WORTH v. WORTH et al

Filing 61

MEMORANDUM AND ORDER THAT PLAINTIFF'S MOTION FOR AN ORDER TO SHOW CAUSE AS TO WHY WE SHOULD NOT ENTER CONTEMPT OR OTHERWISE STAY PARALLEL IS GRANTED IN PART AND DENIED IN PART. DEFENDANT'S CROSS MOTION TO COMPEL ARBITRATION IS DENIED; ETC.. SIGNED BY HONORABLE MARK A. KEARNEY ON 12/22/16. 12/23/16 ENTERED AND E-MAILED.(jl, )

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
MARKWORTH

CIVIL ACTION

v.

NO. 16-3877

STEPHEN WORTH, et al.

MEMORANDUM

December 22, 2016

KEARNEY,J.

There is something curious in a party appealing our Order finding an arbitration clause in
a Shareholders Agreement either does not apply or is waived, obtaining a stay of all proceedings
towards trial pending his appeal and then, forty-eight hours later, filing an arbitration demand on
the same Shareholders Agreement.

While not contemptuous, the party's conduct borders on

"too cute". We are not persuaded by his creative advocacy. We cannot overlook the issue of
whether the parties' disputes concerning the plaintiffs claims his brother harmed their family
owned company and oppressed his shareholder rights must be resolved, by agreement, before
our jury and not in arbitration.

Even if reasonable minds could disagree and seek appellate

review, reasonable minds would have a herculean task to allow the same appealing party to turn
around and file an arbitration demand based on the same fact issues now stayed, at his request,
while he appeals to our Court of Appeals. 1 We cannot find a valid basis to allow the post-appeal
arbitration to proceed and our accompanying Order stays the post-appeal arbitration demand
under the same Shareholders Agreement pending his appeal concerning the scope of arbitration
now before the Court of Appeals.

I.

Background

Mark Worth disputes a series of his brother Stephen's business decisions involving their
family business, Worth and Company. 2 In October 2015, Mark sued Stephen in Pennsylvania
state court. 3 After actively litigating there for nine months, Mark withdrew his state court case
and started here against Stephen and several codefendants based on the same facts now dressed
in federal statutory claims subject to review at summary judgment and trial. 4

Mark's claims

derive from a minority shareholder oppression claim against Stephen, who had allegedly frozen
Mark out of the Company and ordered Mark to stay away from the Company and its
employees. 5 As a result, Mark claims he could not return to work. Mark never claims he quit
work but Stephen could certainly raise this defense when we proceed to trial.
Stephen and his codefendants moved to compel arbitration of this case under a
Shareholders Agreement, although they did not raise arbitration in the nine months of litigating
in state court. 6 At oral argument, Mark conceded his claims were either entirely derivative or
fell within a carve out to the arbitration clause excluding arbitration on matters relating to the
Company's operation and management. On November 29, 2016, we denied Stephen's motion to
compel arbitration finding Mark's claims fell within the carve-out of the arbitration clause as
they related to the operation or management of the Company. 7 We also found even if Mark's
individual statutory claim for minority shareholder oppression did not involve the Company's
operation or management and thus may be subject to the arbitration clause, Stephen waived his
right to arbitrate by litigating these same fact issues in state court for nine months without
mentioning arbitration. 8

After denying Stephen's motion to compel arbitration, we set the

discovery schedule, required F.R.Evid. 408 exchanges, set summary judgment deadlines and
attached counsel for trial beginning May 30, 2017. 9

2

On the same day we issued our Order denying his Motion to compel arbitration and
setting a discovery and trial schedule, Stephen filed a Notice of Appeal and moved to stay our
trial schedule during the pendency of the appeal. 10 We granted Stephen's motion to stay
recognizing our lack of jurisdiction in proceeding with discovery and towards the May 30, 2017
trial during the pendency of Stephen's appeal. 11
Assured he had obtained the stay of our trial schedule in this Court, Stephen waited just
two days to turn around and file a demand for arbitration of issues in the same Shareholders
Agreement then on appeal. 12 Stephen seeks an arbitration order requiring Mark to sell his shares
to Stephen under Sections 7 and 10 of the Shareholders Agreement because Mark no longer
worked full time at the Company .13

II.

Analysis

Mark now moves to stay Stephen's post-appeal arbitration demand, arguing Stephen's
arbitration claim is a backdoor attempt to circumvent our Order denying Stephen's motion to
compel arbitration and Stephen's oppressive conduct caused any change in his employment
status.

14

Stephen counters his post-appeal arbitration under the same Shareholders Agreement

based on Mark's non-employment status provoking a buyout is separate and distinct from the
stayed trial issues. Stephen also argues his claim can be arbitrated pending appeal even if it
shares factual issues with Mark's claims against him. While we do not find Stephen's conduct
is contemptuous, we will stay his end run of our November 29, 2016 Order which he is now
appealing.

A.

We have jurisdiction to decide this motion.

We retain jurisdiction to decide this motion seeking to preserve the status quo after
Stephen's appeal. Filing a notice of appeal generally divests district courts of jurisdiction over

3

the case. 15 Our Court of Appeals has adopted the majority rule of automatic divestiture after an
interlocutory appeal is taken under Section 16(a) of the Federal Arbitration Act. 16 But there are
exceptions to this general rule for matters "collateral to the appeal on the merits." 17 District
courts retain jurisdiction over such matters such as injunctions, sanctions, and attorney's fees. 18
Orders to stay litigation also fall within these exceptions. 19 Courts have considered motions to
stay arbitration in similar circumstances. 20 This makes sense - a decision on a motion to stay has
no bearing on the merits of the parties' substantive arguments. Instead, it involves the court
using its sound discretion to best manage the litigation and the parties' needs. Such a decision is
collateral to the issue on appeal, which is whether Mark's claims fall within the scope of the
Shareholders Agreement's arbitration clause or whether Stephen waived his claim to seek
arbitration by litigating for nine months in state court without mentioning arbitration. We
entertain jurisdiction to decide this motion.

B.

We stay Stephen's demand for arbitration pending appeal.

Motions to stay arbitration proceedings are governed by Fed. R. Civ. P. 62(c). 21

We

consider whether: (1) the stay applicant has made a strong showing he is likely to succeed on
the merits; (2) the applicant will be irreparably injured absent a stay; (3) issuance of the stay
will substantially injure the other parties interested in the proceeding; and (4) an injunction will
affect the public interest. 22
The factors favor our stay of Stephen's post-appeal arbitration demand seeking to
arbitrate the value of Mark's ownership interest based on a finding he resigned employment.
Mark argues he did not resign and Stephen's operations and management of the Company
oppressed him and locked him out of work. These are the issues before us in the matter now on
appeal. We held Mark's arguments must be resolved before us.

4

Mark made a strong showing he is likely to succeed on the merits. We found his claims
are not arbitrable and must proceed into discovery. We found Stephen waived his right to
arbitrate Mark's minority shareholder oppression claim as it relates to the Company's
operations and management. Stephen's present arbitration demand presumes Mark left his
employment and an arbitrator must value his shares.
problem.

Stephen's presumption creates his

To get to an arbitrator valuing Stephen's shares, our jury must first determine

whether Mark's absence from work arises from the facts supporting his claims of minority
oppression.

We cannot allow an arbitrator to short-cut the trial process when the parties did

not agree to arbitrate operation and management issues or otherwise waived an ability to
arbitrate. Even assuming the entire dispute is eventually arbitrated, Stephen's present demand
cannot be resolved until after Mark's claims. Stephen's ability to bring his claim in arbitration
is necessarily dependent on the coming decision from Our Court of Appeals. The first factor
therefore weighs in favor of staying arbitration.
To analyze the next two factors, it is useful to look at both Stephen's claim in his
arbitration demand and Mark's minority shareholder oppression claim. Stephen states Mark is
no longer a full time employee at Worth and Company and therefore must sell his company
shares to Stephen under Section 10 of the Shareholders Agreement. Mark argues Stephen froze
him out of the Company and did not allow him to work there -

this averment forms the basis

of his minority shareholder oppression claim against Stephen. Mark also requests appointment
of a custodian as relief in his oppression claim evidencing Mark's claim Stephen is working to
force him out of the Company, a fear now substantiated by Stephen's post-appeal arbitration
demand. Absent a stay, Mark faces the possibility of having to defend against Stephen's claims
in arbitration and losing his ownership in the Company while his affirmative claims are on

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appeal filed by Stephen.

Of course, parallel proceedings do not themselves constitute

irreparable injury in the context of arbitration. 23
But there is more to this tactic. The question of whether Stephen waived the right to
arbitrate his claim for a forced stock sale may be answered on appeal of our November 29, 2016
A ruling on waiver from our Court of Appeals may moot Stephen's demand for

Order.

arbitration. Participation in an arbitration proceeding which may be rendered moot is an
irreparable injury that federal courts have recognized when considering motions to stay
arbitration. 24 The second factor therefore favors a stay. As to the third factor, a stay does not
injure Stephen in any way. If he is successful on appeal, some or all of Mark's claims will be
arbitrable with his current claim. And an unsuccessful appeal does not affect his ability to bring
his claim within this federal litigation, as Stephen has not answered the Complaint. On the fourth
factor, the public interest does not favor nor disfavor a stay in this fraternal dispute except
Federal Rule of Civil Procedure 1 requires the parties and their lawyers get to work on resolving
the case and avoid the gamesmanship pervading their strategies to date.
As demonstrated, maintaining the status quo is the proper course of action. Stephen
exercised his right to appeal our denial of his motion to compel arbitration. Before he arbitrates
a separate claim against his brother -

a claim sharing many similar facts and legal arguments

with Mark's minority shareholder oppression claim and one which Stephen failed to assert in the
state court action -

our Court of Appeals should be afforded the opportunity requested by

Stephen.

III.

Conclusion

Mark and Stephen Worth must resolve their fraternal dispute. Stephen has chosen to appeal our
threshold decision on whether Mark's claims are arbitrable and we await our Court of Appeals'

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ruling. In the meantime, our accompanying Order stays arbitration proceedings on Stephen's
post-appeal arbitration demand based on the same conduct arising under the same Shareholders
Agreement.

1

Mark also moves for an order to show cause as to why Stephen and his counsel should not be
held in contempt and sanctioned. Given some time to dispel temper, Mark did not press this
request in his reply. We decline such an extraordinary request. There is no basis for contempt.
As we requested in our November 29, 2016 Memorandum, the brothers are better served by
lawyers and judges working towards resolution and not throwing ad hominems. As fair notice,
we may consider sanctions for continued ad hominem distractions.
2

We described the factual background in our November 29, 2016 Memorandum. See Worth v.
Worth, No. 16-3877, 2016 WL 7007721 (E.D. Pa. Nov. 29, 2016).

3

ECF Doc. No. 22-8.

4

See Worth, 2016 WL 700721, at *2.

5

Compl. at 11 42.

6

ECF Doc. No. 20.

7

ECF Doc. Nos. 44 and 45.

8

See Worth, 2016 WL 700721, at *6.

9
10

ECF Doc. No. 46.
Ec F Doc. No. 48.

11

ECF Doc. No. 49.

12

ECF Doc. No. 57-1

13

Id. at 2-3.

14

EcF Doc. No. 57.

15

See Griggs v. Provident Consumer Discount Co., 459 U.S. 56, 58 (1982); see also Mary Ann
Pensiero, Inc. v. Jingle, 847 F.2d 90, 97-98 (3d Cir. 1988).

7

16

Ehleiter v. Grapetree Shores, Inc., 482 F.3d 207, 215 (3d Cir. 2007).

17

Pensiero, 847 F.2d at 98.

18

Venen v. Sweet, 758 F.2d 117, 121 (3d Cir. 1985).

19

See Sheet Metal Workers' Intern. Ass 'n Local 19 v. Herre Bros., Inc., 198 F.3d 391, 394 (3d
Cir. 1999) (finding a,District Court's order staying case pending appeal valid).
20

See Mazera v. Varsity Ford Servs., LLC, No. 07-12970, 2008 WL 2223907, at *1 (E.D. Mich.
May 29, 2008) (staying arbitration while appeals from a district court order were pending in the
Court of Appeals); Mendez v. Skymax Dominica, SA., No. 11-7548, 2011WL6413608, at *1
(S.D.N.Y. Dec. 13, 2011) (denying motion to stay arbitration pending appeal).
21

C.B.S. Employees Federal Credit Union v. Donaldson, 716 F.Supp. 307 (W.D. Tenn. 1989);
Peck Ormsby Const. Co. v. City of Rigby, No.10-545, 2012 WL 914915, at *2-3 (D. Idaho Mar.
15, 2012).
22

Peck Ormsby, 2012 WL 914915; see also Nken v. Holder, 556 U.S. 418, 129 S.Ct. 1749,
1760, 173 L.Ed.2d 550 (2009).

23

See, e.g., Graphic Communications Union, Chicago Paper Handlers' & Electrotypers' Local
No. 2 v. Chicago Tribune Co., 779 F.2d 13, 15 (7th Cir.1985) ("[t]he fact that an order to arbitrate imposes a cost, the cost of the arbitration, whether it is an opportunity cost of time or an
out-of-pocket expense for lawyers or witness fees or whatever, or both types of costs, does not
show irreparable harm. Otherwise every order to arbitrate would be deemed to create irreparable
harm."); Tejidos de Coamo, Inc. v. Int'l Ladies' Garment Workers' Union, 22 F.3d 8, 14 (1st
Cir.1994); Woodlawn Cemetery v. Local 365, Cemetery Workers and Greens Attendants Union,
930 F.2d 154, 157 (2d Cir.1991); Camping Constr. Co. v. Dist. Council of Iron Workers, 915
F.2d 1333, 1349 (9th Cir.1990) ("The district court's principal error lies in its assumption that
unnecessarily undergoing arbitration proceedings constitutes irreparable injury. That is simply
not the case.").
24

See Mazera, 2008 WL 2223907, at *1-2 (E.D. Mich. May 29, 2008) (finding "the outcome of
the arbitration proceeding may be mooted depending upon the decision on appeal," and thus a
stay of arbitration proceedings was appropriate pending appeal); Farr & Co v. the Punta Alice,
144 F. Supp. 839, 841 (S.D.N.Y. 1956) ("refus[ing] to grant the stay requested would compel
the respondent to enter into a proceeding which conceivably could make the appeal moot, this
court believes that the relief sought by the respondent in aid of its appeal should be granted in
order to preserve the status quo of the parties"); see also PaineWebber Inc. v. Hartmann, 921
F.2d 507, 515 (3d Cir. 1990) ("we think it obvious that the harm to a party would be per se irreparable if a court were to abdicate its responsibility to determine the scope of an arbitrator's
jurisdiction and, instead, were to compel the party, who has not agreed to do so, to submit to an

8

arbitrator's own determination of his authority") overruled on other grounds by Howsam v. Dean
Witter Reynolds, Inc., 537 U.S. 79 (2002).

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