Opinion
NO. 212-2013-CV-0012
06-12-2013
Alice Finn v. Ballentine Partners, LLC, successor to Ballentine & Company, Inc., Ballentine & Company, Inc. f/k/a, Ballentine Finn & Company, Inc., Roy C. Ballentine, Kyle Schaffer, Claudio Shilo, Andrew McMorrow and Gregory Peterson
ORDER
Plaintiff Alice Finn ("Finn") brought an action against Defendants arising out of a Shareholder Agreement ("SHA") between the parties. Finn's claim seeks damages for breach of contract, breach of the covenant of good faith and fair dealing, negligent misrepresentation, and a violation of New Hampshire's Consumer Protection Statute. At the same time, Finn filed a Motion to Stay Proceedings and to Compel Arbitration, to which Defendants object. For the reasons stated in this Order, the Motion to Stay is GRANTED, and the parties are ordered to arbitrate this dispute in accordance with section 23.1.1 of the SHA.
I
The parties do not seriously dispute most of the facts underlying this case, and the Court relies on the facts as detailed in the arbitration award that preceded this case. Finn and Roy Ballentine founded Ballentine Finn & Company, Inc. ("BFI") in 1997 as a New Hampshire subchapter S corporation, with each owning one half of the company's stock. Eventually, BFI sold some of the stock to four other individuals. In 2008, the other shareholders forced Finn out. BFI terminated her employment, and the remaining shareholders assert they terminated her for cause. BFI exercised its right to purchase Finn's shares at the price set in the SHA for "for cause" terminations. The share price was 1.4 times earnings, which was lower than the fair market value of the shares at the time of the purchase. Finn disputed the termination, and the case went to arbitration pursuant to the SHA. In 2009, a panel of arbitrators—Hon. Allen Van Gestel, Hon. Bruce Mohl and George Moore, Esq. —entered an award in Finn's favor, finding that the termination was unlawful and awarding Finn $5,721,756.00 for the stock BFI forced her to sell. This figure is approximately 1.9 times earnings. The panel also awarded Finn $720,000.00 in lost wages, for a total award of 6,441,756.00.
BFI paid part of this award to Finn immediately and then paid the balance in January 2010. According to Finn, after she received the final payment, BFI's successor in interest disclosed that it had sold part of its stock to a company called Perspecta. According to Defendants, it was necessary to sell some of the company stock to Perspecta in order to raise cash to satisfy the arbitration award.
Finn argues she is entitled to relief under the so-called "claw back" provisions of the SHA, which is contained in section 11 of the SHA. It provides as follows:
In the event that, within eight years of a Shareholder's sale of Founders' Shares pursuant to this agreement (other than following a Discharge for Cause), there is either a Sale of the Corporation or the acquisition of Shares by an Acquirer, then the following provisions will apply:SHA § 11. Finn claims that the "purpose of the Claw Back provision is to ensure that a founder who sells his or her shares receives a portion of the profits from resale at a higher amount[.]" Pl.'s Obj. 14. Her argument is that Perspecta was an "Acquirer." Under the SHA, an "Acquirer" is "any Person that acquires Shares in the Corporation primarily for investment purposes in an arms length transaction, and is not actively and continuously involved in the day-to-day activities of the Corporation as an employee." SHA § 1.2.
11.1. The purchase price per Founders' Share determined under Section 7 shall be adjusted, and the Corporation or other Shareholders who purchased the Shareholder's Founders' Shares shall pay to the selling Shareholder, an amount per share equal to the product of:
11.1.1. the amount by which the price per Share that was paid to the selling Shareholder is exceeded by the consideration per Share
received by Shareholders in the Company Sale transaction or sale to an Acquirer . . . .
Defendants explain that in arbitration, Finn argued that there was no cause for her termination, and BFI could not purchase her shares at 1.4 times earnings pursuant to the SHA, and that she was therefore entitled to greater compensation. They argue that the arbitrators accepted her position and awarded damages, and therefore BFI never purchased her shares pursuant to the section 11.1 of the SHA. Defendants also assert that Finn's claims are barred by preclusion principles, and this case should be dismissed.
Finn disputes this argument, but more importantly, she argues that the issue of preclusion must be decided in arbitration and not by this Court. The SHA governs arbitration:
23.1.1. No party shall institute a proceeding in any court or administrative agency to resolve the dispute between the parties before that party has sought to resolve the dispute through direct negotiation with the other party(ies). If the dispute is not resolved within ten (10) business days after demand for direct negotiations, the parties shall attempt to resolve this dispute through mediation . . .SHA § 23. Finn alleges that her attempts to negotiate directly with Defendants have failed, and pursuant to section 23.1.1 of the SHA, she is entitled to arbitrate this dispute. Defendants counter that this Court should decide whether arbitration is proper: "In one sense, Finn's Motion raises a simple question: who decides the threshold or 'gateway' issue of whether a defense of collateral estoppel or res judicata bars an arbitration—the court or the arbitrator?" Mem. Support Defs.' Obj. Pl.'s Mot. Stay 3 (emphasis in original). The Court agrees that this is the central issue.
23.2.1. If the parties do not commence mediation within ten (10) business days . . . the aggrieved party may then seek relief through arbitration.
23.2.2. In the case of binding arbitration, each party shall choose an arbitrator. The two arbitrators shall choose a third arbitrator, and if they are unable to agree,
such third arbitrator shall be designated by the then head of the American Arbitration Association (or its successor).
23.2.3. The arbitrator shall follow the commercial arbitration rules, then in effect, of the American Arbitration Association . . . .
II
RSA 542:1 states in relevant part:
A provision in any written contract to settle by arbitration a controversy thereafter arising out of such contract, or an agreement in writing to submit to arbitration any controversy existing at the time of the agreement to submit, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.(Emphasis added). Apart from their defense on the merits, Defendants argue that the dispute in this case does not "arise out of such contract," because Finn did not sell her stock to the company pursuant to section 1.4 of the SHA, but rather received an arbitration award. However, section 23.1.1 of the SHA does not limit its applicability to disputes "arising from the contract." It broadly applies to "dispute[s] between the parties." SHA § 23.1.1. Similarly, while Defendants assert that they do not request mediation—a condition precedent to arbitration—they admit that they would not be willing to mediate in light of their belief that Finn's claims are barred by preclusion.
Defendants' argument that Finn's claims are barred by preclusion is more persuasive. In support of this argument Defendants rely on two cases in which the New Hampshire Supreme Court declined to decide the merits claims in arbitration on the doctrine of collateral estoppel. Farm Family Mut. Ins. Co. v. Peck, 143 N.H. 603, 607 (1999) (finding that decision of worker's compensation tribunal precludes relitigation of that issue in subsequent tort action); Metro. Ins. Co. v. Ralph, 138 N.H. 378, 381 (1994) (finding insured and insurer bound by collateral estoppel but for different reasons). The Supreme Court did not directly address this issue presented in this case in either Farm Family or Metro Ins.
In Farm Family, the New Hampshire Supreme Court held that collateral estoppel barred a plaintiff's claim for worker's compensation benefits resulting from an accident because the department of labor's administrative worker's compensation tribunal had already decided the injury did not result from the workplace accident. However, in Farm Family the insurance carrier had apparently filed a bill in equity in the Superior Court to bar arbitration, and the injured worker seems to have not objected to having the matter resolved by a court rather than by an arbitrator. Farm Family, 143 N.H. at 604. Because both parties can waive arbitration, like any contractual right, and the Supreme Court did not address the issue of whether a court may consider a claim of collateral estoppel over a party's objection, Farm Family provides the Court with little guidance.
Similarly, in Metro Ins., an insurance carrier brought a declaratory judgment action asserting that insured's uninsured motorists claim—which had been previously resolved in arbitration—could not go forward because the insured's claim was barred by collateral estoppel. 138 N.H. at 381. The case contains no discussion of whether a court may consider a claim of collateral estoppel over the parties' objections, and it provides no information about whether the parties had simply agreed to have the matter resolved by a court rather than an arbitrator.
It is not unreasonable to suppose that the parties in both cases may have decided to allow the Superior Court to decide pure issues of law, since the New Hampshire Supreme Court has traditionally taken the view that under RSA 542:8, a court may modify or vacate an arbitration award for plain mistake, or where the arbitrators were mistaken in point of law as long as the court "clearly satisfied that the[ arbitrators] would not have made such an award had they known what the law was." New Hampshire Ins. Co. v. Bell, 121 N.H. 127, 129 (1981) (quoting Piersons v. Hobbes, 33 N.H. 27, 31 (1856)).
Forthrightly recognizing that "although the case law may generally favor referral of these defenses to arbitration, there is no definitive decision on this issue from the U.S. Supreme Court and there is ample case law favoring the opposite result[,]" Defendants argue that this Court should decide the preclusion issue because an arbitrator is in no better position than a judge to decide preclusion, and the parties did not expressly reserve this issue for arbitration. Mem. Support Defs.' Obj. Pl.'s Mot. Stay 9 (relying on Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002)). However, the Court believes that the majority rule is better reasoned, and would be accepted by the New Hampshire Supreme Court if the issue were squarely presented to it.
The United States Supreme Court, like the New Hampshire Supreme Court, has traditionally held that courts considering whether a matter must be arbitrated were limited to considering whether the parties have agreed to submit the dispute to arbitration. AT&T Tech., Inc. v. Commc'n Workers, 475 U.S. 643, 648-49 (1986); Aetna Life & Cas. Co. v. Martin, 134 N.H. 90, 92-93 (1991); Brampton Woolen Co. v. Local Union 112, 95 N.H. 255, 256 (1948). In Howsam, the United States Supreme Court considered a dispute involving whether a matter should be submitted to arbitration under the rules of the National Association of Securities Dealers (NASD). Under the rules, no dispute is eligible for submission to arbitration where more than six years have elapsed from the occurrence or event giving rise to the dispute. While recognizing that the question of whether the parties have agreed to submit a particular dispute to arbitration—i.e. the question of arbitrability—is an issue for judicial determination unless the parties clearly and unmistakably provide otherwise, the Court held that application of the NASD rule presented a question for the arbitrator, not for the judge. 537 U.S. at 85. The Court emphasized that "Linguistically speaking, one might call any potentially dispositive gateway question a 'question of arbitrability,' for its answer will determine whether the underlying controversy will proceed to arbitration on the merits" but noted that its case law makes clear that the phrase "question of arbitrability" has a much more limited scope. Id. at 83. The Court reasoned that the "The time limit rule closely resembles the gateway questions that this Court has found not to be 'questions of arbitrability.'" Id. at 85 (citing Moses H. Cone Mem. Hospital v. Mercury Constr. Co., 460 U.S. 1, 24 (1983) ("waiver, delay or a like defense" are not questions of arbitrability)). The Court emphasized while it is for a court to decide "whether an arbitration clause in a concededly binding contract applies to a particular type of controversy[,]" "procedural questions which grow out of the dispute and bear on its final disposition are presumptively not for the judge, but for an arbitrator, to decide." 537 U.S. at 84 (quotations omitted) (citing John Wiley and Sons, Inc. v. Livingston, 376 U.S. 543, 546-47 (1964)).
Even prior to Howsam, the majority of federal courts had taken a similar view of arbitrability of preclusion claims and have specifically held, "a res judicata objection based on a prior arbitration proceeding is a legal defense that, in turn, is a component of the dispute on the merits and must be considered by the arbitrator, not the court." Chiron Corp. v. Ortho, 207 F.3d 1126, 1132 (9th Cir. 2000); see John Hancock Mut. Life Ins. Co. v. Olick, 151 F.3d 132, 140 (3d Cir. 1998) ("we must conclude that Hancock's res judicata objection based on the prior arbitration is an issue to be arbitrated and is not to be decided by the courts."); National Union Fire Ins. Co. v. Belco Petroleum Corp., 88 F.3d 129, 135 (2d Cir. 1996) (citation and quotation omitted) ("the preclusion issue is not . . . a disagreement over whether [the parties] agreed to arbitrate the merits of their dispute. Belco's claim of preclusion is a legal defense to National Union's claim. As such, it is itself a component of the dispute on the merits."). Nonetheless, the Howsam analysis clearly narrows the definition of "questions of arbitrability."
For example, in Klay v. United Healthgroup, Inc., 376 F.3d 1092, 1109 (11th Cir. 2004), the Eleventh Circuit rejected its prior precedent and held that preclusion claims must be considered by an arbitrator rather than a court. The court rejected its prior precedent on the ground that: "Howsam states that, unless an arbitration agreement otherwise stipulates, a court is empowered only to determine . . . whether a particular dispute falls within the scope of an arbitration clause—and the necessary threshold question of whether that clause is enforceable." 376 F.3d at 1109. Other state courts have similarly rejected prior precedent in holding that arbitrators must determine whether a claim is barred by preclusion based on the reasoning in Howsam. See e.g., WMS, Inc. v. Alltel Corp., 647 S.E.2d 623, 628 (N.C. App. 2007) (citing Howsam and Klay in holding that res judicata is for the arbitrator to decide in the first instance). More recent federal cases, relying on Howsam have held that the determination is for the arbitrator. Steris Corp. v. UAW, 489 F. Supp. 2d 501, 512 (W.D. Pa. 2007) ("We conclude that the law of this Circuit makes the preclusive effect of a prior arbitration an issue for an arbitrator to decide.").
The reasoning of these courts is persuasive. Both the Federal Arbitration Act, 9 U.S.C. section 2, and RSA 542:1 enforce agreements to arbitrate "arising out of such contract." The New Hampshire Supreme Court has cited the United States Supreme Court's interpretation of the Federal Arbitration Act in construing RSA 542. School District No. 42 v. Murray, 128 N.H. 417, 420 (1986). Those few cases taking a contrary view are not persuasive because they seem to be based upon an argument that by considering a preclusion claim, "the trial court does not even reach the merits or lack thereof of the substantive claim that a party has attempted to raise." See Bryan County v. Yates Paving & Grading Co, Inc., 638 S.E.2d 302, 304 (Ga. 2006); see also Waterfront Marine Constr. v. North End 49ers Sandbridge Bulkhead Groups A, B & C, 468 S.E.2d 894, 903 (Va. 1996) (finding dispute that does not arise from the terms of the contract is not arbitrable). This view, however, is inconsistent with Howsam, which states: "procedural questions which grow out of the dispute and bear on its final disposition are presumptively not for the judge, but for an arbitrator, to decide." 537 U.S. at 84 (quotations omitted) Acceptance of the majority rule avoids the risk that parties will be forced to try a case they have agreed to arbitrate. Id.
Accordingly, the Court finds that the arbitration panel must decide the issue of preclusion in the first instance in accordance with the arbitration agreement and well-settled case law.
III
Defendants make several other arguments. First, they argue that the doctrine of judicial estoppel bars Finn from bringing this action because it is inconsistent with the position she relied upon in prior litigation. Kelleher v. Marvin Lumber and Cedar Co., 152 N.H. 813, 848 (2005). Defendants' argument is as follows:
[G]rounds for revocation exist here based on the prior arbitration Panel's findings that the Defendants "violated the [SHA] and Finn's rights thereunder" and that the Defendants' termination of Finn's employment constituted a "breach of the [SHA]." These findings meet the definition of a material breach under New Hampshire law, because the breaches went "to the root or essence of the agreement between the parties" (Finn's employment with the company) and defeated the "object of the parties in entering into the contract" (Finn's intention to remain employed by and a shareholder of BFI). As a result, upon the Panel's finding of breach, the SHA was considered revoked as to Finn. Having asserted that the SHA had been revoked and claiming damages for material breach that she could not have received under the SHA, Finn cannot now change that position and assert that the SHA still exists when it suits her purpose.Defs.' Surreply Mem. 5 (citations omitted).
However, the same reasons that prevent the Court from entertaining a preclusion argument bar the court from considering a judicial estoppel claim. Such a claim is precisely the sort of "procedural question[] which grow[s] out of the dispute and bear[s] on its final" and is therefore for the arbitrators to decide. Howsam, 537 U.S. at 84.
For similar reasons, the Court declines to consider Defendants' claim that Finn made a clear election of remedies in the arbitration and by doing so terminated the contract. The election of remedies claim is not a gateway issue, but it is a merits issue. Defendants' Surreply Memorandum demonstrates this point: "At the heart of the election of remedies doctrine is the notion that allowing a plaintiff to pursue a second suit for remedies it could have pursued in the first suit would be manifestly unjust to the defendant." Defs.' Surreply Mem. 8. This statement is undoubtedly true, but it is also a succinct articulation of the doctrine of claim preclusion. It demonstrates why the Court may not consider this issue.
Finally, Defendants assert that Finn has refused to submit this case to the prior arbitration panel. Defendants explain that starting with a new arbitration panel will result in greater expense and could lead to a subsequent panel rejecting the prior panel's conclusions and ignoring their preclusive effect. While the Court is sympathetic to Defendants' argument insofar as it concerns additional expense, nothing in the SHA requires Finn to select any particular arbitrator. The SHA arbitration provisions are clear. Each party will select one arbitrator, and those two arbitrators select the third. While the Court may review arbitration awards pursuant to RSA 542:8 for errors of law the Court has no authority to modify the procedures the parties have agreed to. New Hampshire Ins. Co. v. Bell, 121 N.H. at 129.
It necessarily follows that Finn's Motion to Stay Proceedings and Compel Arbitration must be GRANTED.
SO ORDERED.
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Richard B. McNamara,
Presiding Justice