Lovelace Farms, Inc. v. Marvin Marshall

In the Missouri Court of Appeals
Eastern District
DIVISION III
LOVELACE FARMS, INC., et al, ) No. ED101069
)
Respondents, ) Appeal from the Circuit Court
) of St. Louis County
vs. )
) Honorable Barbara W. Wallace
MARVIN MARSHALL, et al., )
)
Appellants. ) FILED: September 16, 2014
Introduction
Appellants Marvin Marshall and P.J. Marshall (“the Marshalls”) appeal from the
judgment of the Circuit Court of St. Louis County granting Respondents Lovelace Farms, Inc.,
Wayne Lovelace, and Judy Lovelace‟s motion to stay arbitration. The Marshalls assert that the
circuit court erred in staying arbitration because the Federal Arbitration Act (“FAA”) compelled
arbitration. Specifically, the Marshalls contend that the parties‟ disputes come within the broad
scope of a valid arbitration agreement, and any questions as to arbitrability, including the issue of
waiver, should be decided by the arbitrator, not the court. Because the issue of waiver based on
litigation conduct is a matter for the court and not the arbitrator to decide, and because the
Marshalls by their conduct waived their right to arbitration, we affirm the judgment of the circuit
court.
Factual and Procedural Background
Wayne and Judy Lovelace (“the Lovelaces”) operate Lovelace Farms, a tree farm near
Elsberry, Missouri. The Lovelaces invented a method for accelerating tree growth called the
Root Production Method (“RPM”). In 2006, the Lovelaces entered into a relationship with the
Marshalls to create business entities in the hope of profiting from the RPM technology. To that
end, three limited liability corporations were formed: RPM Holdings, LLC, (“Holdings”), RPM
Ecosystems, LLC (“Ecosystems”), and RPM Technologies, LLC (“Technologies”). Equity in
Holdings was split equally between the Marshalls and Lovelaces.1 Ecosystems was wholly
owned by Holdings, and thus was owned equally by the Marshalls and Lovelaces through their
equal ownership of Holdings. Technologies was owned by the Lovelaces only. Each LLC was
governed by its own operating agreement, and all three operating agreements contained the
following mediation and arbitration clause:
11.1 All disputes, claims, or controversies between Members, or between the
Company and any Member(s) arising under or in any way relating to this
Agreement . . . shall be [] first submitted to and settled, if possible pursuant to
mediation in accordance with the procedures set forth [below] and, if necessary,
binding arbitration pursuant to Section 11.[2] of the Agreement.
11.2 Any Management Dispute not resolved pursuant to section 11.1 shall be
resolved by arbitration pursuant to the procedures set forth below, before Neutral
Arbitrators appointed in accordance with the Commercial Arbitration Rules of the
American Arbitration Association . . . and administered by the American
Arbitration Association in accordance with its Commercial Arbitration Rules as in
effect at the time a request for arbitration is made.
Sometime after the formation of the three LLCs, Ecosystems purchased trees from
Lovelace Farms. Lovelace Farms alleged that Ecosystems failed to pay for the trees, and
subsequently filed a collection action against Ecosystems. The lawsuit, filed July 6, 2009, in the
1
The Marshalls and Lovelaces further divided their equity interests in the three companies between members of
their immediate family. For clarity, we will refer to all members of each family collectively as “the Marshalls” and
“the Lovelaces.”
2
Circuit Court of Lincoln County, sought $465,000 for trees purchased by Ecosystems. The case
was thereafter transferred from the Circuit Court of Lincoln County to the Circuit Court of St.
Louis County.
On September 22, 2009, Ecosystems filed an answer and counterclaim petition against
Lovelace Farms. On November 10, 2009, the Marshalls joined the lawsuit as counterclaim-
plaintiffs and together with Ecosystems filed an amended counterclaim petition against Lovelace
Farms and the Lovelaces, whom they joined as counterclaim-defendants. Ecosystems and the
Marshalls asserted counterclaims for breach of contract, specific performance, tortious
interference, breach of fiduciary duty, and fraud against Lovelace Farms and the Lovelaces
(hereinafter, “the Lovelace parties”). In response, the Lovelace parties filed an amended petition
raising additional claims against Ecosystems and the Marshalls individually for breach of
contract, quantum merit, relief under the UCC, breach of fiduciary duty, aiding and abetting
tortious interference, and an accounting.
On June 8, 2010, Holdings and Ecosystems commenced a federal bankruptcy proceeding
in the United States Bankruptcy Court for the Northern District of New York. The bankruptcy
filing imposed an automatic stay upon all litigation regarding those entities.
On November 4, 2013, the Marshalls filed a demand for arbitration with the American
Arbitration Association. The initial demand named Holdings, Ecosystems, Technologies, and
the Lovelaces as respondents and included claims for specific performance, breach of contract,
breach of fiduciary duty, and related business torts. Shortly thereafter the Marshalls filed an
amended demand for arbitration that withdrew their claims against Holdings and Ecosystems.
In response to the Marshalls‟ demand for arbitration, the Lovelace parties filed a motion
to stay arbitration in the pending action in the Circuit Court of St. Louis County. The Lovelace
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parties argued, inter alia, that the circuit court case involved claims not subject to arbitration and,
to the extent that any claims were subject to arbitration, the Marshalls waived their right to
arbitrate the claims by first pursuing such claims in circuit court.
The circuit court heard argument on the motion to stay arbitration on December 19, 2013.
Thereafter, the circuit court requested supplemental briefing on the issue of waiver. On January
14, 2014, the circuit court granted the motion to stay arbitration. The Marshalls now appeal.
Point on Appeal
In their sole point on appeal, the Marshalls assert that the circuit court erred in staying
arbitration because the FAA compels arbitration. The Marshalls contend that the parties‟
disputes are encompassed within the broad scope of a valid arbitration agreement, and that any
questions regarding arbitrability, including the issue of waiver, must be decided by the arbitrator,
not the court.
Standard of Review
“An appellate court‟s review of the arbitrability of a dispute is de novo.” Dunn Indus.
Grp., Inc. v. City of Sugar Creek, 112 S.W.3d 421, 428 (Mo. banc 2003). Our review of whether
a party has waived its right to arbitrate is also de novo. Getz Recycling, Inc. v. Watts, 71 S.W.3d
224, 228 (Mo. App. W.D. 2002).
Discussion
In their sole point on appeal, the Marshalls maintain that the trial court erred in granting
the Lovelace Parties‟ motion to stay arbitration because the litigated disputes between the parties
fall within the broad scope of the arbitration clauses set forth in the individual operating
agreements for Holdings, Technologies, and Ecosystems. The Marshalls reason that once it is
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determined that litigated disputes come within the scope of a valid arbitration agreement, all
other issues, including disputes over arbitrability, must be referred to the arbitrator.2
The Lovelace parties counter that the Marshalls are not parties to two of the operating
agreements upon which they rely – the Ecosystems Operating Agreement and the Technologies
Operating Agreement – and thus cannot avail themselves of the arbitration clauses in those
agreements. The Lovelace parties contend that the only operating agreement to which the
Marshalls are a party is the Holdings Operating Agreement, and that the Marshalls‟ claim against
Lovelace Farms and the Lovelaces do not fall within the arbitration provision of the Holdings
Operating Agreement because that arbitration provision applies only to disputes between
“Members” or between “the Company and Members.” The Lovelace parties further assert that,
even if some of the Marshalls‟ claims fall within the scope of the arbitration clause in the
Holdings Operating Agreement, the Marshalls have waived any right to now initiate arbitration
as a result of their four-year delay in seeking arbitration and their participation in litigation
conduct. The Lovelace parties further allege that waiver is a question for the court, not the
arbitrator.
Valid arbitration clauses that affect interstate commerce must be enforced according to
the FAA, 9 U.S.C. § 1, et. seq., unless an exception applies. McIntosh v. Tenet Health Sys.
Hosps., Inc., 48 S.W.3d 85, 88 (Mo. App. E.D. 2001). Both parties agree that the contracts at
issue here involved interstate commerce and, therefore, federal law applies. See Major Cadillac,
Inc. v. Gen. Motors Corp., 280 S.W.3d 717, 721 (Mo. App. W.D. 2009). To determine whether
2
The Marshalls also argue that the parties agreed to arbitrate all issues of arbitrability by adopting the rules of the
American Arbitration Association in all three operating agreements. Because this argument was not presented to the
trial court and is not contained in the Marshalls‟ point relied on, we do not consider it. State ex rel. Nixon v. Am.
Tobacco Co., 34 S.W.3d 122, 129 (Mo. banc 2000); Rule 84.04(e).
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arbitration should be compelled, a trial court must decide if a valid arbitration agreement exists
and, if so, whether the disputes fit within the scope of the arbitration clause. Id.
I. Waiver through litigation conduct is decided by the court.
A party to an arbitration agreement can waive its right to arbitrate disputes in different
ways. The Eighth Circuit has held that claims of waiver based on some types of conduct must be
decided by courts, while claims of waiver based on other types of conduct must be decided by
arbitrators. In N & D Fashions, Inc. v. DHJ Industries, Inc., the Eighth Circuit explained that
courts generally decide whether a party has waived its right to arbitrate by “actively
participat[ing] in a lawsuit or tak[ing] other action inconsistent with the right to arbitration.”
N & D Fashions, Inc. v. DHJ Industries, Inc., 548 F.2d 722, 728 (8th Cir.1976) (quotations
omitted). By contrast, arbitrators generally decide claims of waiver based on arguments that
arbitration “would be inequitable to one party because relevant evidence has been lost due to the
delay of the other.” Id. The Eighth Circuit described this second kind of waiver as “„waiver‟ . . .
in the sense of „laches‟ or „estoppel.‟”3 Id.
The record before us confirms that this case involves an assertion of the first kind of
waiver – waiver through litigation conduct. Specifically, the Lovelace parties contend that the
Marshalls waived any right they may have to arbitration under the operating agreements by first
pursuing their claims before a judge in the circuit court, and participating in that litigation for
four years before seeking arbitration. Under N & D Fashions, waiver through litigation conduct
is clearly a matter for the court to decide. Id. Because the issue of waiver was appropriately
before the circuit court, we now address the substantive arguments presented in this appeal.
3
N&D Fashions is consistent with those cases cited by the Marshalls that hold procedural questions such as waiver,
delay, or a like defense to arbitrability are to be decided by the arbitrator. These cases correctly state that the second
type of waiver discussed by the Eighth Circuit – waiver by delay – is an issue to be determined by the arbitrator.
See Parler v. KFC Corp., 529 F. Supp. 2d 1009, 1011 (D. Minn. 2008) (providing an in-depth discussion of the two
types of waiver traditionally recognized by federal courts).
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II. The Marshalls waived their right to arbitration.
Both Missouri and federal courts use the same three-factor test to establish waiver of the
right to arbitrate. The party seeking to establish waiver bears the burden of demonstrating that
the alleged waiving party: “(1) had knowledge of the existing right to arbitrate; (2) acted
inconsistently with that existing right; and (3) prejudiced the party opposing arbitration by such
inconsistent acts.” Berhorst v. J.L. Mason of Missouri, Inc., 764 S.W.2d 659, 662 (Mo. App.
E.d. 1988); Stifel, Nicolaus & Co. Inc. v. Freeman, 924 F.2d 157, 158 (8th Cir. 1991). Whether
the party opposing arbitration has been prejudiced by acts inconsistent with arbitration is a
determination to be made on a case-by-case basis. A finding of prejudice may result from lost
evidence, duplication of efforts, use of discovery methods unavailable in arbitration, litigation of
substantial issues, and postponing invoking arbitration, thereby causing the opposing party to
incur unnecessary delay or expense. Reis v. Peabody Coal Co., 935 S.W.2d 625, 631 (Mo. App.
E.D. 1996). Although delay in requesting arbitration by itself does not constitute prejudice,
“delay and the moving party‟s trial-oriented activity are material factors in assessing prejudice.”
Id. (quoting Fraser v. Merrill Lynch Pierce, Fenner & Smith, Inc., 817 F.2d 250, 252 (4th
Cir.1987)). Waiver must be evaluated in light of the federal policy which strongly favors
arbitration. McCarney v. Nearing, Staats, Prelogar & Jones, 866 S.W.2d 881, 890 (Mo. App.
W.D. 1993). Thus, in considering the three-factor test, any doubts as to whether waiver has
occurred must be resolved in favor of arbitration. Freeman, 924 F.2d at 158.
The Marshalls do not dispute the first two factors of the waiver test; they concede their
knowledge of the right to arbitrate and conduct inconsistent with that right. The Marshalls insist,
however, that the Lovelace parties have suffered no prejudice as a result of their delay in seeking
arbitration. We are not persuaded.
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The record shows that Lovelace Farms filed a petition seeking collection of a debt against
against Ecosystems in the Circuit Court of Lincoln County. Limited issues were presented in the
initial petition. Lovelace Farms is not a party or signatory to any of the aforementioned
operating agreements. The Marshalls substantially broadened the scope of the collection action
filed by Lovelace Farms by filings counterclaims and adding parties. The record supports a
finding that the Lovelace parties spent a significant amount of time and money pursuing claims
and defending against counterclaims initiated by the Marshalls in the circuit court action. On
October 22, 2009, the Lovelace parties filed an answer to Ecosystems and the Marshalls‟
Counterclaim and a motion to dismiss Count V of the Counterclaim. Thereafter, the Lovelace
parties defended against two motions to strike and two motions to dismiss,4 in addition to
answering Ecosystems and the Marshalls‟ First Amended Counterclaim. In pursuit of their own
claims, the Lovelace parties amended their petition three times and sought a temporary
restraining order against Ecosystems and the Marshalls. Nothing in the record before us
indicates that the Marshalls asserted their right to arbitration, or otherwise notified the Lovelace
parties of their desire to proceed in arbitration, at any time throughout this period of substantial
litigation activity.
The Marshalls could have demanded arbitration as early as 2009, but instead chose to
initiate and pursue counterclaims against the Lovelace parties in circuit court. Prejudice can be
established “where a party has postponed arbitration causing his adversary unnecessary delay or
expense.” Getz Recycling, Inc., 71 S.W.3d at 229. Prejudice may also be found “when a party‟s
time and funds are expended because that party has not received the benefit of arbitration:
„efficient and low-cost resolution of disputes.‟” Major Cadillac, Inc., 280 S.W.3d at 723
4
A third motion to dismiss was filed by Ecosystems and the Marshalls on March 5, 2010, but the motion was not
briefed by either party.
8