Disruption 8, LLC v. Vertical Enterprise, LLC

• Court: Missouri Court of Appeals
• Decided: March 4, 2025
• Docket: WD87028
• Status: Published

Opinion

IN THE MISSOURI COURT OF APPEALS WESTERN DISTRICT DISRUPTION 8, LLC, ) ) Respondent, ) WD87028 v. ) ) OPINION FILED: ) March 4, 2025 VERTICAL ENTERPRISE, LLC, ) ) Appellant. )

Appeal from the Circuit Court of Buchanan County, Missouri The Honorable Kate Schaefer, Judge

Before Division Three: W. Douglas Thomson, Presiding Judge and Karen King Mitchell and Thomas N. Chapman, Judges

Vertical Enterprise, LLC (Vertical), appeals the circuit court’s denial of its motion

to compel arbitration of a dispute regarding repayment of a loan, raising a single point of

error that Disruption 8, LLC (Disruption), signed a valid arbitration provision in a

different but contemporaneous contract that was broad enough in scope to apply to the

separate loan contract. Finding no error, we affirm.

Background

Vertical is a licensed marijuana manufacturer and seller with its principal place of

business in St. Joseph, Missouri. In January 2021, Vertical entered into three separate contracts with Disruption: (1) a loan agreement entitled “Credit Facility” (the Loan

Agreement); (2) a Subscription Agreement; and (3) a “Second Amended and Restated

Operating Agreement” 1 (Operating Agreement). The Loan Agreement identified

Disruption as the lender and Vertical as the borrower of $2 million. The Loan Agreement

stated that its purpose was “financing the business operations of [Vertical]” and that it

was “issued to [Vertical] pursuant to the terms of the certain Subscription Agreement.”

Under the Subscription Agreement, Vertical transferred 800 “units” in Vertical to

Disruption in return for the $2 million loan. The Subscription Agreement stated that the

“Offering Documents 2 constitute the entire agreement between the parties regarding the

subject matter contained herein and supersedes all prior or contemporaneous agreements,

representations and understandings of the parties.” Vertical acknowledges that neither

the Loan Agreement nor the Subscription Agreement contains an alternative dispute

resolution clause, incorporates such a clause by reference, or refers to such a clause in

any other contract between the parties.

On February 17, 2021, the Operating Agreement took effect. The Operating

Agreement was signed by Vertical’s members, which at this point included Disruption.

The Operating Agreement states that it “sets forth the Members’ understanding and

agreement with respect to the organization and operation of [Vertical]”; that it was made

1 Previous versions of the “operating agreement” between Vertical and its members, which did not include Disruption, were not included in the record. 2 The term “Offering Documents” was defined by the Subscription Agreement to include (1) the Subscription Agreement, (2) the November 2, 2020 Private Placement Memorandum, and (3) the Confidential Accredited Investor Verification Form attached to the Private Placement Memorandum—not the Operating Agreement.

2 by its members “in consideration of the covenants and the promises made herein”; and

that it was set forth “in its entirety” in its twenty-eight pages (excluding the members’

signature pages and one exhibit listing the members’ names).

Although the Operating Agreement refers to “capital contributions” by its

members, it identifies no debts owed by Vertical generally 3 or to Disruption specifically.

Section 16.7 of the Operating Agreement contains the following alternative dispute

resolution clause:

All disputes and controversies between or among [Vertical] and/or the Members arising out of or in connection with this Agreement[4] (“Claims”) shall be subject to mediation as a condition precedent to arbitration described in Section 16.7(b). . . . All Claims that cannot be settled through mediation . . . shall be decided by neutral, final and binding arbitration.

Pursuant to the terms of the Loan Agreement, Vertical’s “insolvency” is an event

of default. In October 2023, Disruption filed a one-count petition alleging breach of the

Loan Agreement due to Vertical’s insolvency. Vertical filed an answer denying that it

was insolvent and moved to compel arbitration, which, after a hearing, the circuit court

denied. This appeal follows.

3 In Section 3.3, the Operating Agreement refers to “any loan made by [Different Member]” regarding Different Member’s right to issue marijuana licenses issued to Vertical by the state of Missouri. The Operating Agreement’s “Article XII. Accounting and Fiscal Matters” refers to Vertical’s obligation to maintain records and copies of various documents, including any “promise[s] by a Member to contribute cash, property or services,” at its principal place of business. In Section 15.3, regarding distribution of assets in the event of Vertical’s dissolution, the Operating Agreement refers to “creditors of [Vertical] (including members who are creditors in respect of debts owed by [Vertical] to such Members).” 4 “Agreement” is defined in the Operating Agreement as “this Amended and Restated Operating Agreement, as may be amended from time to time.”

3 Analysis

Vertical appeals the circuit court’s denial of its motion to compel arbitration of a

dispute regarding repayment of a loan, raising a single point of error that Disruption

signed a valid arbitration provision in a different but contemporaneous contract that was

broad enough in scope to apply to the separate loan contract.

“When faced with a motion to compel arbitration, the motion court must

determine whether a valid arbitration agreement exists and, if so, whether the specific

dispute falls within the scope of the arbitration agreement.” Nitro Distrib., Inc. v. Dunn,

194 S.W.3d 339, 345 (Mo. banc 2006), as modified on denial of reh’g (June 30, 2006).

“Whether or not a dispute is covered by an arbitration agreement is a question of law for

the courts.” Kansas City Urology, P.A. v. United Healthcare Servs., 261 S.W.3d 7, 11

(Mo. App. W.D. 2008). Appellate review of the circuit court’s determination is de novo.

Id.

Under the Federal Arbitration Act, 9 U.S.C. § 2 (2022) (FAA), arbitration

agreements are “valid, irrevocable, and enforceable, save upon such grounds as exist at

law or in equity for the revocation of any contract.” “[T]his provision [of the FAA]

allows arbitration agreements ‘to be invalidated by generally applicable contract

defenses, such as fraud, duress, or unconscionability, but not by defenses that apply only

to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at

issue.’” Bertocci v. Thoroughbred Ford, Inc., 530 S.W.3d 543, 551 (Mo. App. W.D.

2017) (quoting Eaton v. CMH Homes, Inc., 461 S.W.3d 426, 432 (Mo. banc 2015)). “As

such, arbitration agreements are tested through a lens of ordinary state-law principles that

4 govern contracts[.]” Id. (quoting Eaton, 461 S.W.3d at 432). Therefore, when

determining whether a valid arbitration agreement exists, we “apply the usual rules of

state contract law and canons of contract interpretation.” Nitro Distrib., 194 S.W.3d at

345. Because “[t]he three essential elements of a valid contract are offer, acceptance, and

bargained for consideration,” Bridgecrest Acceptance Corp. v. Donaldson, 648 S.W.3d

745, 752 (Mo. banc 2022), “[a] party cannot be compelled to arbitration unless the party

has agreed to do so.” Kansas City Urology, 261 S.W.3d at 11. “Policies favoring

arbitration are ‘not enough, standing alone, to extend an arbitration agreement beyond its

intended scope because arbitration is a matter of contract.’” Manfredi v. Blue Cross &

Blue Shield of Kansas City, 340 S.W.3d 126, 131 (Mo. App. W.D. 2011) (quoting Kansas

City Urology, 261 S.W.3d at 11).

An agreement to arbitrate is an exercise of “the parties’ right to contractually agree

to relinquish substantial rights.” Malan Realty Invs., Inc. v. Harris, 953 S.W.2d 624, 626

(Mo. banc 1997). Therefore, “any curtailment” of the right to a jury trial, which is what

arbitration agreements do, “should be scrutinized with utmost care.” Holm v. Menard,

Inc., 618 S.W.3d 669, 677 (Mo. App. W.D. 2021) (quoting Attebery v. Attebery, 507

S.W.2d 87, 93 (Mo. App. 1974)). Thus, to be a valid waiver of a party’s right to a jury

trial, an arbitration agreement must be “clear, unambiguous, and conspicuous.” Id.

Here, both parties signed the Operating Agreement containing an arbitration

clause, but Disruption’s petition alleging breach of the Loan Agreement does not concern

a dispute “arising out of or in connection with” the Operating Agreement. Vertical

argues that the language in the Operating Agreement’s arbitration clause is broad enough

5 to apply to a dispute concerning the Loan Agreement because the two contracts, executed

contemporaneously, were “part of the same deal.” We disagree.

Arbitration clauses are generally construed as “broad” or “narrow.” Dunn Indus.

Grp., Inc. v. City of Sugar Creek, 112 S.W.3d 421, 428 (Mo. banc 2003). “A broad

arbitration provision covers all disputes arising out of a contract to arbitrate; a narrow

provision limits arbitration to specific types of disputes.” Id. (emphasis added); see also

Fleet Tire Serv. of N. Little Rock v. Oliver Rubber Co., 118 F.3d 619, 621 (8th Cir. 1997).

An arbitration clause may be “exceedingly broad,” such as where the parties agree to

arbitrate “in the event of a dispute between the parties.” Manfredi, 340 S.W.3d at 131.

Although the arbitration clause in the Operating Agreement is “broad,” it covers only

disputes “arising out of or in connection with” the Operating Agreement, not those

arising out of the Loan Agreement, which contained no arbitration clause.

When the contract at issue contains no express arbitration clause, arbitration may

be compelled only if the circumstances demonstrate a clear agreement to arbitrate. See

Holm, 618 S.W.3d at 677 (requiring that a jury trial waiver be “unequivocal, plain, and

clear”); Dunn Indus. Group, 112 S.W.3d at 436 (holding that a contract’s “[m]ere

reference” to another contract “is insufficient to establish that [a party] bound itself to the

arbitration provision of the [other] contract”). Parties may be compelled to arbitrate if the

contract at issue incorporates by reference an arbitration clause in another contract. Id.

Also, if the parties contemporaneously execute documents “relating to the same subject,”

and one of the documents contains an arbitration clause, arbitration may be compelled in

a dispute involving a related document “unless ‘the realities of the situation’ indicate that

6 the parties did not so intend.” Johnson ex rel. Johnson v. JF Enters., LLC, 400 S.W.3d

763, 767 (Mo. banc 2013) (quoting Martin v. U.S. Fidelity Corp., 996 S.W.2d 506, 511

(Mo. banc 1999)). Contracts do not relate to the same subject, however, when they cover

“distinct aspects of the parties’ transaction.” Arizon Structures Worldwide, LLC v.

Global Blue Technologies-Cameron, LLC, 481 S.W.3d 542, 548 (Mo. App. E.D. 2015).

In Arizon, the “distinct aspects” were evidenced by the first contract, a non-disclosure

agreement “executed in anticipation of” future product sales between the parties, as

compared with the ensuing sales contract that described “the scope of work, schedule of

payments, and terms and conditions of the sale” of products). Id. at 544, 548 (holding

that arbitration could not be compelled for several reasons, including that of the “distinct

aspects” of the two contracts’ purposes). In essence, the claim “must raise some issue[,]

the resolution of which requires reference to or construction of some portion of the

parties’ contract [containing the arbitration agreement].” Nw. Chrysler Plymouth, Inc. v.

DaimlerChrysler Corp., 168 S.W.3d 693, 696 (Mo. App. E.D. 2005) (emphasis added).

Arbitration was compelled in Johnson because the consumer signed a number of

documents all “[a]s a part of the sale transaction” to buy a car, including an installment

contract and an arbitration agreement. Johnson, 400 S.W.3d at 764. The arbitration

agreement was a separate document, not a clause in any of the other documents, and it

specifically covered claims or disputes “arising out of or relating to the credit application,

purchase or condition of the vehicle, the purchase or financing contract, or any resulting

transaction or relationship.” Id. at 765. Because the documents were all clearly part of

the same transaction—the entire purchase and financing of the car, as specifically

7 mentioned by the arbitration clause—the installment contract, despite not separately

including or incorporating an arbitration clause, was subject to the separate arbitration

agreement. Id. at 769.

But a claim does not “arise out of a contract,” as Vertical seems to argue, “simply

because the dispute would not have arisen absent the existence of the contract” with the

arbitration clause. Mackey v. Schooler’s Constr., L.L.C., 640 S.W.3d 792, 798 (Mo. App.

W.D. 2022). When the claim is “independent of the contract terms [in the contract

requiring arbitration] and does not require reference to the underlying contract, arbitration

is not required.” Id. (quoting St. Louis Reg’l Convention v. Nat’l Football League, 581

S.W.3d 608, 617 (Mo. App. E.D. 2019)). In Mackey, the tort claim based on defective

workmanship was subject to arbitration because it was a claim “arising out of or relating

to” the parties’ warranty contract and “the central issue” in the claim was “the same

issue” covered by the warranty. Id. at 797, 799; see also Greenwood v. Sherfield, 895

S.W.2d 169, 175 (Mo. App. S.D. 1995) (holding that a claim that “neither invokes nor

needs to invoke” the contract requiring arbitration did not “arise out of” or relate to that

contract).

The situation between Disruption and Vertical is quite different from that in

Johnson and Mackey. For example, unlike the arbitration agreement in Johnson, which

was separate and expressly applied to any part of the sale transaction and specifically

included the financing aspect, the Operating Agreement’s arbitration clause in this case is

limited to disputes about the Operating Agreement, which is focused on the operation and

governance of Vertical. The Operating Agreement does not discuss how Disruption or

8 any other member obtained its ownership units—whether by loan, contribution, or

otherwise. Although it appears that Disruption obtained its ownership units in Vertical as

a result of making the Loan Agreement, it is the Subscription Agreement—not the

Operating Agreement—that effected the transfer of those units. Moreover, the

Subscription Agreement specifically provided that the Loan Agreement was “issued to

[Vertical] pursuant to the terms of the . . . Subscription Agreement”—not the Operating

Agreement. Thus, the Loan Agreement was most closely tied to the Subscription

Agreement.

The Loan Agreement has nothing to do with the operating or governance of

Vertical, just as the sales contracts in Arizon had nothing to do with protecting the

parties’ confidential information. It contains no arbitration clause and no incorporation

by reference to the Operating Agreement’s arbitration clause. The Loan Agreement

makes no mention of the Operating Agreement at all. The Subscription Agreement

mentions the Operating Agreement, but only as to the transfer of ownership units

complying with the Operating Agreement (in ¶4(j) of the Subscription Agreement) and as

to owners of units having no legal impediment to being bound by the Operating

Agreement (in ¶4(p)).

There is no dispute that Disruption, having signed the Operating Agreement, is

bound by its terms. But its terms include an arbitration clause that covers only disputes

“arising out of or in connection with” the Operating Agreement. Nothing in the record

supports that Disruption consented to binding arbitration of disputes arising under the

9 Loan Agreement, and the dispute raised in Disruption’s lawsuit is not one that arose out

of or is connected with the Operating Agreement. Point I is denied.

Conclusion

Because the arbitration clause in Vertical’s Operating Agreement did not apply to

disputes about the Loan Agreement, we affirm the circuit court’s denial of Vertical’s

motion to compel arbitration.

___________________________________ Karen King Mitchell, Judge

W. Douglas Thomson, Presiding Judge, and Thomas N. Chapman, Judge, concur.