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Greenstar IH Rep, LLC v. Tutor Perini Corporation

Court of Chancery of Delaware

February 23, 2017

GREENSTAR IH REP, LLC and GARY SEGAL, Plaintiffs,
v.
TUTOR PERINI CORPORATION, Defendant.

          Submitted: January 20, 2017

          Kenneth J. Nachbar, Esquire and Lauren K. Neal, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware, and Ira Lee Sorkin, Esquire and Amit Sondhi, Esquire of Mintz & Gold LLP, New York, New York, Attorneys for Plaintiffs.

          Brian C. Ralston, Esquire, Aaron R. Sims, Esquire and Kwesi Atta-Krah, Esquire of Potter Anderson & Corroon LLP, Wilmington, Delaware, and Nomi L. Castle, Esquire and Matthew J. Luce, Esquire of Castle & Associates, PLC, Beverly Hills, California, Attorneys for Defendant.

          MEMORANDUM OPINION

          SLIGHTS, Vice Chancellor

          The Court is asked to decide the "rather arcane" question of who, as between this Court or an arbitrator selected by the parties, should decide whether certain disputes are arbitrable.[1] The analysis of the question is complicated in this case because the parties' relationship, as relevant here, is governed by two contracts that contain different choice of law, choice of forum and, importantly, dispute resolution provisions. Specifically, one contract, an employment agreement, contains a mandatory arbitration clause; the other contract, a merger agreement, provides that all disputes arising under that agreement shall be adjudicated by a Delaware court. The Plaintiffs have raised the issue of arbitrability by a motion for partial judgment on the pleadings in which they seek a declaration that claims the Defendant has asserted in a California arbitration proceeding arise under the merger agreement and must, therefore, be litigated in a Delaware court.

         The issue of substantive arbitrability in essence raises a question of subject matter jurisdiction. Delaware courts are no strangers to the issue and the law of substantive arbitrability can now safely be characterized as settled. Having applied that law to the contractual arbitration clause at issue here, I am satisfied that the motion for judgment on the pleadings must be granted in part and denied in part. The Plaintiffs have demonstrated as a matter of undisputed fact and as a matter of law that a declaration of non-arbitrability is appropriate with respect to the so-called "Earn-Out Claim" that has been brought in the California arbitration. Both parties now appear to concede that this claim arises out of the merger agreement and should, therefore, be pursued in a Delaware court. The Plaintiffs have failed to demonstrate, however, as a matter of undisputed fact or as a matter of law that a declaration of non-arbitrability is appropriate as to the so-called "Indemnification Claims" or the "Consequential Damages Claim, " both of which have been brought in the California arbitration. The question of arbitrability with respect to those claims must be addressed to the California arbitrator.

         I. FACTUAL BACKGROUND

         I draw the facts from the Verified Complaint (the "Complaint") and the documents it incorporates by reference. I assume for now that the well-pled facts are true.

         A. The Parties and Relevant Non-Parties

         Plaintiff Greenstar IH Rep LLC ("IH Rep") is a Delaware Limited Liability Company that represents the interests and rights of the "Interest Holders" (as "Interest Holder Representative") under an Agreement and Plan of Merger By and Among Tutor Perini Corporation, Galaxy Merger, Inc., GreenStar Services Corporation and Greenstar IH Rep, LLC (the "Merger Agreement"). Plaintiff Gary Segal, a resident of New York, is the former CEO of Five Star Electric Corporation ("Five Star") and the former Chairman and CEO of GreenStar Services Corporation ("GreenStar"). Segal is an Interest Holder under the Merger Agreement.

         Defendant Tutor Perini Corporation "is an international civil and building construction company which offers diversified general contracting, construction management and design-build services to private customers and public agencies throughout the world."[2] It is a Massachusetts corporation with its principal place of business in Sylmar, California. Its common stock trades on the New York Stock Exchange under the symbol "TPC."

         Non-party GreenStar was acquired by Tutor Perini pursuant to the Merger Agreement. GreenStar consisted of three affiliated companies: Five Star, WDF, Inc. and Nagelbush Mechanical, Inc. At the time of the acquisition, non-party Five Star, a wholly owned subsidiary of Tutor Perini, was the largest electrical contractor in the greater New York City area with more than 1, 500 employees. It provided electrical light, power and low-voltage systems to a range of public and private sector customers.

         B. The Merger Agreement and the Employment Agreement

         The disputes between the parties follow a 2011 merger in which, as noted, Tutor Perini acquired GreenStar. IH Rep served as the Interest Holder Representative for the former stockholders of GreenStar, inter alia, to assert their rights under the Merger Agreement post-closing. The Merger Agreement contains a Delaware choice of law provision and a forum selection provision designating any state or federal court in Delaware as the exclusive forum. Through its acquisition of GreenStar, Tutor Perini acquired GreenStar's three affiliated companies including Five Star.

         At the time of the merger, Tutor Perini, Five Star and Segal executed an Employment Agreement whereby Segal agreed to serve as President and CEO of Five Star for an initial period of five years. The Employment Agreement contains a New York choice of law provision and a mandatory arbitration provision. The arbitration provision expressly states that the arbitration shall be conducted before JAMS, in accordance with the rules and regulations promulgated by JAMS, and shall be held in Los Angeles, California. The Employment Agreement also contains an exclusive California forum selection clause that provides: "[t]he parties consent to exclusive personal jurisdiction of the state and federal courts situated in the State of California in respect to enforcement of this Agreement and waive any defenses based on personal jurisdiction or venue in such courts."

         C. Procedural History

         On September 29, 2016, Tutor Perini and Five Star initiated a JAMS arbitration in Los Angeles against Segal alleging claims for breach of the Employment Agreement, breach of the implied covenant of good faith and fair dealing, fraud, conversion, and breach of fiduciary duty arising out of Segal's alleged misconduct as an employee of Five Star. In total, there are eight claims for relief in the Demand for Arbitration (the "Demand"). The specific allegations- which have been grouped together and restyled by the Plaintiffs into three defined types of claims, the "Earn Out Claim, " the "Indemnification Claims, " and the "Consequential Damages Claim"-appear in Tutor Perini's and Five Star's first, fourth, fifth and eighth claims for relief. In the Demand, these claims are styled Breach of Employment Agreement, Fraud and Concealment, Constructive Fraud and Declaratory Judgment, respectively. According to Tutor Perini and Five Star, all claims asserted in the California arbitration arise out of damage caused by Segal's conduct while acting as CEO of Five Star, including excessive personal expenditures and improper contracting practices that prompted an investigation by the United States Attorney's Office, all of which allegedly resulted in the loss of significant business opportunities and profits.

         On November 7, 2016, Segal and IH Rep filed their Complaint in this Court alleging breaches of the Merger Agreement and seeking declaratory judgments that certain claims advanced by Tutor Perini in its Demand relate to representations and warranties, indemnification commitments and related damages caps within the Merger Agreement and are subject to that agreement's exclusive Delaware forum selection clause. Plaintiffs filed a motion for a preliminary injunction along with their Complaint to prevent Tutor Perini from prosecuting claims arising under the Merger Agreement in the arbitration. That motion was rendered moot when the parties agreed to stay the arbitration proceedings pending resolution of the declaratory judgment claims by way of this motion for judgment on the pleadings.

         II. LEGAL ANALYSIS

         Plaintiffs' motion for judgment on the pleadings frames an issue that calls the gating question of whether this Court can or should exercise subject matter jurisdiction over certain claims raised in the California arbitration. There is no need for a fully developed factual record to decide the issue. It can be decided as a matter of law based on the matters pled in the Complaint and the documents attached thereto.

         A. Legal Standard

         Under Court of Chancery Rule 12(c), the Court may grant a motion for judgment on the pleadings if, when viewing the claims in the light most favorable to the nonmoving party, there are no material issues of fact and the movant is entitled to judgment as a matter of law.[3] When seeking Rule 12(c) relief in connection with a contract dispute, the moving party must show that the "contract's meaning is unambiguous and the underlying facts necessary to its application are not in dispute."[4]

         B. The California Forum Selection Clause

         At the outset, I note that Tutor Perini has urged me to decline to address the substantive arbitrability question in deference to the California forum selection clause in the Employment Agreement. In this regard, it is important to appreciate the distinction between Tutor Perini's argument that this Court lacks subject matter jurisdiction based on the Employment Agreement's forum selection clause and its separate argument that this Court lacks subject matter jurisdiction because the parties have agreed to arbitrate all disputes including the issue of arbitrability. As to the latter argument, Tutor Perini asserts, as a matter of law, that this Court lacks subject matter jurisdiction over issues which these parties have agreed to arbitrate and that the arbitration provision in the Employment Agreement makes clear that the parties agreed to arbitrate even the issue of substantive arbitrability.[5] Tutor Perini's separate argument that this Court lacks subject matter jurisdiction under the Employment Agreement's forum selection clause is one-step further removed from that analysis. Unlike the typical case where the relevant question is "who has the authority to decide substantive arbitrability, " Tutor Perini asks the Court first to consider "who has the authority to decide who has the authority to decide substantive arbitrability?" While this matryoshka-like question might, in some instances, be complex, the language of the Employment Agreement provides a rather straightforward answer here.

         Tutor Perini is correct that Section 16 of the Employment Agreement does contain an exclusive California choice of forum clause. It ignores, however, the exception to that clause within Section 8 that allows the parties to bypass arbitration and to seek relief "in court" when seeking "temporary or preliminary injunctive relief . . . for the limited purpose of avoiding immediate and irreparable harm." This clause also provides that "[t]he provisions of this Section 8 shall be enforceable in any court of competent jurisdiction." When read in its entirety, the plain meaning of Section 8 reveals that a party seeking to avoid irreparable harm through injunctive relief may proceed in any court of competent jurisdiction without first submitting the matter to arbitration.

         That is precisely what Plaintiffs have done in this case. Segal requested that this Court enjoin Tutor Perini from prosecuting certain claims in the California arbitration by declaring that they are non-arbitrable. "This Court has clearly held that a party faced with immediate arbitration of non-arbitrable issues is threatened with irreparable harm sufficient to warrant an injunction."[6] Therefore, the Employment Agreement, by its terms, allows Plaintiffs to address their claims for declaratory and injunctive relief to this Court notwithstanding the California forum ...


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