Silverwood Partners, LLC v. Wellness Partners, LLC.

• Decision Date: 25 July 2017
• Docket Number: No. 16-P-1174.,16-P-1174.
• Citation: 80 N.E.3d 355
• Court: Appeals Court of Massachusetts
• Parties: SILVERWOOD PARTNERS, LLC v. WELLNESS PARTNERS, LLC.

80 N.E.3d 355

SILVERWOOD PARTNERS, LLC

v.WELLNESS PARTNERS, LLC.¹

No. 16-P-1174.

Appeals Court of Massachusetts, Middlesex..

Argued May 9, 2017.

Decided July 25, 2017.

Michael Paris, Boston, for the plaintiff.

Christopher Robertson for the defendant.

Present: Agnes, Massing, & Lemire, JJ.

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 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 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

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.

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 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, 741 N.E.2d 47 (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, 712 S.E.2d 233 (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, 2 N.E.3d 840 (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, 676 N.E.2d 486 (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 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, 121 S.Ct. 570, 148 L.Ed.2d 488 (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, 28 N.E.3d 401 (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.' "

Id . at 211, 28 N.E.3d 401, 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, 28 N.E.3d 401. 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 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,"...