Equitable estoppel is a legal doctrine that essentially prevents one party from taking unfair advantage of another party. Equitable estoppel allows a non-signatory to a contract to compel arbitration of a signatory’s claims against them, if the signatory raised allegations of concerted misconduct by both the non-signatory and one or more of the signatories to the contract. However, this application of equitable estoppel only applies when the signatory alleges substantially interdependent and concerted misconduct by both a non-signatory and one or more of the signatories to the agreement. Peter Mavrick is a Miami business litigation lawyer who represents clients in arbitration proceedings.
In Greene v. Johnson, 2019 WL 3675268 (Fla. 3d DCA 2019) Frederick Greene (“Greene”) and Cameron Grace (“Grace”) incorporated Oak & Cane Co. (“Oak”), which manufactured and sold Oak & Cane American Craft Rum. Greene and Grace also formed Oak & Cane Holdings, LLC (“Holdings”) as a separate entity to own the rum brand’s trademarks and other intellectual property. Jeffrey Johnson (“Johnson”) made two loans to Oak totaling $300,000. Johnson also provided $300,000 to Greene and Grace as an investment in Oak in exchange for seven and a half percent ownership in both Oak and Holdings.
A dispute arose regarding Greene’s business expenses. Johnson sent notices of default to Oak. Subsequently Johnson, Grace, Oak, and Holdings (and other parties) entered into a settlement agreement which gave Johnson full ownership of the assets and intellectual property owned by Oak and Holdings. Greene, however, did not sign this settlement agreement.
Greene later filed a derivative action on behalf of both Oak and Holdings against Johnson, Grace, and other related persons and entities. Johnson’s derivative action alleged that the defendants conspired to divert the property, assets, and goodwill of Oak and Holdings to a separate company. Greene also alleged that Johnson and Grace breached their fiduciary duties of care and loyalty to Oak and Holdings as managers and members of these companies. Johnson moved to compel arbitration of Greene’s derivative claims against him, citing the broad arbitration provisions in the loan agreements entered into between Johnson and Oak. The trial court entered an order granting the motion as to all defendants. Greene immediately appealed.
The loan agreements between Johnson and Oak contained comprehensive dispute resolution provisions with arbitration clauses that required the parties to arbitrate for “any dispute, claim or controversy arising out of or relating to this Agreement or any Note or the breach, termination, enforcement, interpretation or validity thereof, including the determination of the scope or applicability of this [Dispute Resolution] Section.” “[A]rbitration provisions are favored by the courts and that all doubts should be resolved in favor of arbitration.” CT Miami, LLC v. Samsung Elecs. Latinoamerica Miami, Inc., 201 So. 3d 85 (Fla. 3d DCA 2015).
The appellate court broadly interpreted the phrase “arising out of or relating to,” contained in the arbitration agreements, to encompass many types of ancillary claims that referenced the agreement between the contracting parties. For example, Greene’s derivative claims brought on behalf of Oak against Johnson, required reference to the loan agreements between Johnson and Oak. The appellate court concluded that Greene’s claims of conversion, conspiracy, and breach of fiduciary duty required a determination of whether there was a breach under the loan agreements preceding the settlement agreement. The appellate court reasoned that if Oak brought the claims directly against Johnson, as opposed to Greene bringing the claims derivatively, Johnson’s defense would “relate to” the loans and by extension the loan agreements’ arbitration provisions. Therefore, the appellate court held that Johnson was able to compel arbitration of Greene’s derivative claims brought on behalf of Oak under the loan agreements’ broad arbitration provisions.
Greene’s derivative claims on behalf of Oak against the non-signatory defendants were based on the same set of operative facts that Greene alleged against signatory Johnson, i.e. conspiracy to divert Oak’s assets. The defenses of the non-signatory defendants would have been similarly dependent upon Johnson’s defenses, based on Johnson’s contractual rights contained the loan agreements. The appellate court concluded that the trial court was correct in finding that Greene was estopped from avoiding arbitration of all the derivative claims he brought on behalf of Oak. Greene v. Johnson held that non-signatories to a contract containing an arbitration provision may compel arbitration of claims brought by a signatory based on the doctrine of equitable estoppel, if the signatory raised allegations of concerted misconduct by both the non-signatory and one or more of the signatories to the contract. In other words, Johnson, a non-signatory to the arbitration agreement, could compel arbitration of Greene’s derivative claim, because Greene alleged that Johnson conspired with non-signatories.
On the other hand, the appellate court held that Greene was not equitably estopped from avoiding arbitration of Greene’s derivative claims on behalf of Holdings. There was no underlying agreement entered by Holdings and any of the defendants which required arbitration. The appellate court held that equitable estoppel applies to intertwined claims, however, only when a signatory to an arbitration agreement raises allegations of substantially interdependent and concerted misconduct by both a non-signatory and one or more of the signatories to the agreement. Greene v. Johnson, supra. Therefore, irrespective of whether the claims by Greene on behalf of Oak and those on behalf of Holdings were intertwined, the fact that Holdings was not a signatory to the loan agreements that required arbitration was sufficient to bar the application of equitable estoppel. The appellate court reasoned that an obligation to arbitrate is based on consent, so the action must be based on a contract where the signatories agreed to arbitrate in order for equitable estoppel to apply.
The appellate court affirmed the trial court’s order compelling arbitration of Greene’s derivative claims brought on behalf of Oak and reversed the trial court’s order compelling arbitration of Greene’s derivative claims brought on behalf of Holdings.
Peter Mavrick practices business litigation in Miami-Dade County, Florida. This article does not serve as a substitute for legal advice tailored to a particular situation.