Opinion ID: 4528740
Heading Depth: 2
Heading Rank: 1

Heading: The Appeal by Plaintiff Bayles

Text: Plaintiff Bayles contends that she is the rightful beneficiary of both Ameriprise accounts. She raises three arguments why the circuit court erred in dismissing her complaint and forcing her to arbitrate her claim to those accounts. Two of her arguments concern the enforceability of the arbitration agreements within the applications for the accounts, while the third regards whether the parties’ dispute falls within the scope of the arbitration agreements. First, she argues that she was not a signatory to any arbitration agreement: because only her deceased husband agreed to arbitrate disputes regarding the accounts, the plaintiff asserts she is not bound by the terms of the arbitration agreements. Second, the plaintiff contends that Evans and Ameritrade made fraudulent claims that induced her to consent to the placement of money from her husband’s 401(k) 11 plan into the brokerage and portfolio accounts. Third, and finally, the plaintiff argues that if the arbitration agreements are valid and enforceable, then her claims fall outside the scope of those agreements. We examine these arguments in turn.
The plaintiff’s first and most substantial argument is that the circuit court erred in finding a valid, enforceable arbitration agreement existed between the parties, because the plaintiff did not sign any documents containing an arbitration agreement. The record shows that the decedent, Mr. Bayles, signed one application to create the brokerage account and another application to create the portfolio account. Both of those applications created contracts that incorporated arbitration agreements. The record is also clear that the plaintiff did not sign either of those applications and their incorporated arbitration agreements. The plaintiff reasons that, since she did not assent to those arbitration agreements, she cannot be bound by them. It is well settled that arbitration is a matter of contract. Therefore, as a general rule, only signatories to an arbitration agreement will be required to submit to arbitration. As the plaintiff argues, it is a central rule of contract law is that “[a] party generally cannot be forced to participate in an arbitration proceeding unless the party has, in some way, agreed to participate.” Chesapeake Appalachia, L.L.C. v. Hickman, 236 W. Va. 421, 439, 781 S.E.2d 198, 216 (2015). Stated another way, “Third persons who are not parties to an arbitration agreement generally are not bound by the agreement or any resulting award.” Richard A. Lord, 21 Williston on Contracts § 57:19 (4th ed. 2019). 12 That rule is not inflexible and is subject to traditional principles of contract and agency law. Hence, we have stated that “[a] court may not direct a nonsignatory to an agreement containing an arbitration clause to participate in an arbitration proceeding absent evidence that would justify consideration of whether the nonsignatory exception[s] to the rule requiring express assent to arbitration should be invoked.” Syllabus Point 3, State ex rel. United Asphalt Suppliers, Inc. v. Sanders, 204 W.Va. 23, 511 S.E.2d 134 (1998) (emphasis added). “Well-established common law principles dictate that in an appropriate case a nonsignatory can enforce, or be bound by, an arbitration provision within a contract executed by other parties.” Int’l Paper Co. v. Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d 411, 416-17 (4th Cir. 2000). In Chesapeake Appalachia, we recognized several common law principles in which a signatory to an arbitration agreement can, in very limited circumstances, require a nonsignatory to comply with the agreement. As we stated in Syllabus Point 10 of Chesapeake Appalachia: A signatory to an arbitration agreement cannot require a non-signatory to arbitrate unless the non-signatory is bound under some traditional theory of contract and agency law. The five traditional theories under which a signatory to an arbitration agreement may bind a non-signatory are: (1) incorporation by reference; (2) assumption; (3) agency; (4) veil-piercing/alter ego; and (5) estoppel. Chesapeake Appalachia, 236 W. Va. at 426, 781 S.E.2d at 203. See also 21 Williston on Contracts § 57:19 (“traditional principles of state law allow a contract to be enforced . . . against nonparties to the contract through assumption, piercing the corporate veil, alter ego, 13 incorporation by reference, third party beneficiary theories, waiver, and estoppel.”). We cautioned that courts asked to apply these theories “should be wary of imposing a contractual obligation to arbitrate on a non-contracting party.” Id. at 440, 781 S.E.2d at 217 (quoting Smith/Enron Cogeneration Ltd. P’ship, Inc. v. Smith Cogeneration Int’l, Inc., 198 F.3d 88, 97 (2d Cir. 1999)). Put simply, “a non-signatory cannot be bound to arbitrate unless it is bound ‘under traditional principles of contract and agency law’ to be akin to a signatory of the underlying agreement.” E.I. DuPont de Nemours & Co. v. Rhone Poulenc Fiber & Resin Intermediates, S.A.S., 269 F.3d 187, 194 (3d Cir. 2001). Defendants rely upon the fifth theory listed in Chesapeake Appalachia: estoppel. They contend that the plaintiff is equitably estopped from avoiding arbitration because she claims, as a beneficiary, that she is entitled to a direct benefit from the contracts that her deceased husband signed with Ameriprise. Because Mr. Bayles agreed to arbitrate any disputes regarding those contract benefits, the defendants assert the plaintiff should likewise be required to arbitrate her claim to those benefits. We agree. Syllabus Point 10 of Chesapeake Appalachia recognizes that a signatory to an arbitration agreement has standing to compel a nonsignatory to participate in arbitration based upon the principle of equitable estoppel. The inquiry into whether estoppel applies 10 In Shelton v. Johnston, 82 W. Va. 319, ____, 95 S.E. 958, 959 (1918), the 10 Court offered the following definition of “equitable estoppel”: Continued . . . 14 is fact specific, but essentially involves a review of “the relationships of persons, wrongs and issues, in particular whether the claims . . . [asserted are] intimately founded in and intertwined with the underlying contract obligations.” Choctaw Generation Ltd. P’ship v. Am. Home Assur. Co., 271 F.3d 403, 406 (2d Cir. 2001) (cleaned up). See also, EPIX Holdings Corp. v. Marsh & McLennan Companies, Inc., 410 N.J. Super. 453, 463, 982 A.2d 1194, 1200 (App. Div. 2009) (“The estoppel inquiry . . . usually involves an analysis of the connection between the claim, the arbitration agreement and the parties.”). As with 11 The doctrine of equitable estoppel, as stated by Lord Denman, in Pickard v. Sears, 6 Adolph. & El. 469, has been generally adopted in both English and American courts, as follows: “Where one by his words or conduct willfully causes another to believe the existence of a certain state of things, and induces him to act on that belief, so as to alter his own previous position, the former is concluded from averring against the latter a different state of things as existing at the same time.” Preston v. Mann, 25 Conn. 118, 128. The word “wilfully” as the authorities hold is not to be taken in the limited sense of the term “maliciously” or “fraudulently,” nor does it imply a desire to produce a wrong impression or to produce a particular line of conduct. Regardless of the motive if the natural consequences of one’s words, acts, or conduct will be to influence another to change his condition, and to act upon that belief to his prejudice, the result will be to estop the one responsible for setting up a contrary state of facts. This analysis is particularly important when a nonsignatory asks a court to 11 compel a signatory to arbitrate. As this Court stated in Syllabus Point 4 of Bluestem Brands, Inc. v. Shade, 239 W. Va. 694, 805 S.E.2d 805 (2017): Continued . . . 15 any of the contract and agency theories expressed in Chesapeake Appalachia, “[t]he doctrine of estoppel should be applied cautiously and only when equity clearly requires it to be done.” Syllabus Point 3, Humble Oil & Ref. Co. v. Lane, 152 W. Va. 578, 165 S.E.2d 379 (1969). Accord, Syllabus Point 7, Samsell v. State Line Dev. Co., 154 W. Va. 48, 174 S.E.2d 318 (1970) (“The doctrine of estoppel should be applied cautiously, only when equity clearly requires that it be done[.]”). “The doctrine of equitable estoppel is applied only in very compelling circumstances, where the interests of justice, morality and common fairness clearly dictate that course.” IBS Fin. Corp. v. Seidman & Assocs., L.L.C., 136 F.3d 940, 948 (3d Cir. 1998) (cleaned up). As a general rule, the doctrine of equitable estoppel allows a court to prevent a nonsignatory from embracing a contract, but then turning his, her, or its back on the portions of the contract (such as an arbitration clause) that the nonsignatory finds “distasteful.” E.I. DuPont de Nemours & Co. v. Rhone Poulenc Fiber & Resin Intermediates, S.A.S., 269 F.3d 187, 200 (3d Cir. 2001). One court explained the doctrine this way: In the arbitration context, the doctrine recognizes that a party may be estopped from asserting that the lack of his signature on a written contract precludes enforcement of the contract’s arbitration clause when he has consistently maintained that A non-signatory to a written agreement requiring arbitration may utilize the estoppel theory to compel arbitration against an unwilling signatory when the signatory’s claims make reference to, presume the existence of, or otherwise rely on the written agreement. Such claims sufficiently arise out of and relate to the written agreement as to require arbitration. 16 other provisions of the same contract should be enforced to benefit him. To allow [a nonsignatory] to claim the benefit of the contract and simultaneously avoid its burdens would both disregard equity and contravene the purposes underlying enactment of the [Federal] Arbitration Act. International Paper Co., 206 F.3d at 418 (cleaned up). In summarizing the doctrine, the seminal treatise Williston on Contracts declares that “[a] nonsignatory may not cherry-pick beneficial contract terms while ignoring other provisions that do not benefit it or that it would prefer not to be governed by such as an arbitration clause.” 12 21 Williston on Contracts § 57:19. See also Invista S.A.R.L. v. Rhodia, S.A., 625 F.3d 75, 85 (3d Cir. 2010) (Estoppel “prevents a non-signatory from ‘cherry-picking’ the provisions of a contract that it will benefit from and ignoring other provisions that don’t benefit it or that it would prefer not to be governed by (such as an arbitration clause).”). Stated simply, a nonsignatory who seeks to reap the benefits of a contract must bear its burdens as well. Another way to examine the application of estoppel is to consider whether the nonsignatory has received a “direct benefit” from the contract, parts of which the nonsignatory later tries to disavow. Courts often say that a nonsignatory is estopped from refusing to comply with an arbitration clause “when it receives a ‘direct benefit’ from a contract containing an arbitration clause.” International Paper Co., 206 F.3d at 418 To be clear, a nonsignatory may bind a signatory to the terms of a contract 12 provision as well. “A signatory also cannot have it both ways. It cannot seek to hold the nonsignatory liable pursuant to duties imposed an agreement, which contains an arbitration provision, but deny the arbitration provision’s applicability because the defendant is a nonsignatory.” 21 Williston on Contracts § 57:19; see also, Syllabus Point 4, Bluestem Brands, Inc. v. Shade, 239 W. Va. at 694, 805 S.E.2d at 805. 17 (quoting American Bureau of Shipping v. Tencara Shipyard S.P.A., 170 F.3d 349, 353 (2d Cir. 1999)). “Direct-benefit estoppel involve[s] non-signatories who, during the life of the contract, have embraced the contract despite their non-signatory status but then, during litigation, attempt to repudiate the arbitration clause in the contract.” Hellenic Inv. Fund, Inc. v. Det Norske Veritas, 464 F.3d 514, 517-18 (5th Cir. 2006). “A non-signatory can ‘embrace’ a contract containing an arbitration clause in two ways: (1) by knowingly seeking and obtaining ‘direct benefits’ from that contract; or (2) by seeking to enforce the terms of that contract or asserting claims that must be determined by reference to that contract.” Noble Drilling Servs., Inc. v. Certex USA, Inc., 620 F.3d 469, 473 (5th Cir. 2010). When the nonsignatory knowingly exploits the contract containing the arbitration clause and obtains a direct benefit from that contract, “[c]ourts have applied direct benefits estoppel to bind a non-signatory to an arbitration agreement[.]” Id. In the instant case, the plaintiff is seeking the direct benefits of the contracts signed by her husband, despite not being a signatory to either contract. The plaintiff is seeking to recover the assets that her deceased husband deposited with Ameriprise under the brokerage contract and is seeking to enforce her understanding of the contract: that her husband’s initial choice of beneficiary could never be changed. The plaintiff also wants to enforce the terms of the portfolio contract, because her deceased husband appears to have named her as the beneficiary of the portfolio account. Despite her attempts to recover the benefits of the contracts, the plaintiff is “cherry-picking” the terms beneficial to her while disavowing the terms she would prefer not to be governed by, namely the arbitration 18 clauses in both contracts. Under these facts, the circuit court was within its discretion to find the plaintiff bound by all the terms of the contracts, including the arbitration clauses. Accordingly, despite the plaintiff not being a signatory to either the brokerage or portfolio applications, the equitable doctrine of estoppel compels the plaintiff to arbitrate her claim to benefits from both contracts formed when her husband signed those applications. We, therefore, find no error in the circuit court order dismissing the plaintiff’s complaint and compelling her to arbitration. 13
The plaintiff’s second argument is that any agreement that purports to exist between her and the defendants is a byproduct of fraud or constructive fraud. The plaintiff correctly notes that “[n]othing in the Federal Arbitration Act, 9 U.S.C. § 2, overrides normal rules of contract interpretation. Generally applicable contract defenses—such as laches, estoppel, waiver, fraud, duress, or unconscionability—may be applied to invalidate an arbitration agreement.” Syllabus Point 9, Brown ex rel. Brown v. Genesis Healthcare Corp., 228 W. Va. 646, 724 S.E.2d 250 (2011), cert. granted, judgment vacated sub The plaintiff also complains that it is unfair that her husband’s children 13 (defendants Kristina Nicholls and Stephen Bayles) are being compelled to arbitrate, because they too never signed any arbitration agreement. We reject this general argument because these defendants are in the same position as the plaintiff: their claim to any benefits from defendants Ameriprise and Evans is founded exclusively on the brokerage and portfolio contracts signed by their father. Moreover, the children have, throughout this litigation, consented to have their defense arbitrated with Ameriprise and Evans. 19 nom. Marmet Health Care Ctr., Inc. v. Brown, 565 U.S. 530 (2012) (“Brown I”) (emphasis added). 14 The plaintiff asserts that her husband could not have moved the money out of his 401(k) plan (where federal law guaranteed her a survivor’s benefit) and into the Ameriprise brokerage account without receiving her consent. She further asserts that defendant Evans made misleading or fraudulent statements that induced her to consent to the transfer of money to the Ameriprise brokerage account. The plaintiff contends that, but for Evans’s misstatements, her husband never could have entered into the brokerage contract, and hence, any arbitration clause in that contract must be invalidated as a direct byproduct of fraud, constructive fraud and/or material misrepresentation. In sum, the plaintiff asserts the circuit court erred in finding the arbitration clauses were not void or unenforceable because of the defendants’ fraud. We reject the plaintiff’s argument because, unfortunately, her approach violates a basic rule of federal arbitration law: the doctrine of severability. The doctrine requires a party resisting arbitration to exclusively challenge the enforceability of the arbitration clause, and not the overall contract: When a lawsuit is filed implicating an arbitration agreement, and a party to the agreement seeks to resist “To be clear, this list is not exclusive. Misrepresentation, duress, mutuality 14 of assent, undue influence, or lack of capacity, if the contract defense exists under general common law principles, then it may be asserted to counter the claim that a . . . provision binds the parties. Even lack of consideration is a defense.” Geological Assessment & Leasing v. O’Hara, 236 W. Va. 381, 387, 780 S.E.2d 647, 653 (2015) (citation omitted). 20 arbitration, the Supreme Court has interpreted the FAA to require application of the doctrine of “severability” or “separability.” The gist of the doctrine is that an arbitration clause in a larger contract must be carved out, severed from the larger contract, and examined separately. The doctrine treats the arbitration clause as if it is a separate contract from the contract containing the arbitration clause, that is, the “container contract.” Under the doctrine, arbitration clauses must be severed from the remainder of a contract, and must be tested separately under state contract law for validity and enforceability. Schumacher Homes of Circleville, Inc. v. Spencer, 237 W. Va. 379, 387-88, 787 S.E.2d 650, 658-59 (2016) (quotes and footnotes omitted). In Syllabus Point 4 of State ex rel. Richmond Am. Homes of W. Virginia, Inc. v. Sanders, 228 W. Va. 125, 129, 717 S.E.2d 909, 913 (2011), we said in part: Under the Federal Arbitration Act, 9 U.S.C. § 2, and the doctrine of severability, only if a party to a contract explicitly challenges the enforceability of an arbitration clause within the contract, as opposed to generally challenging the contract as a whole, is a trial court permitted to consider the challenge to the arbitration clause. When the United States Supreme Court first adopted the severability doctrine, it did so in a case with an argument like that posed by the plaintiff. In Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403 (1967), Prima Paint signed a contract with Flood & Conklin. Shortly after performance of the contract began, Prima Paint discovered Flood & Conklin was insolvent and unable to perform. Prima Paint then sued seeking to rescind the entire contract on the ground it had been misled and fraudulently induced to sign. 21 The Prima Paint contract contained an arbitration clause. The Supreme Court concluded that under Section 2 of the Federal Arbitration Act, courts should presume an arbitration clause is “valid, irrevocable, and enforceable” until proven otherwise. See 9 U.S.C. § 2. Accordingly, 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. But the statutory language does not permit the federal court to consider claims of fraud in the inducement of the contract generally. . . . [A] federal court may consider only issues relating to the making and performance of the agreement to arbitrate. Prima Paint, 388 U.S. at 403-04. Stated simply, the severability doctrine adopted in Prima Paint stands for the principle that when a party raises claims of fraud, those claims must be directed solely to the making and performance of the agreement to arbitrate. Claims of fraud in the inducement of the contract in general must be resolved by an arbitrator. Because Prima Paint sued to rescind the entire contract, the Supreme Court presumed the arbitration agreement was valid and enforceable. Prima Paint was, therefore, compelled to arbitrate its fraudulent inducement claim. In the instant case, the plaintiff did not argue to the circuit court that the arbitration agreement was procured by fraud. Instead, she asserted that the entire contractual relationship between her deceased husband, on the one hand, and Ameriprise and Evans on the other, was induced by fraud. The plaintiff argued that if she had not been misled or defrauded by Evans, no contractual relationship would have been formed with Ameriprise – and therefore, there would be no arbitration agreement. 22 Because the plaintiff’s claims of fraud go to the overall existence of a contract, we are required – because of the doctrine of severability – to presume that a valid arbitration agreement was formed by the parties. Accordingly, the question of fraud posed by the plaintiff must be weighed by the arbitrator. Therefore, we find no error by the circuit court on this point.
As we noted earlier, Syllabus Point 2 of State ex rel. TD Ameritrade, Inc. v. Kaufman requires a court to consider “whether the claims averred by the plaintiff fall within the substantive scope of that arbitration agreement.” 225 W. Va. at 251, 692 S.E.2d at 294. The plaintiff contends that her claims of “fraud, misrepresentation, detrimental reliance, etc.” are her own separate, distinct claims and do not arise out of the Ameriprise brokerage and portfolio accounts. Basically, she asserts she had a vested right in her husband’s 401(k) account but defendant Evans induced her, through false representations and to her detriment, to consent to allow money to be removed from the 401(k) and be transferred to the Ameriprise accounts. Hence, the plaintiff argues that her fraud-type claims do not fall within the substantive scope of the arbitration clauses. We reject the plaintiff’s argument because we perceive that the fraud-type claims, as they are asserted by the plaintiff in her amended complaint, are inexorably intertwined with the Ameriprise accounts. The plaintiff’s amended complaint specifically 23 alleges she was induced by fraudulent statements from defendant Evans that the plaintiff’s beneficiary status on the brokerage account “could not be changed in the future without her consent[.]” The plaintiff’s amended complaint also alleges that the fraudulent statements caused the funds from both the brokerage and portfolio accounts to be “wrongfully distributed” to the decedent’s children, defendants Kristina Nicholls and Stephen Bayles. Moreover, the plaintiff’s amended complaint sought damages including the “benefits due under said contract[s.]” As the plaintiff pleaded her amended complaint, the record supports the circuit court’s finding that the plaintiff’s claims were entirely within the scope of the Ameriprise arbitration clauses. The plaintiff’s claims pursue relief related, directly and indirectly, to the brokerage and portfolio account contracts. The claims seek to enforce terms of the account contracts – mainly, to compel Ameriprise to comply with her interpretation of Mr. Bayles’s contractual choice of beneficiary, and to compel the disbursement of the proceeds in the accounts to her. On this record, we find no error by the circuit court. 15 The plaintiff also asserts that the circuit court erred in finding that the 15 arbitration agreements were not unconscionable. We have reviewed the record and find no error by the circuit court. 24