Summary
finding that a non-signatory may compel arbitration with a signatory
Summary of this case from City of Almaty v. SaterOpinion
654850/2017
04-16-2018
332 EAST 66TH STREET, INC. and 167 Bleecker Holding Corp., Plaintiffs, v. Marco WALKER, Ocram Holding, Inc. and Ocram, Inc., Defendants.
For Plaintiffs, Smith, Gambrell & Russell, LLP, 1301 Avenue of the Americas, 21st Floor, New York, NY 10019, By: NICOLE HAFF, Esq. For Defendants, Davidoff Hutcher & Citron LLP, 605 Third Avenue, New York, NY 10158, By: RICHARD C. WOLTER, Esq.
For Plaintiffs, Smith, Gambrell & Russell, LLP, 1301 Avenue of the Americas, 21st Floor, New York, NY 10019, By: NICOLE HAFF, Esq.
For Defendants, Davidoff Hutcher & Citron LLP, 605 Third Avenue, New York, NY 10158, By: RICHARD C. WOLTER, Esq.
Robert R. Reed, J.
This action was initiated by 332 East 66th Street, Inc. (66th Street, Inc.) and 167 Bleecker Holding Corp. (Bleecker Corp.) (collectively, the corporations or plaintiffs) for conversion, replevin, breach of fiduciary duty and declaratory judgment. Following an order attaching their assets and for a preliminary injunction, defendants Marco Walker (Walker), Ocram, Inc. and Ocram Holding, Inc. (collectively, Ocram), (collectively, defendants), cross-move, pursuant to CPLR 7503(a), for an order staying this action and compelling plaintiffs to arbitrate each of the causes of action before the American Arbitration Association.
For the reasons stated below, defendants' cross motion is denied.
I. Background
Plaintiffs
Plaintiff 66th Street, Inc. owns a residential building located at 332 East 66th Street, New York, New York and co-plaintiff Bleecker Corp. owns a residential property at 167 Bleecker Street, New York, New York (collectively, the properties).
The corporations are each owned by a company created under the laws of the British Virgin Islands (corporate shareholders) and had been managed by Rasini & C. SA (Rasini), a Swiss money management firm. On November 24, 2011, the corporations' ownership was moved into Apple Trust, a Swiss trust, of which Managing Growth Trustees SA (MGT) is the trustee (Crespi aff, ¶ 1).
The beneficial owners of the plaintiffs are Carlo Mazzola (Mazzola) and members of his family, Italian nationals, whose interests in the properties are overseen by Andrea Crespi (Crespi), the representative of MGT, the corporate trustee.
Defendants
Walker served as the sole officer and director of each of the plaintiff corporations until his termination in May 2017 by the corporate shareholders at Mazzola's request and his replacement with Louis Grassi.
Ocram, a corporation owned by Walker, served as property manager of the properties until May 2017. Plaintiffs advise in their memorandum of law in opposition that they refer to Ocram, Inc. and Ocram Holding, Inc. as Ocram, for the purposes of this motion and in the absence of an explanation from defendants as to the significance of the distinction.
Alleged Wrongful Acts
Plaintiffs' action stems from defendants' conduct as property manager of the properties. Defendants are alleged to have misappropriated at least $451,000 from plaintiffs' checking accounts. Plaintiffs also claim that defendants have refused to return their books and records and have interfered with plaintiffs' ability to install new property managers at the properties. In addition, plaintiffs aver that Ocram, Inc. and Walker breached their fiduciary duty for their unauthorized transfer of plaintiffs' funds.
The Management Agreements
Defendants rely on management agreements executed by each plaintiff corporation with non-party Zanocram Partners (Zanocram) to support their cross-motion to compel arbitration (Walker aff, exhibits B and C). Both agreements are virtually identical, and were signed by Walker, in his capacity as president of the corporations, and Zanocram. While the agreements are dated December 10, 2009, they were only signed in February 2015.
The agreements refer to each corporation as Investor and Zanocram as Manager. The purpose of the agreements is to retain Zanocram to provide "certain management services relating to real estate investments made by the Investor, managing such investments for the Investor, paying costs, expenses and obligations of the Investor with respect to each such investment, keeping books and records relating to each such investment and the Investor and providing reports to the Investor" (id. at 1). They both contain a broad mediation and arbitration clause.
Non-party Zanocram
At the center of this action is Zanocram, an entity whose corporate identity and relationship to the parties is disputed.
Walker claims that the subject management agreements are an extension of management agreements executed in 1996 by Zanocram and plaintiffs (Walker reply aff, exhibit A). "The first management agreements were executed by me on behalf of Plaintiffs, on one hand, and Michele Rasini on behalf of Zanocram, on the other hand, in 1996 (the "1996 Management Agreements")" (Walker reply aff, ¶ 10).
According to Walker, Zanocram "was originally a joint venture between me and Michele Rasini, who died in [sic] approximately 20 years ago" (Walker aff, ¶ 19). Zanocram is "a joint venture of which I am an owner" (id. , ¶ 37). In his affirmation in support of the cross-motion, defendants' counsel avers that Zanocram is "a joint venture between Zanoras Management LTD and Defendant Ocram, Inc. (The last five letters of "Zanocram" is Defendant Marco Walker's first name spelled backwards.) Walker, as principal of Ocram, Inc., undertook actual management of the Buildings pursuant to the Management Agreements" (Richard Wolter affirmation, ¶ 7).
With regards to the management of the properties, Walker avers that "[t]here is no dispute that I personally managed the Properties—whether I did so through Ocram or Zanocram (or as sole officer of the Plaintiff entities), there would be little practical difference in the day-to-day management of the Buildings" (id. , ¶ 33).
On the other hand, Mazzola claims that Zanocram was "the business vehicle for a Swiss investment advisor named Martino Orombelli (Orombelli), a man I have known for decades and who, as an owner or investor in Rasini, has long advised my mother and me about our investments. In fact, Orombelli was our main point of contact at Rasini" (Mazzola aff, ¶ 26).
Mazzola and Crespi maintain that Zanocram was never the property manager as Ocram was hired for the day-to-day management of the properties.
Mazzola argues that, although he had been made aware in the last year or two that Crespi had been given agreements involving Zanocram, the foregoing had just been mentioned in passing, and neither he nor Crespi had reviewed or approved same (id. , ¶ 29).
Both Mazzola and Crespi suggest that the management agreements dated December 10, 2009, but signed by Walker as President of plaintiffs in February 2015, were fabricated. In addition, Crespi highlights that the purported consent to the management agreements was given by Rasini although MGT was the actual investment manager for these investments, and has been in that role since 2011 (Crespi, ¶ 13). Therefore, Rasini could not have had authority to give consent to the transaction (id. ).
Non-party Martino Orombelli
Both Mazzola and Crespi mention that Orombelli had, over the years, repeatedly recommended that the properties be sold and that his company, Zanocram, should receive a substantial fee in connection with the sale. Mazzola states that he suspects that the management agreements were created either by Walker or Orombelli "in order to support their claim that Zanocram is entitled to an extremely large fee if and when the Properties are sold" (Mazzola aff, ¶ 30; Crespi aff, ¶ 14). However, the affiants insist that their dispute is not with Zanocram and that Orombelli wants no involvement in this action.
II. Procedural History
On July 17, 2017, plaintiffs moved the court by order to show cause (OSC) for an order of attachment, pursuant to CPLR 6201 (3), 6211 and 6212 and a preliminary injunction, pursuant to CPLR 6301. This court signed an order on July 18, 2017 directing the attachment of defendants' assets to the extent of $451,000, and
"pending the hearing of this motion, Defendant Marco Walker, Defendant Ocram, Inc. and Defendant Ocram Holding, Inc., or anyone acting in concert with these Defendants, are enjoined from negotiating or transferring the cashier's check for $100,000, written to Ocram Holding, Inc., using funds from 167 Bleecker Holding Corp.'s checking account at J.P. Morgan Chase Bank ending in x7632, or otherwise dispossessing Plaintiffs of the $100,000 denoted in this check; and/or negotiating or transferring the cashier's check for $100,000, written to Ocram Holding, Inc., using funds from 332 East 66th Street, Inc.'s checking account at J.P. Morgan Chase Bank ending in x6328, or otherwise dispossessing Plaintiffs of the $100,000 denoted in this check" (NYSCEF Doc. Nr. 30 at 2, 3).
The parties appeared before the court for an oral argument on December 7, 2017 whereupon the court ordered the following:
"In addition to the TRO that was signed on July 18th of 2017, it is further ordered that the, [sic] pending a final decision on this motion and cross-motion, the defendant, Marco Walker, defendant Ocram, Inc., and defendant Ocram Holding, Inc. or anyone acting in concert with these defendants are hereby enjoined additionally from transferring or otherwise taking any action concerning $451,000 allegedly belonging to plaintiff, which was identified in the order to show cause and supporting papers of the order to show cause that was previously signed July 18, 2017." (Oral argument transcript at 21).
III. Contentions
In their cross-motion, defendants argue that plaintiffs' causes of action arise out of defendants' conduct as manager of plaintiffs' properties.
Defendants contend first that defendants' role as property manager is governed by two substantively identical management agreements (agreements), which contain provisions requiring arbitration of "any unresolved controversy or claim arising out of or relating to this Agreement, or a breach thereof." Secondly, defendants claim that, although none of the named defendants is a signatory to the management agreements, non-signatory defendants may compel arbitration against signatory plaintiffs. Third, defendants argue that plaintiffs' incidental fraud and/or tort claims are arbitrable.
In opposition, plaintiffs provide context to the agreements by explaining that they were between each of the corporations and non-party, Zanocram. According to plaintiffs, Zanocram is the business vehicle for Orombelli, who has been providing investment advice to the Mazzola family. However, Walker claims that he is 50% owner of Zanocram. Plaintiffs dispute this claim and state that Zanocram has never managed the properties. Plaintiffs also point out that Walker signed the agreements dated 2009 only in 2015 in his capacity as officer of the corporations. In doing so, Walker engaged in self-dealing and fraud, by hiring Zanocram, a company he purports to own half of, to act as property manager for plaintiffs. Plaintiffs underscore that Walker signed these agreements without the knowledge of the corporate trustee or plaintiffs. Nor were they consulted or had a role in drafting and negotiating same.
Plaintiffs highlight that defendants were not parties to the agreements; thus, there is no agreement between these parties to arbitrate their disputes. Plaintiffs also state that they have not asserted any claims under these agreements, which are thus irrelevant to the court.
First, plaintiffs claim that defendants' "interrelatedness" argument fails. Plaintiffs argue that defendants acknowledge that there is no agreement between plaintiffs and defendants requiring them to arbitrate claims. Plaintiffs contend that, even if the claims advanced by them are ultimately found to be binding on them, the agreements would only govern plaintiffs' rights and obligations vis-a-vis Zanocram, not Ocram or Walker.
Secondly, plaintiffs argue that defendants' alternative theory that plaintiffs intentionally elected not to sue Zanocram so as to avoid arbitration is unavailing.
Finally, plaintiffs contend that the Zanocram agreements are unenforceable.
In reply, defendants argue that the court should order additional discovery and an evidentiary hearing in light of the genuine issues of material fact concerning the validity of the parties' agreement to arbitrate. Defendants also reiterate that, if the arbitration provision in any of the management agreements is determined to be enforceable, defendants may enforce them even as non-signatories.
IV. Discussion
A. Legal Standard
New York courts have jurisdiction to enforce written arbitration agreements pursuant to CPLR 7501.
On a motion to compel arbitration, the court must decide whether the parties are bound by an agreement requiring arbitration. General rules of contract law apply, but a higher threshold of proof of contract formation is required. Notably, the Court of Appeals holds that there must be a "clear, explicit and unequivocal" agreement to arbitrate in order to compel a party to arbitrate a dispute ( God's Battalion of Prayer Pentecostal Church, Inc. v. Miele Assoc., LLP , 6 NY3d 371, 374 [2006], quoting Matter of Waldron v. Goddess , 61 NY2d 181, 183 [1984] ).
The threshold issues here are whether a nonsignatory party can invoke the benefits of an arbitration agreement and compel a signatory to arbitration and whether the instant dispute should be submitted to arbitration.
B. The Arbitration Clause
The arbitration clause in the management agreements provides the following in relevant part:
"(j) Mediation/Arbitration
If a dispute arises out of or relates to this Agreement or a breach thereof, and if said dispute cannot be settled through direct discussions, the Parties agree to first endeavour to settle the dispute in an amicable manner by mediation administered by the American Arbitration Association under its Commercial Mediation Rules, before resorting to arbitration. Thereafter, any unresolved controversy or claim arising out of or relating to this Agreement, or a breach thereof, shall be settled by arbitration before three neutral arbitrators .... All issues governing discovery requests shall be decided by the arbitrators." (Walker aff, exhibit B at 10 and exhibit C at 10).
C. Closely Related and Foreseeable
At the outset, the court notes that defendants' jurisprudential premise is misplaced and their reliance on TNS Holdings v. MKI Sec. Corp., 92 NY2d 335 [1998] and its progeny is inapposite. These cases illustrate the circumstances in which a signatory to an agreement containing an arbitration clause can compel arbitration of a controversy with a nonsignatory. Or, to put it another way, they involve analysis pertaining to the determination of the issue of whether a nonsignatory to an arbitration agreement can nevertheless be bound to arbitrate. The foregoing jurisprudence explores the five theories movants can rely on to subject a nonsignatory to arbitration, namely, incorporation by reference; assumption; agency; veil piercing/alter ego; and estoppel.
This is, however, an action in which a nonsignatory seeks to compel arbitration with a signatory. Here, it is defendants, who are nonsignatories to the arbitration agreement, who seek to compel arbitration with plaintiffs.
The Appellate Division, First Department, has held that a nonparty may invoke a forum selection clause under three sets of circumstances:
"First, it is well settled that an entity or individual that is a third-party beneficiary of the agreement may enforce a forum selection clause found within the agreement. (See ComJet Aviation Mgt. , 303 AD2d at 272.) Second, parties to a ‘global transaction’ who are not signatories to a specific agreement within that transaction may nonetheless benefit from a forum selection clause contained in such agreement if the agreements are executed at the same time, by the same parties or for the same purpose. (See PT. Bank Mizuho Indonesia v. PT. Indah Kiat Pulp & Paper Corp. , 25 AD3d 470, 471 [1st Dept 2006].) Third, a nonparty that is ‘closely related’ to one of the signatories can enforce a forum selection clause. (See ComJet Aviation Mgt. , 303 AD2d at 273 ; Direct Mail Prod. Servs. Ltd. v. MBNA Corp. , 2000 WL 1277597, 2000 US Dist LEXIS 12945 [SD NY 2000].) The relationship between the nonparty and the signatory in such cases must be sufficiently close so that enforcement of the clause is foreseeable by virtue of the relationship between them." ( Freeford Ltd. v. Pendleton, 53 AD3d 32, 38–39 [1st Dept 2008] ).
The closely-related analysis is factually intensive ( Out Pub., Inc. v. Lipo Liquidating Corp., 2013 NY Slip Op 31449 [U] *3 [Sup Ct, NY County 2007] ), and can apply to corporations ( Freeford, 53 AD3d at 32 ; Tate & Lyle Ingredients Ams., Inc. v. Whitefox Tech. USA, Inc. , 98 AD3d 401 [1st Dept 2012] ), corporate officers (see Nanopierce Tech., Inc. v. Southbridge Capital Mgt. LLC , 2003 WL 22882137 [SDNY, Dec. 4, 2003, No. 02–Civ–0767 (LBS] ) and corporate directors ( Thibodeau v. Pinnacle FX Invs., 2008 WL 4849957, * 5 n. 4, 2008 US Dist LEXIS 90440, *17 N. 4 [EDNY, Nov. 6, 2008, No. 08–CV–1662 (JFB) (ARL) ]; Pegasus Strategic Partners, LLC v. Stroden, 2016 NY Slip Op 31159 [U] [Sup Ct, NY County 2015] ).
Furthermore, agents have been afforded "the benefit of arbitration agreements entered into by their principals to the extent that the misconduct relates to their behavior as officers or directors or in their capacities as agents of the corporation" ( Hirschfeld Prods. v. Mirvish , 88 NY2d 1054, 1056 [1996] ). The foregoing rule promotes the strong policy in favor of enforcing arbitration agreements by preventing circumvention of same (id. )
Plaintiffs' assertion that defendants must show that they were intended third-party beneficiaries of the agreements is incorrect. Indeed, third-party beneficiary status is not required ( Freeford , 53 AD3d at 40 ).
Here, accepting as true the allegations that Walker and Ocram are part owners or principals of Zanocram, and in light of the fact that they are being sued in connection with their management activities, it was foreseeable to plaintiffs that the forum selection clause would be invoked regarding any controversy against these closely-related individual and corporate entities, respectively, in connection with their work.
D. Validity of the Agreements and Arbitration Clauses
Notwithstanding the foregoing, the court must first determine which forum has the authority to decide the question of the validity of the arbitration agreement.
The validity of an arbitration clause is determined separately from the validity of the underlying agreement. Under the doctrine of separability, "courts are required to treat an agreement containing an arbitration clause as if there were two separate agreements—the substantive agreement between the parties, and the agreement to arbitrate" (Matter of O'Neill v. Krebs Communications Corp. , 16 AD3d 144, 144 [1st Dept 2005], citing Weinrott v. Carp , 32 NY2d 190 [1973] ).
Generally, under a broad arbitration provision, the claim of fraud in the inducement of the agreement is deemed to be included as a matter for arbitrators to determine ( Weinrott v. Carp , 32 NY2d 190, 199 [1973] ).
In order to avoid submission to arbitration, it must be asserted that the fraud relates to the arbitration clause itself ( id. at 197 ), or that something greater than the substantive provisions of the agreement were induced by fraud ( id. at 198 ).
Indeed, where a party claims that "the alleged fraud was part of a grand scheme that permeated the entire contract, including the arbitration provision, the arbitration provision should fall with the rest of the contract" (id. at 197).
In order to sustain such a claim, plaintiffs must establish that the agreement was not the result of an arms' length negotiation or that the arbitration clause was inserted into the contract to accomplish a fraudulent scheme ( Anderson St. Realty Corp. v. New Rochelle Revitalization , 78 AD3d 972, 975 [2d Dept 2010] [finding that "[t]here was no evidence that the parties owed a fiduciary duty to one another"]; Citidental of Harlem P.C. v. C & G Dental PLLC , 2014 NY Slip Op 31925 [U] *1 [Sup Ct, NY County 2014], citing Housekeeper v. Lourie , 39 AD2d 280, 284 [1st Dept 1972] [alleged fraud must relate to the parties' bargaining power and the procurement of the agreement] ).
Here, the agreements contain broad arbitration provisions and plaintiffs claim that fraud permeated the entire agreement. Plaintiffs argue that the agreements were the product of self-dealing as Walker has acknowledged in his affidavit that he signed them because they advanced his personal, financial interests. However, plaintiffs point out, Walker did so in his capacity as officer and director of the plaintiff corporations when he was not free to put his interests before those of plaintiffs. The hiring of a company that he states he owns a 50% interest in creates a conflict of interest.
Furthermore, plaintiffs highlight that the agreements were purportedly signed by Orombelli on behalf of Zanocram and Walker on behalf of plaintiffs, but Walker claims that the termination fee of $1.9 million is due to him personally. In addition, plaintiffs contend that $1.9 million would represent a fee equal to 44 years of property management services while, per industry practice, property managers are not compensated at a percentage of the increase in value of a property, but at a negotiated percentage of the annual rent roll, typically five to six percent.
Finally, plaintiffs assert that there would have been no basis for them to hire Zanocram to manage the properties when Ocram was already managing same.
Plaintiffs have pleaded allegations, which, if true, would establish the existence of a grand scheme to defraud which permeates the entire agreement, including the arbitration clause. As in Oberlander v. Fine Care , there are allegations that one of the parties who allegedly committed fraud in the inducement of the agreement had an interest in the company which was hired pursuant to said agreement ( 108 AD2d 798, 798 [2nd Dept 1985] [court ordered a stay of the arbitration and remitted the matter for an evidentiary hearing to resolve disputed factual issues, which if proven, would invalidate the entire agreement, including the arbitration provision] ).
There are disputed issues of fact which cannot be resolved without further developing the record by giving defendants the opportunity to answer the amended complaint and the court the option to hold an evidentiary hearing ( Housekeeper v. Lourie , 39 AD2d at 285 [allegations of fraudulent breach of fiduciary relationship between an attorney and his clients, which if true, would lead a court to hold an agreement for the termination of a partnership was not the result of arms' length negotiations]; see also Matter of Kennelly v. Mobius Realty Holdings LLC , 33 AD3d 380, 382–383 [1st Dept 2006] ; cf. Ferrarella v. Godt , 131 AD3d 563, 567–568 [2nd Dept 2015] [court, relying on a record it deemed "sufficiently developed to permit a determination as to the validity of the arbitration clause," held that plaintiff did not establish that the contract was not a result of an arms' length negotiations, and that fraud was part of a grand scheme that permeated the entire contract] ).
Based on the foregoing, the issue of validity of the agreements is for the court to determine, but, first, the record must be further expanded.
V. Conclusion
Accordingly, it is
ORDERED that the cross motion of defendants to stay the action and compel mediation, and if necessary, arbitration, is denied, with leave to renew following discovery, and it is furtherORDERED that the defendants serve an answer to the amended complaint within 20 days after receipt thereof, and it further
ORDERED that the parties appear for a preliminary conference in Room 581, 111 Centre Street, on May 31, 2018, at 9:30 AM.
This constitutes the decision and order of the court.