Scruggs v. Wyatt


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Docket Number: 2010-CA-00122-SCT
Linked Case(s): 2010-CA-00122-SCT
Oral Argument: 02-09-2011
 

 

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Supreme Court: Opinion Link
Opinion Date: 03-31-2011
Opinion Author: Randolph, J.
Holding: Reversed and remanded.

Additional Case Information: Topic: Contract - Arbitration - Non-signatory party - Direct-benefit estoppel - Fee-sharing participant - Standing to compel arbitration - Clean hands doctrine
Judge(s) Concurring: Waller, C.J., Dickinson, P.J., Lamar, Chandler and Pierce, JJ.
Non Participating Judge(s): Carlson, P.J., Kitchens and King, JJ.
Procedural History: Motion to Compel Arbitration
Nature of the Case: CIVIL - CONTRACT

Trial Court: Date of Trial Judgment: 01-16-2010
Appealed from: Lafayette County Circuit Court
Judge: Edward C. Prisock
Disposition: Following hearing, the circuit court found the arbitration provision broad enough in scope to cover the instant controversy, yet overruled the Scruggs Defendants' Motion to Compel Arbitration and To Stay Pending Completion of Arbitration. The circuit court reasoned that there is no agreement between Wyatt and the Scruggs Defendants to arbitrate since Wyatt did not sign the Katrina JVA nor was his particular involvement foreseeable as a third-party beneficiary. From that ruling, the Scruggs Defendants timely filed their Notice of Appeal.

  Party Name: Attorney Name:  
Appellant: Richard F. Scruggs and SLF, Inc.




PAUL BOWIE WATKINS, JR., J. CAL MAYO, JR., POPE SHANNON MALLETTE



 

Appellee: Derek A. Wyatt MICHAEL D. SIMMONS, DONNA MARIE MEEHAN  

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Topic: Contract - Arbitration - Non-signatory party - Direct-benefit estoppel - Fee-sharing participant - Standing to compel arbitration - Clean hands doctrine

Summary of the Facts: In December 2006, Derek A. Wyatt entered into an unwritten employment agreement with Nutt & McAlister, PLLC. Nutt & McAlister was a member of the Katrina Joint Venture (which also included the Scruggs Law Firm, PA) a joint venture governed by the “In Re: Katrina Joint Venture Agreement” and created to bring lawsuits on behalf of those “denied insurance coverage for property damage arising out of Hurricane Katrina.” The Katrina JVA included an arbitration provision. In April 2008, all Katrina Joint Venture attorneys and associates were disqualified from Mississippi federal court cases against State Farm Insurance Company in which they were involved, based upon payments to material witnesses in hurricane-damage claims which were likely to become the subject of litigation. Following that disqualification, Nutt & McAlister, despite Wyatt’s protest, withdrew from the Katrina Joint Venture and relinquished its interest in all cases related thereto. Wyatt’s First Amended Complaint was filed in June 2009, against Scruggs and SLF, Inc. Wyatt asserted that he is a “fee sharing participant” and a “fee sharing attorney” in the Katrina Joint Venture; that he has a “fee-sharing interest in the Katrina Joint Venture”; and that the defendants have a “fee sharing relationship” with him. Wyatt further maintained that his employment with Nutt & McAlister was within the scope of the Katrina Joint Venture’s business such that, as co-venturers, the Scruggs Defendants were “jointly and severally liable with Nutt & McAlister for its breach of fiduciary duty and breach of its fee-sharing agreement with Wyatt.” In response, the Scruggs Defendants filed a “Motion to Compel Arbitration and To Stay Pending Completion of Arbitration.” The circuit court found the arbitration provision “broad enough in scope to cover the instant controversy,” yet overruled the Scruggs Defendants’ motion. The Scruggs Defendants appeal.

Summary of Opinion Analysis: Under the Federal Arbitration Act, the Court considers whether the parties intended to arbitrate the dispute, and second, if they did intend to arbitrate, whether legal constraints external to the parties’ agreement foreclosed the arbitration of those claims. Wyatt does not challenge the validity of the arbitration provision itself, but instead argues that there was no agreement to arbitrate between himself and the Scruggs Defendants. Furthermore, this exact arbitration provision has been held in a prior case to be valid and enforceable. Wyatt was not a signatory party to the Katrina JVA, although he claims that he was a “fee sharing participant” thereto. Since arbitration provisions are contractual in nature, the general rule is that a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit. However, a non-signatory party may be bound to an arbitration agreement if so dictated by the ordinary principles of contract and agency. For example, a signatory may enforce an arbitration agreement against a non-signatory if the non-signatory is a third-party beneficiary or if the doctrine of estoppel applies. Direct-benefit estoppel involves non-signatories who, during the life of the contract, have embraced the contract despite their non-signatory status, but then, during litigation, attempt to repudiate the arbitration clause in the contract. A non-signatory can embrace a contract containing an arbitration clause in two ways: by knowingly seeking and obtaining direct benefits from that contract, or by seeking to enforce the terms of that contract or asserting claims that must be determined by reference to that contract. In light of the “fee-sharing participant”-type language throughout the Complaint, the factual allegations in Wyatt’s Complaint clearly touch matters covered by the Katrina JVA. The foundation of Wyatt’s lawsuit is premised upon a dispute with Nutt & McAlister over his compensation (fee share) directly tied to successful recovery by the Katrina Joint Venture against its client’s insurers. As such, Wyatt’s claims against the Scruggs Defendants are directly dependent on the Katrina JVA, and require reference thereto. Even if Wyatt claims that the Scruggs Defendants are jointly and severally liable with Nutt & McAlister as joint venturers, the fount of such alleged joint and several liability flows from the Katrina JVA, which was the sole and only agreement of the members of the Katrina Joint Venture. As Wyatt’s claims against the Scruggs Defendants are “determined by reference to” the Katrina JVA, the direct-benefit estoppel theory requires the nonsignatory claimant, Wyatt, to arbitrate his claims against the Scruggs Defendants. Alternatively, Wyatt argues that Scruggs, individually, has no standing to compel arbitration because he was not individually identified as a party to the Katrina JVA and did not even sign the Katrina JVA on behalf of The Scruggs Law Firm. The arbitration provision in the Katrina JVA is broad, applying to “[a]ny dispute arising under or relating to the terms of this agreement . . . .” Furthermore, Wyatt’s claims against Scruggs necessarily require reference to the Katrina JVA. Thus, Scruggs, individually, may enforce the arbitration provision. Wyatt argues that because the Scruggs Defendants are seeking to enforce an arbitration clause that Scruggs previously entered into a criminal conspiracy to enforce in another lawsuit, then they should be estopped from invoking that same arbitration provision in this case. The clean hands doctrine prevents a complaining party from obtaining equitable relief in court when he is guilty of willful misconduct in the transaction at issue. As the clean-hands doctrine focuses upon willful misconduct in the transaction at issue, it is inapplicable here.


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