Judge Schecter compels arbitration of marijuana investment dispute based on corporate governance documents

11.01.2019

Judge Schecter recently compelled arbitration in a dispute between cannabis investors in Broumand v. Abbot, No. 655954/2018, 2019 WL 4899058 (N.Y. Sup. N.Y. Cnty.), based solely on corporate governance documents rather than a signed arbitration agreement.

The plaintiff in Broumand was a minority investor in a special purpose investment vehicle (SPV) that held a majority stake in a holding company, which in turn owned a medical cannabis company and planned to invest in various others throughout the country. The plaintiff asserted derivative claims on behalf of the SPV and holding company, alleging that the two majority SPV investors breached their fiduciary duties and non-compete obligations by establishing a competing cannabis company and freezing him out. He also alleged various direct claims, including claims that the defendants breached oral agreements promising him a 5% stake in the competing business and a seat on its advisory board.

Judge Schecter granted the defendant’s motion to compel arbitration of all plaintiffs’ claims—despite the fact that none of the parties ever signed an arbitration agreement—based on a broad arbitration clause contained in the holding company’s operating agreement, which mandated arbitration for all claims arising from or “related to” the agreement. While the SVP operating agreement did not have an arbitration clause, and also waived fiduciary liability, the court found that the holding company’s operating agreement was the “most critical agreement” since it was the holding company that was supposed to “own all of the marijuana businesses across the country.” Interestingly, the court also compelled arbitration of the plaintiff’s direct claims with respect to the oral promises, relying heavily on Second Circuit jurisprudence providing that “tie goes to arbitration.”

Notably, at the outset of the litigation, neither party was even aware of the arbitration clause in the operating agreement, which only came out through early discovery. This case therefore serves as an important reminder that inside and outside the cannabis context, corporate governance documents can play a major role in dictating the proper forum for dispute resolution.

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11.01.2019  |  PRACTICE AREAS: Litigation and Dispute Resolution  |  INDUSTRIES: Cannabis

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