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LAS, Inc. v. Mini-Tankers, USA, Inc.
State: Illinois
Court: 5th District Appellate
Docket No: 5-03-0048 Rel
Case Date: 08/27/2003
                  NOTICE
Decision filed 08/27/03.  The text of this decision may be changed or corrected prior to the filing of a Petition for Rehearing or the disposition of the same.

NO. 5-03-0048

IN THE

APPELLATE COURT OF ILLINOIS

FIFTH DISTRICT


LAS, INC.,

     Plaintiff-Appellee,

v.

MINI-TANKERS, USA, INC.,

     Defendant-Appellant.

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Appeal from the
Circuit Court of
Madison County.

No. 00-MR-613

Honorable
Ralph J. Mendelsohn,
Judge, presiding.




JUSTICE WELCH delivered the opinion of the court:

The issue presented by this appeal is whether the defendant, Mini-Tankers, USA, Inc.,waived its right to compel the arbitration of a dispute between it and the plaintiff, LAS, Inc.,by its participation in the lawsuit filed by the plaintiff in the circuit court of Madison County. The trial court found that it had. We reverse. We will set forth the facts, and the history ofthe proceedings before the trial court, only as they pertain to this issue.

On December 26, 2000, the plaintiff filed, in the circuit court of Madison County, atwo-count complaint against the defendant. The complaint sought (1) a declaratory judgmentthat the defendant had breached a subfranchise agreement between the parties, therebyexcusing the plaintiff from performing its obligations under the agreement, and (2) damagesfor a breach of the agreement. Attached to the complaint and incorporated therein was acopy of the subject subfranchise agreement.

On March 8, 2001, the defendant filed a motion to dismiss the complaint pursuant tosection 2-619(a)(6) of the Illinois Code of Civil Procedure (Code) (735 ILCS 5/2-619(a)(6)(West 2000)), because the plaintiff, through its controlling shareholder and president, hadallegedly released the defendant from any and all claims that the plaintiff might have hadagainst it. The plaintiff filed a response to the motion to dismiss on June 19, 2001. It allegedthat the person who executed the release had no interest in the plaintiff at the time the releasewas executed. The motion to dismiss was never set for a hearing or presented to the trialcourt.

On August 10, 2001, the defendant filed a motion to dismiss or, alternatively, for asummary judgment, on the ground that the plaintiff's claims were based on alleged breachesof the subfranchise agreement and that the agreement contained a provision that any disputerelating to or arising out of the agreement must be submitted to nonbinding mediation andthen binding arbitration if necessary. Accordingly, the defendant claimed that the disputebetween the parties could not be litigated in the circuit court but must be submitted tomediation and arbitration in accordance with the subfranchise agreement. On the same date,the defendant filed in the circuit court a motion to compel the mediation and arbitration ofthe dispute.

On October 19, 2001, the trial court entered an order directing the parties to file"motions for summary judgment on existence of a contract between the litigants such thatthe Court may rule on remaining issues." On January 7, 2002, the defendant filed a motionfor a summary judgment in its favor because the subfranchise agreement out of which thedispute had arisen required that the dispute be submitted to mediation and, if necessary,arbitration.

In its June 27, 2002, response to the motion for a summary judgment, the plaintiffargued that the defendant had waived its right to mediation and arbitration by filing its initialmotion to dismiss pursuant to section 2-619 of the Code. The plaintiff argued that anyparticipation by the defendant in the circuit court that does not assert the defendant's rightto arbitration is inconsistent with that right to arbitration and constitutes a waiver of thatright. The plaintiff argued that had the defendant prevailed on its initial motion to dismiss,it would have resulted in the dismissal of the cause based on a factual and legal defense, notbased on the arbitration clause. Accordingly, the plaintiff argued that the filing of the motionto dismiss was inconsistent with an assertion of the defendant's right to arbitration. Thedefendant filed a reply, arguing that it had not waived its right to arbitration by the filing ofits section 2-619 motion to dismiss.

On December 19, 2002, the trial court denied the defendant's motion for a summaryjudgment. The defendant now brings this appeal pursuant to Illinois Supreme Court Rule307(a)(1) (188 Ill. 2d R. 307(a)(1)).

The parties agree that this is an interlocutory appeal properly brought pursuant toSupreme Court Rule 307(a)(1), which allows interlocutory appeals from judgments involvingthe grant, denial, dissolution, or modification of an injunction. 188 Ill. 2d R. 307(a)(1). Because an order on a motion to compel arbitration is in the nature of injunctive relief, thoseorders are reviewable under Supreme Court Rule 307(a)(1). See Clark v. Country MutualInsurance Co., 131 Ill. App. 3d 633, 636 (1985); Deien Chevrolet, Inc. v. Reynolds &Reynolds Co., 265 Ill. App. 3d 842, 844 (1994).

The parties disagree, however, on the proper standard of review. The defendantargues that because the facts are undisputed and the only issue before the trial court was oneof law, the proper standard of review is de novo. See La Hood v. Central IllinoisConstruction, Inc., 335 Ill. App. 3d 363, 364 (2002). The plaintiff argues that the facts arenot undisputed and that, in any event, the proper standard of review for an appeal broughtpursuant to Supreme Court Rule 307(a)(1) is whether the trial court abused its discretion. See Schroeder Murchie Laya Associates, Ltd. v. 1000 West Lofts, LLC, 319 Ill. App. 3d1089, 1092 (2001).

We are aware of the split of authority on the question of the appropriate standard ofreview to be applied to the question now before us on review. However, we believe that theproper standard of review is to be determined by the nature of the question presented to thetrial court, not by the supreme court rule under which the appeal is brought. Those casesholding that an abuse of discretion is the proper standard of review do so primarily becausethe appeal had been brought pursuant to Supreme Court Rule 307(a)(1), and cases havegenerally held that in appeals brought pursuant to that supreme court rule, the properstandard of review is an abuse of discretion. While that may be the appropriate standard ofreview for most appeals brought from an interlocutory order "granting, modifying, refusing,dissolving, or refusing to dissolve or modify an injunction" (188 Ill. 2d R. 307(a)(1)), it isthe not the appropriate standard of review to be applied to the case at bar.

We believe that the proper standard of review is dictated by the nature of the questionpresented to the trial court. In the instant case the facts simply are not in dispute, and theonly issue presented to the trial court was whether those facts established a waiver of thedefendant's right to arbitration as a matter of law. The trial court made no factual orcredibility determinations. A reviewing court determines a legal question independently ofthe trial court's judgment, using a de novo standard of review. Clemons v. MechanicalDevices Co., 202 Ill. 2d 344, 352 (2002). Accordingly, we will review the issue presentedusing the de novo standard of review.

Our position regarding the proper standard of review is consistent with federal caselaw which holds that the review of a federal district court's decision regarding the waiver ofa party's right to arbitrate is de novo, while the review of the factual findings on which thedistrict court relied is by the clear error standard. See Thyssen, Inc. v. Calypso ShippingCorp., S.A., 310 F.3d 102, 104 (2d Cir. 2002); Iowa Grain Co. v. Brown, 171 F.3d 504, 509(7th Cir. 1999); Britton v. Co-op Banking Group, 916 F.2d 1405, 1409 (9th Cir. 1990);Subway Equipment Leasing Corp. v. Forte, 169 F.3d 324, 326 (5th Cir. 1999); Stifel,Nicolaus & Co. v. Freeman, 924 F.2d 157, 158 (8th Cir. 1991). Because in the case at barthe facts are undisputed and the trial court was not required to make any factual findings, ourreview is de novo.

The parties agree that their dispute arises out of the subfranchise agreement and thatthe agreement provides that any disputes arising therefrom must be submitted to mediationand arbitration if necessary. The parties also agree that, pursuant to the subfranchiseagreement, all issues relating to the arbitrability of disputes or the enforceability of theagreement's mediation and arbitration clauses are governed by federal law.

We now address the question presented for our review: whether the trial court erredas a matter of law in determining that the defendant had waived its right to arbitration byfiling an initial motion to dismiss pursuant to section 2-619 of the Code, before asserting itsright to arbitration. In reviewing the federal case law cited by both parties, we conclude thatthere is no hard-and-fast rule on what constitutes a waiver of the right to arbitration and thateach case must be decided on its own unique facts. Adams v. Merrill Lynch, Pierce, Fenner& Smith, 888 F.2d 696, 701 (10th Cir. 1989); Ohio-Sealy Mattress Manufacturing Co. v.Kaplan, 712 F.2d 270, 273 (7th Cir. 1983). The United States Supreme Court has madeclear, however, that there is a liberal federal policy favoring arbitration agreements and thatany doubt concerning the scope of arbitrable issues should be resolved in favor of arbitration,whether the problem at hand is the construction of the contract language itself or anallegation of waiver, delay, or a like defense to arbitrability. Moses H. Cone MemorialHospital v. Mercury Construction Corp., 460 U.S. 1, 24-25, 74 L. Ed. 2d 765, 785, 103 S.Ct. 927, 941 (1983).

The majority of federal cases are consistent in their holdings with respect to a party'swaiver of its right to arbitration. The party asserting waiver bears a heavy burden of proofto show that the party seeking arbitration had knowledge of its existing right to compelarbitration but acted inconsistently with that right and that the party asserting waiver sufferedprejudice as a result of the alleged waiver. Sovak v. Chugai Pharmaceutical Co., 280 F.3d1266, 1270 (9th Cir. 2002); Stifel, Nicolaus & Co. v. Freeman, 924 F.2d 157, 158 (8th Cir.1991). Thus, waiver will be found when the party seeking arbitration substantially invokesthe judicial process and substantially participates in litigation to a point inconsistent with anintent to arbitrate, to the detriment or prejudice of the other party. Subway EquipmentLeasing Corp. v. Forte, 169 F.3d 324, 326 (5th Cir. 1999); Morewitz v. West of England ShipOwners Mutual Protection & Indemnity Ass'n, 62 F.3d 1356, 1366 (11th Cir. 1995). Thesecases consistently require a showing of prejudice on behalf of the party opposing arbitration. Restoration Preservation Masonry, Inc. v. Grove Europe Ltd., 325 F.3d 54, 61 (1st Cir.2003); Stifel, Nicolaus & Co., 924 F.2d at 158; Morewitz, 62 F.3d at 1366; Adams v. MerrillLynch, Pierce, Fenner & Smith, 888 F.2d 696, 701 (10th Cir. 1989); Cargill FerrousInternational v. Sea Phoenix MV, 325 F.3d 695, 700 (5th Cir. 2003); Sovak, 280 F.3d at1270; Thyssen, Inc. v. Calypso Shipping Corp., S.A., 310 F.3d 102, 105 (2d Cir. 2002).

Nevertheless, relying on Cabinetree of Wisconsin, Inc. v. Kraftmaid Cabinetry, Inc.,50 F.3d 388 (7th Cir. 1995), the plaintiff in the case at bar argues that it need notdemonstrate any prejudice as a result of the defendant's filing of the initial motion to dismissprior to asserting its right to arbitration. Cabinetree of Wisconsin, Inc., does indeed hold thatin order to establish a waiver of the right to arbitrate, the party opposing arbitration need notshow that it would be prejudiced if arbitration was compelled. Cabinetree of Wisconsin,Inc., 50 F.3d at 390. Cabinetree of Wisconsin, Inc., held that an election to proceed beforea nonarbitral tribunal is a presumptive waiver of the right to arbitrate and that the partyopposing arbitration need not show any prejudice beyond what is inherent in an effort tochange forums in the course of litigation. Cabinetree of Wisconsin, Inc., 50 F.3d at 390. However, as the court in Cabinetree of Wisconsin, Inc., itself points out, its position is aminority view and is not consistent with the majority of the federal cases on point. Cabinetree of Wisconsin, Inc., 50 F.3d at 390.

The Illinois Supreme Court has clearly stated that the Seventh Circuit Court ofAppeals exercises no appellate jurisdiction over Illinois appellate courts, and we are notbound to follow decisions of the Seventh Circuit where the United States Supreme Court hasnot ruled on the question presented, there is a split of authority among the federal circuitcourts of appeal, and we believe the case from the Seventh Circuit was wrongly decided. Weiland v. Telectronics Pacing Systems, Inc., 188 Ill. 2d 415, 423 (1999). Accordingly, wedecline to follow Cabintree of Wisconsin, Inc., but choose to follow the majority view withrespect to the issue before us.

We conclude that the trial court erred as a matter of law in determining that thedefendant had waived its right to arbitration, for two reasons: the defendant did notsubstantially participate in the trial court litigation to a point inconsistent with an intent toarbitrate, and the plaintiff neither claimed nor demonstrated any prejudice from thedefendant's filing of its section 2-619 motion to dismiss prior to its assertion of its right toarbitrate. The defendant's only participation in the trial court litigation was to file an initialmotion to dismiss pursuant to section 2-619 of the Code. This motion was never presentedto or ruled upon by the trial court. Neither party engaged in any discovery, and no otherproceedings occurred in the trial court prior to the defendant's assertion of its right toarbitration. The defendant asserted its right to arbitration less than eight months after thefiling of the initial complaint. This simply does not constitute substantial participation in thelitigation to a point that is inconsistent with the defendant's intent to arbitrate. The casescited above demonstrate as a matter of law that the defendant did not so substantiallyparticipate in the trial court litigation as to waive its right to arbitrate.

Secondly, the plaintiff neither claims nor demonstrates any prejudice as a result of thedefendant's filing of a section 2-619 motion to dismiss prior to its assertion of its right toarbitrate, and it did not do so before the trial court. The plaintiff only argues that, pursuantto Cabinetree of Wisconsin, Inc., it is not required to show any prejudice. A waiver of theright to arbitrate may not be found in the absence of prejudice to the party opposingarbitration.

We note that this case does not involve forum-shopping on the part of the defendant,as the plaintiff asserts. The defendant had not received an adverse ruling from the trial courtbefore electing to proceed in arbitration. The defendant did not check to see which way thewind was blowing and then change its course because it did not like the wind's direction. The trial court in the case at bar had not ruled on any substantive issue in the case, the casewas not at issue, and no discovery had actually begun.

Finally, we point out that we would reach the same result if we employed the abuse-of-discretion standard of review, as the plaintiff desires. In the absence of any claim orshowing of prejudice on the part of the plaintiff, finding a waiver of the right to arbitrate onthe part of the defendant would constitute an abuse of discretion.

For the foregoing reasons, the judgment of the circuit court of Madison County ishereby reversed, and this cause is remanded for further proceedings and for the entry ofappropriate orders not inconsistent with this opinion.

Reversed; cause remanded.

KUEHN and DONOVAN, JJ., concur.

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