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Schinazi v. Eden

Court of Appeals of Georgia, Second Division

June 27, 2019

SCHINAZI et al.
v.
EDEN, AS TRUSTEE OF TE 2005SCHINAZI GST GRANTOR TRUST.

          MILLER, P. J., RICKMAN and REESE, JJ.

          REESE, JUDGE.

         Raymond F. Schinazi, individually, and RFS & Associates, LLC, as the General Partner of RFS Partners L.P. (collectively, "the Appellants"), appeal[1] from the trial court's denial of their motion to compel arbitration of new claims asserted in an amended petition filed by Carol Eden, the trustee of the 2005 Schinazi GST Grantor Trust ("Trust"). The Appellants contend, inter alia, that the trial court erred in concluding that they had waived their right to arbitration under a partnership agreement by failing to assert the right in a timely manner. For the reasons set forth infra, we affirm.

          This is the second appeal to this Court in the underlying case. In 2016, this Court issued an opinion in Schinazi v. Eden, [2] in which we presented the following overview of the history between the parties and their litigation, as follows:

Schinazi established the Trust on August 23, 2005, naming Eden as Trustee and his daughter as the primary beneficiary. The Trust agreement authorized Schinazi to deposit property into the Trust, and he initially funded it with a $500, 000 gift. Although the Trust was irrevocable, Schinazi "expressly reserve[d] the right, exercisable in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity, during [his] lifetime to reacquire any part or all of the property of any trust created hereunder by substituting property of equivalent value."
Two days after creating the Trust, Schinazi and RFS & Associates, LLC, a corporation in which Schinazi held a controlling interest and served as manager, formed a limited partnership known as RFS Partners, L.P. The partnership agreement named RFS & Associates as "General Partner," designated Schinazi as "Limited Partner," and set forth procedures for transferring partnership interests. It also provided: "NEITHER THE INTERESTS NOR ANY PART THEREOF MAY BE OFFERED FOR SALE, PLEDGED, HYPOTHECATED, SOLD, ASSIGNED OR TRANSFERRED AT ANY TIME EXCEPT IN COMPLIANCE WITH THE TERMS AND CONDITIONS OF … THIS AGREEMENT."
In addition to being a limited partner, Schinazi held a 99 percent economic interest in RFS Partners. On August 31, 2005, Schinazi assigned his partnership interest to the Trust in exchange for a $7, 000, 000 promissory note. To accomplish the transfer, Schinazi (separately as transferor and as manager of RFS & Associates) and Eden (as Trustee) executed a "Sale and Assignment of Interests in RFS Partners, L.P." The "Sale and Assignment" document complied with the transfer requirements in the partnership agreement.
Shortly thereafter, Schinazi made a capital contribution to RFS Partners, contributing 1, 000, 000 shares of Pharmasset, Inc. stock to the partnership in exchange for a new limited partnership interest. Schinazi signed a consent agreement relating to the transaction on behalf of himself, individually, and as manager of RFS & Associates, the general partner. Eden signed for the Trust, which was identified as "Limited Partner."
Over six years later, on January 2, 2012, Schinazi sent Eden a promissory note in the amount of $58, 290, 000, stating that he was "exercising [his] asset substitution right [under the Trust agreement] by substituting [the] Promissory Note for the limited partnership interest owned by the Trust in RFS Partners, L.P." Schinazi asked Eden to acknowledge in writing that he was now "the sole owner of all interest formerly owned by the Trust in the Partnership." Eden refused to sign the acknowledgment, asserting that the promissory note did not constitute a substituted asset of equivalent value, as required by the Trust agreement. Despite this refusal, Schinazi informed Eden on September 11, 2012, that "the Trust's balance sheet consists of" the $58, 290, 000 promissory note, rather than an interest in RFS Partners.[3]

         In November 2012, Eden, as trustee, sued the Appellants (Schinazi and RFS & Associates), then amended the complaint in March 2013. In the amended complaint, Eden sought a declaratory judgment as to whether Schinazi or the Trust owned the partnership interest in RFS Partners that Schinazi had purportedly reacquired in January 2012. Specifically, Eden sought a declaratory judgment as to whether the $58, 290, 000 unsecured promissory note tendered by Schinazi as a substitute for the Trust's partnership interest was "of equivalent value" to the partnership interest, as required by the Trust, and whether the partnership interest could be transferred to Schinazi, individually, without an assignment executed by Eden, as the trustee of the owner of the partnership interest, as "required by the Partnership Agreement[.]"[4] Eden also asserted that a ruling on the ownership of the partnership interest would affect whether she, as trustee, sought distributions from RFS Partners, access to RFS Partners' books and records, and input regarding the management of RFS Partners.

         In addition, Eden asserted two claims for breach of fiduciary duty. The first claim alleged that Schinazi had breached his fiduciary duties under the Trust when he purported to unilaterally reacquire the Trust's limited partnership interest in RFS Partners and transfer the interest to himself. In contrast, Eden asserted the second breach of fiduciary claim against "RFS & Associates, as the General Partner of RFS Partners, and . . . Schinazi, as the Manager of RFS & Associates," alleging that they breached their fiduciary duties "to [Eden] and the Trust, as limited partners of RFS Partners."[5] In that claim, Eden claimed that the Appellants breached their fiduciary duties to her and the Trust "under the Partnership Agreement[ ]" by purporting to transfer the Trust's 71.675 percent limited partnership interest in RFS Partners to Schinazi without complying "with the terms of the Partnership Agreement."[6] She also asserted that the Appellants had improperly transferred the partnership interest to Schinazi, which constituted self-dealing that violated the Appellants' fiduciary duties to the Trust as a limited partner of RFS Partners. In addition to these claims, Eden's amended complaint sought an accounting of the Trust's assets, an injunction preventing Schinazi from transferring or altering the Trust's assets (including the partnership shares at issue), attorney fees and litigation expenses under OCGA § 13-6-11, and punitive damages. The Appellants, however, did not file a motion to compel arbitration under the Partnership Agreement.

         Between March 2013 and May 2015, the parties engaged in extensive discovery, including seven depositions and thirty-seven discovery requests. Then, in May 2015, Eden filed a second amended and restated verified petition, which reasserted the original claims and added an allegation to Count 5, the claim for breach of fiduciary duties to her and the Trust "under the Partnership Agreement[, ]" alleging that the Appellants breached their duties by "purporting to transfer the Trust's 71.675 [percent] limited partnership interest in RFS Partners [to Schinazi] without the express consent of [Eden], as trustee of the Trust[.]"[7] Again, the Appellants did not file a motion to compel arbitration under the Partnership Agreement.

         The Appellants filed a motion for summary judgment on Eden's complaint, and the trial court granted summary judgment to Eden on the declaratory judgment claim, ruling that the Trust's partnership interest in RFS Partners had not been properly transferred to Schinazi and, thus, the Trust still owned the partnership interest.[8] However, the trial court granted summary judgment to the Appellants on Eden's claims for damages.[9]

         On the parties' cross-appeals from that order, this Court affirmed the trial court's grant of summary judgment to Eden on the declaratory judgment claim, specifically ruling that the trial court properly found that "the Trust became a limited partner [of RFS Partners] before Schinazi sought to reacquire the Trust's partnership interest in 2012. Furthermore, because the Trust was a limited partner, any transfer of [the Trust's] interest was governed by Section 5 of [RFS Partners'] [P]artnership [A]greement."[10] According to this Court, "[u]nder the plain terms of the [P]artnership [A]greement, the Trust's interest in RFS Partners could not be transferred absent compliance with Section 5[, ]" and, because Schinazi failed to comply with Section 5 of the Partnership Agreement when he attempted to reacquire the Trust's partnership interest, the purported transfer of the partnership interest to Schinazi was invalid.[11] Thus, the Trust remained the owner of the partnership interest.[12]

         As for Eden's breach of fiduciary duty claim against the Appellants based on their alleged violation of the Partnership Agreement, this Court reversed the grant of summary judgment to the Appellants, ruling that factual issues existed for jury resolution.[13] This Court also held that the fiduciary duty claim was a separate damages claim that was independent from the declaratory judgment action, because it involved the Appellants' fiduciary responsibilities toward the Trust, the Appellants' obligations to the Trust "under the [P]artnership [A]greement," and alleged misconduct by the Appellants regarding the attempted unilateral transfer of the Trust's partnership interest.[14]

         The remittitur from this Court's decision was filed in the trial court on June 7, 2017.[15] Thus, at that point, it had been conclusively established that Schinazi's purported reacquisition of the Trust's limited partnership interest in RFS Partners was invalid;[16] the Trust was the owner of the partnership interest;[17] and the Trust was a limited partner of RFS Partners, even before Schinazi attempted to reacquire the partnership interest.[18] Further, Eden's claim for breach of fiduciary duties under the Partnership Agreement (and related claims) remained pending for jury resolution.[19]Based on the latter ruling, on October 13, 2017, the trial court issued a case management order in preparation for the trial on Eden's remaining claims.

         On November 2, 2017, Eden filed a "Third Amended and Restated Verified Petition[, ]" in which she asserted additional claims against the Appellants. In response to Eden's amended complaint, the Appellants filed a motion to compel arbitration[20] for the first time, asserting that Eden's new claims arose out of and were related to the Partnership Agreement, so the agreement's arbitration clause applied to those claims. Section 8.9 (a) of the Partnership Agreement included the following arbitration clause:

Any controversy, dispute or claim arising out of or relating to this Agreement or any transaction hereunder shall be settled by a single arbitrator appointed in accordance with this Section 8.9. This agreement to arbitrate shall be specifically enforceable under the prevailing arbitration law of the state in which the arbitration is convened.

         Following a hearing, the trial court denied the motion to compel, finding that the Appellants had waived their right to invoke the arbitration clause because they failed to raise it during the previous five years, while this action, "which has centered on [Eden's] claims and alleged rights under the Limited Partnership Agreement[ ]" was being litigated by the parties. The trial court certified the issue for immediate review, this Court granted the Appellant's application, and this appeal followed.

         On appeal, this Court reviews the record "de novo to determine whether the trial court's denial of the motion to compel arbitration is correct as a matter of law."[21]However, we defer to the trial court's findings of fact upon which its denial was based unless those findings are clearly erroneous.[22]

         Although Georgia has "a clear public policy in favor of arbitration, "[23] it is well-established that a party may waive its right to compel arbitration by acting in a manner "which is inconsistent with the right of arbitration."[24] In determining whether a party to an arbitration agreement has waived its arbitration right, we look at

whether the litigation machinery has been substantially invoked and whether the parties were well into preparation of a lawsuit by the time an intention to arbitrate was communicated by the defendant to the plaintiff. Other relevant factors include whether important intervening steps, such as taking advantage of judicial ...

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