NOT RECOMMENDED FOR FULL-TEXT PUBLICATION

File Name: 10a0121n.06

No. 07-3549

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

H. THOMAS MORAN, II, Receiver,

Plaintiff-Appellee,

v.

DAVID W. SVETE,

Defendant-Appellant.

On Appeal from the United

States District Court for the

Southern District of Ohio at

Dayton

 /

Before: GUY, ROGERS, and GRIFFIN, Circuit Judges.

RALPH B. GUY, JR., Circuit Judge. Defendant David W. Svete appeals from

the denial of his motion to dismiss the complaint, which sought to compel arbitration of

claims brought by the Receiver, Thomas Moran, II, arising out of Svete’s alleged control of

LifeTime Capital, Inc.’s viatical investment business. Svete argues that it was error to refuse

to compel arbitration because the district court’s reasons were not supported by the record

and involved error in the application of the law concerning the enforcement of arbitration

clauses. The Receiver contends that the request for arbitration was properly denied, arguing

both (1) that res judicata bars litigation of the question of arbitrability; and (2) that arbitration

was properly denied because the challenge was to the existence—as opposed to the
No. 07-3549 2

validity—of the contract containing the arbitration clause. Because the district court found

the arbitration clause unenforceable on the basis of allegations that the contract as a whole

was a product of fraud, we reverse and remand for further consideration of the demand for

arbitration in this case.

I.

Viatical settlements are financial products involving agreements with terminally ill

viators who sell, at a discount, the right to receive the benefits of their life insurance policies

upon maturity. LifeTime Capital marketed and sold beneficial interests in such policies to

investors, assigning them an interest equivalent to their desired investment plus a promised

return. These investments would yield higher rates of return than other investment

options—as long as the viator died within the life expectancy quoted to the investor.

LifeTime Capital was incorporated by Svete in 1997, and was sold in 1998 to another

company whose principal was allegedly under Svete’s control. Over the next several years,

Svete formed and controlled a number of other entities associated with LifeTime’s viatical

investment business, which were allegedly used to disguise Svete’s control, mislead

investors, and facilitate the diversion of invested funds. For example, one company (Medical

Underwriters, Inc.) allegedly misrepresented and even forged the purportedly independent

medical evaluation of the viator’s life expectancy. Another company, touted as an

independent investment servicing company, allegedly underfunded the premium reserve

account and facilitated the diversion of funds from that account to Svete. Many investments
No. 07-3549 3

Svete and co-defendant Ronald Girardot were convicted in Florida on federal charges of 1

conspiracy, mail fraud, money laundering, and interstate transportation of money obtained by fraud arising

out of LifeTime’s viatical investments. United States v. Svete, 521 F.3d 1302 (11th Cir. 2008), vacated in

part, 556 F.3d 1157, 1159 (11th Cir. 2009) (en banc), and reinstated in part, 565 F.3d 1363 (11th Cir.

2009), reh’g. denied, _F.3d_ (June 18, 2009) (Table, No. 05-13809-HH), petition for cert. filed (Nov. 11,

2009) (No. 09-7576).

failed to mature when expected, and additional premium payments were required. Investors

also claimed that sales agents made false statements concerning life expectancy, the status

of life insurance policies, and the risks associated with the investments. Overall, companies

controlled by Svete obtained more than $100 million in investments from more than 3,000

investors. Svete was convicted of federal charges arising out of the allegedly fraudulent

investments, and proceeded pro se before the district court in this case.1

The Receiver’s appointment, as well as this action, grew out of a lawsuit filed by H.

Thayne Davis, a LifeTime investor, against both LifeTime and Svete for fraud and breach

of contract. (Davis v. LifeTime Capital, Inc., S.D. Ohio No. 3:04-cv-00059). Moran was

appointed as Receiver for LifeTime Capital and was expressly authorized “to take any and

all action as the Receiver may deem necessary or prudent for the preservation, maintenance,

and administration of the LifeTime Portfolio comprised of viatical and life settlement

policies and beneficial interests therein[.]”

In reliance on the district court’s orders granting and clarifying the reach of his

authority, the Receiver commenced this action in February 2005 against Svete, individually,

asserting sixteen claims for relief including: fraud, breach of fiduciary duty, civil conspiracy,

misrepresentation, breach of contract, fraudulent transfer, unjust enrichment, alter ego,
No. 07-3549 4

Seven other entities allegedly controlled by Svete were named as defendants but later dismissed 2

without prejudice for failure to effect service.

constructive trust, corrupt activities in violation of state law (Ohio Rev. Code § 2934.34),

federal Racketeering Influenced and Corrupt Organization (RICO) Act claims (18 U.S.C. §

1962(a)-(d)), and violations of the Sarbanes-Oxley Act of 2002 (Pub. L. No. 107-204, 116

Stat. 745). The case proceeded and Svete filed a number of interlocutory appeals that have 2

largely been dismissed either voluntarily or by order of this court. Although interlocutory

in nature, the decision denying Svete’s motion to dismiss and compel arbitration is

immediately appealable pursuant to 9 U.S.C. § 16. Simon v. Pfizer Inc., 398 F.3d 765, 772

(6th Cir. 2005).

Svete’s pro se motion to dismiss the complaint and enforce arbitration, filed in

September 2006, asserted that the Receiver “is subject to Binding Arbitration with the

Defendant, as per a multitude of contracts that contain the Arbitration Provision” and that the

“multitude of contracts with LifeTime Capital, Inc. clearly specify that any disputes must be

resolved through Binding Arbitration.” Recommending that this motion be denied, the

magistrate judge concluded that:

Defendant’s Motion to Dismiss is unsupported by any Exhibits or

specific reference to documents of records in this case, and the Motion does

not allege that the Receiver (or LifeTime Capital) agreed to mandatory

arbitration of claims against Defendant in his individual or personal capacity.

Although the Complaint alleges that Defendant formerly held an ownership

interest in LifeTime Capital, Inc., and that he was formerly an officer of

LifeTime Capital, Inc., the Receiver’s claims in the present case seek to hold

Defendant personally liable, rather than liable in his corporate capacity as a

former owner or officer of LifeTime Capital. The allegation that LifeTime
No. 07-3549 5

Svete’s motion also asserted—without argument—that the Receiver lacks standing to “represent 3

the 3,000 plus LCI customers.” There is some disagreement about whether the Receiver is asserting breach

of contract claims under contracts between LifeTime and its investors, and whether he would have standing

to do so. See Wuliger v. Mfrs. Life Ins. Co., 567 F.3d 787, 793-96 (6th Cir. 2009); Liberte Capital Group

LLC v. Capwill, 248 F. App’x 650, 656-57 (6th Cir. 2007) (holding that, regardless of the scope of the

court’s authorization, the Receiver only had standing to bring claims belonging to the receivership entities,

and not claims belonging to third parties). These issues are beyond the scope of this appeal.

Capital entered into contracts containing mandatory arbitration provisions does

not establish that Defendant entered into such contracts in his individual or

personal capacity.

Svete filed objections to the report and recommendation and a second motion to stay and

compel arbitration, both of which provided copies of three documents that had not been

attached to the initial motion. Those documents, all from 1999, were: (1) LifeTime’s Letter

of Intent to Purchase Svete’s exclusive right to market viatical settlement sales products; (2)

the resulting Purchase Agreement between LifeTime Capital and “David W. Svete, an

individual”; and (3) the related Consultant Agreement between LifeTime Capital and

“DAVID W. SVETE, a person of full age of majority and a resident of the State of Florida.”

These documents, Svete argued, demonstrate that he actually had entered into a contract with

LifeTime in his individual or personal capacity. He argued that claims arising out of his

relationship with LifeTime were subject to mandatory arbitration pursuant to the arbitration

clause in the Consultant Agreement. Additionally, Svete claimed that he could compel

arbitration under the “multitude” of agreements between LifeTime Capital and each of its

investors, all of which were purported to contain arbitration clauses.3

In two brief orders entered December 12 and 18, 2006, respectively, the district court
No. 07-3549 6

Although this rationale was discarded, to the extent that it can be read to conclude that nonparties 4

may not enforce arbitration agreements we note that nonsignatories may be bound to an arbitration

agreement under ordinary state law contract and agency principles. Javitch v. First Union Sec., Inc., 315

F.3d 619, 629 (6th Cir. 2003); see also Arthur Andersen, LLP v. Carlisle, 129 S. Ct. 1896, 1902 (2009)

(stating that a litigant who was not a party to an arbitration agreement may invoke the stay provisions if the

relevant state contract law would allow him to enforce the arbitration agreement).

overruled Svete’s objections based on “a de novo review of the record in this case” and

denied Svete’s second motion to compel arbitration because it “provide[d] no valid reason

to alter the Court’s prior rejection of mandatory arbitration in this case.” Svete moved for

reconsideration, again attaching the Consultant Agreement between himself and LifeTime

Capital and arguing that the Consultant Agreement was entered into in his individual

capacity. The motion for reconsideration, a time-tolling motion for purposes of this appeal,

was denied along with several other of Svete’s objections and motions in an order entered

March 28, 2007.

That order, in pertinent part, emphasized that Svete had already unsuccessfully raised

the issue of arbitration twice in this case and twice in Davis v. LifeTime Capital, No. 04-cv0059. Specifically noting that it had reviewed the Consultant Agreement, however, the

district court no longer relied on the finding that Svete had not entered into the agreements

in his individual or personal capacity. Instead, the district court stated that the “Consultant 4

Agreement was entered into at a time when Svete was in control of LifeTime.” The

significance of this proposition appears to be that the Consultant Agreement was the product

of fraud. As the district court proceeded to explain:

Entry into the Consultant Agreement was one part of Svete’s extensive
No. 07-3549 7

Claim preclusion bars a subsequent action when there is: “‘(1) a final decision on the merits by a 5

court of competent jurisdiction; (2) a subsequent action between the same parties or their “privies”; (3) an

issue in the subsequent action which was litigated or which should have been litigated in the prior action;

and (4) an identity of the causes of action.’” Becherer v. Merrill Lynch, Pierce, Fenner, and Smith, Inc., 193

schemes to remove significant funds from the treasury of LifeTime for Svete’s

individual benefit. Svete’s extensive schemes to remove significant funds

from LifeTime were the basis for his conviction for fraud, conspiracy and

money laundering. Since Svete seeks to enforce an arbitration clause in a

contract that is the result of fraud or coercion, arbitration will not be

compelled. See Pritzker v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 7 F.3d

1110, 1118 (3d Cir. 1993) (it is well settled that a party may not be compelled

to arbitrate its claims where the arbitration agreements are a result of fraud or

coercion).

The district court stated, in closing, that arbitration would not be compelled because “Svete

seeks to enforce an arbitration clause in a contract that is the result of fraud or coercion.”

Defendant appealed.

II.

A. Res Judicata

We decline the Receiver’s invitation to affirm on grounds not reached by the district

court; namely, that Svete’s request for arbitration is barred by the preclusive effect of the

interlocutory rulings in Davis rejecting Svete’s efforts to compel arbitration in that case.

First, the Receiver relies explicitly on the doctrine of res judicata, or claim preclusion, but

appears to confuse it with collateral estoppel, or issue preclusion. It is issue preclusion that

“bars ‘successive litigation of an issue of fact or law actually litigated and resolved in a valid

court determination essential to the prior judgment,’ even if the issue recurs in the context

of a different claim.” Taylor v. Sturgell, 128 S. Ct. 2161, 2171 (2008) (citation omitted).5
No. 07-3549 8

F.3d 415, 422 (6th Cir. 1999) (en banc) (citation omitted).

Second, even cursory consideration of the relevant pleadings in Davis suggests that

the requirements for issue preclusion are probably not met. Issue preclusion requires that (1)

“the precise issue raised in the present case must have been raised and actually litigated in

the prior proceeding”; (2) “determination of the issue must have been necessary to the

outcome of the prior proceeding;” (3) “the prior proceeding must have resulted in a final

judgment on the merits;” and (4) “the party against whom estoppel is sought must have had

a full and fair opportunity to litigate the issue in the prior proceeding.” NAACP, Detroit

Branch v. Detroit Police Officers Ass’n, 821 F.2d 328, 330 (6th Cir. 1987); see also

Rybarczyk v. TRW, Inc., 235 F.3d 975, 982 (6th Cir. 2000).

In Davis, an investor filed suit against both Svete and LifeTime Capital. Svete’s first

motion to compel arbitration sought to realign the parties so that LifeTime would be deemed

a plaintiff and Svete could seek to compel arbitration under the Consultant Agreement. The

magistrate judge, presiding by consent of the parties, denied the motion in a summary order

based on her “due consideration of the arguments set forth in the motion and in consideration

of the fact that the instant action is an equitable proceeding.” Svete’s second motion to

dismiss sought to compel arbitration under the customer agreement entered into between

Davis and LifeTime Capital. The magistrate judge, giving the reasonsthat would be repeated

in this case, denied this motion both because Svete had not produced any documentation and

because the allegation that LifeTime’s contract with Davis included an arbitration provision
No. 07-3549 9

A federal-court judgment’s preclusive effect is determined by federal common law, which in 6

diversity cases “incorporates the rules of preclusion applied by the State in which the rendering court sits.”

Taylor, 128 S. Ct. at 2171, n.4.

did not establish that Svete had entered into any such agreement in his individual or personal

capacity. (Davis, Doc. 663, pp. 2-3.) If nothing else, it appears that the issue of the

enforceability of the arbitration provision in the Consultant Agreement between LifeTime

and Svete was either not raised or not actually litigated in Davis.

In addition, as the Receiver acknowledges, no final judgment has been entered in

Davis. Under Ohio law, which would apply to the extent that jurisdiction in Davis is based

on diversity of citizenship, interlocutory orders cannot be the basis for res judicata or

collateral estoppel. See Pieper v. Am. Arbitration Ass’n, Inc., 336 F.3d 458, 464 (6th Cir.

2003). The Receiver relies on the Tenth Circuit’s statement that “interlocutory orders 6

denying arbitration have been deemed final and preclusive for res judicata purposes” when

the order effectively and conclusively determines the arbitration issue. Stifel, Nicolaus & Co.

v. Woolsey & Co., 81 F.3d 1540, 1545 (10th Cir. 1996) (citing cases).

Stifel relied, in turn, on Towers, Perrin, Forster & Crosby, Inc. v. Brown, 732 F.2d

345, 349-50 (3d Cir. 1984), for the proposition that the preclusive effect depends on the

finality of the decision. The Third Circuit has since explained that it was significant to the

decision in Towers that, although interlocutory, the order denying arbitration had been

affirmed on appeal in the state court and could not be reviewed again on appeal from a

determination on the merits. Gen. Elec. Co. v. Deutz AG, 270 F.3d 144, 158-59 (3d Cir.
No. 07-3549 10

The Receiver also asserts that the lapse in time between Svete’s first and second motions for a stay 7

in Davis waived any right to seek arbitration in the instant case. This is a fact-based determination that was

not developed, or ruled upon in the district court. This claim is not properly before us.

2001). This court has yet to address this line of authority, and we need not do so here

because Svete was dismissed from Davis without prejudice and with the admonition that no

judgment be entered against him. The Receiver has not shown that the interlocutory orders

in Davis present a similarly final and conclusive decision on the merits.7

B. Arbitration

The Federal Arbitration Act (FAA) provides that a written agreement to arbitrate

disputes arising out of a transaction in interstate commerce “shall be valid, irrevocable, and

enforceable, save upon such grounds as exist at law or in equity for the revocation of any

contract.” 9 U.S.C. § 2. Before compelling an unwilling party to arbitrate, the court must

engage in a limited review to determine whether the dispute is arbitrable, including, first,

whether the parties agreed to arbitrate; and, second, whether the specific dispute falls within

the substantive scope of that agreement. Fazio v. Lehman Bros., Inc., 340 F.3d 386, 392 (6th

Cir. 2003). A district court’s decision refusing to compel arbitration or refusing to stay an

action pending arbitration is reviewed de novo. Id.

The only arbitration clause Svete specifically identified is found in the Consultant

Agreement, Section 15, which provided, in part, that:

All disputes and controversies of every kind and nature between the parties to

this Agreement arising out of or in connection with this Agreement including,

but not limited to, its existence, construction, validity, interpretation or

meaning, performance, non-performance, enforcement, operation, breach,
No. 07-3549 11

continuance, or termination thereof shall be submitted and settled by

arbitration in accordance with the Commercial Rules of the American

Arbitration Association.

The Consultant Agreement was executed by Svete, individually, and by Roger W. Lange, as

President of LifeTime Capital. It is undisputed that the Receiver, asserting the claims of

LifeTime, is bound to arbitrate to the same extent that LifeTime would have been absent the

appointment of a receiver. Javitch v. First Union Sec., Inc., 315 F.3d 619, 627 (6th Cir.

2003). As outlined above, the district court ultimately concluded that the Receiver could not

be compelled to arbitrate because “Svete seeks to enforce an arbitration clause in a contract

that is the result of fraud or coercion.”

1. Fraud

As the Supreme Court explained most recently in Preston v. Ferrer, 552 U.S. 346, 353

(2008), “[a] recurring question under § 2 [of the FAA] is who should decide whether

‘grounds . . . exist at law or in equity’ to invalidate an arbitration agreement.” Restating the

holding in Prima Paint, the Court explained that “attacks on the validity of an entire contract,

as distinct from attacks aimed at the arbitration clause, are within the arbitrator’s ken.” Id.

(citing Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04 (1967)). The

Court in Prima Paint, guided by the language of § 4 of the FAA, held that “‘if the claim is

fraud in the inducement of the arbitration clause itself—an issue which goes to the making

of the agreement to arbitrate—the federal court may proceed to adjudicate it.’” Buckeye

Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445 (2006) (quoting Prima Paint, 388 U.S.
No. 07-3549 12

The court in Carro denied arbitration of all the claims, including the fraud claim, because claims 8

did not “arise under” the contracts containing the arbitration agreements. The court concluded as well that

the fraud claims were not arbitrable under Prima Paint because the plaintiff had alleged that the arbitration

clause was part of the scheme to defraud creditors. Without more discussion, the court stated that, accepting

the plaintiff’s allegations as true, “the arbitration clause was integral to [the] scheme to defraud since it

ensured that defrauded creditors, who were generally small business persons in Puerto Rico, would be

unable to pursue their claims in a distant forum [in Kansas].” Id.

at 403-04). Otherwise, “‘the statutory language does not permit the federal court to consider

claims of fraud in the inducement of the contract generally.’” Id.

The Receiver, urging us to affirm, contends that the district court’s decision rested on

a finding that the allegations of fraud were directed at the arbitration clause itself. It is not

clear at all, however, that this was the case. The district court’s order did not say as much.

The complaint did not obviously allege fraud in the inducement of the arbitration clause

itself. Fazio, 340 F.3d at 394 (quoting Arnold v. Arnold Corp.-Printed Commc’ns. for Bus.,

920 F.2d 1269, 1278 (6th Cir. 1990)). Nor did the Receiver’s arguments in opposition to

arbitration clearly assert that the fraud pertained specifically to the arbitration agreement.

The Receiver asks that we infer that he did from his reference to “the Consultant Agreement

and related transactions” and his citation to Carro Rivera v. Parade of Toys, Inc., 950 F.

Supp. 449, 453 (D.P.R. 1996). The Receiver states that the district court also relied on

Carro, but we cannot conclude as much since the district court did not cite or discuss that

case.8

Nonetheless, to the extent that Carro may be read to support the Receiver’s position,

it is inconsistent with this court’s pronouncement that “under Prima Paint, allegations of
No. 07-3549 13

fraudulent schemes are ‘no longer sufficient to overcome the strong federal policy in favor

of arbitration.’” Fazio, 340 F.3d at 394 (quoting Arnold, 920 F.2d at 1281). This court has

specifically rejected as insufficient allegations that the arbitration agreement was used to

further a fraudulent scheme, where the plaintiff failed to identify any misrepresentations

particular to the arbitration agreement separate from the contract as a whole. See, e.g.,

Burden v. Check Into Cash of Ky., LLC, 267 F.3d 483, 491 (6th Cir. 2001) (“Allegations that

the arbitration agreements furthered the fraudulent scheme are nevertheless arbitrable under

Prima Paint.”). We find that the district court erred by refusing to compel arbitration on the

grounds that the Consultant Agreement as a whole was the product of fraud.

2. Existence or Validity

Seeking to avoid the Prima Paint rule, the Receiver also argues that his challenge is

actually to the existence—as opposed to the validity—of the contract. In other words, the

Receiver argues that there is an issue whether the parties agreed to arbitrate their disputes at

all. Although some circuits viewed Prima Paint as not requiring arbitration of a claim that

the entire contract was void from its inception, the Supreme Court specifically disavowed the

void/voidable distinction in Buckeye. 546 U.S. at 446.

At issue in Buckeye were claims that the lender made illegal usurious loans disguised

as check cashing transactions. The plaintiffs opposed arbitration of their claims under the

contracts’ arbitration provisions on the grounds that the contracts violated state statutes and

were therefore void ab initio. The Supreme Court explained that challenges to the validity
No. 07-3549 14

Similarly, this court’s pre-Buckeye decisions rejected efforts to avoid arbitration on the grounds that 9

the arbitration clause was unenforceable because the contract it was part of was void for illegality, finding

that the challenge was to the substance, rather than the existence, of the contract. See Burden, 267 F.3d at

487; Match-E-Be-Nash-She-Wish Band of Pottawatomi Indians v. Kean-Argovitz Resorts, 383 F.3d 512, 516-

of arbitration agreements are divided into two types: those that challenge the validity of the

agreement to arbitrate itself; and those that challenge the contract as a whole on grounds that

affect the entire agreement (such as fraud), or on the ground that one provision renders the

whole contract invalid. Id. at 444. Because the claim in Buckeye that the whole contract

(including the arbitration clause) was rendered invalid was one of the second type, the

arbitration agreement was enforceable and the challenge was subject to arbitration. Id. at

446. In a footnote, however, the Court cited several of the cases that drew the void/voidable

distinction and explained that:

The issue of the contract’s validity is different from the issue whether

any agreement between the alleged obligor and obligee was ever concluded.

Our opinion today addresses only the former, and does not speak to the issue

decided in the cases cited by respondents (and by the Florida Supreme Court),

which hold that it is for courts to decide whether the alleged obligor ever

signed the contract, Chastain v. Robinson-Humphrey Co., 957 F.2d 851 (CA11

1992), whether the signor lacked authority to commit the alleged principal,

Sandvik AB v. Advent Int’l Corp., 220 F.3d 99 (CA3 2001), Sphere Drake Ins.

Ltd. v. All American Ins. Co., 256 F.3d 587 (CA7 2001), and whether the

signor lacked the mental capacity to assent, Spahr v. Secco, 330 F.3d 1266

(CA10 2003).

Id. 444, n.1. The Receiver relied on several of these same cases in support of the contention

that his challenge to the Consultant Agreement should be decided by the court and not an

arbitrator. We find, as in Buckeye, that the Receiver is challenging the validity, rather than

the existence, of the Consultant Agreement.9
No. 07-3549 15

17 (6th Cir. 2004).

This is not a case in which it is alleged that the signor did not sign the contract, was

an agent without authority to bind his principal, or lacked the mental capacity to assent.

Rather, the Receiver argues that the signor acted “ultra vires,” or outside his express

authority, because his actions were allegedly taken in breach of the fiduciary duties he owed

to the corporation. Relying on Ohio law, which we assume for purposes of appeal would be

the applicable state law, the Receiver argues that Lange’s alleged breach of fiduciary duty

stripped him of express or apparent authority to enter into the contract. The case cited for

this proposition, however, did not so hold.

In Johnstown Manufacturing, Inc. v. Haynes, 557 N.E.2d 1221, 1223 (Ohio App.

1988), an employer sued its bank for cashing a check signed by an employee who pocketed

the money. As the court explained, the question was whether the employer or the bank

should be liable for the acts of an unfaithful servant under Ohio’s commercial code. The

employee was not authorized to conduct the specific transaction, but was an authorized

signor such that the code provisions dealing with unauthorized signatures did not apply. The

court held that because the bank was a holder in due course, the employer was barred from

asserting a negligence claim against the bank. Id. at 1223-24. Johnstown does not suggest

that a claim that a contract executed by one authorized to do so but allegedly in breach of his

fiduciary duties is an attack on the existence as opposed to the validity of the contract. See

also Bd. of County Comm’rs v. L. Robert Kimball & Assocs., 860 F.2d 683, 685 (6th Cir.
No. 07-3549 16

1988) (holding claims that contracts were ultra vires was a legal defense to enforceability that

was properly arbitrated under Prima Paint); Scotts Co. LLC v. Liberty Mut. Ins. Co., 606 F.

Supp.2d 722, 734 (S.D. Ohio 2009) (noting contract may be void for reasons pertaining to

breach of fiduciary duty).

In this case, the Receiver alleged that Lange, as President of LifeTime, executed an

“outrageous” consulting agreement while LifeTime was effectively under Svete’s control,

by which LifeTime purchased Svete’s exclusive rights as a marketing agent for $2 million

and agreed to pay Svete at least $500,000 per month. This, it is argued, was in breach of

Lange’s fiduciary duties because this contract contributed to the fraud by allowing Svete to

maintain control over LifeTime while appearing to have removed himself from its

governance, by providing Svete compensation that had no rational relationship to the services

he provided, and by serving as a means for Svete to divert assets from LifeTime for his

personal benefit. We have no difficulty concluding that the Receiver’s challenge is to the

validity or substance of the contract such that he may not avoid application of Prima Paint

on this basis.

Importantly, the question before us is not whether the allegations can be proved, but

whether the challenge to the enforceability of the contract is to be decided by the court or an

arbitrator. See Preston, 128 S. Ct. at 987. Even so, this appeal does not resolve that issue

entirely. As noted earlier, before compelling arbitration, the court must engage in a limited

review to determine not only whether there is an agreement to arbitrate, but also whether the
No. 07-3549 17

specific dispute falls within the substantive scope of that agreement. 

For the reasons set forth above, we REVERSE the district court’s decision refusing

to compel arbitration and REMAND for further proceedings consistent with this opinion.
No. 07-3549 18

ROGERS, J., dissenting.

Defrauded investors who have not entered into arbitration agreements presumably do

not have to arbitrate their fraudulent conveyance claims against third-party recipients of their

money, even if the fraudulent conveyance (by the fraudfeasor to the third party) itself

involved a contract with an arbitration clause. Assuming that this is so, the same should be

true for a receiver appointed to recover on claims against third-party recipients where the

basis for the receiver’s action is fraud on the investor rather than some obligation that runs

from the third party to the receiver’s principal. I am therefore not able to conclude that

arbitration should be required in the present case.

Cases like Prima Paint Corp. v. Flood & Conklin Manufacturing Co., 388 U.S. 395

(1967), and Fazio v. Lehman Bros., Inc., 340 F.3d 386 (6th Cir. 2003), are different. When

an investor contracts with a fraudfeasor (e.g., a broker), with an arbitration clause, and then

sues the broker (e.g. for fraudulent inducement to contract), those cases make clear that a

general fraud-in-the-inducement claim will not be enough to avoid arbitration. This should

be contrasted with, for instance, a hypothetical situation in which an investor contracts with

a broker to invest investor’s money in viaticals, and the broker fraudulently gives the money

to someone he is in cahoots with (e.g., his brother), let’s say by means of a “contract” to pay

the brother millions for some worthless items. An arbitration clause in the latter contract

should not be enforceable against the investor when the investor sues the brother to get the

investor’s money back. It should be no different if the brother is sued by a receiver for the
No. 07-3549 19

 That the receiver may be asserting the interests of the investors does not affect the 10

receiver’s standing to bring claims as receiver of LifeTime, which was injured by the depletion of

its assets. See Scholes v. Lehman, 56 F.3d 750, 753-55 (7th Cir. 1995). 

broker, rather than by the investor, if the receiver is asserting the interests of the investor, not

the broker.

It is true that in a somewhat similar case, Javitch v. First Union Securities, 315 F.3d

619 (6th Cir. 2003), we held that a receiver was bound by arbitration agreements “to the same

extent that the receivership entities [i.e., the broker in the above example] would have been

absent the appointment of the receiver.” Id. at 627. Javitch appears to be different in an

important respect, however, in that the receiver in Javitch was found to have been asserting

only claims that belonged to the receivership entities. Indeed, Javitch recognized that a

receiver may stand in the shoes of the creditor as well as of the debtor, id. at 626, although

the district court in Javitch had properly found that the receiver asserted only claims

belonging to the receivership entities, id. at 627. This conclusion was based on an

assessment of both the claims being asserted by the receiver and the authority granted to him.

If the receiver (Moran in this case) could be ascertained to be bringing suit to assert the

interests of the defrauded investors (by examination of the nature of the claims and the order

appointing the receiver), then the receiver would not necessarily be bound by the arbitration

agreement, id. at 626.

The receiver’s claims in the instant case do not appear to be based so much on Svete’s

obligations to LifeTime as upon Svete’s obligations to the defrauded investors. See, for 10
No. 07-3549 20

example, the excerpts below. LifeTime would really have no claim against Svete were it not

that the contracts against Svete allegedly constituted fraud on the investors. It follows that,

under the contingency preserved in Javitch, the receiver is bound by the arbitration

agreement no more than the investors would be in a suit against Svete for receiving their

money knowing it was rightfully theirs. I would therefore remand for the district court to

determine, based on an assessment of both the claims being asserted by the receiver and the

authority granted to him, whether the receiver is bringing suit to assert the rights of the

defrauded investors. If so, arbitration should not be required.

Below are some excerpts from the Complaint suggesting that the rights asserted are

those of persons buying viatical contracts through LifeTime, as contrasted to rights of

LifeTime against Svete (emphases added):

3. Following his appointment, the Receiver has learned, among other things, of

the existence of certain transactions which resulted in the diversion of significant funds from

LifeTime accounts to the detriment of LifeTime’s investors.

. . .

26. The Order of Appointment granted the Receiver the authority to, among other

things, take exclusive control and possession of all receivership assets and “take any all

action as the Receiver may deem necessary or prudent” to “protect the interests of the

beneficial owners” of the LifeTime Portfolio of life insurance policies (Order of

Appointment, ¶ 12). Such beneficial owners are primarily those individuals and entities who
No. 07-3549 21

invested money with LifeTime ostensibly for the purchase of one or more viatical settlement

contracts.

27. The Order of Appointment was modified and/or clarified on May 5 and

December 2, 2004. Each of these modifying orders clarified the expansive scope of the

Receiver’s authority to take the steps necessary to protect the interests of LifeTime’s

investors.

. . .

52. In 1997 and continuously through the present, Defendants have continued the

fraudulent scheme described above through continued misrepresentations to LifeTime

investors.

. . .

67. Defendants owed, at all times pertinent to Plaintiff’s Claims for Relief set forth

in this action a fiduciary duty to investors of LifeTime to ensure that the life expectancies

were accurate, that the integrity of the premium reserve account and the funds deposited

therein were maintained, that the Portfolio was preserved and not depleted, that actions not

be taken rendering LifeTime insolvent or unable to pay its obligations as and when they

became due, and that all transactions entered into by LifeTime were reasonable and prudent

and in the best interests of LifeTime and its investors and not merely Svete or his affiliated

entities and/or business associates.