American Bankers Insurance v. Long, 4th Cir. (2006)
American Bankers Insurance v. Long, 4th Cir. (2006)
O R D E R
PUBLISHED
No. 05-1747
COUNSEL
ARGUED: Franklin G. Burt, JORDEN & BURT, L.L.P., Washington, D.C., for Appellant. S. Randall Hood, MCGOWAN, HOOD,
FELDER & JOHNSON, Rock Hill, South Carolina, for Appellees.
ON BRIEF: Kevin Hayne Sitnik, MCGOWAN, HOOD, FELDER &
JOHNSON, Columbia, South Carolina, for Appellees.
OPINION
WILLIAMS, Circuit Judge:
Richard and Lillie Long (the Longs), signatories to a contract containing an arbitration clause, sued American Bankers Insurance Group
(ABIG), a nonsignatory to the contract, on claims relating to a promissory note issued to the Longs. ABIG filed a petition in the district
court seeking to compel the Longs to arbitrate their claims, and the
district court denied the petition. For the reasons that follow, we
reverse.
I.
On December 9, 2003, the Longs filed a class-action suit in the
Richland County (South Carolina) Court of Common Pleas against
ABIG and others alleging that ABIG participated in a scheme to
defraud investors through the sale of worthless securities. In particular, the Longs complaint alleged that Thaxton Life Partners (TLP)
sold automobile insurance policies underwritten by ABIG to the general public and that because ABIG did not have enough funds to pay
claims on the policies, it persuaded TLP to offer approximately $18
million of worthless promissory notes to the public to fund the insurance. As part of its fraudulent scheme, ABIG, knowing that TLP
would be unable to pay the promissory notes, structured them so that
it (ABIG) was in the position of first priority in the event of a default.
The Longs complaint further alleges that on or about August 19,
2003, the Longs purchased a $75,000 promissory note (the Note)
from TLP for a one-year term with a promised return of 10%. The
Note was appended to and its terms "incorporated . . . by reference"
in a document entitled "Form of Senior Subordinated Term Note Subscription Agreement" (Subscription Agreement). (J.A. at 11.) The
Subscription Agreement contained an arbitration clause providing
"that any dispute, controversy or claim arising out of or in connection
with, or relating to, any subscription of the Note, or any breach or
alleged breach hereof, including allegations of violations of federal or
state securities law" shall be subject to arbitration. (J.A. at 14.) The
Longs and TLP were signatories to the Subscription Agreement;
ABIG was not. TLP later filed for bankruptcy protection in the Bank-
ing out of the controversy between the parties, for an order directing
that such arbitration proceed in the manner provided for in such
agreement"), contending that it (ABIG) was entitled to enforce the
arbitration clause in the Subscription Agreement despite the fact it
was not a signatory thereto. In support of this contention, ABIG
argued, inter alia, that the Longs should be equitably estopped from
arguing that it was not a signatory to the arbitration clause because
each of the Longs individual causes of action in their underlying
complaint relied on the terms of the Note, which, as discussed, was
incorporated by reference into the Subscription Agreement (which, as
also discussed, contained the arbitration clause). The district court,
which had subject-matter jurisdiction over the petition, see 28
U.S.C.A. 1332 (West Supp. 2005) (providing that "[t]he district
courts shall have original jurisdiction of all civil actions where the
matter in controversy exceeds the sum or value of $75,000, exclusive
of interest and costs, and is between . . . citizens of different States"),
denied the petition, holding that the Longs were not equitably estopped from asserting that ABIG was not a signatory to the arbitration
clause because their individual causes of action in the underlying
complaint were based on theories of liability other than breach of the
obligations on the Note.
ABIG timely noted an appeal. We have jurisdiction under 9
U.S.C.A. 16 (West 1999) ("An appeal may be taken from . . . an
order . . . denying a petition under section 4 of this title . . . .").
II.
ABIG makes the same argument on appeal that it made to the district court; viz., that the Longs should be equitably estopped from
arguing that it (ABIG) was not a signatory to the arbitration clause
because each of the Longs individual causes of action in their underlying complaint relied on the terms of the Note. We agree with ABIG.2
Before explaining why, however, we first discuss the legal principles
governing when a non-signatory to an arbitration clause may bind a
signatory to arbitration.
2
A.
As a general matter, "arbitration is a matter of contract [interpretation] and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." Intl Paper Co. v.
Schwabedissn Maschinen & Anlagen GMBH, 206 F.3d 411, 416 (4th
Cir. 2000). It is well-established, however, that a nonsignatory to an
arbitration clause may, in certain situations, compel a signatory to the
clause to arbitrate the signatorys claims against the nonsignatory
despite the fact that the signatory and nonsignatory lack an agreement
to arbitrate.
One such situation exists when the signatory is equitably estopped
from arguing that a nonsignatory is not a party to the arbitration
clause. "Equitable estoppel precludes a party from asserting rights he
otherwise would have had against another when his own conduct renders assertion of those rights contrary to equity." Intl Paper, 206
F.3d at 417-18 (internal quotation marks omitted). "In the arbitration
context, the doctrine recognizes that a party may be estopped from
asserting that the lack of [anothers] signature on a written contract
precludes enforcement of the contracts arbitration clause when [the
party] has consistently maintained that other provisions of the same
contract should be enforced to benefit him." Id. at 418.
Applying these concepts, we have announced the following test for
determining when equitable estoppel applies against a signatory to an
arbitration clause:
[E]quitable estoppel applies when the signatory to a written
agreement containing an arbitration clause must rely on the
terms of the . . . agreement in asserting its claims against the
nonsignatory. When each of a signatorys claims against a
nonsignatory makes reference to or presumes the existence
of the written agreement, the signatorys claims arise out of
and relate directly to the written agreement, and arbitration
is appropriate.
Brantley v. Republic Mortgage Ins. Co., 424 F.3d 392, 395-96 (4th
Cir. 2005) (quoting MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942,
948 (11th Cir. 1999))(alterations, ellipses, and internal quotation
marks omitted).3 Because this legal test examines the nature of the
signatorys underlying allegations against the nonsignatory, courts
should examine the underlying complaint to determine whether estoppel should apply. See id. at 396 (denying application of estoppel
where the signatory-plaintiffs underlying "claims" did not rely on the
contract containing the arbitration clause).
The "legal principle [underlying the theory of equitable estoppel]
rests on a simple proposition: it is unfair for a party to rely on a contract when it works to its advantage, and repudiate it when it works
to its disadvantage." Wachovia Bank, Nat. Assn v. Schmidt, 445 F.3d
762, 769 (4th Cir. 2006) (internal quotation marks and alterations
omitted). To be equitably estopped from denying the applicability of
an arbitration clause, therefore, the signatory need not necessarily
assert a cause of action against the nonsignatory for breach of the contract containing the arbitration clause. Instead, estoppel is appropriate
if "in substance [the signatorys underlying] complaint [is] based on
the [nonsignatorys] alleged breach of the obligations and duties
assigned to it in the agreement," Sunkist Soft Drinks, Inc. v. Sunkist
Growers, Inc., 10 F.3d 753, 757 (11th Cir. 1993) (discussing Hughes
Masonry Co. v. Greater Clark County Sch. Bldg. Corp., 659 F.2d 836
(7th Cir. 1981)), "regardless of the legal label assigned to the claim,"
J.J. Ryan & Sons, Inc. v. Rhone Poulenc Textile, S.A., 863 F.2d 315,
319 (4th Cir. 1988). See also R.J. Griffin & Co. v. Beach Club II
Homeowners Assn, Inc., 384 F.3d 157, 164 (4th Cir. 2004) (stating
that a party "may [not] use artful pleading to avoid arbitration").
Although not directly relevant here, it is also important to note that
just as estoppel can apply against a signatory to an arbitration clause
who sues a nonsignatory thereto, it can also apply against a nonsigna3
In addition to the legal test noted in the text, we have applied another
type of estoppel to estop a singatory from arguing that a nonsignatory is
not a party to an arbitration clause. See Brantley v. Republic Mortgage
Ins. Co., 424 F.3d 392, 396 (4th Cir. 2005) (holding that a second form
of "equitable estoppel is warranted when the signatory to the contract
containing the arbitration clause raises allegations of substantially interdependent and concerted misconduct by both the nonsignatory and one
or more of the signatories to the contract"). We need not apply this second type of equitable estoppel to decide this appeal.
tory who sues a signatory. See, e.g., R.J. Griffin, 384 F.3d at 160-64;4
Intl Paper, 206 F.3d at 416-18. In such a situation, however, we have
stated, in language different from Brantleys "rely on" test, that a nonsignatory will be estopped when his underlying claims seek a "direct
benefit" from the contract containing the arbitration clause, R.J. Griffin, 384 F.3d at 162. Although R.J. Griffins language is different
from Brantleys, the "direct benefit" test, similar to the "rely on" test,
recognizes that a nonsignatory should be estopped from denying that
it is bound by an arbitration clause when its claims against the signatory "arise[ ] from" the contract containing the arbitration clause. Id.5
With these principles in mind, we return to ABIGs argument.
B.
ABIG argues that the Longs should be estopped from arguing that
4
In R.J. Griffin & Co. v. Beach Club II Homeowners Assn, Inc., 384
F.3d 157 (4th Cir. 2004), the court dealt with both scenarios a signatory seeking to estop a nonsignatory and a nonsignatory seeking to estop
a signatory. For purposes of our discussion, the first scenario is the most
relevant.
5
Other courts have held that the "direct benefit" test also recognizes
that a nonsignatory to an arbitration clause may benefit from the contract
containing the arbitration clause and should therefore be estopped
from arguing that it is not a party thereto in ways other than the assertion of claims based on the contract. See, e.g., Am. Bureau of Shipping
v. Tencara Shipyard S.P.A., 170 F.3d 349, 353 (2d Cir. 1999) (applying
the "direct benefit" test to estop a nonsignatory from denying that an
arbitration clause applied to it when the nonsignatory received substantial benefits from the contract containing the arbitration clause, including
lowered insurance rates). We need not express an opinion on such a
holding to decide this case, because the status of the parties here is
reversed from cases like Tencara Shipyard ABIG (a nonsignatory) is
attempting to estop the Longs (signatories) and Brantleys "rely on"
test does not authorize estoppel to apply against a signatory in such situations. See Wachovia Bank, Nat. Assn v. Schmidt, 445 F.3d 762, 771 (4th
Cir. 2006) ("The fact that a signatory receives benefits from a contract
[other than the ability to assert claims based on the contract] is . . . insufficient . . . to estop it from asserting that a nonsignatory is not entitled
to invoke the contracts arbitration clause.").
it is not a signatory to the arbitration clause because the Longs individual claims rely on the terms of the Note and, because the Note is
incorporated by reference into the Subscription Agreement, the Longs
are inequitably seeking both to enforce the duties created by the Subscription Agreement and deny the Subscription Agreements arbitration clause. In response, the Longs argue that equitable estoppel
should not apply because their individual claims were based on theories of liability other than breach of the Note.
We generally review de novo the district courts decision on a petition to compel arbitration. Long, 248 F.3d at 315. When, however, the
district courts decision is based on principles of equitable estoppel,
we review the district courts decision for abuse of discretion. See
Brantley, 424 F.3d at 395. The district court abuses its discretion
when it commits an error of law or clearly errs in making a finding
of fact. See Thorn v. Jefferson Pilot Life Ins. Co., 445 F.3d 311, 317
(4th Cir. 2006); Hill v. G.E. Power Sys., Inc., 282 F.3d 343, 348 (5th
Cir. 2002).
In support of ABIGs contention that the Longs are equitably
estopped from arguing that it is a nonsignatory to the arbitration
clause, ABIG contends that when, as here, a nonsignatory to a contract containing an arbitration clause is seeking to estop a signatory,
Brantleys "rely on" test not the "direct benefit" test applied in R.J.
Griffin should apply, and that the "rely on" test is less exacting
than the "direct benefit" test. While the Longs do not contest ABIGs
argument that Brantleys "rely on" test is less exacting than R.J. Griffins "direct benefit" test, they contend that R.J. Griffins "direct benefit" test applies both when a signatory is attempting to estop a
nonsignatory and when a nonsignatory is attempting to estop a signatory.
It is true, as ABIG points out, that our cases have applied Brantleys "rely on" test when the issue was whether a signatory to the contract containing the arbitration clause should be estopped, Schmidt,
445 F.3d at 769-771; Brantley, 424 F.3d at 396, and R.J. Griffins "direct benefit" test when the issue was whether a nonsignatory to the
contract should be estopped, see R.J. Griffin, 384 F.3d at 166; Intl
Paper, 206 F.3d at 418. Where, as here, however, the issue is whether
the underlying claims are such that the party asserting them should be
10
ranty causes of action were not based on any breach of the contract,
but were instead based on duties created by state tort law. Id. at 16263. The Longs argue that, like the owners in R.J. Griffin, their underlying complaint does not allege that ABIG breached a duty created by
the Note.
We disagree. The Longs underlying complaint is different from
the owners complaint in R.J. Griffin in a significant way. In R.J.
Griffin, the duties that the builder owed the owners (and allegedly
breached by the faulty construction of the condominiums) were created entirely by state tort law; if the builder and landowner had never
entered into the building contract, the builder still could have been liable in tort to the owners. Id. Here, by contrast, if TLP had never
issued the Note, the Longs would have no basis for recovery against
ABIG. Each of the Longs individual claims interference with contract, securities fraud and negligence, civil conspiracy, unjust enrichment and recission, and violation of SCUTPA are dependent upon
their allegation that ABIG breached a duty created "solely by [the
Note]", id. at 164, for without the alleged breach of the Note, the
Longs would have no cause to complain. And although each of the
Longs individual claims is phrased in tort, the Longs "may [not] use
artful pleading to avoid arbitration," because, at root, those claims
attempt "to hold [ABIG] to the terms of [the Note]." Id.
Accordingly, we conclude that the Longs individual claims "rely
on" the terms of Note, Brantley, 424 F.3d 395, and that because the
Note was incorporated into the Subscription Agreement, it would be
inequitable to allow the Longs to seek recovery on their individual
claims and at the same time deny that ABIG was a party to the Subscription Agreements arbitration clause. The district court made a
legal error in concluding otherwise, and it thereby abused its discretion.
III.
Although the Longs are equitably estopped from arguing that
ABIG is not a party to the arbitration clause, estoppel does not preclude a party from making the quite different argument that its claims
do not fall within the scope of the arbitration clause. Nevertheless, our
conclusion that the Longs underlying complaint "rel[ies] on" the
11