In Bellman v. I3Carbon, LLC, No. 12-1275 (10th Cir. May 29, 2014) (click here for a copy of the decision), two plaintiffs filed claims for securities fraud, based upon alleged misstatements and omissions made at the time of their investment in a Colorado LLC. In connection with the investment, the defendants provided the plaintiff investors with a binder of hundreds of pages of documents, including an Operating Agreement and a separate Subscription Agreement. These documents contained conflicting provisions regarding dispute resolution. The Operating Agreement contained an arbitration clause, and the plaintiffs never signed this agreement. The binder also included a Subscription Agreement, which contained a forum selection clause providing that all disputes be adjudicated by a court in Colorado. One of the plaintiffs signed this Subscription Agreement.
The district court found, and the Tenth Circuit affirmed, that the defendants had not demonstrated that an enforceable arbitration agreement existed. It was undisputed that the binder of documents contained conflicting provisions (an arbitration clause and a forum selection clause), and the only signed document was the Subscription Agreement, which contained the forum selection clause. Both the district court and Tenth Circuit found no meeting of the minds with respect to an arbitration agreement.
The defendants also raised an equitable estoppel argument: the plaintiffs should be estopped from denying the existence of an arbitration clause in a contract when the plaintiffs have received benefits from the contract and seek to enforce the contract. The district court and Tenth Circuit both rejected this equitable estoppel argument. The courts reasoned that the plaintiffs had never agreed for the investment transaction to be governed by the Operating Agreement, and the plaintiffs never received benefits from the Operating Agreement. Also, the plaintiffs were not asserting claims for breach of the Operating Agreement or trying to enforce any rights under the Operating Agreement. Hence, the equitable estoppel argument did not apply.
The Tenth Circuit also acknowledged that a circuit split existed regarding the appellate standard of review when a district court rejects equitable estoppel arguments in connection with denying a motion to compel arbitration. Some circuits have applied an abuse of discretion standard for appellate review because estoppel is an equitable theory, while other circuits have engaged in de novo appellate review. The Tenth Circuit found it was not necessary to resolve this issue of appellate review because the equitable estoppel arguments were invalid here regardless of the appellate standard.
The enforceability of the arbitration agreement in this case seemed doomed from the start because of the conflicting dispute resolution provisions in the large binder of investment documents, and such conflicting provisions should not exist in connection with a transaction. However, even if there had been no conflicting terms, it looks like the Tenth Circuit, with its formulaic reasoning, still would have rejected the equitable estoppel argument because of the sheer number of documents and contracts involved. Instead of hundreds of pages of different agreements in the binder, it seems the Tenth Circuit may have been more willing to accept an equitable estoppel argument and enforce the arbitration clause had there been one single, governing, comprehensive contract covering the entire investment and containing an arbitration clause.