Levine v. Sheehan
Filing
21
MEMORANDUM OPINION AND ORDER REVERSING IN PART BANKRUPTCY COURT'S MEMORANDUM OPINION AND ORDER AND REMANDING CASE. Signed by District Judge Gina M. Groh on 8/8/2023. Copy to U.S. Bankruptcy Court for the Northern District of West Virginia.(tlg)
Case 3:22-cv-00060-GMG Document 21 Filed 08/08/23 Page 1 of 21 PageID #: 1312
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
MARTINSBURG
DAVID ANDREW LEVINE,
Appellant,
v.
CIVIL ACTION NO.: 3:22-CV-60
(GROH)
MARTIN P. SHEEHAN, Trustee
of the Bankruptcy Estate of Geostellar, Inc.,
Appellee.
MEMORANDUM OPINION AND ORDER REVERSING IN PART BANKRUPTCY
COURT’S MEMORANDUM OPINION AND ORDER AND REMANDING CASE
David Andrew Levine (“Appellant”) brings this action on appeal from the United
States Bankruptcy Court for the Northern District of West Virginia. The Appellant appeals
from Chief Bankruptcy Judge B. McKay Mignault’s March 21, 2022, Order Denying
Defendant’s Motion to Dismiss and Motion to Compel Arbitration in 3:19-ap-24. ECF No.
1. Upon review and consideration of the parties’ briefs, the record, and pertinent case
law, the Court finds that the facts and legal arguments are adequately presented, and the
decisional process would not be significantly aided by oral argument. Thus, a hearing is
unnecessary in this matter. Fed. R. Bankr. P. 8013(c), 8019(b)(3). For the reasons that
follow, the bankruptcy court’s decision is REVERSED IN PART AND REMANDED.
I. Background 1
A. Underlying Adversary Proceeding
On January 29, 2018, Geostellar, Inc., filed for Chapter 11 bankruptcy protection
1
The facts recited are taken from the parties’ briefs and the designated record on appeal.
1
Case 3:22-cv-00060-GMG Document 21 Filed 08/08/23 Page 2 of 21 PageID #: 1313
in the United States Bankruptcy Court for the Northern District of West Virginia, as
docketed in case 3:18-bk-45. Four months later, the bankruptcy court converted
Geostellar’s case from a Chapter 11 to a Chapter 7 proceeding. After the conversion,
Martin P. Sheehan was designated as the Chapter 7 Trustee for Geostellar (“Appellee”).
The Appellee then initiated an adversary proceeding, ancillary to Geostellar’s
bankruptcy proceeding, against the Appellant and Indeco Union on May 20, 2019,
docketed as 3:19-ap-24. This adversary proceeding underlies the present appeal before
this Court. In his initial Complaint, the Appellee alleged breach of contract, fraud, breach
of fiduciary duty, and civil conspiracy claims. 2 ECF No. 14-1. 3 At all times relevant to the
complaint, the Appellant served as the Chief Executive Officer and as a member of the
Board of Directors of Geostellar. As CEO, the Appellant was bound by an Employment
Agreement and Addendum, which the Appellee attached to the original complaint.
The initial business goal of Geostellar was to provide a marketplace connecting
consumers interested in transitioning to solar energy with information related to vendors,
installers, and financiers. To achieve this goal, Geostellar used a proprietary software. In
the initial complaint, the Appellee detailed many actions taken by the Appellant where he
unilaterally changed the focus of Geostellar’s business and then otherwise acted
adversely to Geostellar’s new business interest. Specifically, the Appellee alleged that
the Appellant, without permission from the Board of Directors, transformed the business
of Geostellar from pursuing solar energy to developing cryptocurrency. The Appellant
proposed that Geostellar develop a cryptocurrency he named “Zydeco.”
The Court notes that these allegations were not explicitly set forth in numbered counts or causes of action.
Instead, these allegations were raised generally throughout the Complaint.
3 All ECF docket numbers refer to this Court’s docket for 3:22-cv-60, unless otherwise stated.
2
2
Case 3:22-cv-00060-GMG Document 21 Filed 08/08/23 Page 3 of 21 PageID #: 1314
Shortly thereafter, the Appellant, on his own, formed Applied Philosophy Lab,
P.B.C., a public benefit corporation, and Indeco LLC, a wholly owned subsidiary of
Applied Philosophy Lab. These corporations existed in direct competition with
Geostellar’s new cryptocurrency business. Notably, according to SEC filings, Applied
Philosophy Lab intended to do business as “Zydeco,” which is the name of the
cryptocurrency currency to be developed by Geostellar at the Appellant’s direction.
Additionally, SEC filings show that Indeco, LLC, also intended to offer a cryptocurrency.
Around this same time, the Appellant directed that Geostellar’s proprietary
software be converted to opensource software. The Appellant then terminated all
employees of Geostellar and hired Geostellar’s former engineering department to work
for Indeco Union. 4 Ultimately, the Appellee claimed that the Appellant violated his
contractual and fiduciary duties to Geostellar, defrauded Geostellar, and conspired with
Indeco Union against Geostellar.
On August 23, 2019, the Appellant and then-Defendant Indeco Union 5 filed a
Motion to Dismiss and Strike. ECF No. 14-3. In the motion to dismiss, the Appellant
argued that the Appellee’s claims were subject to the arbitration clause found in the
Appellant’s Employment Agreement. The Appellant also argued that the Appellee failed
to state a claim upon which relief could be granted.
In his February 7, 2020, Memorandum Opinion, United States Bankruptcy Judge
Patrick M. Flatley found that the arbitration clause in the Employment Agreement covered
According to the Appellee, Indeco Union is the current name of what had originally been Applied
Philosophy Lab, P.B.C., and Indeco, LLC. These entities became a single entity known as Indeco Union on
June 27, 2018.
5 On May 3, 2021, Indeco Union was dismissed from the underlying adversary proceeding in an Agreed
Order. ECF No. 48 in 3:19-ap-24. Further, Indeco Union is not a party to this appeal, so the Court will no
longer include Indeco in its background summation.
4
3
Case 3:22-cv-00060-GMG Document 21 Filed 08/08/23 Page 4 of 21 PageID #: 1315
all the Appellee’s claims. ECF No. 14-6. The bankruptcy judge noted that the arbitration
clause governs “any and all disputes . . . arising from or relating to . . . the Executive’s
employment.” ECF No. 14-6 at 6. The bankruptcy judge found that the complaint centered
“almost exclusively around conduct Mr. Levine likely undertook in his role as CEO.” ECF
No. 14-6 at 6.
The bankruptcy judge highlighted six specific events described in the complaint as
examples of the Appellant acting as CEO: (1) the Appellant “caused employees of the
engineering department of Geostellar, Inc., to curtail work related to the development of
a solar energy marketplace and instead to cause those employees to begin working on
the development of a cryptocurrency,” [ECF No. 14-6 at 6 (quoting ECF No. 14-1 at ¶ 27)]
(2) the Appellant “caused the filing of a Form C, as required by 17 C.F.R. § 227.100, et
seq., with the Securities and Exchange Commission in connection with efforts to obtain
Crowdfunding for Geostellar, Inc.,” [ECF No. 14-6 at 6 (quoting ECF No. 14-1 at ¶ 29)]
(3) the Appellant made a presentation “to the Board of Directors of Geostellar, Inc., . . .
concerning the development of the cryptocurrency to be known as Zydeco,” [ECF No. 146 at 6 (quoting ECF No. 14-1 at ¶ 31)] (4) the Appellant “appropriated the business plan
of Geostellar, Inc., for competing companies which he had created,” [ECF No. 14-6 at 6
(quoting ECF No. 14-1 at ¶ 44)] (5) the Appellant “did not accept direction from the Board
of Directors,” [ECF No. 14-6 at 6 (quoting ECF No. 14-1 at ¶ 46)] and (6) the Appellant
“directed that the proprietary software developed by Geostellar, Inc., ... be converted to
‘open source’ software” [ECF No. 14-6 at 6 (quoting ECF No. 14-1 at ¶ 47)].
Further, to the extent that the Appellee argued that he raised claims against the
Appellant as a director, not CEO, of Geostellar, the bankruptcy judge found that these
4
Case 3:22-cv-00060-GMG Document 21 Filed 08/08/23 Page 5 of 21 PageID #: 1316
claims, if they existed, were also subject to arbitration. In analyzing the Appellee’s claims
against the Appellant as a director, the bankruptcy judge found those claims to be
“inexorably linked to [the Appellant’s] conduct as CEO.” ECF No. 14-6 at 6. Lastly, the
bankruptcy judge held that the Appellee’s claims were “non-core,” finding that “nothing
alleged by the [Appellee] implicates a provision of the Bankruptcy Code, the related rules,
or this court’s administration of bankruptcy.” ECF No. 14-6 at 7. Therefore, the bankruptcy
judge found he had no discretion to withhold arbitration.
Despite finding that all the Appellee’s claims were subject to arbitration, the
bankruptcy judge held the motion to dismiss in abeyance in order to allow the Appellant’s
own Chapter 13 bankruptcy proceedings to develop. Without entering an order
adjudicating the motion to dismiss or directing the parties to arbitration, the bankruptcy
court directed the parties to participate in mediation.
Following unsuccessful mediation, and still without an order directing the parties
to arbitrate, the Appellee filed a Motion for Leave to File Amended Complaint. ECF No.
14-12. In his motion, the Appellee stated that he intended to use the amended complaint
“to ‘moot’ the Court’s referral of this matter to arbitration.” ECF No. 14-12 at 4. United
States Bankruptcy Judge B. McKay Mignault granted the Appellee’s motion and ordered
that the amended complaint attached to the motion be filed.
The Amended Complaint sets forth four causes of action: “Count I Breach of
Fiduciary Duty of Loyalty as CEO, Chairman of the Board, and/or Board Member of
Geostellar, Inc.,” “Count II Negligence,” “Count III Constructive Fraud and/or Negligent
Misrepresentation of Facts,” and “Count IV Violation of Uniform Trade Secrets Act.” ECF
No. 14-17 at 10, 12, 14, 16. The amended complaint did not include Indeco Union as a
5
Case 3:22-cv-00060-GMG Document 21 Filed 08/08/23 Page 6 of 21 PageID #: 1317
Defendant in accordance with the prior agreed order, and it abandoned the breach of
contract and civil conspiracy claims. Further, unlike with the initial complaint, the Appellee
did not attach the Employment Agreement and Addendum.
In response to the amended complaint, the Appellant filed a Motion to Dismiss and
Motion to Compel Arbitration. ECF No. 18. In his supporting memorandum, the Appellant
averred that the factual allegations set forth in the amended complaint are largely the
same factual allegations found in the original complaint. Therefore, the Appellant argued
that Bankruptcy Judge Flatley’s earlier findings compelling arbitration should apply to the
amended complaint. The Appellant asserted that although the causes of action have been
renamed, the facts alleged in the Amended complaint still pertain to the Appellant’s
employment as CEO and are covered by the arbitration provision. Further, the Appellant
emphasized that the Appellee’s abandonment of the breach of contract claim and removal
of the Employment Agreement from the amended complaint do not negate the
effectiveness or enforceability of the Employment Agreement.
Additionally, the Appellant moved to dismiss based on the Appellee’s failure to
state a claim. As it pertained to Count I, the Appellant argued that the gist of the action
doctrine barred recovery because the Appellee’s claim for breach of fiduciary duty stems
from the Employment Agreement, not common law. Next, the Appellant argued that the
Appellee’s claim of negligence in Count II violated both the gist of the action doctrine and
economic loss action. The Appellant averred that the Appellee’s allegations in support of
his negligence claim are nearly identical to those in his breach of fiduciary duty claim, and
those duties were imposed by the Employment Agreement. Moreover, the Appellant
asserted that he did not have a special relationship with Geostellar as required to
6
Case 3:22-cv-00060-GMG Document 21 Filed 08/08/23 Page 7 of 21 PageID #: 1318
overcome the economic loss doctrine. For Count III, the Appellant argued that the
Appellee failed to state his constructive fraud and negligent misrepresentation claim with
sufficient particularity. The Appellant did not set forth a specific argument for the dismissal
of Count IV.
On March 21, 2022, Chief Bankruptcy Judge Mignault entered a Memorandum
Opinion denying the Appellant’s Motion to Dismiss and Motion to Compel Arbitration. ECF
No. 14-23. In her opinion, the bankruptcy judge noted that the original complaint in this
matter “contained principally a breach of contract action against [the Appellant] based
upon his employment as CEO.” ECF No. 14-23 at 4. The bankruptcy judge stated that
this “claim undoubtedly fell within the subject arbitration clause.” ECF No. 14-23 at 4.
However, the bankruptcy judge placed great importance on the fact that the
Appellee abandoned the breach of contract claim in the amended complaint. Further, the
bankruptcy judge found that the Appellee “chose to not bring a claim against [the
Appellant] based upon his employment as CEO.” ECF No. 14-23 at 5. Most significantly,
the bankruptcy judge held that the Appellee’s “amended complaint is as distinct from a
breach of contract action as Mr. Levine’s employment as CEO is distinct from his service
as a director. CEO and director are two separate hats that Mr. Levine wore in his time
with the Debtor.” ECF No. 14-23 at 5. The bankruptcy judge emphasized that the claims
raised in the original complaint lacked a distinction between claims against the Appellant
as CEO and claims against the Appellant as director, while the amended complaint did
not. Because of this newly pled distinction, the bankruptcy judge held that the adversary
proceeding was not subject to arbitration.
This newfound distinction also played a significant role in the bankruptcy judge’s
7
Case 3:22-cv-00060-GMG Document 21 Filed 08/08/23 Page 8 of 21 PageID #: 1319
analysis of the Appellant’s motion to dismiss. In finding that the gist of the action doctrine
did not preclude relief, the bankruptcy judge found that the Appellee “abandoned his
contract action and seeks only to recover from Mr. Levine based upon alleged breaches
of duties Mr. Levine owed to the Debtor as a member of the Debtor’s board of directors.”
ECF No. 14-23 at 6. Indeed, the bankruptcy judge reiterated that the Appellant’s “role as
CEO and his role as a director are distinct.” ECF No. 14-23 at 7. Despite acknowledging
that “the same operative facts support both a contract action and tort actions,” the
bankruptcy judge found this overlap “immaterial.” ECF No. 14-23 at 7.
As to the Appellant’s economic loss doctrine argument, the bankruptcy judge found
that a special relationship existed between Geostellar and the Appellant because the
Appellant served as one of Geostellar’s directors. Again, the bankruptcy court
emphasized that it “views [the Appellant’s] two roles with [Geostellar] as distinct and
equal.” ECF No. 14-23 at 7. Therefore, the economic loss doctrine did not preclude relief.
Lastly, the bankruptcy judge found that the Appellant’s constructive fraud claim was
stated with sufficient particularity. Consistent with the findings in its Memorandum
Opinion, the bankruptcy court entered an Order denying the Appellant’s motion to compel
arbitration and motion to dismiss on March 21, 2022.
B. Instant Appeal
The Appellant brings this civil action on appeal from Chief Bankruptcy Judge
Mignault’s March 21, 2022, Memorandum Opinion and Order Denying Defendant’s
Motion to Dismiss and Motion to Compel Arbitration. ECF No. 1. This civil action was
briefly stayed while the parties pursued another round of mediation in the bankruptcy
court. ECF No. 11. The parties were unable to resolve the adversary proceeding [ECF
8
Case 3:22-cv-00060-GMG Document 21 Filed 08/08/23 Page 9 of 21 PageID #: 1320
No. 12], and this Court lifted the stay [ECF No. 13].
The Appellant filed his Brief on August 11, 2022, [ECF No. 16], and the Appellee
filed his Response Brief on September 12, 2022 [ECF No. 18]. The Appellant timely
entered his Reply Brief on September 23, 2022. ECF No. 19.
However, prior to the filing of briefs on appeal, the Appellee filed a Motion to
Dismiss Appeal. ECF Nos. 7, 8. Therein, the Appellee asserted that this Court lacks
jurisdiction because the bankruptcy court’s March 21, 2022, Memorandum Opinion and
Order are not appealable. This Court held that it had jurisdiction over the bankruptcy
judge’s ruling on the Appellant’s underlying motion to compel arbitration but not the
motion to dismiss. ECF No. 20.
Although raised together in one motion, this Court found that the Appellant’s
argument for arbitration and his argument for failure to state a claim were separate and
distinct. Similarly, even though the bankruptcy court’s order denied compulsory arbitration
and dismissal in one order, this Court found that the bankruptcy court applied a separate
analysis for each. Finding that a denial of a motion to dismiss is not a final order, this
Court held that the underlying denial of the Appellant’s motion to dismiss constituted an
interlocutory order that was not immediately appealable. Therefore, this Court held that it
was without jurisdiction to review the bankruptcy court’s denial of dismissal.
Upon review of the Appellant’s motion to compel arbitration, the Court found that
it does have jurisdiction to hear the appeal of the bankruptcy court’s denial of the motion.
The Federal Arbitration Act (“FAA”) provides that “[a]n appeal may be taken from an order
. . . denying an application under section 206 of this title to compel arbitration.” 9 U.S.C.
§ 16(a)(1)(C). Section 206 of Title 9 governs orders to compel arbitration. In initiating this
9
Case 3:22-cv-00060-GMG Document 21 Filed 08/08/23 Page 10 of 21 PageID #: 1321
action, the Appellant properly appealed from an order denying its motion to compel
arbitration.
II. Jurisdiction
District courts have jurisdiction to hear appeals “from final judgments, orders, and
decrees . . . of bankruptcy judges entered in cases and proceedings referred to the
bankruptcy judges under section 157.” 28 U.S.C. § 158(a). To be “final,” an order must
“resolve the litigation, decide the merits, settle liability, establish damages, or determine
the rights” of a party to the bankruptcy case. In re Looney, 823 F.2d 788, 790 (4th Cir.
1987). The district court “may affirm, modify, or reverse a bankruptcy judge’s judgment,
order or decree or remand with instructions for further proceedings.” Fed. R. Bankr. P.
8013.
As alluded to above, this appeal is properly before this Court pursuant to the FAA.
The FAA provides that “[a]n appeal may be taken from an order . . . denying an application
under section 206 of this title to compel arbitration.” 9 U.S.C. § 16(a)(1)(C). Section 206
of Title 9 governs orders to compel arbitration, and in initiating this action, the Appellant
appeals from an order denying its motion to compel arbitration.
III. Standards of Review
A district court sitting as a bankruptcy appellate court reviews “findings of fact only
for clear error, but [the court] consider[s] the relevant legal questions de novo.” In re Varat
Enters., Inc., 81 F.3d 1310, 1314 (4th Cir. 1996). It reviews mixed questions of fact and
law de novo. In re Gordon Properties, LLC, 516 B.R. 323, 327 (E.D. Va.
2014) (citing Canal Corp. v. Finnman, 960 F.2d 396, 399 (4th Cir. 1992)).
Clear error review is a “very deferential standard of review.” United States v.
10
Case 3:22-cv-00060-GMG Document 21 Filed 08/08/23 Page 11 of 21 PageID #: 1322
Horton, 693 F.3d 463, 474 (4th Cir. 2012). A factual finding is clearly erroneous “when
although there is evidence to support it, the reviewing court on the entire evidence is left
with the definite and firm conviction that a mistake has been committed.” HSBC Bank
USA v. F & M Bank N. Va., 246 F.3d 335, 338 (4th Cir. 2001) (quoting Anderson v.
Bessemer City, 470 U.S. 564, 573 (1985)). For clear error review, the inquiry is not
whether the reviewing court would have reached the same result if it were sitting in the
trial court’s shoes.
Rather, the appellate court will determine whether the trial court’s “account of the
evidence is plausible in light of the record viewed in its entirety.” United States v. Thorson,
633 F.3d 312, 317 (4th Cir. 2011) (quoting Anderson, 470 U.S. at 573-74). If the findings
of the court below are plausible, then the reviewing court may not reverse the lower court’s
conclusion—even if it may have weighed the evidence differently. Id. This remains the
rule “even when the district court’s findings do not rest on credibility determinations but
are based instead on physical or documentary evidence or inferences from other facts.”
Id. (internal quotation omitted). Lastly, “due regard shall be given to the opportunity of the
bankruptcy court to judge the credibility of the witnesses.” In re Gordon Properties, LLC,
516 B.R. at 327.
De novo review, on the other hand, by definition, “entails consideration of an issue
as if it had not been decided previously.” Stone v. Instrumentation Lab’y Co., 591 F.3d
239, 246 (4th Cir. 2009). De novo review allows for “a fresh independent determination
of ‘the matter’ at stake.” Doe v. United States, 821 F.2d 697-98 (D.C. Cir. 1987).
Essentially, de novo review results in “a new adjudication.” Betty B Coal Co. v. Dir., Off.
of Workers’ Comp. Programs, U.S. Dep’t of Lab., 194 F.3d 491, 499 (4th Cir.1999).
11
Case 3:22-cv-00060-GMG Document 21 Filed 08/08/23 Page 12 of 21 PageID #: 1323
IV. Legal Analysis
The Appellant presents three issues for this Court on appeal. First, the Appellant
requests a determination on whether the bankruptcy court erred in denying the
Appellant’s Motion to Compel Arbitration. More specifically, the Appellant requests a
determination on whether the bankruptcy court erred in finding that the Appellee’s
amended complaint does not state any claims based on the Appellant’s alleged conduct
as CEO. The second and third issues the Appellant raises involve the Appellant’s
underlying Motion to Dismiss and the bankruptcy judge’s reasoning in denying the motion.
However, as found in this Court’s prior Order, this Court lacks appellate jurisdiction over
the bankruptcy judge’s denial of the Appellant’s motion to dismiss in the underlying
adversary proceeding.
Therefore, this Court limits its ruling on appeal to the first issue presented
contesting the bankruptcy court’s denial of arbitration. The Court will review the
bankruptcy court’s denial of arbitration de novo. Muriithi v. Shuttle Express, Inc., 712 F.3d
173, 178 (4th Cir. 2013). The Court notes that the Appellee argues that the Court should
apply an abuse of discretion standard of review. ECF No. 18 at 11. The Court finds that
the Appellee is blatantly incorrect. Indeed, the case cited by the Appellee in support of its
claim, In re White Mountain Mining Co., L.L.C., does not establish an abuse of discretion
standard of review for cases of this kind. 403 F.3d 164, 168 (4th Cir. 2005). Instead, like
this Court described above, the Fourth Circuit in White Mountain, stated that “[w]e review
de novo the conclusions of law reached by the district and bankruptcy courts, and we
review the bankruptcy court's findings of fact for clear error.” Id.
12
Case 3:22-cv-00060-GMG Document 21 Filed 08/08/23 Page 13 of 21 PageID #: 1324
A. Applicable Law
The FAA, 9 U.S.C. §§ 1-16, applies to “[a] written provision in any . . . contract
evidencing a transaction involving commerce to settle by arbitration a controversy
thereafter arising out of such contract or transaction, or the refusal to perform the whole
or any part thereof.” 9 U.S.C. § 2. The FAA reflects “a liberal federal policy favoring
arbitration agreements.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S.
1, 24 (1983). This policy is supported by Congress’s view that arbitration constitutes a
more efficient dispute resolution process than litigation. Hightower v. GMRI, Inc., 272 F.3d
239, 241 (4th Cir. 2001). Therefore, “due regard must be given to the federal policy
favoring arbitration, and ambiguities as to the scope of the arbitration clause itself
resolved in favor of arbitration.” Adkins v. Labor Ready, Inc., 303 F.3d 496, 500 (4th Cir.
2002) (quoting Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S.
468, 476 (1989)).
To compel arbitration under the FAA, the Fourth Circuit requires the moving party
demonstrate “(1) the existence of a dispute between the
parties, (2) a written agreement that includes an arbitration
provision which purports to cover the dispute, (3) the
relationship of the transaction, which is evidenced by the
agreement, to interstate or foreign commerce, and (4) the
failure, neglect or refusal of the defendant to arbitrate the
dispute.”
Adkins, 303 F.3d at 500-01 (quoting Whiteside v. Teltech Corp., 940 F.2d 99, 102 (4th
Cir. 1991)). “Under the FAA, courts must stay any suit ‘referable to arbitration’ under an
arbitration agreement, where the court has determined that the agreement so provides,
and one of the parties has sought to stay the action.” Noohi v. Toll Bros., Inc., 708 F.3d
599, 604 (4th Cir. 2013).
13
Case 3:22-cv-00060-GMG Document 21 Filed 08/08/23 Page 14 of 21 PageID #: 1325
“A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate
under a written agreement for arbitration may petition any United States district court . . .
for an order directing that such arbitration proceed in the manner provided for in such
agreement.” 9 U.S.C. § 4. Motions to compel arbitration “should not be denied unless it
may be said with positive assurance that the arbitration clause is not susceptible of an
interpretation that covers the asserted dispute. Doubts should be resolved in favor of
coverage.” Zandford v. Prudential-Bache Sec., Inc., 112 F.3d 723, 727 (4th Cir. 1997)
(citations and internal quotation marks omitted). “Indeed, the heavy presumption of
arbitrability requires that when the scope of the arbitration clause is open to question, a
court must decide the question in favor of arbitration.” Peoples Sec. Life Ins. Co. v.
Monumental Life Ins. Co., 867 F.2d 809, 812 (4th Cir. 1989) (citing United Steelworkers
of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582 (1960)).
B. Analysis
The crux of the Appellant’s remaining issue on appeal turns on the second Adkins
factor: whether the arbitration agreement covers the parties’ dispute. The Appellant’s
Employment Agreement with Geostellar includes a provision requiring that “any and all
disputes, claims, or causes of action, law or equity, arising from or relating to the
enforcement, breach, performance, or interpretation of this Agreement, the Executive’s
employment, shall be resolved, to the fullest extent permitted by law, final, binding and
confidential arbitration.” ECF No. 14-19, Ex. B, Employment Agreement ¶ 7.11.
Specifically, the issue this Court must decide is whether the Appellee’s amended
complaint asserts any claims against the Appellant in his role as CEO.
Both the Appellee and the bankruptcy judge place great emphasis on the amended
14
Case 3:22-cv-00060-GMG Document 21 Filed 08/08/23 Page 15 of 21 PageID #: 1326
complaint’s abandonment of the breach of contract claim. Indeed, in his underlying motion
for leave to amend, the Appellee expressly stated that his purpose in amending the
complaint was “to delete the claim for breach of employment contract to reduce coverage
issues, and to ‘moot’ the Court’s referral of this matter to arbitration.” ECF No. 14-12 at 4.
When differentiating the court’s second arbitration ruling from its first, the
bankruptcy judge began by emphasizing that “there is no action for a breach of contract”
in the amended complaint. ECF No. 14-23 at 5. Further, despite conceding that “at least
some of the underlying facts supporting the [Appellee’s] amended complaint could also
support a breach of contract action,” the bankruptcy court found that by simply not
bringing a breach of contract action, the Appellee “chose not to bring a claim against [the
Appellant] based upon his employment as CEO.” ECF No. 14-23 at 5.
This Court disagrees with the bankruptcy judge’s characterization of the amended
complaint and the scope of the arbitration provision. First, the arbitration provision covers
both claims arising from the text of the Employment Agreement directly and claims related
to “the Executive’s employment.” ECF No. 14-19, Ex. B, Employment Agreement ¶ 7.11.
This Court finds that claims can be levied against the Appellant for his conduct as CEO
separate from any claim for breach of contract. The arbitration provision is drafted to cover
claims regarding “the enforcement, breach, performance, or interpretation of this
Agreement,” and, separately, to cover claims related to “the Executive’s employment.”
ECF No. 14-19, Ex. B, Employment Agreement ¶ 7.11. Under this clause, a party could
file suit pertaining to the written words of the Agreement or pertaining to the real world
actions of the Appellant as CEO.
Here, this Court finds that claims related to the Appellant’s conduct while serving
15
Case 3:22-cv-00060-GMG Document 21 Filed 08/08/23 Page 16 of 21 PageID #: 1327
in his role as CEO are covered by the arbitration provision’s clause, regardless of whether
a breach of contract cause of action is separately raised. Therefore, to the extent that the
bankruptcy judge found that the arbitration provision does not cover the parties’ dispute
because the amended complaint does not include a breach of contract cause of action,
the bankruptcy court’s opinion is reversed.
Next, in denying the Appellant’s motion to compel arbitration, the bankruptcy judge
noted that “CEO and director are two separate hats that [the Appellant] wore in his time
with [Geostellar].” ECF No. 14-23 at 5. This Court agrees that one individual can change
hats and act as CEO in some instances and Board Director in others. Continuing on, the
bankruptcy court found that the distinction between the Appellant as CEO and the
Appellant as Board Director was lacking in the original complaint, and this Court agrees.
However, this Court splinters from the bankruptcy court as to the pleading of the
amended complaint. The bankruptcy court placed great emphasis on the amended
complaint’s distinction between the two hats. Indeed, the bankruptcy judge chided the
Appellant for “conflat[ing] his employment as CEO with his service on [Geostellar’s] board
of directors” when he argued that the parties should still be compelled to arbitrate the
claims raised in the amended complaint. ECF No. 14-23 at 5.
This Court does not find that the Appellee pled a distinction, let alone a significant
distinction, between actions the Appellant took as CEO and actions the Appellant took as
Board Director in the amended complaint. On appeal, the Appellant similarly struggled to
find clear distinctions in the amended complaint of when the Appellant acted as CEO and
when the Appellant acted as Board Director. Notably, the Appellee, responding to the
Appellant on this issue, plainly stated in his brief that it would be “an unreasonable
16
Case 3:22-cv-00060-GMG Document 21 Filed 08/08/23 Page 17 of 21 PageID #: 1328
demand” to require the Appellee to distinguish the Appellant’s conduct as CEO from his
conduct in other roles. ECF No. 18 at 13. Despite the bankruptcy judge finding that these
distinctions were pled in the amended complaint, this Court finds that they were not.
Most notably, the first cause of action pled in the amended complaint is titled
“Breach of Fiduciary Duty of Loyalty as CEO, Chairman of the Board, and/or Board
Member of Geostellar, Inc.” ECF No. 14-17 at 10. Similarly, the second supporting
paragraph for the second cause of action refers to the Appellant “[a]s Chief Executive
Officer.” ECF No. 14-17 at ¶ 55. This Court finds, similar to the bankruptcy court’s first
arbitration ruling, that the claims, if any, against the Appellant as Director are inexorably
linked to his conduct as CEO. While the Appellee may argue that his claims are distinct,
this Court finds that his own pleading contradicts his argument.
Indeed, all parties and judges involved in this action agree, albeit to differing
degrees and significances, that the factual allegations in the amended complaint overlap
with those first pled in the original complaint. This Court finds that the factual allegations—
which are incorporated by reference into all four causes of action in the amended
complaint—are substantially similar to those found in the original complaint. To the
degree the pleaded facts differ, the facts do not differ to the degree or in the manner found
by the bankruptcy judge.
In the amended complaint, forty-seven paragraphs precede the four substantive
counts. The Court construes these forty-seven paragraphs as composing the factual
allegations of the amended complaint. After comparing the complaints, this Court found
that thirty-five of the forty-seven paragraphs in the amended complaint are substantially
similar to paragraphs found in the original complaint; a considerable percentage are
17
Case 3:22-cv-00060-GMG Document 21 Filed 08/08/23 Page 18 of 21 PageID #: 1329
identical nearly word-for-word. Regardless of the diction used, the Court finds that those
thirty-five paragraphs provide the same factual information provided in the original
complaint.
Throughout the amended complaint, the Appellee often situates the Appellant as
an individual reporting to the Board of Directors or acting without their consent. At no point
does the Appellee describe the Appellant as acting solely in his capacity as a Board
member or engaging with fellow or other members of the Board. Instead, the Appellee
situates the Appellant as an individual operating in a separate capacity from the Board,
not as part of the Board. Indeed, the amended complaint describes at least twelve
different instances when the Appellant acted without Board approval, in direct defiance of
the Board, or otherwise adverse to the Board’s wishes. E.g. ECF No. 14-17 at ¶¶ 18, 20,
21, 29, 30, 31, 32, 34, 36, 39, 44, 45.
For example, the Appellee alleges that the Appellant diverted Geostellar from its
solar energy work to cryptocurrency development “without Board approval.” ECF No. 1417 at ¶ 18. Similarly, the Appellee alleges that the Appellant redirected the focus of
Geostellar’s engineering department to developing cryptocurrency “without Board
approval.” ECF No. 14-17 at ¶ 20. In that same paragraph, the Appellee repeats that the
Appellant acted “not having Board approval for his diversion,” and the Appellee claims
that the Appellant made false statements to the Board. ECF No. 14-17 at ¶ 20. As the
Appellant pursued this new business direction, the Appellant alleges that the Appellant
“refused to accept direction from the Board of Directors.” ECF No. 14-17 at ¶ 21. When
describing the steps the Appellant took to transfer Geostellar’s intellectual property over
to Applied Philosophy Lab, the Appellee emphasizes that the cryptocurrency
18
Case 3:22-cv-00060-GMG Document 21 Filed 08/08/23 Page 19 of 21 PageID #: 1330
development had “never been authorized by Geo’s board.” ECF No. 14-17 at ¶ 36. The
Appellee’s description of these events, among others, establishes the Appellant as a
rogue CEO acting unilaterally and, at times, in direct defiance of the Board.
Generally, a common responsibility of a CEO is to manage the company’s
executive team and pursue goals that are meant to drive the company forward; these
goals are usually established by the company’s Board of Directors. 6 In most cases, the
CEO executes the Board’s vision for the company. Here, the amended complaint almost
entirely focuses on the many ways in which the Appellant did not further the Board’s vision
of Geostellar. Therefore, this Court finds that the amended complaint brings most, if not
all, its claims against the Appellant in his role as CEO. Moreover, in the few instances
when the Appellee refers to the Appellant as a Board member, the Appellee
simultaneously refers to the Appellant as CEO. ECF No. 14-17 at ¶ 15, 16, 36, 55, 57.
In sum, this Court finds that the claims in the amended complaint are subject to
the arbitration provision in the parties’ Employment Agreement. While the Appellee
abandoned his breach of contract claim in his amended complaint, this Court finds that
the arbitration provision governs more than claims raised pursuant to the Employment
Agreement document itself. The arbitration provision applies to claims arising from or
related to the Appellant’s conduct as CEO.
While the Appellant and bankruptcy judge interpret the amended complaint as not
See, e.g., Thuy-Nga T. Vo, To Be or Not to Be Both Ceo and Board Chair, 76 BROOK. L. REV. 65, 68-69
(2010) (“It is well settled, though, that a board may delegate its management authority to corporate officers,
and that such delegation is now the norm in corporate America. It is the officers who in fact manage most
public corporations on a day-to-day basis. Having delegated the daily management function to the
executives, directors retain oversight responsibility in order to ensure that the executives’ actions advance
the company’s business and financial objectives.”); Paul Mallette & Karen L. Fowler, Effects of Board
Composition and Stock Ownership on the Adoption of “Poison Pills”, 35 ACAD. MGMT. J. 1010, 1012 (1992)
(“[I]t is widely accepted that boards are the formal representatives of firm’' shareholders and that they exist
to monitor top management performance and protect shareholders’ rights and interests.”).
6
19
Case 3:22-cv-00060-GMG Document 21 Filed 08/08/23 Page 20 of 21 PageID #: 1331
raising claims against the Appellant in his role as CEO, this Court finds otherwise. As
analyzed above, this Court finds that the substantial majority of the factual allegations
describe the Appellant’s conduct as CEO. Most significantly, Count I explicitly names the
Appellant in breach of his fiduciary duty “as CEO.” ECF No. 14-17 at 10. Similarly, in the
supporting paragraph of Count II, the Appellee identifies the Appellant “[a]s Chief
Executive Officer.” ECF No. 14-17 at ¶ 55. Counts III and IV do not contain explicit
references to the Appellant’s job title, but both Counts refer to actions taken by the
Appellant in his role as CEO. Indeed, all four Counts incorporate by reference the factual
allegations made in the complaint. Therefore, to the extent that the bankruptcy judge’s
opinion found that the Appellee’s amended complaint does not state any claims based on
the Appellant’s alleged conduct as CEO, the bankruptcy court’s opinion is reversed.
V. Conclusion
For the reasons discussed above, this Court ORDERS that the March 21, 2022,
United States Bankruptcy Court for the Northern District of West Virginia Memorandum
Opinion and Order Denying Defendant’s Motion to Dismiss and Motion to Compel
Arbitration in 3:19-ap-24 be REVERSED IN PART. The bankruptcy court’s ruling denying
arbitration is REVERSED. The Court is without jurisdiction to rule on the remaining portion
of the Memorandum Opinion and Order that adjudicates the motion to dismiss. The Court
REMANDS this action to the United States Bankruptcy Court for the Northern District of
West Virginia for further proceedings consistent with this Court’s ruling.
The Appellant’s Objections [ECF No. 5] are TERMINATED as MOOT.
The Clerk of Court is DIRECTED to transmit copies of this Order to the United
States Bankruptcy Court for the Northern District of West Virginia and all counsel of record
20
Case 3:22-cv-00060-GMG Document 21 Filed 08/08/23 Page 21 of 21 PageID #: 1332
herein.
DATED: August 8, 2023
21
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?