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THIRD NATL. BANK v. WEDGE GROUP

October 18, 1990

THIRD NATIONAL BANK IN NASHVILLE
v.
WEDGE GROUP INCORPORATED



The opinion of the court was delivered by: NIXON

 JOHN T. NIXON, UNITED STATES DISTRICT JUDGE

 Presently before the Court is a motion by the defendant, WEDGE Group Incorporated ("WEDGE"), to stay proceedings in the above-styled action pending arbitration pursuant to 9 U.S.C. § 3. The Court GRANTS the motion for a stay of the proceedings, subject to the appointment of a neutral arbitrator.

 I.

 The motion at bar arises out of an action by Third National Bank in Nashville ("Third National") to recover $ 2,569,983 allegedly owed by WEDGE to the Rodgers Companies ("Rodgers"), a former WEDGE subsidiary. Third National alleges it is entitled to this sum as a result of a Tax Sharing Agreement executed by WEDGE and Rodgers in October, 1980 and a Tax Receivable Agreement entered into by WEDGE, Third National and Rodgers in June, 1986.

 Under the Tax Sharing Agreement, WEDGE and its subsidiaries filed a consolidated federal income tax return as an "affiliated group." The agreement required Rodgers to prepare a "hypothetical" federal income tax return for submission to WEDGE. If this "hypothetical" return produced tax liability that was more than Rodgers' actual taxes paid under the consolidated return, then Rodgers was liable to WEDGE for the difference. Conversely, if Rodgers' liability was less than Rodgers' actual tax payments, then WEDGE was liable to Rodgers for the difference. WEDGE was also obligated to pay Rodgers for the tax benefit accruing to the consolidated group as a result of any Rodgers net operating losses used to offset group income in the consolidated return.

 In 1986, WEDGE sought to deny liability for amounts owed Rodgers under the Tax Sharing Agreement. However, later that year representatives of WEDGE, Rodgers and Third National entered the Tax Receivable Agreement. Under this agreement Rodgers assigned to Third National its accounts receivable, including the tax payment allegedly owed by WEDGE to Rodgers, as security for various loans by Third National to Rodgers. Third National also agreed temporarily to forbear seeking collection from WEDGE of the amounts owed by WEDGE to Rodgers under the Tax Sharing Agreement.

 After Rodgers allegedly defaulted on its loans to Third National, Third National filed this action against WEDGE. Third National claims that Rodgers owes approximately $ 6.2 million under their loan agreement and that under the Tax Sharing Agreement WEDGE owes Rodgers approximately $ 2.6 million. By virtue of the Tax Receivable Agreement and an assignment of interest clause in the Tax Sharing Agreement, Third National argues that it is entitled to the $ 2.6 million allegedly owed to Rodgers by WEDGE.

 Thus far, this action has been consumed with a motion filed by WEDGE in December, 1987 to dismiss under Fed. R. Civ. P. 12(b)(2) for lack of personal jurisdiction. The Magistrate recommended denial of the motion. Upon review of objections to the Magistrate's report, this Court granted WEDGE's motion to dismiss. The Court of Appeals for the Sixth Circuit reversed. Third Nat'l Bank in Nashville v. WEDGE Group Inc., 882 F.2d 1087 (6th Cir.), cert. denied, 493 U.S. 1058, 110 S. Ct. 870, 107 L. Ed. 2d 953 (1990).

 WEDGE now disputes the validity and accuracy of the Rodgers' hypothetical tax computation that Third National is now seeking to enforce. WEDGE argues that since Third National's claim is made pursuant to the Tax Sharing Agreement, Paragraphs 10 and 17 of the Tax Sharing Agreement should govern the resolution of Third National's claim. WEDGE alleges that Paragraph 10 constitutes an agreement between Rodgers and WEDGE to arbitrate disputes arising from Rodgers' filing of its hypothetical federal income tax return with WEDGE. *fn1" Paragraph 17 binds the successors and assignees of Rodgers and WEDGE to the Tax Sharing Agreement. Defendant's Motion to Stay Proceedings Pending Arbitration, Exhibit 1 at 14, Docket Entry No. 29. Defendant has therefore moved the Court for a stay of the proceedings pending arbitration of the hypothetical tax return at issue.

 The plaintiff argues that the issues involved in the present action do not fall within the scope of Paragraph 10 of the Tax Sharing Agreement. Specifically, Third National opposes WEDGE's present motion on the grounds that the plain language of the Tax Sharing Agreement, the intent of the parties, and fundamental fairness preclude the arbitration of this action.

 II.

 A written agreement to arbitrate a dispute is "valid, irrevocable, and enforceable" except on grounds that would exist at law or in equity for the revocation of a contract. 9 U.S.C. § 2. This declaration evinces a liberal federal policy favoring arbitration. Perry v. Thomas, 482 U.S. 483, 107 S. Ct. 2520, 2525, 96 L. Ed. 2d 426 (1987); see e.g., Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626, 105 S. Ct. 3346, 3353, 87 L. Ed. 2d 444 (1985); Southland Corp. v. Keating, 465 U.S. 1, 10, 104 S. Ct. 852, 858, 79 L. Ed. 2d 1 (1984); Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24, 103 S. Ct. 927, 941, 74 L. Ed. 2d 765 (1983). Thus, upon the motion of a party, a district court must stay an action pending arbitration if the issue at bar is referable to arbitration under a written arbitration agreement. 9 U.S.C. § 3.

 "The first task of a court asked to compel arbitration of a dispute is to determine whether the parties agreed to arbitrate that dispute." Mitsubishi Motors Corp., 473 U.S. at 626, 105 S. Ct. at 3353. This analysis must be undertaken with great respect for the broad federal policy favoring arbitration. Mitsubishi Motors Corp., 473 U.S. at 626, 105 S. Ct. at 3353; Moses H. Cone Memorial Hospital, 460 at 24, 103 S. Ct. at 941; McGinnis v. E.F. Hutton and Co., Inc., 812 F.2d 1011, 1013 (6th Cir. 1987); Aspero v. Shearson Am. Express, Inc., 768 F.2d 106, 108 (6th Cir.), cert. denied, 474 U.S. 1026, 106 S. Ct. 582, 88 L. Ed. 2d 564 (1985). Therefore, while the general principles of contract interpretation govern whether arbitration is appropriate, any questions or doubts should be resolved in favor of arbitration. Mitsubishi Motors Corp., 473 U.S. at 626, 105 S. Ct. at 3354; ...


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