J-S07018-15

NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37

AAL INVESTMENTS, LLC, IN THE SUPERIOR COURT OF

PENNSYLVANIA

Appellant

v.

NICHOLAS TSIOLES AND THEODORE 

TSIOLES,

Appellee No. 799 MDA 2014

Appeal from the Order Entered April 7, 2014

In the Court of Common Pleas of Luzerne County

Civil Division at No(s): 2013-4649

BEFORE: BENDER, P.J.E., OLSON AND OTT, JJ.

MEMORANDUM BY OLSON, J.: FILED APRIL 01, 2015

Appellant, AAL Investments, LLC, appeals from an order entered on 

April 7, 2014 in the Civil Division of the Court of Common Pleas of Luzerne 

County. The April 7, 2014 order sustained preliminary objections filed on 

behalf of Appellees, Nicholas Tsioles and Theodore Tsioles, which alleged 

that Appellant’s complaint was subject to compulsory arbitration. In 

addition, the order dismissed Appellant’s complaint without prejudice. We 

quash but remand with directions to the trial court, upon motion of a party, 

to reinstate Appellant’s complaint and stay the action pending the resolution 

of the arbitration proceeding.

The trial court aptly summarized the relevant facts as follows:

In 2008, [Appellant] and Nicholas Tsioles entered into an [a]sset 

[p]urchase and [s]ale [a]greement that was signed by Nicholas 

Tsioles and [Appellant]. Theodore Tsioles did not execute the 
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[a]greement. According to the [a]sset [p]urchase and [s]ale 

[a]greement, [Appellant] agreed to purchase a Curry Donut from 

Nicholas Tsioles. [Appellant] also agreed to purchase the 

machinery, equipment, furniture and fixtures for one hundred 

thousand ($100,000[.00]) dollars. [Nicholas] Tsioles was to 

deliver a bill of sale and assignment for assets to [Appellant]. 

Thereafter, [Appellant] was to execute a judgment note and the 

parties agreed to enter into a [l]ease and [f]ranchise 

[a]greement. The agreements were to be executed 

simultaneously at the closing.

At the time of closing, [Appellant] executed a [p]romissory 

[n]ote and entered into a [l]ease [a]greement with Tsioles, 

however, the parties never entered into a [f]ranchise 

[a]greement.

Trial Court Opinion, 9/10/14, 2-3.

On April 15, 2013, Appellant filed a complaint alleging that Appellees 

committed fraud and violated the Pennsylvania Unfair Trade Practices and 

Consumer Protection Law (UTPCPL). Count I of Appellant’s complaint 

alleged that Appellees made false and fraudulent representations to induce 

Appellant to enter into the asset purchase and sale agreement and the lease 

agreement. Count II of the complaint alleged that Appellees engaged in 

unfair means of competition and deceptive acts in violation of the UTPCPL. 

Appellees filed preliminary objects, together with a brief in support, on May 

13, 2013. Among other things, Appellees argued that Appellant’s complaint 

should be dismissed under Pa.R.C.P. 1028(a)(6) for failure to submit claims 

to arbitration pursuant to paragraph nine of the asset purchase and sales 
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agreement.1 On May 29, 2013, Appellant filed preliminary objections to 

Appellees’ preliminary objections.

By agreement of counsel, the parties waived oral argument and 

submitted the matter for a decision on the briefs. Letter from Counsel for 

Appellees to Trial Court, 2/11/14. On April 7, 2014, the trial court sustained 

Appellees’ preliminary objections and dismissed Appellant’s complaint 

without prejudice. Trial Court Order, 4/7/14. Specifically, the trial court 

held that it lacked jurisdiction to entertain the parties’ dispute under the 

arbitration clause found in the asset purchase and sale agreement. 

Appellant timely filed this appeal on April 28, 2014. After Appellant filed its 

court ordered concise statement of errors complained of on appeal, the trial 

court issued its opinion on September 10, 2014.

Appellant raises a single question for our review:

Did the [trial court] err in failing to adjudicate [Appellant’s] fraud 

in the formation of the contract claim and as such attempted to 

enforce an arbitration clause within the contract itself?

Appellant’s Brief at 4.

____________________________________________

1 The arbitration clause provides as follows:

9. Dispute. Any dispute under this [a]greement shall be settled 

by arbitration in Luzerne County, Pennsylvania, under the rules 

of the American Arbitration Association. The decision of the 

arbitrators shall be final and binding on the parties.

Asset Purchase and Sale Agreement, 2008, Paragraph 9.
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On appeal, Appellant challenges an order that dismissed its complaint 

without prejudice on grounds that the presence of an arbitration clause in 

the parties’ contract defeated jurisdiction in the court of common pleas. “An 

order directing arbitration, whether statutory or common law, is an 

interlocutory order and is not immediately appealable.” Schantz v. 

Dodgeland, 830 A.2d 1265, 1266 (Pa. Super. 2003), quoting Rosy v. 

National Grange Mut. Ins. Co., 771 A.2d 60, 61 (Pa. Super. 2001). Trial 

court orders that direct enforcement of arbitration clauses do not address 

the merits of a case but merely transfer the respective matters to another 

forum. See Fastuca v. L.W. Molnar & Assoc., 950 A.2d 980, 986 (Pa. 

Super. 2008), aff’d, 10 A.3d 1230 (Pa. 2011). Hence, such orders are not 

final and appeals from them are not subject to immediate appellate review. 

Schantz, 830 A.2d at 1266.

Appellant’s efforts to avoid enforcement of the arbitration clause in the 

parties’ agreement are unavailing. Appellant does not allege that his claims 

in the present case fall outside the scope of the arbitration clause found in 

the parties’ asset purchase and sales agreement. Instead, Appellant cites 

various pre-contractual promises that Appellees allegedly failed to fulfill2and 

____________________________________________

2 Appellant relies on the following promises: 1) Appellees’ alleged 

agreement to furnish a franchise contract giving Appellant exclusive rights to 

operate a “Curry Donuts” shop within Pittston City in Luzerne County; 2) 

Appellees’ agreement to supply new equipment for on-site production of 

donuts and related products; and, 3) Appellees’ agreement to allow 

(Footnote Continued Next Page)
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argues that we should deem the parties’ contract void ab initio, not merely 

voidable. Because the contract is void, Appellant reasons that all aspects of 

the agreement, including an embedded arbitration clause, are 

unenforceable. See Appellant’s Brief at 16-17, citing FDA Packaging, Inc. 

v. Advance Personnel Staffing, Inc., 73 Pa. D & C 4th 420, 429 (Pa. Com. 

Pl. Berks County). These contentions lack merit.

The doctrine of severability requires enforcement of an arbitration 

clause included in a voidable contract but does not permit enforcement when 

the contract is void ab initio.

3

 Id. The distinction between a contract that is 

void, and one that is merely voidable, turns on whether there has been fraud 

in the execution of the agreement (also referred to as fraud in the factum) 

(Footnote Continued) _______________________

Appellant to use the Curry Donuts name at a satellite location. See 

Appellant’s Brief at 11-12.

3

Pennsylvania law incorporates this principle by statute. Section 7303 of 

the Judicial Code, which addresses the validity of an agreement to arbitrate 

claims, states in relevant part:

§ 7303. Validity of agreement to arbitrate

A written agreement to subject any existing controversy to 

arbitration or a provision in a written agreement to submit to 

arbitration any controversy thereafter arising between the 

parties is valid, enforceable and irrevocable, save upon such 

grounds as exist at law or in equity relating to the validity, 

enforceability or revocation of any contract.

42 Pa.C.S.A. § 7303.
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or fraud in the inducement. The District Court for the Eastern District of 

Pennsylvania succinctly articulated the difference between these principles:

Courts “classically” distinguish between two types of fraud, fraud 

in the factum and fraud in the inducement. 26 Samuel Williston, 

A Treatise on the Law of Contracts § 69:4 (Richard A. Lord ed., 

4th ed.1990); see also 7 Arthur Linton Corbin, Corbin on 

Contracts § 28.22 (Joseph M. Perillo ed., rev. ed. 1993) 

(distinguishing between fraud in the factum and fraud in the 

inducement). In cases where one party's assent has been 

procured by fraud in the factum, courts treat the agreement as 

void and legally ineffective. See, e.g., Resolution Trust Corp. 

v. Koock, 867 F.Supp. 284, 287 (E.D. Pa. 1994) (Robreno, J.) 

(“[F]raud in the factum ... would render the [agreement] void 

....”); see also Restatement (Second) of Contracts § 163 

(1981). When, however, there is fraud in the inducement, the 

agreement is voidable at the option of the defrauded party. 

See, e.g., Langley v. FDIC, 484 U.S. 86, 94, 108 S.Ct. 396, 98 

L.Ed.2d 340 (1987) (recognizing that “fraud in the inducement 

... renders [a contract] voidable but not void”); see also

Restatement (Second) of Contracts § 164 (1981).

* * *

Fraud in the factum occurs when “fraud ... procures a party's 

signature to an instrument without knowledge of its true nature 

or contents.” FDIC v. Deglau, 207 F.3d 153, 171 (3d Cir. 

2000) (quoting Langley v. FDIC, 484 U.S. 86, 93, 108 S.Ct. 

396, 98 L.Ed.2d 340 (1987)); see also Restatement (Second) of 

Contracts § 163 & cmt. a (1981) (defining fraud in the factum as 

“a misrepresentation as to the character or essential terms of a 

proposed contract”). “Fraud in the inducement, on the other 

hand, does not involve terms omitted from an agreement, but 

rather allegations of oral representations on which the other 

party relied in entering into the agreement but which are 

contrary to the express terms of the agreement.” Dayhoff Inc. 

v. H.J. Heinz Co., 86 F.3d 1287, 1300 (3d Cir.1996); see also

Restatement (Second) of Contracts § 164.
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Giannone v. Ayne Institute, et al., 290 F.Supp.2d 553, 561 (E.D. Pa. 

2003).4

Appellant’s claims in the present case assert only fraud in the 

inducement, not fraud in the execution. Hence, the parties’ agreement is 

merely voidable, not void. Appellant’s complaint attaches the parties’ asset 

purchase and sale agreement, but does not allege that the attached 

agreement was not intended to consummate the parties’ transaction. 

Appellant makes no claim that the arbitration clause was procured by fraud 

or was inserted after its review. The thrust of Appellant’s position is that 

Appellees fraudulently misrepresented their intent to comply with the terms 

of the parties’ agreement. See Complaint, 4/15/13, at ¶¶ 4-31 (setting 

forth Appellant’s fraud allegations); Asset Purchase and Sales Agreement, 

2008, at 1, 2, and 4 (¶¶ 1 and 4(d)) (listing items conveyed under the 

agreement and setting forth terms relating to execution of franchise 

agreement). As such, we conclude that Appellant’s complaint sought relief 

for “oral representations on which [Appellant] relied in entering into the 

____________________________________________

4 The Restatement goes on to explain that void contracts generally arise in 

cases of forgery of a party's name or unauthorized execution of an 

agreement on behalf of another party. See e.g., Restatement (Second) of 

Contracts §7 cmt. a. Whereas, voidable contracts involve agreements that 

allegedly are tainted by unconscionability, duress, misrepresentation, fraud, 

or other bad faith conduct. See e.g., Restatement (Second) of Contracts §7 

(1981).
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agreement but which [were] contrary to the express terms of the 

agreement. See Giannone, 290 F.Supp.2d at 561-562. Thus, no relief is 

warranted. Id. at 560 (“courts should adjudicate issues involving fraud in 

the inducement of an arbitration clause, but arbitrators should determine 

whether there has been fraud in the inducement of an entire contract”).

Although the trial court correctly determined that Appellant’s claims 

are subject to compulsory arbitration, we discern an error in the trial court’s 

dismissal of Appellant’s claims without prejudice. We confronted a similar 

situation in Schantz, supra. In that case, we observed:

[The a]ppellant argues that he has effectively been put out of 

court because the trial court dismissed his complaint. Such 

action was improper. In Maleski v. Mutual Fire, Marine and 

Inland Ins. Co., 633 A.2d 1143 (Pa. 1993), our Supreme Court 

considered the appeal of the state insurance commission which 

sought review of an order granting the appellees, insurance 

companies', motion to compel arbitration and dismissing the 

appellant's complaint. The Supreme Court began by noting that 

an appeal from an order directing arbitration is interlocutory; 

thus, the appeal had to be quashed. However, it further held 

that the original court action should have been stayed pending 

arbitration. The Court found a stay was required pursuant to 

Section 7304[(d)] of the Pennsylvania Arbitration Act, 42 

Pa.C.S.A. § 7304. It provides in part that an action “involving an 

issue subject to arbitration, shall be stayed if a court order to 

proceed with arbitration has been made.” Id. The Supreme 

Court ruled that a stay of the court action pending arbitration 

was required by statute which made the order appealed from 

interlocutory. The Court then quashed the appeal. 

Shantz, 830 A.2d at 1266 (parallel citations omitted).

In this case, the trial court held that Appellant’s claims should proceed 

to arbitration, yet the court dismissed Appellant’s claims without prejudice. 
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Section 7304(d) of the Pennsylvania Arbitration Act requires a stay of 

judicial proceedings where an issue is referred to arbitration. A stay is 

necessary, among other reasons, to preserve Appellant’s claims in the event 

the limitations period were to close while the arbitration proceedings 

remained ongoing. Thus, in accordance with Maleski, Schantz, and 42 

Pa.C.S.A. § 7304(d), we conclude the trial court improperly dismissed the 

proceedings before it after referring the matter to arbitration. We thus 

direct the trial court, upon motion of a party, to reinstate Appellant's 

complaint and stay the action pending the resolution of the arbitration 

proceeding.

Appeal quashed. Jurisdiction relinquished.

Judgment Entered.

Joseph D. Seletyn, Esq.

Prothonotary

Date: 4/1/2015