American Bankers Insurance v. Long ( 2006 )

Filed: July 20, 2006
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 05-1747
(CA-04-21790-3-GRA)
AMERICAN BANKERS INSURANCE GROUP, Incorporated,
Plaintiff - Appellant,
versus
RICHARD F. LONG; LILLIE M. LONG,
Defendants - Appellees.
O R D E R
The court amends its opinion filed July 14, 2006, as
follows:
On Page 8, first full paragraph, line 6, -- the words “error
or law” should read “error of law.”
On Page 11, Section IV., a period has been added at the end
of the first sentence.
For the Court
/s/ Patricia S. Connor
____________________________
Clerk
PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
AMERICAN BANKERS INSURANCE 
GROUP, INCORPORATED,
Plaintiff-Appellant,
v.  No. 05-1747
RICHARD F. LONG; LILLIE M. LONG,
Defendants-Appellees.

Appeal from the United States District Court
for the District of South Carolina, at Columbia.
G. Ross Anderson, Jr., District Judge.
(CA-04-21790-3-GRA)
Argued: May 24, 2006
Decided: July 14, 2006
Before WILKINS, Chief Judge, and WILLIAMS
and MICHAEL, Circuit Judges.
Reversed and remanded with instructions by published opinion. Judge
Williams wrote the opinion, in which Chief Judge Wilkins and Judge
Michael joined.
COUNSEL
ARGUED: Franklin G. Burt, JORDEN & BURT, L.L.P., Washing-
ton, D.C., for Appellant. S. Randall Hood, MCGOWAN, HOOD,
FELDER & JOHNSON, Rock Hill, South Carolina, for Appellees.
ON BRIEF: Kevin Hayne Sitnik, MCGOWAN, HOOD, FELDER &
JOHNSON, Columbia, South Carolina, for Appellees.
2 AMERICAN BANKERS INSURANCE v. LONG
OPINION
WILLIAMS, Circuit Judge:
Richard and Lillie Long (the Longs), signatories to a contract con-
taining an arbitration clause, sued American Bankers Insurance Group
(ABIG), a nonsignatory to the contract, on claims relating to a prom-
issory note issued to the Longs. ABIG filed a petition in the district
court seeking to compel the Longs to arbitrate their claims, and the
district court denied the petition. For the reasons that follow, we
reverse.
I.
On December 9, 2003, the Longs filed a class-action suit in the
Richland County (South Carolina) Court of Common Pleas against
ABIG and others alleging that ABIG participated in a scheme to
defraud investors through the sale of worthless securities. In particu-
lar, the Longs’ complaint alleged that Thaxton Life Partners (TLP)
sold automobile insurance policies underwritten by ABIG to the gen-
eral public and that because ABIG did not have enough funds to pay
claims on the policies, it persuaded TLP to offer approximately $18
million of worthless promissory notes to the public to fund the insur-
ance. As part of its fraudulent scheme, ABIG, knowing that TLP
would be unable to pay the promissory notes, structured them so that
it (ABIG) was in the position of first priority in the event of a default.
The Longs’ complaint further alleges that on or about August 19,
2003, the Longs purchased a $75,000 promissory note (the Note)
from TLP for a one-year term with a promised return of 10%. The
Note was appended to and its terms "incorporated . . . by reference"
in a document entitled "Form of Senior Subordinated Term Note Sub-
scription Agreement" (Subscription Agreement). (J.A. at 11.) The
Subscription Agreement contained an arbitration clause providing
"that any dispute, controversy or claim arising out of or in connection
with, or relating to, any subscription of the Note, or any breach or
alleged breach hereof, including allegations of violations of federal or
state securities law" shall be subject to arbitration. (J.A. at 14.) The
Longs and TLP were signatories to the Subscription Agreement;
ABIG was not. TLP later filed for bankruptcy protection in the Bank-
AMERICAN BANKERS INSURANCE v. LONG 3
ruptcy Court for the Middle District of North Carolina, and it
informed the Longs and other investors that it would neither pay
interest on the promissory notes nor return the principal investments.
The Longs’ state-court complaint alleges eleven individual and
class causes of action against ABIG arising out of its alleged partici-
pation in the fraudulent promissory-note scheme: (1) interference with
contract, (2) securities fraud, (3) negligence, (4) equitable subordina-
tion, (5) civil conspiracy, (6) unjust enrichment, (7) respondeat supe-
rior, (8) rescission, (9) participation and alter ego, (10) violation of
the South Carolina Unfair Trade Practices Act (SCUTPA), and (11)
aiding and abetting. In essence, these causes of action seek recovery
for: (1) ABIG’s alleged interference with TLP’s obligations under the
notes (interference with contract claim); (2) ABIG’s alleged failure to
disclose that TLP would be unable to pay the notes (securities fraud
and negligence claims); (3) ABIG’s alleged conspiracy with, and con-
trol over, TLP in issuing the notes and in insuring that TLP did not
make payments thereon (civil conspiracy); (4) ABIG’s allegedly
unlawful retention of the proceeds from the notes (unjust enrichment
and recission claims); and (5) ABIG’s alleged unfair trade practices
regarding the notes (SCUTPA claim).1 The Longs seek to recover
from ABIG actual damages, punitive damages and/or treble damages,
rescission of the notes, a declaratory judgment subordinating ABIG’s
interest in the notes, and attorney’s fees and costs. The Longs did not
name TLP as a party to the suit.
After the Longs filed their complaint, ABIG removed the suit to the
bankruptcy court where TLP’s bankruptcy proceeding was pending,
but the bankruptcy court remanded to state court. On August 5, 2004,
ABIG filed a petition to compel arbitration against the Longs in the
District Court for the District of South Carolina, see 9 U.S.C.A. § 4(West 1999) (providing that "[a] party aggrieved by the alleged fail-
ure, neglect, or refusal of another to arbitrate under a written agree-
ment for arbitration may petition any United States district court
which, save for such agreement, would have jurisdiction under Title
28, in a civil action or in admiralty of the subject matter of a suit aris-
1
The Longs’ claims for equitable subordination, respondeat superior,
participation and alter ego, and aiding and abetting relate to each of these
five categories of claims.
4 AMERICAN BANKERS INSURANCE v. LONG
ing out of the controversy between the parties, for an order directing
that such arbitration proceed in the manner provided for in such
agreement"), contending that it (ABIG) was entitled to enforce the
arbitration clause in the Subscription Agreement despite the fact it
was not a signatory thereto. In support of this contention, ABIG
argued, inter alia, that the Longs should be equitably estopped from
arguing that it was not a signatory to the arbitration clause because
each of the Longs’ individual causes of action in their underlying
complaint relied on the terms of the Note, which, as discussed, was
incorporated by reference into the Subscription Agreement (which, as
also discussed, contained the arbitration clause). The district court,
which had subject-matter jurisdiction over the petition, see 28
U.S.C.A. § 1332 (West Supp. 2005) (providing that "[t]he district
courts shall have original jurisdiction of all civil actions where the
matter in controversy exceeds the sum or value of $75,000, exclusive
of interest and costs, and is between . . . citizens of different States"),
denied the petition, holding that the Longs were not equitably estop-
ped from asserting that ABIG was not a signatory to the arbitration
clause because their individual causes of action in the underlying
complaint were based on theories of liability other than breach of the
obligations on the Note.
ABIG timely noted an appeal. We have jurisdiction under 9
§ U.S.C.A. 16 (West 1999) ("An appeal may be taken from . . . an
order . . . denying a petition under section 4 of this title . . . .").
II.
ABIG makes the same argument on appeal that it made to the dis-
trict court; viz., that the Longs should be equitably estopped from
arguing that it (ABIG) was not a signatory to the arbitration clause
because each of the Longs’ individual causes of action in their under-
lying complaint relied on the terms of the Note. We agree with ABIG.2
Before explaining why, however, we first discuss the legal principles
governing when a non-signatory to an arbitration clause may bind a
signatory to arbitration.
2
Because the parties have not asked us to do so, we express no opinion
on the arbitrability of the Longs’ class claims.
AMERICAN BANKERS INSURANCE v. LONG 5
A.
As a general matter, "arbitration is a matter of contract [interpreta-
tion] and a party cannot be required to submit to arbitration any dis-
pute which he has not agreed so to submit." Int’l Paper Co. v.
Schwabedissn Maschinen & Anlagen GMBH, 206 F.3d 411, 416 (4th
Cir. 2000). It is well-established, however, that a nonsignatory to an
arbitration clause may, in certain situations, compel a signatory to the
clause to arbitrate the signatory’s claims against the nonsignatory
despite the fact that the signatory and nonsignatory lack an agreement
to arbitrate.
One such situation exists when the signatory is equitably estopped
from arguing that a nonsignatory is not a party to the arbitration
clause. "Equitable estoppel precludes a party from asserting rights he
otherwise would have had against another when his own conduct ren-
ders assertion of those rights contrary to equity." Int’l Paper, 206
F.3d at 417-18 (internal quotation marks omitted). "In the arbitration
context, the doctrine recognizes that a party may be estopped from
asserting that the lack of [another’s] signature on a written contract
precludes enforcement of the contract’s arbitration clause when [the
party] has consistently maintained that other provisions of the same
contract should be enforced to benefit him." Id. at 418.
Applying these concepts, we have announced the following test for
determining when equitable estoppel applies against a signatory to an
arbitration clause:
[E]quitable estoppel applies when the signatory to a written
agreement containing an arbitration clause must rely on the
terms of the . . . agreement in asserting its claims against the
nonsignatory. When each of a signatory’s claims against a
nonsignatory makes reference to or presumes the existence
of the written agreement, the signatory’s claims arise out of
and relate directly to the written agreement, and arbitration
is appropriate.
Brantley v. Republic Mortgage Ins. Co., 424 F.3d 392, 395-96 (4th
Cir. 2005) (quoting MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942,
948 (11th Cir. 1999))(alterations, ellipses, and internal quotation
6 AMERICAN BANKERS INSURANCE v. LONG
marks omitted).3 Because this legal test examines the nature of the
signatory’s underlying allegations against the nonsignatory, courts
should examine the underlying complaint to determine whether estop-
pel should apply. See id. at 396 (denying application of estoppel
where the signatory-plaintiffs’ underlying "claims" did not rely on the
contract containing the arbitration clause).
The "legal principle [underlying the theory of equitable estoppel]
rests on a simple proposition: it is unfair for a party to rely on a con-
tract when it works to its advantage, and repudiate it when it works
to its disadvantage." Wachovia Bank, Nat. Ass’n v. Schmidt, 445 F.3d
762, 769 (4th Cir. 2006) (internal quotation marks and alterations
omitted). To be equitably estopped from denying the applicability of
an arbitration clause, therefore, the signatory need not necessarily
assert a cause of action against the nonsignatory for breach of the con-
tract containing the arbitration clause. Instead, estoppel is appropriate
if "in substance [the signatory’s underlying] complaint [is] based on
the [nonsignatory’s] alleged breach of the obligations and duties
assigned to it in the agreement," Sunkist Soft Drinks, Inc. v. Sunkist
Growers, Inc., 10 F.3d 753, 757 (11th Cir. 1993) (discussing Hughes
Masonry Co. v. Greater Clark County Sch. Bldg. Corp., 659 F.2d 836(7th Cir. 1981)), "regardless of the legal label assigned to the claim,"
J.J. Ryan & Sons, Inc. v. Rhone Poulenc Textile, S.A., 863 F.2d 315,
319 (4th Cir. 1988). See also R.J. Griffin & Co. v. Beach Club II
Homeowners Ass’n, Inc., 384 F.3d 157, 164 (4th Cir. 2004) (stating
that a party "may [not] use artful pleading to avoid arbitration").
Although not directly relevant here, it is also important to note that
just as estoppel can apply against a signatory to an arbitration clause
who sues a nonsignatory thereto, it can also apply against a nonsigna-
3
In addition to the legal test noted in the text, we have applied another
type of estoppel to estop a singatory from arguing that a nonsignatory is
not a party to an arbitration clause. See Brantley v. Republic Mortgage
Ins. Co., 424 F.3d 392, 396 (4th Cir. 2005) (holding that a second form
of "equitable estoppel is warranted when the signatory to the contract
containing the arbitration clause raises allegations of substantially inter-
dependent and concerted misconduct by both the nonsignatory and one
or more of the signatories to the contract"). We need not apply this sec-
ond type of equitable estoppel to decide this appeal.
AMERICAN BANKERS INSURANCE v. LONG 7
tory who sues a signatory. See, e.g., R.J. Griffin, 384 F.3d at 160-64;4
Int’l Paper, 206 F.3d at 416-18. In such a situation, however, we have
stated, in language different from Brantley’s "rely on" test, that a non-
signatory will be estopped when his underlying claims seek a "direct
benefit" from the contract containing the arbitration clause, R.J. Grif-
fin, 384 F.3d at 162. Although R.J. Griffin’s language is different
from Brantley’s, the "direct benefit" test, similar to the "rely on" test,
recognizes that a nonsignatory should be estopped from denying that
it is bound by an arbitration clause when its claims against the signa-
tory "arise[ ] from" the contract containing the arbitration clause. Id.5
With these principles in mind, we return to ABIG’s argument.
B.
ABIG argues that the Longs should be estopped from arguing that
4
In R.J. Griffin & Co. v. Beach Club II Homeowners Ass’n, Inc., 384
F.3d 157 (4th Cir. 2004), the court dealt with both scenarios — a signa-
tory seeking to estop a nonsignatory and a nonsignatory seeking to estop
a signatory. For purposes of our discussion, the first scenario is the most
relevant.
5
Other courts have held that the "direct benefit" test also recognizes
that a nonsignatory to an arbitration clause may benefit from the contract
containing the arbitration clause — and should therefore be estopped
from arguing that it is not a party thereto — in ways other than the asser-
tion of claims based on the contract. See, e.g., Am. Bureau of Shipping
v. Tencara Shipyard S.P.A., 170 F.3d 349, 353 (2d Cir. 1999) (applying
the "direct benefit" test to estop a nonsignatory from denying that an
arbitration clause applied to it when the nonsignatory received substan-
tial benefits from the contract containing the arbitration clause, including
lowered insurance rates). We need not express an opinion on such a
holding to decide this case, because the status of the parties here is
reversed from cases like Tencara Shipyard — ABIG (a nonsignatory) is
attempting to estop the Longs (signatories) — and Brantley’s "rely on"
test does not authorize estoppel to apply against a signatory in such situa-
tions. See Wachovia Bank, Nat. Ass’n v. Schmidt, 445 F.3d 762, 771 (4th
Cir. 2006) ("The fact that a signatory receives benefits from a contract
[other than the ability to assert claims based on the contract] is . . . insuf-
ficient . . . to estop it from asserting that a nonsignatory is not entitled
to invoke the contract’s arbitration clause.").
8 AMERICAN BANKERS INSURANCE v. LONG
it is not a signatory to the arbitration clause because the Longs’ indi-
vidual claims rely on the terms of the Note and, because the Note is
incorporated by reference into the Subscription Agreement, the Longs
are inequitably seeking both to enforce the duties created by the Sub-
scription Agreement and deny the Subscription Agreement’s arbitra-
tion clause. In response, the Longs argue that equitable estoppel
should not apply because their individual claims were based on theo-
ries of liability other than breach of the Note.
We generally review de novo the district court’s decision on a peti-
tion to compel arbitration. Long, 248 F.3d at 315. When, however, the
district court’s decision is based on principles of equitable estoppel,
we review the district court’s decision for abuse of discretion. See
Brantley, 424 F.3d at 395. The district court abuses its discretion
when it commits an error of law or clearly errs in making a finding
of fact. See Thorn v. Jefferson Pilot Life Ins. Co., 445 F.3d 311, 317
(4th Cir. 2006); Hill v. G.E. Power Sys., Inc., 282 F.3d 343, 348 (5th
Cir. 2002).
In support of ABIG’s contention that the Longs are equitably
estopped from arguing that it is a nonsignatory to the arbitration
clause, ABIG contends that when, as here, a nonsignatory to a con-
tract containing an arbitration clause is seeking to estop a signatory,
Brantley’s "rely on" test — not the "direct benefit" test applied in R.J.
Griffin — should apply, and that the "rely on" test is less exacting
than the "direct benefit" test. While the Longs do not contest ABIG’s
argument that Brantley’s "rely on" test is less exacting than R.J. Grif-
fin’s "direct benefit" test, they contend that R.J. Griffin’s "direct bene-
fit" test applies both when a signatory is attempting to estop a
nonsignatory and when a nonsignatory is attempting to estop a signa-
tory.
It is true, as ABIG points out, that our cases have applied Brant-
ley’s "rely on" test when the issue was whether a signatory to the con-
tract containing the arbitration clause should be estopped, Schmidt,
445 F.3d at 769-771; Brantley, 424 F.3d at 396, and R.J. Griffin’s "di-
rect benefit" test when the issue was whether a nonsignatory to the
contract should be estopped, see R.J. Griffin, 384 F.3d at 166; Int’l
Paper, 206 F.3d at 418. Where, as here, however, the issue is whether
the underlying claims are such that the party asserting them should be
AMERICAN BANKERS INSURANCE v. LONG 9
estopped from denying the application of the arbitration clause, any
difference in the two tests is more semantic than substantive. Both
tests examine whether the plaintiff has asserted claims in the underly-
ing suit that, either literally or obliquely, assert a breach of a duty cre-
ated by the contract containing the arbitration clause. Compare
Brantley, 424 F.3d at 396 (noting that equitable estoppel applies when
the signatory’s claims "arise out of" the contract containing the arbi-
tration clause (internal quotation marks omitted)) with R.J. Griffin,
384 F.3d at 162 (noting that equitable estoppel does not apply when
the nonsignatory sues on theories that "arise from" tort law, not the
contract containing the arbitration clause). Whether such examination
is called a "direct benefit" test or a "rely on" test, the inquiry is ulti-
mately the same.
ABIG next contends that even if the "rely on" and "direct benefit"
tests are identical for purposes of this case, estoppel is proper here
because the Longs’ individual claims essentially allege that the duties
created by the Note were breached. The Longs argue that estoppel is
not proper because they do not assert a claim for breach of the Note.
In support of their counter-argument, the Longs point to R.J. Grif-
fin. There, a builder had entered into a contract containing an arbitra-
tion clause with the landowner to build condominiums. 384 F.3d at
159. After the landowner sold the individual units, the new unit own-
ers complained that the units leaked water, and they sued the builder
in state court for negligence and breach of the implied warranty of
good workmanship. Id. The builder filed a petition to compel arbitra-
tion of the owners’ lawsuit, asserting that the owners should be equi-
tably estopped from claiming that the arbitration clause did not apply
to them because their state-court claims depended on the existence of
the contract containing the arbitration clause. Id. at 160. On appeal of
the district court’s denial of the petition, we rejected this argument,
concluding that the owners’ underlying suit did not seek a "direct ben-
efit" from the contract, id. at 161,6 because their negligence and war-
6
As discussed, this holding is tantamount to a holding that the owners’
suit did not "rely on" the building contract for purposes of Brantley
because the owners’ allegedly inequitable conduct was their simulta-
neous assertion of rights under the building contract and denial of the
contract’s arbitration clause.
10 AMERICAN BANKERS INSURANCE v. LONG
ranty causes of action were not based on any breach of the contract,
but were instead based on duties created by state tort law. Id. at 162-
63. The Longs argue that, like the owners in R.J. Griffin, their under-
lying complaint does not allege that ABIG breached a duty created by
the Note.
We disagree. The Longs’ underlying complaint is different from
the owners’ complaint in R.J. Griffin in a significant way. In R.J.
Griffin, the duties that the builder owed the owners (and allegedly
breached by the faulty construction of the condominiums) were cre-
ated entirely by state tort law; if the builder and landowner had never
entered into the building contract, the builder still could have been lia-
ble in tort to the owners. Id. Here, by contrast, if TLP had never
issued the Note, the Longs would have no basis for recovery against
ABIG. Each of the Longs’ individual claims — interference with con-
tract, securities fraud and negligence, civil conspiracy, unjust enrich-
ment and recission, and violation of SCUTPA — are dependent upon
their allegation that ABIG breached a duty created "solely by [the
Note]", id. at 164, for without the alleged breach of the Note, the
Longs would have no cause to complain. And although each of the
Longs’ individual claims is phrased in tort, the Longs "may [not] use
artful pleading to avoid arbitration," because, at root, those claims
attempt "to hold [ABIG] to the terms of [the Note]." Id.Accordingly, we conclude that the Longs’ individual claims "rely
on" the terms of Note, Brantley, 424 F.3d 395, and that because the
Note was incorporated into the Subscription Agreement, it would be
inequitable to allow the Longs to seek recovery on their individual
claims and at the same time deny that ABIG was a party to the Sub-
scription Agreement’s arbitration clause. The district court made a
legal error in concluding otherwise, and it thereby abused its discre-
tion.
III.
Although the Longs are equitably estopped from arguing that
ABIG is not a party to the arbitration clause, estoppel does not pre-
clude a party from making the quite different argument that its claims
do not fall within the scope of the arbitration clause. Nevertheless, our
conclusion that the Longs’ underlying complaint "rel[ies] on" the
AMERICAN BANKERS INSURANCE v. LONG 11
Subscription Agreement, Brantley, 424 F.3d at 395, forecloses any
argument that the Longs’ claims do not fall within the scope of the
arbitration clause, see Am. Recovery Corp. v. Computerized Thermal
Imaging, Inc., 96 F.3d 88, 93 (4th Cir. 1996) (noting that similarly-
worded arbitration clause encompassed all disputes having a "signifi-
cant relationship" to the contract in which the arbitration clause is
contained).
IV.
For the foregoing reasons, we reverse and remand for further pro-
ceedings consistent with this opinion.
REVERSED AND REMANDED WITH INSTRUCTIONS