Gregory G. Nethery v. CapitalSouth Partners Fund II, L.P. , 257 So. 3d 270 ( 2018 )

IN THE SUPREME COURT OF MISSISSIPPI
NO. 2017-CA-01238-SCT
GREGORY G. NETHERY
v.
CAPITALSOUTH PARTNERS FUND II, L.P.,
CAPITALSOUTH PARTNERS SBIC FUND III,
L.P., CAPITALSOUTH PARTNERS FLORIDA
SIDECAR FUND I, LP, CAPITALSOUTH
PARTNERS, LLC, HARBERT MEZZANINE
PARTNERS III SBIC, LP, HARBERT
MEZZANINE PARTNERS III, LP PROPERLY
KNOWN AS HARBERT MEZZANINE III, LP f/k/a
HARBERT MEZZANINE PARTNERS III SBIC,
LP, ON-SITE FUEL SERVICE, INC. AND ON-
SITE FUEL HOLDINGS, INC.
DATE OF JUDGMENT: 08/25/2017
TRIAL JUDGE: HON. WILLIAM E. CHAPMAN, III
TRIAL COURT ATTORNEYS: CECIL MAISON HEIDELBERG
KAYTIE MICHELLE PICKETT
EMERSON BARNEY ROBINSON, III
PHILIP W. THOMAS
ADAM STONE
J. KEVIN WATSON
PHIL B. ABERNETHY
JOHN HOUSTON DOLLARHIDE
COURT FROM WHICH APPEALED: RANKIN COUNTY CIRCUIT COURT
ATTORNEYS FOR APPELLANT: CECIL MAISON HEIDELBERG
J. KEVIN WATSON
ATTORNEYS FOR APPELLEES: KAYTIE MICHELLE PICKETT
ADAM STONE
JACKIE RAY BOST, II
EMERSON BARNEY ROBINSON, III
PHIL B. ABERNETHY
JOHN HOUSTON DOLLARHIDE
PHILIP W. THOMAS
NATURE OF THE CASE: CIVIL - OTHER
DISPOSITION: AFFIRMED - 11/15/2018
MOTION FOR REHEARING FILED:
MANDATE ISSUED:
BEFORE KITCHENS, P.J., BEAM AND CHAMBERLIN, JJ.
BEAM, JUSTICE, FOR THE COURT:
¶1. Gregory Nethery appeals from the Rankin County Circuit Court’s decision to grant
a motion to compel arbitration filed by Defendants CapitalSouth Partners,1 Harbert
Mezzanine Partners, and On-Site Fuel Services (collectively, “Defendants”).2 Finding the
circuit court properly granted Defendants’ motion to compel arbitration, we affirm.
COURSE OF PROCEEDINGS
¶2. Nethery founded On-Site Fuel Service, Inc. (OSFS), in 1996. In 2011, Defendants
CapitalSouth and Harbert approached Nethery about acquiring an ownership interest in
OSFS. A deal was consummated for CaptialSouth and Harbert to invest in OSFS, and OSFS
then used the investment capital to buy out two other longtime investors. On-Site Fuel
Holdings (OSFH) was then created as a holding company. OSFH is a Delaware corporation
that owns OSFS and does business in interstate commerce and in Mississippi.
¶3. Nethery retained a minority thirty-percent ownership interest in OSFS through his
stock interest in OSFH. CapitalSouth and Harbert each held the remaining interest. No
shareholder owns more than fifty percent of the holding company.
1
CapitalSouth Defendants are CapitalSouth Partners Fund II, L.P.; CapitalSouth
Partners SBIC, Fund III, L.P.; CapitalSouth Partners, Florida Sidecar Fund I, L.P.; and
CapitalSouth Partners, LLC.
2
On-Site Fuel Defendants are On-Site Fuel Service, Inc., and On-Site Fuel Holdings,
Inc.
2
¶4. As part of the deal, Nethery signed a Stockholders Agreement containing an
arbitration clause (denoted as Section 5.03(b) of the agreement), which provided the
following:
Except as provided in Section 6.03(a),3 any dispute among the parties hereto
shall, on demand of any party to such dispute, be submitted to binding
arbitration in Charlotte, North Carolina, conducted in accordance with the
Commercial Arbitration Rules of the American Arbitration Association by a
panel of three impartial arbitrators selected in accordance with such
Commercial Arbitration Rules, and judgment upon the award may be entered
in any court of competent jurisdiction. In rendering the award, the arbitrators
shall enforce this Agreement in accordance with its terms and in accordance
with applicable law, and shall assess the costs of such arbitration as they deem
just and equitable in light of their determination of the issues being arbitrated.
¶5. In October 2016, Nethery filed suit in circuit court against CapitalSouth and Harbert,
claiming breach of fiduciary duty, corporate freeze out, unjust enrichment, constructive trust,
civil conspiracy, and negligence and mismanagement.4
3
This is a typographical error. Section 5.03(b) clearly refers to Section 5.03(a), not
Section 6.03(a), because no Section 6 is contained in the Stockholders Agreement. Section
5.03(a) provided the following:
Each Stockholder acknowledges and agrees that in the event of any breach of
this Agreement, the non-breaching party or parties would be irreparably
harmed and could not be made whole by monetary damages, and therefore
each Stockholder hereby waives the defense in any action for specific
performance or injunctive relief that a remedy at law would be adequate.
Each Stockholder further agrees that all other Stockholders, in addition to any
other remedy to which they may be entitled at law or in equity, shall be
entitled to compel specific performance of this Agreement and to obtain
injunctive relief in any action instituted in a court of proper jurisdiction.
4
Nethery did not plead a cause of action against OSFS, but he named it as a defendant
in order to “seek the remedy of an accounting.”
3
¶6. In the complaint, Nethery claimed that OSFS, under his continued guidance,
transitioned well from CapitalSouth’s and Harbert’s entry into the business, growing
“Earnings Before Interest, Taxes, Depreciation and Amortization” (EBITDA) substantially,
which in turn “grew enterprise value.” Due to the growth, OSFS was contacted by numerous
investment groups interested in acquisition. But CapitalSouth and Harbert refused to engage
seriously in these opportunities that “would have benefited all stockholders handsomely.”
¶7. In December 2013, CapitalSouth and Harbert appointed their own executive to be
present at the company offices on a regular basis. In 2014, Nethery claims he began to be
excluded from company and departmental meetings. Nethery confronted CapitalSouth and
Harbert about his exclusion from company business to no avail.
¶8. In June 2014, Nethery says he was invited to Atlanta to meet with CapitalSouth
principals. CapitalSouth demanded core changes in the company and told Nethery these
demands were better than asking for Nethery’s resignation.
¶9. According to Nethery, CapitalSouth Defendants suspended him later that same month
“under the guise of false and specious allegations.” And in July 2014, Nethery was
terminated without cause.
¶10. Nethery claims that since his termination, “the company’s trajectory has spiraled in
a 180-direction.” The company reported approximately $8 million in losses during 2015, and
shareholder equity essentially vanished. But the majority shareholders “profited in spite of
the losses by implementing a loan arrangement with the company where they collect over
4
$250,000 per month through interest and accruals.” Through their loans to the company, the
majority shareholders “drain cash flow, handcuffing the company, while they benefit.”
¶11. Nethery claims that at all times, CapitalSouth and Harbert “conspired together and
acted in concert on behalf of themselves and each other, taking the positions of each other,
and acting in one block to control the voting of the company.” Considering their combined
majority interest, CapitalSouth and Harbert worked together for themselves and against the
interests of Nethery, the minority shareholder.
¶12. Defendants answered Nethery’s complaint, asserting the affirmative defense of
arbitration, and filed their motion to compel arbitration that same day. The circuit court
granted the motion and stayed the action filed by Nethery pending the completion of any
resulting arbitration.
¶13. As he claimed in the circuit court, Nethery maintains on appeal that, based upon a
choice-of-law provision contained in the Stockholders Agreement, Delaware law governs
interpretation of the agreement.5 Nethery contends that under Delaware law, the arbitration
clause does not apply because Nethery’s complaint does not allege breach of the
Stockholders Agreement, nor does Nethery seek legal relief under the agreement. Rather,
Nethery asserts only noncontractual state-law claims and his legal claims exist independently
from the contract.
5
Section 5.07 of the Stockholders Agreement provides, “The laws of the State of
Delaware, excluding the principles of conflicts of law thereof, shall govern the interpretation,
validity and performance of the terms of this Agreement.”
5
¶14. Nethery contends the Delaware Supreme Court’s decision in Parfi Holding AB v.
Mirror Image Internet, Inc., 817 A.2d 149, 155 (Del. 2002), controls. Under Parfi’s
analysis dealing with an arbitration clause contained in a “stock underwriting agreement,”
Nethery argues his independent state-law claims fall outside the scope of the arbitration
agreement; therefore, according to Nethery, they are not subject to arbitration.
¶15. Defendants respond that Delaware law is inapplicable, and it is also preempted by the
Federal Arbitration Act (FAA). Alternatively, the Defendants contend that, even if Delaware
law does apply, Parfi is distinguishable, and the controlling case is Elf Atochem North
America, Inc. v. Jaffari, 727 A.2d 286, 294 (Del. 1999).
¶16. The Defendants further contend that, because the arbitration agreement incorporates
the Rules of the American Arbitration Association (AAA), the parties intended to delegate
questions of arbitrability to an arbitrator (in this case, an arbitration panel). Thus, they
continue that the scope of the arbitration agreement should be determined by an arbitration
panel, not the court.
DISCUSSION
¶17. At the outset, we agree with Nethery that Delaware law governs interpretation of
Stockholders Agreement, based upon the agreement’s choice-of-law provision. In turn,
Delaware law governs the arbitration provision incorporated into the agreement. And
because the Stockholders Agreement indisputably involves interstate commerce, the Federal
Arbitration Act (FAA) governs. James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76,
80 (Del. 2006).
6
¶18. “The FAA requires that upon application of a party to a suit brought in court, the court
shall stay the court proceeding ‘upon being satisfied that the issue involved in such suit or
proceeding is referable to arbitration . . . .’” McLaughlin v. McCann, 942 A.2d 616, 621
(Del. Ch. 2008). “When deciding whether the parties agreed to arbitrate a certain matter
(including arbitrability), courts generally should apply ordinary state-law principles that
govern the formation of contracts.” Id. (quoting First Options of Chicago, Inc., v. Kaplan,
514 U.S. 938, 944, 115 S. Ct. 1920, 131 L. Ed. 2d 985 (1995)). Generally, “any doubts
concerning the scope of arbitrable issues should be resolved in favor of arbitration.” Id.
(quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626, 105
S. Ct. 3346, 87 L. Ed. 2d 444 (1985)).
¶19. In applying traditional state-contract-law principles to make a determination on the
question of arbitrability, “the court presumes that parties intended courts to decide issues of
substantive arbitrability[,] unless ‘the parties clearly and unmistakably provide otherwise.’”
Willie Gary, 906 A.2d at 79 (citing Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83,
123 S. Ct. 588, 154 L. Ed. 2d 491 (2002)).
Arbitrability
¶20. As a threshold issue, Delaware has adopted “the majority federal view that reference
to the AAA rules evidences a clear and unmistakable intent to submit arbitrability issues to
an arbitrator.” Willie Gary, 906 A.2d at 80. Willie Gary provides,
As a matter of policy, we adopt the majority federal view that reference to the
AAA rules evidences a clear and unmistakable intent to submit arbitrability
issues to an arbitrator. We do so in the belief that Delaware benefits from
adopting a widely held interpretation of the applicable rule, as long as that
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interpretation is not unreasonable. The majority view does not, however,
mandate that arbitrators decide arbitrability in all cases where an arbitration
clause incorporates the AAA rules. Rather, it applies in those cases where the
arbitration clause generally provides for arbitration of all disputes and also
incorporates a set of arbitration rules that empower arbitrators to decide
arbitrability.
Id.
¶21. Thus, under Delaware law, “the parties are deemed to have agreed to arbitrate
substantive arbitrability in accordance with the rules that they have broadly incorporated,”
under two conditions: “(1) the arbitration provision refers to the AAA or comparable rules
and (2) the arbitration clause generally provides for the arbitration of all disputes.” Roberts
v. Strickland, No. CV 510-081, 2010 WL 11553201, *1 (S.D. Ga. Dec. 10, 2010) (quoting
GTSI Corp. v. Eyak Tech., LLC, 10 A.3d 1116, 1120-21 (Del. Ch. 2010)).
¶22. In Willie Gary, the Delaware Supreme Court held that, even though the arbitration
clause before it had incorporated the AAA rules, the federal majority rule did not apply. Id.
at 81. Because the arbitration clause contained in the parties’ “LLC agreement” also allowed
LLC members to pursue injunctive relief and specific performance in the court, the Delaware
Supreme Court reasoned that the arbitration clause did not refer “all controversies to
arbitration, . . . and something other than the incorporation of the AAA rules would be
needed to establish that the parties intended to submit arbitrability questions to an arbitrator.”
Id. at 81.
¶23. Here, similar to the LLC agreement construed in Willie Gary, the arbitration clause
under Section 5.03(b) of the Stockholders Agreement generally refers all disputes arising or
relating to the Stockholders Agreement to arbitration, and the clause specifically incorporates
8
the Commercial Arbitration Rules of the AAA. But also similar to Willie Gary, the language
contained in Section 5.03(a) allows the parties to pursue claims for injunctive relief and
specific performance in the court.
¶24. While Nethery does not seek injunctive or specific-performance relief, unlike as was
the case in Willie Gary,6 we think Section 5.03 fails under Willie Gary’s second prong.
Under Willie Gary, Section 5.03(a) constitutes a carve-out provision providing judicial
remedies for disputes. Given its inclusion in the agreement, we think “something other than
incorporation of the AAA rules would be needed to establish that the parties intended to
submit arbitrability questions to an arbitrator.” Id. at 81. Accordingly, we find that the
question of arbitrability in this case was an issue for the circuit court’s determination; it was
not an issue for determination by an arbitration panel.
¶25. The circuit court’s order compelled Nethery to arbitrate all of his claims against the
defendants in accordance with the arbitration clause contained in the parties’ Stockholders
Agreement. For reasons explained below, we affirm the circuit court’s order.
Scope
¶26. In Parfi, the Delaware Supreme Court established a two-part test for determining
whether a dispute is committed to arbitration:
First, the court must determine whether the arbitration clause is broad or
narrow in scope. Second, the court must apply the relevant scope of the
provision to the asserted legal claim to determine whether the claim falls
within the scope of the contractual provisions that require arbitration. If the
6
In Willie Gary, the complainant had sought injunctive relief, specific performance,
and, alternatively, dissolution. Willie Gary, 906 A.2d at 78. No other relief was sought. Id.
Here, Nethery seeks monetary damages only.
9
court is evaluating a narrow arbitration clause, it will ask if the cause of action
pursued in court directly relates to a right in the contract. If the arbitration
clause is broad in scope, the court will defer to arbitration on any issues that
touch on contract rights or contract performance.
Parfi, 817 A.2d at 155.
¶27. The issue before the Delaware Supreme Court in Parfi was whether an arbitration
clause in an underwriting agreement should control in a minority shareholder’s fiduciary-duty
claims against a corporation. Id. at 155-56. The Parfi court found at the outset that the
arbitration clause was broad in scope. “By agreeing to submit to arbitration any dispute,
controversy, or claim arising out of or in connection with Underwriting Agreement, [the
parties] have signaled an intent to arbitrate all possible claims that touch on the rights set
forth in their contract.” Id. at 155. Even though the Parfi Court found the arbitration clause
was broad in scope, it said the actual question before it was “whether the arbitrable contract
claims are connected to the fiduciary duty claims that are independently grounded on
Delaware corporation law.” Id.
¶28. In answering the question, the Parfi court said, “Generally, purportedly independent
actions do not touch matters implicated in a contract if the independent cause of action could
be brought had the parties not signed a contract.” Id. at 156 n.24. Applying this test, the
Parfi court concluded that because the fiduciary claims “would be independently and
separately assertable” even if no underwriting agreement existed, they are “not ‘in
connection’ with the Agreement.” Id. at 157. That is to say, because the fiduciary claims
did not depend in any manner on the underwriting agreement, the Parfi court found that the
claims were not arbitrable. Id.
10
¶29. The Parfi court, however, was careful to distinguish its case, which involved a
separate underwriting agreement not binding on all the stockholders of the corporation, and
the situation in Jaffari. In Jaffari, the Delaware Supreme Court held that a broad arbitration
provision in an LLC Agreement could encompass breach-of-fiduciary-duty claims raised by
a member. Jaffari, 727 A.2d at 295. And as Parfi itself summarized, the LLC agreement
in Jaffari required “parties to submit purported fiduciary duty claims to arbitration since the
series of agreements created a system setting for[th] the governance and operation of the
parties’ joint venture.” Parfi, 817 A.2d at 160 n.42 (citing Jaffari, 727 A.2d at 293-95).
¶30. Here, the arbitration provision contained in the Stockholders Agreement is broad in
scope, because it governs “[a]ny dispute among the parties.” The Stockholders Agreement
governs the relationship between stockholders (CapitalSouth, Harbert, Sidecar, and Nethery)
who expressed the “desire to enter into this Agreement for the purpose of agreeing to certain
aspects of their relationship as holders of such capital stock.”
¶31. This relationship, as the Defendants argue, is directly related to Nethery’s primary
allegation: “Due to the majority shareholders’ actions, the company has become encumbered
with high interest debt to the majority shareholders and/or their entities, a benefit to the
majority shareholders and a detriment to the minority shareholders.”
¶32. Section 3.04 of the Stockholders Agreement provides,
Major Management Decisions. The following acts, expenditures,
decisions and obligations made or incurred by the Company or any Subsidiary
shall require the prior written approval of the Required Investors (unless the
Required Investors indicate otherwise in writing prior to any action by the
Board, approval by the CapitalSouth Nominees and the Harbert Nominees at
a meeting or by written consent shall constitute the approval of the Required
11
Investors for the purposes of this Section 3.04):
....
(h) the incurrence of Debt, other than borrowings under any revolving line of
credit that has been approved hereunder, or the sale or issuance by the
Company or any Subsidiary of any equity security of the Company or any
Subidiary;
(i) the guarantee of any obligation (including Debt) in excess of $100,000 of
any Person, other than a Company Subsidiary.
¶33. Section 5.14 of the Stockholders Agreement provides,
No Effect on Lending Relationships. To the extent any lender to the
Company owns any Company Securities, nothing contained in this Agreement
or any other equity documentation shall affect, limit or impair the rights and
remedies of any lender to the Company in its capacity as a lender pursuant to
any agreement under which the Company has borrowed money from such
Person.
¶34. Section 5.16 provides,
Discussion re Purchase of Nethery’s Company Securities. Upon
termination of Nethery’s employment with the Company and its Subsidiaries
for any reason, the Company and Nethery shall negotiate in good faith with
respect to a potential repurchase of the Nethery’s Company Securities by the
Company. In connection with such negotiations, upon the request of Nethery,
the Company shall engage a national or regional investment bank or business
appraiser who shall be mutually acceptable to the Company and Nethery, to
provide a non-binding determination of the fair market value of such Company
Securities. The costs of such appraisal shall be born[e] 50% by Nethery and
50% by the Company.
¶35. The conduct in which Nethery alleges the Defendants engaged (and which forms the
basis for each of Nethery’s state-law claims) arises from the authority provided by the
Stockholders Agreement and its provisions therein—Sections 3.04(h) and (i) and Section
5.14 of the Stockholders Agreement, in particular. The alleged conduct is dependent on the
12
agreement’s terms and is not “independently and separately assertable” apart from the
Stockholders Agreement. Cf. Parfi, 817 A.2d at 157. Thus, the circuit court correctly found
that Nethery’s claims are subject to the agreement’s arbitration provision.
CONCLUSION
¶36. For these reasons, we affirm the circuit court’s order granting the defendants’ motion
to compel arbitration.
¶37. AFFIRMED.
WALLER, C.J., RANDOLPH AND KITCHENS, P.JJ., KING, COLEMAN,
MAXWELL, CHAMBERLIN AND ISHEE, JJ., CONCUR.
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