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Hurley v. Emigrant Bank

United States District Court, N.D. Texas, Dallas Division

October 25, 2019




         Before the Court is Defendants' Motion to Compel Arbitration and Stay Proceedings (Doc. 31). After reviewing the parties' briefing and applicable law, the Court GRANTS the motion.

         I. BACKGROUND

         A. Factual Background

         This dispute arises from the aftermath of a company's forced sale and subsequent purchase. The company, Fiduciary Network, LLC, was a joint venture between Mark P. Hurley and EB Safe, LLC. Doc. 1, Notice of Removal, 2. Hurley and EB Safe formed Fiduciary Network to provide long-term financing for wealth management firms. Id. Fiduciary Network is governed by an LLC Agreement.[1] The question before the Court is whether an arbitration provision in this Agreement can be relied upon by the Defendants in this case, who never signed the Agreement, to compel arbitration against Hurley, who did sign the Agreement. But before turning to that issue, the Court introduces the parties and entities that are involved in this dispute.

         The case is brought by Mark Hurley and his LLC, JA Brookview.[2] Doc. 28, Am. Compl., 1. In 2006, Hurley and EB Safe LLC cofounded Fiduciary Network. Doc. 34, Mot. to Compel, 2. EB Safe is a wholly owned subsidiary of Emigrant Bank, a private depository institution. Doc. 28, Am. Compl., ¶ 16. Emigrant Bank is owned and operated by Howard Milstein. Id. Hurley and Milstein negotiated the LLC Agreement that formed Fiduciary Network. Id. ¶ 17. At the times relevant to this lawsuit, Fiduciary Network had a seven-member board: EB Safe controlled five of the seats and Hurley controlled two. Id. EB Safe appointed as directors Barry Friedberg, Alain Lebec, John Sanders, Gregg Friedman, and Karl Heckenberg (referred to together as, “director Defendants, ” below). Id.

         The arrangement was that EB Safe provided the capital to start Fiduciary Network, while Hurley managed the day-to-day operations. Id. at 2-3. EB Safe received a 75% membership interest, while Hurley and his management team received the remaining 25%. Id. at 6-7. Hurley retained around 19% for himself and his related entities.[3] Doc. 34, Defs.' Br., 3 (citing Ex. 14 to Doc. 28, Am. Compl.).

         Hurley's amended complaint goes on to detail the tumultuous history of Fiduciary Network, which ultimately led to a forced-sale process that Hurley triggered under the LLC Agreement. The Court need not wade into these allegations to resolve this motion. Suffice to say, the LLC Agreement provided Hurley with the right to initiate a forced sale of his membership interest in Fiduciary Network. Doc. 41, Pls.' Resp., 3 (citing Ex. 14 to Doc. 28, Am. Compl.). And EB Safe was given a right of first refusal where it could buy Hurley's membership interest at the end of the sales process if it matched the price of the highest bidder. Id. Hurley triggered his forced-sale right in November 2016. Id. This started the sales process under which a third-party investment banker was selected to solicit bids and maximize the value of membership interests. Id. Ultimately, on November 20, 2018, the sales process closed, and EB Safe exercised its right of first refusal to purchase Hurley's membership interest. Id. at 4. EB Safe then terminated Hurley as CEO. Id.

         Hurley alleges that EB Safe “engaged in numerous wrongful acts” to either stop the sales process or to artificially lower the price of Hurley's membership interest so that it could make a matching bid at the end of the sales process. Id. at 3. As Hurley puts it, Milstein led “a multi-year scorched-earth campaign . . . to wrest control of a once-successful business (for pennies on the dollar) by disrupting its contractual relationships and disparaging its founder.” Doc. 28, Am. Compl., 1. Hurley's specific claims here essentially stem from this general allegation.

         B. Procedural Background

         This is not the first action the parties have brought that relates to this dispute. It started in December of 2017, when EB Safe commenced an arbitration proceeding against Hurley, seeking to preclude Hurley from bidding on his own membership interest in the sale process. Doc. 41, Pls.' Resp., 3. At some point during that proceeding, EB Safe's board attempted to suspend Hurley as CEO pending an investigation related to Hurley's personal affairs. Id. at 3-4. Hurley challenged his suspension in the arbitration and won. Id. EB Safe then filed an emergency petition in New York state court, arguing that the arbitration panel exceeded its authority in granting Hurley's request for relief because it improperly extended its jurisdiction to matters concerning EB Safe's directors. Id. The New York court rejected this argument. Id.

         Next, Fiduciary Network brought its own suit against Hurley in New York state court. Id. at 5. Fiduciary Network claimed that Hurley was not entitled to indemnification for attorneys' fees and costs associated with defending against his investigation and suspension. Id. Fiduciary Network also claimed Hurley was interfering with its current and prospective business relations through the sales process. Id. Specifically, Fiduciary Network claimed that Hurley triggered the sales process to find a new financing partner that he could partner with. Id. But once it was clear he wouldn't be the highest bidder, Hurley allegedly attempted to intimidate portfolio companies from working with Fiduciary Network. Id.

         Hurley subsequently removed the action to the Southern District of New York. See Fiduciary Network LLC v. Hurley, Civ. Action No. 1:19-cv-0379-GHW (S.D.N.Y. Jan. 14, 2019). That case is still pending.

         And then we get to the case before the Court. Hurley filed his original petition in this case on December 7, 2018, in Texas state court. Doc. 1, Notice of Removal, 1-2. That petition named as defendants Emigrant Bank, Milstein, and the other EB Safe directors listed above. Id. The petition also named EB Safe as a defendant and brought derivative claims on behalf of Fiduciary Network. Id. The petition alleges the following claims:

1. Tortious Interference with Prospective Business Relations (against EB Safe);
2. Derivative Claim for Tortious Interference (against EB Safe, Emigrant Bank, and Milstein);
3. Defamation Per Se;
4. Business Disparagement;
5. Derivative Claim for Breach of Fiduciary Duty (against Freidberg, Lebec, Sanders, Freedman, Heckenberg, and against EB Safe, Emigrant Bank, and Milstein); and
6. Civil Conspiracy (against EB Safe, Milstein, Friedberg, Lebec, Sanders, Freedman, and Heckenberg).

Id. at 3. On January 3, 2019, Defendants removed to this Court on the basis of diversity. Id.

         Then, on January 10, 2019, Defendants filed a motion to compel arbitration and stay proceedings based on the arbitration clause in the Fiduciary Network LLC Agreement. Doc. 6, Mot. to Compel. Instead of filing a response, Plaintiffs chose to amend their complaint. See Doc. 28, Am. Compl. In their amended complaint, Plaintiffs no longer name EB Safe as a Defendant. In fact, Plaintiffs have seemingly removed all allegations and references related to EB Safe and instead attribute their previous allegations to Emigrant Bank and the other Defendants. Plaintiffs have also removed any derivative claims on Fiduciary Network's behalf.

         Defendants then filed a renewed motion to compel arbitration based on the allegations in the amended complaint. Doc. 31, Mot. to Compel. All briefing has been submitted, and the motion is now ripe for the Court's consideration.


         In enacting the Federal Arbitration Act (FAA), “Congress . . . expressed a strong policy favoring arbitration before litigation.” J.S. & H. Constr. Co. v. Richmond Cty. Hosp. Auth., 473 F.2d 212, 214-15 (5th Cir. 1973). Under the FAA, “[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 . . . shall be valid, irrevocable, and ...

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