SECOND DIVISION
MILLER, P. J.,
RICKMAN and REESE, JJ.
NOTICE: Motions for reconsideration must be
physically received in our clerk’s office within ten
days of the date of decision to be deemed timely filed.
http://www.gaappeals.us/rules
June 27, 2019
In the Court of Appeals of Georgia
A19A0474. SCHINAZI et al. v. EDEN, AS TRUSTEE OF TE 2005
SCHINAZI GST GRANTOR TRUST.
REESE, Judge.
Raymond F. Schinazi, individually, and RFS & Associates, LLC, as the
General Partner of RFS Partners L.P. (collectively, “the Appellants”), appeal1 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.
1
This Court granted the Appellants’ application for interlocutory review.
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.”
2
338 Ga. App. 793 (792 SE2d 94) (2016).
2
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
3
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.
3
Schinazi, 338 Ga. App. at 793-794 (punctuation omitted).
4
(Emphasis supplied.)
4
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
5
(Emphasis supplied.)
6
(Emphasis supplied.)
5
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 re-
asserted 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
7
(Emphasis supplied.)
8
See Schinazi, 338 Ga. App. at 793, 796 (2).
6
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
9
See id. at 793.
10
Id. at 797 (2). According to Schinazi, Section 5 of the Partnership Agreement
“outlined the procedure for transferring a limited partnership generally . . . or to a
‘Family Member[.]’ It also regulated the “Form of Transfers.” Id. at 797 (2). Further,
under Section 5.4, a limited partner could transfer all or any part of his or her
economic interest in RFS Partners as long as he or she complied with the other
provisions of Section 5 and as long as “the transferor and transferee Partners and, if
applicable, the General Partner, execute[d] an Assignment substantially in the form
of Exhibit A or A-1, as applicable[.] The General Partner’s execution of such
Assignment shall signify, if applicable, the consent of the General Partner to such
transfer.” Id.
7
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
11
Id. at 798 (2).
12
See id.
13
See id. at 798-799 (3) (a).
14
See id. at 799-800 (3) (b) (emphasis supplied). Based on these rulings, this
Court also reversed the grant of summary judgment to the Appellants on Eden’s
claims for attorney fees and punitive damages. See id. at 800-801 (4) (a), (b).
8
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
15
The Supreme Court of Georgia denied the Appellants’ petitions for a writ of
certiorari. See Schinazi v. Eden, No. S17C0487, 2017 Ga. LEXIS 393 (May 15,
2017); Schinazi v. Eden, No. S17C0486, 2017 Ga. LEXIS 399 (May 15, 2017).
16
See Schinazi, 338 Ga. App. at 798 (2).
17
See id.
18
See id. at 797 (2).
19
See id. at 798-801 (3), (4).
9
arbitration20 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[ ]”
20
See OCGA § 9-9-6 (a) (“A party aggrieved by the failure of another to
arbitrate may apply for an order compelling arbitration. If the court determines there
is no substantial issue concerning the validity of the agreement to submit to
arbitration or compliance therewith and the claim sought to be arbitrated is not barred
by limitation of time, the court shall order the parties to arbitrate. If a substantial issue
is raised or the claim is barred by limitation of time, the court shall summarily hear
and determine that issue and, accordingly, grant or deny the application for an order
to arbitrate.”).
10
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
21
Kindred Nursing Centers Ltd. Partnership v. Chrzanowski, 338 Ga. App.
708, 708-709 (791 SE2d 601) (2016) (citation and punctuation omitted).
22
See Ed Voyles Jeep-Chrysler v. Wahls, 294 Ga. App. 876, 877 (670 SE2d
540) (2008).
23
Order Homes, LLC v. Iverson, 300 Ga. App. 332, 334-335 (1) (685 SE2d
304) (2009) (punctuation and footnote omitted).
24
USA Payday &c. #1 v. Evans, 281 Ga. App. 847, 849 (637 SE2d 418) (2006)
(punctuation and footnote omitted).
11
plaintiff. Other relevant factors include whether important intervening
steps, such as taking advantage of judicial discovery procedures not
available in arbitration,[25] have taken place.26
What constitutes a waiver of the right of arbitration depends on the facts of each
case.27
With these guiding principles in mind, we turn now to the Appellants’ specific
claims of error.
1. The Appellants contend that the trial court erred in “looking solely at the
length of time from the beginning of the litigation until the filing of the motion to
compel arbitration[ ]” when it concluded that the Appellants had waived their right
to arbitration under the Partnership Agreement. This argument is apparently based
upon the trial court’s reference to “the over five-year record of this action” in its order
denying the motion to compel.
25
See Ed Voyles Jeep-Chrysler, 294 Ga. App. at 877 (noting that discovery is
a limited right under the Georgia Arbitration Code); see also OCGA § 9-9-9 (b)
(“Notices to produce books, writings, and other documents or tangible things;
depositions; and other discovery may be used in the arbitration according to
procedures established by the arbitrators.”).
26
Ed Voyles Jeep-Chrysler, 294 Ga. App. at 877.
27
See USA Payday &c. #1, 281 Ga. App. at 850.
12
The Appellants’ argument, however, ignores the rest of the sentence in the trial
court’s order, in which the court found that the “action” that the parties had litigated
for five years “centered on [Eden’s] claims and alleged rights under the Limited
Partnership Agreement[.]”28 In other words, the trial court implicitly, if not explicitly,
found that the claims asserted by Eden in the original complaint and the first and
second amended complaints arose out of and/or were related to the Partnership
Agreement and, thus, were subject to the Partnership Agreement’s arbitration clause,
which, by its plain language, applied to “[a]ny controversy, dispute or claim arising
out of or relating to this Agreement or any transaction hereunder[.]” Yet, because the
Appellants had not invoked the arbitration clause as to any of those claims, the court
found that they had waived their right to compel arbitration at that point in the
litigation.
We find no error in the trial court’s ruling. The Appellants were on notice in
March 2013, if not earlier, that Eden was asserting a claim that the Appellants had
violated their fiduciary duties under the Partnership Agreement to the Trust, as a
limited partner of RFS Partners. The Appellants have not only failed to explain how
that claim did not fall under the arbitration clause of the Partnership Agreement, they
28
(Emphasis supplied.)
13
actually admitted during the hearing on the motion to compel arbitration that “the
substantive claims in the original case [included a claim for] breach of duties under
the [P]artnership [Agreement].”
Further, the Appellants have failed to explain why, instead of asserting their
right to arbitration, they took actions that were clearly inconsistent with that right.
These actions included, inter alia, participating in extensive discovery, including
seven depositions and thirty-seven discovery requests, filing a motion for summary
judgment on Eden’s claims, appealing from the trial court’s adverse ruling on that
motion, and filing petitions for a writ of certiorari, actions which Eden estimated cost
the parties five years and “hundreds of thousands of dollars[.]” Moreover, even after
the case returned to the trial court following the appeal in June 2017, the Appellants
failed to assert their right to arbitration of Eden’s remaining claims. Nor did they file
a motion to compel in response to the trial court’s October 2017 order instructing the
parties to file a consolidated pre-trial order by December 11, 2017. Instead, they
waited until after Eden had filed the third amended complaint in November 2017 to
finally file a motion to compel arbitration.
14
In Wise v. Tidal Construction Company,29 this Court held that the defendant
waived its right to arbitration by conducting itself in a manner that was inconsistent
with such right. According to this Court’s opinion, the defendant failed to invoke its
right to arbitration immediately in response to the plaintiffs’ complaint
but, instead, proceeded with litigation of the case up to actual trial,
which consisted of protracted discovery over 16 months, and which,
fundamentally, was inconsistent with its right to arbitration. [The
defendant also] engaged in extensive discovery, in a motion for
summary judgment, in [a] pre-trial order, in . . . trial calendar settings,
and in a jury selection.30
This Court noted that, “after the plaintiffs expended over $11,000 for trial preparation
and after [the defendant] failed to obtain a ruling on its motion for summary judgment
and faced a jury trial after jury selection, only then, at the eleventh hour, did [the
defendant] invoke its rights to arbitration to avoid such jury trial.”31 This Court
29
261 Ga. App. 670 (583 SE2d 466) (2003).
30
Id. at 674 (2) (emphasis supplied).
31
Id.
15
concluded, therefore, that “[s]uch conduct [was] inconsistent with the rights of
arbitration and constituted a waiver.”32
Similarly, in the instant case, we hold that the Appellants’ failure to invoke its
right to arbitration and its decision, instead, to participate in almost five years of very
costly litigation constituted conduct that was inconsistent with its right to arbitration
and, thus, waived that right.33 Consequently, under the circumstances presented, we
find no error in the trial court’s denial of the Appellants’ motion to compel
arbitration.34
2. The Appellants contend that the trial court erred in denying their motion to
compel because the new claims in Eden’s third amended complaint “greatly expanded
the litigation” and because there was no evidence that Eden or the Trust had been
32
Id.
33
See Ed Voyles Jeep-Chrysler, 294 Ga. App. at 877 (affirming trial court’s
finding of waiver of the right to arbitration because the defendants did not invoke
their right to arbitration until after they had received the plaintiffs’ discovery
responses); USA Payday &c. #1, 281 Ga. App. at 849-851 (affirming the trial court’s
finding of waiver based on the defendants’ failure to move to compel arbitration until
over a year after the complaint was filed, during which time the defendants
participated in discovery, filed a variety of motions, and allowed the case to be placed
on the trial calendar).
34
See Ed Voyles Jeep-Chrysler, 294 Ga. App. at 877; USA Payday &c. #1, 281
Ga. App. at 849-851.
16
prejudiced by the Appellants’ failure to assert their right to arbitration earlier in the
litigation. Pretermitting whether there is any merit to these contentions,35 the
Appellants waived these arguments by failing to raise them in the trial court.36
Accordingly, we affirm the trial court’s denial of the Appellants’ motion to
compel arbitration.
Judgment affirmed. Miller, P. J., and Rickman, J., concur.
35
See Ed Voyles Jeep-Chrysler, 294 Ga. App. at 878 (This Court held that the
evidence clearly showed that the defendants took actions in the litigation that were
inconsistent with their arbitration rights and that “[s]uch actions could have
prejudiced [the plaintiff] by putting him to the trouble and expense of preparing for
the deposition and responding to the discovery requests and by requiring him to
thereby produce information that he would not be required to divulge in arbitration.”
Thus, this Court concluded that, “[a]s a factual matter, the trial court was authorized
to find that the actions of both [defendants] were sufficiently prejudicial to [the
plaintiff] to warrant a determination that each of them had waived their arbitration
rights.”).
36
See Champion Windows of Chattanooga v. Edwards, 326 Ga. App. 232, 242
(2), n. 9 (756 SE2d 314) (2014) (“Issues and objections not raised in the trial court
and ruled on by the trial court are deemed waived and cannot be raised for the first
time on appeal.”) (citation and punctuation omitted); Luxenberg v. Griffith, 237 Ga.
App. 201, 202 (1) (514 SE2d 63) (1999) (“The rule is that the scope of review is
limited to the scope of the ruling in the trial court as shown by the trial record and
cannot be enlarged or transformed through a process of switching or shifting.”)
(citation and punctuation omitted).
17