Opinion
218-2022-CV-00585
12-20-2022
Grace Costa and Michael McCann v. PureFacts Financial Solutions, Inc., et al
ORDER
DAVID A. ANDERSON, JUDGE
Plaintiffs have brought this action against Defendants for claims arising out of the alleged breach of a number of contracts between the parties. Presently before the Court are Defendants' motions to dismiss or stay certain claims either (1) for failure to state a claim; (2) pursuant to a forum selection clause; or (3) pursuant to a mandatory arbitration provision. Plaintiffs object. The Court held a hearing on November 3, 2022. For the reasons that follow, Defendants' motions are GRANTED in part and DENIED in part.
Factual Background
In 2013, Plaintiffs founded VennScience, LLC in New Hampshire. In 2020, defendant PureFacts Financial Solutions, Inc. ("PFS") approached Plaintiffs about acquiring VennScience. Plaintiffs agreed to the acquisition and the parties entered into a series of contracts.
For the sale of Plaintiffs' interest in VennScience to PFS, the parties entered into a Membership Interest Purchase Agreement (MIPA) on May 1, 2020. Under the MIPA, VennScience remained a New Hampshire LLC but PureFacts USA, Inc. became its sole member and Robert Madej, PureFacts' CEO and Chairman of the Board of Directors, became its sole manager. Following closing of the acquisition, and as a condition thereof, PFS offered Plaintiffs continued employment with VennScience, the terms of which were set forth in a pair of Employment Agreements. (See generally Compl., Ex. 1.) Under these Employment Agreements, PFS retained McCann as President of VennScience and Costa as Senior Vice President of Client Success of VennScience. (Id.) Plaintiffs also acquired equity in PFS that was governed by an Employee Share Ownership Plan (ESOP) Agreement. (Compl., Ex. 3.)
Each of the foregoing contracts contains different choice of law and forum selection clauses. The MIPA provides that it is governed by New York law and that issues arising thereunder shall be litigated in New York. (Compl., Ex. 2 § 8.11.) In contrast, each of the Employment Agreements are governed by New Hampshire law and identify New Hampshire as the chosen forum for resolving disputes thereunder. (Compl., Ex. 1 § 11.1.) Finally, Ontario law governs the ESOP and disputes arising out of same are subject to mandatory arbitration under Ontario's Arbitration Act of 1991. (Compl., Ex. 3 §§ 11.01 &11.03.)
Plaintiffs claim that PureFacts failed to fulfill their obligations under the agreements and hindered Plaintiffs' ability to meet their own obligations and performance benchmarks. PureFacts eventually terminated Plaintiffs' employment, initially without cause. The parties subsequently engaged in discussions about severance, earn-out consideration, and redemption of Plaintiffs' PureFacts stock. After these preliminary discussions failed to result in an agreement, Defendants changed their position and notified Plaintiffs in a letter dated April 21, 2021, that they were being terminated for cause. As a result, Defendants have failed to pay severance and earnout consideration as contemplated under the above contracts. In addition, Madej, acting under a power of attorney granted pursuant to the ESOP, unilaterally redeemed Plaintiffs' PureFacts stock for significantly less than its fair market value. Plaintiffs subsequently initiated the instant suit against VennScience, PureFacts USA, PFS, and Madej.
Analysis
As a preliminary matter, the parties made a number of concessions at the November 3 hearing clarifying the scope of the claims and the parties against whom they are brought. Specifically, the parties agree that: (1) PureFacts USA is no longer a defendant in Counts I or II; (2) Count IV is alleged only against PFS and PureFacts USA under the MIPA, and against VennScience and PFS under the Employment Agreements; (3) pending motions related to Count VII are withdrawn; and (4) the motion regarding personal jurisdiction will be stayed pending further order.
Plaintiffs agreed to waive their ability to argue at a later time that Defendants have waived their right to raise personal jurisdiction issues. However, in order to avoid this issue going unaddressed for an indefinite period of time or being raised on the eve of trial, the parties shall within the next six (6) months of this date inform the court that the personal jurisdiction issue is ripe for a ruling or submit a joint statement explaining why more time is needed to address it. Failing that, the jurisdictional defense will deemed to have been waived.
I. Motion to Dismiss or Stay All MIPA- and ESOP-Related Claims
In their motion, Defendants seeks to dismiss Counts III, IV, and V of the complaint to the extent they allege claims involving the MIPA that are subject to its forum selection clause, and to stay Counts III through VI to the extent they allege claims involving the ESOP that are subject to its arbitration provision.
1. Count III - Breach of Contract
Count III alleges that Defendants breached Schedules B and F of the MIPA. There appears to be no dispute that the claim involving Schedule B falls squarely within the MIPA and is subject to the forum selection clause therein. As the Court has found the forum selection clause to be valid and enforceable, this claim must be dismissed.
The Court has issued a separate order denying Plaintiffs' motion for reconsideration of the Court's order upholding the forum selection clause.
With respect to Schedule F, there is a dispute as to whether such a claim is governed by the MIPA or the ESOP. While Schedule F is contained within the MIPA, Section 7.11 of the MIPA provides:
Effective immediately following Closing, PureFacts and the Sellers hereby agree that the ESOP Shareholders Agreement will automatically be supplemented to grant the Sellers the benefit of the proposed amendments to the ESOP Shareholders Agreement set forth on Schedule "F" hereto and that, in the event of any conflict between the ESOP Shareholders Agreement as it pertains to the Sellers and Schedule "F", Schedule "F" shall prevail (the "ESOP Shareholders Agreement Supplement"). For the avoidance of doubt, PureFacts hereby waives any provision of the ESOP Shareholders Agreement as it applies to the Sellers that is inconsistent with Schedule "F". PureFacts may, in its sole discretion, amend the ESOP Shareholders Agreement following Closing to reflect the amendments set forth in the ESOP Shareholders Agreement Supplement for the benefit of all ESOP Shareholders and, if it elects to do so, the Sellers hereby agree to support such amendment, and, upon its effectiveness, such amendment will supersede this Section 7.11. Until such time as such amendment to the ESOP Shareholders Agreement occurs, this Section 7.11 and the ESOP Shareholders Agreement Supplement shall be deemed to be an agreement by and among PureFacts and each of the Sellers separate from and supplemental to the ESOP Shareholders Agreement and integral to this Agreement, and, without limiting the generality of Section 4.1(i), PureFacts represents and warrants to the Sellers that this Section 7.11 and the ESOP Shareholders Agreement Supplement are enforceable against PureFacts by the Sellers in accordance with their terms.(Compl., Ex. 2 § 7.11.) Defendants maintain that Section 7.11 effectively brings claims arising under Schedule F into the purview of the ESOP's arbitration clause. That arbitration clause applies to "[a]ny matter of dispute among the parties to this Agreement." (Compl. Ex. 3, § 11.01.) "Agreement" is defined to include the ESOP itself as well as "any and every amendment or supplement hereto and any and every instrument supplemental or ancillary hereto." (Id. § 1.01(b).)
Plaintiffs maintain that Section 7.11 of the MIPA is not a valid amendment or supplement to the ESOP and thus does not fall within the purview of the latter agreement's arbitration clause. Plaintiffs point to Section 12.01 of the ESOP, which provides that "any provision of this Agreement may be amended, modified or terminated, only by a written instrument signed by the Corporation and ESOP Shareholders party to this Agreement that own more than 50% of all issued and outstanding ESOP Shares owned by ESOP Shareholders at such time." (Id. § 12.01.) Plaintiff maintain that no such procedure occurred, and thus Schedule F never became part of the ESOP.
Defendants concede that no formal vote as required by Section 12.01 occurred. Section 7.11 of the MIPA provides that until such amendment occurs, Section 7.11 and Schedule F "shall be deemed to be an agreement by and among PureFacts and each of the Sellers separate from and supplemental to the ESOP Shareholders Agreement and integral to this Agreement [the MIPA]." (Compl., Ex. 2 § 7.11 (emphasis added).) The Court interprets this language to mean that Section 7.11 and Schedule F are governed by the MIPA until such time as Schedule F was formally adopted as an amendment to the ESOP. Because no amendment occurred, the Court agrees with Plaintiffs that Schedule F remains part of the MIPA and is subject to its forum selection clause. Accordingly, the claims in Count III involving Schedule F must be dismissed.
2. Count IV - Good Faith and Fair Dealing
Count IV alleges a breach of the implied covenant of good faith and fair dealing pursuant to both the Employment Agreements and the MIPA. At the hearing, Plaintiffs represented that ¶¶ 80(f) through (i) of the complaint arise under the MIPA generally, ¶¶ 80(j) through (p) arise from Schedule B to the MIPA, and ¶¶ 80(q) through (r) arise out of Schedule F. Defendant did not appear to contest this representation. Because all of these specific claims allege violations of the MIPA, they must be dismissed pursuant to the forum selection clause.
3. Count V - Shareholder Freeze-out
Count V alleges a claim for shareholder freeze-out, alleging that Defendants have engaged in conduct that has had and is having the effect of freezing out Plaintiffs from their rightful benefits under the Employment Agreements, the MIPA, and the ESOP. (Compl. ¶ 85.) Defendants argue that the essence of this claim is the redemption of Plaintiffs' stock at an unfair price, bringing the claim within the purview of the ESOP. Plaintiffs argue the alleged conduct in this claim is much broader than either the ESOP or the MIPA and includes many types of oppressive conduct, such as not providing shareholders materials, not giving notice of annual shareholder meeting, not providing financial materials they were entitled to receive, and changing how revenue is calculated.
The New Hampshire Supreme Court has never formally adopted the tort of corporate freeze-out, although it has assumed its existence arguendo. See Thorndike v. Thorndike, 154 N.H. 443, 446 (2006). "Courts in most jurisdictions recognize the tort of corporate freeze-out, holding that majority dominant or controlling shareholders owe a fiduciary duty to the minority shareholders." Meehan v. Gould, No. 218-2017-CV-1322, 2019 WL 3519455, at *4 (N.H. Super. Ct. July 31, 2019) (citing 18A Am. Jur. 2d. Corporations § 637). Such cases may exist when:
(1) a majority shareholder's conduct substantially defeats the minority's expectations that objectively viewed, were both reasonable under the circumstances and central to the minority shareholder's decision to join the venture; or (2) burdensome, harsh, or wrongful conduct, a lack of probity and fair dealing in the company's affairs to the prejudice of some members, or a visible departure from the standards of fair dealing, and a violation of fair play on which every shareholder who entrusts his or her money to a company is entitled to rely.18A Am. Jur. 2d Corporations § 641. These cases take many forms, "and tactics employed against a minority shareholder to effect a 'freeze-out' include but are not limited to generally oppressive conduct, withholding of dividends, restricting or precluding employment in the corporation, . . . withholding information relating to the operation of the corporation, . . . and excluding the minority from a meaningful role in corporate decision-making." Id.
Here, the complaint alleges that Defendants have engaged in a broad range of conduct, including: (1) falsely characterizing the grounds for Plaintiffs' termination in order to avoid paying them severance, earn-out consideration, and the fair market value for their stock "in order to create leverage to financially pressure [Plaintiffs] to accept an inadequate redemption price for their PureFacts stock"; (2) violating their obligations under Schedules B and F, again "in order to create leverage to financially pressure [Plaintiffs] to accept an inadequate redemption price for their PureFacts stock"; (3) "offering to purchase their PureFacts stock at inadequate redemption prices"; and (4) "unilaterally, and without notice to or consent from [Plaintiffs], redeeming their PureFacts stock on July 20, 2022 by a power of attorney granted unilaterally to Madej for an inadequate price based on a faulty EY valuation." (Compl. ¶ 85.)
Although Count V makes some reference to conduct that does not implicate the ESOP, the Court agrees with Defendants that the gravamen of the claim is the redemption of Plaintiffs' PureFacts stock for an inadequate price. Such a claim directly arises out of the ESOP and is subject to its arbitration provision. Accordingly, Count V shall be stayed pending arbitration.
4. Count VI - Fiduciary Duty
Count VI alleges a breach of fiduciary duty by PureFacts CEO Robert Madej. Specifically, the complaint alleges that Madej violated his fiduciary duty by: (1) entering into a fiduciary relationship with Plaintiffs despite a conflict of interest between Plaintiffs, Madej, and PureFacts; (2) failing and refusing to communicate with Plaintiffs about his appointment as their power of attorney; (3) failing and refusing to communicate with Plaintiffs about their interests and the actions he intended to take on their behalf; (4) failing and refusing to obtain Plaintiffs' consent before taking those actions; and (5) taking actions on Plaintiffs' behalf that are contrary to their best interests, "including, but not limited to, unilaterally and without notice to or consent from [Plaintiffs] executing documents that redeemed their PureFacts stock for an inadequate stock price based on a faulty EY valuation and an alleged for cause termination that Madej knew [Plaintiffs] were and are disputing." (Compl. ¶ 90.)
Defendants argue that Madej was operating under a power of attorney granted by the ESOP and he used that power for the sole purpose of unilaterally redeeming Plaintiffs' PureFacts stock, and that therefore this claim arises solely under the ESOP and must be stayed pending arbitration. As with the freeze-out claim, Plaintiffs argue that the fiduciary duty claim is broader than the question of whether Madej had the authority to sign the promissory notes and redeem Plaintiffs' stock. Plaintiffs maintain that as a fiduciary, Madej had an obligation to communicate with Plaintiffs, provide notice, and obtain their consent regarding the redemption. Plaintiffs acknowledge that Madej's power of attorney arose out of the ESOP, but argues that "the tortious conduct that Madej engaged in extends much further than simply the formulaic act of signing documents." (Pls.' Obj. Mot. Dismiss (Doc. 31) ¶ 27.)
Looking again to the complaint, the Court concludes that Count VI arises out of the ESOP and is subject to its arbitration provision. Because Madej's fiduciary duty to Plaintiffs arose out of the ESOP, the scope of that duty is defined by the scope of his responsibilities in that contract. Here, the ESOP authorized Madej, as power of attorney, to "execute and deliver, on behalf of and in the name of the ESOP Shareholder, such deeds, transfers, share certificates (if any), resignations or other documents that may be necessary to complete the subject transaction." (Compl., Ex. 3 § 7.02(g).) The only action Madej took pursuant to the power of attorney appears to be the unilateral redemption of Plaintiffs' stock for less than fair market value. Because the conduct giving rise to Count VI is inextricably intertwined with the ESOP, this claim must be governed by the terms of that agreement, including the arbitration provision. Therefore, Count VI must be stayed pending arbitration.
Plaintiffs argue that Defendants effectively waived their right to have this claim subject to arbitration because they took a contrary position in a case currently pending in the Southern District of New York. In the New York action, PureFacts USA and PFS brought a claim seeking a declaratory judgment "confirming that PureFacts may offset any damages awarded in [the New York] action against payments due the Sellers under the Notes [the documents signed by Madej to effect the redemption of Plaintiffs' stock]." As Defendants argued at the hearing, this claim does not call for any interpretation or application of the ESOP or raise a dispute under the ESOP. The Court agrees with Defendants that there is no inconsistency in seeking such a declaration in the New York action and enforcing the arbitration provision in this case. Specifically, addressing the declaratory judgment claim will not require the parties or the federal court to evaluate the ESOP or any of the claims to be arbitrated thereunder in any detail. Therefore, Defendants have not waived the right to seek arbitration of claims under the ESOP.
II. Motion to Dismiss for Failure to State a Claim
PureFacts USA and VennScience move to dismiss all counts against them. As noted above, Counts I and II are no longer being alleged against PureFacts USA. Moreover, Count III, a majority of Count IV, Count V, and Count VI have been either dismissed or stayed pending arbitration. The Court shall address the remaining arguments below.
1. VennScience's Employer Status
In moving to dismiss the claims against it, VennScience argues that it was neither a party to the Employment Agreements nor was it Plaintiffs' employer. VennScience further argues that the complaint does not specifically claim that it engaged in any of the conduct alleged. Defendants respond that the record clearly indicates that VennScience was a joint employer of Plaintiffs with PFS, and that it was a party to the Employment Contracts.
"A joint employer relationship exists where two or more employers exert significant control over the same employees and share or co-determine those matters governing essential terms and conditions of employment." Holyoke Visiting Nurses Ass'n v. NLRB, 11 F.3d 302, 306 (1st Cir. 1993). "Whether an employer possesses sufficient indicia of control to be an employer is essentially a factual issue." Id. "The First Circuit has discussed several factors that may be used in determining the existence of joint employer status, including: supervision of the employees' day-to-day activities; authority to hire, fire, or discipline employees; authority to promulgate work rules, conditions of employment, and work assignments; participation in the collective bargaining process; ultimate power over changes in employer compensation, benefits and overtime; and authority over the number of employees." Worthy v. E. Me. Healthcare Sys., No. 2:14-cv-184-JAW, 2017 WL 211609, at *32 (D. Me. Jan. 18, 2017).
Here, the Employment Agreements offer Costa and McCann consideration in the form of, among other things, employment in the role of SVP, Client Success and President of VennScience, respectively. (Compl. Ex. 1 at 1.) Each agreement informs Plaintiffs that their "responsibilities will include growing the business and managing the day-to-day operations." (Id. at 1.1.) Costa's Agreement provides that she will report to the President of VennScience, while McCann's provides that he will report to the President of PFS. (Id. (McCann Agreement) at 1.1.) Both Agreements state that Plaintiffs "are entitled to participate in the VennScience employee benefit plans" and that they are "entitled to unlimited vacation a year as per VennScience employee handbook." (Id. at 2.5, 2.6.) The MIPA also refers to Plaintiffs as employees of VennScience. (See Compl. Ex. 2 § 7.2 ("For so long as any of the Sellers . . . remain employed by the Company [VennScience], PureFacts and Buyer shall cause the Company's jurisdiction of organization to remain in New Hampshire ....") Finally, Defendants terminated Plaintiffs' "employment with VennScience" in multiple formal communications. (Compl. Ex. 5, 6.) These facts strongly indicate that VennScience was Plaintiffs' employer.
While Defendants argue that VennScience's status as an employer is separate from its responsibility under the Employment Agreements, the Court is unpersuaded. The pleadings and Defendants' concessions at the hearing establish that Plaintiffs were employed by VennScience, they performed their services for the benefit of VennScience, and that VennScience issued their paychecks, among other things. In his April 21, 2021 letter to Plaintiffs, Madej even stated that "[a]t the time that the Termination Notice was sent to you, it was the intention of the Company [defined in this letter as VennScience] to terminate your employment without cause pursuant to your employment agreement." (Compl. Ex. 6 (emphasis added).) The letter goes on to say that "[i]f you fail to remedy or cure the deficiencies within that time period, the Company will terminate your employment for Cause and, therefore, cease any applicable pay and benefits pursuant to the termination provision of the Agreement." (Id. (emphasis added).) The record and the representations at the hearing therefore indicate that while it was not a signatory to the Employment Agreements, VennScience was a party to the agreements and took numerous actions pursuant to them.
For the foregoing reasons, the Court finds that the complaint adequately states a claim against VennScience as both an employer and as a party to the Employment Agreements. Accordingly, VennScience's motion to dismiss claims on these grounds is DENIED.
2. Severance as Wages
Count II alleges that Defendants violated various provisions of RSA 275:42 et seq. for failing to pay wages. Specifically, Plaintiffs claim that they never received the severance they were entitled to pursuant to paragraphs 4.1 and 4.4 of the Employment Agreements and argue that such severance constitutes wages pursuant to RSA 275:43, V. Plaintiffs argue that this failure to pay was willful, triggering RSA 275:44, IV, and additionally seek costs and attorney's fees pursuant to RSA 275:53, III.
Defendants argue that Count II must be dismissed because the severance Plaintiffs seek does not constitute wages under the relevant statutory scheme. "Wages" are defined as "compensation . . . for labor or services rendered by an employee." RSA 275:42, III. Pursuant to RSA 275:43, V, "severance pay, . . . when benefits are a matter of employment practice or policy, or both, shall be considered wages pursuant to RSA 275:42, III, when due." In support of their position, Defendants cite ACAS Acquisitions (Precitech), Inc. v. Hobert, 155 N.H. 381 (2007). There, the New Hampshire Supreme Court agreed with a trial court finding that "because severance benefits were offered only in connection with the sale of Precitech and only then to a few employees on terms negotiated individually with those employees, granting severance benefits was not a matter of practice or policy at ACAS." Id. at 401. As a result, the Supreme Court concluded that "the defendant's severance benefits do not meet the definition of wages." Id. Defendants argue that Plaintiffs' severance, as provided for in their Employment Agreements in connection with the sale of VennScience to PureFacts, similarly fails to meet the statutory definition of wages.
Plaintiffs respond that ACAS is not applicable in part because it was decided on appeal following a full trial, whereas the instant case is only at the motion to dismiss stage. The Court agrees that it would be inappropriate to apply the holding of ACAS to claims that remain at the pleading stage. "New Hampshire is a notice pleading jurisdiction and, as such, [the Court] take[s] a liberal approach to the technical requirements of pleadings." Toy v. City of Rochester, 172 N.H. 443, 448 (2019). "A complaint need not do more than state the general character of the action and put both court and counsel on notice of the nature of the controversy." Id. While the complaint is conclusory with respect to whether the severance offered in the Employment Agreements constituted wages, they are sufficient to withstand a motion to dismiss. (See Compl. ¶ 67 (stating the severance constituted wages under RSA 275:42, III because it was "compensation for services rendered," and also citing RSA 275:43, V).) Defendants are free to raise this issue again following discovery in a motion for summary judgment, if appropriate.
3. Count IV - Good Faith and Fair Dealing
In their objection, Plaintiffs clarify that this claim is alleged against VennScience and PFS under the Employment Agreements, and against PFS and PureFacts USA under the MIPA. As set forth above, the claims arising out of the MIPA are dismissed pursuant to that contract's forum selection clause. Therefore, the Court shall only consider the claims set forth in ¶¶ 80(a) through (e) of the complaint, which Plaintiffs assert arise under the Employment Agreements.
Defendants' arguments with respect to VennScience in this count are the same as those asserted above under Counts I and II, namely that VennScience is not a party to the Employment Agreements. For the reasons set forth above, the Court finds that VennScience is a party to the Employment Agreements and can be held liable for a breach of the covenant of good faith and fair dealing implied therein.
Conclusion
For the foregoing reasons, Defendants' motions to dismiss or stay are DENIED with respect to Count I, as VennScience is an employer and party to the Employment Agreements; DENIED with respect to Count II, as the complaint adequately alleges severance as wages; GRANTED with respect to Count III, as all claims therein are subject to the MIPA's forum selection clause; (4) GRANTED in part with respect to the claims under Count IV arising under the MIPA and DENIED in part with respect to the claims under Count IV arising under the Employment Agreements; GRANTED with respect to Counts V and VI, as both claims must be stayed pursuant to the ESOP's arbitration provision.
As a result, the following claims remain active in this case: (1) Count I as alleged against PFS and VennScience; (2) Count II as alleged against PFS, VennScience, and Madej; (3) Count IV as alleged against PFS and VennScience with respect to the claims in ¶¶ 80(a) through (e); and (4) Count VII.
SO ORDERED.