Legacy Carbon, LLC v. Potter

Filing 28

ORDER DENYING WITHOUT PREJUDICE PETITION TO COMPEL ARBITRATION OF THIRD-PARTY CLAIMS AGAINST TIFFANY POTTER re 1 - Signed by JUDGE SUSAN OKI MOLLWAY on 8/28/2017. "Based on the present record, the petition to compel arbitration is denied without prejudice. Legacy Carbon may file an amended petition within thirty days of the date of this order. If no amended petition is filed by the deadline, judgment against Legacy Carbon will be automatically entered." (emt, )CERTIFICATE OF SERVICEParticipants registered to receive electronic notifications received this document electronically at the e-mail address listed on the Notice of Electronic Filing (NEF). Participants not registered to receive electronic notifications were served by first class mail on the date of this docket entry

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
LEGACY CARBON LLC,

)
)
Petitioner,
)
)
vs.
)
)
TIFFANY POTTER,
)
)
Respondent.
_____________________________ )

CIVIL NO. 17-00231 SOM-KJM
ORDER DENYING WITHOUT
PREJUDICE PETITION TO COMPEL
ARBITRATION OF THIRD-PARTY
CLAIMS AGAINST TIFFANY POTTER

ORDER DENYING WITHOUT PREJUDICE PETITION TO COMPEL ARBITRATION
OF THIRD-PARTY CLAIMS AGAINST TIFFANY POTTER
I.

INTRODUCTION.
The main issue before this court is whether Tiffany

Potter, President of Streamline Consulting Group LLC, is
compelled to arbitrate claims brought against her in her
individual capacity by Legacy Carbon LLC.

Legacy Carbon and

Potter ask this court to rule on the present petition based on
the papers.

The petition is denied.

However, Legacy Carbon may

file an amended petition within thirty days of the date of this
order.
Any amended petition must include an exhibit clearly
and thoroughly identifying all claims Legacy Carbon proposes to
pursue against Potter in her individual capacity.
must include the factual basis for each claim.

1

This exhibit

If the amended

motion seeks discovery, the specific discovery and the legal
authority to conduct discovery must be set forth.
II.

BACKGROUND.
On January 3, 2014, Streamline Consulting Group, a

District of Columbia limited liability company, entered into a
contract with Hawaiian Legacy Carbon LLC.
Agreement”).

(“Services

See Petition to Arbitrate, Exhibit A, ECF No. 1-2,

PageID #s 16-18.

See also Streamline Consulting Group LLC v.

Legacy Carbon LLC, Civ. No. 15-00318 SOM-KSC, 2016 WL 347301,
at *1 (D. Haw. Jan. 27, 2016).

The Services Agreement states

that Streamline “is a consulting practice managing information,
communication, due diligence services, and capacity building for
private or public sector entities that develop eco-assets.”
No. 1-2, PageID # 16.

ECF

It says that Hawaiian Legacy Carbon, also

known as Legacy Carbon, “through its affiliate[,] Hawaiian
Legacy Hardwoods, is a project developer that plants trees,
restores degraded land, provides ecotourism, and creates
products in the form of RFID tacks and ecosystem service
credits.”

Id.
Pursuant to the Services Agreement, Streamline was to

“assist in implementing [Legacy Carbon’s] business plan.”

Id.

In return, Legacy Carbon and Hawaiian Legacy Hardwoods promised
to pay a fee of 3.5% of the “awarded project funding.”
2

Id.

The Services Agreement has an arbitration clause
stating:
Any controversy or claim arising out of, or
relating to this agreement, or breach thereof,
which is not settled amicably by and between the
signatories within a period of 30 days shall be
settled through binding arbitration in accordance
with the laws of the defending state.
Id., PageID # 18.
In early January 2014, the Services Agreement was
signed on behalf of Legacy Carbon by Jeffrey Dunster, its cofounder, and on behalf of Streamline by Tiffany Potter, its
President.

Id.
On or about December 17, 2013, a few weeks before the

Services Agreement was executed, Hawaiian Legacy Hardwoods,
entered into a Non-Circumvention Agreement with Streamline.
id.; see also Petition to Arbitrate, Exhibit E, ECF No. 1-6,
PageID #s 109-13.

According to the terms of the agreement,

Hawaiian Legacy Hardwoods agreed not to
circumvent, avoid, bypass, or obviate directly or
indirectly, the creation or pursuit of the
Collaboration [defined as the mutually beneficial
business relationship that might involve third
parties] by entering into any direct or indirect
negotiations, communications, or transactions
with, or by soliciting or accepting any business
or financing from or on behalf of an Introduced
Party . . . .

3

See

ECF No. 1-6, PageID # 111.

Hawaiian Legacy Hardwoods promised

to pay Streamline a fee of 20% of the total value of money
involved if it breached this non-circumvention provision.

Id.

The Non-Circumvention Agreement was executed by
Dunster on behalf of Legacy Hardwoods, LLC, even though it was
Hawaiian Legacy Hardwoods that was listed as a party to the
agreement, 1 see id., PageID # 109, and by Potter on behalf of
Streamline, see id., PageID # 113.
On October 21, 2014, Streamline sent a demand for
arbitration of its claims that the Services Agreement and NonCircumvention Agreement had been breached.

The demand went to

Legacy Carbon LLC, dba Hawaii Legacy Carbon, dba Hawaiian Legacy
Hardwoods.

See Exhibit B, ECF No. 1-3, PageID #s 20-22.

The

Legacy entities responded that only Legacy Carbon, the company
that had signed the Services Agreement, was subject to the
mandatory arbitration provision.
PageID #s 64-69.

See Exhibit C, ECF No. 1-4,

The parties chose former Hawaii Supreme Court

Associate Justice James Duffy as their arbitrator.

See

Streamline Consulting Group LLC, 2016 WL 347301, at *3.

1

In an order filed on January 27, 2016, in a related
case, this court discussed piercing the corporate veil, alter
ego, and joint tortfeasor liability with respect to the Legacy
parties. See Streamline Consulting Group LLC, 2016 WL 347301,
at *2-3.
4

In light of a dispute about which parties were subject
to arbitration, Streamline commenced a suit in this court
against the following entities:

Legacy Carbon LLC, dba Hawaiian

Legacy Carbon; Hawaiian Legacy Reforestation Initiative, dba
Hawaiian Legacy Hardwoods, dba Hawaiian Legacy Forests, dba,
Legacy Forest, dba Legacy Trees; HLH LLC, aka Hawaiian Legacy
Hardwoods, LLC; Legacy Hardwoods, Inc., aka Hawaiian Legacy
Hardwoods, Inc.; Legacy Holdings LLC, aka Hawaiian Legacy
Holdings, LLC; and Jeffrey Dunster individually (“Legacy
Defendants”).

See id. at *1; see also Exhibit H, ECF No. 1-9,

PageID #s 150-82.

Legacy Defendants sought dismissal of certain

claims and an order compelling arbitration of other claims.
Exhibit J, ECF No. 1-11, PageID #s 184-328; Exhibit K, ECF No.
1-12, PageID #s 331-53.

Streamline filed a countermotion

seeking to compel arbitration of all claims.

Exhibit L, ECF No.

1-13, PageID #s 355-95.
On January 27, 2016, this court compelled arbitration
of claims arising under both the Services Agreement and the NonCircumvention Agreement.
WL 347301, at *5-6.

Streamline Consulting Group LLC, 2016

However, the court retained jurisdiction to

decide which Legacy Defendants were bound by the arbitration
provision in the Services Agreement.

Id. at *7.

Faced with

litigation over which Legacy Defendants were required to
5

arbitrate, the parties entered into a Stipulation to Stay the
Proceedings Pending Arbitration and to Refer All Issues to
Arbitration (“Stipulation”).
PageID #s 420-22.

See Exhibit N, ECF No. 1-15,

The parties agreed that “all [Legacy]

Defendants will submit to arbitration.”

Id., PageID # 421.

The

parties also agreed to refer to arbitration “(i) all Plaintiff’s
claims that were or could have been raised in this action; (ii)
all [Legacy] Defendants’ defenses, counterclaims, and thirdparty claims that could have been raised in this action; and
(iii) all Plaintiff’s defenses that could have been raised in
this action.”

Id.

This court approved the Stipulation, which

was signed by attorney John Winnicki on behalf of Streamline,
and by attorney Christopher Muzzi on behalf of all Legacy
Defendants.

See id., PageID # 422.

Thereafter, the parties raised with the arbitrator the
issue of whether claims against Potter, who had not been
individually named in the earlier lawsuit filed in this court,
were arbitrable.

The arbitrator stayed arbitration proceedings

to allow the present motion asking this court to compel
arbitration of claims against Potter.
III.

ANALYSIS.
The Federal Arbitration Act (“FAA”) governs

arbitration agreements in contracts involving interstate
6

commerce.

See 9 U.S.C. § 2.

Under the FAA, arbitration

agreements “shall be valid, irrevocable, and enforceable, save
upon such grounds as exist at law or in equity for the
revocation of any contract.”

Id.

“A party aggrieved by the

alleged failure, neglect, or refusal of another to arbitrate
under a written agreement for arbitration may petition” a
federal district court with jurisdiction “for an order directing
that such arbitration proceed in the manner provided for in such
agreement.”

Id. § 4.

A.

This Court, Not an Arbitrator, Should Decide
Whether the Arbitration Agreement and/or
Stipulation Binds Potter, Who Did Not
Individually Sign Those Agreements.

There are two categories of “gateway issues” on a
petition to compel arbitration.

See Martin v. Yasuda, 829 F.3d

1118, 1122-23 (9th Cir. 2016).

The first category concerns the

“question of arbitrability,” or rather, “whether the parties
have submitted a particular dispute to arbitration.”

Howsam v.

Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002).

“This

category includes issues that the parties would have expected a
court to decide such as ‘whether the parties are bound by a
given arbitration clause’ or whether ‘an arbitration clause in a
concededly binding contract applies to a particular type of
controversy.’”

Martin, 829 F.3d at 1123 (quoting Howsam, 537

U.S. at 84); see, e.g., First Options of Chicago, Inc. v.
7

Kaplan, 514 U.S. 938, 943-46 (1995) (determining that a court
should decide which parties agreed to arbitration); Atkinson v.
Sinclair Ref. Co., 370 U.S. 238, 241-45 (1962) (ruling that a
court should decide whether the term “grievances” in the
arbitration agreement covered claims for damages for breach of a
no-strike agreement).

These gateway matters are “for judicial

determination unless the parties clearly and unmistakably
provide otherwise.”

Howsam, 537 U.S. at 83 (quoting AT&T

Techs., Inc. v. Comms. Workers, 475 U.S. 643, 649 (1986)).
The second category of gateway issues relates to
procedural questions that “grow out of the dispute and bear on
its final disposition.”

Id. at 84 (quoting John Wiley & Sons,

Inc. v. Livingston, 376 U.S. 543, 546-47 (1964)).

These

procedural disputes, which may include issues such as waiver,
delay, or similar defenses to arbitrability, “are presumptively
not for the judge, but for an arbitrator to decide.”

Id.

Legacy Carbon asks this court to compel Potter to
arbitrate third-party claims it proposes to assert against her.
This is not a procedural question bearing on the final
disposition of the third-party claims.

Rather, it falls within

the first category of gateway disputes reserved for judicial
determination.

The record does not demonstrate that the parties

have “clearly and unmistakably” agreed to submit the question of
8

the arbitrability of claims against Potter individually to
arbitration.

See First Options of Chicago, Inc., 514 U.S. at

943 (“Just as the arbitrability of the merits of a dispute
depends upon whether the parties agreed to arbitrate that
dispute, . . . so the question ‘who has the primary power to
decide arbitrability’ turns upon what the parties agreed about
that matter.” (citations omitted)).

Accordingly, it falls to

this court to determine whether claims against Potter are
arbitrable and whether Potter is bound by the Services Agreement
and/or Stipulation.
B.

The Present Record Does Not Establish That Claims
Against Potter Are Subject to Arbitration.

The court turns first to the question of whether the
claims in issue are arbitrable because they fall within the
scope of a valid arbitration agreement.

See Mitsubishi Motors

Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985)
(“[T]he first task of a court asked to compel arbitration of a
dispute is to determine whether the parties agreed to arbitrate
that dispute.”).

Questions of arbitrability are addressed in

favor of arbitrability such that “any doubts concerning the
scope of arbitrable issues should be resolved in favor of
arbitration.”

Id. (quoting Moses H. Cone Mem’l Hosp. v. Mercury

Constr. Corp., 460 U.S. 1, 24-25 (1983)).

“Thus, as with any

other contract, the parties’ intentions control, but those
9

intentions are generously construed as to issues of
arbitrability.”

Id.

The arbitration clause in the Services Agreement
provides, “Any controversy or claim arising out of, or relating
to this agreement, or breach thereof, which is not settled
amicably by and between the signatories within a period of 30
days shall be settled through binding arbitration in accordance
with the laws of the defending state.”
PageID # 18.

ECF No. 1-2,

Claims against Potter, even if arising out of or

relating to the Services Agreement, are not expressly and
unambiguously identified in the Services Agreement.
On February 13, 2015, during arbitration proceedings,
Legacy Carbon nevertheless asserted third-party claims against
Potter, alleging breach of the duty of good faith and fair
dealing and negligence/intentional misrepresentation relating to
Potter’s individual conduct under the Services Agreement.
ECF No. 1, PageID # 6; ECF No. 1-7, PageID #s 134-39.
On September 2, 2016, the court approved and filed a
Stipulation to Stay the Proceeding Pending Arbitration and to
Refer All Issues to Arbitration, which was signed by counsel for
both Streamline and all named Legacy Defendants, including
Legacy Carbon.

ECF No. 59, PageID # 621.

Potter does not

appear to have been expressly named as a party to the
10

Stipulation in her individual capacity, although the signatories
stipulated and agreed to refer to arbitration all of Legacy
Defendants’ “third-party claims that could have been raised in
this action.”

Id.

It is not clear what was contemplated when Streamline
and all Legacy Defendants agreed to arbitrate all Legacy
Defendants’ “third-party claims that could have been raised in
this action.”

Although Potter, as Streamline’s President,

presumably knew that claims against her might have been
contemplated, this court cannot tell what was intended with
respect to Potter when Streamline and Legacy Defendants entered
into the Stipulation.

Additionally, this court is unable to

determine exactly what claims Legacy Carbon now seeks to pursue
against Potter in arbitration, and whether such claims must be
resolved by an arbitrator.
Potter appears to have signed the Services Agreement
containing the arbitration clause on behalf of Streamline as its
President, not in her individual capacity.
PageID # 18.

See ECF No. 1-2,

Similarly, counsel for Streamline signed the

Stipulation on behalf of only the LLC, not Potter in her
individual capacity.

Although federal law establishes a strong

policy in favor of compelling arbitration, see Mitsubishi Motors
Corp., 473 U.S. at 625, arbitration is “a matter of contract and
11

a party cannot be required to submit to arbitration any dispute
which he has not agreed so to submit.”

AT&T Techs., Inc., 475

U.S. at 648 (quoting Steelworkers v. Warrior & Gulf Navigation
Co., 363 U.S. 574, 582 (1960)).
However, the Ninth Circuit has recognized that
“nonsignatories of arbitration agreements may be bound by the
agreement under ordinary contract and agency principles.”
Letizia v. Prudential Bache Secs., Inc., 802 F.2d 1185, 1187
(9th Cir. 1986).

“Among these principles are ‘1) incorporation

by reference; 2) assumption; 3) agency; 4) veil-piercing/alter
ego; and 5) estoppel.’”

Comer v. Micor, Inc., 436 F.3d 1098,

1101 (9th Cir. 2006) (quoting Thomson-CSF, S.A. v. Am.
Arbitration Ass’n, 64 F.3d 773, 776 (2d Cir. 1995)).

“In

addition, nonsignatories can enforce arbitration agreements as
third party beneficiaries.”

Id.

This court turns to the theories argued here:
assumption, agency, and estoppel (direct benefits and judicial).
Incorporation by reference and veil piercing/alter ego theories
have not been advanced.
1.

Assumption.

In the absence of a signature, a party may be bound by
an arbitration clause if subsequent conduct indicates that the
party is assuming the obligation to arbitrate.
12

Invista S.A.R.L.

v. Rhodia, S.A., 625 F.3d 75, 85 (3d Cir. 2010); see also
Thomson-CSF, S.A. v. Am. Arbitration Assoc., 64 F.3d 773 (2d
Cir. 1995).

“[N]on-signatories may assume the obligations

contained in an arbitration clause where there is a sufficiently
close relationship to justify doing so, and the circumstances
warrant that result.”

Invista S.A.R.L., 625 F.3d at 85.

In Gvozdenovic v. United Air Lines, Inc., 933 F.2d
1100, 1105 (2d Cir. 1991), the court held that flight attendants
had manifested a clear intention to arbitrate a dispute because
the flight attendants had sent a representative to act on their
behalf during arbitration proceedings and did not object to the
process, refuse to arbitrate, or make any attempt to seek
judicial relief.
Potter was Streamline’s President when the LLC entered
into the Stipulation.

But Streamline’s agreement to the terms

of the Stipulation does not, on its own, make Potter clearly
required to arbitrate claims against her personally.

Absent

additional conduct indicating that Potter clearly assumed an
obligation to arbitrate, this court declines to apply the
assumption theory to the present record.

13

2.

Agency.

Legacy Carbon asserts that Potter acted as
Streamline’s agent and therefore is subject to the arbitration
provision in the Services Agreement and to the Stipulation.
Agency theory may justify applying an arbitration
clause to a nonsignatory.

See Creative Telecomms., Inc. v.

Breeden, 120 F. Supp. 2d 1225, 1240-41 (D. Haw. 1999).

“Federal

courts have consistently afforded agents, employees, and
representatives the benefit of arbitration agreements entered
into by their principals to the extent that the alleged
misconduct relates to their behavior as officers or directors or
in their capacities as agents of the corporation.”

Id. at 1240.

Courts have followed “the well-settled principle affording
agents the benefits of arbitration agreements made by their
principal.”

Arnold v. Arnold Corp.-Printed Comms. for Bus., 920

F.2d 1269, 1282 (6th Cir. 1990).

See, e.g., id. (holding that

corporate officers and directors were bound by an arbitration
agreement when the allegedly wrongful behavior related to their
capacities as agents of the corporation); Letizia, 802 F.2d at
1187 (holding that a broker’s nonsignatory employees were
entitled to an agreement’s arbitration clause in a lawsuit in
which the plaintiff asserted claims of fraud and federal

14

securities violations against his brokerage account executive
and supervisor).
Courts have reasoned that, if agents could not invoke
arbitration provisions signed by their principals, then a party
could easily “avoid the practical consequences of an agreement
to arbitrate by naming nonsignatory parties [as defendants] in
his complaint or signatory parties in their individual
capacities only,” which would effectively nullify an arbitration
agreement.

Arnold, 920 F.2d at 1281 (citation omitted).
However, the Ninth Circuit has not expressly addressed

the situation in which a signatory seeks to invoke an
arbitration clause against a nonsignatory agent.

Indeed, few

courts have relied on an agency theory in that situation.

See,

e.g., Bel-Ray Co. v. Chemrite Ltd., 181 F.3d 435, 445-46 (3d
Cir. 1999) (declining to bind an agent who had not signed the
underlying agreement to the agreement’s arbitration clause);
Legacy Wireless Servs., Inc. v. Human Capital, L.L.C., 314 F.
Supp. 2d 1045, 1054-55 (D. Or. 2004) (hesitating to apply the
agency exception when a signatory plaintiff sought to compel a
nonsignatory defendant to arbitrate).
Under agency law, “Unless otherwise agreed, a person
making or purporting to make a contract with another as agent
for a disclosed principal does not become a party to the
15

contract.”

Legacy Wireless Servs., Inc., 314 F. Supp. 2d at

1054 (quoting Restatement (Second) of Agency § 320).

Potter was

apparently acting on behalf of a disclosed principal and, absent
more, is not bound to the terms of the contract under agency
law.

See id.

Arbitration is generally contractual in nature,

making agency principles applicable when a signatory seeks to
compel a nonsignatory agent to arbitrate claims.

See id.

“Basic fairness principles more readily favor holding a
signatory to a contract to which it specifically agreed.”

Id.

at 1055 (citing Bel-Ray Co., 181 F.3d at 445, and Clausen v.
Watlow Elec. Mfg. Co., 242 F. Supp. 2d 877, 883-84 (D. Or.
2002)).
Based on the current record, this court declines to
apply the agency exception to Potter with respect to either the
Services Agreement or the Stipulation.
3.

Estoppel.

Legacy Carbon says that Potter should be required to
submit to arbitration under an estoppel theory.

Two types of

estoppel are advanced--direct benefits estoppel and judicial
estoppel.
a.

Direct Benefits Estoppel.

The Ninth Circuit has observed, “Equitable estoppel
typically applies to third parties who benefit from an agreement
16

made between two primary parties.”

Nguyen v. Barnes & Noble

Inc., 763 F.3d 1171, 1179 (9th Cir. 2014).

“Equitable estoppel

precludes a party from asserting rights ‘he otherwise would have
had against another’ when his own conduct renders assertion of
those rights contrary to equity.”

Int’l Paper Co. v.

Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d 411, 417-18
(4th Cir. 2000) (citation omitted).

“In the arbitration

context, the doctrine recognizes that a party may be estopped
from asserting that the lack of his signature on a written
contract precludes enforcement of the contract’s arbitration
clause when he has consistently maintained that other provisions
of the same contract should be enforced to benefit him.”

Id. at

418.
When a nonsignatory seeks to compel a signatory to
arbitrate, the primary inquiry is whether the claims brought by
the signatory against the nonsignatory are “intertwined” with
the underlying agreement.
Supp. 2d at 1056.

Legacy Wireless Servs., Inc., 314 F.

However, when a signatory seeks to compel a

nonsignatory to arbitrate:

the “signatory may not estop [the]

nonsignatory from avoiding arbitration regardless of how closely
affiliated that nonsignatory is with another signing party.”
MAG Portfolio Consultant, GMBH v. Merlin Biomed Group LLC, 268
F.3d 58, 62 (2d Cir. 2001).
17

Legacy Carbon seeks to compel a nonsignatory to
arbitrate.

The inquiry for this court is whether the

“nonsignatory ‘knowingly exploits’ the benefits of the agreement
and receives benefits flowing directly from the agreement.”
Nguyen, 763 F.3d at 1179.

A nonsignatory is estopped from

refusing to comply with an arbitration clause “when it receives
a ‘direct benefit’ from a contract containing an arbitration
clause.”

Am. Bureau of Shipping v. Tencara Shipyard S.P.A., 170

F.3d 349, 353 (2d Cir. 1999) (citing Thomson-CSF, 64 F.3d at
778-79); see also MAG Portfolio Consultant, GMBH, 268 F.3d at
61-63 (concluding that benefits did not “flow” from the purchase
contract agreement itself); Int’l Paper Co., 206 F.3d at 418 (“A
nonsignatory is estopped from refusing to comply with an
arbitration clause ‘when it receives a ‘direct benefit’ from a
contract containing an arbitration clause.’” (citation
omitted)); Deloitte Noraudit A/S v. Deloitte Haskins & Sells,
9 F.3d 1060, 1064 (2d Cir. 1993) (concluding that a nonsignatory
was bound to arbitrate when it knew of the arbitration agreement
and “knowingly accepted the benefits of” that agreement); Amkor
Tech., Inc. v. Alcatel Bus. Sys., 278 F. Supp. 2d 519, 521 (E.D.
Pa. 2003) (“[T]he party seeking to enforce the arbitration
clause must show that the non-signatory to be bound received a

18

‘direct benefit’ from the contract containing the clause.”
(citation omitted)).
As with the agency exception, the Ninth Circuit has
not applied direct benefits estoppel when a signatory seeks to
bind a nonsignatory to an arbitration agreement.

See Nguyen,

763 F.3d at 1179 (applying the direct benefits estoppel theory
but finding the nonsignatory not bound by an arbitration
agreement).

“[F]ederal courts have been hesitant to apply the

estoppel theory against nonsignatories.”

Legacy Wireless

Servs., Inc., 314 F. Supp. 2d at 1055 (citing MAG Portfolio
Consultant, GMBH, 268 F.3d at 62, and Bridas S.A.P.I.C. v.
Turkmenistan, 345 F.3d 347, 361 (5th Cir. 2003)).

This is in

part because “[r]equiring nonsignatories to arbitrate introduces
an element of unpredictability to parties’ private affairs,
thereby compelling a greater degree of vigilance in applying
arbitration clauses.”

Id. at 1055-56.

Cases applying direct

benefits estoppel tend to involve nonsignatories asserting
claims against signatories based on the underlying agreement.
As the district court said in Legacy Wireless Services, Inc.,
There is an important distinction, however,
between cases where the courts seriously consider
applying direct benefits estoppel, and the case
at bar. In the former, the nonsignatory had
brought suit against a signatory premised in part
upon the agreement. Here, it is undisputed that
the [nonsignatory] has not sued [the signatory]
under the agreement. The [nonsignatory] has thus
19

not “exploited” the [underlying agreement] to the
degree that the cases that consider applying this
version of estoppel require.
314 F. Supp. 2d at 1057 (quoting Bridas S.A.P.I.C., 345 F.3d at
362).
However, as the United States District Court of Oregon
has observed, some courts focus “on whether the nonsignatory
‘directly benefitted’ from the agreement,” not on whether the
nonsignatory is suing a signatory under the agreement.

Id.

(citing Thomson-CSF, Int’l Paper Co., and Am. Bureau of
Shipping).

This court agrees that when a nonsignatory is not

suing a signatory, the court should examine whether that
nonsignatory has “directly benefitted” from the agreement.
Otherwise, a nonsignatory could “knowingly exploit” the
underlying agreement and receive a direct benefit by not
asserting any claims against a signatory.

The dispositive issue

is whether the nonsignatory actually “received direct benefits”
from the contract.

Id. (citation omitted).

Legacy Carbon argues that Potter individually received
direct benefits from the Services Agreement as the sole
principal and sole provider of services under the Services
Agreement, positing that “Potter is effectively Streamline, but
for the limited liability conferred on her related to
Streamline’s debts.”

ECF No. 9, PageID #s 507-08.
20

Potter responds that these are factually incorrect
assertions, arguing that several analysts, other than Potter,
performed services under the Services Agreement on behalf of
Streamline.

ECF No. 16, PageID # 586; see also Surreply,

Exhibit B, ECF No. 16-3, PageID # 601; Exhibit C, ECF No. 16-4,
PageID # 602.

Potter points to invoices attached to the

surreply in support of her argument.

These invoices, however,

date back to January 11, 2013, and January 29, 2013, which is
almost a year before Legacy Carbon and Streamline executed the
Services Agreement at issue.

It is not clear that the matters

now in issue arise under circumstances like those in effect in
2013.

The record does not establish that Potter was the sole

service provider under the Services Agreement.

While she was

Streamline’s President at the time the Services Agreement was
executed, other hired analysts and staff members could have
performed services under the Services Agreement on Streamline’s
behalf.

Potter may have had an important role in the creation

of the agreement and in fulfilling Streamline’s contractual
obligations, but Legacy Carbon’s assertions as to Streamline’s
corporate structure and as to Potter’s status and role under the
agreement are not themselves determinative of whether Potter is
bound by any arbitration agreement.

21

Part of the problem with Legacy Carbon’s argument is
that it would nullify the corporate form of any wholly owned
entity.

It would pierce the corporate veil and make every 100%

owner the alter ego of the entity.

But Legacy Carbon has not

expressly asked this court to pierce Streamline’s corporate veil
or to consider Potter the alter ego of the LLC.

Even if Legacy

Carbon had raised that issue, the record lacks sufficient
information allowing this court to pierce the corporate veil and
declare Potter the alter ego of the company.

See Bridas

S.A.P.I.C., 345 F.3d at 359 (“Alter ego determinations are
highly fact-based, and require considering the totality of the
circumstances in which the instrumentality functions.”); MAG
Portfolio Consultant, GMBH, 268 F.3d at 63 (noting that
“[d]etermining that veil-piercing is appropriate is a ‘fact
specific’ inquiry”).
Legacy Carbon also asserts that Potter received direct
benefits from the Services Agreement in the form of financial
compensation and having her name and biography included on
Legacy Carbon’s and other Legacy Defendants’ marketing materials
and websites.

See ECF No. 1-2, PageID # 16; see also Am. Bureau

of Shipping, 170 F.3d 349 (recognizing that direct benefits
included “significantly lower insurance rates” and “the ability
to sail under the French flag”).
22

Without the Services

Agreement, Legacy Carbon suggests, Potter would not have been
able to bolster her personal reputation and networking
connections, which in turn might have promoted business
opportunities for her individually and for Streamline.

However,

again, the record is insufficient to support these assertions.
Potter’s position is that she only received financial
compensation as an “indirect” benefit based on the operating
agreement between her and Streamline.

See MAG Portfolio

Consultant, GMBH, 268 F.3d at 61 (noting that “the benefit
derived from an agreement is indirect where the nonsignatory
exploits the contractual relation of parties to an agreement,
but does not exploit (and thereby assume) the agreement
itself”); see also Thomson-CSF, 64 F.3d at 778-79 (concluding
that a nonsignatory received only an indirect benefit of
squeezing a signatory out of the market by exploiting the
underlying agreement).

However, an invoice dated July 4, 2014,

for services provided in May 2014 under the Services Agreement
appears to call for direct payment to Potter personally,
specifically stating, “Make all payments to Tiffany McCormick
Potter.”

ECF No. 1-5, PageID # 96.

This is a deviation from

other invoices from around that time calling for payments to be
made to “Streamline Consulting Group.”

Id.

The amount of

$4,536 in the July 2014 invoice is part of the damages that
23

Streamline seeks in its Complaint in Civil No. 15-00318, see ECF
No. 1-10, PageID #s 156, 167, and its First Amended Claim for
Damages, see ECF No. 1-5, PageID #s 80, 96.

The court cannot

presently say whether that invoice was a mistake or whether
Potter intended to personally receive specific financial
benefits flowing directly from the Services Agreement.

In

short, this court is unable to conclude that Potter should be
estopped on a direct benefits theory from refusing to arbitrate
claims against her personally.
b.

Judicial Estoppel.

Both Legacy Carbon and Potter say that judicial
estoppel should apply in this case.

“The use of equitable

estoppel is within a district court’s discretion.”
S.A.P.I.C., 345 F.3d at 360.

Bridas

“[W]here a party assumes a certain

position in a legal proceeding, and succeeds in maintaining that
position, he may not thereafter, simply because his interests
have changed, assume a contrary position, especially if it be to
the prejudice of the party who has acquiesced in the position
formerly taken by him.”
(1895).

Davis v. Wakelee, 156 U.S. 680, 689

Generally, the doctrine of judicial estoppel “prevents

a party from prevailing in one phase of a case on an argument
and then relying on a contradictory argument to prevail in
another phase.”

New Hampshire v. Maine, 532 U.S. 742, 749
24

(2001) (quoting Pegram v. Herdrich, 530 U.S. 211, 227 n.8
(2000)).
The purpose of the doctrine of judicial estoppel is
“to protect the integrity of the judicial process” by
“prohibiting parties from deliberately changing positions
according to the exigencies of the moment.”
(citations omitted).

Id. at 749-50

“Because the rule is intended to prevent

‘improper use of judicial machinery,’ . . . judicial estoppel
‘is an equitable doctrine invoked by a court at its
discretion.’”

Id. at 750 (citations omitted).

A court considers several factors when deciding
whether to apply judicial estoppel to a particular case.

First,

the court considers whether a party’s later position is “clearly
inconsistent” with its earlier position.

Id. (quoting United

States v. Hook, 195 F.3d 299, 306 (7th Cir. 1999)).

Second, the

court examines whether “the party has succeeded in persuading a
court to accept that party’s earlier position, so that judicial
acceptance of an inconsistent position in a later proceeding
would create ‘the perception that either the first or the second
court was misled.’”

Id. (quoting Edwards v. Aetna Life Ins.

Co., 690 F.2d 595, 599 (6th Cir. 1982)).

Third, the court looks

to “whether the party seeking to assert an inconsistent position

25

would derive an unfair advantage or impose an unfair detriment
on the opposing party if not estopped.”

Id. at 751.

There are no “inflexible prerequisites or an
exhaustive formula” when determining whether judicial estoppel
should apply to a particular case.

Id.

The court may consider

additional factors based on the specific facts and context of a
case.

Id.
This court declines to apply judicial estoppel to

Potter.

There is no evidence before this court about any

response by Potter to any claim asserted against her in any
prior proceeding.

The record lacks any information as to

whether Potter contemplated that the Stipulation’s provision
included claims against her individually.

In light of this

uncertainty, this court cannot say that Potter took inconsistent
positions.
Potter claims that judicial estoppel should be applied
to Legacy Carbon for taking inconsistent positions with respect
to whether it would assert and pursue third-party claims against
her individually.

Potter points to the statement in Legacy

Carbon’s amended counterclaim, which says, “[Legacy Carbon] has
claims against Tiffany Potter, individually, but which claims
[Legacy Carbon] believes are not properly the subject of this
Arbitration Proceeding.”

ECF No. 1-7, PageID # 131.
26

However,

Legacy Carbon did address claims against Potter individually the
very same day that it filed its amended counterclaim, i.e.,
PageID # 134, noting that it “has additional claims against
Potter, but which claims [it] believes are not properly the
subject of this Arbitration Proceeding.”

Id., PageID # 138

(emphasis added).
The record remains extremely confusing, precluding
this court from applying judicial estoppel to any party at this
time.
C.

Further Information Is Needed Before Arbitration
Will Be Ordered.

Among the matters that remain unclear are the
following:
•

Whether Legacy Carbon’s counterclaims and thirdparty claims previously asserted in the
arbitration have been addressed in any way in the
arbitration by the arbitrator and/or the parties,
including by Potter in her individual capacity.
If no action was taken, why not?

•

What Streamline and Legacy Defendants
contemplated when they entered into the
Stipulation, agreeing to arbitrate all Legacy
Defendants’ “third-party claims that could have
been raised in the current action.”
27

•

What Potter understood, in both her individual
capacity and in her capacity as Streamline’s
President, when Streamline agreed to the
Stipulation.

•

The corporate structure of Streamline, its
business organization and employment practices,
the contents of the operating agreement between
Streamline and Potter, and Potter’s effective
role in the LLC, including, if applicable, her
hiring of employees and performance of services
under Streamline’s contracts with other entities.

•

What specific benefits Potter received or did not
receive, directly or indirectly, from the
Services Agreement and Non-Circumvention
Agreement, including any monetary benefits and
anything that might have affected her
professional reputation.

•

What subsequent conduct, if any, Potter took to
demonstrate that she assumed an obligation to
arbitrate third-party claims against her.

•

Any other factual issues necessary to support any
theory relied upon, including, but not limited
to:

assumption, agency, estoppel (direct
28

benefits and/or judicial), and/or veilpiercing/alter ego.
This court expresses no view on the substantive issues
raised by the parties relating to the third-party claims against
Potter or any other claims at issue.
IV.

CONCLUSION.
Based on the present record, the petition to compel

arbitration is denied without prejudice.

Legacy Carbon may file

an amended petition within thirty days of the date of this
order.

If no amended petition is filed by the deadline,

judgment against Legacy Carbon will be automatically entered.
IT IS SO ORDERED.
DATED: Honolulu, Hawaii, August 28, 2017.

/s/ Susan Oki Mollway
Susan Oki Mollway
United States District Judge
Legacy Carbon LLC v. Tiffany Potter, Civ. No. 17-00231 SOM-KSC, ORDER DENYING
WITHOUT PREJUDICE PETITION TO COMPEL ARBITRATION OF THIRD-PARTY CLAIMS
AGAINST TIFFANY POTTER.

29