Appendix — Distajo v. Doctor's Associates, Inc.

TABLE OF CONTENTS FOR APPENDIX

Second Circuit Opinion, Order and

Judgment of September 12, 1995

September 28, 1995 Amendment to

the Second Circuit Opinion

Second Circuit’s Order of

November 1, 1995 denying the

Petition for Rehearing in

one of the appeais .....

Second Circuit’s November 14,

1995 order denying the

Petition for Rehearing in

the remaining appeal .......

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UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Nos. 1724, 1725, 1726, 1988—August Term, 1994

(Argued: June 7, 1995 Decided: September 12, 1995)

Docket Nos. 94-9207, 94-9293, 94-9209, 95-7183

DOCTOR’S ASSOCIATES, INC.,

Plaintiff-Appellee,

om am

EMILY DISTAJO, RENATO DISTAJO, CONSTANTINO

LAMANDO, MILO LAMANDO, JOSE ALBERTO BRENES,

ALVARO GUERRERO, MARIA T. GUERRERO, WESAM

S. YOUMARAN, LINDA YOUMARAN, JULIE SHINO,

JOHNSON SHINO, ALBERT YONAN, LEYLAH YONAN,

LOUIS LOENNEKE, MARY ANN BOOKOUT, MICHAEL

JOHNSON, DEBORAH A. KANE, GREGORY F. KANE,

BRUNO GIANINNI, RONALD ROTHMUND, PATRICIA

ROTHMUND, JOHN S. PAPALEO, JOHN A. MCCRARY,

JOHN GILLON, SONYA SMITH, PAUL RIISE, MELISSA

RIISE, and RHONDA BENTON,

Defendants-Appellants.

—and—

7123 2a

DOCTOR'S ASSOCIATES, INC.,

Plaintiff-Appellee,

— ee

RAYMOND BICKEL and SANDRA BICKEL,

Defendants-Appellants.

Before:

MINER, LEVAL and CABRANES,

Circuit Judges.

Appeal from several orders of the United States Dis-

trict Court for the District of Connecticut (Peter C.

Dorsey, Chief Judge), denying certain appellants’

motions to dismiss, granting appellee’s petitions to com-

pel arbitration, and entering a preliminary injunction

barring appellants from pursuing parallel state litigation.

Appellants contend that (1) the district court lacked sub-

ject matter jurisdiction; (2) the district court should have

accorded preclusive effect to judgments entered in state

courts against DAI; (3) the arbitration clause is void for

“lack of mutuality”; (4) DAI waived its right to compel

arbitration by initiating litigation through a shell cor-

poration; and (5) the district court should have decided

whether the appellants were fraudulently induced to

enter the arbitration agreement, rather than leaving that

question for the arbitrators.

Reversed in part and affirmed in part.

7124 3a

DAVID M. DUREE, Reinert, Duree & Crane,

St. Louis, Missouri, for Defendants-

Appellants Emily Distajo, Renato Dis-

tajo, Constantino Lamando, Milo

Lamando, Jose Brenes, Alvaro Guerrero,

Maria Guerrero, Wesam Youmaran,

Linda Youmaran, Julie Shino, Johnson

Shino, Albert Yonan, Leylah Yonan,

Louis Loenneke, Mary Ann Bookout,

Michael Johnson, Deborah A. Kane,

Gregory F. Kane, Bruno Gianinni,

Ronald Rothmund, Patricia Rothmund,

John S. Papaleo, Raymond Bickel and

Sandra Bickel.

Edward E. Angwin, Birmingham, Alabama,

for Defendants-Appellants John A.

McCrary, John Gillon, Sonya Smith,

Paul Riise, Melissa Riise, and Rhonda

Benton.

Nicholas Wocl, Tooher, Puzzuoli & Wocl,

Stamford, Connecticut, for all Defen-

dants-Appellants.

EDWARD WOOD DUNHAM, Wiggin & Dana,

New Haven, Connecticut, for Plaintiff-

Appellee.

JOSE A. CABRANES, Circuit Judge:

This case is about forum-shopping, by one and all.

Doctor’s Associates, Inc. (“DAI”) is the national fran-

chisor of Subway sandwich shops. DAI and its fran-

chisees entered into standard franchise agreements,

7125 4a

which required them to arbitrate all contractual disputes

in Bridgeport, Connecticut, under Connecticut law.

When problems did arise, however, neither side invoked

the arbitration clause. First, DAI directed its wholly

owned real-estate leasing companies to bring summary

eviction proceedings against the franchisees in local

State courts.! The franchisees, in turn, scrambled to

obtain judgments against DAI in local state courts.

When DAI found itself faced with state court claims

around the country, it sought shelter in the arbitration

clause of its franchise agreements. Accordingly, it peti-

tioned the federal district court in Connecticut to com-

pel arbitration under the Federal Arbitration Act. Before

the district court could act, some of the franchisees won

state court judgments against DAI. But DAI eventually

convinced the district court to enjoin the franchisees

from pursuing their state actions—even from enforcing

judgments already entered—and to send the parties to

Bridgeport to resolve their disputes around the arbitral

table.

' DAI and other franchisees have been involved in similar litigation

around the country. See, e.g., Kroll v. Doctor's Assocs., Inc., 3 F.3d 1167

(7th Cir. 1993); Mosca v. Doctors Assocs., Inc., 852 F. Supp. 152

(E.D.N.Y. 1993); Wilson v. Subway Sandwiches Shops, Inc., 823 F. Supp.

194 (S.D.N.Y. 1993); In re Sims, 1991 U.S. Dist. LEXIS 13664 (E.D. La.

1991); Yates v. Doctor's Assocs., Inc., 193 Ill. App. 3d 431, 549 N.E.2d

1010 (Sth Dist. 1990); Cox v. Doctor’s Assocs., Inc., 245 Ill. App. 3d

186, 613 N.E.2d 1306 (Sth Dist.), appeal denied, 152 Ill.2d 556 (1993),

cert. denied, 114 S. Ct. 1069 (1994); Casarotto v. Lombardi, 268 Mont.

369, 886 P.2d 931 (1994), vacated and remanded, 115 S. Ct. 2552

(1995).

The relationship between DAI and the Bickels’ landlord has also been

the subject of litigation. Jannotta v. Subway Sandwich Shops, Inc., 1995

U.S. Dist. LEXIS 7586 (N.D. Ill. 1995).

7126 5a

On appeal, we are presented with several questions

relating to the Federal Arbitration Act: (1) whether a dis-

trict court has subject matter jurisdiction over a petition

to compel arbitration where there is complete diversity

among all the parties to the arbitration agreement (all of

whom are joined as parties in the petition), but where

other, nondiverse parties have been joined as defendants

in a parallel state action involving the same underlying

dispute; (2) whether the district court should have

accorded preclusive effect to various state court judg-

ments entered in Alabama, Illinois, and North Carolina

courts; (3) whether an arbitration clause is void for “lack

of mutuality” under Connecticut law if it requires only

one party to submit disputes to arbitration; (4) whether

a party to an arbitration agreement waives its right to

compel arbitration when it litigates substantial issues

through an alter ego; and (5) whether a district court or

an arbitrator should decide whether a party was fraudu-

lently induced to assent to an arbitration agreement.

The district court found complete diversity, refused to

accord preclusive effect to the state court judgments,

found that the arbitration clause did not lack mutuality,

held that DAI had not waived its right to arbitrate

regardless of whether its leasing affiliates, which

brought the court proceedings, were its alter egos, and

left the question of fraudulent inducement to the arbi-

trators. As discussed below, we affirm in part and

reverse in part.

I. FACTS

Doctor’s Associates, Inc. (“DAI”), a Florida corpo-

ration, 1s the national franchisor of “Subway” sandwich

shops. DAI entered into identical franchise agreements

7127 6a

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with each of the defendant franchisees (the “Fran-

chisees”).2 Each agreement contains an identical arbi-

tration clause, which provides that any claim arising out

of or relating to the franchise agreement must be arb:-

trated in Bridgeport, Connecticut, under the Commercial

Arbitration Rules of the American Arbitration Associa-

tion. According to the arbitration clause, no party may

take legal action against the other in connection with the

franchise agreement without first attempting to arbitrate

the dispute.?

: For convenience, we shall refer to the franchisees individually

according to the following case numbers, or collectively according to the

state in which they brought suit, e.g., the “Alabama franchisees.” We list

the district court docket number, as well as the state of each group of

franchisees whose cases were consolidated under the heading of Doctor's

Associates, Inc. v. Distajo:

Case #1: 3:94-CV-349 Doctor's Associates, Inc. v. Distajo (IL)

Case #2: 3:94-CV-511 Doctor's Associates, Inc. v. Brenes (IL)

Case #3: 3:94-CV-514 Doctor's Associates, Inc. v. Guerrero (IL)

Case #4: 3:94-CV-515 Doctor's Associates, Inc. v. Youmaran (IL)

Case #5: 3:94-CV-516 Doctor's Associates, Inc. v. Shino (IL)

Case #6: 3:94-CV-517 Doctor's Associates, Inc. v. Loenneke (IL)

Case #7: 3:94-CV-803 Doctor's Associates, Inc. v. Johnson (NC)

Case #8: 3:94-CV-354 Doctor's Associates, Inc. v. McCrary (AL)

Case #9: 3:94-CV-369 Doctor's Associates, Inc. v. Gillon (AL)

Case #10: 3:94-CV-370 Doctor's Associates, Inc. v. Smith (AL)

Case #11: 3:94-CV-371 Doctor's Associates, Inc. v. Risse (AL)

Case #12: 3:94-CV-372 Doctor's Associates, Inc. v. Benton (AL)

Case #13: 3:94-CV-948 Doctor's Associates, Inc. v. Kane (MA)

Case #14: 3:94-CV-1108 Doctor's Associates, Inc. v. Giannini (PA)

Case #15: 3:94-CV-1456 Doctor's Associates, Inc. v. Rothmund (IL)

Case #16: 3:94-CV-1457 Doctor's Associates, Inc. v. Papaleo (IL)

Although DAI v. Bickel was not consolidated with the other sixteen

cases before the district court, it was consolidated for purposes of oral

argument before this court.

3‘ The arbitration clause provides as follows:

Any controversy or claim arising out of or relating to this contract

or the breach thereof shall be settled by Arbitration in accordance

with the Commercial Arbitration Rules of the American Arbitration

Association at a hearing to be held in Bridgeport, Connecticut and

aaa

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DAI requires each franchisee to sublease its premises

from one of several real-estate leasing companies that

are wholly owned by DAI. Each sublease contains a

“cross-default” provision, whereby any breach of the

franchise agreement by the franchisee constitutes a

breach of the sublease.‘ According to the deposition tes-

timony of one of its own officers, DAI wanted its leas-

ing affiliate to be the franchisees’ sublessor to obtain

greater leverage over them in the event of a dispute.

A. The District Court Proceedings in Doctor’s

Associates, Inc. v. Distajo (Nos. 94-9207, 94-9209,

94-9293)

From 1991 through 1993, various disputes arose

between DAI and the several franchisees. DAI never

filed any demands for arbitration, despite its claims that

the franchisees had breached the franchise agreements.

Instead, DAI directed its leasing companies to invoke

the cross-default provisions of the subleases, and to

institute eviction proceedings in state courts against each

franchisee.

In response to these eviction proceedings, each of the

franchisees filed a state court action claiming, inter alia,

judgment upon an award rendered by the Arbitrator(s) may_be entered

in any court having jurisdiction thereof. The commencement of arbi-

tration proceedings by an aggrieved party to settle disputes arising out

of or relating to this contract is a condition precedent to the com-

mencement of legal action by either party. The cost of such a pro-

ceeding will be borne equally by the parties.

The cross-default provision reads in relevant part as follows:

If at any time during the term of this Sublease, Sublessee shal! default

in the performance of any of the terms, covenants or conditions of the

aforesaid Franchise Agreement. . . Sublessor, at its option, may ter-

minate this lease. . . and upon such termination, Sublessee shall quit

and surrender the leased premises to Sublessor. . . .

7129 Sa

fraud and breach of contract by DAI, its leasing com-

panies, and several of DAI’s officers and agents.

According to the franchisees, DAI uses this subleasing

arrangement to circumvent the arbitration clause in the

franchise agreements. They argue that the leasing com-

panies are mere shells, or alter egos, of DAI. It is undis-

puted that the leasing companies are wholly owned by

DAI, that they have no assets or net income, and that

DAI decides when the leasing companies will file evic-

tion proceedings. Pursuant to the sublease, the fran-

chisee must pay rent directly to the actual landlord; no

rent is paid to the leasing company. According to the

franchisees, DAI has taken the position that the arbi-

tration clause in the franchise agreement is not binding

on its leasing companies, because they are not parties to

that agreement. The franchisees claim also that the leas-

ing companies have asserted the right to proceed with

eviction lawsuits against the franchisees even if the fran-

chisees file arbitration demands against DAI. Thus, DAI

allegedly brought eviction lawsuits through its leasing

companies to pressure its franchisees into resolving dis-

putes, but invokes the arbitration clause to protect itself

against litigation initiated by the franchisees.

DAI responded to each state lawsuit brought by the

franchisees by serving a demand for arbitration pursuant

to the franchise agreement. When the franchisees refused

to arbitrate their disputes, DAI filed petitions to compel

arbitration, pursuant to the Federal Arbitration Act,

9 U.S.C. § 4, in the United States District Court for the

District of Connecticut. All sixteen cases were eventu-

ally consolidated before Chief Judge Peter C. Dorsey.

Before the district court ruled on DAI’s petitions, the

state courts in Alabama, Illinois, and North Carolina

7130 9a

entered judgments in favor of the franchisees in Cases |-

12 and 15-16.

In the district court, DAI contended that the fran-

chisees were bound by the franchise agreement to submit

any disputes with DAI to arbitration in Bridgeport, Con-

necticut, before instituting judicial proceedings. The

franchisees responded by seeking dismissal of DAI’s

petitions on several grounds, including, inter alia:

(1) lack of subject matter jurisdiction, due to incomplete

diversity of the parties; and (2) collateral estoppel, based

on the intervening state court judgments. The district

court rejected each of these contentions in a ruling dated

September 29, 1994. The district court simultaneously

rejected DAI’s motion to enjoin the franchisees from

pursuing parallel] state court proceedings, on the grounds

that the requested injunction did not fall within any of

the narrow exceptions to .he Anti-Injunction Act, 28

U.S.C. § 2283.

On November 10, 1994, the district court granted

DAI’s petitions to compel arbitration. In doing so, the

court rejected several defenses raised by the franchisees,

including the following: (1) that the arbitration clause

was void for lack of mutuality; (2) that DAI had waived

arbitration by virtue of its leasing companies’ prosecu-

tion of eviction lawsuits; and (3) that DAI had fraudu-

lently misrepresented the scope of the arbitration clause

in the franchise agreement. The court held that the arbi-

trators, not the court, should determine whether the leas-

ing companies were “alter egos” of DAI, and then

address the question whether DAI had fraudulently mis-

represented the scope of the arbitration agreement.

When the franchisees continued to pursue their state

court actions, DAI obtained a temporary restraining

7131 10a

order from the district court on November 22, 1994, pre-

venting them from participating in the parallel state pro-

ceedings. On December 14, 1994, the district court

entered a preliminary injunction, barring the Distajo

franchisees from seeking enforcement of their Illinois

judgment. Doctor's Assocs., Inc. v. Distajo, 870 F. Supp.

34 (D. Conn. 1994). The court concluded that injunctive

relief was “not inappropriate” under the Anti-Injunction

Act, 28 U.S.C. § 2283, because continued state litigation

would “impair the integrity of the order of arbitration.”

In granting DAI’s motion, the court rejected the fran-

chisees’ argument that an intervening judgment entered

in favor of the Distajo franchisees by an Illinois state

court on October 24, 1994, was “final” for res judi-

cata purposes and would preclude entry of the injunction

under the full faith and credit statute, 28 U.S.C. § 1738.

All of the franchisees filed timely appeals from the

district court’s order of September 29, 1994, denying

their motions to dismiss, and the order of November 10,

1994, compelling arbitration. All of the franchisees

except those from Alabama (Cases 8-12) also appeal

from the court’s December 9, 1994, order entering the

preliminary injunction.

B. The District Court Proceedings in Doctor’s

Associates, Inc. v. Bickel (No. 95-7183)

The proceedings in the Bickel case differ somewhat

from those cases consolidated under the Distajo rubric.

On December 16, 1994, the Bickels filed a complaint

in Illinois state court against DAI, its leasing company,

its development agent, and three DAI officers. DAI

responded by filing a petition to compel arbitration in

the United States District Court for the District of Con-

necticut on January 20, 1995, and moved to enjoin the

7132 lla

Bickels from prosecuting their state court action. On

February 7, 1995, the Illinois court entered a default

judgment against DAI. On February 13, 1995, Chief

Judge Dorsey granted both DAI’s petition to compe!

arbitration and its motion for a preliminary injunction,

while permitting DAI to move the Illinois court to vacate

the default judgment on the basis of defective service

of process. The district court entered a written order

embodying the Bickel injunction on May 9, 1995, but did

not order DAI to post a bond.

The Bickels appeal from the court’s order of May 9,

1995, granting DAI’s petition to compel arbitration and

entering the preliminary injunction.

I. DISCUSSION

“When reviewing a district court’s determination of its

subject matter jurisdiction, we review factual findings

for clear error and legal conclusions de novo.” Jn re

Vogel Van & Storage, Inc., 59 F.3d 9, 11 (2d Cir. 1995).

We also review de novo the district court’s decision to

compel arbitration. Collins & Aikman Prods. Co. v.

Building Systems, Inc., 58 F.3d 16, 19 (2d Cir. 1995).

A. Subject Matter Jurisdiction

Section 4 of the Federal Arbitration Act (“FAA”),

9 U.S.C. §§ 1-16, confers jurisdiction on district courts

to hear petitions to enforce arbitration agreements, but

only to the extent that the court would otherwise have

jurisdiction over the dispute. The statute provides as

follows:

A party aggrieved by the alleged . . . refusal of

another to arbitrate under a written agreement for

7133 12a

arbitration may petition any United States district

court which, save for such agreement, would have

jurisdiction under Title 28, in acivil action. . . of

the subject matter of a suit arising out of the con-

troversy between the parties, for an order directing

that such arbitration proceed in the manner provided

for in such agreement.

9 U.S.C. § 4 (emphasis added). As the Supreme Court

has explained,

[t]he Arbitration Act is something of an anomaly in

the field of federal-court jurisdiction. It creates a

body of federal substantive law establishing and

regulating the duty to honor an agreement to arbi-

trate, yet it does not create any independent federal-

question jurisdiction under 28 U.S.C. § 1331 (1976

ed., Supp. V) or otherwise. Section 4 provides for

an order compelling arbitration only when the fed-

eral district court would have jurisdiction over a suit

on the underlying dispute; hence, there must be

diversity of citizenship or some other independent

basis for federal jurisdiction before the order can

issue.

Moses H. Cone Memorial Hosp. v. Mercury Constr.

Corp., 460 U.S. 1, 25 n.32 (1983).

The parties seem to agree that the only possible basis

for federal subject matter jurisdiction in this case would

be diversity of citizenship. 28 U.S.C. § 1332. It is a

long-settled rule that in order to invoke diversity juris-

diction, the petitioner must show “complete diversity” —

that is, that it does not share citizenship with any

defendant. C. 7. Carden v. Arkoma Assocs., 494 U.S.

185, 187 (1990); Strawbridge v. Curtiss, 7 U.S. (3

Cranch) 267, 267 (1806), overruled on other grounds, 43

7134 3a

U.S. (2 How.) 497, 555 (1844); Curley v. Brignoli, Cur-

ley & Roberts Assocs., 915 F.2d 81, 84 (2d Cir. 1990),

cert. denied, 499 U.S. 955 (1991). DAI is a Florida

corporation with its principal place of business in

Florida. The franchisees are residents of Alabama, II1i-

nois, Massachusetts, North Carolina, and Pennsylvania.

The franchisees argue that there is not complete diver-

_ sity of citizenship here. According to the franchisees, the

“controvers[ies] between the parties” to which the FAA

refers involve not only DAI, but also DAI’s development

agents—some of whom share the same citizenship with

certain franchisees. None of those agents was a party to

the franchise agreement; none has been joined as a party

in the present proceeding. These local DAI agents, the

franchisees contend, are “indispensable parties” to

the present federal action, as evidenced by the fact that

the affiliates are named defendants in the franchisees’

State actions. In other words, the franchisees argue that

their state court actions are the “suit[s] arising out of the

controversy between the parties” hypothesized by

the FAA. If so, then the citizenship of all the parties in

the state actions determines whether there is complete

diversity in the federal action to compe! arbitration.

Because these agents cannot be joined without destroy-

ing diversity, the franchisees argue that the district court

should have dismissed the petitions to compel.

DAI responds that the “suit arising out of the contro-

versy between the parties” is DAI’s action to compel

arbitration—not the parallel state action—and that DAI’s

affiliates are not “indispensable parties” to the federal

action. Accordingly, DAI argues that we should look at

the citizenship only of the parties named in the petition

to compel, when determining whether there is diversity

jurisdiction. Prudential-Bache Sec., Inc. v. Fitch, 966

1

F.2d 981, 988 (Sth Cir. 1992) (“jurisdiction for a petition

to compel arbitration [must] be determined from the face

of the petition”). DAI offers a textual argument and a

policy argument to support its position. First, it notes

that the FAA asks whether the district court would have

jurisdiction over a suit arising out of a controversy

“between the parties.” The phrase “the parties” most

sensibly refers to those persons who are parties to the

arbitration agreement—and who therefore can be named

in the petition to compel arbitration. Second, DAI argues

that the FAA would be fatally undermined if “the par-

ties” described in § 4 could be expanded to include per-

sons who had not signed the arbitration clause but who

allegedly were involved in the “underlying controversy.”

If such a rule were adopted, a party resisting arbitration

could defeat federal jurisdiction simply by suing some-

one from the same state, plus the party seeking to com-

pel arbitration, in a separate state lawsuit. Diversity

would be destroyed simply by claiming that the local

defendants in the parallel action were “indispensable

parties” to the petition to compel.

We agree with DAI. The “parties” to which § 4 of

the FAA refers are the parties to the petition to compel.

As with any federal action, diversity of citizenship is

determined by reference to the parties named in the pro-

ceeding before the district court, as well as any indis-

pensable parties who must be joined pursuant to Rule 19

of the Federal Rules of Civil Procedure. Where joinder

of a party would destroy subject matter jurisdiction, the

court must dismiss the action if that party is “indis-

pensable” to the litigation. Fed. R. Civ. P. 19(b)5; Fluent

5 Rule 19(b) provides:

Determination by Court Whenever Joinder not Feasible. If a per-

son as described in subdivision (a)(1)-(2) hereof cannot be made a

7136 15a

v. Salamanca Indian Lease Auth., 928 F.2d 542, 548 (2d

Cir.) (finding dismissal proper where indispensable party

was Indian tribe that enjoyed sovereign immunity from

suit), cert. denied, 502 U.S. 818 (1991). But individuals

who are not parties to the arbitration agreement cannot

be “indispensable” parties under Rule 19(b) if they do

not meet either of the threshold tests of Rule 19(a).¢ That

provision only requires joinder of a party if (1) the court

cannot afford “complete relief” to those already joined,

in the absence of that party, and (2) the unjoined party

has an interest in the litigation and his absence may

either impede his ability to protect that interest or

subject the already-joined parties to a risk of inconsis-

tent obligations—which often means the risk of piece-

meal litigation. Neither condition is satisfied in the

present case. First, the district court can grant all the

party, the court shall determine whether in equity and good con-

science the action should proceed among the parties before it, or

should be dismissed, the absent person being thus regarded as indis-

pensable. The factors to be considered by the court include: first, to

what extent a judgment rendered in the person's absence might be

prejudicial to the person or those already parties; second, the extent

to which, by protective provisions in the judgment, by the shaping of

relief, or other measures, the prejudice can be lessened or avoided:

third, whether a judgment rendered in the person's absence will be

adequate; fourth, whether the plaintiff will have an adequate remedy

if the action is dismissed for nonjoinder.

© Rule 19(a) provides that

A person who is subject to service of process and whose joinder will

not deprive the court of jurisdiction over the subject matter of the

action shall be joined as a party in the action if (1) in the person's

absence complete relief cannot be accorded among those already par-

ties, or (2) the person claims an interest relating to the subject of the

action and is so situated that the disposition of the action in the per-

son's absence may (i) as a practical matter impair or impede the per-

son's ability to protect that interest or (ii) leave any of the persons

already parties subject to a substantial risk of incurring double, mul-

tiple, or otherwise inconsistent obligations by reason of the claimed

interest.

7137 16a

relief sought by DAI in this case—an order compelling

arbitration—regardless of whether DAI’s development

agents (nonparties to the arbitration agreement) are pre-

sent. Second, the other consideration set forth in Rule

19(a)—possible prejudice resulting from piecemeal

litigation—is overcome in this context by the FAA’s

strong bias in favor of arbitration. Indeed, the Supreme

Court has categorically stated that the FAA requires

courts to enforce an arbitration agreement “notwith-

standing the presence of other persons who are parties to

the underlying dispute but not to the arbitration agree-

ment.” Moses H. Cone, 460 U.S. at 20. A district court

should not consider the citizenship of strangers to the

arbitration contract, since they are not “parties” the suit

arising out of the controversy within the meaning of the

FAA.

Accordingly, we hold that the district court was cor-

rect in looking only to the citizenship of the parties in

the action before it—that is, DAI and the franchisees,

who signed the arbitration agreement—to determine

whether there was complete diversity. (JA 643) Because

the parties conceded at oral argument that DAI and the

franchisees are completely diverse, we affirm the district

court’s finding that it possessed subject matter juris-

diction pursuant to 28 U.S.C. § 1332 and 9 U.S.C. § 4.

B. Preclusive Effect of State Court Judgments

The franchisees claim that the district court should

have accorded full faith and credit to the various state

court judgments that found the arbitration clause unen-

forceable in cases involving DAI and various of the

defendant franchisees.

The full faith and credit Statute, 28 U.S.C. § 1738,

provides that “[state] judicial proceedings . . . shail

have the same full faith and credit in every court within

the United States. . . as they have by law or usage in

the courts of such State. . . from which they are taken.”

Accordingly, a federal court must “give preclusive effect

to state-court judgments whenever the courts of the State

from which the judgments emerged would do so.” Allen

v. McCurry, 449 U.S. 90, 96 (1980); Valley Disposal,

Inc. v. Central Vermont Solid Waste Management Dist.,

31 F.3d 89, 98 (2d Cir. 1994).

The parties agree that the question, therefore, is

whether the various state court judgments (one in

Alabama, eight in Illinois, and one in North Carolina)

would be accorded preclusive effect under Alabama, IIli-

nois, or North Carolina law, respectively. We address

each state’s law in turn.

1. The Alabama Judgment (Case # 8)

During October 1993, DAI’s real-estate leasing com-

pany and its equipment leasing company filed suit

against franchisee John McCrary in the Circuit Court

of Talladega County, Alabama. In December 1993,

McCrary filed a counterclaim against those DAI affili-

ates, and added DAI and its Alabama development

agents as cross-claim defendants. On January 25, 1994,

DAI and its affiliates filed a motion to dismiss the

counterclaims and cross-claims or, in the alternative,

to stay the Alabama case pending arbitration. DAI

claims that it withdrew that motion after filing its peti-

tion to compel arbitration in the district court in Con-

necticut on March 8, 1994. On June 28, 1994, McCrary

filed in the Alabama court a “Motion to Determine Non-

Arbitrability of Issues.”

On July 7, 1994, the Alabama Circuit Court ruled that

the arbitration clause was void and unenforceable “for

any of the following independent reasons”: (1) lack of

mutuality; (2) fraudulent inducement; (3) waiver by DAI

of the right to invoke the arbitration clause; and (4) inva-

lidity of the clause under Alabama law prohibiting all

arbitration agreements, since the agreement lacked a suf-

ficient “interstate nexus” to permit application of the

FAA (which preempts state laws invalidating arbitration

clauses affecting interstate commerce). The court also

held that the issues raised in McCrary’s counterclaim fell

outside the scope of the arbitration clause. The Alabama

court then expressly found “no just reason for delay” and

accordingly directed that final judgment be entered in

favor of McCrary.

DAI subsequently filed a motion for reconsideration,

which the Alabama court denied on September 28, 1994.

McCrary represents to this court that DAI subsequently

appealed these orders to the Alabama Supreme Court.

(The parties have been barred from proceeding with that

appeal pursuant to the preliminary injunction entered by

the district court on December 9, 1994.)

In an order entered September 29, 1994, denying

McCrary’s motion to dismiss, the district court declined

‘to give preclusive effect to this Alabama judgment. The

court reasoned that because a motion to reconsider the

judgment was still pending in state court, there was not

yet a final judgment on the merits. Thus, principles of

res judicata and collateral estoppel would not apply.

On appeal, DAI concedes that the Alabama ruling was

indeed “final” for the purposes of preclusion. Under

Alabama law, an order entered upon less than all of the

claims presented in an action is a final, appealable order

7140 19a

if “the judge makes an express determination that there

is no just reason for delay. . . .” Goza vy. Everett, 365

So. 2d 658, 659 (Ala. 1978). “Alabama courts, like fed-

eral courts, generally apply the same test of finality for

purposes of preclusion as they do for appealability.”

Stone v. Williams, 970 F.2d 1043, 1055 (2d Cir. 1992),

cert. denied, 113 S. Ct. 233] (1993); see also First Ala.

Bank of Montgomery, N.A. v. Parsons Steel, Inc., 825

F.2d 1475, 1480 (11th Cir. 1987) (interpreting Alabama

law), cert. denied sub nom. McGregor v. First Ala. Bank

of Montgomery, 484 U.S. 1060 (1988). Because the Cir-

cuit Court of Talladega County expressly found that its

decision was final and that there was no reason for

delay, its July 7, 1994, order was immediately appeal-

able and thus would be accorded preclusive effect under

Alabama law as of that date.

DAI urges this court nevertheless to disregard the

Alabama judgment, for three reasons. First, DAI argues

that the Supreme Court’s decision in Allied-Bruce

Terminix Cos. v. Dobson, 115 S. Ct. 834 (1995), over-

turned the interstate commerce analysis that provided the

A'abama court’s fourth rationale for voiding the arbi-

tration clause. The Supreme Court’s decision, DAI

contends, constitutes an “intervening change in the

applicable legal context,” Staten Island Rapid Transit

Operating Auth. v. ICC, 718 F.2d 533, 543 (2d Cir.

1983), that requires a federal court not to accord preclu-

Sive effect to the Alabama decision. See RESTATEMENT

(SECOND) OF JUDGMENTS § 28(2) (1980). Even if

Allied-Bruce did undermine one rationale supporting the

Alabama court’s judgment, however, the Supreme

Court’s decision did not affect the alternate grounds set

forth by the court for voiding the arbitration clause.

714] 20a

Because the legal context has not shifted at all in these

other areas, we cannot reexamine the Alabama judgment.

Second, DAI contends that it was not afforded a “full

and fair opportunity to litigate” the arbitration claims in

the Alabama court. See Milltex Indus. Corp. v. Jacquard

Lace Co., 922 F.2d 164, 168 (2d Cir. 1991); Stone, 970

F.2d at 1056. DAI assigns error to three aspects of the

procedure followed in the Alabama court, each of which

we reject. (1) DAI complains that it was not afforded the

right to file a brief in response to McCrary’s “Motion to

Determine the Non-Arbitrability of the Issues.” But as

DAI conceded at oral argument before this court, noth-

ing in the record indicates that it ever sought to file such

a brief, much less that the Alabama court prevented it

from filing one. Absent any evidence to the contrary, we

accept the statement in the written order of the Alabama

court that “[bJoth sides have thoroughly briefed the

issues and provided factual evidence in support of their

respective positions.” (2) DAI also claims that it was not

afforded “meaningful oral argument.” Because DAI does

not claim that oral argument was completely denied, we

dismiss the argument out of hand. This court has held

that “[ojral argument is not a necessary component of

due process in all circumstances.” Zaluski v. INS, 37

F.3d 72, 73 (2d Cir. 1994); see also FCC v. WJR, The

Goodwill Station, Inc., 337 U.S. 265, 276 (1949) (“Cer-

tainly the Constitution does not require oral argument in

all cases where only insubstantial or frivolous questions

of law, or indeed even substantial ones, are raised.”).

Courts have broad discretion to determine how much, if

any, oral argument is appropriate in a given case. We

will not second-guess the Aiabama court’s allocation of

its time. (3) Finally, DAI argues that the Alabama court

drastically misapplied the law. This argument is nothing

7142 = 2la

more than an invitation for this court to revisit the mer-

its of the Alabama court’s judgment—precisely what the

full faith and credit statute tells us not to do. See Charles

Koen & Assocs. v. City of Cairo, 909 F.2d 992, 1000 n.8

(7th Cir. 1990) (“The full faith and credit statute does

not permit federal courts to reassess the merits of state

court judgments.”). “Lower federal courts are not supe-

rior to state courts.” Lion Bonding & Sur. Co. v. Karatz,

262 U.S. 77, 90 (1923); see also District of Columbia

Court of Appeals v. Feldman, 460 U.S. 462, 482 (1983)

(“[A] United States District Court has no authority to

review final judgments of a state court in judicial pro-

ceedings.”). If DAI is dissatisfied with the judgment of

the Alabama trial court, it should take an appeal.

Third, DAI argues that there was no motion properly

before the Alabama court that would permit it to decide

the arbitrability issue. That is, DAI claims that it had

already withdrawn its own motion to compel arbitration

under § 3 of the FAA, and that McCrary’s own “Motion

to Determine the Non-Arbitrability of the Issues” was

unauthorized, considering that McCrary had never

sought a declaratory judgment in his complaint. Accord-

ing to DAI, the Alabama opinion is therefore purely

“advisory,” and is not entitled to preclusive effect under

State law. This argument fails for two reasons. First, the

Alabama court clearly believed that DAI’s motion to

dismiss had been submitted for decision, since it denied

that motion on the merits. Second, Stamps v. Jefferson

County Board of Education, 642 So. 2d 941, 944 (Ala.

1994), which DAI cites, does not support the proposition

that a declaratory judgment is merely “advisory” if such

relief was not specifically requested in the complaint.

All the Alabama Supreme Court stated in Stamps was

that “[a]ctions or opinions are denominated ‘advisory,’

7143 22a

. where the judgment sought would not constitute

specific relief to a litigant. . . .” 642 So. 2d at 944

(quoting EDWIN M. BORCHARD, DECLARATORY JUDG-

MENTS 34 (1934)) (emphasis deleted). In that case, a

group of teachers had sued their employer and sought a

judicial declaration that their work duties subjected them

to prosecution by a state agency. The court held that

such a declaratory judgment would be purely advisory

because the prosecutorial agency had not been joined

as a party, and thus would not be bound by the decision.

Id. But DAI is a party in the Alabama action, and is

bound by the state court judgment. Because the declara-

tory judgment finding the arbitration clause to be

unenforceable provides “specific relief’ to McCrary

against DAI, as required by Stamps, it cannot be brushed

aside as an “advisory” opinion.

For these reasons, we hold that the district court

should have accorded full faith and credit to the

Alabama judgment. Accordingly, we reverse the district

court orders denying McCrary’s motion to dismiss and

compelling him to pursue arbitration. On remand, we

direct the district court to dismiss DAI’s petition to com-

pel McCrary to arbitrate. Although McCrary did not

appeal from the December 9, 1994 order entering the

preliminary injunction, we nevertheless exercise our

pendent appellate jurisdiction in the interests of judicial

economy to vacate the injunction. See Golino v. City of

New Haven, 950 F.2d 864, 868 (2d Cir. 1991) (“[W]here

we have jurisdiction to consider some questions on

appeal, we may exercise our discretion to take pendent

jurisdiction over related questions.”), cert. denied sub

nom. Lillis v. Golino, 112 S. Ct. 3032 (1992).

7144 23a

2. The Illinois Judgments (Cases ## 1-6, 15-16,

DAI v. Bickel)

Eight groups of Illinois franchisees’ filed complaints

against DAI, its leasing companies, and DAI’s two co-

Owners, and their cases were eventually consolidated

before the Circuit Court of Madison County, Illinois. On

October 24, 1994, the Illinois court granted the fran-

chisees’ motion for summary judgment, declaring the

arbitration clause void and unenforceable on several

grounds. The court stated that its decision was a “final

and appealable order and judgment under Illinois

Supreme Court Rule 304(a) in that there is no just reason

for delaying either the enforcement of or the appeal from

this judgment and order.”

DAI represented to the district court that it had filed a

motion for reconsideration in the Illinois court, and that

the possibility of appeal remained open. Reasoning that

a judgment subject to appeal was not final under Illinois

law, the district court refused to accord preclusive effect

to the Illinois court’s decision. The district court relied

on Pelon v. Wall, 262 Ill. App. 3d 131, 135 (2d Dist.

1994), which held that “[f]or res judicata purposes, a

judgment is not final until the possibility of appellate

review has been exhausted.”

The Bickels also filed a complaint against DAI and

others in the Circuit Court of Madison County, on

December 16, 1994. DAI failed to enter an appearance

in Madison County within the prescribed time, so the

Illinois court entered a default judgment in favor of

the Bickels on February 7, 1994. In its judgment, the

I]linois court declared the arbitration clause void and

7 Cases 1, 2,3, 4, 5, 6, 15, 16, and DAI v. Bickel. See supra note 2 for

the list of franchisees involved in each case listed here.

1145 44,

unenforceable, and scheduled a hearing on damages for

April 4, 1995. On February 13, 1995, however, the dis-

trict court ruled that for the purposes of issue preclusion,

the Illinois judgment obtained by the Bickels was no

more final than the judgment obtained by the other fran-

chisees in Madison County. Accordingly, the district

court granted DAI’s petition to compel arbitration and

enjoined the Bickels from continuing their Illinois liti-

gation. The injunction contained an exception, however,

which permitted DAI to move the Illinois court to set

aside its default judgment.

EL OS Ee este are ry’

The Illinois Supreme Court has held that an Illinois

judgment is not final, and thus not entitled to preclusive

effect, until the time for appeal has expired. Bellweg v.

City of Springfield, 114 Ill. 2d 107, 113 (1986) (“For

purposes of applying the doctrine of collateral estoppel,

finality requires that the potential for appellate review

must have been exhausted.”); Relph v. Board of Educ.,

84 Ill. 2d 436, 442 (1981) (holding that an appellate

court’s mandate to remand with instructions for further

proceedings establishes the law of the case, but does not

constitute a final judgment entitled to res judicata

effect—partially because the trial court’s further pro-

ceedings are subject to subsequent appeal, and partially

because the appellate court’s mandate is subject to

review by the Illinots Supreme Court); see also People

v. Condon, 246 Ill. App. 3d 74, 76 (2d Dist. 1993) (hold-

ing that judgment is not final for purposes of preclusion

until the potential for appellate review has been

exhausted).

The franchisees respond by citing Illinois Founders

| Insurance Co. v. Guidish, 248 Ill. App. 3d 116, 120 (1st

Dist. 1993), where it was said that

7146 25a

lee

[t]he pendency of an appeal has no effect on the

finality of the order appealed from. Under certain

circumstances, the pendency of an appeal can affect

the enforceability of a judgment. . . but not its

finality. More to the point, a final judgment can

serve as the basis to apply the doctrines of res judi-

cata and collateral estoppel even though the judg-

ment is being appealed.

The Illinois Appellate Court’s Statement in Guidish is

clearly at odds with the Illinois Supreme Court’s cate-

gorical statements in Bellweg and Relph. See Prymer v.

Ogden, 29 F.3d 1208, 1213 n.2 (7th Cir.) (discussing, but

declining to resolve, conflict in authority), cert. denied,

115 S. Ct. 665 (1994). Despite the best efforts of the

franchisees to distinguish Bellweg and Relph, we must

follow the rulings of the Illinois Supreme Court.®

We hold that the district court correctly refused to

accord preclusive effect to the Illinois judgments.

3. North Carolina (Case #7)

In April 1993, Michael Johnson filed a complaint

against DAI and several affiliated individuals in the

General Court of Justice, Superior Court Division, in

Gaston County, North Carolina. Johnson alleged, inter

alia, fraud, breach of contract, and conversion. DAI

replied by filing two motions. First, it moved to Stay the

lawsuit pending arbitration. Second, it moved to dismiss

Johnson’s complaint, on the grounds that he had waived

§ We note that many of the franchisees’ arguments were espoused in a

dissenting opinion by a judge on the Illinois Appellate Court, who

directly criticized the holding of Bellweg for deviating from the Restate-

ment (Second) of Judgments § 13. Southeastern Ill. Elec. Coop., Inc. v.

Illinois Human Rights Comm'n, 162 Il. App. 3d 806, 814 (Sth Dist.

1987) (Karns, J., dissenting), appeal denied, 119 Ill. 2d 575 (1988).

7147 26a

his right to challenge the arbitration agreement by

previously participating in arbitration proceedings with

DAI. Johnson, in turn, claimed that the arbitration clause

was unenforceable on several grounds, including (1) that

it lacked mutuality and (2) that he had been fraudulently

induced into executing the arbitration agreement.

On May 3, 1994, the North Carolina court denied both

of DAI’s motions. In its written order, the court explic-

itly addressed only the issues raised in DAI’s motion to

dismiss: it held that Johnson’s “limited participation in

the arbitration proceedings did not constitute a waiver of

his right to challenge the enforceability of the arbitration

clause.” With respect to DAI’s first motion, however, the

court did not explain why it denied the stay, nor did it

make any findings of fact or conclusions of law regard-

ing the arbitration clause.

Johnson argues that the North Carolina court must

have relied on one of the rationales offered by Johnson

(lack of mutuality or fraudulent inducement) even

though the court did not specify which one. In North

Carolina, however, collateral estoppel only precludes the

relitigation of issues that were actually and necessarily

decided in the earlier action. King v. Grindstaff, 200

S.E.2d 799, 805 (N.C. 1973). The party invoking the

benefit of collateral estoppel (here, Johnson) bears

the burden of establishing what was in fact determined

by the prior judgment. Thomas M. McInnis & ASsocs.,

Inc. v. Hall, 349 S.E.2d 552, 557 (N.C. 1986). Even if

one of the issues raised by Johnson—mutuality or fraud-

ulent inducement—was necessarily decided by the state

judge, it is impossible to ascertain which issue was actu-

ally decided. We therefore hold that the judgment of the

Gaston County court would not be accorded preclusive

7148 27a

aici

effect under North Carolina law with respect to the

validity of the arbitration clause.

Accordingly, we affirm the district court’s decision not

to accord full faith and credit to the judgment against

DAI obtained by Johnson in the North Carolina court.?

C. The Franchisees’ Challenges to the Arbitration

Clause

1. Mutuality

The franchisees argue that the arbitration Clause is

void for lack of mutuality, in that it requires a franchisee

to submit all controversies to arbitration but reserves to

DAI (through its leasing companies) the right to seek

Summary eviction against the franchisees. The district

court rejected this argument, finding no lack of mutu-

ality: If the leasing companies were separable entities,

then “the arbitration clause will be enforceable only as

to DAI and the [franchisees], obliging them to arbitrate,

thus establishing mutuality.” If, on the other hand, the

leasing companies were indistinguishable from DAI,

then they too would be bound to arbitrate. Either way,

the court reasoned, mutuality was not an issue.

We agree that mutuality is not an issue, but for dif-

ferent reasons. Preliminarily, we note that the parties

have not offered any reason why we should not apply the

choice-of-law clause in the franchise agreements, which

9 The district court refused to give full faith and credit to the North

Carolina judgment on the grounds that it was subject to appeal, and thus

did not constitute a final order entitled to preclusive effect. On appeal

before this court, DAI concedes and we agree that the North Carolina

judgment is a “final” order for the Purposes of North Carolina preclusion

law. Sims v. Ritter Constr., Inc., 62 N.C. App. 52, 55, 302 S.E.2d 293,

295 (1983) (holding that interlocutory order affecting a substantial right

is final and appealable, and entitled to res judicata effect under North

Carolina law).

7149 28a

indicates that Connecticut law applies. Connecticut

courts, however, have not addressed the precise question

whether an arbitration clause may be void for “lack of

mutuality.”

The term “mutuality” can refer to several different

concepts in contract law. Although it is unclear whether

the franchisees are referring to “mutuality of obligation”

or “mutuality of remedy,” both doctrines are largely

dead letters. The doctrine of “mutuality of obligation”

requires a valid contract to be based on an exchange of

reciprocal promises. 1A ARTHUR L. CORBIN, CORBIN

ON CONTRACTS § 152, at 3 (1963). As applied to arbi-

tration clauses, that rule has been restated to mean that

“the consideration exchanged for one party’s promise to

arbitrate must be the other party’s promise to arbitrate.”

Hull v. Norcom, Inc., 750 F.2d 1547, 1550 (11th Cir.

1985) (interpreting New York law). But “mutuality of

obligation” has been largely rejected as a general prin-

ciple in contract law, as well as in the arbitration con-

text. The latest Restatement of Contracts provides that

“(i}f the requirement of consideration is met, there is no

additional requirement of . . . ‘mutuality of obliga-

tion.’ RESTATEMENT (SECOND) OF CONTRACTS § 79

(1979). Option contracts, for example, are unquestion-

ably valid under this modern rule despite their lack of

“mutuality of obligation.” That is, one party’s promise to

honor a future offer to purchase an item is valid if sup-

ported by the other party’s present payment of a sum of

money. The promise to accept the offer need not be sup-

ported by a reciprocal promise to make that offer. The

New York Court of Appeals essentially adopted the Sec-

ond Restatement position in a case involving a challenge

to an arbitration clause which bound only one of the par-

ties to arbitrate. In Sablosky v. Edward S. Gordon Co.,

7150 29a

73 N.Y.2d 133, 137, 538 N.Y.S.2d 513, 516 (1989), the

court held that

[i]f there is consideration for the entire agreement

that is sufficient; the consideration supports the

arbitration option, as it does every other obligation

in the agreement. . . . Since it is settled that the

validity of an arbitration agreement is to be deter-

mined by the law applicable to contracts generally

. . . there is no reason for a different mutuality rule

in arbitration cases.

Most courts facing this issue have arrived at the same

conclusion. See, e.g., Wilson Elec. Contractors, Inc. v.

Minnotte Contracting Corp., 878 F.2d 167, 168 (6th Cir.

1989); Becker Autoradio U.S.A., Inc. y. Becker Auto-

radiowerk GmbH, 585 F.2d 39, 47 (3d Cir. 1978); WL.

Jorden & Co. v. Blythe Indus., 702 F. Supp. 282, 284

(N.D. Ga. 1988); Willis Flooring, Inc. v. Howard S.

Lease Constr. Co. & Assocs., 656 P.2d 1184, 1185

(Alaska 1983) (“As one clause in a larger contract, the

[arbitration] clause is binding to the same extent that the

contract as a whole is binding.”); LaBonte Precision,

Inc. v. LPI Indus. Corp., 507 So. 24 1202, 1203 (Fla.

Dist. Ct. App. 1987); Kalman Floor Co. v. Jos. L. Mus-

carelle, Inc., 196 N.J. Super. 16, 481 A.2d 553 (1984),

aff'd for reasons stated below, 98 N_J. 266, 486 A.2d

334 (1985). Contra Stevens/Leinweber/Sullens. Inc. v.

Holm Dev. & Management, Inc., 795 P.2d 1308, 1313

(Ariz. Ct. App. 1990); R.W. Roberts Constr Co. v. St.

Johns River Water Management Dist., 423 So. 2d 630,

633 (Fla. Dist. Ct. App. 1982).

It has been argued that, according to the Supreme

Court’s decision in Prima Paint Corp. v. Flood & Con-

klin Manufacturing Co., 388 U.S. 395, 403-04 (1967), an

arbitration clause is separable from its underlying con-

7151

tract, and therefore must be supported by separate

consideration. Stevens, 795 P.2d at 1312-13. In Prima

Paint, the Court held that a claim of fraud in the induce-

ment of an underlying contract must be left to the arbi-

trators, but that a claim of fraud in the inducement of the

arbitration clause should be decided by the court. Prima

Paint, 388 U.S. at 403-04. In reaching this conclusion,

the Court endorsed the result reached by our court in

Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271

F.2d 402 (2d Cir. 1959) (Medina, J.), cert. granted, 362

U.S. 909, cert. dismissed for mootness, 364 U.S. 801

(1960).'° In Robert Lawrence, we described the FAA as

distinguishing between “the entire contract between the

parties on the one hand and the arbitration clause of the

contract on the other,” 271 F.2d at 409—the latter being

described as a “separable part of the contract.” Jd. at

410. At one point in Robert Lawrence, we speculated

that

we would suppose that generally where the arbi-

tration provision of the contract is sufficiently broad

to encompass the issue of fraud, the mutual

promises to arbitrate would form the guid pro quo

of. one another and constitute a separable and

enforceable part of the agreement. We do not decide

this point, however, as it is not necessarily before

us.

Id. at 411. This passage, one might argue, indicates that

an arbitration clause must be treated as a contract sup-

ported by independent consideration. For the following

reasons, however, we reject this characterization.

10 Prima Paint, 388 U.S. at 400 (“We agree [with the result reached in

Robert Lawrence), albeit for somewhat different reasons. . . .”)

7152 31a

el

First, of course, we clearly labelled our statement in

Robert Lawrence as dicta. Second, though we suggested

that mutual promises to arbitrate could constitute suffi-

cient consideration to support an arbitration agreement,

we did not exclude the possibility that other considera-

tion could support the agreement. Third, we indicated

only that arbitration clauses are “separable” from void or

voidable provisions of a contract—not that they are inde-

pendent contracts. Although we consider an arbitration

clause separately for the limited Purpose of evaluating a

claim of fraudulent inducement, we do not do so for all

purposes. For example, when determining the parties’

intent in the arbitration clause, we must read the contract

as a whole. Mastrobuono v. Shearson Lehman Hutton,

Inc., 115 S. Ct. 1212, 1217 (1995) (quoting RESTATE-

MENT (SECOND) OF CONTRACTS. § 202(2) (1979)).

State law generally governs the determination of whether

the parties agreed to arbitrate a certain matter, First

Options of Chicago, Inc. v. Kaplan, 115 S. Ct. 1920,

1924 (1995), and Connecticut courts “construe the con-

tract as a whole” and consider “all relevant provisions

. . when determining the intent of the parties.” White

v. Kampner, 641 A.2d 1381, 1385 (Conn. 1994).

Wilson Electrical Contractors, Inc. v. Minnotte Con-

tracting Corp., 878 F.2d 167, 169 (6th Cir. 1989),

rejected the contention that under Prima Paint, “an arbi-

tration clause is an independent contract that is separa-

ble from the main contract in which it is found and

therefore must have all of the essential elements of a

contract, including consideration.” As the Wilson court

pointed out, more recent decisions of the Supreme Court

have consistently emphasized that the FAA is grounded

in a strong federal policy favoring arbitration. Jd. at 169.

A doctrine that required separate consideration for arbi-

tration clauses might risk running afoul of that policy. In

any event, because the franchisees make no claim that

the underlying contract was the result of fraud, we have

no occasion to consider the arbitration clause in isolation

from the larger contract. Accordingly, we need not

decide whether the arbitration clause must be supported

by independent consideration.

The doctrine of “mutuality of remedy” affords no

“greater relief for the franchisees. That rule, which pro-

vides generally that a “plaintiff shall not get specific

enforcement unless the defendant could also have

obtained it,” SA ARTHUR L. CORBIN, CORBIN ON CON-

TRACTS § 1181, at 336 (1964), is also defunct. See, e.g.,

Sablosky, 73 N.Y.2d at 137 (“Mutuality of remedy is not

required in arbitration contracts.”). As explained in the

latest Restatement, —

the law does not require that the parties have simi-

lar remedies in case of breach, and the fact that spe-

cific performance or an injunction is not available

to one party is not a sufficient reason for refusing it

to the other party. The rationale of the supposed

requirement of “mutuality of remedy” is to make

sure that the party in breach will not be compelled

to perform without being assured that he will

receive any remaining part of the agreed exchange

from the injured party. It is therefore enough if ade-

quate security can be furnished.

RESTATEMENT (SECOND) OF CONTRACTS § 363 cmt. c

(1979).

In view of Connecticut’s strong policies favoring arbi-

tration, see, e.g., White v. Kampner, 229 Conn. 465, 471,

641 A.2d 1381, 1384 (1994); Garrity v. McCaskey, 223

Conn. 1, 7, 612 A.2d 742, 746 (1992), we believe that

7154 33a

ee

the Connecticut courts would conclude that “where the

agreement to arbitrate is integrated into a larger unitary

contract, the consideration for the contract as a whole

covers the arbitration clause as well.” W.L. Jorden &

Co., 702 F. Supp. at 284. The franchisees do not contest

that the franchise agreement as a whole is supported by

consideration. Absent a failure of consideration, in this

instance, we cannot invalidate the agreement in whole or

in part.

2. Waiver of Right to Pursue Arbitration

The district court held that regardless of whether the

leasing companies were DAI’s alter egos, DAI had not

waived its right to compel arbitration under the franchise

agreement. On the one hand, if the leasing companies

were not DAI’s alter egos, then their pursuit of eviction

proceedings against the franchisees could not be imputed

to DAI. On the other hand, even if the leasing companies

were DAI’s alter egos, DAI nevertheless invoked its

arbitration rights as soon as it was named a party in the

various state court actions commenced by the fran-

chisees. Somewhat opaquely, the court held that DAI

“cannot be held to have waived a right of arbitration by

an after-the-fact holding that it is the alter ego of the

leasing companies.” We disagree.

There is no authority to support the notion that a party

is liable for acts of its alter ego only if a court has pre-

viotsly found that an alter-ego relationship exists. As we

have explained in the context of contractual liability, “it

is clear that the consequence of applying the alter ego

doctrine is that the corporation and those who have con-

trolled it without regard to its separate entity are treated

as but one entity, and. . . the acts of one are the acts of

all.” Fisser v. International Bank, 282 F.2d 231, 234 (2d

Cir. 1960) (holding parent corporation bound to arbi-

trate, where its alter-ego instrumentality signed arbi-

tration agreement); see also Interocean Shipping Co. v.

National Shipping & Trading Corp., 523 F.2d 527, 539

(2d Cir. 1975) (holding that company may be compelled

to arbitrate even if not party to agreement containing

arbitration clause, where company is alter ego of another

party that clearly is subject to arbitration), cert. denied,

423 U.S. 1054 (1976). We believe that this principle

applies with equal force in the present context. If DAI

and its leasing companies should be treated as one and

the same, then the initiation of eviction proceedings by

the leasing companies must be imputed to DAI.

There remain two further questions: (1) whether the

district court or the arbitrators should determine the

waiver issue, and (2) what standard should be used by

the appropriate decistonmaker. As to the first question,

we note that the defense of waiver is generally referable

to the arbitrators in cases involving petitions to compel

under § 4 of the FAA—with one important exception

which we shall shortly explain. In World Brilliance

Corp. v. Bethlehem Steel Co., 342 F.2d 362 (2d Cir.

1965), we squarely held that issues of waiver, like issues

of fraud in the inducement of the entire contract, were

properly resolved by the arbitrators, not the district

court. Jd. at 364-65. In reaching this conclusion, we

pointed out that § 2 of the FAA makes an arbitration

agreement enforceable “ ‘save upon such grounds as

exist at law or in equity for the revocation of any con-

‘tract.’ ” Id. at 364 (quoting 9 U.S.C. § 2). Waiver, we

explained, does not constitute a ground for “revocation”

of a contract within the meahing of § 2, and thus is not a

basis for invalidating an arbitration contract. Jd. Like-

wise, we explained that under § 4, a court is required to

7156 35a

grant a petition to compel arbitration except where a

question of fact exists as to (1) “the making of the arbi-

tration agreement” or (2) the “failure, neglect, or refusal

Of another [i.e., the respondent to the § 4 petition] to

arbitrate.” Jd. at 364-65 (quoting 9 U.S.C. § 4 (emphasis

added)). Because acts by the petitioner constituting

waiver of the right to arbitrate did not fall within either

of these enumerated Categories, a district court cannot

refuse to order arbitration under §4 on a theory of

waiver. Id. at 365. We reaffirmed this restrictive inter-

pretation of §4 in Trafalgar Shipping Co. v. Inter-

national Milling Co., 401 F.2d 568, 571 (2d Cir. 1968),

where we held that most questions regarding the defense

of laches should be decided “by the arbitrators, not the

courts.” In that case, we repeated that “[t]he only issues

which the court is authorized to consider on a motion to

compel arbitration are ones which pertain to ‘the making

of the arbitration agreement or the failure, neglect, or

refusal to perform the same,’ ” id. at 571, and that the

latter phrase referred to the failure of the respondent in

a § 4 action to submit to arbitration, id. at 572.

Our decision in World Brilliance did not call into

question, however, a parallel line of cases that considers

waiver to be an equitable defense to a Stay application

under § 3 of the FAA, which a court is empowered to

consider. Section 3 authorizes a court to Stay proceed-

ings pending arbitration, “providing the applicant for the

Stay is not in default in proceeding with such arbitra-

tion.” 9 U.S.C. § 3. For example, in Kulukundis Shipping

Co. v. Amtorg Trading Corp., 126 F.2d 978 (2d Cir.

1942), a defendant sought to amend his answer nine

months into the litigation and two months before trial,

raising for the first time the defense that the case was

arbitrable. Jd. at 986. We construed the defendant's

7157 36a

motion to amend as an application for a §3 stay of

proceedings. Jd. at 986 n.29. We explained that the

proy'so in § 3—that a stay shall be granted “providing

the applicant for the stay is not in default in proceeding

with such arbitration”—referred to a party “who, when

requested, has refused to go to arbitration or who has

refused to proceed with the hearing before the arbitrators

once it has commenced.” /d. at 989. We also noted with

approval that, in other courts,

[a) plaintiff who brought suit on a contract, without

seeking to avail himself of its arbitration clause, has

been held to have waived his rights thereunder, so

that he could not subsequently, after a long delay,

ask the court, under Section 3, to stay the action

pending arbitration.

Id. We also indicated.our agreement with a Fourth Cir-

cuit decision finding waiver of the right to arbitrate by

a counterclaim defendant who participated at length in

litigation, but on the eve of trial moved for a stay under

§ 3 of the FAA. Id. (describing Radiator Specialty Co. v.

Cannon Mills, Inc., 97 F.2d 318 (4th Cir. 1938)). The

defendant in Kulukundis did not waive its right to arbi-

trate, we held, because it had not pursued litigation as

extensively as had the parties in these other cases. 126

F.2d at 989.

We again equated a waiver of the right to arbitrate

with a “default in proceeding with such arbitration”

under § 3 in Robert Lawrence, 271 F.2d at 412; see Car-

cich v. Rederi A/B Nordie, 389 F.2d 692, 696 (2d Cir.

1968) (deciding waiver issue where defendant moved for

stay). The Court of Appeals for the District of Columbia

Circuit apparently took the same view, when it explained

that

7158 = 37a

[t}he right to arbitration, like any other contract

right, can be waived. A party waives his right to

arbitrate when he actively participates in a lawsuit

or takes other action inconsistent with that right.

Once having waived the right to arbitrate, that party

is necessarily “in default in | proceeding with such

arbitration.”

Cornell & Co. v. Barber & Ross Co., 360 F.2d 512, 513

(D.C. Cir. 1966) (per curiam).

Yet some of our cases have also recognized that a

court may consider a waiver defense to § 4 actions to

compel arbitration as well as to § 3 stay applications—

seemingly in derogation of our holding in World Bril-

liance. For example, in Chatham Shipping Co. v. Fertex

Steamship Corp., 352 F.2d 291, 293-94 (2d Cir. 1965),

the petitioner had filed a complaint alleging breach of a

contract but then filed a § 4 petition and moved to dis-

miss the first complaint, before the defendant had even

filed an answer. We rejected the respondent’s defense of

waiver on the merits, even though World Brilliance had

been decided only seven months earlier. In Demsey &

Associates, Inc. v. §.S. Sea Star, 461 F.2d 1009, 1017 (2d

Cir. 1972), where a defendant in a contract action

pleaded arbitration “as an affirmative defense” after trial

had been completed, we did not construe it as seeking

either a § 3 stay or a § 4 order compelling arbitration. We

held that the defendant’s failure to raise the arbitration

issue until after filing cross-claims, participating in dis-

covery, and going to trial on the merits constituted

waiver of its right to arbitrate. Jd. The court did not dis-

cuss its authority for reaching the waiver issue—possi-

bly because the defendant had neither sought a stay

under § 3, nor petitioned the court to compel arbitration

under § 4. Jd. Yet in all of the cases cited in Demsey,

7159 38a

except Chatham, the court decided the waiver issue only

where a defendant, deep into the litigation, sought a stay

of judicial proceedings under §3 of the FAA. 7d. at

1017-18."

Any distinction between § 3 and § 4 actions—never

fully explicated—submerged even more deeply by the

time this court decided Sweater Bee by Banff, Ltd. v.

Manhattan Industries, Inc., 754 F.2d 457 (2d Cir.), cert.

denied, 474 U.S. 819 (1985). That case involved a defen-

dant who, only after obtaining an adverse ruling on a

motion to dismiss pursuant to Rule 12(b)(6) of the Fed-

eral Rules of Civil Procedure, sought both a § 3 stay and

a § 4 order compelling arbitration. 754 F.2d at 459.

Citing Demsey, we stated that “[t])he rule of this circuit

. . is that the litigation of substantial issues going to

the merits may constitute a waiver of arbitration,” id. at

461, and proceeded to decide the waiver issue. Shortly

thereafter, we faced a similar case involving a defendant

who sought to sever certain claims from ongoing liti-

gation and petitioned the court to compel arbitration of

those claims under § 4 of the FAA. Rush v. Oppenheimer

& Co., 779 F.2d 885, 886 (2d Cir. 1985). We made it

clear that “waiver of the right to compel arbitration due

to participation in litigation may be found only when

11 Demsey cited the following cases: Carcich v. Rederi A/B Nordie, 389

F.2d 692 (2d Cir. 1968) (holding no waiver where defendant moved for

§ 3 stay after participating in discovery and pretrial conferences); Robert

Lawrence, 271 F.2d 402 (holding no waiver where defendant moved for

§ 3 stay in the answer); Reynolds Jamaica Mines, Lid. v. La Societe

Navale Caennaise, 239 F.2d 689 (4th Cir. 1956) (in what was arguably

a § 3 action, finding no waiver and dismissing federal lawsuit because

dispute was arbitrable—but not ordering arbitration); Hilti, Inc. v.

Oldach, 392 F.2d 368 (ist Cir. 1968) (holding no waiver where defen-

dant moved for § 3 stay eight months after raising arbitrability as a

defense in answer); Mason v. Stevensville Golf & Country Club, Inc., 292

F. Supp. 348 (S.D.N.Y. 1968) (Pollack, J.) (finding no waiver where

defendant sought § 3 stay after failing to object to scheduling of trial).

7160 39a

prejudice to the other party is demonstrated,” id. at 887,

and again decided ihe waiver issue. Finally, in Kramer v.

Hammond, 943 F.2d 176 (2d Cir. 1991), we held that a

party bringing a petition to compel under § 4 had waived

his right to arbitration by engaging in prior litigation in

State courts, not in the district court.'? Jd. at 180. Again,

the parties did not raise and we did not discuss why this

issue was for the courts rather than the arbitrators to

resolve.

It would appear that the waiver defense has slowly

been transformed from a statutorily mandated inquiry in

§ 3 cases—whether the “applicant for the stay is. . . in

default in proceeding with such arbitration”—into a

broader equitable defense in § 4 cases. This trend has its

12

Prior to our decision in Kramer, all of the cases in which we reached

the issue of waiver involved substantial litigation on the merits in the

district court which was asked to grant the § 3 stay, not in other state or

federal courts. Our decisions to rule on the waiver issue, rather than to

refer the question to the arbitrators, could have been explained as exer-

cises of the federal courts’ inherent power to deal with abusive litigation

practices in their courtrooms. See, e.g., Chambers v. Nasco, 501 U.S. 32,

44-45 (1991) (“A primary aspect of [a court’s} discretion {to exercise its

inherent powers) is the ability to fashion an appropriate sanction for con-

duct which abuses the judicial process.”); Link v. Wabash R.R., 370 U.S.

626, 629 (1962) (“The authority of a federal trial court to dismiss a

plaintiff's action with prejudice because of his failure to prosecute can-

not seriously be doubted.”); Landis v. North Am. Co., 9 U.S. 248, 254

(1936) (“[T]he power to stay proceedings is incidental to the power

inherent in every court to control the disposition of the causes on its

docket with economy of time and effort for itself, for counsel, and for lit-

igants.”); United States v. Hudson, 7 Cranch 32, 34 (1812) (holding that

the inherent powers of federal courts are those which “are necessary to

the exercise of all others.”). In Kramer, however, we reached the ques-

tion of waiver even though the petitioner had not engaged in prior liti-

gation in the district court. Our precedent therefore teaches that a court's

ability to reach the question of waiver as a defense to arbitration is not

grounded solely in its ability to control litigation practices before it. In

light of Kramer, we are bound to hold that a district court may reach the

question of waiver whenever a party seeking arbitration has engaged in

any prior litigation.

7161 40a

limits, however, and another of our decisions suggests

how the equitable waiver defense may be reconciled

with our holdings in World Brilliance. In Prudential

Lines, Inc. v. Exxon Corp., 704 F.2d 59 (2d Cir. 1983),

we reaffirmed the holdings of World Brilliance and

Trafalgar that a waiver defense, like a laches defense,

was “an arbitrable issue.” /d. at 67. We noted that in the

cases where the court itself decided the issue of waiver,

the “party had previously participated in court pro-

ceedings to litigate the same dispute.” Jd. at 67 n.8. We

therefore distinguished between cases where the waiver

defense was based on prior litigation by the party seek-

ing arbitration—when the court should decide the issue

of waiver—and those when the defense was based on

other actions. It may be that the modern evolution of our

waiver doctrine does not correspond precisely to our

understanding of the FAA thirty years ago. Yet we are

bound to abide by our most recent precedent. Cf. Com-

modity Futures Trading Commission v. Dunn, 58 F.3d 50,

54 (2d Cir. 1995) (holding that a panel of Court of

Appeals may not “disregard the reasoning of a decision

_ [of a prior panel] because an entirely different line of

reasoning was available”).

Clearly, the present case falls squarely within the

parameters of Kramer v. Hammond, where the party

invoking arbitration (DAI) was allegedly involved in

prior litigation in state courts. Pursuant to the distinction

we drew in Prudential Lines, and consistent with

Kramer, we hold that the issue of DAI’s waiver of arbi-

tration is for the district court to resolve on remand. To

do so, the court must evaluate the franchisees’ factual

contentions, including whether the leasing companies

were mere alter egos of DAI. If DAI was responsible for

the eviction proceedings, the court must then determine

whether prosecution of those eviction actions constituted

litigation of “substantial issues going to the merits,”

Sweater Bee, 754 F.2d at 461. This inquiry will require

a determination of whether, in fact, the particular evic-

tion proceedings were based on the cross-default pro-

visions of the subleases. If the alleged violations of the

subleases were premised on violations of the franchise

agreement (which DAI was contractually bound to

resolve through arbitration) then DAI did litigate sub-

stantial issues going to the merits, and the only remain-

ing question will be whether the franchisees suffered

prejudice from the eviction proceedings. See, e.g., Cot-

ton v. Slone, 4 F.3d 176 (2d Cir. 1993) (finding prejudice

where defendant failed to pursue interlocutory appeal

from denial of motion to compel, and instead fully liti-

gated arbitrable issues on the merits in the district

court); Com-Tech Assocs. v. Computer Assocs. Int'l, Inc.,

938 F.2d 1574, 1576-77 (2d Cir. 1991) (finding prejudice —

where defendant’s extensive litigation before raising

issue of arbitration forced plaintiffs to litigate arbitrable

claims, and caused considerable expense and delay).

Accordingly, we reverse the district court’s order

rejecting the franchisees’ waiver argument, and remand

for further proceedings.

3. Fraudulent Misrepresentation

The franchisees argue that DAI fraudulently misrep-

resented to them that arbitration was a condition prece-

dent to the institution of legal action by either party to

the franchise agreement. They argue that DAI had, in

reality, reserved the right to bring summary eviction

actions against the franchisees through its leasing com-

panies. The franchisees aiso claim that DAI failed to dis-

close that it had a custom and practice of bringing

1S ne

summary eviction proceedings and other legal proceed-

ings for alleged violations of the franchise agreement.

The district court held that these allegations would be

pertinent only if the leasing companies!’ were indeed

DAI’s alter egos. Both the alter-ego and fraudulent-

inducement issues, the court concluded, should properly

be left to the arbitrators. This was error.

In Prima Paint, 388 U.S. at 403-04, the Supreme

Court stated that “if the claim is fraud in the inducement

of the arbitration clause itself—an issue which goes to

the ‘making’ of the agreement to arbitrate—the federal

court may proceed to adjudicate it.” See also Scherk v.

Alberto-Culver Co., 417 U.S. 506, 519 n.14 (1974) (cit-

ing Prima Paint for the proposition that “an arbitration

or forum-selection clause in a contract is not enforceable

if the inclusion of that clause in the contract was the

product of fraud or coercion”). As this court has

explained, if the “arbitration clause was induced by

fraud, there can be no arbitration; and if the party charg-

ing this fraud shows there is substance to his charge,

there must be a judicial trial of that question before a

stay can issue.” Robert Lawrence, 271 F.2d at 411.

The franchisees allege that they were fraudulently

induced to assent to the arbitration clause—not to the

rest of the contract. Accordingly, under Prima Paint, the

district court had to reach the fraudulent inducement

issue before deciding whether to compel arbitration.

Resolution of the fraud issue, in turn, will require an

answer to the antecedent question of whether the leasing

companies were DAI’s alter egos.

13 Although the district court actually referred to the “development

agents” as being possible alter egos of DAI, it seems to have meant the

“leasing companies.” The franchisees do not allege that DAI's various

development agents (who engaged in some negotiations on behalf of

DAI with the franchisees) were DAI's alter egos.

7164

43a

We therefore reverse the district court’s determination

that the arbitrators rather than the court should decide

the alter-ego and fraudulent-inducement questions. On

remand, the district court must resolve these issues.

III. CONCLUSION

To summarize: '4

1. We affirm the district court’s decision that it had

subject matter jurisdiction over all of DAI’s petitions to

compel arbitration, because there was complete diversity

between the parties to the arbitration clause.

2. We reverse the district court’s holding that the

Alabama court’s judgment in the McCrary case (Case

#8) was not entitled to full faith and credit. That judg-

ment had preclusive effect under Alabama law, and thus

barred DAI from seeking to enforce its arbitration agree-

ment with McCrary. We therefore reverse the district

court’s denial of franchisee McCrary’s motion to dismiss

DAI’s motion to compel and its order granting DAI’s

petition to compel McCrary to arbitrate. In the exercise

of our pendent appellate jurisdiction, we vacate the pre-

liminary injunction barring McCrary from pursuing his

Alabama state court claims against DAI. We direct the

district court, on remand, to dismiss with prejudice

DAI’s motion to compel McCrary to arbitrate.

3. We affirm the district court’s holding that the

Illinois courts’ judgments in Cases ## 1-6, 15-16, and

DAI v. Bickel were still subject to appeal, and thus under

Illinois law were not entitled to preclusive effect. We

'¢ For the list of cases affected by our ruling, see supra note 2.

165 gg

therefore affirm the district court’s denial of those fran-

chisees’ motions to dismiss.

4. We affirm the district court’s holding that the North

Carolina judgment in the Johnson case (Case # 7) was

not entitled to full faith and credit. That judgment would

not be accorded preclusive effect under North Carolina

law, because the court’s written order does not indicate

what issues were actually decided. We therefore affirm

the district court’s denial of the Johnson franchisees’

motion to dismiss.

5. We affirm the district court’s holding that “mutu-

ality” was not at issue, but on different grounds. We hold

that where consideration supports a contract as a whole,

an arbitration clause in that contract is not void for Jack

of consideration.

6. We reverse the district court’s holding that DAI did

not waive its right to petition to compel arbitration, and

remand for further proceedings. We hold that if the leas-

ing companies were mere alter egos of DAI, their pursuit

of eviction proceedings based on violations of the fran-

chise agreements could constitute waiver of DAI’s right

to demand arbitration.

7. We reverse the district court’s decision to defer to

the arbitrators on the question of whether DAI fraudu-

lently induced the franchisees to enter into the arbitra-

tion agreement. On remand, the district court must

decide this issue. |

8. Because the district court should have decided the

alter-ego, waiver and fraudulent-inducement issues, we

reverse its order granting DAI’s motion to compel arbi-

tration in all cases and remand for further proceedings.

We also reverse its entry of preliminary injunctions

7166 45a

against all of the franchisees—including, in the exercise

of our pendent appellate jurisdiction and in the interests

of judicial economy, the Alabama franchisees.

9. Finally, because we reverse the district court’s

orders entering the preliminary injunctions, we need not

address the franchisees’ contention that those orders vio-

lated the Anti-Injunction Act.

7167 46a

September 28, 1995

ORDER

IT IS HEREBY ORDERED that the opinion

filed on September 12, 1995, be amended as

follows:

Slip op. at 7162, line 30 from top:

Insert footnote 13 after "remand."

Slip op. at 7162, bottom of page: Insert

"By so holding, we do not purport to reach

the question of how the district court should

resolve this issue. The defendants’ jury

demands should be considered by the district

court in the first instance."

Slip op. at 7162, lines 30-31 from top:

Delete "To do so, the court must evaluate the

franchiees" and insert "The"

Slip op. at 7162, line 32 from top:

Delete ", including" and insert "to be

resolved include"

Slip op. at 7162, line 34 from top:

Delete "the court must then determine" and

insert “it must then be determined"

Slip op. at 7164, line 4 from top:

Change footnote number from 13 to 14.

Slip op. at 7164, bottom of page: Change

footnote number from 13 to 14.

Slip op. at 7165, line 3 from top:

Insert footnote 15 after "questions."

Slip op. at 7165, bottom of page: Insert

"See cupra note 13."

47a

Slip op. at 7165, line 6 from top:

Change footnote number from 14 to 16.

Slip op. at 7165, bottom of page: Change

footnote number from 14 to 16.

IT IS SO ORDERED:

FOR THE COURT.

GEORGE LANGE III, Clerk

48a

November 1, 1995

Appesi No. 95-7183

A petition for rehearing containing a

suggestion that the action be reheard in banc

having been filed herein by the appellant

Raymond and Sandra Bickel.

Upon consideration by the panel that

decided the appeal, it is Ordered

that said petition for rehearing is

DENIED.

It is further noted that the suggestion for

hearing in banc has been transmitted to the

judges for the court in regular active service

and to any other judge that heard the appeal

and that no such judge has requested that a

vote be taken thereon.

FOR THE COURT

GEORGE LANGE III, Clerk

By:

Beth J. Meador

49a

November 14, 1995

Appeal No. 94-9207

A petition for rehearing containing a

suggestion that the action be reheard in banc

having been filed herein by the appellant

Emily Distajo, et al.

Upon consideration by the panel that

decided the appeal, it is Ordered

that said petition for rehearing is

DENIED.

It is further noted that the suggestion for

rehearing in banc has been transmitted to the

judges for the court in regular active service

and to any other judge that heard the appeal

and that no such judge has requested that a

vote be taken thereon.

FOR THE COURT

GEORGE LANGE III, Clerk

By:

Beth J. Meador

Administrative Atty.

50a

9 U.8.C. § 3

Stay of proceedings where issued therein

referable to arbitration

If any suit or proceeding be brought in any of

the courts of the United States upon any issue

referable to arbitration under an agreement in

writing for such arbitration, the court in

which such suit is pending, upon being

satisfied that the issue involved in such suit

or proceeding is referable to arbitration

under such an agreement, shall on application

of one of the parties stay the trial of the

action until such arbitration has been had in

accordance with the terms of the agreement,

providing the applicant for the stay is not in

default in proceeding with such arbitration.

9 U.8.C. § 4

Failure to arbitrate under agreement; petition

to United States court having jurisdiction for

order to compel arbitration; notice and

service thereof; hearing and determination

A party aggrieved by the alleged failure,

neglect, or refusal of another to arbitrate

under a written agreement for arbitration may

petition any United States district court

which, save for such agreement, would have

jurisdiction under Title 28, in a civil action

or in admiralty of the subject matter of a

suit arising out of the controversy between

the parties, for an order directing that such

arbitration proceed in the manner provided for

in such agreement. Five days’ notice in

writing of such application shall be served

upon the party in default. Service thereof

shall be made in the manner provided by the

Federal Rules of Civil Procedure. The court

shall hear the parties, and upon being

51a

satisfied that the making of the agreement for

arbitration or the failure to comply therewith

is not in issue, the court shall make an order

directing the parties to proceed to

arbitration in accordance with the terms of

the agreement. The hearing and proceedings,

under such agreement, shall be within the

district in which the petition for an order

directing such arbitration is filed. If the

making of the arbitration agreement or the

failure, neglect or refusal to perform the

same be in issue, the court shall proceed

summarily to the trial thereof. If no jury

trial be demanded by the party alleged to be

in default, or if the matter in dispute is

within admiralty jurisdiction, the court shall

hear and determine such issue. Where such an

issue is raised, the party alleged to be in

default may, except in cases of admiralty, on

or before the return day of the notice of

application, demand a jury trial of such issue

and upon such demand the court shall make an

order referring the issue or issues to a jury

in the manner provided by the Federal Rules of

Civil Procedure, or may specially call a jury

for that purpose. If the jury find that no

agreement in writing for arbitration was made

or that there is no default in proceeding

thereunder, the proceeding shall be dismissed.

If the jury find that an agreement for

arbitration was made in writing and that there

is a default in proceeding thereunder, the

court shall make an order summarily directing

the parties to proceed with the arbitration in

accordance with the terms thereof.

28 U.8.C. § 1738

State and Territorial statutes and

judicial proceedings; full faith and credit

The Acts of the legislature of any State,

52a

Territory, or Possession of the United States,

or copies thereof, shall be authenticated by

affixing the seal of such State, Territory or

Possession thereto.

The records and judicial proceedings of

any court of any such State, Territory or

Possession, or copies thereof, shall be proved

or admitted in other courts within the United

States and its Territories and Possessions by

the attestation of the clerk and seal of the

court annexed, if a seal exists, together with

a certificate of a judge of the court that the

said attestation is in proper forn.

Such Acts, records and judicial

proceedings or copies thereof, so

authenticated, shall have the same full faith

and credit in every court within the United

States and its Territories and Possessions as

they have by law or usage in the courts of

such State, Territory or Possession from which

they are taken.

735 ILCS 5/2-619(a)(3) and (b)

Involuntary dismissal based upon certain

defects or defenses

§ 2-619. Involuntary dismissal based upon

certain defects or defenses.

(a) Defendant may, within the time for

pleading, file a motion for dismissal of the

action or for other appropriate relief upon

any of the following grounds. If the grounds

do not appear on the face of the pleading

attacked the motion shall be supported by

affidavit:

ch: =

(3) That there is another action pending

between the same parties for the same cause.

53a

(b) A similar motion may be made by any

other party against whom a claim is asserted.

ILLINOIS SUPREME COURT RULE 20(a) and (b)

Rule 20. Certification of Questions of state

Law from Certain Federal Courts

(a) Certification. When it.shall appear

to the Supreme Court of the United States, or

to the United States Court of Appeals for the

Seventh Circuit, that there are involved in

any proceeding before it questions as to the

law of this State, which may be determinative

of the said cause, and there are no

controlling precedents in the decisions of

.- this court, such court may certify such

questions of the laws of this State to this

court for instructions concerning such

questions of State law, which certificate this

court, by written opinion, may answer.

(b) Contents of Certification Order. A

certification order shall contain:

(1) the questions of law to be

answered; and

(2) a statement of all facts

relevant to the questions certified and

showing fully the nature of the

controversy in which the questions arose.

ILLINOIS SUPREME COURT RULE 272

Rule 272. When Judgment is Entered.

If at the time of announcing final

judgment the judge requires the submission of

a form of written judgment to be signed by the

54a

judge or if a circuit court rule requires the

prevailing party to submit a draft order, the

clerk shall make a notation to that effect and

the judgment becomes final only when the

signed judgment is filed. If no such signed

written judgment is to be filed, the judge or

clerk shall forthwith make a notation of

judgment and enter the judgment of record

promptly, and the judgment is entered at the

time it is entered of record.

ILLINOIS SUPREME COURT RULE 304 (a)

Rule 304. Appeals from Final Judgments

That Do Not Dispose of an Entire Proceeding

(a) Judgments As to Fewer Than All

Parties or Claims ~-- Necessity for Special

Finding. If multiple parties or multiple

claims for relief-are involved in an action,

an appeal may be taken from a final judgment

as to one or more but fewer than all of the

parties or claims only if the trial court has

made an express written finding that there is

no just reason for delaying either enforcement

or appeal or both. Such a finding may be made

at the time of the entry of the judgment or

thereafter on the court’s own motion or on

motion of any party. The time for filing a

notice of appeal, the entry of the required

finding shall be treated as the date of the

entry of final judgment. In the absence of

such a finding, any judgment that adjudicates

fewer than all the claims or the rights and

liabilities of fewer than all the parties is

not enforceable or appealable and is subject

to revision at any time before the entry of a

judgment adjudicating all the claims, rights,

and liabilities of all the parties.