Rossi v. Purvis

Background

StormQuant and its major shareholder, Edward Rossi, sued Reuben Timothy Purvis, III, Heather Purvis, and Collis Systems LLC. The complaint asserted federal and state securities-law claims, fraud, misrepresentation, breach of fiduciary duty, and related aiding-and-abetting claims based on statements and omissions concerning Purvis’s employment agreement and the issuance of StormQuant shares.

In December 2021, Purvis and StormQuant executed a Restricted Stock Purchase Agreement (RSPA). Rossi signed it for StormQuant as a director. The RSPA contained a broad arbitration provision covering disputes arising out of, relating to, or resulting from the agreement, including disputes with the company and its employees, officers, directors, shareholders, or benefit plans. It also stated that arbitration would be the sole, exclusive, and final remedy for covered disputes.

The defendants moved to compel arbitration of the claims in this federal action and of claims in a separate state-court lawsuit. The plaintiffs argued that the RSPA and its arbitration provision were unenforceable, that Heather Purvis and Collis Systems could not enforce the provision because they did not sign it, and that their claims did not fall within its scope. The plaintiffs also moved for leave to file an amended complaint.

Federal claims and the RSPA

The court concluded that the RSPA’s arbitration provision was enforceable. The plaintiffs argued that a later share-exchange agreement displaced the RSPA, but the court found that the later agreement did not reference or terminate the RSPA or its arbitration provision. The plaintiffs also argued that the RSPA was fraudulently induced. The court held that this challenge was directed at the RSPA as a whole, rather than specifically at the arbitration provision, so the challenge had to be presented to the arbitrator rather than used to prevent arbitration.

The court also rejected the argument that other agreements containing different arbitration provisions showed that there was no agreement to arbitrate under the RSPA. The court stated that the defendants were seeking arbitration under the RSPA and that the existence of other agreements did not make the RSPA’s provision unenforceable or unconscionable.

Nonsignatory defendants

The court held that Heather Purvis and Collis Systems could enforce the arbitration provision even though they did not sign the RSPA. The court relied on the plaintiffs’ allegations that Heather Purvis was a co-trustee and agent connected to Purvis and the Purvis Trust, and that Collis Systems was Purvis’s alter ego and had an agency relationship with him. Under the California-law principles applied by the court, agents and entities sued as an alter ego of a signatory may enforce an arbitration agreement.

Scope of arbitration

The court held that all claims in the federal action related to the RSPA and therefore fell within its arbitration provision. This included the federal securities-law claim, the California securities-law claim, fraud and misrepresentation, aiding and abetting, negligent misrepresentation, breach of fiduciary duty, and aiding and abetting breach of fiduciary duty. The court ordered the parties to proceed with arbitration under the RSPA.

State-court claims

The defendants also asked the court to compel arbitration of the claims in the separate state-court action and to stay those proceedings. The court denied that portion of the request. It concluded that the Anti-Injunction Act generally barred an injunction against the state case and that none of the relevant exceptions applied. The court also found that it lacked jurisdiction to compel arbitration of those state-court claims because the state complaint contained no federal claims, the parties were alleged to be citizens of the same state, and the state claims were not part of the same case or controversy as the federal claims in this action.

The court therefore held that the defendants’ motion was granted in part and denied in part: arbitration was compelled for all claims in this federal action, but the request concerning the state-court claims and proceedings was denied.

Stay and amendment motion

Because all claims in this action were subject to arbitration, the court stayed the case while arbitration proceeded. The court stated that it would dismiss the case on July 1, 2024, unless new legal authority required the stay to continue while the parties completed arbitration.

The court denied the plaintiffs’ motion for leave to amend as moot because the current complaint’s claims had to be arbitrated. That denial was without prejudice to seeking amendment in arbitration under the applicable arbitration rules.

Disposition

The defendants’ motion to compel arbitration was granted in part and denied in part. The parties were ordered to arbitrate all claims in the federal action. The request to compel arbitration of the state-court claims and stay the state-court proceedings was denied. The plaintiffs’ motion for leave to amend was denied, without prejudice to seeking amendment in arbitration. Judge P. Casey Fitts stayed this action pending arbitration, subject to the stated July 1, 2024 dismissal date unless new authority required the stay to continue.