American Bar Association
Media Alerts
Media Alerts - Griswold v. Coventry First LLC - Third Circuit
Decrease font size
Increase font size
August 12, 2014
  Griswold v. Coventry First LLC - Third Circuit
Headline: Third Circuit Affirms Sidestep of Arbitration Clause in Life Settlement Fraud Case

Area(s) of Law: Corporations, Contracts, Standing, and Appellate Jurisdiction

Issues Presented: Whether the Third Circuit has appellate jurisdiction to review the District Court's denial of a motion to dismiss for lack of standing; and whether the District Court erred when it denied a motion to compel arbitration.

Brief Summary: Lincoln Griswold created a trust which engaged in a life settlement deal with Coventry First, LLC through Mid-Atlantic Financial and its broker, Kevin McGarrey. Mr. McGarrey entered into an allegedly fraudulent agreement with Coventry to refrain from seeking further bids for Griswold's life insurance policy and to report any competing offers and their terms, in exchange for the right to name his own commission. Upon finding out, Griswold sued Coventry for common law fraud, fraudulent concealment, conversion, aiding and abetting the breach of fiduciary duties, unjust enrichment, and violation of state life settlement acts, the Sherman Act, and RICO. Coventry, in response, moved to dismiss the case for lack of standing, or in the alternative, to compel arbitration pursuant to the purchase agreement. The District Court denied Coventry's motion to dismiss, finding that Griswold had standing due to possessing a proprietary interest in the property that was injured, and denied the alternative motion to compel arbitration, holding that the arbitration clause was "unenforceable as to Plaintiffs who are non-signatories." The Third Circuit found that it had neither interlocutory power nor could exercise pendent jurisdiction over the District Court's denial of the motion to dismiss. It also affirmed the denial of the motion to compel arbitration because Griswold was not a signatory to the original purchase agreement and because the alleged fraud stemmed from the antecedent agreement between McGarrey and Coventry.

Extended Summary: This case arises from an alleged fraud in connection with a life settlement, or the sale of a life insurance policy for more than its cash-surrender value, but less than the net death benefit. The purchaser pays the premiums until the death of the original policy owner, then collects the death benefits.

In January 2006, Griswold purchased an $8.4 million life insurance policy and established the Lincoln T. Griswold Irrevocable Trust (the Trust) under Georgia law for the "sole and exclusive purpose" of owning the policy and he disclaimed any personal "right, title or interest in or power, privilege or incident of ownership" in the trust property. He appointed Wells Fargo Bank to serve as Trustee. Two weeks later, Griswold named Griswold LLP as its sole beneficiary. According to the terms of the partnership agreement, Griswold LLP would dissolve once it fulfilled its limited purpose of receiving the proceeds of the life insurance policy.
In January 2006, the Trust appointed Mid-Atlantic Financial as its exclusive agent to "identify, select and appoint" a life-settlement broker, who then selected Kevin McGarrey. In March 2008, McGarrey contacted Coventry First LLC (Coventry), a Pennsylvania-based insurer, indicating that Griswold's life insurance policy was for sale and that he was the authorized broker for a commission of $84,000. Griswold alleges that Coventry rigged the bidding process by having McGarrey sign an agreement (the "Secret McGarrey Agreement") promising not to seek any further bids and to report any competing offers and their material terms to Coventry, which McGarrey did. In exchange, Coventry allegedly allowed McGarrey to "self-determine" his new commission of $145,000.

Coventry offered $1.675 million for the Griswold policy which included McGarrey's commission. Coventry and McGarrey did not disclose the amount of broker compensation to the Trust or to Griswold. On March 31, 2008, the Trust sold its policy to Coventry without having received a competing offer and the written purchase agreement contained a broad arbitration clause.

Once Coventry acquired the life insurance policy, the Trust dissolved, having fulfilled its sole purpose. The Trustee, Wells Fargo, then transferred the proceeds of the sale to Griswold LLP, the sole beneficiary. In December 2008, the partners of Griswold LLP filed a "Cancellation of Limited Liability Partnership Election" in Georgia state court pursuant to the LLP's partnership agreement.

In September 2010, after learning of Coventry's alleged fraud, Griswold sued Coventry, Coventry Group, Montgomery Capital, Coventry Financial, and Reid S. Buerger, Coventry's Executive Vice President, in Pennsylvania state court on behalf of himself, as the former majority partner of Griswold LLP, and on behalf of a class of persons who had sold their life insurance policies to these Defendants. Griswold alleged that Coventry's collusion with McGarrey to conceal his self-determined commission and rig the bidding process constituted common law fraud, fraudulent concealment, conversion, aiding and abetting the breach of fiduciary duties, unjust enrichment, and also violated state life settlement acts, the Sherman Act, and RICO.

Coventry removed the case to the Eastern District of Pennsylvania and moved to dismiss for lack of standing because neither Griswold himself nor Griswold LLP had signed the purchase agreement, only the Trust. In the alternative, Coventry moved to compel arbitration pursuant to the purchase agreement.

In response, Griswold filed an "Election to Revive and Reinstate and Otherwise Become a Limited Liability Partnership," followed by an Amended Complaint adding Griswold LLP as a Plaintiff. Coventry moved to dismiss the Amended Complaint. The District Court denied Coventry's motion to dismiss, finding that because "Griswold possesses a proprietary interest in the property of Griswold LLP that was injured, both Lincoln T. Griswold and the LLP have Article III standing." The District Court then denied Coventry's alternative motion to compel arbitration, holding that the arbitration clause was "unenforceable as to Plaintiffs who are non-signatories."

The Third Circuit first found that it had jurisdiction over the denial of the motion to compel arbitration stemming from 28 U.S.C. ยง 1332(d) and the Federal Arbitration Act (FAA). It then turned to the parties' dispute over whether it had appellate jurisdiction to review the District Court's denial of Coventry's motion for lack of standing. Coventry argued that, under Majestic Star Casino, LLC v. Barden Development, Inc., the court had both the authority and the obligation to review the denial since standing is a "threshold jurisdictional requirement." The court, however, distinguished the issue in Majestic from the case at bar since there the issue of standing had been first raised at appeal and was "inextricably intertwined with the merits of the case."

Instead, the court said, it must decide whether it is required to adjudicate a standing issue already decided by the District Court. The court found that once a district court has determined that plaintiff has standing, an appellate court has limited interlocutory power to review that determination. The court also rejected Coventry's argument that the court should exercise pendent jurisdiction over the District Court's ruling on standing since it had already exercised jurisdiction over the compelled arbitration motion. The standing issue, it said, turns on whether Griswold LLP remains in existence and can bring claims on behalf of the Trust as its sole beneficiary, whereas the question of arbitrability turns on whether Griswold LLP, a non-signatory to the purchase agreement, can be bound to its arbitration clause because it reaped the benefits of the contract. Because it could reach the arbitration question without addressing the standing question, "the jurisdictional question was not sufficiently intertwined with the merits of the appealable order, requiring us to 'exercise restraint' and forego review until the unrelated issue is appealable in its own right.'"

The court then turned to the issue of the District Court's denial of Coventry's motion to compel arbitration. Neither party disputed that the purchase agreement included a broad arbitration agreement requiring the parties to arbitrate any disputes arising out of the contract itself.

The court noted that, while the FAA does create a presumption in favor of arbitration clauses, that presumption does not extend to non-signatories to contracts who have not agreed to be bound by the clauses. However, Coventry argued that both Georgia and Pennsylvania law, as well as Third Circuit precedent, allow for non-signatories to be bound by arbitration agreements in contracts through equitable estoppel. The Third Circuit agreed, noting, however, that for that to occur the non-signatory party must: 1) have knowingly exploited the agreement containing the arbitration clause despite never having signed the agreement; or 2) have insisted on the arbitration clause itself due to "the close relationship between the entities involved, as well as the relationship of the alleged wrongs to the non[-]signatory's obligations and duties in the contract ... and [the fact that] the claims were intimately founded in and intertwined with the underlying contract obligations."

Because Griswold clearly did not insist on the arbitration clause himself, Coventry claimed that he was bound by the first of the above conditions because he "embrace[d] the agreement and directly benefit[ed] from it." Third Circuit precedent has established that, "A non-signatory can 'embrace' a contract in two ways: (1) by knowingly seeking and obtaining direct benefits from that contract; or (2) by seeking to enforce terms of that contract or asserting claims [based on the contract's other provisions]."

The Third Circuit disagreed with this analysis as applied to Griswold because in order to compel a non-signatory to arbitration, the claims must be based directly on the contract that contains the provision. The court found that the arbitration agreement in the purchase agreement did not bind Griswold here because the "contract" at issue on appeal is not the purchase agreement itself, rather the "Secret McGarrey Agreement" antecedent to, and separate from, the purchase agreement.
To read the full opinion, please visit: http://www2.ca3.uscourts.gov/opinarch/131879p.pdf.

Panel (if known): Ambro, Hardiman, and Greenway, Jr., Circuit Judges

Argument Date: January 14, 2014

Date of Issued Opinion: August 11, 2014

Docket Number: No. 13-1879

Decided: No appellate jurisdiction as to motion to dismiss, affirm denial of motion to compel

Case Alert Author: Aaron Spencer

Counsel: Counsel for the Appellants: Kannon K. Shaunmugam, (Argued), Steven D. Andrews, Kenneth J. Brown, Sarah K. Campbell, David Forkner, Marcie R. Ziegler, F. Warren Jacoby, and Jennifer M. McHugh; Counsel for the Appellees: Ronald J. Mann (Argued), Gerard M. McCabe, Daniel P. Goetz, R. Eric Kennedy, Mark D. Griffin, Thormon Petrov Griffin, Peter Hardin Levine, J. Matthew Linehan, and Christopher P. Thorman.

Author of Opinion: Judge Hardiman

Circuit: Third Circuit

Case Alert Supervisor: Prof. Susan L. DeJarnatt

    Posted By: Susan DeJarnatt @ 08/12/2014 03:58 PM     3rd Circuit  

FuseTalk Enterprise Edition - © 1999-2018 FuseTalk Inc. All rights reserved.

Discussion Board Usage Agreement

Back to Top