Court Opinion

ID: 4236731
Source: CourtListenerOpinion
Date Created: 2018-01-16 13:12:23.252576+00
Date Added: 2024-06-11T14:42:39.357468
License: Public Domain

IN THE COURT OF APPEALS OF NORTH CAROLINA

                                    No. COA16-908

                                Filed: 2 January 2018

Union County, No. 15 CVS 2234

iPAYMENT, INC., Plaintiff,

             v.

KELLY M. GRAINGER, INDIVIDUALLY AND AS ADMINISTRATOR OF THE
ESTATE OF GEORGE GREGORY GRAINGER, WEAKLEY GETWAWAYS, LLC,
1ST AMERICARD, INC., JESSICA GRAINGER, and UNIVERSAL FINANCE &
LEASING CORPORATION, Defendants.

      Appeal by Plaintiff from an order entered 25 August 2016 by Judge Theodore

S. Royster, Jr., in Union County Superior Court. Heard in the Court of Appeals 8

February 2017.

      Rayburn Cooper & Durham, P.A., by Ross R. Fulton and Tory Ian Summey, for
      Plaintiff-Appellant.

      Koehler & Associates, by Stephen D. Koehler, for Defendants-Appellees.

      INMAN, Judge.

      iPayment Inc. (“Plaintiff”) appeals from an order denying its motion to compel

arbitration of counterclaims brought against Plaintiff by Universal Finance and

Leasing Corp. (“Universal”). Plaintiff argues that the trial court erred in finding that

Plaintiff waived its right to compel arbitration on Universal’s counterclaims. After

careful review, we reverse the trial court’s order.

                      Factual and Procedural Background
                                    IPAYMENT V. GRAINGER

                                       Opinion of the Court

       This appeal arises from a dispute between Plaintiff and 1st Americard, Inc.

(“Americard”) involving an Asset Purchase Agreement, governed by New York law,

which resulted in an arbitration award (the “Arbitration Award”) of $2,350,264.74 in

favor Plaintiff.

       The parties are in the business of processing bankcard payments for retail

merchants. Their rights and duties are governed by interconnecting agreements,

specifically an Asset Purchase Agreement between Plaintiff and Americard and a

separate Split Funding Agreement between Plaintiff and Universal.

       Kelly M. Grainger (“Kelly”) is the President and sole shareholder of Americard.

Jessica Grainger (“Jessica”), daughter of Kelly, was initially an employee of

Americard before becoming an employee of Universal following the death of her father

George Gregory Grainger.1 At all relevant times, Kelly and Jessica were citizens and

residents of Union County, North Carolina. Kelly and Jessica were also the sole

officers and employees of Universal.            Weakley Getaways, LLC (“Weakley”) is a

corporation based in Panama City Beach, Florida, owned and operated by Cathy

Baker, Kelly Grainger’s sister, and Cathy’s husband, Gordon H. Weakley.

       On 28 June 2013, Plaintiff and Americard executed an Asset Purchase

Agreement, whereby Plaintiff agreed to purchase rights to Americard’s existing

       1  George Gregory Grainger, spouse of Kelly, was the Chief Executive Officer of Americard and
passed away on 24 April 2015. George Grainger was a party to the original arbitration which gave
rise to the Arbitration Award.

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                                IPAYMENT V. GRAINGER

                                   Opinion of the Court

merchant accounts in exchange for $4,867,852.32.          Plaintiff and Americard also

executed a Sub-Independent Sales Organization agreement (“Sub-ISO”), whereby

Americard agreed to submit all new merchant applications for payment processing

services exclusively to Plaintiff during the “Initial Term” and to use its best efforts to

obtain new merchants.       The Asset Purchase Agreement included the following

arbitration clause and choice of law provision:

             BINDING ARBITRATION. EXCEPT AS PROVIDED IN
             SECTION 5.2(C) HEREOF, ANY DISPUTE OR CLAIM
             BETWEEN THE PARTIES ARISING OUT OF OR
             RELATED    TO   THIS   AGREEMENT   OR THE
             TRANSACTIONS     CONTEMPLATED     BY   THIS
             AGREEMENT SHALL BE FULLY AND FINALLY
             RESOLVED BY BINDING ARBITRATION IN THE CITY
             OF NEW YORK, NEW YORK COUNTY IN
             ACCORDANCE       WITH    THE    COMMERCIAL
             ARBITRATION RULES AND PRACTICES OF THE
             AMERICAN ARBITRATION ASSOCIATION (“AAA”)
             FROM TIME TO TIME IN FORCE AND EFFECT.

             ...

             GOVERNING LAW. THIS AGREEMENT SHALL BE
             CONSTRUED AND ENFORCED IN ACCORDANCE
             WITH THE LAWS OF THE STATE OF NEW YORK,
             WITHOUT REGARD TO ANY JURISDICTION’S
             PRINCIPLES OF CONFLICT OF LAWS.

      A month after executing the Asset Purchase Agreement, on 25 July 2013,

Plaintiff and Universal executed a Split Funding Agreement providing that Universal

would advance funds to merchants serviced by Plaintiff in exchange for Plaintiff’s

remittal of certain funds related to those accounts. Similar to the Asset Purchase

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                               IPAYMENT V. GRAINGER

                                  Opinion of the Court

Agreement, the Split Funding Agreement included the following mandatory

arbitration clause (the “Arbitration Clause”) and choice of law provision (the “Choice

of Law Provision”):

             BINDING ARBITRATION. EXCEPT FOR ANY ACTION
             FOR INJUNCTIVE RELIEF WITH RESPECT TO THE
             ENFORCEMENT OF ANY PARTY’S RIGHTS UNDER
             SECTION 11 OR 12 HEREOF, ANY DISPUTE OR CLAIM
             BETWEEN THE PARTIES ARISING OUT OF OR
             RELATED TO THIS AGREEMENT SHALL BE FULLY
             AND    FINALLY     RESOLVED     BY    BINDING
             ARBITRATION IN THE CITY AND COUNTY OF NEW
             YORK IN ACCORDANCE WITH THE COMMERCIAL
             ARBITRATION RULES AND PRACTICES OF THE
             AMERICAN ARBITRATION ASSOCIATION (“AAA”)
             FROM TIME TO TIME IN FORCE AND EFFECT.

             ...

             GOVERNING LAW. THIS AGREEMENT SHALL BE
             CONSTRUED AND ENFORCED IN ACCORDANCE
             WITH THE LAWS OF THE STATE OF NEW YORK
             WITHOUT REGARD TO ANY JURISDICTION’S
             PRINCIPLES OF CONFLICT OF LAWS.

      Within a year after purchasing Americard’s merchant accounts, Plaintiff

brought an arbitration action in New York against Americard, Kelly, and George

Grainger alleging that they made misrepresentations to Plaintiff and breached the

Asset Purchase Agreement and associated agreements, excluding the Split Funding

Agreement. In February 2015, Plaintiff obtained the Arbitration Award finding

Americard, Kelly, and Jessica jointly and severally liable to Plaintiff for

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                              IPAYMENT V. GRAINGER

                                 Opinion of the Court

$2,350,264.74. Plaintiff then filed a motion to confirm the arbitration award in the

United States District Court for the Southern District of New York.

      On 25 August 2015, while Plaintiff’s motion to confirm the arbitration award

was pending, Plaintiff filed a verified complaint in Union County Superior Court

alleging that immediately after the arbitration award was entered, Kelly and George

Grainger entered into a scheme to fraudulently transfer their assets to Weakley in

an attempt to avoid Plaintiff’s eventual judgment from the Arbitration Award. On

18 September 2015, Plaintiff amended its original complaint to include Kelly in her

capacity as the administrator of the estate of George Gregory Grainger. On 26

October 2015, Plaintiff filed its second amended verified complaint (the “Second

Amended Complaint”), which named Jessica, Americard, and Universal as additional

defendants in the action.   Plaintiff asserted two claims against Universal as a

transferee of fraudulent transfers from the other Defendants, alleging “[u]pon

information and belief, Universal Finance is the recipient of some or all of those

fraudulently transferred assets from the Graingers or 1st AmeriCard or their

proceeds.” The Second Amended Complaint alleged no conduct by or on behalf of

Universal other than receiving fraudulent transfers.

      Plaintiff began pursuing discovery in the fraudulent transfer litigation on 24

September 2015 by propounding to Kelly interrogatories, requests for production of

documents, and requests for admissions.        On 1 October 2015, prior to adding

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                               IPAYMENT V. GRAINGER

                                  Opinion of the Court

Americard and Universal as defendants in the action, Plaintiff issued a subpoena to

a third-party accountant for all documents relating to Americard, Universal, or Kelly

and George Grainger “for the period from January 1, 2013 through the present,

including, but not limited to, tax returns, financial statements, work papers, bank

account records, and all correspondence (including emails, letters, and text

messages).” Later in October 2015, but prior to naming Americard and Universal as

defendants in the action, Plaintiff issued subpoenas to five banks seeking additional

documents and information relating to specific accounts and transactions involving

Kelly, George Grainger, Americard, and Universal.

      In December 2015, after asserting claims against Americard, Universal, and

Jessica, Plaintiff served on Americard and Jessica a set of interrogatories, requests

for production of documents, and requests for admissions, and served interrogatories

and requests for production of documents on Universal.

      On 29 December 2015, Defendants filed a joint answer to Plaintiff’s Second

Amended Complaint and counterclaims by Universal against Plaintiff for breach of

contract, defamation, tortious interference with contract and/or prospective

advantage, and unfair and deceptive trade practices and unfair methods of

competition. All of the counterclaims related to the Split Funding Agreement.

      On 26 and 27 January 2016, Plaintiff took depositions of Kelly and Jessica.

Plaintiff’s counsel specified before questioning Kelly about Universal’s counterclaims:

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                                 IPAYMENT V. GRAINGER

                                    Opinion of the Court

“iPayment is reserving all rights to argue that counterclaim 1 [breach of the Split

Funding Agreement] is subject to arbitration under its contract and as [sic] they’re

participating in discovery without waiving any of those rights to those arguments.”

Plaintiff’s counsel went on to ask Kelly a series of questions, including, inter alia:

“What false statements—false and misleading statements has iPayment made about

[Universal]?” and “[w]hat false and misleading statements has iPayment made about

the officers of Universal Finance & Leasing?” Plaintiff’s counsel also inquired about

the internal operations of Universal, communications between several merchants and

Universal, and the structure of the Split Funding Agreement.

      On 24 February 2016, Plaintiff filed a motion to dismiss Universal’s

counterclaims arising from the Split Funding Agreement or, in the alternative, to

stay the litigation and compel arbitration of the counterclaims (“Motion to Compel”).

      The Motion to Compel came on for hearing on 4 April 2016. Universal asserted

that Plaintiff waived its right to compel arbitration of Universal’s counterclaims

under the Split Funding Agreement because of Plaintiff’s participation in this

litigation, including Plaintiff’s pursuit of discovery.

      On 25 April 2016, the trial court entered an order denying Plaintiff’s Motion to

Compel. The trial court held that “[t]he conduct of the Plaintiff in this action was

clearly inconsistent with the arbitration provision contained in the Split Funding

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                               IPAYMENT V. GRAINGER

                                  Opinion of the Court

Agreement and manifests Plaintiff’s election to submit to the jurisdiction of this

forum.”

      Plaintiff filed its notice of appeal on 9 May 2016.

                              Appellate Jurisdiction

      An order denying a motion to compel arbitration is interlocutory. “Generally,

there is no right of immediate appeal from interlocutory orders and judgments.”

Goldston v. American Motors Corp., 326 N.C. 723, 725, 392 S.E.2d 735, 736 (1990).

However, our courts have long held that an order denying a motion to compel

arbitration affects a substantial right which might be lost if the appeal is delayed,

and therefore is immediately appealable. Prime South Homes, Inc. v. Byrd, 102 N.C.

App. 255, 258, 401 S.E.2d 822, 825 (1991). Accordingly, we hold this appeal is

properly before us.

                                      Analysis

      I. Choice of Law

      The trial court concluded, and the parties do not dispute, that New York law

governs the Arbitration Clause, as provided in the Split Funding Agreement. A

choice of law provision agreed upon by parties is “generally binding on the

interpreting court as long as they had a reasonable basis for their choice and the law

of the chosen State does not violate a fundamental public policy of the state or

otherwise applicable law.” Torres v. McClain, 140 N.C. App. 238, 241, 535 S.E.2d

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                                IPAYMENT V. GRAINGER

                                   Opinion of the Court

623, 625 (2000) (citations omitted). When the parties entered into the Split Funding

Agreement, Plaintiff’s principle place of business was New York, so there was a

reasonable basis for the choice of law provision. Additionally, applying New York law

will not violate any fundamental public policy of the State of North Carolina. See

Behr v. Behr, 46 N.C. App. 694, 696-97, 266 S.E.2d 393, 395 (1980) (applying New

York law to the interpretation of a separation agreement).

      II. Waiver of Right to Arbitration

      Universal does not dispute that the Arbitration Clause in the Split Funding

Agreement applies to its counterclaims. Rather, Universal asserts that Plaintiff

waived its right to compel arbitration of the counterclaims by engaging in litigation

and by obtaining discovery beyond that allowed by the rules of arbitration.

Universal’s contention relies on the presupposition that Plaintiff’s fraudulent

transfer claims against Universal, asserted in the Second Amended Complaint, were

also subject to the Arbitration Clause. We disagree with this presupposition and hold

that Plaintiff did not waive its arbitration rights by litigating and pursuing discovery

related to that claim.

      The trial court, in determining that Plaintiff acted in a manner inconsistent

with its right to arbitrate and prejudiced Universal, considered discovery that

Plaintiff pursued prior to Universal’s filing of its counterclaims. Because we disagree

with the premise upon which Universal’s argument lies—i.e., that Plaintiff’s claims

                                          -9-
                                    IPAYMENT V. GRAINGER

                                       Opinion of the Court

asserted in the Second Amended Complaint against Universal invoked the

Arbitration Clause in the Split Funding Agreement—and conclude that Universal

failed to present competent evidence that Plaintiff acted inconsistently with its right

to compel arbitration or that Universal was prejudiced by Plaintiff’s actions prior to

the assertion of its right to compel, we reverse the trial court’s order.

       A. Standard of Review

       Our precedent reflects a protracted dispute, and divergence of decisions,

regarding the standard of review applicable to a trial court’s denial of a motion to

compel arbitration on the basis that a party waived this contractual right.2

       The seminal decision, Cyclone Roofing Co., Inc. v. David M. LaFave Co., Inc.,

312 N.C. 224, 321 S.E.2d 872 (1984), explains that arbitration is a contractual right,

which may be waived. The misperception about whether this is a question of fact or

law arises from the North Carolina Supreme Court’s plain statement in Cyclone:

“Waiver of a contractual right to arbitration is a question of fact.” Id. at 229, 321

S.E.2d at 876 (citations omitted). Following this language, several decisions have

treated the issue as one of pure fact. See, e.g., Elliott, 231 N.C. App. at 332, 752

S.E.2d at 694.         However, close examination of the Supreme Court’s own

       2 In Elliott v. KB Home North Carolina, Inc., 231 N.C. App. 332, 752 S.E.2d 694 (2013), this
Court highlighted the divergence between what our courts state is the standard of review and what
our courts apply in their analyses. 321 N.C. App. at 337-38 n. 1, 752 S.E.2d at 698 n. 1 (“We
acknowledge that this Court has also treated a determination of waiver as a conclusion of law,
sometimes in the same opinion stating that it is a finding of fact.” (citations omitted)).

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                                IPAYMENT V. GRAINGER

                                   Opinion of the Court

interpretation of Cyclone and the question of whether waiver is an issue of law or fact,

along with later decisions’ treatment of the issue, lead us to conclude that whether a

party has waived the contractual right to arbitration is actually a mixed question of

law and fact. This conclusion affects the applicable standard of review of the trial

court’s determination that Plaintiff waived its arbitration rights.

      In Servomation Corp. v. Hickory Const. Co., 316 N.C. 543, 544-45, 342 S.E.2d
853, 854 (1986), the North Carolina Supreme Court explained:

             The leading case on arbitration in North Carolina, Cyclone
             Roofing Co. v. Lafave Co., 312 N.C. 224, 321 S.E.2d 872,
             teaches that arbitration is a contractual right which may
             be waived. However, the mere filing of a complaint or
             answer does not result in waiver of arbitration absent
             evidence showing prejudice to the adverse party.

             A party may be prejudiced by his adversary’s delay in
             seeking arbitration if (1) it is forced to bear the expense of
             a long trial, (2) it loses helpful evidence, (3) it takes steps
             in litigation to its detriment or expends significant
             amounts of money on the litigation, or (4) its opponent
             makes use of judicial discovery procedures not available in
             arbitration.

             There is a strong public policy favoring the settlement of
             disputes by arbitration, and doubts concerning the scope of
             arbitrable issues will be resolved in favor of the party
             seeking arbitration.

             We note holdings from other jurisdictions, consistent with
             Cyclone, to the effect that a party waives arbitration when
             it engages in conduct inconsistent with arbitration which
             results in prejudice to the party opposing arbitration.
             Maxum Foundations, Inc. v. Salus Corp., 779 F.2d 974, 981
             (4th Cir. 1985); ATSA of California, Inc. v. Continental Ins.

                                          - 11 -
                                IPAYMENT V. GRAINGER

                                   Opinion of the Court

             Co., 702 F.2d 172, 175 (9th Cir. 1983).

             Applying these rules of law to the facts of [the] instant case
             we initially observe that there has been no long trial.
             Further there is no evidence that [the] plaintiff has lost
             helpful evidence or taken steps in litigation to its
             detriment.
316 N.C. at 544-45, 342 S.E.2d at 854 (emphasis added). Servomation explicitly holds

that the determination of whether a party has waived its right requires the

application of “rules of law.” Id. at 545, 342 S.E.2d at 854.

      Whether an issue is one of fact or law turns on whether its determination

requires the application of legal principles.

             The classification of a determination as either a finding of
             fact or a conclusion of law is admittedly difficult. As a
             general rule, however, any determination requiring the
             exercise of judgment, see Plott v. Plott, 313 N.C. 63, 74, 326
S.E.2d 863, 870 (1985), or the application of legal
             principles, see Quick v. Quick, 305 N.C. 446, 452, 290
S.E.2d 653, 657-58 (1982), is more properly classified as a
             conclusion of law. Any determination reached through
             “logical reasoning from the evidentiary facts” is more
             properly classified a finding of fact. Quick, 305 N.C. at 452,
             290 S.E.2d at 657-58 (quoting Woodard v. Mordecai, 234
N.C. 463, 472, 67 S.E.2d 639, 645 (1951)).

In re Helms, 127 N.C. App. 505, 510, 491 S.E.2d 672, 675 (1997).

      Some prior decisions by this Court have perpetuated confusion regarding the

appropriate standard of review regarding waiver of the right to arbitrate. In Prime

South Homes, despite stating that waiver is a question of fact, we reviewed de novo

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                                 IPAYMENT V. GRAINGER

                                    Opinion of the Court

the trial court’s conclusion that the plaintiff waived his right to arbitration. 102 N.C.

App. at 258-59, 401 S.E.2d at 825.

       We interpret Cyclone’s reference to waiver as a question of fact to apply to the

question of whether a party has in fact engaged in a particular action. But we follow

Servomation, and the manner in which this issue has been addressed in other

decisions, and conclude that the question of whether those actions, once found as fact

by the trial court, amount to waiver of the right to arbitrate a dispute is a question of

law subject to de novo review. Servomation, 316 N.C. at 545, 342 S.E.2d at 854

(“Applying these rules of law to the facts of [the] instant case . . . .” (emphasis added));

see also Moose v. Versailles Condominium Ass’n, 171 N.C. App. 377, 382, 614 S.E.2d
418, 422 (holding that we review whether a trial court’s findings of fact “support its

conclusions of law that a party has waived its right to compel arbitration”). This

interpretation is consistent with the holdings in Cyclone and Servomation and

resolves the inconsistency in our jurisprudence.

       Accordingly, we first review whether the trial court’s findings of fact are

supported by competent evidence, and then examine de novo whether those findings

taken together support the legal conclusion that Plaintiff waived its right to compel

arbitration. As required by the parties’ Choice of Law Provision, we apply New York

law with regard to the substantive legal issue of what actions amount to waiver of

the right to compel.

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                                IPAYMENT V. GRAINGER

                                      Opinion of the Court

        B. Discussion

        The primary question before us is whether Plaintiff’s actions prior to seeking

arbitration of Universal’s counterclaims waived Plaintiff’s contractual right to compel

arbitration. We note that there is a split in New York law as to when the Federal

Arbitration Act (“FAA”) applies and whether the standard for demonstrating waiver

under    the   FAA   differs   from     New     York’s       standard—specifically,   whether

demonstration of prejudice is a requisite for the conclusion of waiver. Compare

Gramercy Advisors LLC v. J.A. Green Dev. Corp., No. 650166/2014, 2015 WL 1623789

*1, *6 (N.Y. Sup. Ct. Aug. 13, 2015), aff’d, 23 N.Y.S.3d 38, 134 A.D.3d 652 (2015)

(noting that “the court need not determine whether New York or [the FAA] waiver

standards govern, as the court holds that there is no material difference in the

standards”) and All Metro Health Care Services, Inc. v. Edwards, 884 N.Y.S.2d 648,

653 n.3 (2009) (“It is noted that New York law and the FAA apply different standards

of wavier. Under the FAA, a wavier will not be inferred without prejudice to the

opposing party as a result of the delay. New York cases do not condition a finding of

waiver on prejudice to the opposing party but find a waiver based on the degree of

participation.” (internal citations omitted)). However, we do not need to settle this

split in the present case. As discussed below, Universal has failed to demonstrate

both that Plaintiff acted inconsistent with its right to compel arbitration and that

                                             - 14 -
                                IPAYMENT V. GRAINGER

                                   Opinion of the Court

Universal was prejudiced, and therefore the trial court’s denial of Plaintiff’s Motion

to Compel is erroneous.

      Both New York and Federal law impose a strong policy favoring arbitration.

Leadertex, Inc. v. Morganton Dyeing & Finishing Corp., 67 F.3d 20, 25 (2nd Cir. 1995).

Generally, “any doubts concerning whether there has been a waiver are resolved in

favor of arbitration.” Id. at 25 (citing Moses H. Cone Memorial Hosp. v. Mercury

Constr. Corp., 460 U.S. 1, 24-25, 74 L. Ed. 2d 765 (1983)). This policy has led to the

decree that “waiver of arbitration is not to be lightly inferred.” Id. at 25 (internal

quotation marks and citations omitted). “Whether or not there has been a waiver is

decided in the context of the case, with a healthy regard for the policy of promoting

arbitration.” Id. at 25 (citation omitted).

      When reviewing whether a party has waived the right to compel arbitration,

courts look to (1) “the amount of litigation (usually exchanges of pleadings and

discovery),” (2) “the time elapsed from the commencement of litigation to the request

for arbitration,” and (3) “the proof of prejudice[.]” Leadertex, 67 F.3d at 25; see also

Cusimano v. Schnurr, 26 N.Y.3d 391, 400, 44 N.E.3d 212, 218, 23 N.Y.S.3d 137, 143

(2015).

      1. Amount of Litigation

      This case presents a unique legal issue. In reviewing the trial court’s findings

relating to the amount of litigation inconsistent with Plaintiff’s arbitration rights, we

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                                IPAYMENT V. GRAINGER

                                   Opinion of the Court

must decide whether Plaintiff’s claims in its Second Amended Complaint asserted

against Universal—as the transferee of fraudulent transfers—arose out of or related

to the Split Funding Agreement. How we decide this issue will determine whether

Plaintiff’s discovery efforts relating to the claims in the Second Amended Complaint

were inconsistent with its right to compel arbitration. We conclude that, based on

the pleadings, Plaintiff’s initial claims against Universal bore no relation to the Split

Funding Agreement, and therefore we will consider only the litigation and discovery

pursued by Plaintiff following, and directly related to, Universal’s counterclaims.

      Plaintiff’s claims against Universal assert only that Universal was a recipient

of certain fraudulent transfers by the other defendants. These claims are entirely

independent of any claim against Universal for other conduct, including conduct

related to the Split Funding Agreement. Universal filed its counterclaims against

Plaintiff on 29 December 2015, alleging breach of contract, defamation, tortious

interference with contract and/or prospective advantage, and unfair and deceptive

trade practices, all relating to the Split Funding Agreement. Plaintiff filed its first

response to Universal’s counterclaims—a motion to dismiss, or, in the alternative, to

stay and compel arbitration—on 24 February 2016. Plaintiff served no additional

discovery requests on Universal after the counterclaims were filed.             We are

unpersuaded that Plaintiff’s claims in its Second Amended Complaint are

inextricably interwoven with Universal’s counterclaims.

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                                IPAYMENT V. GRAINGER

                                   Opinion of the Court

      In January 2016, within a month after the counterclaims were filed, Plaintiff

took the depositions of Kelly and Jessica. The trial court’s finding that Kelly and

Jessica were the “sole employees and officers” of Universal is unchallenged and

binding on appeal. However, the pleadings reveal that Plaintiff sued Kelly and

Jessica in their individual capacities and not as employees, officers, or agents of

Universal.   A close examination of the deposition transcripts also shows that

Plaintiff’s questions relating to Universal’s counterclaims were limited, and that

counsel for Plaintiff stated, prior to questioning witnesses, “iPayment is reserving all

rights to argue that counterclaim 1 is subject to arbitration under its contract and as

[sic] they’re participating in discovery without waiving any of those rights to those

arguments.” Keeping in mind the strong public policy favoring arbitration, we hold

that the trial court’s conclusion that Plaintiff acted inconsistent with its right to

compel arbitration is unsupported by its findings of fact.

      2. Time Elapsed From the Commencement of the Litigation

      Given the particular facts and the nature of Plaintiff’s claims in this case, the

relevant period of litigation prior to the request for arbitration began not with the

filing of the lawsuit, but with the filing of Universal’s counterclaims. Plaintiff moved

to compel arbitration within two months after Universal filed its counterclaims. This

two-month period falls far short of periods that other courts have deemed insufficient

to establish waiver of arbitration rights. See, e.g., Brownstone Inv. Grp., LLC v. Levey,

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                                IPAYMENT V. GRAINGER

                                   Opinion of the Court

514 F. Supp. 2d 536, 540 (S.D.N.Y. 2007) (holding that a “delay of more than ten

months in seeking arbitration is insufficient by itself to support a finding of waiver”).

Accordingly, we are unpersuaded that this amount of time would support the

conclusion that Plaintiff waived its right to compel arbitration based on delay.

      3. Prejudice

      Plaintiff’s limited participation in the litigation has not prejudiced Universal

by allowing Plaintiff to take advantage of discovery not permitted under the rules of

arbitration. The Arbitration Clause in the Split Funding Agreement limits discovery

to: “twenty-five (25) interrogatories and twenty-five (25) document requests per side,

and no more than two (2) depositions per side; and [] the discovery period to three (3)

months . . . .” The period between Universal’s filing of its counterclaims and Plaintiff’s

filing of its Motion to Compel was two months, well within the permissible timeframe

for discovery allowed by the Arbitration Clause. Moreover, Plaintiff’s depositions of

Kelly and Jessica did not exceed the scope of discovery allowed by the Arbitration

Clause.

      We also note that Plaintiff’s initial response to the counterclaims was to assert

its right to compel arbitration of those claims. Beyond Plaintiff’s Motion to Compel

the counterclaims, Plaintiff engaged in no motion practice related to the merits of the

counterclaims. See Kramer v. Hammond, 943 F.2d 176, 179 (2nd Cir. 1991) (holding

that the defendant’s substantial engagement in motion practice including a motion

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                                IPAYMENT V. GRAINGER

                                   Opinion of the Court

for summary judgment, amounted to prejudice to the plaintiff and established waiver

of the right to compel arbitration).

      We hold that Universal has failed to demonstrate any prejudice caused by the

limited discovery taken prior to Plaintiff’s Motion to Compel. Considering the record

in light of the strong public policy favoring arbitration, we conclude that Plaintiff did

not waive its right to compel arbitration.

                                       Conclusion

      For the foregoing reasons, we reverse the trial court’s denial of Plaintiff’s

Motion to Compel Arbitration and remand this matter to the trial court to enter an

order compelling arbitration of Universal’s counterclaims.

      REVERSED AND REMANDED.

      Judges CALABRIA and DILLON concur.

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