Kirsch v. Dean

Filing 54

MEMORANDUM OPINION signed by Senior Judge Charles R. Simpson, III on 12/31/2016, re Defendant's 14 MOTION to Compel Arbitration and to Stay Further Proceedings, and Plaintiff's 35 MOTION to Stay arbitration proceedings. The Court will enter an order in accordance with this Memorandum Opinion.cc: Counsel (RLK)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
AT LOUISVILLE
TERRI KIRSCH

PLAINTIFF
CIVIL ACTION NO. 3:16:CV-00299-CRS

v.
ROBERT DEAN

DEFENDANT
Memorandum Opinion

I.

Introduction
This matter is before the Court on the motion of Defendant Robert Dean to compel

arbitration and to stay further proceedings as to claims concerning ZFX, Inc. (“ZFX”), ECF No.
14. Plaintiff Terri Kirsch responded, ECF No. 18, and Dean replied, ECF No. 28. Kirsch then
moved to stay the American Arbitration Association (AAA) arbitration proceedings pending the
Court’s decision on Dean’s motion to compel arbitration, ECF No. 35. Dean responded, ECF No.
37, and Kirsch replied, ECF No. 41.
Because these motions involve the same facts and issues, the Court will address them in a
single memorandum opinion and order. For the reasons set forth below, the Court will grant
Dean’s motion to compel arbitration and to stay further proceedings as to Kirsch’s claims
concerning ZFX. The Court will also deny Kirsch’s motion to stay the AAA arbitration
proceedings as moot.
II.

Background
A.

Allegations in the Complaint

As this Court has previously discussed, Kirsch and Dean are each 50 percent shareholders
in ZFX. Compl. ¶¶ 2–4, ECF No. 1. ZFX is a Nevada corporation that provides flying effects
services for stage performances. Id. ¶¶ 4, 7–8. In 2014, Kirsch told Dean that she was
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considering selling her ZFX shares and membership units in ZFX Property Holdings, LLC
(“ZFX Property”). Id. ¶¶ 3, 20. Around December 2015, Kirsch learned that Dean had removed
her from the corporate records as an officer and director. Id. ¶ 27.
In February 2016, Dean sent Kirsch proposed sale agreements for her shares, which she
signed. Id. ¶¶ 28–29. But before he bought her shares, Dean told Kirsch that he had discovered a
number of financial irregularities that had occurred while she had been serving as president of
ZFX and that he would not be able to execute the sales agreement until the financial irregularities
were resolved. Id. ¶ 33. He removed Kirsch’s access to ZFX’s computer system and financial
records. Id. ¶ 32. He also discontinued her health and dental insurance plans, and her pay. Id. ¶
34.
Kirsch then brought this action against Dean. She seeks a declaration of rights that she is
a 50% owner, director, and president of ZFX and a 50% owner and member of ZFX Property
(Count I). Id. ¶¶ 37–39. She also asserts that Dean breached his fiduciary duties he owed her as a
shareholder and member (Court II), and seeks punitive damages (Count IV).1 Id. ¶¶ 40–61.
B.

Dean’s Counterclaims

In response to Kirsch’s claims against him, Dean filed an answer and a verified amended
counterclaim in which he asserts several claims against her. He alleges that she breached her
fiduciary duty to ZFX “by failing to act on an informed basis and in good faith in overseeing
ZFX’s financial affairs” (Count 1). V. Am. Countercl. ¶¶ 75–80, ECF No. 13. Dean also alleges
that Kirsch engaged in waste (Count II), id. ¶¶ 81–88, and that she aided and abetted a company
employee in embezzling funds from ZFX (Count III), id. ¶¶ 89–94. He seeks declaratory relief
(Count IV). Id. ¶¶ 95–105. He further contends that Kirsch breached her fiduciary duty to him as

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The Court dismissed Count III of the complaint with prejudice. Order, ECF No. 11.
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a 50 percent shareholder in ZFX (Count V). Id. ¶¶ 106–21. Finally, he alleges that Kirsch
breached a document entitled “Stock Restriction Agreement Between ZFX, Inc. and It’s [sic]
Shareholders” (the “Stock Restriction Agreement”) when she pursued claims in court that the
document requires to be arbitrated under its arbitration provision (Count VI). Id. ¶¶ 122–36.
C.

The Stock Restriction Agreement

In relevant part, the Stock Restriction Agreement is a contract that was made “by and
among ZFX, Inc. . . . and Robert Dean and Terri Kirsch.” Ex. 1 at 1, ECF No. 13-1. The Stock
Restriction Agreement was intended to “impose limitations on the resale and/or transfer of shares
of the Corporation, and to provide for the orderly resale of such shares upon the occurrence of
certain events.” Id. For example, the document restricts the free transfer of shares, requires Dean
and Kirsch to offer the other and ZFX a right of first refusal before selling shares to a third party,
requires the company to maintain insurance for its shareholders, and prevents Dean and Kirsch
from competing with ZFX in the event that either of them would end his or her relationship with
the company. Id. at 1–10. The Stock Restriction Agreement also includes a mandatory purchase
requirement. Id. at 4. The mandatory purchase requirement states that in the event of “the
termination of a Shareholder’s employment with the Company for any reason,” the “Selling
Shareholder shall sell, and the Remaining Shareholders shall purchase on a pro rata basis, all of
the Shares of the Company owned by the Selling Shareholder.” Id. at 4–5.
At the end of the Stock Restriction Agreement is an arbitration provision. Id. at 9. The
arbitration provision applies to any disputes “between the parties with respect to any of the terms
of [sic] provisions of this Agreement, or with respect to the performance by any of the parties
under this Agreement.” Id.

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III.

Discussion
A.

Whether the Claims are Subject to Arbitration

Dean now moves to compel arbitration of Kirsch’s claims related to ZFX based on the
arbitration provision in the Stock Restriction Agreement; he does not move to compel arbitration
of Kirsch’s claims involving ZFX Property. See Mem. Supp. Mot. Compel 3, ECF No. 14-1. He
argues that Kirsch’s claims related to ZFX are subject to arbitration because they arise from his
alleged conduct in failing to purchase her ZFX shares. Id. at 7–8. Kirsch, however, maintains that
her claims do not concern the terms or provisions of the Stock Restriction Agreement, or her or
Dean’s performance under the document, and thus they are not subject to the arbitration
provision. Resp. Opp. Mot. Compel 5, ECF No. 5.
Both parties agree that the Federal Arbitration Act (FAA) applies to this matter. Mem.
Supp. Mot. Compel 3, ECF No. 14-1; Resp. Opp. Mot. Compel 5, ECF No. 5. Under the FAA,
“[a] written provision in . . . a contract evidencing a transaction involving commerce to settle by
arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid,
irrevocable, and enforceable, save upon grounds as exist at law or in equity for the revocation of
any contract.” 9 U.S.C. § 2. When asked to compel arbitration under a contract, a federal court
must determine first whether the parties agreed to arbitrate the issue. Stout v. J.D. Byrider, 228
F.3d 709, 714 (6th Cir. 2000). The court should ask if the action could be maintained without
“reference to the contract or relationship at issue.” Fazio v. Lehman Bros., Inc., 340 F.3d 386,
395 (6th Cir. 2003). If so, the action is likely outside the scope of the arbitration agreement. Id.
The court must decide whether the parties agreed to arbitrate the issue “in light of the
strong federal policy in favor of arbitration.” Stout, 228 F.3d at 714. Thus, “any ambiguities in
the contract or doubts as to the parties’ intentions should be resolved in favor of arbitration.” Id.

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Arbitration, however, is not absolute: “no matter how strong [sic] the federal policy favors
arbitration, arbitration is a matter of contract between the parties, and one cannot be required to
submit to arbitration a dispute which it has not agreed to submit to arbitration.” Simon v. Pfizer
Inc., 398 F.3d 765, 775 (6th Cir. 2005) (citations omitted).
Here, the arbitration provision broadly applies to Kirsch, Dean, and ZFX’s obligations
described in the Stock Restriction Agreement; any disputes “between the parties with respect to
any of the terms of [sic] provisions of this [Stock Restriction] Agreement, or with respect to the
performance by any of the parties under this [Stock Restriction] Agreement” are subject to
arbitration. Ex. 1 at 9, ECF No. 13-1.
Kirsch’s claims arise from Dean’s failure to purchase her ZFX shares, an event that is
contemplated by the Stock Restriction Agreement, including by its mandatory buy out
requirement. In her complaint, Kirsch asserts that she told Dean that she was considering selling
her shares in ZFX. Compl. ¶ 20, ECF No. 1. She then explains that they reached tentative terms
for the sale of her shares and that Dean then prepared written agreements for the sale. Id. ¶ 22,
23. Kirsch alleges that Dean then emailed the documents to her and that she signed and mailed
copies to him per his instructions. Id. ¶ 28, 29. She alleges that she signed the documents in
February 2012. Id. ¶ 22. But then Dean never finalized the sales, instead informing her that he
could not buy the shares until some financial irregularities that he had discovered were resolved.
Id. ¶ 33. She explains that these actions “were designed to illegally ‘freeze out’ and oppress
[her], effectively rendering her shares and units worthless.” Id. ¶ 34. From these actions arose
Kirsch’s claims against Dean as related to ZFX.
Because Kirsch’s claims related to ZFX stem from Dean’s failure to purchase her shares
in the company—an event that implicates the Stock Restriction Agreement—they cannot be

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resolved without reference to the document. Thus, these claims are subject to the arbitration
provision. See Fazio, 340 F.3d at 395 (directing that if the action could not be maintained
without “reference to the contract or relationship at issue,” then it would be subject to
arbitration). That the claims are subject to arbitration is further supported by the declaration of
the United States Court of Appeals for the Sixth Circuit that “any ambiguities in the contract or
doubts as to the parties’ intentions should be resolved in favor of arbitration.” Stout, 228 F.3d at
714.
B.

Whether Kirsch’s Affirmative Defenses Prevent Arbitration

Kirsch asserts the affirmative defenses of estoppel and waiver in further support of her
argument that her claims involving ZFX should not be submitted to arbitration under the Stock
Restriction Agreement’s arbitration provision. Mem. Opp. Mot. Compel, 7–10, 14–18, ECF No.
18. Her arguments are nearly identical to those that she raised in her motion to dismiss Count IV
of the verified amended counterclaim. See Mot. Dismiss, ECF No. 17.
i. Whether Dean is Equitably Estopped from Relying on the Arbitration Provision
Kirsch asserts that Dean is equitably estopped from relying on the arbitration provision in
the Stock Restriction Agreement because (1) he concealed material facts, (2) she had no
knowledge of the material facts, (3) he takes a new litigation position that is inconsistent with his
previous position, and (4) his conduct has injured or will injure her. Id. at 7–10. Dean disputes
these factual assertions and argues that Kirsch thus cannot prove the elements of equitable
estoppel. Reply 2–9, ECF No. 28.
State contract law is applicable to determine whether an arbitration agreement is valid,
revocable, and enforceable generally. Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 631
(2009). As the Stock Restriction Agreement contains a choice of law provision that states that the

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agreement “shall be governed by, construed and enforced in accordance with the laws of the
Commonwealth of Kentucky,” Ex. 1 at 9, ECF No. 13-1, this Court will apply Kentucky law to
the issue of whether Dean is equitably estopped from asserting his rights under the arbitration
provision.
As this Court previously noted, a party alleging equitable estoppel in Kentucky must
prove the following elements:
(1) [c]onduct which amounts to a false representation or concealment of material
facts, or, at least, which is calculated to convey the impression that the facts are
otherwise than, and inconsistent with, those which the party subsequently
attempts to assert; (2) intention, or at least expectation, that such conduct shall be
acted upon by the other party; (3) knowledge, actual or constructive, of the real
facts. As related to the party claiming the estoppel, [the elements of equitable
estoppel] are: (1) Lack of knowledge and of the means of knowledge of the truth
as to the facts in question; (2) reliance upon the conduct of the party estopped;
and (3) action based thereon of such a character as to change his position
prejudicially.
Smith v. Howard, 407 S.W.2d 139, 143 (Ky. 1966).
Regarding the elements that concern the conduct of the party being estopped, Kirsch
asserts that Dean concealed the arbitration and mandatory buy-out provisions in the document,
Mem. Opp. Mot. Compel, 8, ECF No. 18. In support of this allegation, she points to Dean’s
choice to litigate her claims on the merits rather than compel arbitration upon receiving the
complaint. Id. But Dean swears in his affidavit that he had no recollection of the Stock
Restriction Agreement before September 28, 2016, Dean Aff. ¶ 6, ECF No. 20-6, a date that
occurred after he submitted his motion to dismiss. Mot. Dismiss, ECF No. 4. Moreover, shortly
after he remembered the Stock Restriction Agreement, he filed his motion to compel arbitration.
Mot. Compel, ECF No. The Court thus finds that Dean did not conceal the arbitration and
mandatory buy-out provisions in the Stock Restriction Agreement, as Kirsch contends.

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Concerning the elements that related to the party claiming estoppel, Kirsch argues that
she had no knowledge of the Stock Restriction Agreement and its arbitration and buy-out
provisions because she could not access ZFX’s electronic network. Opp. Mot. Compel 8–9, ECF
No. 18. Yet Kirsch asked for and obtained legal advice about the Stock Restriction Agreement in
2012. Email 8/10/12, ECF No. 20-3; Email 9/12/12. ECF No. 20-5. She also signed the Stock
Restriction Agreement at that time. Ex. 1 at 10, ECF No. 13-1. Given this evidence, Kirsch was
aware of the Stock Restriction Agreement and read or should have read its arbitration and buyout provisions.
Kirsch also maintains that Dean has taken an inconsistent litigation position by filing a
motion to dismiss her claims and then by raising the Stock Restriction Agreement’s arbitration
provision in his answer and verified amended counterclaim. Opp. Mot. Compel, 9–10, ECF No.
18. As stated above, Dean had no recollection of the Stock Restriction Agreement until after he
filed his motion to dismiss. Dean Aff. ¶ 6, ECF No. 20-6; Mot. Dismiss 1, ECF No. 4. Moreover,
Dean has not taken inconsistent litigation positions in filing a motion to dismiss Kirsch’s claims
under Federal Rule of Civil Procedure 12(b)(6) before submitting his answer. Rather, he has
followed the proper order of litigation. See Fed. R. Civ. P. 12(b) (“A motion asserting any of
these defenses must be made before pleading if a responsive pleading is allowed.”).
Finally, Kirsch contends that Dean’s inconsistent litigation positions could severely
prejudice her. Opp. Mot. Compel 10, ECF No. 18. But, as explained above, Kirsch knew about
the Stock Restriction Agreement and could have initiated arbitration. Instead, she chose to
litigate the matter. As such, Kirsch is unable to show that Dean’s litigation strategy is or could
prejudice her.

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Given that Kirsch is unable to show that Dean is equitably estopped from relying on the
arbitration provision in the Stock Restriction Agreement, her claims involving ZFX shall proceed
to arbitration.
ii. Whether Dean Waived His Right to Compel Arbitration
Kirsch argues that Dean waived his right to compel arbitration of her claims involving
ZFX when he filed a motion to dismiss and original counterclaims that made no mention of the
arbitration provision then filed an answer that mentioned the arbitration provision. Mem. Opp.
Mot. Compel 14–18, ECF No. 18. Dean asserts that, consistent with current Sixth Circuit
precedent, his act of raising the arbitration provision in his answer after filing a motion to
dismiss Kirsch’s claims does not amount to waiver and that his original counterclaims did not
implicate the arbitration clause. Reply 11–15, ECF No. 28.
In the Sixth Circuit, federal law applies to the question of whether a party has waived his
right to compel arbitration. See, e.g., Highlands Wellmont Health Network v. John Deere Health
Plan, 350 F.3d 568, 574 (6th Cir. 2003) (applying federal law); O.J. Distrib., Inc. v. Hornell
Brewing Co., 340 F.3d 345, 356 (6th Cir. 2003) (same). A party waives a right to compel
arbitration if “it acts in a manner completely inconsistent with any reliance on an arbitration
agreement" or delays asserting arbitration to such an extent that the opposing party incur[red]
actual prejudice.” Shy v. Navistar Int'l Corp., 781 F.3d 820, 827–28 (6th Cir. 2015) (citing
Hurley v. Deustsche Bank Trust Co. Americas, 610 F.3d 334, 338 (6th Cir. 2010)). A party does
not waive its right to arbitrate by only filing a motion to dismiss. Healthcare Mgmt. Sys. v. Syntel
Ltd., No. 3:12-0845, 2013 U.S. Dist. LEXIS 103252, at *8 (M.D. Tenn. July 24, 2013) (quoting
Sharif v. Wellness Int'l Network, Ltd., 376 F.3d 720, 726 (7th Cir. 2004)).

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Here, Dean’s filing of a motion to dismiss did not waive his right to compel arbitration
under the Stock Restriction Agreement’s arbitration provision. See Syntel, Ltd., 2013 U.S. Dist.
Lexis 103252 at *8. Additionally, his original counterclaims do not concern the Stock Restriction
Agreement or the sale of Kirsch’s shares; instead, they concern Kirsch’s misconduct in
relationship to Janet McIsaac, an employee of ZFX. See Countercl. ¶¶ 75–105. As Dean did not
waive his rights to arbitration, Kirsch’s claims involving ZFX shall proceed to arbitration.
IV.

Conclusion
The Court will grant Dean’s motion to compel arbitration and to stay further proceedings

as to Kirsch’s claims that relate to ZFX. The Court will also deny Kirsch’s motion to stay AAA
arbitration proceedings as moot. Kirsch’s claims involving ZFX Property will not be subject to
arbitration. This Court will refer the remainder of the matter to the magistrate judge. The Court
will enter an order in accordance with this memorandum opinion.

December 31, 2016

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