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Independent Fraud Claim Cannot be Forced Into Arbitration

In its August 11, 2014 decision in Griswold v. Coventry First, LLC, et al. the Third Circuit affirmed the District Court’s decision that denied Defendant’s motion to compel arbitration, and held that Plaintiff, Lincoln T. Griswold, was not estopped from pursuing his fraud claim by rejecting arbitration.

Griswold purchased an $8.4 million life insurance policy in January of 2006, establishing a Lincoln T. Griswold Irrevocable Trust for the “sole and exclusive purpose” of maintaining ownership of the policy. Shortly thereafter the formation of the Trust, Griswold formed a limited liability partnership in Georgia, Griswold LLP, as the sole beneficiary of the policy. Upon the receipt of the proceeds from the life insurance policy, this limited liability partnership would be dissolved, and the trustee would then liquidate the property, satisfy the claims of creditors, and distribute remaining property to the partners. At the completion of this task, the trustee would file a “Cancellation of the Election to Become a Limited Liability Partnership” to terminate the partnership.

Concurrently, in January of 2006, the Trust sought the assistance of Mid-Atlantic Financial to identify and select a life-settlement broker to assist in the sale of Griswold’s life insurance policy. Mid-Atlantic appointed Kevin McGarrey, who was the individual that procured the life insurance policy for Griswold.

In March 2008, McGarrey located Coventry First LLC in Pennsylvania and proceeded to try and sell the policy to Coventry. It was alleged that during this time, McGarrey formed a “Secret Agreement” with Coventry that promised to pay McGarrey an increased commission of $145,000, as opposed to the acceptable commission of $84,000, if McGarrey prevented the search of future bids and did not pursue competitive buyers.

Without any further bids due to this secret agreement, Griswold sold his policy for $1.675 million to Coventry, $1.53 million for Coventry and $145,000 for McGarrey’s commission, although the broker compensation was not disclosed to the Trust or Griswold. Thereafter, the Griswold LLP was dissolved.

In 2010, Griswold learned of Coventry’s fraud and sued, both in his individual capacity and as the former majority partner of Griswold LLP. Coventry sought to dismiss or to proceed to arbitration as per the arbitration clause included within the purchase agreement. Griswold argued the arbitration clause was not applicable to his claim, and the District Court agreed..

Coventry’s main argument stood on the basis of “equitable estoppel,” in that although Griswold was not a direct signatory of the purchase agreement, because he had “indirectly” benefited from the sale, he should be held bound by the terms of the agreement. Thus, Griswold should be forced into arbitration through the terms of the contract. The doctrine of equitable estoppel prevents a nonsignatory from “cherry-picking” the provisions of a contract, and restricts their ability to “turn their back” on provisions of a contract they would rather not accept.

Affirming the District Court’s decision, the Third Circuit held that, because the Secret McGarrey Agreement, which initiated the fraud in the first place, began before and separately from the execution of the purchase agreement, the arbitration clause contained in the purchase agreement could not be enforced against Griswold. The secret agreement had never been incorporated into the purchase agreement, and thus Defendants are restricted from compelling arbitration upon Plaintiffs.

This decision serves as a reminder that, while courts would generally uphold and enforce an arbitration clause, they will not hesitate from refusing to enforce such a clause when it is used unfairly to force a party into arbitration for a tort claim that arises independently from the document containing the arbitration clause.

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