Silverwood Partners, LLC v. Wellness Partners, LLC

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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.