Opinion
No. 14608–11.
2012-02-27
Lyle PIKE, Plaintiff, v. Eric ARONSON a/k/a Eric J. Aronson, Fredric Aaron a/k/a Fredric H. Aaron, and Permapave USA Corp., Defendants.
Jeffrey B. Hulse, Esq., Sound Beach, for Plaintiff. Garbarini & Scher, P.C., New York, for Defendants.
Jeffrey B. Hulse, Esq., Sound Beach, for Plaintiff. Garbarini & Scher, P.C., New York, for Defendants.
ARTHUR M. DIAMOND, J.
The following papers having been read on this motion:
+-------------------------+ ¦Notice of Motion ¦1¦ +-----------------------+-¦ ¦Notice of Cross Motion ¦2¦ +-----------------------+-¦ ¦Opposition ¦3¦ +-----------------------+-¦ ¦Reply ¦4¦ +-----------------------+-¦ ¦Reply to Cross Motion ¦5¦ +-------------------------+
Motion by defendant, Fredric Aaron a/k/a/ Fredric H. Aaron for an Order of this Court, pursuant to CPLR § 3211(a)(7), (e) and (f) dismissing the Complaint of plaintiff, Lyle Pike, or alternatively, pursuant to CPLR. § 7503(a) staying the action and compelling the plaintiff to submit his claim to arbitration, is granted in part.
Cross Motion by defendant, Eric Aronson for an Order of this Court staying the action pending the outcome of the parallel criminal action against him under the caption: United States v. Aronson, et al, Docket No. 11–MJ–00989, is determined as set forth herein below.
The instant motion arises out of underlying complaint alleging, inter alia, violations of the RICO statute and New York General Business Law § 349, and unjust enrichment. In October, 2011, the Security and Exchange Commission, (“SEC”) filed an action in the United States District Court, Southern District of New York, under the caption, Securities and Exchange Commission v. Eric. J. Aronson, et al., Docket No. 11–CIV–7033 (JSR), seeking injunctive relief against the named defendants and several PermaPave entities. In 2011
, the SEC filed a criminal complaint against defendant, Aronson.
The last page of the criminal complaint bearing the date, was not attached to defendant's exhibit.
FACTS
In July, and September of 2009, the parties, plaintiff, and defendants, Aronson and PermaPave, entered into respective agreements requiring plaintiff to tender the amount of $255,000.00 in furtherance of distributing Permapave products, and requiring plaintiff to invest $1,500,000.00 in the PermaPave business in exchange for a return on such investment. Specifically, under the July agreement, plaintiff was to receive a share of the profits resulting from the sales of PermaPave products to various purchasers, including the City of Las Vegas. Both agreements contained an arbitration clause which provided in relevant part: “... [a]ny dispute, disagreement, controversy or claim arising out of or relating to this Agreement or the breach thereof shall be resolved by arbitration ...”
PermaPave's products include its own invention, “a permeable paver. which filters rainwater, eliminates outfall pollution and enables clean water to recharge subterranean aquifers by allowing rainwater to pass through the pavers. In addition, PermaPave allegedly manufactures and/or distributes materials used in landscaping and construction.
According to plaintiff, he received interest payments as an apparent attempt by defendants to deceive him into believing that the business was sound. However, plaintiff never received any return on his investment or any profits from sales. Plaintiff also discovered that the City of Las Vegas never ordered or received shipment of any pavers.
Procedurally, the SEC filed its Order to Show Cause in the Southern District Court on October 6, 2011, and after hearing the merits, that Court issued its Order freezing the defendants' assets on October 30, 2011. Plaintiff filed the summons and complaint in this Court on October 12, 2011 and personally served the same upon Aronson on October 17, 2011.
Defendant, Aronson, filed the instant motion on November 12, 2011. Defendant, Aaron, filed his cross motion on December 15, 2011.
The plaintiff did not submit an affidavit of service for defendant, Aaron.
The Order to Show Cause, signed by Hon. Jed Rakoff on October 6, 2011 provides in relevant part:
“... [no person], entity, including any PermaPave Defendant or Relief Defendant [as well as any creditor of or claimant against these defendants] against these defendants or relief defendants, or any person acting on behalf of such defendants or relief defendants, [ shall take any action to interfere with the taking control, possession, or management of the assets, including but not limited to, the filing of any lawsuits ], liens or encumbrances, or bankruptcy cases to impact the property and assets subject to this order [without three (3) business days notice to the SEC and approval by this Court] ...” (see Notice of Motion, Exhibit 3).
Further, on October 30, 2011, the Hon. Judge Rakoff signed an Order on Consent Imposing Preliminary Injunction, Asset Freeze, and Other Relief against the defendants.
ARGUMENTS
Defendant, Aaron, alleges that the plaintiff has commenced the action in violation of the federal court Order, requiring that the civil action against the defendants can only be commenced upon three days' notice to the SEC, and with approval by the United States District Court. Further, the matter is within the purview of the arbitration clause as contained in the subject agreements. Therefore, the matter is improperly before this Court. He submits copies of the federal pleadings and the pleadings of this Court, as supporting evidence.
Defendant, Aronson, contends that as the criminal charges against him are based upon the same set of facts alleged in the underlying civil action, he will suffer prejudice in his criminal defense, and his constitutional right against self incrimination outweighs any other competing interest. He submits an incomplete copy of his criminal complaint into evidence.
Plaintiff contends that Aronson is in default as his time to answer the summons and complaint has expired and has not been extended. Further, Aaron is not a party to the agreements between plaintiff and Aronson, and the arbitration provisions contained therein, do not apply to him. In addition, the parties did not anticipate that the dispute at bar would be subject to arbitration. Finally, plaintiff is not bound by the federal court Order as the same was not served upon him nor did he have any notice of it. Plaintiff submits into evidence copies of the federal court pleadings and an e-mail entry from John S. Ridilla, Deputy City Attorney for the City of Las Vegas stating that the City of Las Vegas has not ordered or taken delivery of any pavers.
DISCUSSION
As to the issue of an alleged default by both defendants, CPLR § 3211(e) provides in relevant part: ... “[a]t any time before service of the responsive pleading is required, a party may move on one or more of the grounds set forth in subdivision (a), and no more than one such motion shall be permitted ...” Further, CPLR § 3211(f) provides in relevant part: “... [s]ervice of a notice of motion under subdivision (a) or (b) before service of a pleading responsive to the cause of action or defense sought to be dismissed extends the time to serve the pleading until ten days after service of notice of entry of the order ...”
In other words, CPLR § 3211(f) is a time-extender. It advises the movants that they need not plead to the claim or defense that they want to move against; in the first instance, they only need to make the motion as long as it is timely, and as such, it automatically extends the time for pleading (see CPLR § 3211 Practice Commentaries by David D. Siegel; C3211;1. The Motion to Dismiss, Generally.). Here, the complaint was served upon Aronson and he filed this motion within less than 30 days after service. As to Aaron, he filed his motion almost two months after the filing of the summons and complaint in this Court. Additionally, given the short duration of default, and that plaintiff did not move this Court for an Order granting a default judgment, there is no need to reach this issue.
In regards to whether the plaintiff was bound by the order of the federal court, it must be shown that the plaintiff had actual notice of the order. If the plaintiff had notice, he would be treated as a creditor prohibited from “ tak[ing] any action to interfere with the taking control, possession, or management of the assets, including but not limited to, the filing of any lawsuits ...” However, to be bound by this clause, plaintiff would have had to have notice of the Order of the federal court (see NLRB v. Blackstone Mfg. Co., 123 F.2d 633 (2d Cir.1941). No defendant has offered evidence that notice of the asset freeze was given to, or received by the plaintiff (see S.E.C. v. Haligiannis, 608 F.Supp2d 444 [2009], see also Fed.Rules Civ.Proc.Rule 65, 28 U.S.C.A). Accordingly, this Court will not dismiss plaintiff's cause of action. Resultantly, there is no need to reach the issue regarding whether plaintiff's cause of action interferes with the S.E.C's control of the defendants' assets.
In order to determine as to whether Aaron has standing to compel arbitration as a non signatory/non party to the subject agreements, it must first be determined whether the underlying action is subject to arbitration. As the instant motion, the underlying cause of action, and the federal court litigation involve alleged violations under the SEC, a review of federal court decisions regarding arbitration agreements in similar transactions, is appropriate. Generally, firmly entrenched in federal and state laws is the strong policy favoring arbitration agreements (Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1[1983];Olympia & York OLP Co. v. Merrill Lynch, Pierce, Fenner & Smith, 214 A.D.2d 509 [1st Dept 1995] ). In construing arbitration agreements, the courts have distinguished between “broad” and “narrow” ones, the former submitting “any and all” disputes to arbitration, the latter dealing with only specific types of disputes ( see, McDonnell Douglas Finance Corp. v. Pennsylvania Power & Light Co., 858 F.2d 825 [2d Cir.1988] ). Here, the arbitration clause contained in the subject agreements, are considered “broad” ones. That is, it encompasses any dispute, disagreement, controversy or claim arising out of or relating to the agreement or the breach thereof. With a broad arbitration clause, “the strong federal presumption in favor of arbitrability applies with greater force” (McDonnell Douglas Finance Corp. v. Pennsylvania Power & Light Co., supra, 858 F.2d at p. 832).
The actual stated purpose of both agreements, executed about the same time, was for co-defendants, Aronson and PermaPave, and plaintiff, Pike, to form a joint venture where PermaPave products would be acquired, transported and ultimately sold, and for Pike to invest in VeriGreen, LLC, an entity that was to be formed by subsidiaries and related entities of PermaPave. Pike, as per the two agreements, had tendered the sum of $255,000.00 for the purposes of acquiring the product, and invested the sum of $1,5000,000.00. Both sums were paid to and received by Aronson and PermaPave. Therefore, contrary to the plaintiff's contention, the damages sought by plaintiff do flow from the agreements.
A review of the fact pattern set forth in the plaintiff's complaint, clearly refers to the obligations of the parties under the two agreements and the arbitration clause itself contemplates arbitration of any dispute, disagreement, controversy or claim arising therefrom. It is noted that plaintiff alleges violations of RICO; however, the Supreme Court in Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 (1987), expressly held that civil RICO claims were subject to an arbitration clause.
As to plaintiff's argument that the execution of the agreements were part of the fraud and therefore did not flow from the agreements, the federal and state policy favoring arbitration requires this Court to construe arbitration clauses as broadly as possible. Doubts as to arbitrability should be resolved in favor of coverage. Further, language excluding certain disputes from arbitration must be clear and unambiguous, and arbitration should be ordered “unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute” (see Wire Service Guild v. United Press International, 623 F.2d 257, 260 [2d Cir.1980], Town of Ramapo v. Ramapo Police Benev. Ass'n, 17 AD3d 476 [2nd Dept 2005] ). Unless excluded, claims of fraud in the inducement of a contract, are arbitrable.
Based on the totality of the circumstances, coupled with the strong federal and state policy favoring arbitration, the Court finds that the dispute arising out of the two agreements is subject to the broad arbitration clause contained in the both agreements. After resolving this issue, this Court must now determine as to whether Aaron has standing to compel arbitration.
Generally, a court will not order a party to submit to arbitration absent evidence of that party's unequivocal intent to arbitrate the relevant dispute and unless the dispute falls clearly within that class of claims which the parties agreed to refer to arbitration. However, the Court of Appeals recognizes that “in certain limited circumstances the need to impute the intent to a non-signatory” is appropriate (TNS Holdings, Inc. v. MKI Sec. Corp., 92 N.Y.2d 335 [1998] ). As well, consent to arbitration has been inferred where the nature of the relationship between a signatory and non-signatory indicates that the agreement to arbitrate should be extended in the interest of fairness (Astra Oil Co. v. Rover Navigation, Ltd., 344 F3d 276 [2d Cir.2003] ).
A review of the fact pattern and allegations regarding Aaron, as set forth by plaintiff in his complaint, indicates: that defendants, Aronson and Aaron, “engaged in certain business practices intended to induce investors to invest large sums of monies in companies directly or indirectly controlled by them ...”; that “Aaron exercised control over the business beyond that of mere legal counsel and derived substantial benefit from the business above and beyond normal fees charged by independent attorneys”; and that “Aaron drafted a written agreement intended and carefully crafted to give the appearance that the transactions underlying the defendants' representations were bona fide business transaction in which plaintiff could and should invest.” (See Notice of Motion, Exhibit 1).
Accepting the foregoing allegations as true, there are five theories under which Aaron, may be bound: (1) incorporation by reference; (2) assumption; (3) agency; (4) veil piercing / “alter ego”; and (5) estoppel (see Thomson—CSF, S.A. v. Am. Arbitration Assn., 64 F.3d 773, 776 [2d Cir.1995] ). Given Aaron's role as his co-defendants' attorney and plaintiff's allegations against him, Aaron can be bound under the theories of agency, alter ego, estoppel, and assumption.
Under the theory of estoppel, the Court in JLM Industries v. Stolt–Nielsen S.A., 387 F3d 163, (2d Cir.2004), following Choctaw Generation Ltd. P'ship v. Am. Home Assurance Co., 271 F.3d 403, 406 (2d Cir.2001) held that where the merits of an issue between the parties was bound up with a contract binding one party and containing an arbitration clause, the tight relatedness of the parties, contracts and controversies, was sufficient to estop the bound party from avoiding arbitration.
The JLM Industries court determined that the party attempting to resist arbitration was estopped from doing so because it had treated arguably non-signatory companies and their signatory assignees as a single unit in its complaint in a related lawsuit. As such, the signatories to an arbitration agreement can be compelled to arbitrate their claims with a non-signatory where a “careful review of the relationship among the parties, the contracts they signed ..., and the issues that had arisen' among them discloses that the issues ... to resolve in arbitration are intertwined with the agreement that the estopped party has signed' “ (JLM Industries, 387 F.3d 163, 177 (2d Cir.2004), quoting Choctaw Generation Ltd. P'ship, 271 F.3d 403, 406 (2d Cir.2001).
Here, the record evinces that the relationship between Aaron and Aronson is such that arbitration could not take place without Aaron's participation. As in the foregoing referenced case, the plaintiff treated Aaron and his co-defendants as a unit, acting in concert with the intent to defraud the plaintiff. Accordingly, Aaron has standing to compel arbitration.
Finally, regarding Aronson's cross motion seeking a stay of the civil proceeding before this Court, although the pendency of a criminal proceeding does not give rise to an absolute right under the United States or New York State Constitutions to a stay of a related civil proceeding, it has also been held that “[t]here is no question but that the court may exercise its discretion to stay proceedings in a civil action until a related criminal dispute is resolved (see In re Astor, 62 AD3d 867 [2nd Dept 2009]; Klitzman, Klitzman & Gallagher v. Krut, 591 F.Supp 258 [DC.NJ.1984] ). The most important factor to be considered in determining whether it is appropriate to stay civil litigation related to a pending criminal matter is the extent to which the issues in the criminal case overlap with those presented in the civil case. This is so because self-incrimination is more likely if there is a significant overlap. On this motion, the principal dispute is whether the issues in the referenced criminal action and in the civil action sufficiently overlap to warrant a stay of the civil action (see Sterling Nat. Bank v. A–1 Hotels International, Inc., 175 F. Supp 2d 573, 577 [SDNY 2001] ). In addition, trial courts have consistently found the privilege against self-incrimination to be a compelling factor and therefore found it appropriate to stay related civil cases during the pendency of criminal prosecutions (see, Zonghetti v. Jeromack, 150 A.D.2d 561 [2nd Dept 1989]; Britt v. International Bus Services, 255 A.D.2d 143 [1st Dept 1998] ). As such, the protection of Aronson's constitutional right against self-incrimination is the more important consideration (see DeSiervi v. Liverzani, 136 A.D.2d 527 [2nd Dept 1988] ). A review of the criminal and the civil complaints, indicate that the wrongful conduct alleged in the underlying civil action before this Court is sufficiently similar to the allegations contained in the Complaint and Affidavit in Support of an Arrest Warrant (see Notice of Cross Motion, Exhibit A). The criminal complaint alleges, inter alia, that Aronson, together with other parties, devised a scheme for purposes to defraud and obtain money and property under materially false pretenses, and he participated in such activities between August 2006 and December 2010. The civil complaint cites actions by Aronson, occurring within that time period, and sets forth allegations that Aronson fraudulently obtained money from plaintiff by inducting plaintiff to invest in his schemes.
Notwithstanding the foregoing, it is noted that the plaintiff, in opposition, argues that under CPLR § 2215, Aronson's cross motion is untimely as plaintiff was allegedly served with such motion on December 14, 2011, one day before the return date of December 15, 2011. CPLR § 2215 provides in relevant part:
“... [a]t least three days prior to the time at which the motion is noticed to be heard, or seven days prior to such time if demand is properly made pursuant to subdivision (b) of rule 2214, a party may serve upon the moving party a notice of cross-motion demanding relief, with or without supporting papers; provided, however, that: ... if such notice and any supporting papers are served by mailing ..., they shall be served three days earlier than as prescribed in this rule; and ... if served by overnight delivery ..., they shall be served one day earlier than as prescribed in this rule ...”
It is noted that the foregoing facts regarding service, have not been disputed by Aronson. This Court in its discretion; however, may entertain the cross motion despite short service where no substantial right of a party is prejudiced. The analysis as set forth in Drolet v. New York State Racing and Wagering Bd. 115 Misc.2d 7 [N.Y.Sup Ct 1982] ), citing a New York State Administrative Agency provision, considered whether public health, safety, or welfare imperatively required emergency action. Here, there is nothing in record to indicate that Aronson's application warrants immediate consideration, particularly when it has not been established as to the date on which the criminal complaint was drawn. This omission lends little support in determining whether Aronson acted promptly in seeking his own relief (see Drolet v. New York State Racing and Wagering Bd., supra).
This Court, without evidence to the contrary, has determined that Aronson's cross motion is untimely. The Court will afford the plaintiff the opportunity to submit papers in opposition thereto before considering the merits of said defendant's cross-motion (see Vincent v. Seaman, 142 Misc.2d 196 [NY Co. Ct.1989] ).
Accordingly, the return date of defendant's, Aronson's, cross motion is adjourned to March 14, 2012 and plaintiff is hereby ordered to submit opposition papers on March 21, 2012, with defendant's reply papers on March 28, 2012. The branch of defendant's, Aaron's, motion to dismiss plaintiff's complaint is denied, and the branch of Aaron's motion seeking an Order compelling that the underlying civil action before this Court, be submitted to arbitration, is granted. The matter will be submitted to arbitration, pending the disposition of defendant's Aronson's cross motion.
This constitutes the decision and order of this Court.