Corp., 298 Md. 96, 103-04 , 468 A.2d 91 (1983), the Court of Appeals summarized the law of arbitration in Maryland: Arbitration is the process whereby parties voluntarily agree to substitute a private tribunal for the public tribunal otherwise available to them. Arbitration is a matter of contract which the parties should be allowed to conduct in accordance with their agreement. A party cannot be required to submit any dispute to arbitration that it has not agreed to submit.

The Maryland Uniform Arbitration Act ... embodies a legislative policy favoring enforcement of executory agreements to arbitrate. In accord with this legislative policy, the Act strictly confines the function of the court in suits to compel arbitration to the resolution of a single issue — is there an agreement to arbitrate the subject matter of a particular dispute. Where the language of the arbitration ⁵²⁶ clause is clear, and it is plain that the dispute sought to be arbitrated falls within the scope of the arbitration clause, arbitration should be compelled. If it is apparent, on the other hand, that the issue sought to be arbitrated lies beyond the scope of the arbitration clause, the opposing party should not be compelled to arbitration, since there is no agreement to arbitrate.

Where there is a broad arbitration clause, calling for the arbitration of any and all disputes arising out of the contract, all issues are arbitrable unless expressly and specifically excluded. (Citations and footnote omitted). Appellants contend that the trial court erred when it ordered arbitration and stayed the action because it failed to consider a threshold issue — whether there exists between the parties a valid and enforceable arbitration clause. Specifically, Appellants argue that, because they elected to rescind the Agreement due to various violations of the Maryland Franchise Act, Md.Ann.Code art. 56, §§ 345-365D (1988) (now entitled the Maryland Franchise Registration and Disclosure Law and codified in Md.Bus.Reg.Code Ann. §§ 14r-201 to -233 (1992 & Supp.1993)), and because grounds exist for the trial court to order that Coverall rescind the Agreement, see id. § 365(b), the trial court, not the arbitrator, should decide whether the Agreement exists.

We disagree. The Maryland Uniform Arbitration Act, Md.Cts. & Jud. Proc.Code Ann. (hereinafter “CJ”) §§ 3-201 to -234 (1989), contains the following provisions relevant to the disposition of this appeal: § 3-206. Validity of arbitration agreements....

(a) Validity. — A ... provision in a written contract to submit to arbitration any controversy arising between the parties in the future is valid and enforceable, and is irrevocable, except upon grounds that exist at law or in equity for the revocation of a contract. § 3-207. Order to arbitrate. ⁵²⁷ (a) Refusal to arbitrate. — If a party to an arbitration agreement ... refuses to arbitrate, the other party may file a petition with a court to order arbitration. (b) Denial of existence of arbitration agreement. — If the opposing party denies existence of an arbitration agreement, the court shall proceed expeditiously to determine if the agreement exists. (c) Determination by court. — If the court determines that the agreement exists, it shall order arbitration.

Otherwise it shall deny the petition. § 3-208. Stay of arbitration. (a) Petition to stay. — If a party denies existence of the arbitration agreement, he may petition a court to stay commenced or threatened arbitration proceedings. # s{« * ❖ * * (c) Determination of existence of arbitration agreement. — If the court determines that existence of the arbitration agreement is in substantial and bona fide dispute, it shall try this issue promptly and order a stay if it finds for the petitioner. If the court finds for the adverse party, it shall order the parties to proceed with arbitration.

Appellants cite three cases, Crown Oil & Wax Co. v. Glen Constr. Co., 320 Md. 546, 557-58 , 578 A.2d 1184 (1990); Stephen L. Messersmith, Inc. v. Barclay Townhouse Assocs., 313 Md. 652, 661 , 547 A.2d 1048 (1988); and Bel Pre Medical Ctr., Inc. v. Frederick Contractors, Inc., 21 Md.App. 307, 320 , 320 A.2d 558 (1974), rev’d on other grounds, 274 Md. 307 , 334 A.2d 526 (1975), each of which support the proposition (either directly or tangentially) that a court must determine, before ordering arbitration under CJ § 3-207(c), whether an agreement to arbitrate exists between the parties. Appellants then suggest that this same rule applies when, as in this case, the validity and enforceability of the Agreement, which admittedly contains an arbitration agreement, is in dispute. Appellants argue that, under Petals Factory Outlet v. EWH & Assocs., 90 Md.App. 312 , 600 A.2d 1170 (1992), rescission of ⁵²⁸ the Agreement is a “threshold issue” that must be resolved by the court prior to arbitration.

We disagree. In Petals, the