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Salsitz v. Kreiss

September 20, 2001

NEIL SALSITZ ET AL., APPELLANTS,
v.
FRITZ KREISS ET AL., APPELLEES.



The opinion of the court was delivered by: Justice Freeman

Released for publication January 24, 2002.

NEIL SALSITZ ET AL., APPELLANTS,
v.
FRITZ KREISS ET AL., APPELLEES.

The opinion of the court was delivered by: Justice Freeman

As amended December 4, 2001.

PUBLISHED

 Docket No. 89156-Agenda 18-May 2000.

At issue in this case is the arbitrability of certain disputes between plaintiffs, Neil Salsitz, Biagio D'Ugo, and New Horizon Productions, Ltd., and defendants, Fritz Kreiss and Alternative Utility Services of IL, Inc.

BACKGROUND

On March 9, 1994, Neil Salsitz and Biagio D'Ugo executed letters of understanding, dated November 17, 1993, whereby each agreed to invest $6,500 in Alternative Utility Services of IL, Inc. (AUS). Fritz Kreiss executed the letters of understanding as president of AUS. The letters of understanding do not contain an arbitration clause. Also on March 9, 1994, Salsitz and D'Ugo each executed a document denominated:

"Addendum 1, Letter of Understanding dated November 17, 1993

INCENTIVE STOCK OPTION PROGRAM."

These documents contained an arbitration clause providing in part:

"In the event there are any claims or disputes between PARTIES hereto, such claims or disputes shall be submitted by the PARTIES for resolution and binding arbitration within Lake County, IL, in accordance with the rules of the American Arbitration Association as in effect under IL law."

On June 17, 1994, Salsitz and D'Ugo requested the return of their investment and reimbursement of certain expenses they had incurred. On July 21, 1994, Kreiss returned Salsitz's and D'Ugo's original investment. However, Kreiss did not reimburse Salsitz's and D'Ugo's expenses. Salsitz and D'Ugo then filed suit in the municipal division of the circuit court (municipal court) for breach of contract and fraud, seeking $29,888.58 in unpaid expenses.

Kreiss and AUS moved to dismiss the municipal court action based upon the presence of the arbitration clauses in the stock option agreements. Salsitz and D'Ugo filed a response denying that they agreed to arbitrate the claims at issue, arguing that there was no agreement to arbitrate since the arbitration clauses were in the stock option agreements, not the letters of understanding. Salsitz and D'Ugo also argued that the contracts had been rescinded.

On February 15, 1995, the municipal court ordered the civil action stayed and directed that an arbitrator determine whether particular matters were arbitrable. Salsitz and D'Ugo did not pursue arbitration. However, Kreiss and AUS filed their own demand for arbitration on November 16, 1995. In their demand for arbitration, Kreiss and AUS sought an injunction preventing Salsitz, D'Ugo and New Horizon Productions, Ltd. (New Horizon), from unfairly competing with AUS, and sought monetary damages for violation of the Illinois Trade Secrets Act, for tortious interference with defendants' existing contracts and with prospective business relations, for breach of contract, and for breach of fiduciary duty. On November 17, 1995, Salsitz and D'Ugo nonsuited the action in municipal court. At that point, all that remained before the court was Kreiss and AUS's demand for arbitration.

Several arbitration hearings were held in 1996 and 1997. On August 8, 1997, Salsitz, D'Ugo and New Horizon filed a verified complaint in chancery court for declaratory and injunctive relief, seeking to stay and permanently enjoin the arbitration proceedings on the grounds that no agreement to arbitrate existed. Plaintiffs also sought a declaration that the arbitration clauses did not apply to any dispute under the letters of understanding, and, in particular, to the claims in the arbitration proceedings. In addition, on August 13, 1997, plaintiffs filed a motion for a stay of arbitration, and, on August 15, 1997, plaintiffs filed a motion for a temporary restraining order to enjoin the continuation of the arbitration hearings. On August 19, 1997, the chancery court denied plaintiffs' motion for a temporary restraining order. As explained by the court at a later hearing:

"This case first came to this Court during the pendency of an arbitration hearing. At that time, on or about August 19, 1997, then Counsel for Plaintiffs Salsitz, D'Ugo and the New Horizon Productions asked this Court to stay an arbitration proceeding commencing between the parties. The issue addressed during the emergency motion was a determination as to the arbitrability of the issues. Although this Court did not enter a stay of the arbitration Proceedings at that time, the Court did leave it open for parties to address the issue at a later date."

The arbitration continued. On September 23, 1997, plaintiffs filed an amended motion for a stay of arbitration, asserting that no agreement to arbitrate existed. On October 9, 1997, the chancery court denied plaintiffs' amended motion for a stay. Thereafter, the arbitrator notified the parties that the final arbitration hearings would be held on December 10, 1997. Plaintiffs did not appear for those hearings. The arbitrator heard evidence from defendants regarding damages that they sustained. On December 11, 1997, the arbitrator declared the hearings closed, and issued a notice to plaintiffs on December 24, 1997. The notice informed plaintiffs that the arbitrator would issue an award within 30 days. Plaintiffs did not file a motion to reopen the hearings. On January 10, 1998, the arbitrator awarded defendants $3,761,174.40 in actual damages, and $2.5 million in punitive damages.

On January 21, 1998, defendants filed an application for confirmation of the arbitration award and for entry of judgment on the award. Plaintiffs opposed confirmation of the arbitration award; asked that the chancery court review the arbitrator's determination of arbitrability; asked that the court vacate the arbitration award; and asked for leave to file an amended complaint, requesting that the court vacate the arbitration award. Subsequently, on June 12, 1998, Salsitz and New Horizon amended their complaint to add a count seeking to vacate the arbitration award. D'Ugo also amended his complaint to add a count seeking to vacate the arbitration award. In the amended verified complaints, plaintiffs alleged, inter alia, that the arbitration award was obtained through undue means, citing misleading communications between the arbitrator and plaintiffs. Plaintiffs complained that the arbitrator should not have conducted the hearing on December 10, 1997, in plaintiffs' absence, and should not have closed the hearings without giving plaintiffs an opportunity to present evidence. Plaintiffs alleged that they did not know the law firm, which had represented plaintiffs at the earlier hearings, had decided to cease representing plaintiffs and, consequently, did not appear on plaintiffs' behalf at the hearing on December 10.

Thereafter, defendants filed a motion to dismiss plaintiffs' amended verified complaints. At a hearing on January 27, 1999, the chancery court noted that the issue of arbitrability and defendants' motion to dismiss plaintiffs' amended complaints were intertwined. The court stated that it would first "address whether or not there could be arbitration of the agreement or agreements involved in the business relationship that was entered into by the parties." The court believed, however, that it could not upset or invalidate the ...


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