PHILADELPHIA - The U.S. District Court for the Eastern District of Pennsylvania has compelled arbitration in a case involving the dissolution of a law firm.
In the ruling on Jan. 28, Judge John Padova said Michael R. Nelson, a previous member of Nelson Levine de Luca & Hamilton LLC, can compel arbitration after his former partners allegedly took advantage of him when the firm split up.
The court rejected all of the arguments made by defendants John M. Clark, Claudia D. McCarron, John F. Mullen, Kenneth Levine and Daniel de Luca, saying the parties have entered into valid agreements to enter into arbitration. According to the opinion, Nelson and his former partners had executed an Amended and Restated LLC Operating Agreement and an Amended and Restated Buy-Sell Agreement.
Nelson was seeking arbitration to settle the dispute over the repayment of a $4 million line of credit with First Niagara Bank.
“Plaintiff Nelson has had to contribute more than his proportionate share to repay that line of credit and he has also had to pay income taxes on certain sources of income used for the repayment,” the opinion said.
The court said Nelson also alleges that the defendants took advance draws that exceeded their entitlement to distributions for 2014, in violation of Section IV of the Operating Agreement.
“Despite demand, defendants have refused to repay the excess advance draws that they received and, instead, defendants have tried to characterize those advance draws as guaranteed payments,” the opinion said. “This has diluted Nelson’s interest.”
Citing the Operating Agreement and the Buy-Sell Agreement, the court said the parties agreed that “any and all claims, controversies and disputes ... arising under or relating to [the Agreements] shall be settled through mediation conducted in accordance with the then-existing rules of the Pennsylvania Bar Association’s Lawyer Dispute Resolution Program Rules.”
According to the opinion, Clark argued that Nelson lacks standing to assert the claims he seeks to arbitrate because he did not suffer an injury as a result of the actions described in Paragraph 18 of the Amended Complaint.
“Clark has supplied no evidence that plaintiff did not suffer an injury as described in Paragraph 18 and has supplied no legal authority to support his argument that plaintiff lacks standing,” the opinion said.
According to the opinion, McCarron and Mullen argued that the court should deny the Motion to Compel Arbitration as to them because Paragraph 18 does not state arbitrable claims against them. The court said McCarron and Mullen argued that any claim against them that arises from the repayment of the $4 million line of credit with First Niagara Bank would arise under their individual guaranty agreements with First Niagara, not under the Operating and Buy-Sell Agreements.
According to the court, “the claim described in Paragraph 18(a) plausibly falls within the scope of Sections III of the Operating Agreement and Section 3.1.1 of the Buy-Sell Agreement and thus falls within the scope of the arbitration provisions in those Agreements.”
The district court also disagreed with Levine and de Luca, who argued the court should deny the Motion to Compel Arbitration because the prerequisites to filing a motion pursuant to the Federal Arbitration Act were not satisfied before Nelson filed the action.