Weiner-Govostes: One Party’s Attempt to Terminate the Other’s Contractual Property Right by Will
Necessarily, arbitration awards often affect—or indeed determine—the rights of nonparties to the arbitration with respect to the matters at issue between the parties in arbitration. This can raise the perceived, but misplaced, specter of denying the nonparties their “constitutional and sacred right to a jury trial” in civil litigation concerning the matters to be determined in the parties’ arbitration, as was argued in Weiner-Govostes. There, the appellate court ruled that the potential impact of an arbitration award on rights of nonparties to the arbitration was not a sound basis for staying arbitration pending the outcome of civil litigation between an arbitration party and nonparties to the arbitration.
Weiner-Govostes involved a dispute over ownership of a family-held franchise network. Former spouses, Paul Govostes and Francine Weiner-Govostes, together operated 10 Dunkin’ Donuts franchises for 21 years during their marriage and then, after their divorce in 2012, for nearly a decade longer. Upon their divorce, Paul and Francine rearranged their ownership of the business so that they would continue to operate the franchises as joint tenants with the right of survivorship. When either Paul or Francine died, the survivor would own all.
In 2012, Paul and Francine executed a detailed Joint Tenancy Operating Agreement (JTOA), which set forth their respective obligations and included a two-tiered arbitration process for prompt resolution of any disputes arising in the continued operation of their franchise business. A single arbitrator would be named to resolve any day-to-day operational deadlocks, and a panel of three arbitrators was designated to resolve all other disputes. The JTOA provided broadly that “any unresolved controversy, claim, or dispute arising out of or related to this Agreement or the breach of any provision hereof shall be settled by binding arbitration.”
The JTOA between Paul and Francine included a process for its termination. It provided that “if either of the Owners reasonably determines over time that he or she believes it is impossible to continue to manage the [franchises] together, either Owner may request in writing to the other, that they shall meet . . . to try to negotiate an amicable disposition of the [franchises] based upon a 50/50 division of their respective equity interests in the [franchises].” If such a meeting did not result in a negotiated resolution, then the party who did not trigger the termination process had the right to buy out the party who did in a process specified in the JTOA.
The divorced couple continued to operate the business for nine years without resort to the arbitration process.
In December 2019, Paul was diagnosed with terminal lung cancer. He moved in with his sister, Debra Foundas. In March 2020, Paul executed a will that apparently named Foundas as his sole heir. Paul succumbed to his illness in August 2020.
In July 2020, three weeks before he died, Paul allegedly had signed a letter addressed to Francine, purporting to initiate the termination process of the JTOA. An electronic copy of the July 2020 letter was sent to Francine by Michael Morizio, then acting as an attorney for Paul. If the July 2020 letter was effective to end the survivorship feature of the JTOA, then half of the ownership of the business would become property of Paul’s estate and would presumably pass to Foundas under the will, rather than to Francine pursuant to the JTOA’s survivorship provision. Paul passed away before any of the steps to complete the termination process set forth in the JTOA could be followed.
After Paul’s death, Francine amended the corporate records of the business to reflect the transfer of ownership occurring by operation of law when parties are joint tenants with rights of survivorship. Francine’s lawyer contacted the franchisor to obtain its approval of the transfer. The personal representative of Paul’s estate also contacted the franchisor, asserting that the estate owned half of the franchises. Ultimately, the franchisor declared the franchise agreements to be in default for failure to request prior approval of any transfer. After extended negotiation, the franchisor, the estate, and Francine entered into a settlement agreement that required Francine to sell the family franchise business within nine months.
Commencement of Arbitration, with Placeholding Civil Action to Toll the Statute of Limitations
Francine harbored the hope that once the dispute with the estate was resolved, the franchisor would reconsider and allow her to continue to operate the franchises. Time was of the essence, given the nine-month period provided for sale in the settlement with the franchisor and estate. But with arbitration, the dispute concerning the effectiveness of the July 2020 letter could have been expeditiously resolved within the nine-month period.
Francine promptly commenced arbitration under the JTOA against the personal representative of Paul’s estate to determine the validity and effectiveness of the July 2020 letter. She maintained that the July 2020 letter did not properly invoke the termination provision because Paul, on his deathbed, could not have “reasonably determine[d]” that the parties no longer could get along. She contended that the July 2020 letter amounted, at best, to an improper effort by Paul to repudiate the survivorship provision to which he had agreed. She alleged that Paul lacked the requisite mental capacity when he purportedly had signed the letter, and she questioned whether the signature in the letter was actually his. Some of the additional grounds that Francine raised in arbitration implicated the actions of Foundas and Morizio, Paul’s lawyer. For example, she alleged that when the gravely ill Paul was residing with Foundas, he was subjected to undue influence.
The arbitration proceeded apace, and, following discovery and prehearing briefing, a merits hearing before a panel of arbitrators was scheduled to commence in September 2021. Thus, the dispute under the JTOA would have been resolved within nine months of the settlement with the franchisor and estate.
However, Massachusetts requires that monetary claims against an estate be asserted within a year of the death of the decedent. With the one-year anniversary of Paul’s death approaching, in July 2021, Francine filed a lawsuit against Paul’s personal representative in Superior Court to toll the statute of limitations. The suit included tort claims against Foundas and Morizio, nonparties to the JTOA, arising from the circumstances surrounding the initiation of the JTOA termination process. Shortly after her commencement of the suit, Francine filed a motion to stay it, explaining that she had filed the litigation merely as a placeholder for limitations purposes and that she intended to continue proceeding with the arbitration against Paul’s estate under the JTOA. The estate and Foundas opposed the motion to stay the litigation and filed their own motion to stay the arbitration.
Dueling Motions to Stay
Less than a week before the merits hearing was scheduled to begin in the arbitration, in September 2021, the Superior Court held an “emergency hearing” and issued an order staying the arbitration because, as the court viewed it, the award might prejudice the jury rights of Foundas and Morizio, who were named in the lawsuit but were not parties to the arbitration. According to the trial court, “[i]t would be patently unfair to let the arbitration proceeding in which [Foundas and Morizio] are not parties, proceed and set them up for both issue and claim preclusion in the instant matter where they are entitled to trial by a jury or their peers.”
The Superior Court decision was appealed immediately.
Decision of the Appeals Court
The principal issue on appeal in Weiner-Govostes was whether the trial court was wrong as a matter of law to stay the arbitration. The award could not bind nonparties, but, more critically, concerns about the effect a potential award might have on the potential jury rights of nonparties to an arbitration had never been held to be enough to justify stopping an arbitration between signatories to an arbitration agreement. Yet, the trial court had done just that.
The appellate court dissolved the stay and ordered that the claims in the lawsuit between the arbitration parties be stayed. The Appeals Court explained:
[W]e need not engage in speculation about how the arbitrators might rule and what the potential preclusive effect of that ruling might be with respect to Foundas and Morizio. That is because the narrow question before us is whether the judge’s concern about potential impacts of the arbitration on third party rights presented a valid ground to stay the arbitration. It plainly did not. The appellees have not cited any case that supports their position that an otherwise proper arbitration proceeding may be stayed because it might eventually present unfair preclusive effects on third parties. Based on long-settled law, this is unsurprising.
Citing Danvers v. Wexler Construction Co., 422 N.E.2d 782 (Mass. App. Ct. 1981), the court in Weiner-Govostes noted that “concerns about judicial economy and potential unfairness to other parties arising from having same controversy addressed in both arbitration and litigation were not valid grounds for ignoring clear terms of broad arbitration agreement.” As for the claim of Foundas and Morizio that they “might be entitled to a jury trial on some potential aspects of this controversy,” the appeals court could “see no reason to resolve the legitimacy of such arguments in advance of knowing in whose favor the arbitrators will rule and on what grounds.” “Once the arbitration has been resolved,” the court continued, “it should become clear what, if anything, remains to be resolved in the litigation.”
Aftermath of Appeal: The Arbitration Proceeds after 16 Months’ Delay
In January 2023, the merits hearing in Francine’s arbitration with the personal representative of Paul’s estate commenced. Judicial error had forestalled the progress of the scheduled arbitration for 16 months, since September 2021. Meanwhile, the nine-month period of the settlement with the franchisor and estate had long passed. The franchises were sold to third parties, with the proceeds placed in escrow, and Francine’s opportunity to attempt to persuade the franchisor that she should retain rights as the sole franchisee—with a binding arbitral resolution concerning the July 2020 letter—was lost.
Importantly, the appeals court in Weiner-Govostes suggested in its opinion that “[i]n order to reduce potential overlap between the arbitration and the litigation with regard to Foundas and Morizio, the arbitrators, who have considerable discretion in managing the case, may find it useful to consider first whether [Francine] should prevail for reasons independent of any conduct by Foundas or Morizio.” See also Danvers, 422 N.E.2d at 787 n.9 (“The arbitrator, who has considerable discretion in managing the case . . . may hold the matter until the town’s claims underlying the third-party action are resolved, on the possibility that some or all of those claims might become moot as a result of settlement or trial.”).
In the end, as the decision in Weiner-Govostes makes clear, sound trial court management calls for a measure of confidence in the arbitral process.