FPE Foundation v. Cohen

United States Court of Appeals
For the First Circuit
Nos. 14-1376; 14-1377
THE FPE FOUNDATION,
Plaintiff, Appellant/Cross-Appellee,
v.
LEWIS COHEN, as co-trustee of the Qualified Terminable Interest
Property Trust,
Defendant, Appellant/Cross Appellant,
MARTIN P. SOLOMON, as co-trustee of the Qualified Terminable
Interest Property Trust; BETSY A. SOLOMON, as trustee of the
LLLB Trust; J. ROBERT CASEY; BETSY A. SOLOMON and MARTIN P.
SOLOMON, as co-trustees of the Cohen-Solomon Family Foundation,
Defendants, Appellees/Cross-Appellees.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon George A. O'Toole, Jr., U.S. District Judge]
Before
Howard, Chief Judge,
Souter,* Associate Justice,
and Lipez, Circuit Judge.
Joseph D. Whelan, with whom Matthew H. Parker and Whelan,
Kinder & Siket LLP were on brief, for cross-appellee FPE
Foundation.
Sean T. Carnathan, with whom O'Connor Carnathan and Mack, LLC
*
Hon. David H. Souter, Associate Justice (Ret.) of the Supreme
Court of the United States, sitting by designation.
was on brief, for cross-appellant Lewis C. Cohen.
Robert S. Frank, Jr., with whom Anita M.C. Spieth and Choate,
Hall & Stewart LLP were on brief for appellee Robert Casey.
Rosanna Sattler, with whom James E. Kruzer and Posternak
Blankstein & Lund LLP were on brief, for appellees Martin P.
Solomon, as co-trustee of the Qualified Terminable Interest
Property Trust, and Betsy A. Solomon and Martin P. Solomon, as co-
trustees of the Cohen-Solomon Family Foundation.
September 2, 2015
HOWARD, Chief Judge. Federal court involvement in this
case turns on whether an arbitration clause in a trust agreement
applies to the claims asserted here and whether the appellees have
waived their right to arbitration. Concluding that there had been
no waiver, and that all of the counts were arbitrable, the district
court dismissed the action. Agreeing with both conclusions, we
affirm.
I.
The litigation resulting in these consolidated appeals
stems from disputes within the Cohen family. At the top of that
family tree were Maurice and Marilyn Cohen. They were married and
had two children: Lewis and Betsy. Betsy eventually married Martin
Solomon, another lead in this saga.
In 1989, Maurice created the Maurice M. Cohen Revocable
Trust ("Maurice Trust"). After he died in 1995, assets from the
trust were passed to a Qualified Terminable Interest Property Trust
("QTIP Trust") and to a charitable organization, the Fund for
Philanthropy and Education ("Fund"). Lewis and Martin, co-trustees
of the Maurice Trust, the QTIP trust, and the Fund, were tasked
with distributing the income and principal of the QTIP Trust to
Marilyn during her lifetime. J. Robert Casey served as an advisor
to the co-trustees with respect to the QTIP Trust.
In 2010, Marilyn died. At this point, pursuant to the
terms of the Maurice Trust, all remaining assets of the QTIP Trust
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rolled over to the Fund. Disputes quickly emerged between Lewis
and Martin respecting the administration of the Fund. In September
2010, the two trustees signed a settlement agreement pursuant to
which roughly half of the Fund's assets were to be given to a new
charity managed by Betsy -- the C-S Foundation ("C-S"). Martin was
to then resign as co-trustee of the Fund, leaving Lewis to manage
the Fund and its successor, the FPE Foundation ("FPE").
In addition to quarreling over the Fund, the parties
began tussling over yet another trust (one that Marilyn had created
during her lifetime: the "Marilyn Trust"). This dispute sparked a
lawsuit by Betsy and Casey against Lewis in July 2011 in the
Suffolk County Probate and Family Court ("Suffolk suit"), along
with a nearly identical case that Lewis initiated against Betsy and
Casey in the Norfolk Division of the Superior Court of
Massachusetts ("Norfolk suit").
Lewis subsequently expanded the scope of the Norfolk
suit. Specifically, he argued that the trustees of the QTIP Trust
(himself included) distributed assets from it to Marilyn in
violation of their authority. Lewis added FPE (which he manages)
as a defendant. FPE then counter-claimed, contending that any
improper transfer was to the detriment of its remainder interest.
The Norfolk suit was eventually dismissed, and FPE
(again, remember, managed by Lewis) thereafter filed the present
federal case against Martin, Lewis, Betsy, and Casey. Similar to
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its counter-claim in the Norfolk suit, FPE alleged that Lewis and
Martin exceeded their powers as co-trustees of the QTIP Trust. FPE
further claimed that Casey breached his fiduciary duty to that
trust. Lewis cross-claimed against Casey, seeking contribution and
indemnity, and accusing him of legal malpractice.1
In 2013, C-S intervened in the federal case and counter-
claimed against FPE. C-S pointed to the 2010 settlement agreement
and argued that it was the rightful successor-in-interest to the
Fund. Accordingly, C-S insisted that it was entitled to at least
half of any damages that FPE might recover.
As C-S entered the case, the defendants (sans Lewis)
lobbied for a way out. They filed a motion to dismiss and to
compel arbitration. Relying on an arbitration clause contained in
the Maurice Trust, the district court allowed the motion.
Lewis and FPE timely appealed.
II.
We review a district court's decision to enforce an
arbitration clause, de novo. Gove v. Career Sys. Dev. Corp., 689
F.3d 1, 4 (1st Cir. 2012).
Two discrete issues are presented. First, Lewis
maintains that the other defendants waived their right to
1
Although Betsy remains involved in this case as a co-
trustee of C-S, she was also originally a defendant as co-trustee
of yet another entity. The claims related to that trust are not at
issue in this appeal.
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arbitration, and thus dismissal was inappropriate. Second, FPE
contends that C-S's counter-claim is not subject to the arbitration
clause in the Maurice Trust. We address each in turn.
i.
We begin with Lewis' claim that the defendants waived
their right to arbitration. He believes that their actions in the
prior state court litigation amounted to a conduct-based waiver.
He thus contends that his cross-claim against Casey should remain
in federal court and, since that claim is inexorably linked with
FPE's central counts, those claims must also stay.
At the outset, we note that our analysis would normally
begin by asking whether a valid arbitration clause exists, whether
the movant is entitled to invoke the clause, whether the non-moving
party is bound by it, and whether the clause covers the claims
asserted. See Soto-Fonalledas v. Ritz-Carlton San Juan Hotel Spa
& Casino, 640 F.3d 471, 474 (1st Cir. 2011). Only then would we
consider whether a party has waived such a right. Here, we have
serious doubts as to whether Casey, as a mere advisor and counselor
to QTIP, was ever entitled to invoke the arbitration clause. But,
Lewis has failed to argue that the agreement is otherwise
unenforceable and we therefore soldier on. See United
States v. Oladosu, 744 F.3d 36, 39 (1st Cir. 2014) ("Because the
argument is underdeveloped, it is waived.").
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Although a party may waive a right to arbitrate -- either
explicitly or through its conduct -- we resolve any doubts in favor
of arbitration. See Moses H. Cone Mem'l Hosp. v. Mercury Constr.
Corp., 460 U.S. 1, 25-26 (1983). Such an approach is consistent
with a liberal federal policy favoring arbitration. See AT&T
Mobility, LLC v. Concepcion, 131 S. Ct. 1740, 1745 (2011). A number
of considerations guide our waiver inquiry. These factors include:
(1) whether the parties participated in a lawsuit or took other
action inconsistent with arbitration; (2) whether the "litigation
machinery has been substantially invoked and the parties [are] well
into preparation of a lawsuit by the time an intention to arbitrate
[is] communicated"; (3) "whether there has been a long delay" and
trial is near at hand; (4) whether the party seeking to compel
arbitration has "invoked the jurisdiction of the court by filing a
counterclaim"; (5) whether discovery not available in arbitration
has occurred; and, (6) whether the party asserting waiver has
suffered prejudice. Restoration Preservation Masonry v. Grove Eur.
Ltd., 325 F.3d 54, 60-61 (1st Cir. 2003) (citations omitted).
Lewis points to the two state court actions as evidence
of a conduct-based waiver. He begins with the Suffolk Suit, about
which some additional background is necessary.
Before the Suffolk suit was initiated, Lewis insisted
that certain amendments to the Marilyn Trust were improper as she
allegedly lacked testamentary capacity at the time of the relevant
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changes. In response, in July 2011, Betsy and Casey (both were
also co-trustees of the Marilyn Trust) filed the Suffolk Suit,
seeking a declaratory judgment respecting the validity of the
amendments. Betsy also filed a cross-claim respecting an entirely
separate trust (the Cohen Florence Nominee Trust). Lewis moved to
dismiss the Suffolk suit, but the court denied his motion.
In our case, Lewis avers that the defendants waived any
right to arbitrate because they instituted and maintained the
Suffolk litigation. In taking this position, however, Lewis
ignores the substantive differences between the Suffolk counts and
the federal claims now at issue. Critically, neither of the
instruments at issue in the Suffolk suit included an arbitration
clause. In fact, had the Suffolk plaintiffs initially sought to
arbitrate those claims, Lewis could have been at the court's door
seeking to block that move. And, since those claims were not
subject to any arbitration provision, a court would have likely
agreed. See McCarthy v. Azure, 22 F.3d 351, 354-55 (1st Cir. 1994)
("Thus, a party seeking to substitute an arbitral forum for a
judicial forum must show, at a bare minimum, that the protagonists
have agreed to arbitrate some claims.").
Admittedly, as Lewis suggests, the claims here do
tangentially relate to the counts asserted in the Suffolk suit,
since the disposition of the federal claims could affect the
property held in the Marilyn Trust. But, even assuming that the
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overlap somehow rendered the Suffolk claims arbitrable, the Suffolk
plaintiffs' failure to insist upon arbitration for those counts
would not constitute a waiver as to the specific, discrete claims
alleged in this federal case. Indeed, "[o]nly prior litigation of
the same legal and factual issues as those the party now wants to
arbitrate results in waiver of the right to arbitrate." 1 Domke on
Commercial Arbitration § 23:6 (2014). This is true even "where a
party has previously litigated an unrelated yet arbitrable
dispute." Id. (citing Doctor's Assocs., Inc. v. Distajo, 107 F.3d
126, 133 (2d Cir. 1997)); accord Microstrategy, Inc. v. Lauricia,
268 F.3d 244, 250 (4th Cir. 2001). Simply put, no such overlap
respecting the claims exists in this case. As such, the Suffolk
suit does not provide any justification for a waiver finding here.
Finding no luck in Suffolk, Lewis turns to the Norfolk
suit. That case began roughly three months after the commencement
of the Suffolk case. At that time, Lewis filed a complaint in
Norfolk, largely mirroring his answer and arguments in the Suffolk
suit. Relying on the pendency of the Suffolk suit, the defendants
in the Norfolk action (Betsy and Casey as co-trustees of the
Marilyn Trust), moved to dismiss under Mass. R. Civ. P. 12(b)(9)
(permitting dismissal when there is a prior, pending action in a
Commonwealth court).
In response to that motion, Lewis amended his complaint
to assert claims related to the Maurice Trust. For the first time,
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he argued that the trustees (himself included) distributed assets
from QTIP to Marilyn in violation of their authority. He then
added FPE as a defendant, which, as previously highlighted,
counter-claimed.
Betsy and Casey did not answer these new claims.
Instead, they rested on their previously-filed motion to dismiss.
They did note that they would not "object to the addition to the
Suffolk Probate case of parties from the Norfolk case or claims
made in the Norfolk case." The Norfolk court eventually dismissed
the case, and FPE voluntarily withdrew its claims.
Lewis now maintains that the Norfolk defendants' failure
to insist on arbitration following his initial (and amended)
complaint, constitutes waiver. This is particularly true, he
argues, since the defendants "chose to persuade [the courts] to
dismiss Lewis' complaint, arguing successfully that the matter
should be heard in probate court." More concretely, he highlights
statements made in the Norfolk litigation, which he alleges
establish that the Norfolk defendants agreed to eschew any future
jurisdictional defenses that they might have otherwise had.
Both the facts and law undercut Lewis' position. Lewis'
initial complaint in Norfolk overlapped with the issues in his
Suffolk answer. Thus, for the same reasons that the Suffolk suit
cannot ground a waiver finding, the Norfolk defendants' failure to
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insist on arbitration in response to the initial complaint does not
constitute a waiver as to the federal counts.
It is true that Lewis amended his Norfolk complaint to
assert the QTIP issues at the heart of this federal case.
Following the amendment, however, the Norfolk defendants took no
further action which would have churned the "machinery of
litigation." Instead, they merely relied on their previously-filed
motion to dismiss. Even if, arguendo, they had submitted a new
motion, such a filing would still have been a far cry from the type
of action that we have deemed sufficient to constitute a conduct-
based waiver. See Creative Solutions Grp., Inc. v. Pentzer Corp.,
252 F.3d 28, 33 (1st Cir. 2001) (finding no waiver where the
defendant filed a motion to dismiss and a single request for
production); J & S Constr. Co. v. Travelers Indem. Co., 520 F.2d
809, 809-10 (1st Cir. 1975) (no waiver where the defendant waited
13 months to request arbitration and actively participated in
discovery); contra Joca-Roca Real Estate, LLC v. Brennan, 772 F.3d
945, 948 (1st Cir. 2014) (finding waiver where "the plaintiff
commenced a civil action, vigorously prosecuted it, and then -
after many months of active litigation - tried to switch horses
midstream to pursue an arbitral remedy.").
To the extent that Lewis relies on the defendants'
statements in the Norfolk litigation, that argument also has no
legs. Specifically, the Norfolk defendants asserted that they
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would not raise any jurisdictional claims if the issues related to
QTIP were all joined in the Suffolk probate court litigation. Had
Lewis and FPE responded to the Norfolk dismissal by asserting these
claims in the Suffolk suit, and had the (federal) defendants
responded by insisting upon arbitration, Lewis' argument would be
compelling. But, since Lewis and FPE essentially rejected the
Norfolk defendants' offer to resolve the entire dispute in Suffolk
by filing this federal suit instead, the remaining defendants are
entirely within their rights to now insist upon arbitration.
Ultimately, we can discern no conduct in either suit that suggests
that the defendants waived their right to arbitration.
Even assuming that there were some conduct suggestive of
waiver, though, Lewis has also failed to show any prejudice. As we
have consistently said, "prejudice is essential for a [finding of]
waiver" even though the showing of prejudice can be "tame at best."
Id. at 949 (internal quotation marks and citation omitted). Here,
we are unable to find, for example, any "delay [that] was
protected" or "litigation-related activities [that] were copious."
Id. at 950. A finding of waiver would thus still be inappropriate,
and the district court did not err in reaching that conclusion.2
2
Lewis also lobs a judicial estoppel argument that is
largely cut from the same cloth as his waiver contention. Even
evaluating the argument independently though, it fails for two
reasons. First, Lewis did not present the argument to the district
court and thus it "cannot be broached for the first time on
appeal." Teamsters, Chauffeurs, Warehouseman & Helpers Union,
Local No. 59 v. Superline Transp. Co., 953 F.2d 17,21 (1st Cir.
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ii.
The second issue in this appeal is whether C-S's counter-
claim is subject to arbitration. That, in turn, hinges on whether
C-S's assertions are governed by the Maurice Trust or the 2010
settlement agreement. On this question, we conclude that C-S's
claim fundamentally boils down to whether the terms of the Maurice
Trust entitled it, as a successor-in-interest to the Fund, to
certain assets of the QTIP trust.
To set the stage, Maurice utilized broad language when
crafting his trust agreement. It noted that "[a]ny controversy or
claim arising out of or relating to this trust agreement, or the
breach thereof, shall be settled by arbitration." Meanwhile, the
settlement agreement stated that "the Commonwealth of Massachusetts
shall have exclusive jurisdiction over any action related to, or
arising out of, this Agreement."
Whether an arbitration clause covers a specific claim is
initially a question of state contract law, although we invoke a
presumption in favor of arbitration where the clause is "ambiguous
about whether it covers the dispute at hand." Dialysis Access
Ctr., LLC v. RMS Lifeline, Inc., 638 F.3d 367, 379 (1st Cir. 2011).
Here, the Maurice Trust is governed by Florida law, which also has
1992). Second, even were we to consider the merits of the estoppel
claim, Lewis has not shown that the other defendants took an
inconsistent position in an earlier case, or that any court ever
accepted such an earlier, irreconcilable argument. See Healey
v. Spencer, 765 F.3d 65, 76-77 (1st Cir. 2014).
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a strong public policy favoring arbitration. See 13 Parcels LLC
v. Laquer, 104 So. 3d 377, 380 (Fla. Dist. Ct. App. 2012).
FPE's central theory is that C-S's counter-claim derives
exclusively from the parties' 2010 settlement agreement. As a
result, it argues that the "arise under" and "relate to" language
in the Maurice Trust simply does not apply to C-S's claims. Thus,
according to FPE, the forum selection clause of the settlement
agreement -- calling for resolution in Massachusetts state courts
-- must be given full effect.3
Florida takes a broad view of the phrase "relates to" in
the context of a forum selection clause. Under that state's law,
"relates to" merely requires a "significant relationship" between
the claim asserted and the contract containing the arbitration
provision. See Jackson v. Shakespeare Found., Inc., 108 So. 3d 587,
593 (Fla. 2013). This requires a "contractual nexus" which exists
when "the claim presents circumstances in which the resolution of
the disputed issue requires either reference to, or construction
of, a portion of the contract." Id.
Here, it is helpful to clarify the contours of C-S's
counter-claim. C-S does not contend that FPE somehow breached the
settlement agreement or that FPE acted in a manner entitling C-S to
3
Although the parties do not argue it, we find it curious
that FPE has invoked the forum selection clause, but failed to
actually argue for its enforcement by, for example, demanding
dismissal of the counter-claim in favor of the Massachusetts state
courts.
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recover. Instead, it is arguing that, as provided in the
settlement agreement, it is a successor-in-interest to the Fund
established by the Maurice Trust and thus, like FPE, has a direct,
financial interest in any moneys that should have been passed to
the Fund. To the extent that the QTIP trustees exceeded their
power, it was to the direct detriment of C-S's pecuniary interest.
Thus, if FPE recovers anything on that claim, C-S insists that it,
too, is entitled to share in the recovery.
Accordingly, C-S's claim unquestionably "relates to" the
Maurice Revocable trust. C-S asserts that it is entitled to
recover based on mismanagement of QTIP -- a legal theory that
hinges entirely on the powers provided to the QTIP trustees. Those
powers, in turn, are defined in the Maurice Trust Agreement, and
thus require an interpretation of that document. Although the
settlement agreement may have established C-S as successor-in-
interest of the Fund, the specific claim that it brings here
relates solely to the Fund's rights to assets of the QTIP trust as
governed by the terms of the Maurice Trust.
Attempting to avoid that straightforward conclusion, FPE
protests that even if the claim is "related to" the Maurice Trust,
the 2010 settlement agreement amended that instrument with respect
to any claim that also "relates to" or "arises from" the settlement
agreement. FPE leans heavily on two cases to broadly profess that
parties are free to revoke or amend an earlier arbitration
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agreement by establishing an alternative dispute resolution for
specific claims. See Applied Energetics, Inc. v. Newark Capital
Mkts., LLC, 645 F.3d 522 (2d Cir. 2011); Nat'l R.R. Passenger Corp.
v. ExpressTrak LLC, 330 F.3d 523 (D.C. Cir. 2003). It then notes,
as in those cases, that the 2010 settlement agreement contained a
"merger clause."
As an initial matter, this claim ignores the hurdles that
the law imposes on parties seeking to amend an irrevocable trust.
In Florida, "[o]nce created, a valid trust cannot be altered,
amended, or revoked except by the exercise of a power identified in
the trust." L'Argent v. Barnett Bank, N.A., 730 So. 2d 395, 397
(Fla. Dist. Ct. App. 1999). Other than Section VIII of the trust
(a section which preserved the grantor's right to make certain
changes), the parties have not pointed to any provision that
permitted amendments following Maurice's death. Thus, an amendment
could only take place with the unanimous consent of all of the
qualified beneficiaries and trustees, which was never obtained
here. Fla. Stat. § 736.0412 (2014).
Nor do the cases that FPE cites actually cut in its
favor. Both Applied Energetics and ExpressTrak involved multiple
agreements between the same parties. In each, there was a clear
intent to amend the initial document through a subsequent one.
Indeed, in Applied Energetics, the parties' latter agreement was
simply a formalized version of an earlier, preliminary contract.
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645 F.3d at 523. While the initial document included an
arbitration clause, the second one changed it to a forum selection
clause. Id. In that circumstance, the Second Circuit reasonably
concluded that the language of both was "all-inclusive, both [were]
mandatory, and neither admits the possibility of the other." Id.
at 526.
In this case, however, the settlement agreement and its
merger clause had a more constrained purpose. As the agreement
makes clear, the parties were resolving a dispute over the
management of the Fund in an effort to prevent litigation
respecting that entity. The merger clause merely indicated that
the final agreement became the sole governing document resolving
that specific dispute. Notably absent was any indication that the
settlement agreement sought to alter the Maurice Trust agreement.
Thus, even if the parties could have amended the Maurice Trust, a
proposition we greatly doubt, there is nevertheless no evidence
here that they sought to do so.
All told, C-S's claim is covered by the arbitration
provision of the Maurice Trust and the 2010 settlement agreement
did nothing to change that. Nonetheless, FPE attempts to make one
final argument. It insists that we should still reject the
arbitration provision in favor of the forum selection clause
because the latter is a better fit with the federal claims at
issue.
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Contrary to FPE's argument, however, the forum selection
clause does not imbricate with C-S's counter-claim. The settlement
agreement's provisions concerning potential litigation establish
that the forum selection clause is reserved for those claims
respecting responsibilities or breaches of the settlement agreement
itself. For instance, a section of the agreement addresses
potential suits for breaches of warranties or representations made
in the document. Certainly, the forum selection clause would be
perfectly suitable for such a claim. But, this federal claim, as
noted, does not fall into the same category. Instead, it turns
exclusively on an interpretation of the powers delegated to the
QTIP trustees -- powers established and governed by the Maurice
Trust, not by the 2010 settlement agreement. This fact, when
combined with the strong public policy favoring arbitration, see
Concepcion, 131 S. Ct. at 1745, leads us to reject this final
contention.
III.
As a result of the arbitration provision in the Maurice
Trust, federal court involvement in this case must come to an end.
Accordingly, we affirm the district court's decision to dismiss the
case and to compel arbitration.
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