Southeastern Paper Group, Inc. v. Sunburst Chemicals, Inc.

Southeastern Paper Group, Inc. v. Sunburst Chemicals, Inc., 2012 NCBC 15.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
COUNTY OF GUILFORD 11 CVS 8690

SOUTHEASTERN PAPER GROUP, )
INC., a North Carolina Corporation, )
and )
SOUTHEASTERN PAPER GROUP, )
INC., a South Carolina Corporation, )
)
Plaintiffs, )
ORDER ON DEFENDANT’S MOTION
)
TO DISMISS OR TO STAY
v. )
PROCEEDINGS AND COMPEL
)
ARBITRATION
SUNBURST CHEMICALS, INC., )
)
Defendant. )
)
)
)
)

{1} This matter is before the court on Defendant’s Motion to Dismiss or to Stay
Proceedings and Compel Arbitration pursuant to Rule 12(b)(1) of the North
Carolina Rules of Civil Procedure (“Motion”). For the reasons stated, ruling on the
Motion is DEFERRED pending limited discovery on the contested issue whether
there is a binding arbitration agreement.

Brooks, Pierce, McLendon, Humphrey & Leonard, LLP, by James C. Adams,
II, and Benjamin R. Norman, and Ford & Harrison LLP by Matthew J. Gilley
and Jeffrey A. Lehrer, pro hac vice, for Plaintiffs Southeastern Paper Group,
Inc., a North Carolina Corporation and Southeastern Paper Group, Inc., a
South Carolina Corporation.

Womble Carlyle Sandridge & Rice, PLLC, by W. Andrew Copenhaver and
James A. Dean, and Stoel Rives, LLP, by Jodi L. Johnson, pro hac vice, for
Defendant Sunburst Chemicals, Inc.

Gale, Judge.
I. INTRODUCTION
{2} Plaintiffs Southeastern Paper Group, Inc., a North Carolina corporation
(“North Carolina SEPG”) and Southeastern Paper Group, Inc., a South Carolina
corporation (“South Carolina SEPG”) seek injunctive and monetary relief for
tortious interference with business relations, civil conspiracy, conversion of
property, violation of the North Carolina Trade Secrets Protection Act, and unfair
and deceptive trade practices against Defendant Sunburst Chemicals, Inc.
(“Sunburst”).
{3} The Motion challenges this court’s jurisdiction based on an arbitration
clause included in a January 2007 “Distribution Agreement” executed by North
Carolina SEPG and Sunburst. Plaintiffs contend the person executing the contract
for North Carolina SEPG had no authority to do so, so that there is no enforceable
arbitration agreement.
{4} Ruling on the Motion is DEFERRED, pending the completion of limited
discovery on this isolated issue of whether there is an arbitration agreement as to
either or both Plaintiffs. Where the parties dispute the validity of an agreement to
arbitrate, the court must first resolve this threshold issue.

II. PROCEDURAL BACKGROUND
{5} This action was filed in Guilford County Superior Court on August 5, 2011.
The matter was designated a mandatory complex business case by the August 15,
2011 order of the Chief Justice of the Supreme Court of North Carolina and
assigned to the undersigned judge.
{6} Defendant Sunburst filed its Motion on December 21, 2011. The Motion
was fully briefed and the court heard oral arguments on February 23, 2012.
III. FACTUAL BACKGROUND
{7} Because Defendant challenges jurisdiction, the court looks to facts taken
from the pleadings as well as other evidence presented.1

A. THE PARTIES
{8} Plaintiff North Carolina SEPG is a North Carolina corporation2 with its
main office in Browns Summit, Guilford County, North Carolina.
{9} Plaintiff South Carolina SEPG is a South Carolina corporation with its
main office in Spartanburg, South Carolina.
{10} Defendant Sunburst is a Minnesota corporation with its principal place of
business in Bloomington, Minnesota. It conducts business and has employees
located in the state of North Carolina, including Guilford County. Sunburst
supplied products to SEPG from approximately 2001 through 2011.
{11} The Motion seeks to compel arbitration as to all claims, based on an
agreement executed by North Carolina SEPG which includes an arbitration clause
(“Distribution Agreement”). Sunburst contends this agreement binds all parties to
arbitrate any dispute which “arises out of or is related to this Agreement or the
breach thereof.”3 SEPG disputes the validity of the Distribution Agreement, and
specifically contends that SEPG cannot be bound to arbitrate when its signatory to
the document had no authority to bind the corporation. Sunburst contends that
even this initial dispute as to the validity of the Distribution Agreement must be
submitted to arbitration, rather than being resolved by the court.

1 In determining whether parties had a valid agreement to arbitrate, the court may consider

evidence as to facts that are in dispute. Slaughter v. Swicegood, 162 N.C. App. 457, 461, 591 S.E.2d
577, 580 (2004).
2 The parties dispute whether the alleged arbitration agreement is binding as to both North Carolina

SEPG and South Carolina SEPG, and whether the two organizations were legally distinct
corporations. Throughout this discussion, “SEPG” used alone will refer to North Carolina SEPG and
South Carolina SEPG collectively.
3 Exh. 1 to Def.’s Amended Compl..
B. THE DISTRIBUTION AGREEMENT
{12} The Distribution Agreement was signed by Jerald Shadley, SEPG Sales
Manager, in January 2007.4 The Distribution Agreement includes a paragraph
providing that:
Any controversy or claim between SUNBURST and DISTRIBUTOR
which in any way arises out of or is related to this Agreement or the
breach thereof, shall be settled by final and binding arbitration in
accordance with the rules of the American Arbitration Association then
in force. The Arbitration hearings shall be held in Minneapolis,
Minnesota.5

{13} Plaintiffs dispute that the Distribution Agreement is valid.6 The various
affidavits offered by the Parties offer divergent perspectives. Accordingly, if the
court has authority to decide the issue of enforceability of the agreement, it must
resolve disputed issues of fact.
{14} Sunburst asserts that Shadley’s signature bound SEPG to the Distribution
Agreement for several reasons.7 It asserts, inter alia, that Shadley had authority as
North Carolina SEPG’s sales manager, that Gregory Rizzi instructed Sunburst to
deal with Shadley, and that a letter later sent by Shadley to Sunburst confirmed
Shadley’s authority.
{15} There is no dispute that Shadley actually signed the Distribution
Agreement. In January 2007, Shadley met with Sunburst representatives in North
Carolina, during which meeting he signed the Distribution Agreement.8 Shadley
believed he was signing an agreement related only to training North Carolina
SEPG sales staff for a specific Sunburst customer. He contends he did not have
authority to enter into a contract with a supplier related to North Carolina SEPG's
customers.9

4 Exh. 1 to Def.’s Amended Ans. to Amended Compl. and Counterclaims.
5 Id. ¶ 14.
6 Def.’s Mem. of Law in Support of Mot. to Dismiss, 12-13; Pls.’ Resp. to Def.’s Mot. to Dismiss 2-6.
7 Def.’s Reply Mem. of Law in Support of Mot. to Dismiss 6-9.
8 Aff. Jerald Shadley ¶ 3.
9 Id. ¶ 6.
{16} Rizzi was North Carolina SEPG Director of Sales, and was Shadley’s
supervisor in January 2007.10 Shadley was a sales manager, overseeing
approximately twelve sales representatives.11 Rizzi disclaims his own authority to
sign distribution contracts on behalf of SEPG, and testifies that he never gave
similar authority to Shadley.12
{17} In his role as South Carolina SEPG Division Manager for
Warehouse/Laundry, John Covington participated in the negotiation of pricing
terms with Sunburst.13 Covington testified that consolidation of Sunburst’s pricing
structure for South Carolina SEPG and North Carolina SEPG actually benefitted
North Carolina SEPG in early 2011, and there was no suggestion at the time that
Sunburst believed a Distribution Agreement was relevant to the change.14
{18} Jerry Billingsley, former South Carolina SEPG Equipment Service
Manager, testified that he was aware of the Distribution Agreement, that South
Carolina SEPG received benefits related to the Distribution Agreement, and that
the Distribution Agreement was generally discussed within South Carolina SEPG
during 2007 and 2008.15
{19} Sunburst President Robert Laughlin was familiar with a distribution
partnership between Sunburst and South Carolina SEPG going back to August
2001.16 With regard to the January 2007 Distribution Agreement, Laughlin
testified that Rizzi told Sunburst that Shadley was responsible for discussions
related to the arrangement.17 South Carolina SEPG purportedly received
substantial benefits from Sunburst due to the January 2007 Distribution
Agreement.18

10 Aff. Gregory Rizzi ¶ 4.
11 Id.
12 Id. ¶¶ 4-5.
13 Aff. John Covington ¶ 6.
14 Aff. John Covington ¶ 6.
15 Aff. Jerry Billingsley ¶ 8.
16 Aff. Robert Laughlin (August 11, 2011) ¶ 4.
17 Aff. Robert Laughlin (December 21, 2011) ¶ 14.
18 Id. ¶¶ 7-8.
{20} On August 1, 2011 SEPG ended its relationship with Sunburst and began
to use Ecolab as a supplier. Thereafter, several North Carolina SEPG employees
went to work for Sunburst, and Sunburst allegedly solicited, obtained, and used
SEPG customer lists to solicit SEPG customers.19 SEPG filed claims against
Sunburst in Guilford County Superior Court on August 5, 2011, asserting tortious
interference with business relations, civil conspiracy, conversion of property,
violation of the North Carolina Trade Secrets Act, and unfair and deceptive trade
practices.20

IV. STANDARD OF REVIEW
{21} A motion to dismiss pursuant to Rule 12(b)(1) is not viewed in the same
manner as a motion to dismiss for failure to state a claim upon which relief can be
granted. Data Gen. Corp. v. County of Durham, 143 N.C. App. 97, 102, 545 S.E.2d
243, 247 (2001); Tart v. Walker, 38 N.C. App. 500, 502, 248 S.E.2d 736, 737 (1978).
Matters outside of the pleadings may be considered and weighed by the court in
determining the existence of jurisdiction over the person or the subject matter.
Data Gen. Corp., 143 N.C. App. at 102, 545 S.E.2d at 247; Tart, 38 N.C. App. at 502,
248 S.E.2d at 737.
{22} Here, the Parties dispute the validity of the agreement giving rise to the
right to arbitration. If a party refuses to arbitrate upon its opponent’s motion, “the
court shall proceed summarily to decide the issue and order the parties to arbitrate
unless it finds that there is no enforceable agreement to arbitrate.” N.C. Gen. Stat.
§ 1-569.7(a)(2012). Therefore, the court must determine whether the agreement is
valid and binding on the Parties before making an assessment as to whether it may
compel arbitration of any particular dispute.
{23} The court has therefore examined the pleadings as well as additional
evidence submitted in connection with Defendant’s Motion.

19 Pls.’ Resp. to Def.’s Mot. to Dismiss 8.
20 Amended Compl. ¶¶ 41-92.
V. ANALYSIS
{24} While the Federal Arbitration Act favors enforcement of arbitration
provisions, a prerequisite is the existence of a valid agreement to arbitrate. See,
e.g., 9 U.S.C. § 2 (providing that, under the Federal Arbitration Act, a contractual
arbitration provision “shall be valid, irrevocable, and enforceable, save upon such
grounds as exist at law or in equity for the revocation of any contract.”); Granite
Rock Co. v. Int'l Bhd. of Teamsters, 561 U.S. ___, ___, 130 S. Ct. 2847, 2855−56
(2010) (“Where the dispute at issue concerns contract formation, the dispute is
generally for courts to decide.”); Routh v. Snap-On Tools Corp., 108 N.C. App. 268,
271−72, 423 S.E.2d 794 (1992) (“The law of contracts governs the issue of whether
there exists an agreement to arbitrate. Accordingly, the party seeking arbitration
must show that the parties mutually agreed to arbitrate their disputes.”) (citation
omitted).
{25} The presumption favoring arbitration applies only where it derives its
legitimacy from a judicial conclusion that the parties’ express agreement to
arbitrate was validly formed. Granite Rock, 561 U.S. at ___, 130 S. Ct. at 2859−60.
“[A]rbitration is a matter of contract and a party cannot be required to submit to
arbitration any dispute which he has not agreed so to submit.” United Steelworkers
of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582, 80 S. Ct. 1347, 1353
(1960).
{26} Therefore, the court must first consider relevant evidence to determine
whether the Parties had a valid, enforceable agreement. “[P]ublic policy favoring
arbitration does not come into play unless a court first finds that the parties entered
into an enforceable agreement to arbitrate.” Evangelistic Outreach Ctr. v. Gen.
Steel Corp., 181 N.C. App. 723, 726, 640 S.E.2d 840, 843 (2007).
{27} The initial questions of contract formation are determined as a matter of
state law. Capps v. Blondeau, 2010 NCBC 7 ¶ 43 (N.C. Super. Ct. April 13, 2010),
http://www.ncbusinesscourt.net/opinions/2010_NCBC_7.pdf, aff’d, 719 S.E.2d 256
(N.C. Ct. App. 2011). “The [Federal Arbitration Act] only preempts state rules of
contract formation which single out arbitration clauses and unreasonably burden
the ability to form arbitration agreements . . . with conditions on (their) formation
and execution . . . which are not part of the generally applicable contract law.” Park
v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 159 N.C. App. 120, 122, 582 S.E.2d
375, 378 (2003) (citations and quotation omitted).
{28} In North Carolina, the burden of proving that an arbitration agreement
exists is with the party seeking to compel arbitration. Slaughter v. Swicegood, 162
N.C. App. 457, 461, 591 S.E.2d 577, 580 (2004). This party must persuade the court
that the parties mutually agreed to arbitrate their disputes. Id.. See Thompson v.
Norfolk S. Ry. Co., 140 N.C. App. 115, 120, 535 S.E.2d 397, 400 (2000); Routh, 108
N.C. App. at 271—72, 423 S.E.2d at 794 (1992). The trial court’s finding with
regard to whether there existed an arbitration agreement is a question of fact, to be
determined by the trial court upon competent evidence. Id. Such a determination
is conclusive on appeal, even where the evidence might support findings to the
contrary. Id.; Sciolino v. TD Waterhouse Investor Servs., Inc., 149 N.C. App. 642,
645, 562 S.E.2d 64, 66 (2002).
{29} North Carolina law controls the initial issue of contract formation. The
Distribution Agreement purports to subject all claims under the contract to
determination under Minnesota law. However, the primary question at this stage
is whether the Parties came to a valid agreement.
{30} Neither party argues the agreement was intended to govern commercial
activity in Minnesota, and the record suggests that Shadley signed the agreement
in North Carolina.21 Even if the Distribution Agreement were actually signed
during a meeting of party representatives in Minnesota, if performance is to be
wholly outside of the state where the agreement was made, the law of the place of
performance governs. Cocke v. Duke Univ., 260 N.C. 1, 8, 131 S.E.2d 909, 913
(N.C. 1963).
{31} Therefore, this court must first resolve whether, under North Carolina
law, the Parties came to an agreement to arbitrate.

21 Aff. Jerald Shadley ¶ 3.
{32} The Parties contest several issues controlling this initial decision. At this
point, a question of fact remains as to whether Shadley had authority to bind North
Carolina SEPG, and whether North Carolina SEPG ratified the Distribution
Agreement by its conduct in response to the Agreement.
{33} The court is mindful of the limitations on the use of discovery by a party
opposing arbitration. See Cyclone Roofing Co. v. David M. LaFave Co., 312 N.C.
224, 229−30, 321 S.E.2d 872, 876−77 (1984), citing Carcich v. Rederi A/B Nordie,
389 F. 2d 692, 696 n. 7 (2nd Cir. 1968).
{34} However, the court believes it appropriate to allow a discovery period
ending on April 27, 2012 limited to the following specific issues:
(1) whether the Distribution Agreement is an enforceable contract executed
by one with authority;
(2) whether Plaintiffs’ conduct has affirmed and/or ratified the arbitration
clause of the Distribution Agreement; and
(3) whether any arbitration agreement was understood to apply to both North
Carolina SEPG and South Carolina SEPG.
{35} Upon conclusion of this period, the court will decide the matter on written
submissions, including sworn testimony, affidavits and authenticated documents.
{36} The Parties shall file simultaneous supplemental briefs on May 29, 2012.
{37} If the court determines that there is a valid arbitration agreement, the
court will then address the scope of the arbitration clause and whether claims here
should be decided by the court or by the arbitrator.
{38} The extent to which the arbitration clause applies to claims by both
plaintiffs is also disputed. Specifically, Plaintiffs contend the Distribution
Agreement cannot cover claims related to Defendant’s solicitation of Plaintiffs’
customers,22 while Defendant asks the court to apply the arbitration clause to any

22 Pls.’ Resp. to Def.’s Mot. to Dismiss 9.
and all claims by Plaintiffs.23 This issue, however, deals with the scope of the
arbitration clause rather than the issue of its enforceability vel non. 24

VI. CONCLUSION
{39} NOW THEREFORE, based upon the foregoing, it is ORDERED that the
motions to stay judicial proceedings and to compel arbitration propounded in this
matter by Defendant Sunburst Chemicals, Inc. are DEFERRED. This action shall
proceed accordingly.

IT IS SO ORDERED, this 13th day of March, 2012.

23 Def.’s Memo. of Law in Support of Mot. to Dismiss 15.
24 Resolution of whether a particular dispute is within the scope of the arbitration agreement is

generally a decision for the court. See Green v. Short, 2007 NCBC 8 (N.C. Super. Ct. 2007), citing
Raspet v. Buck, 147 N.C. App. 133, 136, 554 S.E.2d 676, 678 (2001). As to this question, the court
considers: (1) whether the parties had a valid agreement to arbitrate, and (2) whether the specific
dispute between the parties falls within the substantive scope of their agreement. Raspet, 147 N.C.
App. at 136, 554 S.E.2d at 678. Unless a contractual provision “clearly and unmistakably” provides
that the arbitrator will decide which disputes the parties will agree to arbitrate, “the question of
arbitrability ... is undeniably an issue for judicial determination.” Peabody Holding Co., LLC v.
UMW, 665 F.3d 96, 102 (4th Cir. Va. 2012), quoting AT&T Techs., Inc. v. Commc'ns Workers of Am.,
475 U.S. 643, 649, 106 S. Ct. 1415, 1418 (1986).