Passero v. Ford

Background

Thomas Passero, Laura Katzenberger, Prosthetic and Orthotic Associates, Inc., Handspring Rehabilitation, LLC, and Handspring Management Company, Inc. sued Mark Ford and Randolph Schmitke. Plaintiffs alleged that the parties entered into a Stock Purchase and Redemption Agreement dated January 1, 2017, as part of a management buyout involving some of Passero’s majority ownership interests in the companies.

Plaintiffs sought a declaration that the Stock Purchase and Redemption Agreement was unenforceable, had been terminated, and had no further force or effect. Alternatively, they sought a ruling that Schmitke was prevented from purchasing Passero’s equity interests under that agreement. Ford had been voluntarily dismissed from the action with prejudice before the motion at issue.

Schmitke moved under Section 4 of the Federal Arbitration Act to compel arbitration and dismiss the action. The Stock Purchase and Redemption Agreement itself did not contain a dispute-resolution clause. The shareholders’ agreements for Prosthetic and Orthotic Associates and Handspring Management Company did contain arbitration clauses. Those clauses required mediation first and arbitration if mediation did not resolve the dispute, subject to an exception for disputes concerning issues requiring unanimous shareholder consent.

Issues

The court considered whether the agreements formed an integrated transaction and, if so, whether the arbitration clauses in the shareholders’ agreements applied to the dispute concerning the Stock Purchase and Redemption Agreement. The court also considered whether the court or an arbitrator should decide the initial question of arbitrability—that is, whether the dispute falls within the arbitration agreement.

Analysis

The court held that the Stock Purchase and Redemption Agreement, shareholders’ agreements, operating agreement, and other closing documents were related, integrated agreements. The shareholders’ agreements described an option to purchase the interests that the Stock Purchase and Redemption Agreement made subject to a mandatory buyout. The agreements were made at the same time and referred to one another. The Stock Purchase and Redemption Agreement also incorporated the shareholders’ agreements and operating agreement by reference.

Because the agreements were part of one transaction, the court held that the Stock Purchase and Redemption Agreement could not be read separately from the other documents. The court concluded that the arbitration clauses in the shareholders’ agreements therefore applied to the Stock Purchase and Redemption Agreement as well.

The court further held that the parties clearly and unmistakably agreed to have an arbitrator decide arbitrability. The arbitration clauses incorporated the then-current rules of the American Arbitration Association, which authorize an arbitrator to decide objections concerning the arbitrability of claims. The court rejected Plaintiffs’ argument that exceptions for certain non-arbitrable disputes showed that the parties had not delegated arbitrability questions to the arbitrator. The arbitrator would determine which of Plaintiffs’ claims were arbitrable, and the court would abide by that determination.

Disposition

The court GRANTED Defendant’s motion to compel arbitration. The action was stayed pending arbitration. The clerk was directed to terminate the motion and administratively close the case, without prejudice to either party moving by letter to reopen the case within 30 days after the arbitration proceedings concluded.