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Silverwood Partners, LLC v. Wellness Partners, LLC

Appeals Court of Massachusetts, Middlesex

July 25, 2017

SILVERWOOD PARTNERS, LLC
v.
WELLNESS PARTNERS, LLC.[1]

          Heard: May 9, 2017.

         Civil action commenced in the Superior Court Department on November 4, 2015.

         A motion to dismiss was heard by Elizabeth M. Fahey, J.

          Michael Paris for the plaintiff.

          Christopher Robertson for the defendant.

          Present: Agnes, Massing, & Lemire, JJ.

          MASSING, J.

         In this appeal we consider whether the doctrine of equitable estoppel bars the plaintiff corporation, which agreed to arbitrate its claims against the two principals of the defendant corporation, from litigating nearly identical claims against the defendant corporation itself. In the circumstances of this case, we hold that it does.

         Background.

         The plaintiff, Silverwood Partners, LLC (Silverwood), initiated this lawsuit alleging that its former employees, Nicolas McCoy and Michael Burgmaier, breached their contractual and fiduciary duties by secretly creating a competing firm -- the defendant Wellness Partners, LLC, doing business as Whipstitch Capital (Whipstitch) -- stealing Silverwood's clients, converting Silverwood's property, and diverting Silverwood's business opportunities to Whipstitch.

         Silverwood, a broker-dealer registered with the Securities and Exchange Commission (SEC), is a member of the Financial Industry Regulatory Authority, Inc. (FINRA). McCoy and Burgmaier are registered with FINRA and, as senior executives with Silverwood, had the status of FINRA "associated persons." Whipstitch is not a member of FINRA. Silverwood's original complaint named McCoy, Burgmaier, and Whipstitch as defendants.[2]The three codefendants filed a motion to dismiss, or in the alternative to stay the proceedings, on the ground that Silverwood's claims fell within the scope of FINRA's mandatory arbitration provision, which governed McCoy's and Burgmaier's relationship with Silverwood. In response, Silverwood filed a first amended complaint in which it dropped McCoy and Burgmaier as parties, leaving Whipstitch as the sole defendant.[3]Whipstitch filed a renewed motion to dismiss or stay, maintaining that Silverwood was equitably estopped from proceeding against Whipstitch outside of arbitration. A Superior Court judge allowed Whipstitch's motion to dismiss on the ground that "the entire matter is required to be arbitrated."[4]

         According to the allegations in Silverwood's amended complaint, McCoy's and Burgmaier's employment relationship with Silverwood was governed by Silverwood's "Supervisory Procedures and Compliance Manual, " attached as an exhibit to the complaint and referred to as the "[a]greement." The agreement makes it clear that McCoy's and Burgmaier's duties to Silverwood and its clients were substantially governed by SEC and FINRA rules and regulations. For example, the complaint alleges that McCoy and Burgmaier agreed to comply with the agreement's outside business activity restriction, a provision required by FINRA rule 3270 and its supplemental requirements. Silverwood also alleged that McCoy and Burgmaier made false and misleading public statements in violation of FINRA rules. Indeed, references to FINRA rules, restrictions, and mandates appear on nearly every page of the agreement.

         Under the agreement, Silverwood's employees are required to be "appropriately registered with and licensed by FINRA." McCoy and Burgmaier were required to file an initial "Form U4" (U4 registration form) -- FINRA's "Uniform Application for Securities Industry Registration or Transfer" -- and to amend the U4 registration form "upon the occurrence of an event that requires an update, " including any changes in outside business activities.

         FINRA, pursuant to its rule 13200, [5] requires arbitration of claims between or among its members and associated person, and the agreement incorporates mandatory FINRA arbitration. A section of the agreement entitled "U4 Disclosure to Associated Persons" explains that FINRA rules require Silverwood to provide each associated person with a written statement "indicating that the [U4 registration form] contains a predispute arbitration clause." Silverwood's chief compliance officer is responsible "for verifying that each associated person has signed a predispute arbitration clause certification." McCoy's and Burgmaier's U4 registration forms included the certification, "I ...


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