HICKEY v. SMITH

Background

Joseph P. Hickey and Laurel Ulrich, individually and as guardian for Ulrich’s two minor children, sued Joseph P. Smith, Joseph J. Grillo, Richard F. Passarelli, Joseph C. Phair, and several Bobby Van’s restaurant entities. Plaintiffs alleged that Defendants fraudulently obtained or transferred ownership interests in several restaurants and withheld income distributions. The Second Amended Complaint asserted seventeen claims, including fraud, breach of fiduciary duty, conspiracy, unjust enrichment, and a request for an accounting.

The dispute centered on a 2017 Stock Purchase Agreement and a 2021 Amended Stock Purchase and Sale Agreement. Both agreements contain arbitration provisions requiring disputes to be resolved in New York. Plaintiffs alleged that Smith and Phair misrepresented the effect of the 2017 agreement and that the 2021 agreement did not resolve all of Hickey’s claims. Plaintiffs also argued that the 2017 agreement was invalid because of fraud and that the later agreement had ended the earlier arbitration provision.

Procedural History and Legal Standard

The case was first filed in the District of Columbia. That court treated Defendants’ earlier motions as requests to compel arbitration, held that Hickey had entered valid arbitration agreements with Smith and Phair, held that the agreements delegated questions about whether claims were arbitrable to an arbitrator, and transferred the case to the Southern District of New York because arbitration was to occur in New York.

After the transfer, Plaintiffs filed the operative Second Amended Complaint. Defendants again moved to dismiss or stay the case based on the arbitration agreements, as well as failure to state a claim, the heightened pleading standard for fraud, and the statute of limitations. Because Defendants sought to have the claims sent to arbitration, Judge Vyskocil treated the motions to dismiss as motions to compel arbitration.

Under the Federal Arbitration Act, written arbitration agreements generally must be enforced. Courts normally decide whether a dispute falls within an arbitration agreement, but an arbitrator decides that question when the agreement clearly and unmistakably delegates it to the arbitrator.

Rulings on the Arbitration Agreements

Judge Vyskocil held that the 2017 and 2021 agreements contain valid arbitration agreements. The court rejected Plaintiffs’ argument that the 2017 agreement was invalid because of fraud in the factum, which means that a person was tricked about the basic character of the document being signed. Plaintiffs alleged that Hickey was misled about the agreement’s legal effect, but they did not allege that he believed he was signing something other than a binding contract or that he was prevented from reading and understanding it.

The court also rejected Plaintiffs’ argument based on fraudulent inducement, which means that a person was persuaded to enter a contract through fraud. The court explained that a challenge based on fraudulent inducement must specifically challenge the arbitration clause itself, not merely the rest of the contract. Plaintiffs alleged that Hickey was induced to sign the 2017 agreement but did not allege that he was specifically induced to agree to arbitration.

The court further held that the 2017 arbitration provision was not ended by the 2021 agreement. Both agreements contained arbitration provisions and did not directly conflict. In addition, Phair was not a party to the 2021 agreement, so that agreement could not revoke Phair’s right to arbitrate under the 2017 agreement. The court also rejected the argument that the 2017 agreement became void because Smith and Phair did not exercise the alleged option to purchase Hickey’s shares.

Following the earlier District of Columbia ruling, Judge Vyskocil held that questions about whether claims fall within the arbitration agreements were delegated to the arbitrator. The court therefore did not decide Plaintiffs’ arguments about the scope of the 2021 arbitration provision.

Which Claims Were Subject to Arbitration

Hickey, Smith, and Phair were signatories to the relevant agreements. The court held that Hickey’s claims against Smith and Phair must be submitted to an arbitrator. These included Counts IV through XIII and XV through XVII to the extent those counts were asserted against Smith or Phair.

The court separately analyzed claims involving non-signatories. It held that Ulrich’s claims concerning her minor children’s interests in Kennedy BV were not sufficiently connected to either agreement. Hickey had transferred that interest to his children in 2014, before the 2017 and 2021 agreements, and the agreements did not concern the children’s Kennedy BV interests. Counts I through III therefore were not required to be arbitrated.

The court held that Hickey’s claims against the non-signatory defendants, other than Grillo, were closely connected to the two agreements. Those claims depended on whether the agreements transferred Hickey’s ownership interests and resolved his claims. The court concluded that Passarelli and the restaurant entities could seek arbitration under principles that can prevent a party from avoiding arbitration when its claims are closely connected to an agreement and its relationship with the signatories supports arbitration.

The court reached a different conclusion about Grillo. Although Grillo acted as an accountant, certified public accountant, financial advisor, and business consultant for the restaurants and Smith, the court found that he did not have a sufficiently close corporate relationship to the signatories to enforce the arbitration agreements. Accordingly, the court stated that Ulrich’s claims in Counts I through III and Hickey’s claims against Grillo in Counts VII, XV, XVI, and XVII were justiciable in court rather than required to be arbitrated.

Disposition

Because the arbitrable and non-arbitrable claims were closely connected, and because the arbitrator would decide whether some claims were arbitrable, Judge Vyskocil concluded that staying the entire case would promote judicial efficiency. The court therefore granted Defendants’ motions to dismiss or stay in favor of arbitration and stayed all proceedings pending arbitration. The court did not rule on the underlying allegations of fraud, ownership transfers, fiduciary-duty breaches, withheld distributions, unjust enrichment, or accounting.