Silverwood Partners, LLC v. Wellness Partners, LLC

• Court: Massachusetts Appeals Court
• Decided: July 25, 2017
• Docket: AC 16-P-1174
• Status: Published

Opinion

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16-P-1174 Appeals Court

SILVERWOOD PARTNERS, LLC vs. WELLNESS PARTNERS, LLC.1

No. 16-P-1174.

Middlesex. May 9, 2017. - July 25, 2017.

Present: Agnes, Massing, & Lemire, JJ.

Financial Institution. Arbitration, Stay of judicial proceedings. Contract, Arbitration. Practice, Civil, Motion to dismiss. Estoppel. Securities, Registration of broker-dealer.

Civil action commenced in the Superior Court Department on November 4, 2015.

A motion to dismiss was heard by Elizabeth M. Fahey, J.

Michael Paris for the plaintiff. Christopher Robertson for the defendant.

MASSING, J. In this appeal we consider whether the

doctrine of equitable estoppel bars the plaintiff corporation,

which agreed to arbitrate its claims against the two principals

of the defendant corporation, from litigating nearly identical

1 Doing business as Whipstitch Capital. 2

claims against the defendant corporation itself. In the

circumstances of this case, we hold that it does.

Background. The plaintiff, Silverwood Partners, LLC

(Silverwood), initiated this lawsuit alleging that its former

employees, Nicolas McCoy and Michael Burgmaier, breached their

contractual and fiduciary duties by secretly creating a

competing firm -- the defendant Wellness Partners, LLC, doing

business as Whipstitch Capital (Whipstitch) -- stealing

Silverwood's clients, converting Silverwood's property, and

diverting Silverwood's business opportunities to Whipstitch.

Silverwood, a broker-dealer registered with the Securities

and Exchange Commission (SEC), is a member of the Financial

Industry Regulatory Authority, Inc. (FINRA). McCoy and

Burgmaier are registered with FINRA and, as senior executives

with Silverwood, had the status of FINRA "associated persons."

Whipstitch is not a member of FINRA. Silverwood's original

complaint named McCoy, Burgmaier, and Whipstitch as defendants.2

The three codefendants filed a motion to dismiss, or in the

alternative to stay the proceedings, on the ground that

2 Silverwood's original complaint included eight counts, seven asserted against McCoy, Burgmaier, or both, and four including Whipstitch as well: (1) breach of contract and (2) of the implied covenant of good faith and fair dealing by McCoy and Burgmaier; (3) breach of fiduciary duty by McCoy and (4) aiding and abetting breach of fiduciary duty by Burgmaier; and (5) conversion, (6) interference with advantageous business relations, (7) tortious interference with contractual relations, and (8) violation of G. L. c. 93A by all defendants. 3

Silverwood's claims fell within the scope of FINRA's mandatory

arbitration provision, which governed McCoy's and Burgmaier's

relationship with Silverwood. In response, Silverwood filed a

first amended complaint in which it dropped McCoy and Burgmaier

as parties, leaving Whipstitch as the sole defendant.3

Whipstitch filed a renewed motion to dismiss or stay,

maintaining that Silverwood was equitably estopped from

proceeding against Whipstitch outside of arbitration. A

Superior Court judge allowed Whipstitch's motion to dismiss on

the ground that "the entire matter is required to be

arbitrated."4

3 The first amended complaint asserted five counts against Whipstitch alone: (1) aiding and abetting McCoy in the breach of his fiduciary duty, (2) conversion, (3) tortious interference with advantageous business relations, (4) tortious interference with contractual relations, and (5) violation of G. L. c. 93A.

References to the "complaint" herein refer to the first amended complaint. We refer to the "original complaint" or the "amended complaint" when differentiation between the two is essential to the discussion. 4 Whipstitch has attached to its brief a copy of a FINRA arbitrators' award, which reflects that Silverwood filed a claim for arbitration against McCoy and Burgmaier with the FINRA Office of Dispute Resolution, and that the arbitrators entered an award favorable to McCoy and Burgmaier while this appeal was pending. Whipstitch asks us to take judicial notice of the arbitration decision, which is not part of the record; Silverwood has not raised any objection to the inclusion of the decision. Ultimately, we need not decide whether to take judicial notice of the arbitration decision, as it does not factor into our decision. 4

According to the allegations in Silverwood's amended

complaint, McCoy's and Burgmaier's employment relationship with

Silverwood was governed by Silverwood's "Supervisory Procedures

and Compliance Manual," attached as an exhibit to the complaint

and referred to as the "[a]greement." The agreement makes it

clear that McCoy's and Burgmaier's duties to Silverwood and its

clients were substantially governed by SEC and FINRA rules and

regulations. For example, the complaint alleges that McCoy and

Burgmaier agreed to comply with the agreement's outside business

activity restriction, a provision required by FINRA rule 3270

and its supplemental requirements. Silverwood also alleged that

McCoy and Burgmaier made false and misleading public statements

in violation of FINRA rules. Indeed, references to FINRA rules,

restrictions, and mandates appear on nearly every page of the

agreement.

Under the agreement, Silverwood's employees are required to

be "appropriately registered with and licensed by FINRA." McCoy

and Burgmaier were required to file an initial "Form U4" (U4

registration form) -- FINRA's "Uniform Application for

Securities Industry Registration or Transfer" -- and to amend

the U4 registration form "upon the occurrence of an event that

requires an update," including any changes in outside business

activities. 5

FINRA, pursuant to its rule 13200,5 requires arbitration of

claims between or among its members and associated person, and

the agreement incorporates mandatory FINRA arbitration. A

section of the agreement entitled "U4 Disclosure to Associated

Persons" explains that FINRA rules require Silverwood to provide

each associated person with a written statement "indicating that

the [U4 registration form] contains a predispute arbitration

clause." Silverwood's chief compliance officer is responsible

"for verifying that each associated person has signed a

predispute arbitration clause certification." McCoy's and

Burgmaier's U4 registration forms included the certification, "I

agree to arbitrate any dispute, claim or controversy that may

arise between me and my firm . . . that is required to be

arbitrated under the [FINRA] rules."

Discussion. The parties do not dispute that the FINRA

rules, as incorporated in Silverwood's agreement with McCoy and

5 In pertinent part, FINRA rule 13200 provides as follows:

"13200. Required Arbitration

"(a) Generally

"Except as otherwise provided in the Code, a dispute must be arbitrated under the Code if the dispute arises out of the business activities of a member or an associated person and is in between or among:

 Members;  Members and Associated Persons; or  Associated Persons." 6

Burgmaier and in their U4 registration forms, require

Silverwood's dispute with McCoy and Burgmaier to be submitted to

FINRA arbitration. See generally Bank of Am., N.A. v. UMB

Financial Servs., 618 F.3d 906, 909, 912 (8th Cir. 2010)

(discussing FINRA arbitration). However, Whipstitch is not a

member or associated person within the meaning of the FINRA

rules. See Ladd v. Scudder Kemper Invs., Inc., 433 Mass. 240,

243-245 (2001) ("person associated with a member" under rules of

National Association of Securities Dealers limited to natural

persons; therefore, nonmember corporation could not compel

arbitration); United States Trust Co., N.A. v. Rich, 211 N.C.

App. 168, 173-174 (2011) ("associated person" within meaning of

FINRA rules limited to natural persons; therefore, nonmember

corporation could not compel arbitration). Accordingly,

Whipstitch cannot demand arbitration under FINRA rule 13200.

See Licata v. GGNSC Malden Dexter LLC, 466 Mass. 793, 796 (2014)

(Neither Federal nor Massachusetts arbitration act "compels

arbitration of claims brought by one who is not covered by an

arbitration agreement"); Unisys Fin. Corp. v. Allan R. Hackel

Org., 42 Mass. App. Ct. 275, 280 (1997) ("[I]t is fundamental

that a party has no right or obligation to demand arbitration if

there is no contract provision providing for it").

Thus, the only issue in this appeal is whether Whipstitch

may extend the reach of the provision in the agreement that 7

requires Silverwood to arbitrate its claims against McCoy and

Burgmaier to compel Silverwood to arbitrate with it. Whipstitch

contends that Silverwood is equitably estopped from avoiding

arbitration because the allegations in its lawsuit are

intimately intertwined with its claims against McCoy and

Burgmaier. We agree.

Federal courts generally "have been willing to estop a

signatory from avoiding arbitration with a nonsignatory when the

issues the nonsignatory is seeking to resolve in arbitration are

intertwined with the agreement that the estopped party has

signed." Thomson-CSF, S.A. v. American Arbitration Assn., 64

F.3d 773, 779 (2d Cir. 1995). See, e.g., MS Dealer Serv. Corp.

v. Franklin, 177 F.3d 942, 947 (11th Cir. 1999); Grigson v.

Creative Artists Agency, L.L.C., 210 F.3d 524, 527 (5th Cir.),

cert. denied, 531 U.S. 1013 (2000); InterGen N.V. v. Grina, 344

F.3d 134, 145-146 (1st Cir. 2003). The Supreme Judicial Court

recently adopted the doctrine of equitable estoppel in Machado

v. System4 LLC, 471 Mass. 204 (2015). The court explained,

"Equitable estoppel typically allows a nonsignatory to compel arbitration in either of two circumstances: (1) when a signatory 'must rely on the terms of the written agreement in asserting its claims against the nonsignatory' or (2) when a signatory 'raises allegations of substantially interdependent and concerted misconduct by both the nonsignatory and one or more of the signatories to the contract.'" 8

Id. at 211, quoting from Grigson, supra. The second

circumstance emphatically applies in this case.

Silverwood has "consistently alleged concerted misconduct"

by Whipstitch, McCoy, and Burgmaier. Machado, supra at 215.

The complaint begins by asserting that "Whipstitch is a company

created by two highly paid former senior executives of

Silverwood," and that while McCoy and Burgmaier worked at

Silverwood, "their efforts were focused on secretly building

Whipstitch." Every alleged injurious action taken by Whipstitch

is based on McCoy's and Burgmaier's conduct while they were

employed by Silverwood. For example, in a section entitled,

"Whipstitch Secretly Starts Poaching Silverwood's Clients," the

complaint describes how McCoy and Burgmaier, "[a]cting on behalf

of Whipstitch," engaged a new client for Silverwood but

fashioned the terms of the agreement to facilitate their ability

to transfer the engagement to Whipstitch. The complaint further

alleges that "McCoy and Burgmaier acted improperly on behalf of

Whipstitch to drive other Silverwood clients towards Whipstitch

as well." The complaint continues, "Since their departure,

McCoy and Burgmaier, acting on behalf of Whipstitch, have

convinced a number of Silverwood's clients and Industry Advisors

to terminate their relationship with Silverwood."

That Silverwood's claims against Whipstitch are intertwined

with its claims against McCoy and Burgmaier becomes even more 9

apparent by comparing the original complaint, which named McCoy,

Burgmaier, and Whipstitch as defendants, with the amended

complaint, which named only Whipstitch. The amended complaint

incorporates perhaps ninety percent of the original complaint

verbatim. Even more telling are the alterations Silverwood made

to the original complaint. Where the original complaint

referred to McCoy and Burgmaier or to the defendants

collectively, the amended complaint simply substituted the word

"Whipstitch." For example, the section of the amended complaint

referred to above -- "Whipstitch Secretly Starts Poaching

Silverwood's Clients" -- was entitled "McCoy and Burgmaier

Secretly Start Poaching Silverwood's Clients" in the original

complaint (emphasis supplied). Where another section of the

original complaint described the "Defendants' Tortious

Interference with Silverwood's Advantageous Business Relations,"

the amended complaint referred to "Whipstitch's Tortious

Interference," based on the exact same allegations (emphasis

supplied). Furthermore, in several instances where the original

complaint alleged conduct by McCoy and Burgmaier, the amended

complaint simply inserted the phrase "acting on behalf of

Whipstitch."

Despite the fact its claims against Whipstitch in the

complaint are just a slightly repackaged version of its claims

against McCoy and Burgmaier that are required to be arbitrated, 10

Silverwood suggests two related reasons why the doctrine of

equitable estoppel should not be applied in this case. Neither

is persuasive.

First, Silverwood asserts that doctrine of equitable

estoppel applies only when a signatory to a contract containing

an arbitration clause is asserting contract-based claims against

a nonsignatory. See Machado, 471 Mass. at 211-212, quoting from

Lenox MacLaren Surgical Corp. v. Medtronic, Inc., 449 Fed. Appx.

704, 710 (10th Cir. 2011) ("The plaintiff's actual dependence on

the underlying contract in making out the claim against the

nonsignatory defendant is therefore always the sine qua non of

an appropriate situation for applying equitable estoppel").

While the assertion of contract claims is an essential element

of the first of the two bases for equitable estoppel -- "when a

signatory 'must rely on the terms of the written agreement in

asserting its claims against the nonsignatory'" -- it is not

essential for the second basis -- when a party to an arbitration

agreement raises allegations by both a party and a nonparty of

"substantially interdependent and concerted misconduct."

Machado, 471 Mass. at 211 (quotation omitted). See Grigson, 210

F.3d at 527-528 (discussing the two "independent bases advanced

by the Eleventh Circuit [in MS Dealer Serv. Corp., 177 F.3d at

947] for applying the intertwined-claims doctrine"). 11

In any event, Silverwood does in fact substantially rely on

its contracts with McCoy and Burgmaier in its allegations of

misconduct by Whipstitch. The complaint refers repeatedly to

Silverwood's "[a]greement" with McCoy and Burgmaier, and

Silverwood repeatedly invokes the FINRA rules and requirements

encompassed in the agreement in describing McCoy's and

Burgmaier's misconduct. Silverwood's assertion that its claims

"are solely based on Whipstitch's tortious conduct" does not

survive scrutiny. Although Silverwood has attempted to

characterize its claims against Whipstitch as sounding in tort,

for example, interference with advantageous business and

contractual relations, its complaint is "fundamentally grounded

in [McCoy's and Burgmaier's] alleged breach of the obligations

assigned to [them] in the [Silverwood] agreement." Hughes

Masonry Co. v. Greater Clark County Sch. Bldg. Corp., 659 F.2d

836, 838 (7th Cir. 1981). See Sunkist Soft Drinks, Inc. v.

Sunkist Growers, Inc., 10 F.3d 753, 758 (11th Cir. 1993),

quoting from McBro Planning & Dev. Co. v. Triangle Elec. Constr.

Co., 741 F.2d 342, 344 (11th Cir. 1984) (party may not avoid

arbitration "by attempting to cast its complaint in tort rather

than contract").

Second, Silverwood correctly notes that the doctrine of

equitable estoppel has never been applied to compel FINRA

arbitration as opposed to contractual arbitration. To our 12

knowledge, the only appellate decision in which the doctrine of

equitable estoppel is discussed in the context of FINRA

arbitration is Bank of Am., N.A., 618 F.3d at 912-914. In that

case, a FINRA member attempted to assert the doctrine of

equitable estoppel against a party that was not a member. Id.

at 912 (noting that plaintiff "is not a FINRA member and did not

directly agree to subject itself to arbitration under FINRA's

terms"). The court rejected this attempt, noting that the

"inextricably intertwined" claims theory of equitable estoppel

might appropriately be asserted by a nonsignatory to compel a

party that has agreed to an arbitration provision, but cannot be

applied inversely to compel a nonsignatory to comply with an

arbitration agreement that it never agreed to. Id. at 912-913.

Thus, a FINRA member such as Silverwood could not compel a

nonmember such as Whipstitch to submit to FINRA arbitration.

These considerations do not apply here, where it is a

nonmember, Whipstitch, that seeks to compel a FINRA member to

submit to FINRA arbitration. Silverwood did agree to subject

itself to arbitration of its claims against McCoy and Burgmaier.

"The context of the case is significant. The party who is a

signatory to the written agreement requiring arbitration is the

party seeking to avoid arbitration." Sourcing Unlimited, Inc.

v. Asimco Intl., Inc., 526 F.3d 38, 46 (1st Cir. 2008).

Silverwood's dispute with Whipstitch is "sufficiently 13

intertwined with [Silverwood's agreement with McCoy and

Burgmaier] for application of estoppel to be appropriate." Id.

at 47.

Allowing Silverwood to maintain a lawsuit against

Whipstitch based on the conduct of McCoy and Burgmaier would

substantially undermine the FINRA arbitration proceedings. See

MS Dealer Serv. Corp., 177 F.3d at 947 (quotation omitted)

(application of equitable estoppel necessary to prevent

arbitration proceedings between signatories from being "rendered

meaningless"). "The linchpin for equitable estoppel is

equity -- fairness. For the case at hand, to not apply this

intertwined-claims basis to compel arbitration would fly in the

face of fairness." Grigson, 210 F.3d at 528.

Judgment affirmed.