Reliability Inc. v. Doki
| Decision Date | 04 August 2021 |
| Docket Number | 20 Civ. 7109 (KPF) |
| Parties | RELIABILITY INCORPORATED, Plaintiff, v. NAVEEN DOKI; SILVIJA VALLERU; SHIRISHA JANUMPALLY individually and in her capacity as trustee of JUDOS TRUST; KALYAN PATHURI individually and in his capacity as trustee of IGLY TRUST; and FEDERAL SYSTEMS, Defendants. |
| Court | U.S. District Court — Southern District of New York |
This lawsuit is one in a series of disputes arising from a failed merger (the “Merger”) between Plaintiff Reliability Incorporated (“Reliability”) and nonparty Maslow Media Group, Inc. (“Maslow”). Reliability brings this action, pursuant to New York Civil Practice Law and Rules (“C.P.L.R.”) § 7503(a), to compel Defendants Naveen Doki, Silvija Valleru Shirisha Janumpally (individually and in her capacity as trustee of Judos Trust), Kalyan Pathuri (individually and in his capacity as trustee of Igly Trust), and Federal Systems (collectively, “Defendants”), to arbitrate claims arising from a September 18, 2019 Merger Agreement (the “Merger Agreement”), pursuant to which Reliability acquired Maslow. Defendants, in turn, have moved to dismiss Reliability's Petition to Compel Arbitration pursuant to Rules 12(b)(1), 12(b)(3), and 12(b)(6) of the Federal Rules of Civil Procedure. While sourced to different provisions in Rule 12, Defendants' arguments all concern the impact vel non of prior lawsuits involving Reliability and Maslow that were brought in the Circuit Court for Montgomery County, Maryland (the “Maryland Action”), and the District Court of Harris County Texas (the “Texas Action”). For the reasons that follow, Defendants' motion to dismiss is denied.
BACKGROUND[1]
Reliability is a Texas corporation with its principal place of business in Maryland. (Pet. ¶ 2). Between 1971 and 2007, Reliability was principally engaged “in the design, manufacture, market and support of high-performance equipment used to test and condition integrated circuits.” (Demand ¶ 7). Reliability “shut down” this business in 2007, and continued as a “shell company” until October 2019, when it acquired Maslow, an HR and staffing firm that also offers video production services. (Id. at ¶¶ 1, 7).
Defendants Naveen Doki, Silvija Valleru, Shirisha Janumpally, and Kalyan Pathuri reside in Fairfax, Virginia. (Pet. ¶¶ 3-5, 8). Janumpally and Pathuri serve as the sole trustees and beneficiaries of Judos Trust and Igly Trust, respectively. (Id. at ¶¶ 6-7). Janumpally is also alleged to be the alter ego of Federal Systems, which is also based in Fairfax, Virginia. (Id. at ¶ 9). Defendants collectively own the majority of the outstanding shares of Reliability common stock, which shares they received as a result of Reliability's October 2019 acquisition of Maslow. (Id. at ¶ 10; Demand ¶ 23).
On November 9, 2016, Vivos Holdings, LLC, an entity owned and controlled by Doki and Valleru, acquired Maslow in its entirety. (Demand ¶ 20). Maslow's assets were used to finance the purchase, with the balance paid from Maslow's cash flows over the course of the following two years. (Id. at ¶¶ 1, 20). Following its acquisition, Maslow served as the payee on three promissory notes (the “Notes”) executed with Vivos Holdings, LLC and Vivos Real Estate, LLC, another entity owned and controlled by Doki (collectively with Vivos Holdings, LLC, “Vivos”). (Id. at ¶ 31; see also Kendall Decl., Ex. B (“Vivos Intercompany Promissory Notes”)). Maslow's obligations under the Notes amounted to almost $5, 000, 000. (See Demand ¶¶ 1, 31). Doki, as well as his “friends and family, ” separately procured millions of dollars for their other businesses using Maslow's credit, and - unbeknownst to Maslow's management - listed Maslow as a guarantor to obtain a mortgage on a nonMaslow property. (Id.). In June 2019, Doki executed a personal guarantee to Maslow, pursuant to which he was obligated to repay $3, 000, 000 of the balance of Maslow's debt by December 31, 2019. (Id. at ¶ 2; see also Vivos Intercompany Promissory Notes 8).
On September 18, 2019, Reliability, an entity named “R-M Merger Sub, Inc., ” Maslow, Doki, and Valleru entered into the Merger Agreement. (Demand ¶ 23). Janumpally, both individually and in her role as trustee of Judos Trust, and Pathuri, in his role as trustee of Igly Trust, then signed joinder agreements binding themselves to the Merger Agreement. (Pet. ¶¶ 5-6, 8; id., Ex. 3-5). The Merger closed on October 29, 2019. (Demand ¶ 23). Under the terms of the Merger Agreement, Defendants received 260 million shares of Reliability common stock, which amounted to 94% of Reliability's issued and outstanding shares. (Id.; Pet. ¶ 10).
The Merger Agreement included various representations about Maslow's finances, including that “Maslow had no liabilities, obligations or commitments of any nature whatsoever . except (a) those which are adequately reflected or reserved against in [its financial statements], and (b) those which have been incurred in the Ordinary Course of Business ....”).” (Merger Agreement § 3.06; see also id. §§ 3.05, 3.07, 3.15). Reliability alleges that during the parties' discussions in advance of the Merger, Doki assured Jeffrey Eberwein, Reliability's largest shareholder, that Maslow's loans would be repaid and its guarantees for the debts of Doki's other businesses “would be taken care of.” (Demand ¶ 2). As part of these assurances, Doki executed an additional promissory note for payment of a $750, 000 tax liability incurred by Maslow by December 31, 2019. (Id. at ¶ 33). Moreover, on October 28, 2019, in connection with the closing of the Merger, Doki, Valleru, Janumpally, Pathuri, and Federal Systems entered into an agreement (i) acknowledging that Maslow was jointly liable for certain of Doki's and Valleru's debts and (ii) pledging shares of Maslow common stock to ensure that Maslow had the capacity to repay those debts in the event that Doki or Valleru failed to do so. (Id. at ¶ 43).
Separately, the Merger Agreement provided that Doki, Valleru, and Janumpally would be appointed to Reliability's Board of Directors following the Merger. (Merger Agreement § 2.15(c)). However, Reliability alleges that during the parties' discussions leading up to the Merger, Doki offered to remove both his name and the names of other large investors from the list of candidates, and agreed instead that Reliability's Board of Directors could select qualified candidates. (Demand ¶¶ 2, 22). Doki also assured Eberwein that Maslow's Chief Executive Officer and Chief Operating Officer, Nick Tsahalis and Mark Speck, would remain in charge of Maslow's business. (Id.). Reliability further alleges that in return, it agreed that certain Defendants would be exempt from the Merger Agreement's “lock-up” requirements, which would have barred them from selling their shares of Reliability stock for a one-year period. (Id. at ¶ 2).
As relevant here, the Merger Agreement contains the following arbitration clause:
Following the execution of the Merger Agreement, Doki's other businesses defaulted on the loans that Maslow had guaranteed, and Reliability discovered the existence of Maslow's mortgage guarantee. (Demand ¶ 4). Worse yet, Defendants refused either to return the pledged Maslow shares or to put them in escrow. (Id. at ¶ 44). Reliability alleges that, as a result, “Maslow was in fact worth nothing.” (Id. at ¶ 4). In spite of these apparent breaches, and in contravention of his prior concessions, Doki then sought to convene a special meeting of Reliability shareholders in order to oust the incumbent Board of Directors. (Id. at ¶ 5).
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