[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 11-12515 FILED
________________________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
D.C. Docket No. 1:10-cv-20695-FAM FEB 28, 2012
JOHN LEY
CLERK
SOLYMAR INVESTMENTS, LTD.,
a Cayman Islands Corporation,
ASTROLITE INVESTMENTS, LTD.,
a Cayman Islands Corporation,
ETERNALITE INVESTMENTS, LTD.,
a Cayman Islands Corporation,
SUNRAYS INVESTMENTS, LTD.,
a Cayman Islands Corporation,
llllllllllllllllllllllllllllllllllllllll Plaintiffs - Appellants,
versus
BANCO SANTANDER S.A.,
BANCO SANTANDER INTERNATIONAL,
SANTANDER BANK AND TRUST, LTD.,
OPTIMAL INVESTMENT SERVICES S.A.,
MANUEL ECHEVERRIA FALLA,
et al.,
llllllllllllllllllllllllllllllllllllllll Defendants - Appellees.
________________________
Appeal from the United States District Court
for the Southern District of Florida
________________________
(February 28, 2012)
Before DUBINA, Chief Judge, MARCUS, and FAY, Circuit Judges.
FAY, Circuit Judge:
At its core, this case presents a novel question about who is supposed to
decide what in considering challenges to a contract containing an arbitration
clause. While the Supreme Court has recently addressed this general issue in
Granite Rock Co. v. International Brotherhood of Teamsters, 130 S. Ct. 2847
(2010), it did not address the particular circumstances at issue here. Namely,
whether a district court, having found a valid contract containing an arbitration
clause exists, is also required to consider a further challenge to that contract’s
place within a broader, unexecuted agreement. Having considered those
circumstances in light of Granite Rock and other relevant precedent, we find that
the district court properly construed the law regarding arbitrability in dismissing
Plaintiff-Appellants’ suit. Accordingly, we affirm.
2
I.1
Plaintiff-Appellants (the “Holding Corporations”) are personal investment
holding corporations owned by two related Panamanian shareholders. Defendant-
Appellees, of which there are two distinct groups, are (1) a related group of
banking corporations operating under the umbrella of Banco Santander,2 which
provide banking, investment, and other financial management services; and (2)
certain individual officers/employees of Santander. For convenience, we refer to
Defendant-Appellees collectively as “Santander.”
The Holding Corporations invested an undisclosed sum of money with
Santander. At the time of that investment, they informed Santander that they
desired low-risk investments. Santander assured them that a low-risk portfolio
would be tailored to their needs and that they would receive certain additional
services, including comprehensive account management, investment advisory
1
The parties agree that the appropriate standard of review for a district court order
compelling arbitration is de novo, see, e.g., Lobo v. Celebrity Cruises, Inc., 488 F.3d 891, 893
n.1 (11th Cir. 2007), as is the standard for review of a ruling on a motion to dismiss. Bell Atl.
Corp. v. Twombly, 550 U.S. 544 (2007); Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937 (2009).
Under both Twombly and Ashcroft, we are required to accept well-pleaded facts as true when
considering a motion to dismiss. Twombly, 550 U.S. at 572; Ashcroft, 129 S.Ct. at 1949-50.
2
We see no need to distinguish between the individual Santander entities named in this
suit.
3
services, and other similar services directed towards ensuring their investment
needs were met.
Santander invested some of the Holding Corporations’ money in a fund
called Optimal Strategic US Equity Series of Optimal Multiadvisors Ltd.
(“Optimal Strategic”). Optimal Strategic had engaged Bernard L. Madoff “to
execute its investment strategy and had all or a substantial part of its assets
deposited with and traded through Madoff Securities.” Exch. Agmnt. at 2 ¶ IV.
While Santander had a policy against investing in funds managed by a single
person, it continued to recommend Madoff-run funds to its clients and particularly
to the Holding Corporations. Eventually, Madoff’s Ponzi scheme was exposed and
the Holding Corporations’ substantial losses were revealed.3
After learning of their losses, the Holding Corporations sought to negotiate
a recovery from Santander. Santander’s first offer, found within an “Exchange
Agreement,” involved an exchange of “worthless” Optimal Strategic shares for
shares of Santander’s own perpetual, non-cumulative 2% shares.4 The Exchange
3
We need not recount the breadth of the well-documented fraud perpetrated by Bernie
Madoff. However, for a discussion of the history of that fraud and the ongoing efforts at
recovery, see Irving H. Picard, The Madoff Recovery Initiative (February 13, 2012),
http://www.madoff.com.
4
According to the Exchange Agreement, the relevant terms and conditions were referred
to in “Annex 2, identified in Part B of Annex 1.” Exch. Agmnt. at 2.
4
Agreement also contained an arbitration clause.5 The Holding Corporations
rejected Santander’s Exchange Agreement as the sole basis for a settlement
between the parties. The negotiations continued.
Eventually, the parties agreed to a multi-part, comprehensive settlement. In
relevant part, the settlement was to include the Exchange Agreement previously
rejected by the Holding Corporations, as well as a non-recourse promissory note
secured by Santander’s perpetual, non-cumulative 2% preferred shares. The term
of the promissory note was ten years.
Several days later, the Holding Corporations received for the first time the
Exchange Agreement in English.6 Santander informed them that they had less than
24 hours to return the signed Exchange Agreement, otherwise they would not be
permitted to subscribe to the preferred shares. Counsel for the parties discussed the
Exchange Agreement in the context of the comprehensive settlement. The Holding
Corporations allege that Santander “represented that the Exchange Agreement was
5
Section 6.1 of the Arbitration provision provides that “all controversies between the
client and the bank or the bank parties arising out of or relating to this agreement or matters
related thereto, shall be finally and exclusively settled by arbitration . . . .”
6
On appeal, the Holding Corporations emphasize that the Exchange Agreement had been
conveyed to them prior to this time only in Spanish. We see no reason for such emphasis, given
the Holding Corporations were created on behalf of two Panamanian citizens and the
communications between the parties that are found in the record reflect all parties’ fluency in
Spanish.
5
limited to Madoff claims,” and was “only one part of the intended Proposed
Settlement Agreement.” Although the Holding Corporations were unwilling to
execute the document because they did not want it to stand alone, Santander told
them that they had not yet had time to prepare the necessary paperwork for the
other aspects of the agreement and that execution of the Exchange Agreement
would be a showing of “good faith.” Santander further assured the Holding
Corporations that the other relevant documents would be completed soon after.
In reliance on those representations, the Holding Corporations signed the
Exchange Agreement.7 Relevant sections within the Exchange Agreement
included the Holding Corporations’ acknowledgment that they were “sophisticated
investor[s],” and that, “[p]rior to the execution of this Agreement . . . [they had]
sought and received, to [their] entire satisfaction, independent financial, legal and
taxation advice in relation to this Agreement, this investment in the Preferred
Securities and the risks deriving therefrom.” Furthermore, the Holding
Corporations agreed that, “[i]n making [their] decision to enter into this
Agreement, . . . [they were] not relying on any information, representation or
warranty given by the Bank, . . . other than as specifically set forth in this
7
In fact, four identical Exchange Agreements were signed by the parties. For the sake of
clarity, however, we refer to the Exchange Agreements in the singular.
6
Agreement . . . .” Moreover, the Exchange Agreement contained an integration
clause, which stated that “this Agreement contains the entire agreement between
[the Holding Corporations], on the one hand, and [Santander], on the other hand,
regarding the subject matter hereof. . . . No oral understandings, statements
promises or inducements contrary to the terms of this Agreement exist.”
The final provision within the Exchange Agreement relevant to these
proceedings was the release provision, wherein the Holding Corporations
release[d], acquit[ed], and forever discharge[d] [Santander] of and
from all past, present, and future claims . . . and any liability ( . . .
whether arising out of statute, regulations, contracts, breach of
fiduciary duty or tort or otherwise, and whether based on strict
liability, fraud, gross negligence or negligence or otherwise) . . .
arising out of or in connection with or relating to the Optimal
Strategic US Equity Series of Optimal Multiadvisors Ltd., the
Optimal Strategic US Equity Ireland Fund, [the Holding
Corporations’] Optimal SUS Securities, [the Holding Corporations’]
investment in the Optimal Funds or any other matter deriving from an
investment managed by any Bank Party, or in connection with which
a Bank Party may have rendered advice or investment services, and
having any actual or potential exposure to Madoff Securities . . . .
Exch. Agmnt. at 3(F). Santander contemporaneously executed Final Term Sheets
as to each holding corporation. The Final Term Sheets specified the terms of the
10-year term notes and the date (April 25, 2009) by which the notes would be
funded.
7
Although the parties subsequently exchanged several revisions of the
proposed promissory note and a document detailing the pledge of the preferred
shares, they failed to come to any agreement as to the structure or substance of
those documents. The Holding Corporations’ counsel therefore sent an e-mail to
Santander’s counsel, advising him that they believed no contract had been formed
between the parties. The Holding Corporations subsequently filed suit.
The Holding Corporations’ 149-page Amended Complaint is the controlling
pleading here. Therein, they set forth fourteen counts against Santander, alleging
such causes of action as breach of fiduciary duty (Counts I, II, V, VI,), negligence
(Counts III, IV, VII, VIII), fraud (Count X), a claim under the Securities and
Exchange Act (Counts XII and XIII), a state statutory claim (Count XI), and
equitable relief in the form of an unjust enrichment claim (Count IX), as well as
seeking declaratory relief (Count XIV). To rebut the explicit language of the
Exchange Agreement, the Holding Corporations seek to rely on affidavits and
parol testimony regarding the intent of the parties in executing the Exchange
Agreement.
Santander asked the district court to dismiss the proceedings, either under
the arbitration clause of the Exchange Agreement or the forum-selection
provision, which required “that all claims . . . to enforce the Parties’ agreement to
8
arbitrate . . . be heard and determined exclusively in the courts sitting in Geneva,
Switzerland.” Exch. Agmnt. at ¶ 6.2. The district judge referred the matter to a
magistrate. The magistrate judge recommended granting dismissal of the Amended
Complaint in its entirety, finding that the Exchange Agreements was a binding
contract and that, under Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S.
395 (1967) and Granite Rock, the Holding Corporations’ challenges were reserved
for an arbitrator or a court of law.8 The district court adopted the Report and
Recommendation. This appeal follows.
II.
We turn first, as we must, to the Federal Arbitration Act (“FAA”), 9 U.S.C.
§§ 1 et seq. It provides that a written arbitration agreement in certain contracts
“shall be valid, irrevocable, and enforceable, save upon such grounds as exist at
law or in equity for the revocation of any contract.” 9 U.S.C. § 2. Because of the
FAA, federal courts are required to place arbitration clauses on equal footing with
other contracts. Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct. 2772, 2776
(2010); Janiga v. Questar Capital Corp., 615 F.3d 735, 740 (7th Cir. 2010)
8
We need not address the district court findings regarding the forum-selection clause
contained within the Exchange Agreement, given our finding that dismissal of the Holding
Corporations’ Amended Complaint was appropriate in keeping with the Exchange Agreement’s
arbitration clause.
9
(“[F]ederal law places arbitration clauses on equal footing with other contracts,
not above them.”). Nonetheless, federal courts interpret arbitration clauses broadly
where possible. AT&T Techs., Inc. v. Commn’cs Workers of Am., 475 U.S. 643,
649-50 (1986). The result of such broad interpretation is that “any doubts
concerning the scope of arbitral issues should be resolved in favor of arbitration.”
First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 945 (1995) (internal
citation and quotation marks omitted); AT&T Techs., Inc., 475 U.S. at 650
(“Doubts should be resolved in favor of coverage.”) (quotation omitted). “[A]s a
matter of substantive federal arbitration law, an arbitration provision is severable
from the remainder of the contract.” Buckeye Check Cashing, Inc. v. Cardegna,
546 U.S. 440, 445 (2006).
The challenges before us, however, are not to the arbitration clause
contained within the Exchange Agreement, but instead to the binding nature of the
Exchange Agreement itself. Namely, the Holding Corporations urge that it was the
district court’s role, rather than an arbitrator’s, to decide whether the Exchange
Agreement was but one part of a comprehensive agreement between the parties.
Thus, we must first discuss who shall decide what in the context of formation
challenges to contracts containing arbitration clauses.
10
The proper allocation of responsibility for deciding such questions was first
addressed in the seminal arbitration case, Prima Paint. There, the Supreme Court
announced that courts are the proper forum to evaluate a challenge to the validity
of an arbitration clause, but where the entire agreement of which an arbitration
clause is but a part is challenged, such evaluation is properly left to the arbitrator.
Prima Paint, 388 U.S. at 403-04. For over forty years, the Supreme Court has
relied on that distinction. See, e.g., Buckeye Check Cashing, 546 U.S. at 446
(holding that, because respondents challenged a contract broadly without
challenging the arbitration clause specifically, challenge must be considered by an
arbitrator); Rent-A-Center, 130 S. Ct. at 2779-80 (affirming distinction between
general challenge to contract rather than to specific arbitration clause).
Nonetheless, in the years following Prima Paint the Supreme Court declined
to clarify whether a court or an arbitrator is required to decide any and all disputes
over the formation of an agreement containing an arbitration clause. So, for
example, the Buckeye Court stated in a footnote that
The issue of the contract's validity is different from the issue whether
any agreement between the alleged obligor and obligee was ever
concluded. Our opinion today addresses only the former, and does not
speak to the issue decided in the cases cited by respondents (and by
the Florida Supreme Court), which hold that it is for courts to decide
whether the alleged obligor ever signed the contract, whether the
11
signor lacked authority to commit the alleged principal, and whether
the signor lacked the mental capacity to assent.
Buckeye Check Cashing, 546 U.S. at 444 n.1 (internal citations omitted). See also
Rent-A-Center, 130 S.Ct. at 2778 n.2 (same). As such, the Court recognized a
distinction between challenges to the validity of an agreement containing an
arbitration clause, which were reserved for an arbitrator; and challenges to the
formation of an agreement containing an arbitration clause, which the Court
declined to address.
However, that issue was recently clarified in Granite Rock, when the Court
held that issues concerning contract formation are generally reserved for the courts
to decide. Granite Rock, 130 S. Ct. at 2855-56. Indeed, it found that such a
determination is the threshold question in any dispute involving arbitration. Id. at
2854. Therefore, the district court must first “resolve any issue that calls into
question the formation or applicability of the specific arbitration clause that a
party seeks to have the court enforce.” Id. at 2856. In other words, arbitration of a
dispute should only be ordered where “the court is satisfied that neither the
formation of the parties’ arbitration agreement nor . . . its enforceability or
applicability to the dispute is in issue. Where a party contests either or both
12
matters, the court must resolve the disagreement.” Id. at 2857-58 (quotation marks
omitted) (alteration in original).
It is against this backdrop that the Holding Corporations seek reversal of the
district court order. Relying primarily on Granite Rock and its conclusion that
certain “gateway matters” such as the existence of agreement must be determined
before any arbitration may be ordered, the Holding Corporations argue both that 1)
Granite Rock has overturned the bright-line rule announced in Prima Paint; and 2)
their challenges constitute formation challenges within the meaning of Granite
Rock. We disagree with both assertions.
First, Granite Rock did not overturn Prima Paint.9 Instead, it simply makes
explicit a determination that courts have consistently undertaken. While the
Supreme Court had never before mandated that contract formation questions be
reserved for courts of law, both the Supreme Court and other courts have long
recognized such a de facto result. See, e.g., First Options, 514 U.S. at 944 (“When
9
We note at least three reasons why Granite Rock has not overruled Prima Paint: (1) the
Supreme Court has never explicitly overruled its holding in Prima Paint, and we will not assume
a case has been overturned in the absence of such explicit language, see Rodriguez de Quijas v.
Shearson/Am. Express, Inc., 490 U.S. 477, 484 (1989) (“If a precedent of this Court has direct
application in a case, yet appears to rest on reasons rejected in some other line of decisions, the
Court of Appeals should follow the case which directly controls, leaving to this Court the
prerogative of overruling its own decisions.”); (2) Prima Paint continues to play a prominent part
in the Supreme Court’s jurisprudence on the issue of arbitrability, cited approvingly in Granite
Rock, 130 S.Ct. at 2858, and three days earlier in Rent-A-Center, 130 S.Ct. at 2778; and (3) we
have no difficulty reconciling the two cases.
13
deciding whether the parties agreed to arbitrate a certain matter . . . courts
generally . . . should apply ordinary . . . principles that govern the formation of
contracts.”); Adams v. Suozzi, 433 F.3d 220 (2d Cir. 2005) (considering issues of
contract formation prior to enforcement of arbitration clause).
As such, Granite Rock’s threshold inquiry of whether a contract was formed
necessarily precedes Prima Paint’s bright-line rule but does not erase it. Once a
district court has, in accordance with Granite Rock, satisfied itself that “neither the
formation of the parties’ arbitration agreement nor . . . its enforceability or
applicability to the dispute is in issue,” Granite Rock, 130 S.Ct. at 2857-58, it will
then proceed to consider the nature of the challenge under Prima Paint. There is
thus a two-step process required in considering the arbitrability of any contract
containing an arbitration clause: 1) resolution of any formation challenge to the
contract containing the arbitration clause, in keeping with Granite Rock; and 2)
determination of whether any subsequent challenges are to the entire agreement, or
to the arbitration clause specifically, in keeping with Prima Paint.
We now apply that two-step process to the facts at issue here.
III.
First, we address whether the district court properly resolved the formation
challenges to the Exchange Agreement as a binding contract. The Holding
14
Corporations challenge the binding nature of the Exchange Agreement on three
grounds: (a) any agreement was procured by Santander’s fraud in the factum; (b)
there was no meeting of the minds; and (c) the conditions precedent were never
fulfilled. Underlying all three of those challenges is the Holding Corporations’
contention that, since the Exchange Agreement was but a part of the parties’
intended settlement, the district court was required to resolve the Holding
Corporations’ challenges in relation to the comprehensive agreement.
The determination of whether a contract exists between the parties is
governed, as the district court recognized, by state law. See First Options, 514
U.S. at 944. Here, the parties agree that Florida law applies and that the goal of
Florida law vis-à-vis contract formation is to effectuate the parties’ intent. Accord
Commerce Nat’l Bank v. Safeco Ins. Co. of Am., 252 So. 2d 248, 252 (Fla. 4th
DCA 1971) (“A contract should be construed to give effect to the intent of the
parties.”).
It is that issue of intent, though, that is the sticking point here, as the parties
disagree over their respective intent in signing the Exchange Agreement. The
Holding Corporations claim that the Exchange Agreement was only the first step
in a broader comprehensive agreement and that, in fact, the Exchange Agreement
15
is full of ambiguities that prevent it from being binding. Santander takes the
contrary position, citing the plain language of the Exchange Agreement.
In Florida, “[i]t is a fundamental tenet of contract law that a phrase in a
contract is ‘ambiguous’ only when it is of uncertain meaning, and may be fairly
understood in more ways than one.” Emergency Assocs. of Tampa, P.A. v.
Sassano, 664 So. 2d 1000, 1002 (Fla. 2d DCA 1995) (quotation marks and internal
citation omitted). “In the event of such an ambiguity, a trial court is authorized to
admit parol evidence to explain the words used and how the contracting parties
intended them to be interpreted.” Id. (citation omitted). However, in the absence of
such ambiguity, parol evidence is inappropriate. See Fla. Bar v. Frederick, 756 So.
2d 79 (Fla. 2000) (stating parol evidence is only admissible where a party seeking
to introduce such evidence can establish that the document is ambiguous); Lab.
Corp. of Am. v. McKown, 829 So. 2d 311, 313 (Fla. 5th DCA 2002). Thus, where
a contract is facially complete and contains no ambiguous terms, Florida law
requires those contracts be enforced in accordance with their terms. Accord id.;
Arnold v. First Sav. & Trust Co., 104 Fla. 545, 559 (1932) (“It is elementary law
that a contract will be construed according to its own clear and unambiguous
terms, and that the construction placed upon it by the parties thereto is relevant
only in determining the proper construction of a contract when the provisions
16
thereof are ambiguous. If the contract is clear and unambiguous, the legal
construction of it follows, regardless of what construction may apparently have
been placed upon it by the parties.”).
Both before the district court and on appeal, the Holding Corporations
posited certain facts that they claim vitiated their consent to the Exchange
Agreement. For example, they claim that Santander informed them that the
Exchange Agreement was but one part of the comprehensive agreement between
the parties; that they had insufficient time to review the Exchange Agreement,
given the time constraints placed on them once they received the Exchange
Agreement in English; that the parties’ negotiations after the signing of the
Exchange Agreement show that certain terms were still open; and that Santander
had informed them that the Exchange Agreement was limited only to their Madoff
claims. As proof of these facts, the Holding Corporations offer parol evidence
such as affidavits and communications between the parties.
However, the district court properly declined to consider the parol evidence
offered by the Holding Corporations because the Exchange Agreement is not
ambiguous. A plain reading of the Exchange Agreement simply does not support
the Holding Corporations’ contention that “the parties le[ft] open essential terms
17
. . . for further negotiation and execution of subsequent documents.” Most
obviously, the Exchange Agreement’s integration clause, supra, states that the
Exchange Agreement “contains the entire agreement between” the parties.
However, the Exchange Agreement makes no reference to the comprehensive
agreement now alleged by the Holding Corporations. Rather, it clearly describes
the pertinent history leading up to the parties’ agreement; details the parties’
respective obligations under §§ 1-3; and outlines other miscellaneous duties
relating to the enforcement of the agreement. There are no blank spaces reserved
for later resolution, and key terms are defined. On its face, therefore, the Exchange
Agreement is a complete and final document. See Sassano, 664 So. 2d at 1003
(“[I]n the absence of an ambiguity on the face of a contract, it is well settled that
the actual language used in the contract is the best evidence of the intent of the
parties, and the plain meaning of that language controls.” (internal citations and
quotation marks omitted)).
Nor can the Holding Corporations rely upon the fraudulent “inducement
exception” to admit evidence contrary to the parol evidence rule. While the
inducement exception permits the admissibility of certain evidence contrary to the
parol evidence rule, it is inapplicable where the proffered oral testimony sought to
be admitted would “directly contradict[] an express provision” of the Exchange
18
Agreement. Accord Ungerleider v. Gordon, 214 F.3d 1279, 1282 (11th Cir. 2000)
(interpreting Florida law). Moreover, the inducement exception only applies where
a “written instrument does not purport to contain the entire agreement between the
parties.” Id. at 1282 (citing Bond v. Hewitt, 111 Fla. 180, 185 (1933)). No such
circumstances exist here, where the Exchange Agreement, both through its
integration clause and through its lack of reference to other contracts, facially
contained the entire agreement between the Holding Corporations and Santander.
Accordingly, notwithstanding the Holding Corporations’ contentions to the
contrary, the district court properly refused to consider parol testimony on
considering the nature of the Exchange Agreement.
Before we turn to the specific challenges raised by the Holding
Corporations to the Exchange Agreement, however, we must first consider their
challenge to the Exchange Agreement as a part of a broader agreement. The
Holding Corporations now argue that their challenges go not just to the formation
of the Exchange Agreement, but also to the formation of a broader agreement of
which the Exchange Agreement is but a part.
In the context of the FAA, though, challenges to the role of a written
agreement are not questions of formation but rather of validity. As noted above,
the Supreme Court has long recognized a distinction between the two. Buckeye
19
Check Cashing, 546 U.S. at 444 n.1 (“The issue of the contract’s validity is
different from the issue whether any agreement . . . was ever concluded.”). Nor did
Granite Rock amend that distinction. Granite Rock, 130 S.Ct. at 2860 n.9, n.11.
Instead, Granite Rock states explicitly that once a court is satisfied with the
“formation of the parties’ arbitration agreement” and “the applicability of the
specific arbitration clause that a party seeks to have the court enforce,” id. at 2854,
reference to an arbitrator to resolve any outstanding issues is appropriate. With the
district court having satisfied itself that the Exchange Agreement was a binding
contract, asking the district court to assess the validity of the Exchange Agreement
relative to a broader, unexecuted agreement would be an invasion of the
responsibility that the Supreme Court has reserved for the arbitrator. See, e.g.,
Buckeye Check Cashing, 546 U.S. at 448-49 (holding validity challenges to a
whole contract go to the arbitrator); Benoay v. Prudential-Bache Sec., Inc., 805
F.2d 1437, 1441 (11th Cir. 1986) (reserving for arbitrator consideration of certain
claims regarding validity of underlying contract as opposed to validity of
arbitration clause).
Moreover, we note that, in arguing that the district court must consider all
formation challenges subsequent to Granite Rock, the Holding Corporations cite
20
cases that are wholly inapposite.10 For example, citing Gore v. Alltel
Communications, LLC, No. 10-735-DRH, 2011 WL 1303820 (S.D. Ill. Apr. 1,
2011), rev’d, --- F.3d ---, 2012 WL 169758 (7th Cir. (Ill.) Jan. 19, 2012), the
Holding Corporations argue that all contract formation disputes must be resolved
by the district court in the first instance. However, the district court in that case
was faced with an arbitration agreement that the parties disputed having signed.
Gore, 2011 WL at 1303820 at *4. Similarly, the Holding Corporations cite Dedon
GmbH v. Janus et Cie, 411 Fed. Appx. 361 (2d Cir. 2011). However, there too the
existence of a contract containing an arbitration clause was in dispute, as one of
the parties to the contract had not signed it.11 Likewise, another case cited by the
Holding Corporations, Van Tassell v. United Marketing Group, LLC, 795 F. Supp.
2d 770, 788 (N.D. Ill. 2011), involved a party disputing whether it had ever read or
signed the contract in question.
Here, there is no such dispute over whether the parties read or signed the
Exchange Agreement, or whether the Exchange Agreement contained an
10
Of course, it is axiomatic that this Circuit is bound only by its own precedents and
those of the Supreme Court. Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981)
(“[T]he decisions of one circuit are not binding on other circuits.”). This is even more obvious in
the context of a district court determination from another circuit.
11
The signatory dispute is not readily apparent on review of the Second Circuit case,
although it is referred to with particularity by the district court in Dedon GmbH v. Janus et Cie,
No. 10 Civ. 04541, 2010 WL 4227309, *1 (S.D.N.Y. Oct. 19, 2010).
21
arbitration clause to which the parties consented. Cf. Chastain v. Robinson-
Humphrey Co., Inc., 957 F.2d 851, 854 (11th Cir. 1992) (“Under normal
circumstances, an arbitration provision within a contract admittedly signed by the
contractual parties is sufficient to require the district court to send any
controversies to arbitration. The calculus changes when it is undisputed that the
party seeking to avoid arbitration has not signed any contract requiring
arbitration.”); accord Rainbow Invs., Inc. v. Super 8 Motels, Inc., 973 F. Supp.
1387, 1391 (M.D. Ala. 1997) (decided prior to Granite Rock but noting that courts
should consider formation challenges only where there is a “viable claim of lack of
assent” in the form of signatures to the underlying contract).
Thus, requiring the district court to resolve any challenge to the Exchange
Agreement’s place in the alleged comprehensive agreement would constitute
broader inquiry than contemplated by the Granite Rock or Prima Paint Courts;
and, just as importantly, it would be contrary to the explicit terms of the Exchange
Agreement. We decline the Holding Corporations’ request to expand the scope of
inquiry into arbitrability. Therefore, we now turn to the Holding Corporations’
specific formation challenges to the Exchange Agreement as a binding contract.
A.
22
The Holding Corporations first challenge the Exchange Agreement as void
because it was obtained by fraud in the factum. However, much as Shakespeare
long ago observed that a rose by any other name is still but a rose,12 we find that a
fraud in the inducement claim, though garbed in the trappings of fraud in the
factum, is still but a fraud in the inducement claim.13 Because Prima Paint requires
reference to an arbitrator for a general challenge to a contract on the grounds of
fraud in the inducement, Prima Paint, 388 U.S. at 403-04, we are not surprised that
the Holding Corporations seek instead to plead a claim for fraud in the factum.
However, a rose is but a rose.
As an initial matter, we note the distinction in case law between fraud in the
factum and fraud in the inducement. As noted by one of our district courts,
[f]raud in the inducement consists of one party's misrepresenting a material
fact concerning the subject matter of the underlying transaction and the
12
William Shakespeare, “Romeo and Juliet,” act. 2, sc. 2.
13
A successful fraud in the factum claim makes the underlying contract void ab initio,
Baumann v. Savers Fed. Sav. & Loan Ass’n, 934 F.2d 1506, 1516 (11th Cir. 1991)(“Fraud in the
factum renders an instrument entirely void . . . .”), whereas a successful claim for fraud in the
inducement only makes the underlying contract voidable. See Fed. Sav. & Loan Ins. Corp. v.
Gordy, 928 F.2d 1558, 1565 (11th Cir. 1991) (“Fraud in the inducement . . . render[s] the
instrument merely voidable and thus capable of transfer.”). Of the two, only voidable contracts
are subject to rescission but still create legal obligations. Sphere Drake Ins. Ltd. v. Clarendon
Nat’l Ins. Co., 263 F.3d 26, 31 (2d Cir. 2001). This distinction is therefore crucial to determining
whether a contract exists for purposes of arbitration. But cf. Buckeye Check Cashing, 546 U.S. at
440 (begging the question whether that distinction still exists). While four Supreme Court
justices disregard this distinction, see Rent-A-Center, 130 S.Ct. at 2786 (Stevens, J., dissenting)
(“Whether the general contract defense renders the entire agreement void or voidable is
irrelevant.”), we need not reach that issue, given the facts of this case.
23
other party's relying on the misrepresentation to his, her, or its detriment in
executing a document or taking a course of action. On the other hand,
[f]raud in the factum occurs when a party procures a[nother] party's
signature to an instrument without knowledge of its true nature or contents.
Reynolds v. Credit Solutions, Inc., 541 F. Supp. 2d 1248, 1260 (N.D. Ala. 2008),
vacated on other grounds by Picard v. Credit Solutions, Inc., 564 F.3d 1249 (11th
Cir. 2009) (quotation marks, internal references, and citations omitted); see also
Fed. Sav. & Loan Ins. Corp. v. Gordy, 928 F.2d 1558, 1565 (11th Cir. 1991)
(same). This distinction is echoed by the Florida Supreme Court. See, e.g.,
Browning v. Fla. Hometown Democracy, Inc., PAC, 29 So. 3d 1053, 1061 n.4
(Fla. 2010) (citing Black’s Law Dictionary for similar distinction).
The primary difference between the two species of fraud claims lies in the
parties’ understanding of the contract into which they are entering. See, e.g.,
Cancanon v. Smith Barney, Harris, Upham & Co., 805 F.2d 998 (11th Cir. 1986)
(denying arbitration clause on basis of fraud in the factum). If a party understands
the nature of the contract they are executing but contends that there has been some
material misrepresentation as to the obligations rising thereunder, only a fraud in
the inducement claim will lie. Accord Browning, 29 So. 3d at 1061 n.4 (noting
fraud in the inducement arises from misrepresentation that leads one to enter a
contract “with a false impression of the risks, duties, or obligations involved,”
24
while fraud in the factum arises “when a legal instrument executed differs from the
one intended for execution”).
Cancanon, notwithstanding the Holding Corporations’ argument to the
contrary, is representative of this distinction. There, the plaintiffs (who could not
read English) alleged that they were told by their English-speaking financial
advisor that they were signing an agreement to open a money market account.
Cancanon, 805 F.2d at 999. In reality, however, they had been given a security
account agreement that permitted representatives of Smith Barney to trade
securities on their behalf. The plaintiffs signed the agreement. After suffering
substantial losses arising from Smith Barney’s securities trades and associated
fees, the plaintiffs sued, alleging fraud in the factum. Smith Barney moved to
compel arbitration under the terms of the signed agreement. Both the district court
and our court found that arbitration was inappropriate because of the alleged
“misrepresentation of the character or essential terms of the contract.” Id. at 1000.
See also In re Arbitration Between Nuclear Elec. Ins. Ltd., 926 F. Supp. 428, 434
(S.D.N.Y. 1996) (noting other types of fraud in the factum include forgery of
signature, physical coercion, and the like).
Applying this understanding to the Holding Corporations’ allegations in the
Amended Complaint, we conclude that they cannot state a claim for fraud in the
25
factum. Simply put, their allegations do not relate to the execution of the contract,
but instead to their obligations thereunder. For example, they do not allege that
they could not read the Exchange Agreement, as did the Cancanon plaintiffs.
Cancanon, 805 F.2d at 999. Instead, the record is clear that the Holding
Corporations here received both an English and Spanish version of the Exchange
Agreement before signing it, and that they understood exactly what it was they
were signing. Nor have the Holding Corporations alleged that they believed the
Exchange Agreement to be something different from what it was, as did the
Cancanon plaintiffs. Id. Here, the Holding Corporations knew what they signed
and admit that the Exchange Agreement was understood to bind the parties. Their
signatures serve as testament to that understanding. Their contention that there
were other, subsequent contracts contemplated does not negate the district court’s
proper finding that the Exchange Agreement itself constituted a binding contract.
Therefore, this case presents the situation where a party understands the nature of
the contract but contends there has been some underlying material
misrepresentation. A fraud in the factum claim will not lie under such
circumstances.
Instead, since the Holding Corporations’ allegations are more properly
characterized as relating to fraud in the inducement, the issue becomes one
26
properly reserved for an arbitrator. See Prima Paint, 388 U.S. at 403-04. The
district court having found the same, we affirm that finding.
B.
The Holding Corporations also challenge the Exchange Agreement for an
alleged lack of a meeting of the minds. Namely, they contend that “when parties
leave open essential terms of a contract for further negotiation and execution of
subsequent documents, a binding contract does not exist.” In support, they cite
cases such as David v. Richman, 568 So. 2d 922, 924 (Fla. 1990), Montgomery v.
English, 902 So. 2d 836, 838 (Fla. 5th DCA 2005), and Collectors Editions, Inc. v.
Peak, 848 So. 2d 473, 475 (Fla. 5th DCA 2003). We need not address this
contention at length, given our finding, supra, that there were no terms left open
by the Exchange Agreement.14 Where a contract is complete on its face, Florida
law does not allow further inquiry into whether the contract is a part of a broader
contract that is not referenced. See, e.g., Rocky Creek Ret. Props., Inc. v. Estate of
Fox ex rel. Bank of Am., N.A., 19 So. 3d 1105, 1108-09 (Fla. 2d DCA 2009)
14
Nor do we find the cases cited by the Holding Corporations persuasive in this regard,
since each is predicated on easily distinguished facts from those at issue here. See David, 568 So.
2d at 923 (involving a real estate contract in which there were numerous spaces left blank at the
time of execution); Montgomery, 902 So. 2d at 837-38 (predicated on one party’s failure to agree
to certain hand-written changes to a written real estate contract); Peak, 848 So. 2d at 474-75
(dealing with ongoing settlement discussions between parties where neither party had signed a
written settlement agreement). Here, unlike in those cases, the parties made no changes to the
unambiguous and express language of the Exchange Agreement and executed it in its entirety.
27
(refusing to consider challenge to contract containing arbitration clause where
contract was facially complete and parties are “conclusively presumed to know
and understand the contents, terms, and conditions of the contract” they execute).
C.
Lastly, the Holding Corporations’ contend that the Exchange Agreement is
not a binding agreement because certain conditions precedent were unfulfilled. We
reject that argument on two discrete bases: 1) Florida law does not regard
conditions precedent as issues of contract formation; and 2) alleged conditions
precedent that are not expressly adopted by the underlying contract are not
appropriate for district court consideration.
First, although Florida law permits an exception to the parol evidence rule
in the context of a condition precedent, such an exception does not overturn the
propriety of the district court’s order compelling arbitration. Florida law permits
oral testimony to show that a written contract, while unconditional on its face, was
delivered subject to a condition precedent. See Ketchian v. Concannon, 435 So. 2d
394, 395 (Fla. 5th DCA 1983). However, under Florida law, whether a condition
precedent is at issue is not relevant to contract formation.
Instead, even in the words of the case relied upon by the Holding
Corporations, Ketchian, a condition precedent arises as a “defense of non-
28
performance.” Id. at 396; see also Custer Med. Ctr. v. United Auto. Ins. Co., 62
So. 3d 1086, 1096 (Fla. 2010) (“[A] defending party's assertion that a plaintiff has
failed to satisfy conditions precedent necessary to trigger contractual duties under
an existing agreement is generally viewed as an affirmative defense, for which the
defensive pleader has the burden of pleading and persuasion.”) (emphasis in
original); cf. Christian Mut. Life Ins. Co. v. Penn Mut. Life Ins. Co., 163 F. Supp.
2d 260, 262-63 (S.D.N.Y. 2001) (holding under New York law that conditions
precedent are not a defense to contract formation). As such, the issue is not one of
contract formation for purposes of Granite Rock under Florida law. See Victor v.
Dean Witter Reynolds, Inc., 606 So. 2d 681, 683 n.5 (Fla. 5th DCA 1992) (holding
under both Florida law and FAA that factual affirmative defenses are properly
decided by the arbitrator rather than the court).15
Moreover, distinct from the nature of a condition precedent as an
affirmative defense, we also find unpersuasive the cases cited by the Holding
15
We therefore need not address the Holding Corporations’ reliance on unsatisfied
conditions precedent. Nonetheless, we have some doubt that conditions precedent that are not
expressly referenced by a written agreement may vary the explicit terms of a written agreement
under Florida law. Compare Gunderson v. Sch. Dist. of Hillsborough Cnty., 937 So. 2d 777, 779
(Fla. 1st DCA 2006) (“Provisions of a contract will only be considered conditions precedent or
subsequent where the express wording of the disputed provision conditions formation of a
contract and or performance of the contract on the completion of the conditions.” (emphasis
omitted)), with S. Internet Sys., Inc. ex rel. Menotte v. Pritula, 856 So. 2d 1125, 1128 (Fla. 4th
DCA 2003) (finding contract was unenforceable because of failure of condition precedent
expressly referenced by contract). However, because that issue is ultimately for the arbitrator, we
decline to address it here.
29
Corporations. The Holding Corporations rely primarily upon Adams in arguing
that conditions precedent constitute a contract formation question that must be
considered by the district court rather than an arbitrator.16 However, in Adams the
conditions precedent were expressly stated in two sections of the agreement
entered into by the parties. Adams, 433 F.3d at 223. As such, the inquiry into
whether a contract was formed necessarily hinged upon whether those conditions
had been satisfied. Such an issue is inherently akin to the issue in Granite Rock,
where the inquiry hinged upon whether the arbitration clause-containing contract
had been ratified. Granite Rock, 130 S.Ct. at 2860 n.9.
However, a condition precedent that is expressly referenced by a contract is
a far cry from a condition precedent about which a signed agreement is silent.
Instead, such an inquiry would require the district court to delve into issues
beyond the validity or execution of a contract, consider the communications
between the parties leading up to and after the signing of any agreement, and
ignore the express language of any integration clause, as was present here in the
Exchange Agreement. Accord Victor, 606 So. 2d at 683 n.5. In other words, such
an inquiry would require a district court to invade the province of the arbitrator.17
16
We also note that Adams relied on New York law for its interpretation of conditions
precedent in the arbitrability context. Id. at 227.
17
Certainly, where, as here, such an inquiry would necessitate extensive discovery and
expend limited judicial resources, as well as run contrary to a signed agreement in which the
30
Considering the totality of the Holding Corporations’ formation challenges
to the Exchange Agreement as a binding contract, it is clear that the district court
properly considered any challenges it was required to consider under Granite
Rock.
IV.
Therefore, having considered the first step of the Granite Rock inquiry, the
district court was then required to consider the second inquiry under Prima Paint.
Prima Paint hinges upon whether the challenge raised is to the arbitration clause
specifically, or to the contract in which the arbitration clause is found generally.
Prima Paint, 388 U.S. at 403-04. We need not consider this issue at length, as the
Holding Corporations do not differentiate between the formation of the arbitration
clause specifically when challenging the Exchange Agreement. As the district
court stated, the Holding Corporations “fail to specifically allege any
misrepresentation that allegedly induced them to agree to the Arbitration Clause,
other than those that relate generally to the Exchange Agreement as a whole.” R &
R at 22. Upon independent consideration of the Amended Complaint, we must
agree.
arbitration clause was found, ideals of judicial efficiency and the aims of the FAA require such
inquiry be made by the arbitrator rather than the court.
31
The allegations of the Amended Complaint make it clear that the Holding
Corporations do not challenge the formation of the arbitration clause within the
Exchange Agreement, but rather the entirety of the Agreement. For example, the
Amended Complaint states that the Holding Corporations “seek a declaratory
judgment declaring ‘the Exchange Agreement’ that was negotiated in connection
with the parties’ initial settlement discussions . . . to be void ab initio because the
parties never reached a final, enforceable agreement . . . .” Am. Compl. ¶ 14.
Although most of the remaining 149 pages of the Amended Complaint are silent
regarding the nature of the Holding Corporations’ challenge to the Exchange
Agreement, nonetheless Count XIV of the Amended Complaint refers specifically
to those allegations. For example, the Holding Corporations allege that “the
Exchange Agreement and the arbitration and forum selection clauses contained
therein, in particular, are unenforceable because [the Holding Corporations] were
fraudulently induced to sign the Exchange Agreement and to agree to the
arbitration and forum selection clauses therein.” Id. ¶ 501. However, the Amended
Complaint alleges no facts regarding the arbitration clause specifically, nor does it
differentiate between Santander’s allegedly fraudulent actions. Instead, it is silent
regarding any distinction between the alleged inducements to enter the Exchange
Agreement vis-à-vis the arbitration clause therein.
32
There can thus be no doubt that the Holding Corporations’ challenges are
not specific to the arbitration clause of the Exchange Agreement. Because Prima
Paint was intended to prevent district courts from considering such broad
challenges to general contracts containing arbitration clauses, Prima Paint applies
here. We therefore affirm the district court’s application of Prima Paint to the
Holding Corporations’ challenges.
V.
Lastly, the Holding Corporations contend that, even if some of their claims
are arbitrable under the Exchange Agreement because of the nexus with the losses
they suffered from Madoff’s fraud, the first four counts of their Amended
Complaint are not. Specifically, they contend that the Exchange Agreement
requires arbitration “only as to claims arising from investments in Optimal SUS
and 1.3% of the Arbitrage Fund.” Appllnt. Br. at 53. However, the Holding
Corporation characterizes their claims under Counts I-IV as relating to Santander’s
“recommendations of unsuitable investments contrary to [their] stated risk of
tolerance and investment objectives, not including Optimal SUS and 1.3% of
Arbitrage.” Id. at 54. We perceive no such distinction in the Holding
Corporations’ pleadings.
33
The Amended Complaint itself belies the Holding Corporations’ distinction
between the claims arising from Santander’s negligence and others arising from
Madoff’s fraud. In Count I, for example, the Holding Corporations, after adopting
the previous 91 pages and 314 paragraphs of allegations relating to the facts
underlying their claims (many of which pertained to Madoff’s fraud), allege
specifically that Santander
continu[ed] to promote and recommend that [the Holding
Corporations] invest additional funds in Optimal SUS and Arbitrage
after they knew or reasonably should have known that Madoff was
engaged in fraudulent conduct such that any additional investments
placed with Madoff through Optimal SUS and Arbitrage would
further expose [the Holding Corporations] to the fraud . . . .
Am. Compl. ¶ 322(h). Nor is Count I alone in alleging the pertinence of Madoff’s
fraud to the Holding Corporations’ losses.18 Count III also adopts 314 paragraphs
of allegations and alleges the identical language as cited above in Count 1. Id.
¶340(h). So does Count IV. Id. ¶350(h).
The Exchange Agreement clearly encompasses such claims. As noted
above, the arbitration clause, section 6.1, states that “all controversies between the
client and the bank or the bank parties arising out of or relating to this agreement
or matters related thereto” must be arbitrated. The “whereas” clauses within the
18
While Count II does not refer to Madoff’s fraud, it is explicitly pleaded in the
alternative to Count I and is therefore inherently related to the allegations contained in ¶ 322(h)
of the Amended Complaint.
34
Exchange Agreement refer directly to the Optimal Strategic funds and their
Madoff nexus. See, e.g., Exch. Agmnt. at 2(IV). Moreover, the release within the
Exchange Agreement, found in section 3(F), provides a release of claims “whether
arising out of statute, regulations, contracts, breach of fiduciary duty or tort or
otherwise, and whether based on strict liability, fraud, gross negligence or
negligence or otherwise . . . .” On consideration of the Holding Corporations’
claims in light of those sections of the Exchange Agreement, there can be no doubt
that the parties intended to encompass all such claims as the Holding Corporations
now seek to state.19
VI.
For the reasons noted above, we find that the district court, having correctly
found that the Exchange Agreement executed by the parties was a binding
contract, was bound by federal arbitration law and state principles of contract law
to dismiss the Holding Corporations’ challenges to the Exchange Agreement as
part of a comprehensive settlement agreement. Such challenges, as made clear
both by Granite Rock and Prima Paint, are properly reserved for an arbitrator.
Moreover, since the entirety of the claims stated by the Amended Complaint were
covered by the Exchange Agreement’s arbitration clause, the district court
19
This finding also comports with the“national policy” favoring arbitration. Buckeye
Check Cashing, 546 U.S. at 443.
35
correctly dismissed the entirety of the Amended Complaint in favor of
arbitration.20
AFFIRMED.
20
Of course, we make no finding regarding the boundaries of the parties’ comprehensive
settlement agreement, or whether their agreement was limited to the Exchange Agreement. These
matters are properly reserved for other entities in accordance with the Exchange Agreement.
36