Costa v. PureFacts Fin. Sols.

• Decision Date: 20 December 2022
• Docket Number: 218-2022-CV-00585
• Parties: Grace Costa and Michael McCann v. PureFacts Financial Solutions, Inc., et al
• Court: New Hampshire Superior Court

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Grace Costa and Michael McCann v. PureFacts Financial Solutions, Inc., et al

No. 218-2022-CV-00585

Superior Court of New Hampshire, Hillsborough

December 20, 2022

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, defendantPureFacts 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 generallyCompl., 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.^[1]

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,^[2] this claim must be dismissed.

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...