Court Opinion

ID: 4531739
Source: CourtListenerOpinion
Date Created: 2020-05-05 15:20:17.562484+00
Date Added: 2024-06-11T12:29:25.740267
License: Public Domain

FILED
                                                              MAY 5, 2020
                                                     In the Office of the Clerk of Court
                                                    WA State Court of Appeals, Division III

         IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
                            DIVISION THREE

DAVID TERRY INVESTMENTS, LLC-                )         No. 36792-4-III
PRC, a Washington State limited liability    )
company, and DAVID TERRY, a married          )
individual,                                  )
                                             )
                     Respondent,             )
                                             )
              v.                             )         PUBLISHED OPINION
                                             )
HEADWATERS DEVELOPMENT                       )
GROUP LIMITED LIABILITY                      )
COMPANY, a Washington State limited          )
liability company; STONERIDGE                )
CONTRACTORS LLC, a Washington                )
State limited liability company; SG          )
SPADY CONSULTING &                           )
CONSTRUCTION MANAGEMENT,                     )
LLC, a Washington State limited liability    )
company; PARK ROAD COMMONS                   )
LLC, a Washington State limited liability    )
company; STEVE SPADY, an individual,         )
and LAURA L. KOGER, an individual,           )
                                             )
                     Appellants.             )

       LAWRENCE-BERREY, J. — Washington has a strong public policy that favors

arbitration. This policy supports broadly construing arbitration clauses in contracts when
No. 36792-4-III
David Terry Inv. v. Headwaters Dev. Grp.

such construction is reasonable and consistent with the parties’ intent. We depart from

the holding of McClure v. Davis Wright Tremaine, 77 Wash. App. 312, 890 P.2d 466

(1995), which followed the minority approach in construing somewhat similar arbitration

clauses narrowly.

       We also recognize the principle of “equitable estoppel” in the context of a

signatory to a contract requiring arbitration, who attempts to avoid arbitration by bringing

an action against a nonsignatory. We follow numerous other courts that conclude a

signatory to a contract, requiring arbitration, may not take advantage of the benefits of the

contract while avoiding its burden, i.e., arbitration.

       In the context of this case, we reverse the trial court’s order that mostly denied the

defendants’ motion to compel arbitration and conclude the dispute between the parties

should be referred to arbitration in accordance with their various joint venture agreements

that require arbitration of disputes “over this Agreement.”

                                           FACTS

       This dispute involves three joint venture agreements to develop separate properties

in Spokane—Park Road, Dakota Street, and Market Street.

       David Terry is the managing member of plaintiff David Terry Investments, LLC-

PRC (DTI), whose role in the joint venture was to provide financing for the development

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David Terry Inv. v. Headwaters Dev. Grp.

of the three properties. Steve Spady is the managing member of various entities whose

roles in the joint venture were to (1) own the three properties,1 (2) provide construction

management advice,2 and (3) act as the licensed general contractor.3 Park Road

Commons, LLC (PRC) was a holding company created by Terry for tax purposes and was

a subsidiary of both DTI and HDG. We will refer to these four entities as the Spady

entities.

       Throughout the latter part of 2013, DTI executed separate joint venture agreements

for each of the three properties with SG Spady Consulting, and separate joint venture

agreements for each of the three properties with HDG. Each of the six agreements

contains the following provision:

       In a dispute over this Agreement, the dispute shall be submitted to
       arbitration before a local Spokane County Arbitrator who is mutually agreed
       amongst the parties. Arbitration shall be governed under the rules outlined
       under the Uniform Arbitration Act unless the parties agree otherwise.

Clerk’s Papers (CP) at 29, 36, 43, 52-53, 62, 72-73) (emphasis added). The agreements

require them to be construed as a whole, according to their fair meaning, without regard

to who drafted them. They also contain addenda that set forth DTI’s payment

       1
            Headwaters Development Group, LLC (HDG).
       2
            SG Spady Consulting & Construction Management, LLC (SG Spady Consulting).
       3
            Stoneridge Contractors, LLC (Stoneridge).

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David Terry Inv. v. Headwaters Dev. Grp.

responsibilities to HDG and SG Spady Consulting and those two companies’ performance

obligations to DTI. DTI did not sign a joint venture agreement with Stoneridge, PRC, or

Spady individually.

       On August 21, 2018, Spady wrote to Terry. In that letter, Spady declared DTI in

breach of its obligations to fund the three projects and requested arbitration of the dispute.

He asserted he had received offers to purchase the Park Road and the Dakota Street

properties and requested DTI’s assistance in removing its “cloud on the title.” CP at 78.

In exchange, he promised to deposit a specified portion of the sale proceeds in escrow,

pending the result of arbitration. He also requested DTI to remove its “cloud of title”

from the Market Street property to assist him in selling it. CP at 78. In response, Terry

and DTI commenced this action in Spokane County Superior Court.

       To determine whether the claims are subject to arbitration, it is necessary for us to

set forth in detail the allegations in the first amended complaint, which was the subject of

the motion to compel arbitration. The allegations are:

              3.4     Spady’s proposal [to Terry] involved three properties that he
       was in the process of developing through different entities that he
       controlled, namely [HDG], Stoneridge, SG Spady Consulting, and [PRC].
       These three properties consisted of [Park Road, Market Street, and Dakota
       Street]. Spady represented that he was a qualified and competent contractor
       with the ability to work on and develop the properties quickly and within
       budget. He stated that, with funds invested by Terry, [HDG] could develop
       the properties and make money for both Terry and Spady. Spady also made

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      representations as to the present value of the properties (that turned out to
      be untrue). As a result of those representations, Terry, through DTI, made
      initial investments of approximately $800,000.00 with [HDG]. In return for
      the initial investments, as well as potential future investments, Spady
      promised that DTI would receive an ownership stake in all three properties.
       Spady also promised to diligently develop the properties so that DTI would
      get a return on its investment. Further, Spady and [HDG] were to keep
      track of and report progress to Terry and DTI.
               3.5    Also as a result of the aforementioned representations,
      Terry—on behalf of DTI—signed three Joint Venture Agreements with
      [HDG] concerning the Park Road Property, the Market Street Property, and
      the Dakota Street Property. Terry/DTI relied on Spady/[HDG’s]
      representations in deciding to enter in these agreements.
               3.6    . . . Spady concealed the fact that he and his businesses were
      financially distressed, that he and his businesses lacked the requisite
      knowledge and expertise to develop properties, and that he and his
      businesses had no ability to property [sic] manage the logistical and
      financial aspects of property development. Spady also did not reveal that he
      and his businesses had problems with the Internal Revenue Service and had
      not been filing taxes.
               3.7    . . . Spady, individually and on behalf of [HDG], never
      actually intended to abide by his promises to DTI and keep up his end of the
      bargain. Rather, he was just looking for a source of funds that he could use
      to pay off his existing creditors and enrich himself.
               3.8    . . . [From 2014 to the middle of 2018], DTI invested
      [millions of dollars] based on representations from Spady/[HDG] regarding
      the necessity of such expenditures, their provision of status reports, copies
      of invoices, and other documentation. . . .
               3.9    By mid-2018, DTI’s total investment with [HDG] amounted
      to approximately $5.5 million. DTI typically invested this money by
      transferring it to a shared account with [HDG], with the agreement that the
      fund transfers would only be used for specific development purposes.
               ....
               3.11 [Around the end of 2017], Terry and DTI . . . realized that
      [HDG] and Spady had been sending them falsified documents concerning
      the projects all along. . . . Spady/[HDG] had been improperly transferring

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David Terry Inv. v. Headwaters Dev. Grp.

       and spending DTI funds . . . [and] had been transferring these funds to
       Spady personally, to Stoneridge, SG Spady Consulting and [PRC]. . . .
               3.12 Spady’s and [HDG’s]misuse, misappropriation, and
       mishandling of DTI and Terry’s funds also constituted breaches of the three
       Joint Venture Agreements. Pursuant to these agreements, DTI gained a
       50% share in the Market Street Property, a 50% share in the Park Road
       Property, and a 25% share in the Dakota Street Property in exchange for
       certain sums of money. Further, [HDG] was obligated to spend DTI’s
       funds for specific expenses and purposes, and also had to put forth efforts to
       develop the three properties. [HDG] did not spend the funds as agreed.
       [HDG] frustrated the purposes of the [joint venture] agreements by not
       keeping proper books and accounting, which, inter alia, made it impossible
       for the joint ventures to secure financing for the construction projects.

CP at 101-04 (emphasis added).

       Based on these allegations, Terry and DTI asserted the following causes of action:

(1) fraud (against Spady and HDG), (2) unjust enrichment (against all Spady entities),

(3) conversion (against all Spady entities), and (4) breach of contract (against HDG).

       The Spady entities4 filed a motion to compel arbitration and to stay the trial court

proceeding. Terry and DTI opposed the motion and urged the trial court to narrowly

construe the arbitration clause as excluding their noncontract claims. They also filed a

motion to compel discovery and a motion to allow the filing of a second amended

       4
        By oversight, the Spady entities omitted Stoneridge both from their caption and
from their motion. We deem this oversight unintentional and construe the motion as
including a request by Stoneridge to arbitrate.

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complaint, and set those motions to be heard immediately following the Spady entities’

motion to compel arbitration.

       The trial court narrowly construed the arbitration clause and ordered only DTI’s

breach of contract claim against HDG to arbitration. It retained jurisdiction of the

noncontract claims against the Spady entities and granted Terry’s and DTI’s requested

motions.

       Several days later, the Spady entities timely appealed.

                                       ANALYSIS

       A.     THE SPADY ENTITIES’ MOTION TO COMPEL ARBITRATION

       In 2005, Washington enacted chapter 7.04A RCW, Washington’s “Uniform

Arbitration Act.” The act applies to this dispute. See RCW 7.04A.030(1).

       Whether a controversy is subject to an agreement to arbitrate is a question for the

court, not the arbitrator. RCW 7.04A.060(2). We review a trial court’s decision to grant

or deny a motion to compel arbitration de novo. Townsend v. Quadrant Corp., 173
Wash. 2d 451, 455, 268 P.3d 917 (2012).

       Washington has a strong policy favoring arbitration. Godfrey v. Hartford Cas. Ins.

Co., 142 Wash. 2d 885, 892, 16 P.3d 617 (2001); Davidson v. Hensen, 135 Wash. 2d 112, 117-

18, 954 P.2d 1327 (1998); Boyd v. Davis, 127 Wash. 2d 256, 262, 897 P.2d 1239 (1995).

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But even so, arbitration is a matter of contract, and a party cannot be required to arbitrate

a dispute he or she has not agreed to arbitrate. Satomi Owners Ass’n v. Satomi, LLC, 167
Wash. 2d 781, 810, 225 P.3d 213 (2009).

       The material portion of the arbitration clause at issue provides: “In a dispute over

this Agreement, the dispute shall be submitted to arbitration . . . .” See CP at 29, 36, 43,

52-53, 62, 72-73 (emphasis added).

       The trial court ordered only DTI’s breach of contract claim against HDG to

arbitration. We organize our analysis of the issues briefed by the parties as follows:

(1) whether the arbitration clause required DTI’s noncontract claims against HDG and SG

Spady Consulting to be submitted to arbitration, (2) whether the claims brought by Terry

must be arbitrated, and (3) whether DTI’s claims against Stoneridge, Spady, and PRC

must be arbitrated.

              1.      DTI’s noncontract claims asserted against HDG & SG Spady

Consulting

       The trial court declined to compel arbitration of DTI’s noncontract claims against

HDG and SG Spady Consulting, despite both companies having contracts with DTI that

contained agreements to arbitrate. In declining, the trial court relied on McClure v. Davis

Wright Tremaine, 77 Wash. App. 312.

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David Terry Inv. v. Headwaters Dev. Grp.

       There, the contract provision required arbitration of “‘[a]ny dispute, controversy or

claim [1] arising out of or [2] in connection with, or [3] relating, to this Agreement . . . .’”
Id. at 314. The McClure court, citing one federal district court authority, noted “‘relating

to’” is broader than “‘arising out’” of a contract. Id. at 314. Choosing the broadest of

the three phrases, the McClure court held that the phrase “‘relating to’” encompassed a

claim for breach of fiduciary duty. Id. at 315.

       Here, the trial court construed “over this Agreement” and concluded the phrase

more closely resembled “arising out of” than “relating to.” For this reason, it construed

“over this Agreement” narrowly and concluded the parties had not intended to include

noncontract claims in the scope of the arbitration provision.

       We can discern little distinction between the three phrases, “arising out of,”

“relating to,” and “over this.” We disagree with McClure and instead agree with the vast

majority of jurisdictions that these and similar phrases should be construed broadly.

       In Digital Landscape, Inc. v. Media Kings, LLC, 2018 COA 142, 440 P.3d 1200,

cert. denied, 2019 WL 2178082, an appellate court in Colorado, thoroughly analyzed a

split within the federal circuits of whether “arising out of” and “relating to” should be

similarly construed. Its conclusions were: The First, Third, Fifth, Sixth, Seventh, Eighth

and Eleventh federal circuits had concluded the two phrases should be similarly and

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broadly construed. Id. at 1207-09. The Ninth and federal circuits had concluded “arising

out of” should be more narrowly construed than “relating to.” Id. at 1206-07. And the

Second Circuit, although not overruling its adherence to the minority view, had

recognized the minority view is “‘inconsisten[t] with federal policy favoring

arbitration.’” Id. at 1207 (alteration in original) (quoting S.A. Mineracao Da Trindade-

Samitri v. Utah Int’l, Inc., 745 F.2d 190, 194 (2d Cir. 1984)).

       We adopt the majority view for three reasons. First, as noted previously,

Washington has a strong policy favoring arbitration. The majority view better effectuates

this policy.

       Second, RCW 7.04A.901 requires courts, when construing the Uniform

Arbitration Act, to consider “the need to promote uniformity of the law with respect to its

subject matter among states that enact it.” We best promote uniformity by adopting the

clear majority view. See also Townsend, 173 Wash. 2d at 456-57 (recognizing this policy of

uniformity and adopting the approach set forth in the commentary to the Uniform

Arbitration Act).

       Third, our primary goal when construing contract language is to discern the

parties’ intent. Hearst Comm’ns, Inc. v. Seattle Times Co., 154 Wash. 2d 493, 503, 115 P.3d
262 (2005). Parties select arbitration to achieve an inexpensive and efficient resolution of

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their disputes. Godfrey, 142 Wash. 2d at 892. This goal is thwarted by a process that

permits a financially advantaged party to split claims involving the same core facts into

two forums. Unless the parties clearly state a desire to pursue related claims in two

forums, courts should not do it for them. See Sweet Dreams Unlimited, Inc. v. Dial-A-

Mattress Int’l, Ltd., 1 F.3d 639, 642 (7th Cir. 1993) (if parties want to split potential

claims, they should specifically state in their contract which claims should be subject to

arbitration and which should not).

       We conclude that a dispute “over this Agreement” is as broad as a dispute “relating

to the Agreement” or “arising under the Agreement.” DTI’s noncontract allegations

against HDG and SG Spady Consulting all relate to the three joint venture agreements.

The central component of the amended complaint’s allegations involve the three joint

venture agreements—the formation thereof, the performance thereof, and the breach

thereof. The disposition of each cause of action will involve similar evidence. We

conclude DTI’s noncontract claims against HDG and SG Spady Consulting must be

litigated in one forum—arbitration.5

       5
        The trial court properly adhered to the only controlling authority on this issue,
McClure, 77 Wash. App. at 314-15. We are not so bound. See In re Pers. Restraint of
Arnold, 190 Wash. 2d 136, 148-50, 410 P.3d 1133 (2018) (the Court of Appeals is not
bound by “horizontal stare decisis”; conflicts within the Court of Appeals are resolved by
the Supreme Court).

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              2.     Claims brought by Terry

       Terry did not sign any of the six agreements in his individual capacity but seeks to

recover monies he invested in the project through DTI. As we noted previously, a party

cannot be required to arbitrate a dispute he or she has not agreed to arbitrate. Satomi

Owners Ass’n, 167 Wash. 2d at 810. “However, courts have recognized limited exceptions

to this rule, including the principle of equitable estoppel.” Townsend, 173 Wash. 2d at 461.

“Equitable estoppel ‘precludes a party from claiming the benefits of a contract while

simultaneously attempting to avoid the burdens that contract imposes.’” Id. (internal

quotation marks omitted) (quoting Mundi v. Union Sec. Life Ins. Co., 555 F.3d 1042,

1045-46 (9th Cir. 2009)).

       The Townsend court discussed application of equitable estoppel to nonsignatories

to a contract requiring arbitration. In Townsend, parents and children sued a homebuilder

for serious construction defects that caused personal injuries relating to mold, pests, and

poisonous gases. Id. at 454. The parents had contracted with the homebuilder to build

the house, and the contract contained a clause that required arbitration of claims arising

out of or related to the construction contract. Id. The four-justice lead opinion, and a

fifth justice in a concurrence, held that whether the arbitration agreement was

procedurally unconscionable, as the parents claimed, must be determined by an arbitrator.

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David Terry Inv. v. Headwaters Dev. Grp.
Id. at 460, 464 n.4. The five-justice concurring/dissenting opinion addressed the other

issue, whether the nonsignatory children were also required to arbitrate. The majority on

this issue declined to apply equitable estoppel against the children. The majority

concluded the children’s pursuit of personal injury claims outside of arbitration was not

inequitable because their rights arose wholly independent of the building contract. Id. at

465-66.

         But here, application of equitable estoppel against Terry is proper. Terry chose to

invest money in HDG through his company, DTI. His claims are as intimately tied to the

joint venture agreements as are the claims asserted by DTI. He alleges the Spady entities

induced him to invest in the projects and then failed to perform as promised and misused

his investment proceeds in ways not contemplated by the joint venture agreements. He is

essentially seeking the benefit of the contractual promises the Spady entities made to DTI.

We hold it would be inequitable for Terry to accept the benefit of the contract, i.e., the

promises made in the joint venture agreements, while avoiding its burden, i.e., an

agreement to arbitrate. To the extent DTI must pursue its claims in arbitration, so must

Terry.

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David Terry Inv. v. Headwaters Dev. Grp.

              3.     Noncontract claims against Stoneridge, Spady, and PRC

       Stoneridge, Spady and PRC did not sign the joint venture agreements. Washington

courts have not addressed the application of equitable estoppel in the context presented

here, where a signatory to a contract requiring arbitration seeks to avoid arbitration by

bringing claims against nonsignatories. In Metalclad Corp. v. Ventana Environmental

Organizational Partnership, 109 Cal. App. 4th 1705, 1 Cal. Rptr. 3d 328 (2003), the

appellate court in California discussed this very issue.

       “[T]he equitable estoppel doctrine applies when a party has signed an agreement to

arbitrate but attempts to avoid arbitration by suing nonsignatory defendants for claims that

are ‘based on the same facts and are inherently inseparable’ from arbitrable claims

against signatory defendants.” Id. at 1713 (internal quotation marks omitted) (quoting

Sunkist Soft Drinks, Inc. v. Sunkist Growers, Inc., 10 F.3d 753, 757 (11th Cir. 1993)).

“Courts applying equitable estoppel against a signatory have ‘looked to the relationships

of persons, wrongs and issues, in particular whether the claims that the nonsignatory

sought to arbitrate were intimately founded in and intertwined with the underlying

contract obligations.’” Id. (internal quotation marks omitted) (quoting Choctaw

Generation Ltd. P’ship v. Am. Home Assurance Co., 271 F.3d 403, 406 (2d Cir. 2001)).

Federal circuits have applied the doctrine of equitable estoppel to compel arbitration of a

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No. 36792-4-III
David Terry Inv. v. Headwaters Dev. Grp.

signatory’s claims against a nonsignatory in multiple cases. Choctaw Generation Ltd.

P’ship, 271 F.3d at 406; J.J. Ryan & Sons, Inc. v. Rhone Poulenc Textile, S.A., 863 F.2d
315, 320-21 (4th Cir. 1988); Grigson v. Creative Artists Agency, LLC, 210 F.3d 524, 527

(5th Cir. 2000); Hughes Masonry Co. v. Greater Clark County Sch. Bldg. Corp., 659 F.2d
836, 838-39 (7th Cir. 1981); In re Boon Global Ltd., 923 F.3d 643, 654 n.5 (9th Cir.

2019); McBro Planning & Dev. Co. v. Triangle Elec. Constr. Co., 741 F.2d 342 (11th Cir.

1984).

         Here, DTI’s claims against Stoneridge and PRC are based only on allegations that

those companies received funds misappropriated by HDG. Whether HDG

misappropriated funds largely depends on the contractual rights and responsibilities

between DTI and HDG. We conclude DTI’s claims against Stoneridge and PRC are

sufficiently intertwined with the joint venture agreements so as to require arbitration.

         Similarly, DTI’s claims that Spady made false representations before and during

the joint venture agreements are sufficiently intertwined with the joint venture

agreements. Spady and HDG are substantially the same “person,” and DTI’s allegations

against them involve the same asserted wrongs and issues—all intimately intertwined

with the joint venture agreements. We conclude DTI’s claims against Spady are such that

equitable estoppel also requires those claims to be pursued in arbitration.

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       MOTIONS TO AMEND AND COMPEL DISCOVERY

       The Spady entities contend the trial court erred when it granted plaintiffs’ motions

to amend their complaint and to compel discovery. Those motions were granted the same

day the court ruled on the Spady entities’ motion to compel arbitration. The Spady

entities argue the denial of the motion to compel arbitration was appealable as of right,

RAP 2.2(a)(3), and if we reverse that ruling, then these two other orders are void ab

initio. We disagree.

       A trial court generally retains full authority to consider and rule on whatever

motions are presented to it until a party files a notice of appeal. RAP 7.1. The trial court

was not required to wait 30 days to see if the Spady entities timely appealed the

unfavorable ruling. The trial court had authority to consider and rule on the two

additional motions until the Spady entities filed their notice of appeal several days later.

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David Terry Inv. v. Headwaters Dev. Grp.

       Reversed in part; remanded for the trial court to enter an order compelling

arbitration of all claims and to stay the proceedings.

                                                   Lawrence-Berrey, J.
WE CONCUR:

? . ;,_ \ C..T.
Pennell, C.J.

Andrus, J. 6

       6
        The Honorable Beth Andrus is a Court of Appeals, Division One, judge sitting in
Division Three under CAR 21(a).

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