The U.S. Small Business Administration, as Receiver for Acorn Technology Fund, L.P. v. Peter E. Chimicles, the U.S. Small Business Administration, as Receiver for Acorn Technology Fund, L.P. v. Leonard Barrack Lynne Barrack
Docket: 05-1330
Court: Court of Appeals for the Third Circuit; May 10, 2006; Federal Appellate Court
In the case of The U.S. Small Business Administration, as Receiver for Acorn Technology Fund, L.P. v. Peter E. Chimicles and Leonard Barrack, the U.S. Court of Appeals for the Third Circuit addressed appeals concerning orders from the United States District Court for the Eastern District of Pennsylvania. Both Chimicles and the Barracks sought to stay proceedings pending arbitration, arguing that their disputes fell under an arbitration provision in a related agreement. The court affirmed the district court's decisions, ruling that the contractual disputes did not involve the arbitration provision since they were based on agreements that did not contain such provisions.
The background of the case involves Acorn Technology Fund, L.P., a New Jersey limited partnership founded in 1997, with Acorn Technology Partners, LLC as its general partner. Chimicles and the Barracks were private limited partners who executed a partnership agreement and a subscription agreement with Acorn, committing to capital contributions in exchange for partnership interests. Acorn was licensed as a Small Business Investment Company (SBIC) by the SBA and could receive federal matching funds for private investments in small businesses, provided it complied with the Small Business Investment Act of 1958.
The SBA was appointed as receiver for Acorn following allegations of violations of the SBIA, and a stay was placed on all civil litigation involving Acorn or its affiliates. Despite this stay, the cases at hand focused on the SBA's efforts to recover outstanding amounts owed by the limited partners under their subscription agreements. Specifically, Chimicles had committed $315,000 in total, fulfilling $250,000 but failing to pay an additional $65,000, which he claimed was waived by the general partner.
On June 12, 2003, the Small Business Administration (SBA) demanded payment from Chimicles for an unpaid balance on his subscription commitment. Following his refusal, the SBA filed a breach of contract complaint against him. Chimicles responded on January 16, 2004, with a motion to dismiss based on lack of personal jurisdiction or to stay the case for arbitration; this motion was denied on September 21, 2004, prompting a timely appeal.
Separately, the Barracks executed a subscription agreement on April 7, 1998, committing to a $1.5 million investment in Acorn, of which they paid only $750,000. They claimed that Torkelsen had waived penalties for unpaid amounts. The SBA demanded the remaining $750,000 on June 5, 2003, and upon refusal, sued the Barracks for breach. Their motion to dismiss or stay for arbitration was denied on January 5, 2005, leading to an appeal.
The appeals were consolidated on February 7, 2005. The court has subject matter jurisdiction under 9 U.S.C. § 16(a) and reviews arbitration agreement applicability and scope under a plenary standard. It noted that while arbitration agreements are generally enforceable under the Federal Arbitration Act (FAA), a party must have agreed in writing to arbitrate the specific dispute.
The critical issue is whether the SBA's enforcement attempts of the subscription agreements necessitate arbitration. Both Chimicles and the Barracks acknowledge that the subscription agreements lack an arbitration clause but argue that the partnership agreements contain a broad arbitration provision applicable due to their interrelation. Section 1.1 of the subscription agreement mandates that investors adhere to the terms of both the subscription and partnership agreements.
If arbitration is applicable, it would be derived from Section 13.10 of the partnership agreement, which requires arbitration in Princeton, New Jersey, for any disputes arising from the agreement. Additionally, Section 13.7 stipulates that actions to enforce the agreement must also be pursued through arbitration in New Jersey, following Section 13.10.
The arbitration provisions in the partnership agreement are significant for two reasons: they are between the general partner and the private limited partners, and section 13.7 specifies that the arbitration clause applies to actions enforcing the partnership agreement and those initiated by private limited partners. Acorn and the SBA, as receiver, are not private limited partners and thus not covered by this arbitration provision. Even if section 1.1 of the subscription agreement incorporates the partnership agreement's terms, it does not extend to actions by Acorn or SBA. The district court correctly identified the subscription and partnership agreements as separate, fully-integrated contracts, as indicated in sections 3.5 and 13.6 of both agreements, which assert their completeness and exclusivity.
Appellants' reliance on Brayman Construction Corp. v. Home Insurance Co. is misplaced; that case involved two contracts signed by the same parties and did not address enforcing an arbitration clause against a third party. Similarly, other cited cases involved parties that had signed the agreements.
Even assuming disputes under the subscription agreement could be subject to mandatory arbitration, appellants failed to clarify why section 5.1.2 of the partnership agreement negates any arbitration obligation. This section states that in cases of restricted operations, contributions required by the SBA are not subject to other agreement conditions, including the arbitration provision. Therefore, with the SBA now as receiver, obligations for contributions are no longer bound by conditions in the agreement, meaning the arbitration provision does not apply to disputes regarding unpaid investor commitments. The district court's ruling that these disputes are not subject to mandatory arbitration is affirmed.
