             In the Missouri Court of Appeals
                                Eastern District
                                          DIVISION III

LOVELACE FARMS, INC., et al,                  )               No. ED101069
                                              )
                Respondents,                  )               Appeal from the Circuit Court
                                              )               of St. Louis County
vs.                                           )
                                              )               Honorable Barbara W. Wallace
MARVIN MARSHALL, et al.,                      )
                                              )
                Appellants.                   )               FILED: September 16, 2014


                                            Introduction

         Appellants Marvin Marshall and P.J. Marshall (“the Marshalls”) appeal from the

judgment of the Circuit Court of St. Louis County granting Respondents Lovelace Farms, Inc.,

Wayne Lovelace, and Judy Lovelace‟s motion to stay arbitration. The Marshalls assert that the

circuit court erred in staying arbitration because the Federal Arbitration Act (“FAA”) compelled

arbitration. Specifically, the Marshalls contend that the parties‟ disputes come within the broad

scope of a valid arbitration agreement, and any questions as to arbitrability, including the issue of

waiver, should be decided by the arbitrator, not the court. Because the issue of waiver based on

litigation conduct is a matter for the court and not the arbitrator to decide, and because the

Marshalls by their conduct waived their right to arbitration, we affirm the judgment of the circuit

court.
                                     Factual and Procedural Background

         Wayne and Judy Lovelace (“the Lovelaces”) operate Lovelace Farms, a tree farm near

Elsberry, Missouri. The Lovelaces invented a method for accelerating tree growth called the

Root Production Method (“RPM”). In 2006, the Lovelaces entered into a relationship with the

Marshalls to create business entities in the hope of profiting from the RPM technology. To that

end, three limited liability corporations were formed: RPM Holdings, LLC, (“Holdings”), RPM

Ecosystems, LLC (“Ecosystems”), and RPM Technologies, LLC (“Technologies”). Equity in

Holdings was split equally between the Marshalls and Lovelaces.1 Ecosystems was wholly

owned by Holdings, and thus was owned equally by the Marshalls and Lovelaces through their

equal ownership of Holdings. Technologies was owned by the Lovelaces only. Each LLC was

governed by its own operating agreement, and all three operating agreements contained the

following mediation and arbitration clause:

         11.1 All disputes, claims, or controversies between Members, or between the
         Company and any Member(s) arising under or in any way relating to this
         Agreement . . . shall be [] first submitted to and settled, if possible pursuant to
         mediation in accordance with the procedures set forth [below] and, if necessary,
         binding arbitration pursuant to Section 11.[2] of the Agreement.

         11.2 Any Management Dispute not resolved pursuant to section 11.1 shall be
         resolved by arbitration pursuant to the procedures set forth below, before Neutral
         Arbitrators appointed in accordance with the Commercial Arbitration Rules of the
         American Arbitration Association . . . and administered by the American
         Arbitration Association in accordance with its Commercial Arbitration Rules as in
         effect at the time a request for arbitration is made.

         Sometime after the formation of the three LLCs, Ecosystems purchased trees from

Lovelace Farms. Lovelace Farms alleged that Ecosystems failed to pay for the trees, and

subsequently filed a collection action against Ecosystems. The lawsuit, filed July 6, 2009, in the


1
  The Marshalls and Lovelaces further divided their equity interests in the three companies between members of
their immediate family. For clarity, we will refer to all members of each family collectively as “the Marshalls” and
“the Lovelaces.”

                                                          2
Circuit Court of Lincoln County, sought $465,000 for trees purchased by Ecosystems. The case

was thereafter transferred from the Circuit Court of Lincoln County to the Circuit Court of St.

Louis County.

       On September 22, 2009, Ecosystems filed an answer and counterclaim petition against

Lovelace Farms. On November 10, 2009, the Marshalls joined the lawsuit as counterclaim-

plaintiffs and together with Ecosystems filed an amended counterclaim petition against Lovelace

Farms and the Lovelaces, whom they joined as counterclaim-defendants. Ecosystems and the

Marshalls asserted counterclaims for breach of contract, specific performance, tortious

interference, breach of fiduciary duty, and fraud against Lovelace Farms and the Lovelaces

(hereinafter, “the Lovelace parties”). In response, the Lovelace parties filed an amended petition

raising additional claims against Ecosystems and the Marshalls individually for breach of

contract, quantum merit, relief under the UCC, breach of fiduciary duty, aiding and abetting

tortious interference, and an accounting.

       On June 8, 2010, Holdings and Ecosystems commenced a federal bankruptcy proceeding

in the United States Bankruptcy Court for the Northern District of New York. The bankruptcy

filing imposed an automatic stay upon all litigation regarding those entities.

       On November 4, 2013, the Marshalls filed a demand for arbitration with the American

Arbitration Association. The initial demand named Holdings, Ecosystems, Technologies, and

the Lovelaces as respondents and included claims for specific performance, breach of contract,

breach of fiduciary duty, and related business torts. Shortly thereafter the Marshalls filed an

amended demand for arbitration that withdrew their claims against Holdings and Ecosystems.

       In response to the Marshalls‟ demand for arbitration, the Lovelace parties filed a motion

to stay arbitration in the pending action in the Circuit Court of St. Louis County. The Lovelace



                                                 3
parties argued, inter alia, that the circuit court case involved claims not subject to arbitration and,

to the extent that any claims were subject to arbitration, the Marshalls waived their right to

arbitrate the claims by first pursuing such claims in circuit court.

       The circuit court heard argument on the motion to stay arbitration on December 19, 2013.

Thereafter, the circuit court requested supplemental briefing on the issue of waiver. On January

14, 2014, the circuit court granted the motion to stay arbitration. The Marshalls now appeal.

                                          Point on Appeal

       In their sole point on appeal, the Marshalls assert that the circuit court erred in staying

arbitration because the FAA compels arbitration. The Marshalls contend that the parties‟

disputes are encompassed within the broad scope of a valid arbitration agreement, and that any

questions regarding arbitrability, including the issue of waiver, must be decided by the arbitrator,

not the court.

                                         Standard of Review

       “An appellate court‟s review of the arbitrability of a dispute is de novo.” Dunn Indus.

Grp., Inc. v. City of Sugar Creek, 112 S.W.3d 421, 428 (Mo. banc 2003). Our review of whether

a party has waived its right to arbitrate is also de novo. Getz Recycling, Inc. v. Watts, 71 S.W.3d

224, 228 (Mo. App. W.D. 2002).

                                                 Discussion

       In their sole point on appeal, the Marshalls maintain that the trial court erred in granting

the Lovelace Parties‟ motion to stay arbitration because the litigated disputes between the parties

fall within the broad scope of the arbitration clauses set forth in the individual operating

agreements for Holdings, Technologies, and Ecosystems. The Marshalls reason that once it is




                                                  4
determined that litigated disputes come within the scope of a valid arbitration agreement, all

other issues, including disputes over arbitrability, must be referred to the arbitrator.2

         The Lovelace parties counter that the Marshalls are not parties to two of the operating

agreements upon which they rely – the Ecosystems Operating Agreement and the Technologies

Operating Agreement – and thus cannot avail themselves of the arbitration clauses in those

agreements. The Lovelace parties contend that the only operating agreement to which the

Marshalls are a party is the Holdings Operating Agreement, and that the Marshalls‟ claim against

Lovelace Farms and the Lovelaces do not fall within the arbitration provision of the Holdings

Operating Agreement because that arbitration provision applies only to disputes between

“Members” or between “the Company and Members.” The Lovelace parties further assert that,

even if some of the Marshalls‟ claims fall within the scope of the arbitration clause in the

Holdings Operating Agreement, the Marshalls have waived any right to now initiate arbitration

as a result of their four-year delay in seeking arbitration and their participation in litigation

conduct. The Lovelace parties further allege that waiver is a question for the court, not the

arbitrator.

         Valid arbitration clauses that affect interstate commerce must be enforced according to

the FAA, 9 U.S.C. § 1, et. seq., unless an exception applies. McIntosh v. Tenet Health Sys.

Hosps., Inc., 48 S.W.3d 85, 88 (Mo. App. E.D. 2001). Both parties agree that the contracts at

issue here involved interstate commerce and, therefore, federal law applies. See Major Cadillac,

Inc. v. Gen. Motors Corp., 280 S.W.3d 717, 721 (Mo. App. W.D. 2009). To determine whether




2
  The Marshalls also argue that the parties agreed to arbitrate all issues of arbitrability by adopting the rules of the
American Arbitration Association in all three operating agreements. Because this argument was not presented to the
trial court and is not contained in the Marshalls‟ point relied on, we do not consider it. State ex rel. Nixon v. Am.
Tobacco Co., 34 S.W.3d 122, 129 (Mo. banc 2000); Rule 84.04(e).

                                                           5
arbitration should be compelled, a trial court must decide if a valid arbitration agreement exists

and, if so, whether the disputes fit within the scope of the arbitration clause. Id.

I.       Waiver through litigation conduct is decided by the court.

         A party to an arbitration agreement can waive its right to arbitrate disputes in different

ways. The Eighth Circuit has held that claims of waiver based on some types of conduct must be

decided by courts, while claims of waiver based on other types of conduct must be decided by

arbitrators. In N & D Fashions, Inc. v. DHJ Industries, Inc., the Eighth Circuit explained that

courts generally decide whether a party has waived its right to arbitrate by “actively

participat[ing] in a lawsuit or tak[ing] other action inconsistent with the right to arbitration.”

N & D Fashions, Inc. v. DHJ Industries, Inc., 548 F.2d 722, 728 (8th Cir.1976) (quotations

omitted). By contrast, arbitrators generally decide claims of waiver based on arguments that

arbitration “would be inequitable to one party because relevant evidence has been lost due to the

delay of the other.” Id. The Eighth Circuit described this second kind of waiver as “„waiver‟ . . .

in the sense of „laches‟ or „estoppel.‟”3 Id.

         The record before us confirms that this case involves an assertion of the first kind of

waiver – waiver through litigation conduct. Specifically, the Lovelace parties contend that the

Marshalls waived any right they may have to arbitration under the operating agreements by first

pursuing their claims before a judge in the circuit court, and participating in that litigation for

four years before seeking arbitration. Under N & D Fashions, waiver through litigation conduct

is clearly a matter for the court to decide. Id. Because the issue of waiver was appropriately

before the circuit court, we now address the substantive arguments presented in this appeal.

3
  N&D Fashions is consistent with those cases cited by the Marshalls that hold procedural questions such as waiver,
delay, or a like defense to arbitrability are to be decided by the arbitrator. These cases correctly state that the second
type of waiver discussed by the Eighth Circuit – waiver by delay – is an issue to be determined by the arbitrator.
See Parler v. KFC Corp., 529 F. Supp. 2d 1009, 1011 (D. Minn. 2008) (providing an in-depth discussion of the two
types of waiver traditionally recognized by federal courts).

                                                            6
II.    The Marshalls waived their right to arbitration.

       Both Missouri and federal courts use the same three-factor test to establish waiver of the

right to arbitrate. The party seeking to establish waiver bears the burden of demonstrating that

the alleged waiving party: “(1) had knowledge of the existing right to arbitrate; (2) acted

inconsistently with that existing right; and (3) prejudiced the party opposing arbitration by such

inconsistent acts.” Berhorst v. J.L. Mason of Missouri, Inc., 764 S.W.2d 659, 662 (Mo. App.

E.d. 1988); Stifel, Nicolaus & Co. Inc. v. Freeman, 924 F.2d 157, 158 (8th Cir. 1991). Whether

the party opposing arbitration has been prejudiced by acts inconsistent with arbitration is a

determination to be made on a case-by-case basis. A finding of prejudice may result from lost

evidence, duplication of efforts, use of discovery methods unavailable in arbitration, litigation of

substantial issues, and postponing invoking arbitration, thereby causing the opposing party to

incur unnecessary delay or expense. Reis v. Peabody Coal Co., 935 S.W.2d 625, 631 (Mo. App.

E.D. 1996). Although delay in requesting arbitration by itself does not constitute prejudice,

“delay and the moving party‟s trial-oriented activity are material factors in assessing prejudice.”

Id. (quoting Fraser v. Merrill Lynch Pierce, Fenner & Smith, Inc., 817 F.2d 250, 252 (4th

Cir.1987)). Waiver must be evaluated in light of the federal policy which strongly favors

arbitration. McCarney v. Nearing, Staats, Prelogar & Jones, 866 S.W.2d 881, 890 (Mo. App.

W.D. 1993). Thus, in considering the three-factor test, any doubts as to whether waiver has

occurred must be resolved in favor of arbitration. Freeman, 924 F.2d at 158.

       The Marshalls do not dispute the first two factors of the waiver test; they concede their

knowledge of the right to arbitrate and conduct inconsistent with that right. The Marshalls insist,

however, that the Lovelace parties have suffered no prejudice as a result of their delay in seeking

arbitration. We are not persuaded.



                                                 7
        The record shows that Lovelace Farms filed a petition seeking collection of a debt against

against Ecosystems in the Circuit Court of Lincoln County. Limited issues were presented in the

initial petition. Lovelace Farms is not a party or signatory to any of the aforementioned

operating agreements. The Marshalls substantially broadened the scope of the collection action

filed by Lovelace Farms by filings counterclaims and adding parties. The record supports a

finding that the Lovelace parties spent a significant amount of time and money pursuing claims

and defending against counterclaims initiated by the Marshalls in the circuit court action. On

October 22, 2009, the Lovelace parties filed an answer to Ecosystems and the Marshalls‟

Counterclaim and a motion to dismiss Count V of the Counterclaim. Thereafter, the Lovelace

parties defended against two motions to strike and two motions to dismiss,4 in addition to

answering Ecosystems and the Marshalls‟ First Amended Counterclaim. In pursuit of their own

claims, the Lovelace parties amended their petition three times and sought a temporary

restraining order against Ecosystems and the Marshalls. Nothing in the record before us

indicates that the Marshalls asserted their right to arbitration, or otherwise notified the Lovelace

parties of their desire to proceed in arbitration, at any time throughout this period of substantial

litigation activity.

        The Marshalls could have demanded arbitration as early as 2009, but instead chose to

initiate and pursue counterclaims against the Lovelace parties in circuit court. Prejudice can be

established “where a party has postponed arbitration causing his adversary unnecessary delay or

expense.” Getz Recycling, Inc., 71 S.W.3d at 229. Prejudice may also be found “when a party‟s

time and funds are expended because that party has not received the benefit of arbitration:

„efficient and low-cost resolution of disputes.‟” Major Cadillac, Inc., 280 S.W.3d at 723


4
 A third motion to dismiss was filed by Ecosystems and the Marshalls on March 5, 2010, but the motion was not
briefed by either party.

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