District Court Rules that Individual LLC Member Is Third-Party Beneficiary and Bound by Arbitration Agreement


The US District Court for the Southern District of Florida confirmed that third-party beneficiaries of a contract containing an arbitration clause may be compelled to arbitrate their claims notwithstanding that the third-party beneficiary is not technically a party to the agreement.

Plaintiff Great Lakes Reinsurance brought claims in federal court, as subrogee for its policyholder, for negligence, gross negligence and bailment against Sunset Harbor Yacht Club, Inc. and Sunset Harbor Marina, Inc. The defendants moved to compel arbitration.

In 2009, David Trafton reported his boat stolen from the Marina and, following an insurance investigation, had his loss paid by Great Lakes. Trafton’s father, who originally purchased the boat and sold it to his son in 2006, had the boat docked at the Marina since 2003. David Trafton signed a dockage agreement at the Marina giving the Traftons temporary access to a slip for the boat until they could set up a membership with the Yacht Club and get a permanent slip. Consistent with the terms of the membership plan, the Traftons set up a limited liability company to purchase an equity membership in the Yacht Club. The company completed the purchase in 2003. Although David Trafton was a member of the company, only his father and his father’s wife signed the purchase agreement.

The parties did not dispute that the limited liability company was a member of the Yacht Club and bound by the Yacht Club’s Bylaws, which mandate that all disputes be decided by mediation, and, if necessary, arbitration. The only dispute was over whether David Trafton, as an individual, was a member and thus bound by the arbitration provision of the bylaws.

Although David Trafton was not a signatory to the arbitration agreement, defendants contended that he was an intended third-party beneficiary of the company’s membership. Plaintiff maintained that David Trafton was never an intended beneficiary and that his father was the “designated user” and therefore the intended beneficiary.

The court, applying Florida law, concluded that David Trafton was an intended beneficiary because he availed himself of the membership benefits whenever he chose. David Trafton testified that he was the member of the company who most frequented the Yacht Club and that he always had a means of entry to the private facility. The fact that he was arguably a step removed from the arbitration agreement did not mean, according to the court, that he should be able to enjoy the benefits of the company’s membership without being bound by the arbitration agreement.

Great Lakes Reinsurance (UK) PLC v. Sunset Harbor Marina, Inc., No. 10-CV-24469 (S.D.Fla. Dec. 12, 2012).


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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