Big Bob's Flooring Outlet of Am., Inc. v. Elyachar
| Decision Date | 30 September 2021 |
| Docket Number | CIVIL ACTION NO. 20-11379-TSH, CIVIL ACTION NO. 20-11381-TSH |
| Citation | 566 F.Supp.3d 89 |
| Parties | BIG BOB'S FLOORING OUTLET OF AMERICA, INC., Floors & More, LLC, and Vincent Virga, Petitioners, v. Joseph ELYACHAR and Michael Elyachar, Respondents. Floors & More, LLC, and Vincent Virga, Petitioners, v. Big Bob's Outlets of Kansas City, Inc., and David Elyachar, Respondents. |
| Court | U.S. District Court — District of Massachusetts |
Scott E. Regan, Fletcher Tilton PC, Worcester, MA, Michael E. Brangwynne, Morrison Mahoney LLP, Boston, MA, for Petitioners.
Deron A. Anliker, Pro Hac Vice, Dustin D. Rucinski, Pro Hac Vice, John M. Duggan, Pro Hac Vice, Duggan Shadwick Doerr & Kurlbaum LLC, Overland Park, KS, Lawrence J. Sugarman, Cetrulo LLP, Boston, MA, for Respondents.
In the first action, Big Bob's Flooring Outlet of America, Inc. ("BBOA"), Floors and More, LLC ("FAM"), and Vincent Virga ("Virga" and together with BBOA and FAM, the "BBOA Litigants") have petitioned the Court pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. § 4, to compel Joseph Elyachar ("Joseph") and Michael Elyachar ("Michael") to arbitrate all claims arising under or related an alleged arbitration agreement between the parties. This Memorandum of Decision and Order addresses Defendants’ Motion to Dismiss (Docket No. 9). For the reasons set for the below, that motion is granted.
In the second action, Virga and FAM have petitioned the Court pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. § 4, to compel Big Bob's Outlet of Kansas City, Inc. ("BBKC") and David Elyachar ("David") to arbitrate all claims arising under or related an alleged arbitration agreement between the parties. This Memorandum of Decision and Order addresses Defendants’ Motion to Dismiss Under Fed.R.Civ.P. 12(b)(1) (Docket No.12). For the reasons state below, that motion is granted.
Following is a summary of the relationship between the parties and the various proceedings presently pending among them. More detailed findings of fact are set forth below.
David and Adam Elyachar ("Adam" and together with David, Joseph, Michael, and BBKC, the "Elyachar Litigants") started the BBOA carpet franchise in the 1980s. In 2015 and 2016, David agreed to sell seventy percent (70 %) of his BBOA shares to FAM, which is a Massachusetts limited liability company managed by Virga. In December 2015, David and FAM signed a letter of intent ("LOI") which set forth the terms of the sale. In theory, after the sale, the remaining thirty percent (30%) of BBOA would be owned by Joseph, Michael and Bradley Cotlar ("Cotlar") and David would continue to operate Kansas City area BBOAs through a separate company, BBKC. The LOI also specified various rights and obligations of the parties going forward which were to be memorialized in the agreements to be signed in connection with the purchase, including that: BBOA would pay BBKC a consulting fee; BBOA would pay dividends or partner's distributions; the BBOA system and brand would continue and be expanded, and would not be diluted through Virga's ownership of any other brands; and the terms of BBKC's royalty payments.
In January 2016, David sold his interest to FAM pursuant to a Stock Purchase Agreement (the "Stock Purchase Agreement"). As part of the stock purchase transaction, FAM paid a portion of the sale price up front and executed a promissory note for the remainder in favor of David (the promissory note had been paid in full). At the same time, BBOA, FAM, David, Joseph, Michael and Cotlar entered a stockholder's agreement (the "Stockholder's Agreement"). There were three other agreements entered contemporaneously with the Stock Purchase Agreement which were attached as exhibits thereto: (1) a consulting agreement, between BBOA and BBKC, which addressed David's consulting role (the "Consulting Agreement"); (2) a franchise agreement between BBOA and BBKC (the "Franchise Agreement"); and (3) a so-called a "napkin agreement" between David and Virga, as managing member of FAM, related to the Franchise Agreement between BBOA and BBKC. These three agreements will be referred to collectively as the "Sale Contracts."
It is alleged that to induce David to sell his shares to FAM, Virga made oral representations to him, including that: (1) Virga would not enforce any non-compete restrictions against BBKC, David, and Adam in the event the business relationship with BBOA soured; (2) BBOA would make distributions to David's sons who owned BBOA stock; (3) BBOA would make rebate payments for BBKC purchasing inventory from preferred vendors; (4) the royalty structure would be as agreed to in the LOI; (5) BBOA would not make cash calls to Joseph and Michael; (6) Joseph's and Michael's stock would not be diluted; (7) Virga could take a normal salary in conjunction with BBOA, but could not put personal expenses through the business, and all income and expenses would be disclosed in financial statements; and (8) BBOA and the "Big Bob's" brand would be expanded, and that all acquisitions, expansions, and startups of all things flooring - both wholesale and retail- and including kitchen, cabinet, countertop, and paint businesses would be under the "Big Bob's" brand.
David thought it was important for the sale be completed before a trade show that both he and Virga would be attending in Las Vegas from January 19-22, 2016 so he could issue a press release and announce the sale at the show. Virga represented to David that all the provisions contained in the LOI and his oral representations had been included in the various agreements and therefore, David signed those agreements. David eventually sold his interest in BBOA to his two sons, Joseph and Michael.
Ultimately, the business relationship between Joseph and Michael and FAM/Virga broke down over FAM's alleged failure to expand the Big Bob's brand. Consequently, the parties have filed multiple actions against each other—in addition to the instant actions, there are suits pending in Missouri and Kansas state courts seeking declaratory judgment, mandamus, and an accounting and/or alleging claims for breach of various agreements, unjust enrichment, negligent and fraudulent misrepresentation, breach of the duty of good faith and fair dealing, breach of fiduciary duty, minority shareholder oppression/judicial dissolution. The BBOA Litigants (defendants in the Missouri and Kansas state court actions) invoked 9 U.S.C. § 4 and notified the Elyachar Litigants in those respective actions that their cases were subject to arbitration under the FAA. After the Elyachar Litigants declined to pursue arbitration in those cases, the BBOA Litigants filed the instant petitions to compel arbitration with this Court. The next day, the BBOA Litigants filed motions to arbitrate in the pending Kansas and Missouri state court actions.
To survive a Rule 12(b)(6) motion to dismiss, a complaint must allege "a plausible entitlement to relief." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 559, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). The complaint "must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). The standard "requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly , 550 U.S. at 555, 127 S.Ct. 1955. The Court "must assume the truth of all well-plead[ed] facts and give the plaintiff the benefit of all reasonable inferences therefrom." Rhodes v. Ocwen Loan Servicing, LLC , 44 F.Supp.3d 137, 139 (D. Mass. 2014) (quoting Ruiz v. Bally Total Fitness Holding Corp. , 496 F.3d 1, 5 (1st Cir. 2007) ). A claim is facially plausible if the factual content ‘allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal , 556 U.S. at 665, 129 S.Ct. 1937.
Virga signed the LOI to purchase from David all of the shares of Class A non-voting Common Stock and seventy percent (70 %) of the shares of BBOA Class B non-voting stock. The LOI provided that the purchase price would be $750,000 with a $250,000 down payment and personal guaranty by Virga. Joseph, Michael and Cotlar would each retain 10% of the shares in Class B non-voting stock or have 10% non-voting membership if the corporation were converted into an LLC. BBOA would pay BBKC a consulting fee of $5,000 per month. BBOA would maintain a dividend policy in which the company would pay dividends or partner's distributions as required by franchise law and the IRS and would only retain profits as required by law, or at a maximum of 25% of net income whichever is less. Joseph, Michael and Cotlar would sit on all strategic meetings and on board of directors for life (or as long as they are shareholders or members). David, Joseph, Michael and Cotlar would sign non-competition agreements providing that if they leave BBKC, they could not compete in the flooring franchise, cooperative, affiliation or mill affiliation business nor any other flooring group business for a period of 7 years. Virga would take a normal salary in conjunction with the work he performs for BBOA and BBOA would pay normal operating expenses and neither Virga nor his family would put personal expenses through the business. Shares of BBOA held by Joseph, Michael and Cotlar would not be diluted in any manner except if there were a requirement for additional liquidity (in which case the company would comply with its governing documents). The LOI also provided that BBKC would sign a Franchise Agreement which would have a term of 7 years and would automatically renew at its option. BBOA would receive no royalty on the first $4.5 million of net volume, after which it would pay a .75% royalty on all net sales (as defined therein). The LOI included the following statement "Nothing in...
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