## Facts

- John Bosworth, Melvin Ehrenreich, and John Scalice each owned one-third of Hi-Pro Marketing, Inc. (Hi-Pro), an Illinois closely held corporation in the sports-cards manufacturing business, and served as its shareholder-managers.
- The parties entered a shareholders’ agreement that contained a broadly worded arbitration clause requiring arbitration in New York City for any controversy “arising out of or relating to” the agreement, including disputes tied to its modification, extension, or termination.
- In early 1993, disagreements arose about corporate control and day-to-day management of Hi-Pro.
- Bosworth claimed that on February 10, 1993, the parties signed a handwritten “Terms of Buyout” document under which Scalice agreed to sell back all of his Hi-Pro shares and resign; Scalice disputed that he agreed to sell all of his stock or resign as a director.
- After Ehrenreich and Scalice settled their differences, they aligned against Bosworth.
- On May 21, 1993, Ehrenreich and Scalice voted to terminate Bosworth as an officer of Hi-Pro, which Bosworth characterized as an effort to freeze him out of management.
- Bosworth filed a three-count action in the District of New Jersey against Ehrenreich, Scalice, and Hi-Pro alleging (1) illegal and oppressive conduct connected to his removal/exclusion, (2) the need for a provisional director to resolve deadlock, and (3) injunctive relief to prevent or halt actions allegedly harming his rights and the corporation.
- Bosworth sought immediate preliminary injunctive relief, including the appointment of a provisional director.
- Scalice moved under the Federal Arbitration Act (FAA) to compel arbitration and stay the federal action based on the shareholders’ agreement’s New York City arbitration provision; Bosworth conceded the injunctive-relief count was arbitrable but argued the first two counts were not.

## Issues

1. Whether the shareholders’ agreement’s broad arbitration clause covered Bosworth’s claims of illegal/oppressive conduct and his request for appointment of a provisional director.
2. Whether the District of New Jersey had authority under FAA § 4 to order the parties to proceed to arbitration in New York City, the contractually selected arbitral forum.
3. Whether the court could grant preliminary injunctive relief (including appointing a provisional director) while directing the parties toward arbitration, and whether transfer to the Southern District of New York was the proper procedural step.

## Decision

- The court ruled that the arbitration clause was broad and reached Bosworth’s shareholder-management disputes, including his claims challenging his termination/exclusion and his request for a provisional director.
- The court concluded it could not compel arbitration in New York City from the District of New Jersey because FAA § 4 authorizes an order directing arbitration only “within the district” where the petition is filed.
- To honor the parties’ forum selection for arbitration, the court transferred the case to the Southern District of New York under 28 U.S.C. § 1404(a).
- In light of the transfer, the court dismissed as moot (in New Jersey) the pending motion to compel arbitration and motion to stay, leaving further arbitration-enforcement steps to the transferee court.
- Applying Rule 65 standards, the court granted Bosworth’s request for interim equitable relief in part and denied it in part, including appointing a provisional director to address the governance deadlock and stabilize corporate decision-making pending further proceedings.

## Legal Principles

- A broadly drafted arbitration clause covering disputes “arising out of or relating to” a shareholders’ agreement is read to cover disputes tied to shareholder rights, management control, and alleged freeze-out conduct when those disputes connect to the parties’ contractual relationship.
- FAA § 4 limits a federal district court’s power to compel arbitration to an arbitration hearing to be held within that district; a court generally may not order arbitration to occur in another federal district chosen by contract.
- When a lawsuit is filed in a district that cannot issue a § 4 order for the agreed arbitral location, transfer under 28 U.S.C. § 1404(a) may be used to place the case in the district where an order compelling arbitration at the chosen site can be entered.
- A federal court may issue preliminary injunctive relief in aid of arbitration to prevent irreparable harm and maintain the status quo pending arbitration-related proceedings, so long as the relief is limited and consistent with the parties’ agreement to arbitrate.
- Appointment of a provisional director can be an available interim remedy to address deadlock in a closely held corporation where ongoing conflict threatens the corporation’s operations and shareholder interests.

## Conclusion

Bosworth v. Ehrenreich involved a three-owner closely held corporation whose shareholders’ agreement required arbitration in New York City for disputes related to the agreement. The District of New Jersey held that Bosworth’s freeze-out and deadlock claims fell within that broad arbitration clause, but that FAA § 4 prevented it from compelling arbitration outside its district; the court therefore transferred the case to the Southern District of New York and, while doing so, granted limited preliminary relief—including appointment of a provisional director—to reduce the risk of immediate harm to the corporation and the parties pending the arbitration-forum court’s handling of enforcement proceedings.


Bosworth v. Ehrenreich, 823 F. Supp. 1175 (1993)