Heard: May 9, 2017.
action commenced in the Superior Court Department on November
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.
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.
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.
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.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.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."
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.
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
pursuant to its rule 13200,  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