On July 19, 2021, the Superior Court of Pennsylvania affirmed the denial of a motion to compel arbitration. The court held that while the parties’ arbitration agreement covered all disputes relating to escrow services, the plaintiff’s claims did not relate to defendant’s duties as an escrow agent but rather to his duties as the plaintiff's lawyer. Dakota Oil Processing, LLC v. Hayes, 260 A.3d 150 (Pa. Super. Ct. 2021).
Dakota Oil Processing (Dakota) was a limited liability company formed to develop and operate an oil refinery near Trenton, North Dakota. To facilitate funding, it sought to obtain a standing letter of credit (SLOC) from Cal and Schwartz (C&S) in exchange for a payment of two and a half million dollars. The agreement required Dakota to deposit the two and a half million dollars into an escrow account pending issuance of the SLOC.
In August 2016, C&S requested that the parties use Hayes, a lawyer in Pennsylvania, to serve as the escrow agent. Counsel for Dakota inquired from Hayes whether his liability insurance would cover the escrow relationship. Hayes's insurance firm informed him that he would have to be practicing law in the transaction for coverage under the policy. Hayes sent an email to Dakota stating that it would be serving as its “escrow attorney” in the transaction.
In September 2016, the parties settled on their escrow agreement terms. The agreement specified that Hayes was to release the escrow funds to C&S only after it had gotten confirmation from a lender that it had loaned five million dollars to Dakota. All parties executed the agreement. In November 2016, representatives for Dakota contacted Hayes to confirm the money was still in the account. Dakota learned that the funds had been disbursed, C&S would not be sending the money back, and it could not secure a loan for its refinery.
Dakota instituted an action in October 2018, naming Hayes and his law firm as defendants. In January 2019, Dakota filed an amended complaint asserting claims for professional negligence, breach of contract, and breach of fiduciary duty. Hayes objected and sought to compel arbitration based on an arbitration agreement in the escrow agreement.
The trial court held that the claims brought by Dakota were outside the escrow agreement and Dakota would not be required to arbitrate them. The trial court inferred an attorney-client relationship based on Hayes's conduct and ruled the case could go to trial. Hayes appealed the decision to the superior court.