Opinion
008692/06.
Decided November 2, 2006.
This motion, by defendants, to dismiss the complaint on the grounds of another action pending, or to transfer the action to New York County, or in the alternative to compel arbitration is granted to the extent that the parties are directed to proceed with arbitration; and the cross-motion, by plaintiff, for summary judgment is denied .
This is an action for breach of a shareholder agreement. The defendant Hawkins, Feretic, Daly, Maroney, P.C. was a law firm which operated as a professional corporation. The plaintiff and the individual defendants were partners in the firm, which maintained its office in Manhattan.
The parties began their initial law practice in 1995. On January 1, 1998, they formed a professional corporation and entered into a shareholder agreement along with a fifth partner, Edward Hayes. Hayes is not a party to this proceeding. The shareholder agreement provided that each partner was a 20 % shareholder. The shareholders agreed to bear losses in the same ratio as they shared net income.
Chapter Three of the shareholder agreement, entitled "Withdrawal, Retirement, Expulsion or Death of a Partner," provides that a shareholder's interest in the firm shall terminate upon certain occurrences, including withdrawal or retirement of the shareholder on sixty days written notice. The agreement further provides that absent agreement of the shareholders, the value of the departing shareholder's interest is to be determined by appraisal by two qualified appraisers, one selected and paid by the shareholder and the other selected and paid by the firm. If the two appraisers cannot agree as to value, they are to select a third appraiser, whose fee is to be shared equally by the shareholder and the firm. The value is then to be set by taking the average of the appraisals prepared by the three appraisers."Any dispute not resolved by [the] parties" is to be submitted to arbitration before the American Arbitration Association.
On June 30, 2004, plaintiff withdrew from the firm without providing the required sixty days written notice. On or about July 9, 2004, plaintiff commenced a special proceeding against defendants in Supreme Court, New York County, seeking a judicial dissolution of the professional corporation pursuant to §§ 1104 and 1104-a of the Business Corporation Law. In the petition, plaintiff also alleged a claim for breach of an oral agreement whereby the firm was to advance all of the expenses in exchange for half of the fee in plaintiff's personal injury cases. Defendants cross-moved to dismiss the petition and compel plaintiff to submit the dispute to arbitration.
On September 20, 2005, the parties entered into a stipulation in the New York County proceeding. Pursuant to the stipulation, plaintiff withdrew his order to show cause seeking judicial dissolution and defendants withdrew their cross-motion to dismiss the proceeding. In the stipulation, the parties further agreed to determine the value of plaintiff's interest in the professional corporation according to "the process" set forth in the shareholder agreement. The stipulation further provided that, "The valuation shall include an allocation of all assets, liabilities, and debts of HFDM." The parties were to exchange the names of their respective appraisers on or before July 20, 2005. The appraisals were to be completed, and the parties were to exchange their respective appraisals by December 15, 2005. If the matter was not resolved by December 30, the appraisers were to select a third appraiser by January 15, 2006. The third appraiser was to submit his findings no later than January 30, 2006. The three appraisals were then to be averaged as provided under the shareholder agreement. Finally, the stipulation provided that "as specified in . . . the shareholder agreement, any dispute not resolved by the parties must be submitted to the American Arbitration Association. . . ."
The defendants retained a CPA, Anthony Basile, to render an appraisal as to the value of plaintiff's 25 %. Mr. Basile found that the value of plaintiff's interest as of June 30, 2004 was $268,025, based upon his calculation of the capitalized value of future earnings of the firm. On December 15, 2005, defendants submitted Basile's appraisal to plaintiff, but plaintiff failed to submit any valuation report. On December 29, 2005, counsel for plaintiff wrote to counsel for defendants stating that plaintiff would "accept the valuation calculations set forth in [Basile's] report." Thus, plaintiff purported "to waive" his right to obtain a separate appraisal and requested defendants to purchase his interest at the price determined by Basile's analysis.
On May 3, 2006, counsel for defendants wrote to counsel for plaintiff in response to plaintiff's proposal. In the letter, counsel for defendants noted that the total liabilities of the firm totaled $541,986, including a bank loan, accounts payable, office renovation costs, a checking account overdraft, and other miscellaneous debts. Counsel for defendants asserted that plaintiff's share of the firm's fixed assets, i.e. furniture and equipment, and his share of the firm's cases had already been distributed to him. In order to complete the winding up of the affairs of the corporation, counsel for defendants requested that plaintiff remit his proportional share of the firm' s liabilities, i.e. $135,496.50.
The present action was commenced on May 26, 2006. Rather than seeking judicial dissolution, plaintiff sues for breach of the shareholder agreement. Plaintiff seeks as damages $268,025, the amount which defendants' appraiser found was the value of plaintiff's interest. CPLR 3211(a)(4) provides that a party may move for judgment dismissing one or more causes of action asserted against him on the ground that there is another action pending between the same parties for the same cause of action in a court of any state or the United States. The court need not dismiss upon this ground but may make such order as justice requires. Pursuant to CPLR 3211(a)(4), the court has broad discretion as to the disposition of an action when another action is pending ( Feustel v. Rosenblum , 24 AD3d
549, 2d Dep't., 2005). The court may dismiss an action under this rule, where there is a substantial identity of parties for the same cause of action(Id). To warrant dismissal, the two actions must be sufficiently similar and the relief sought must be the same or substantially the same. It is unnecessary that the precise legal theories presented in the first proceeding also be presented in the second proceeding. Rather, it is necessary that the pleadings be based upon the same actionable wrong. Where both actions are pending in Supreme Court, the court, on a motion to dismiss pursuant to CPLR 3211(a)(4) may direct the dismissal of the other action ( Great Western Bank v. Terio , 200 AD2d 608, 2d Dep't., 1994; see also Siegel's practice commentary C3211:18).
The court notes that the parties are identical in both the New York County and the present action. The primary relief sought in the New York County action was judicial dissolution.However, judicial dissolution of a professional corporation will ordinarily result in appraisal, that is the petitioner's shares being purchased at fair value by either the other shareholders or the professional corporation (Business Corporation Law § 1118; Hung Yak Ong v. Kow Loon Ong , 299 AD2d 173, 1st Dep't., 2002). Thus, the court concludes that the relief sought is substantially the same in both actions. Moreover, from the context of the litigation, it is clear that the two actions arise from the same "actionable wrong," namely, the defendants' alleged failure to buy out plaintiff at the price determined by the procedure set forth in the shareholder agreement.
In considering which action should be allowed to proceed, the court may consider a variety of factors, including priority of filing, the relative convenience of the fora, and the relative progress of the two actions ( Flintkote Co. v. American Mut. Liability Ins. Co. , 103 AD2d 501, 505, 2d Dep't., 1984, aff'd 67 NY2d 857; see also Siegel's practice commentary C3211:14). The New York County action has priority of filing because it was filed first. However, the two actions appear to be substantially equivalent in terms of convenience because it was plaintiff who commenced both actions. Since the present action is ripe for summary judgment, relative progress clearly favors the present action. Accordingly, defendants' motion to dismiss the instant action or, in the alternative, transfer it to New York County is denied . On the court's own motion, New York County Index Number 602167-04 is dismissed because of the pendency of the instant action.
A written agreement to submit a controversy to arbitration is enforceable and confers jurisdiction on the courts of the state to enforce it(CPLR § 7501). A party aggrieved by the failure of another to arbitrate may apply for an order compelling arbitration(CPLR § 7503[a]). Where there is no substantial question whether a valid agreement was made or complied with, and the claim sought to be arbitrated is not time barred, the court shall direct the parties to arbitrate. The CPLR provisions embody the strong public policy favoring arbitration as a means of conserving the time and resources of the courts and upholding the intention of the contracting parties ( Smith Barney Shearson Inc. v Sacharow , 91 NY2d 39, 49, 1997). In asserting that there is no basis to compel arbitration, plaintiff argues that the only matter which the parties agreed to arbitrate was "the valuation" of a withdrawing shareholder's interest. Since plaintiff purports to adopt the valuation figure arrived at by defendants' expert, plaintiff further argues that there is no dispute as to the value of his interest and, as a result, there is nothing to arbitrate.
However, according to the plain meaning of the shareholder agreement, a party would be bound by the finding of his appraiser only if both appraisers agreed on a valuation figure. Absent an agreement by the appraisers, the agreement provides for the selection of a third appraiser, and the value being fixed by averaging their three appraisals. It appears that a valuation dispute may be referred to outside arbitration only in situations similar to the case at bar, i.e. where the requisite number of appraisers have not been appointed. If arbitration before the American Arbitration Association were not permitted in these circumstances, the arbitration provision would be rendered meaningless. Since an agreement should not be construed so as to render it meaningless, the arbitration provision must apply whenever an average appraisal cannot be calculated because three appraisers have not been appointed ( Rodrigues v. N S Building Contractors, Inc. , 5 NY3d 427, 432, 2005).
The court notes that by agreeing to this dispute resolution procedure, under which the value would be set by the agreement of two or the averaging of three appraisals, the parties set up a type of "appraisal poker game." Having obtained their own appraisals, both the withdrawing shareholder and the firm had the option of "folding their hand" by agreeing upon a compromise valuation figure. If either party elected "to call" the other by exchanging valuation reports, he was in effect gambling that the appraisers would not agree and a more favorable result could be obtained through taking an average of three appraisals. However, by viewing defendants' appraisal without submitting his own, plaintiff was in effect playing poker and seeing his opponent's hand. Thus, if defendants' appraiser had "come in low," under plaintiff's interpretation of the contract, plaintiff would have had the opportunity to submit his own appraisal, knowing that he had little to lose by "drawing a card" and obtaining a third appraisal. It appears to the court that plaintiff's interpretation could not have been what the parties intended when they agreed to this dispute resolution procedure. Nonetheless, plaintiff is free, if he wishes, to argue to the arbitrator that defendants are bound by their own expert' s appraisal report. Under a broad arbitration clause, the interpretation of contract provisions is not for the court but rather for the arbitrator ( Stillman v. Stillman , 80 AD2d 356, 359, 1st Dep't., 1981).
Finally, the court notes that, contrary to plaintiff's position, there is in fact a dispute as to the value of plaintiff's interest in the professional corporation. Defendants argue that their appraiser's estimate is invalid because, by focusing on capitalized value of income, it gave insufficient consideration to outstanding liabilities and the book value of the practice. In these circumstances, there is clearly a good faith dispute as to the value of plaintiff's interest, which is a matter which the parties agreed to arbitrate.
Accordingly, the parties are directed to arbitrate before the American Arbitration Association the issue of the value of plaintiff's interest in the professional corporation. This action is stayed pending the issuance of an arbitration award. Because the matter is arbitrable, plaintiff's cross-motion for summary judgment is in all respects denied .
Serve a copy of this order upon the Clerk of New York County as it applies to Index no. 602167/04.
This shall constitute the decision and order of the court.