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Madison House Group v. Pinnacle Entertainment


March 15, 2010


On appeal from the Superior Court of New Jersey, Chancery Division, Atlantic County, Docket No. C-145-08.

Per curiam.


Argued: December 16, 2009

Before Judges Axelrad and Sapp-Peterson.

Defendant Pinnacle Entertainment, Inc. (Pinnacle)*fn1 appeals from the February l8, 2009 order of the Chancery Division permanently enjoining it from proceeding with the arbitration it had commenced against plaintiff, Madison House Group, L.P. (Madison), with the American Arbitration Association (AAA). We affirm.

This appeal involves the hotel portion of the Sands Casino that Greate Bay Hotel & Casino, Inc. leased from Madison in 2000. In July 2004, Greate Bay assigned the lease to Pinnacle. There were ongoing problems between landlord and tenant and by letter of November 25, 2008, Madison gave notice to Pinnacle of default under the lease, asserting violations not relevant to this appeal.

In response, on December l0, Pinnacle commenced an AAA arbitration against Madison, primarily seeking a declaration that Pinnacle had complied with its lease obligations and was not in breach. According to Pinnacle, it was entitled to pursue this arbitration under the dispute resolution provision contained in Paragraph 21 of the parties' lease, which provides in relevant part:

21. Governing Law. This Lease shall be governed by and construed in accordance with the domestic laws of the State of New Jersey without giving effect to any choice or conflict of law provision or rule that would cause the application of the laws of any jurisdiction other than the State of New Jersey. Any and all legal proceedings concerning the infringement, breach, or contemplated breach of this Lease, shall be subject to arbitration in the State of New Jersey, Atlantic County only, and the parties hereto consent to such jurisdiction and venue. Any such disputes arising under this Lease, shall be decided finally by three arbitrators in an arbitration proceeding conforming to the Rules of the . . . ("AAA") applicable to commercial arbitration. The arbitrators shall be appointed as follows: . . . . The decision of a majority of the arbitrators shall be conclusively binding upon the parties and final, and such decision shall be enforceable as a judgment in any court of competent jurisdiction. Notwithstanding the above, at the option of either Landord or Tenant, Landlord or Tenant shall have the right to resolve any dispute, whether initiated by Landlord or Tenant, in a state or federal court of competent jurisdiction located in the State of New Jersey, Atlantic County (or Camden County if federal court), and each party irrevocably submits to the jurisdiction and venue of such court for such purposes.

[(Emphasis added by underline).]

On December 23, 2008, Madison commenced this action in the New Jersey Superior Court, Chancery Division, Atlantic County, seeking specific performance under the lease and damages for breach of the lease and breach of the implied covenant of good faith and fair dealing. Madison also sought a mandatory injunction directing Pinnacle to withdraw its arbitration proceeding and submit its dispute to the court. During an administrative conference call between the parties and AAA, counsel for Madison advised that it had filed the court complaint and would not be arbitrating the dispute. On January 7, 2009, Pinnacle filed suit in the federal district court to compel arbitration and stay the state court action.*fn2

On or about January 6, 2009, Madison filed an order to show cause with temporary restraints in the state court action. Madison argued that the last sentence of Paragraph 21 beginning with "[n]otwithstanding the above," applied to the entirety of the paragraph that preceded the phrase. It contended the paragraph clearly provided that either party had the option of arbitrating disputes arising under the lease unless the other party wanted to litigate those disputes in court; in the vernacular, a lawsuit would "trump" arbitration.

Pinnacle argued that the parties recognized the arbitration of the disputes under the lease was mandatory and the "notwithstanding" clause specifically referred only to the preceding sentence. It contended that by including a clause incorporating AAA rules, the parties conferred jurisdiction in the first instance on the arbitration panel, which included the initial decision as to the issue of arbitrability. According to Pinnacle, once a final and binding decision was issued by the arbitrator, the last sentence of the paragraph gave either party the option to seek redress under the New Jersey Arbitration Act in the state or federal court to either enforce or appeal the arbitration award.

Following oral argument on January 8, 2009, Judge William C. Todd, III gave the following explanation, in part, for his ruling granting the preliminary injunction:

On the record that I have before me today it seems to me that at the least if I were to acknowledge that there's an ambiguity [in Paragraph 21 of the Lease], a review of all the circumstances would suggest that the language should be interpreted as the plaintiffs are urging. I think almost anyone reading that paragraph would come to the conclusion that the parties reserve to themselves the option of litigating rather than proceeding with arbitration. I think that is clearly the most reasonable interpretation of that language of the agreement, and because that language seems so clear, I think it's quite a strain to suggest that that was an issue that was intended to be presented to the arbitrator or arbitrators first.

On the return date on February l3, the court reiterated:

I am satisfied that the preliminary decision I outlined is the appropriate one, and I don't think I can add much to it. I do not think there is any plausible way to interpret the provisions of paragraph [2]1 except as giving each party the right to litigate in court. The arguments that have been made today, you can say they're creative, they are, but they're not convincing and I don't have any reason to pause in terms of how this paragraph should be interpreted. So I'm satisfied that there is no right to arbitrate when one party has chosen to litigate and I'm going to restrain the arbitration.

By order of February 18, 2009, the court permanently enjoined the arbitration and established a discovery schedule for the parties. This appeal ensued.*fn3

On appeal, Pinnacle argues: (1) its appeal from the order staying arbitration is of right*fn4 ; (2) review of the order staying arbitration is de novo; (3) the Federal Arbitration Act (FAA) governs whether the lease requires Madison to participate in the AAA arbitration; and (4) under FAA law, the lease requires Madison to participate in the AAA arbitration because Paragraph 2l of the lease incorporates an AAA rule expressing such an agreement and/or the provision is susceptible to an interpretation making the parties' substantive dispute subject to arbitration. We are not persuaded by any of these arguments.

The issue before us is whether the trial court correctly determined that Paragraph 21 of the parties' lease, while referring to arbitration as a means for dispute resolution, also conferred upon the parties the unconditional and unilateral right to a judicial resolution of such dispute. We have held that the "[i]nterpretation and construction of a contract is a matter of law for the court subject to de novo review." Kaur v. Assured Lending Corp., 405 N.J. Super. 468, 474 (App. Div. 2009) (citation omitted). We afford no special deference to the trial court's interpretation of the law and the legal consequences that flow from established facts. Manalapan Realty, L.P., v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995). With this principle in mind, we have reviewed Judge Todd's ruling, and are in accord with his analysis and conclusion.

Pinnacle asserts, and Madison does not dispute, that Madison's claims fall under the FAA, 9 U.S.C.A. §§ 1-16, because the lease provides for the operation of the property as a hotel, which is a "contract evidencing a transaction involving commerce." 9 U.S.C.A. § 2 (2009). The FAA creates a body of substantive law that is applicable in state and federal courts. Southland Corp. v. Keating, 465 U.S. 1, 12, 104 S.Ct. 852, 859, 79 L.Ed. 2d 1, 13 (1984). It "requires courts to enforce privately negotiated agreements to arbitrate, like other contracts, in accordance with their terms," and interprets such agreements pursuant to "general state-law principles of contract interpretation" but with "due regard . . . to the federal policy favoring arbitration." Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S. 468, 475-78, l09 S.Ct. l248, 1254-55, l03 L.Ed. 2d 488, 498-500 (1989).

The FAA's pro-arbitration policy, however, "does not operate without regard to the wishes of the contracting parties," Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 57, 115 S.Ct. 1212, 1216, l3l L.Ed. 2d 76, 84 (1995), and "does not require parties to arbitrate when they have not agreed to do so," Volt, supra, 489 U.S. at 478, 109 S.Ct. at 1255, 103 L.Ed. 2d at 499. That is because under state and federal law, arbitration is a matter of contract, and "arbitrators derive their authority to resolve disputes only because the parties have agreed in advance to submit such grievances to arbitration." AT&T Techs. v. Commc'ns Workers of Am., 475 U.S. 643, 648-49, 106 S.Ct. 1415, 1418, 89 L.Ed. 2d 648, 655 (1986). The general rule is that the threshold question of arbitrability is for a court. "Courts should not assume that the parties agreed to arbitrate arbitrability unless there is 'clea[r] and unmistakabl[e]' evidence that they did so." First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 1924, 131 L.Ed. 2d 985, 994 (1995) (quoting AT&T Techs., supra, 475 U.S. at 649, 106 S.Ct. at 1418, 89 L.Ed. 2d at 656).

There is no question that Paragraph 21 of the parties' agreement is far from a model of draftsmanship and leaves much to be desired from the standpoint of clarity. Interpreting it under general principles of contract, we must view it in its entirety, AXA Assurance, Inc. v. Chase Manhattan Bank, 339 N.J. Super. 22, 26 (App. Div. 2001), giving words their plain and ordinary meaning, Independent Oil Workers v. Mobil Oil Corp., 44l F.2d 651, 653 (3d Cir. l971).

We are not persuaded by Pinnacle's argument that Paragraph 21 of the lease contains a "clear and unmistakable" agreement to delegate the determination of arbitrability to an arbitrator because it incorporates by reference an AAA rule.*fn5 See l Oehmke, Commercial Arbitration § 20:5 (3d ed. 2009) (stating that the general rule is that courts decide whether the parties agreed to arbitrate, but the "issue of arbitrability may be submitted to binding arbitration if there has been a clear demonstration that the parties contemplated it, such as by reference to the AAA rules.") In Qualcomm, Inc. v. Nokia Corp., 466 F.3d 1366, 1372-73 (Fed. Cir. 2006), for example, relied on by Pinnacle, the agreement that was held to "clearly and unmistakably" incorporate the AAA rules provided, without further qualification, that "[a]ny dispute, claim or controversy arising out of or relating to this Agreement, or the breach or validity hereof, shall be settled by arbitration in accordance with the arbitration rules of the [AAA]."

The first part of Paragraph 21 does reference the AAA rules. However, it neither incorporates the AAA Rules in express language, nor in the context of the entire paragraph does it provide for arbitration to be the mandatory, unilateral procedure for determining arbitrability or settling all disputes respecting the lease. The paragraph begins with the premise that all proceedings concerning the breach of the lease "shall be subject to arbitration," and the process to be followed is then set forth, namely, that the disputes will be decided finally by three arbitrators in a proceeding conforming to the AAA commercial arbitration rules, with a designation of how the arbitrators will be appointed (emphasis added). The paragraph continues that the decision of the majority of the arbitrators will be binding and enforceable as a judgment in court.

However, in contrast to the majority of the cases relied on by Pinnacle, the parties did not stop there in the paragraph they drafted pertaining to their dispute resolution. The parties next provided that "[n]otwithstanding the above," at the option of either party, that party has the "right" to resolve any dispute, regardless of who it was initiated by, "in a state or federal court" and "each party irrevocably submits to the jurisdiction and venue of such court for such purposes."

Accordingly, even if the first section were read as incorporating AAA rules, of which we have our doubts, that section cannot be read in a vacuum and thus Qualcomm and related cases cited by Pinnacle are inapposite. Reading the paragraph as a whole, we are not satisfied there is "clear and unmistakable evidence" of an agreement to arbitrate arbitrability and thus Judge Todd properly determined the threshold issue of arbitrability.

Pinnacle further argues that even if jurisdiction of the matter first lies in the court, FAA law would require that the parties' substantive dispute be subject to arbitration because it is apparent the lease is susceptible of a plausible interpretation requiring arbitration. See AT&T Techs., supra, 475 U.S. at 650, 106 S.Ct. at 1419, 89 L.Ed. 2d at 656 ("[W]here the contract contains an arbitration clause, there is a presumption of arbitrability in the sense that an order to arbitrate the particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.") (citations and quotations omitted).

According to Pinnacle, based on the language of the agreement and principles of statutory construction, "the above" modifier following "[n]otwithstanding" is intended to solely and specifically refer to the preceding sentence -- that the decision of the majority of the arbitrators shall be binding on the parties and final and enforceable as a judgment in any court of competent jurisdiction. In other words, the two sentences read together, provide for the right of either party to seek redress in court to enforce or appeal an arbitration award.

Pinnacle urges this construction, in part, because of the similarity of subject matter, i.e., that these two sentences are the only ones in Paragraph 21 that address a judicial forum. Because, as a matter of federal law under the FAA, "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration," Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25, l03 S.Ct. 927, 941, 74 L.Ed. 2d 765, 785 (1983), Pinnacle concludes that Paragraph 21 of the parties' lease is thus susceptible of an interpretation requiring arbitration.

We disagree. Like Judge Todd, we are satisfied the "notwithstanding" language in the last sentence of Paragraph 21 is incompatible with arbitration as an exclusive or mandatory method of resolution of the parties' disputes under the lease. This sentence cannot be read as merely preserving the "right" of the parties to go to court to enforce or challenge the integrity of their arbitration. As the parties would have this option under the AAA Rules, Commercial Arbitration Rule R-48(c), or New Jersey law, N.J.S.A. 2A:23B-22 to -28, such a provision would be redundant. Rather, the "notwithstanding" language must be read in the context of the entire paragraph, and, in doing so, we are convinced it provides a judicial guarantee clearly designed to override, if so chosen, the arbitration alternative in the opening sentences of the paragraph. We note, for example, the parties' choice of words in these two sections - all disputes under the contract are "subject to arbitration" while the parties have a "right to resolve" these same disputes in a court of competent jurisdiction. The stronger language providing for the submission of the dispute to the courts reflects an intention to make arbitration of the disputes under the lease optional and submission to a court of the disputes under the lease a superior and unconditional right. Therefore, under the plain language of the agreement, it is apparent that a dispute is only "subject to" arbitration if neither party elects to litigate. It is implausible to read Paragraph 21 as intending to foreclose the "right" of a party to seek judicial relief in the first instance merely because the other party initiated an arbitration proceeding.


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