Ostrolenk Faber LLP v. Lagassey

Background

Ostrolenk Faber LLP sued Paul J. Lagassey for claims including breach of contract, account stated, quantum meruit, unjust enrichment, and fraud. The claims arose from legal services and disbursements that Ostrolenk Faber provided for several corporate entities associated with Lagassey. Ostrolenk Faber alleged that Lagassey and the entities owed at least $141,893, plus interest. Lagassey appeared without a lawyer.

The entities had separate written retainer agreements with Ostrolenk Faber. Lagassey signed the agreements as manager of the respective entities. The agreements contained arbitration clauses covering disputes about fees, disbursements, and services, and referred to arbitration under American Arbitration Association rules. The clause also addressed payment of arbitration costs and allocation of costs and attorneys’ fees.

After initially failing to appear, Lagassey successfully obtained relief from the clerk’s entry of default. He later filed a motion labeled as a motion to dismiss, raising several grounds, including arbitration, lack of subject-matter jurisdiction, improper venue, and failure to state a claim. Because his briefs argued that Ostrolenk Faber was required to arbitrate and expressly asked the court to order arbitration, the court construed the motion in part as a motion to compel arbitration.

Jurisdiction and Arbitration Agreement

The court found that it had subject-matter jurisdiction based on diversity of citizenship. Ostrolenk Faber alleged approximately $141,893 in damages, that its primary place of business was in New York, and that Lagassey was a citizen of Florida. The court concluded that Lagassey’s challenge to the amount in controversy did not show to a legal certainty that the amount was below the jurisdictional threshold.

Under the Federal Arbitration Act, a court considering a motion to compel arbitration determines whether a valid agreement or obligation to arbitrate exists and whether a party failed, neglected, or refused to arbitrate. Ostrolenk Faber did not dispute that the retainer agreements contained arbitration provisions. The court therefore considered the arguments against enforcing those provisions.

Non-Signatory Enforcement and Equitable Estoppel

Ostrolenk Faber argued that it should not have to arbitrate against “corporate ghosts” because the entities that signed the agreements were allegedly defunct or inactive. The court rejected that argument. It explained that equitable estoppel—a doctrine that can prevent a party from relying on a contract for its claims while avoiding the contract’s arbitration requirement—may allow a non-signatory to compel arbitration when there is a close relationship between the parties and the claims are closely connected to the agreement containing the arbitration clause.

The court found both requirements satisfied. It relied on Ostrolenk Faber’s allegations that Lagassey managed the entities, acted on their behalf, received invoices, and treated the entities as his alter egos. It also found that Ostrolenk Faber’s claims were directly based on the legal services provided under the retainer agreements. The court concluded that it made no difference for this analysis whether the entities were defunct because the arbitration would be against Lagassey, the non-signatory seeking enforcement.

Alleged Breach of the Agreements

Ostrolenk Faber argued that Lagassey could not enforce the arbitration clauses because the agreements had been materially breached. It relied on language making arbitration subject to administrative rules or other legal obligations and argued that Lagassey had an obligation to maintain the entities and preserve their assets.

The court rejected this argument because Ostrolenk Faber cited no legal authority or contract provision showing that the quoted language required Lagassey to maintain the entities in good standing for arbitration to occur. To the extent Ostrolenk Faber challenged the agreements as a whole, the court stated that such a challenge must be decided by the arbitrator rather than the court.

Timeliness and Refusal to Arbitrate

Ostrolenk Faber argued that Lagassey had waived arbitration by delaying his appearance and raising the arbitration issue only after the court nearly entered a default judgment. The court acknowledged the delay but found no waiver. It considered Lagassey’s self-represented status, the strong presumption favoring arbitration, and the absence of significant prejudice because Ostrolenk Faber had not engaged in costly discovery or merits-based motion practice.

The court also found that Ostrolenk Faber had failed or refused to arbitrate by filing the lawsuit instead of proceeding in arbitration. It concluded that the arbitration obligation covered the fee dispute.

Disposition

The court granted Lagassey’s motion to compel arbitration. It did not dismiss the case. Because neither party requested a stay, the court exercised its discretion to stay the matter pending completion of arbitration, concluding that a stay would promote a more efficient resolution. The parties were ordered to update the court by April 15, 2020, about the status of arbitration.