Schwab v. MissionSide, LLC
| Decision Date | 04 November 2021 |
| Docket Number | Civil Action 20-2376 (JEB) |
| Parties | CURTIS SCHWAB, Plaintiff and Counterdefendant, v. MISSIONSIDE, LLC, Defendant and Counterclaimant. |
| Court | U.S. District Court — District of Columbia |
Defendant and Counterclaimant MissionSide, LLC purchased Blue Water Media from Plaintiff and Counterdefendant Curtis Schwab in 2019. After Schwab filed suit to recover a signing bonus he believes he is owed, MissionSide counterclaimed. It asserts claims against Schwab for breach of contract indemnification, intentional or fraudulent misrepresentation and inducement, negligent misrepresentation, and “declaratory relief.” It alleges that, during the due-diligence process preceding the sale, Schwab misrepresented Blue Water's financial position, made misleading projections about its future performance, and failed to disclose a half-million-dollar debt.
Schwab now moves to dismiss, arguing that three of the counts should be referred to arbitration under the terms of the Membership Interest Purchase Agreement and the remaining two fail to state a claim for relief. The Court will deny the Motion in part and grant it in part, referring the breach-of-contract count to arbitration, staying the indemnification count pending the prior count's resolution, dismissing the declaratory-relief count, and allowing the misrepresentation counts to proceed.
Considering the facts set forth in the Counterclaim as true at this stage, the Court begins with the purchase by Defendant and Counterclaimant MissionSide of “all the outstanding member interests in Blue Water Media, LLC.” See ECF No. 24 (First Amended Counterclaim), ¶ 1. Blue Water, a “website development services company in the public and private sectors, ” was founded and wholly owned by Schwab. Id.; ECF No. 24-1 (Membership Interest Purchase Agreement) at 1. In July 2019, MissionSide and Schwab signed the Membership Interest Purchase Agreement, which memorialized the terms of the sale. See Am. Countercl., ¶ 44.
The MIPA was the culmination of an acquisition process that began in July 2018. Id., ¶ 15. According to the Amended Counterclaim, Schwab repeatedly made misleading statements to MissionSide during this process. Id., ¶¶ 23-25. He also allegedly renegotiated contracts at a negative margin with no explanation, directed his then-CFO to invoice customers for work that had not yet been performed, and otherwise acted to inflate the accounts receivable and make Blue Water's revenues appear higher than they actually were. Id., ¶¶ 29-35.
On July 24, 2019, with Schwab's allegedly fraudulent activities still unknown to MissionSide, the parties executed the MIPA. Id., ¶ 44. Most relevant to this dispute, Section 2.04 provides for adjustments to the purchase price at and after closing to account for differences between the target and actual working capital, outstanding debts, and unpaid transaction expenses at the time of exchange. Id., ¶¶ 49-54. It also articulates a process for making these adjustments, which requires the buyer to present the seller with its calculation of the adjustment (Post-Closing Adjustment) and gives the seller a set time period in which to issue its response (Statement of Objections). See MIPA § 2.04(c). In the event of a dispute over the amount owed, Section 2.04(c)(iii) also outlines a resolution process, whereby:
[A]ny amounts remaining in dispute (“Disputed Amounts” and any amounts not so disputed, the “Undisputed Amounts”) shall be submitted for resolution to the office of Aronson, LLC (the “Independent Accountant”) who, acting as experts and not arbitrators, shall resolve the Disputed Amounts only and make any adjustments to the Post-Closing Adjustment, as the case may be, and the Closing Statement.
Aronson's “resolution of the Disputed Amounts and their adjustments to the Closing Statement and/or the Post-Closing Adjustment shall be conclusive and binding upon the parties hereto.” Id. § 2.04(c)(v). The MIPA further obligates both parties to indemnify the other against losses arising out of, among other things, inaccuracies or breaches in representations or breaches of obligations under the agreement. Id. § 8.02-8.03.
In keeping with the procedure laid out in Section 2.04, MissionSide provided Schwab with a Closing Statement on October 23, 2019, informing him that he owed a Closing-Price Adjustment of $361, 614.72. See Am. Countercl., ¶ 59. In late November, Schwab provided a Statement of Objections to the Closing Statement. Id., ¶ 64. As of the filing of this lawsuit, Schwab has not paid any amount and instead contends that he is owed $100, 000. See Am. Countercl., ¶ 68.
In the midst of this post-closing adjustment process, MissionSide also learned that Schwab allegedly owed over $500, 000 to the landlord of a property leased by Blue Water. Id., ¶¶ 71-76. MissionSide alleges this is an “indebtedness” and/or a “current liability” of Blue Water that should have been disclosed by Schwab during the negotiations. Id., ¶¶ 77-78. The resulting dispute with the landlord has caused MissionSide to incur “significant expense in negotiating with the landlord, ” and MissionSide also faces a threat of litigation. Id., ¶¶ 76, 79. Schwab has refused to submit this rent liability to the independent accountant pursuant to § 2.04(c)(iii), even though MissionSide alleges that it “significantly impacts the Post-Closing Adjustment amount.” Id., ¶ 80.
Schwab initiated this lawsuit in August 2020 to recover a $100, 000 signing bonus he alleges he is owed under an employment agreement with MissionSide. See ECF No. 1 (Compl.), ¶ 12. MissionSide counterclaimed in response, filing the operative First Amended Counterclaim in August 2021. There, it brings counts against Schwab for 1) breach of contract, 2) indemnification, 3) intentional and/or fraudulent misrepresentation and inducement, 4) negligent misrepresentation, and 5) declaratory relief. Schwab now moves to dismiss all five counts. See ECF No. 25-1 (Pl. Motion to Dismiss).
Counterdefendant's Motion invokes the legal standards for dismissal under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). Schwab acknowledges, however, that his arbitration arguments, though presented in a 12(b)(1) motion, may be more appropriately governed by the standard that applies to summary judgment. Id. at 10. The Court agrees. While unusual, courts “have allowed [parties] to ‘petition' the court [to direct arbitration under the Federal Arbitration Act, 9 U.S.C. § 1, et seq., ] through the use of a motion to dismiss for lack of subject matter jurisdiction.” Brown v. Dorsey & Whitney, LLP, 267 F.Supp.2d 61, 66 (D.D.C. 2003). When such a motion is opposed on the ground that no agreement to arbitrate was formed, “the proper approach to employ in reviewing the [party's] motion to dismiss and compel arbitration is to apply the same standard of review that governs Rule 56 motions.” Id.; see also Stromberg Sheet Metal Works, Inc. v. Washington Gas Energy Systems, Inc., 448 F.Supp.2d 64, 68 (D.D.C. 2006). That standard instructs the Court to “grant a party's motion to compel arbitration when the pleadings and the evidence demonstrate that ‘there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.'” Booker v. Robert Half International, Inc., 315 F.Supp.2d 94, 99 (D.D.C. 2004) (quoting Fed.R.Civ.P. 56(c)). The party moving for arbitration “bears the initial responsibility of demonstrating the absence of a genuine dispute of material fact, ” and “the non-movant's statements should be accepted as true and all inferences should be drawn in the non-movant's favor.” Id. ().
To survive a motion to dismiss under Rule 12(b)(6), which governs the other claims, a complaint must “state a claim upon which relief can be granted.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 552 (2007). Although “detailed factual allegations” are not necessary to withstand a Rule 12(b)(6) motion, id. at 555, “a complaint must contain sufficient factual matter, [if] accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570). Though a party may survive a Rule 12(b)(6) motion even if “‘recovery is very remote and unlikely, '” the facts alleged in the complaint “must be enough to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555-56 (quoting Scheuer v. Rhodes, 416 U.S. 232, 236 (1974)).
In evaluating a motion to dismiss, a court must “treat the complaint's factual allegations as true and must grant plaintiff ‘the benefit of all inferences that can be derived from the facts alleged.'” Sparrow v. United Air Lines, Inc., 216 F.3d 1111, 1113 (D.C. Cir. 2000) (citation omitted) (quoting Schuler v. United States, 617 F.2d 605, 608 (D.C. Cir. 1979)). The court need not accept as true, however, “a legal conclusion couched as a factual allegation, ” nor an inference unsupported by the facts set forth in the complaint. Trudeau v. FTC, 456 F.3d 178, 193 (D.C. Cir. 2006) (quoting Papasan v. Allain, 478 U.S. 265, 286 (1986)).
Counterdefendant mounts his challenges in two groups: 1) to Counts 1, 2, and 5, which he primarily contends must be sent to arbitration, and 2) to Counts 3 and 4, which he maintains should be dismissed for failing to state a claim. The Court adopts the same structure here.
According to Schwab, the Court lacks jurisdiction over Counts 1 (breach of contract), 2 (indemnification), and 5 ...
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