Nethery v. Capitalsouth Partners Fund Ii, L.P.

257 So.3d 270

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.

NO. 2017-CA-01238-SCT

Supreme Court of Mississippi.

November 15, 2018

ATTORNEYS FOR APPELLANT: CECIL MAISON HEIDELBERG, Ridgeland, J. KEVIN WATSON, Jackson

ATTORNEYS FOR APPELLEES: KAYTIE MICHELLE PICKETT, ADAM STONE, JACKIE RAY BOST, II, Jackson, EMERSON BARNEY ROBINSON, III, PHIL B. ABERNETHY, JOHN HOUSTON DOLLARHIDE, Ridgeland, PHILIP W. THOMAS, Jackson

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 CapitalSouth 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.

¶ 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

¶ 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 $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.

¶ 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).

¶ 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 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

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