Silverwood Partners, LLC v. Wellness Partners, LLC
AC 16-P-1174
| Mass. App. Ct. | Jul 25, 2017Background
- Silverwood Partners, a FINRA-member broker-dealer, sued Whipstitch (Wellness Partners, LLC) alleging that two former Silverwood executives, McCoy and Burgmaier, secretly formed Whipstitch, stole clients, converted property, and diverted business opportunities.
- McCoy and Burgmaier were FINRA-associated persons who had signed Silverwood’s compliance manual and FINRA U4 forms containing mandatory FINRA arbitration agreements; Whipstitch is a nonmember corporation.
- Silverwood’s original complaint named McCoy, Burgmaier, and Whipstitch; after defendants moved to dismiss or stay asserting FINRA arbitration, Silverwood amended to drop the two individuals and sued only Whipstitch on substantially the same factual allegations.
- Whipstitch moved to dismiss (or stay) on equitable estoppel grounds, arguing Silverwood’s claims against it are intertwined with claims required to be arbitrated against McCoy and Burgmaier.
- The Superior Court dismissed Silverwood’s amended complaint, concluding the entire matter must be arbitrated; the Appeals Court affirmed, applying the equitable-estoppel doctrine to compel arbitration.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether equitable estoppel bars Silverwood from litigating claims against a nonsignatory (Whipstitch) outside FINRA arbitration | Silverwood: claims against Whipstitch are tort-based and separate from arbitration-covered claims against McCoy and Burgmaier; equitable estoppel inapplicable | Whipstitch: Silverwood’s claims are substantially intertwined with claims against the FINRA-signatory individuals, so estoppel compels arbitration | Held: Yes—equitable estoppel applies; Silverwood cannot avoid arbitration because its amended claims rest on interdependent misconduct by the FINRA-signatory individuals |
| Whether equitable estoppel requires the plaintiff to assert contract-based claims against the nonsignatory | Silverwood: estoppel applies only when plaintiff must rely on contract terms to state claims | Whipstitch: even under the "concerted misconduct" rationale estoppel applies where claims are substantially interdependent | Held: Not required here; the second Grigson/Machado basis (concerted, interdependent misconduct) applies despite tort labels |
| Whether equitable estoppel doctrine can be used to compel FINRA arbitration (given limited precedents) | Silverwood: equitable estoppel not previously used to compel FINRA arbitration; FINRA rules apply only to members/associated natural persons | Whipstitch: estoppel can be used here because Silverwood (a FINRA member) is the signatory seeking to avoid arbitration | Held: Doctrine may be applied to compel a FINRA-member signatory to arbitrate where claims are intertwined with its agreement with associated persons |
| Whether allowing litigation would undermine FINRA arbitration and fairness | Silverwood: permits pursuit of distinct tort claims against a nonmember | Whipstitch: parallel litigation would render the arbitration meaningless and be unfair | Held: Court agrees with Whipstitch—equity/fairness require estoppel to prevent undermining arbitration |
Key Cases Cited
- Thomson-CSF, S.A. v. American Arbitration Assn., 64 F.3d 773 (2d Cir. 1995) (endorses estoppel to bind signatory to arbitration when issues intertwined)
- MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942 (11th Cir. 1999) (discusses intertwined-claims doctrine and equitable estoppel)
- Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524 (5th Cir. 2000) (identifies two bases for estoppel: reliance on contract and concerted misconduct)
- InterGen N.V. v. Grina, 344 F.3d 134 (1st Cir. 2003) (applies intertwined-claims estoppel analysis)
- Bank of Am., N.A. v. UMB Financial Servs., 618 F.3d 906 (8th Cir. 2010) (rejects forcing a nonsignatory into FINRA arbitration when the nonsignatory never agreed to it)
- Machado v. System4 LLC, 471 Mass. 204 (Mass. 2015) (Mass. SJC adopting equitable estoppel doctrine and articulating the two bases)
- Ladd v. Scudder Kemper Invs., Inc., 433 Mass. 240 (Mass. 2001) (‘‘associated person’’ limited to natural persons; nonmember corporation cannot compel FINRA arbitration)
- Licata v. GGNSC Malden Dexter LLC, 466 Mass. 793 (Mass. 2014) (arbitration statutes do not compel arbitration by nonparties)
- Sourcing Unlimited, Inc. v. Asimco Intl., Inc., 526 F.3d 38 (1st Cir. 2008) (estoppel appropriate where signatory seeks to avoid arbitration and claims are intertwined)