Opinion
FSTCV196042813S
02-04-2020
Guoliang Zhao, Individually and Derivatively on Behalf of Metals Trading Corporation et al. v. Metals Trading Corporation et al.
UNPUBLISHED OPINION
Judge (with first initial, no space for Sullivan, Dorsey, and Walsh): Sommer, Mary E., J.
DECISION RE MOTION TO COMPEL ARBITRATION AND FOR A STAY PENDING ARBITRATION BY DEFENDANT METALS TRADING CORPORATION’S [#107.00]
SOMMER, J.
I. INTRODUCTION AND FACTUAL SUMMARY
Plaintiffs Guoliang Zhao ("Zhao") and Fabio Calia ("Calia") (Zhao and Calia, collectively, "Plaintiffs"), both former executives of the Gerald Group, commenced this action by complaint dated June 27, 2019, seeking damages against the defendants as a result of their failure to pay sums allegedly due to each of the plaintiffs under promissory notes dated December 12, 2012. On August 29, 2019 motion of Metals Trading Corporation ("MTC") to compel arbitration and to stay this action pending the completion of arbitration (the "Motion"). The plaintiffs have filed a memorandum in opposition to the motion to compel arbitration dated September 16, 2019. The defendants filed a reply memorandum on September 29. 2019. The parties argued the motion before the court at short calendar on October 7, 2019.
In their complaint the plaintiffs allege that the defendants engaged in a series of actions designed for the purpose of avoiding their payment obligations to them while misappropriating to themselves hundreds of millions of dollars from the employee shareholders of the defendant Metals Trading Corporation ("MTC"). MTC is an employee owned holding company that controlled Gerald Group, which was a Stamford-based mining and metals trading company until its recent move overseas. The plaintiffs allege that the defendants accomplished this through a stock dilution and a series of fraudulent transfers to shell companies, using the money and assets of the company and therefore, that of the shareholders. The plaintiffs further allege that the defendants forced former director-shareholder Zhao to terminate his employment with the company in August 2017 and the plaintiff Calia to terminate his employment with the company in 2015. In the case of Zhao, they promised to purchase his shares in exchange for his silence. Neither Zhao nor Calia, like other shareholders, was ever paid the monies owed him. The defendants seek an order compelling plaintiff Zhao to submit to arbitration and a corresponding order to stay litigation by Zhao and Calia. The defendants also filed a motion to dismiss which had not been argued at the time tis motion appeared on short calendar.
MTC’s Motion seeks different relief against each of the two Plaintiffs. First, it asks this court to compel Zhao to arbitrate all of his claims in this action, effectively foreclosing his right to prosecute any claim against the defendants in this court. Second, it asks the court to stay prosecution of all of Calia’s claims pending the filing and completion of Zhao’s arbitration of his claims against Defendants. The court has reviewed the pleadings and the memoranda submitted by the parties and considered the arguments presented by both sides to the court: The following is the court’s analysis and its decision.
The motion to compel arbitration must be viewed in light of the express terms of the arbitration agreement itself. The defendant claims that it is entitled to arbitration of all plaintiff Zhao’s claims because he signed an agreement to arbitrate all claims. The plaintiff Zhao acknowledges that the agreement which contains language requiring arbitration, he does not agree-that the agreement precludes him from bringing the claims in his complaint to this court: In short, Zhao maintains that he never signed an arbitration agreement that required him to arbitrate the claims asserted in this action; to the contrary, the provision in question specifically excludes these claims from arbitration. MTC’s motion against Calia faces the following claims in opposition: (1) Calia did not sign any arbitration agreement and his claims are predicated on different documents, (2) MTC cites no authority for the extraordinary remedy of staying the claims of an unwilling non-signatory to an arbitration agreement pending an arbitration between other parties, and (3) even if the court had the authority to impose such a stay under these circumstances, there is no prudential reason to do so here.
As noted above, this is an action by Zhao and Calia to collect monies owing to them by MTC in the face of alleged concerted, wrongful acts by defendants to evade these payment obligations. Zhao and Calia are similarly-situated former employees of Gerald Group, of which MTC is or was the holding company; they both allege that they are victims of defendants’ illegal scheme but are otherwise unrelated, and as set forth more fully in their complaint, they have brought these claims together in this forum as a matter of convenience, efficiency, and the conservation of judicial resources.
The complaint alleges a wide-ranging scheme in which defendants allegedly misappropriated funds and assets ultimately belonging to MTC and thus, its shareholders, and transferred them to other entities and persons in derogation of plaintiffs’ rights. As a result, plaintiffs have asserted claims against MTC, their contractual counter-party, as well as against numerous other persons and entities that have participated in this scheme.
The plaintiff notes, and it is not disputed, that three of the four agreements at issue have no arbitration clause at all. As to the fourth agreement, the plaintiff argues that the arbitration provisions specifically exclude the claims which the plaintiff Zhao is making in the complaint. The two December 19, 2012 Dividend Promissory Notes issued by MTC to each plaintiff; which’ are Exhibits B and C to the complaint, do not contain-an arbitration provision.
As alleged in the complaint and supported by attached exhibit D, the Amended and Restated Stockholders’ Agreement, dated as of November 6, 2013 ("Stockholders Agreement"), among MTC, plaintiffs, and various other shareholders also does not contain any reference to arbitration. As further alleged in the complaint, in 2011, concomitant with his exit from the company, Zhao (along with his wife and a family trust) and MTC (along with a related entity, Gerald Metals, LLC), entered into a Stock and LLC Membership Interest Repurchase and Severance Agreement ("Repurchase Agreement"). Zhao’s Repurchase Agreement is the only agreement at issue containing an arbitration provision, i.e., the one quoted in full above and selectively quoted in MTC’s motion to compel arbitration. The Repurchase Agreement is Exhibit E to the Complaint. Calia never entered into a similar agreement.
Neither plaintiff has ever received even a single payment under the Dividend Promissory Notes, the Stockholders Agreement, or the Repurchase Agreement. To the contrary, the plaintiffs argue that defendants have engaged in a concerted scheme to enrich themselves at plaintiffs’ expense by totally avoiding their payment obligations under these agreements. Accordingly, Plaintiffs have commenced this action in which they claim that they are entitled to relief from defendants’ willful breaches and misconduct. The following is an analysis of the facts as related to the motion to compel arbitration and stay litigation.
First, the agreement which Zhao did sign containing an arbitration provision must be read in its entirety. The subject arbitration provision contains an express exclusion carving out the claims he brings in this action, i.e.," ... claims ... to enforce payment obligations owed to it." MTC’s motion ignores this language although the complaint twice quotes the language of this express exclusion. MTC has deliberately excluded this phrase from the purported block quotation of the "relevant part" of the "mandatory arbitration clause" by omitting, without reference, the sentence containing the express exclusion is incomplete and the defendants have failed to present the actual arbitration language which the court must evaluate. The full arbitration provision, with the sentence omitted by MTC indicated in italics, states:
Any dispute, controversy or claim arising out of or relating to this Agreement or the performance by the parties of its or their terms, shall be settled by binding arbitration held in Stamford, Connecticut, administered by the American Arbitration Association under its Commercial Arbitration Rules then in effect. The Seller agrees that arbitration shall be the exclusive forum for the adjudication of all such claims, that the Seller waives the right to file suit in court (other than to enforce the results of the arbitration), and that the Seller shall be precluded from bringing suit in court with respect to any claim(s) that was or could have been brought pursuant to this section, other than pursuant to Section 7(c) below or to enforce payment obligations owed to it.
Thus, as set forth in greater detail below and entirely omitted from MTC’s Motion, the agreement to arbitrate is only mandatory for claims "other than ... to enforce payment obligations" to Zhao. In this action, Zhao’s claims seek to enforce such payment obligations. Plaintiffs allege that MTC has breached its obligations to pay them millions of dollars, and that defendants have engaged in a course of misconduct and wrongdoing both to manufacture false grounds for refusing to pay and to prevent enforcement of MTC’s payment obligations by placing MTC’s assets beyond plaintiffs’ reach. As summarized in paragraph 12 of the complaint:
Thus, as set forth in detail below, Defendants engaged in a concerted scheme to deprive Plaintiffs of millions of dollars owed to them by MTC, by misappropriating hundreds of millions of dollars in value from MTC to themselves and their entities, and by fraudulently conveying the assets and income of MTC to other persons and entities, and then claiming that MTC was unable to meet its obligations to Plaintiffs.
As such, Zhao’s claims fall squarely within the arbitration provision’s express exclusion permitting him to seek reccurse.in court, and MTC’s motion must accordingly be denied in full.
Second, even if there were a basis for compelling Zhao to arbitrate, this would severely and unfairly prejudice Calia, who never signed any arbitration agreement with any of the defendants and who has been separated from his employment with the defendant since 2015, to defer his substantial claims for an undefined period of time to allow the arbitration to proceed. It is not unreasonable for Calia to not be willing defer his right to adjudicate his claims while Zhao and the defendants engage in what will, under the facts of this case, be a lengthy arbitration process. The plaintiff argues that there is no authority for involuntarily imposing such a heavy burden on a non-signatory to an arbitration agreement. MTC does not cite any such authority, but rather, relies exclusively upon cases involving the opposite, and thus, inapplicable, situation, where a non-signatory relies upon an arbitration agreement to compel arbitration of claims by a signatory to the arbitration agreement.
Plaintiff aptly characterizes the effect of the proposed stay on Calia as draconian because it would in effect, indefinitely stay the claims of a party who never agreed to arbitrate anything; and argues that it should not do so here. MTC’s rationale for staying Calia’s claims is that it would "preclude the very real probability of inconsistent rulings on ... core issues of fact and law" (MTC Br. at 14). The plaintiff argues and the court concurs that the opposite result is more likely. Compelling arbitration by Zhao now, and then forcing Calia to wait to litigate his claims until after the arbitration, would create, not prevent, the risk of inconsistent rulings, as Calia would not be bound by any arbitral decision in a proceeding to which he was not be a party. Under the circumstances of this case, the court concludes that the only way to avoid inconsistent rulings is to adjudicate Zhao’s and Calia’s claims together in this forum. The court is unable to find any reason for the defendants’ insistence on the stay in this case other than to delay the day when it must pay plaintiffs according to the terms of the defendants’ obligations under the law. That litigation strategy does not support a stay of this action.
II. APPLICABLE LAW AND ANALYSIS
A. Whether Zhao’s Claims Are Arbitrable
The plaintiff has argued that MTC cannot compel arbitration of Zhao’s claims because the mandatory arbitration requirement, by its terms, does not apply to Zhao’s claims. The language to which the court must look in deciding this issue is the provision in the arbitration clause which expressly excludes claims "to enforce payment obligations owed to [Zhao]." The plaintiff argues that this phrase refers precisely to the claims that Zhao asserts in this action.
It is, well established under applicable New York law, which the parties agree to this issue, that arbitration provisions do not apply to matters outside their scope. Rockland Cty. v. Primiano Const. Co., 51 N.Y.2d 1, 7, 409 N.E.2d 951, 953 (1980) ("if the court concludes that, while the parties may have made a valid agreement to arbitrate, the particular agreement that they made was of limited or restricted scope and the particular claim sought to be arbitrated is outside that scope, there will likewise be ... a denial of the motion to compel arbitration"); see also Marlene Indus. Corp. v. Carnac Textiles, Inc., 45 N.Y.2d 327, 333, 380 N.E.2d 239, 242 (1978) ("It has long been the rule in this State that the parties to a commercial transaction will not be held to have chosen arbitration as the forum for the resolution of their disputes in the absence of an express, unequivocal agreement to that effect; absent such an explicit commitment neither party may be compelled to arbitrate"; citations and internal quotation marks omitted).
Thus, even when the parties have agreed to a broad arbitration provision, courts will not require arbitration of matters excluded from the provision. In re Monticello Raceway Mgmt., Inc., 45 A.D.3d 937, 938, 844 N.Y.S.2d 498, 499 (3d Dep’t 2007) ("It is well settled that a substantive issue may be excluded from arbitration by the terms of an arbitration agreement.") (citing cases); see also Brandle Meadows, LLC v. Bette, 84 A.D.3d 1579, 1580, 923 N.Y.S.2d 294, 296 (3d Dep’t 2011) ("exclusion of a substantive issue from arbitration generally requires specific enumeration in the arbitration clause itself"; citations and internal quotation marks omitted).
When read in full it is clear that the arbitration clause itself excludes the claims asserted here by Zhao:
(ii) Any dispute, controversy or claim arising out of or relating to this Agreement or the performance by the parties of its or their terms, shall be settled by binding arbitration held in Stamford, Connecticut, administered by the American Arbitration Association under its Commercial Arbitration Rules then in effect. The Seller [i.e., Zhao] agrees that arbitration shall be the exclusive forum for the adjudication of all such claims, that the Seller waives the right to file suit in court (other than to enforce the results of the arbitration), and that the Seller shall be precluded from bringing suit in court with respect to any claim(s) that was or could have been brought pursuant to this section, other than pursuant to Section 7(c) below or to enforce payment obligations owed to it.
MTC’s block quotation in its motion included only the first sentence of this provision and omitted the second, critical sentence from this two-sentence provision. MTC fails to mention the second sentence in its brief, or otherwise reference it, even though it directly addresses the central issue raised by MTC’s motion to compel arbitration.
The court cannot ignore the language highlighted above and omitted by MTC’s memorandum. This language makes clear that the requirement to pursue claims in arbitration and precluding access to court expressly applies to claims "other than ... to enforce payment obligations to [Zhao]." The phrase "other than" clearly and unambiguously conveys an intent to exclude claims to enforce payment obligations and to permit Zhao to bring those in court should he so choose. Scanomat A/S v. Boies, Schiller & Flexner, LLP, 54 Misc.3d 1215(A), 2017 WL 581218, at *3 (N.Y.Sup.Ct. Feb. 9, 2017) ("where the parties unequivocally agreed in the Engagement Letter that all disputes between them ‘relating to any matter other than [respondent’s] fees * * * shall be settled by binding, confidential arbitration’ ... the facts even more strongly militate in favor of the granting of a stay of arbitration") (emphasis in original). The Court should interpret the arbitration provision to give effect to these words. See Mionis v. Bank Julius Baer & Co., 301 A.D.2d 104, 109, 749 N.Y.S.2d 497 (1st Dep’t 2002) ("Courts are obliged to interpret a contract so as to give meaning to all of its terms.")
The court recognizes the strong public policy of the state of New York favoring arbitration. The defendants have cited the general principles well known to courts considering whether to compel arbitration. However, said policy cannot be applied in a vacuum. The facts of each case determine the issue of arbitrability. There is no doubt that the language relating to arbitration in the agreement is broad. There is also no doubt, based on the court’s analysis, that is excludes the very claims brought by the plaintiff Zhao and does not apply at all to Calia.
Based on a review of the complaint and the agreement which is the subject of this motion, the court concurs with the plaintiffs’ argument that Zhao is not precluded from bringing his claims in court because they are all directed at "enforc[ing] payment obligations owed to" him. Both plaintiffs seek to enforce the payment obligations set forth in the promissory notes which the defendants executed.
By way of example, the following allegations as quoted below relate to Zhao’s right to enforce the defendants’ payment obligations to him. The First Cause of Action is to enforce MTC’s payment obligations to Zhao under the Dividend Note. MTC has failed to make payments of interest and principal due to Zhao under the Dividend Promissory Note. "Zhao is entitled to immediate payment of the principal amount of the Dividend Promissory Note." The Fourth Cause of Action is to enforce MTC’s payment obligation to Zhao under the Repurchase Agreement. "MTC has failed to pay any of the repurchase price for Zhao’s capital stock in MTC," "Zhao is entitled to immediate payment of the entire repurchase price." The Fifth Cause of Action seeks, in the alternative, to rescind the Repurchase Agreement because of MTC’s unjustified failure to pay any of the repurchase price. Because the essence of the claim is to seek a remedy for MTC’s failure to comply with its payment obligation, it fits squarely within the exception to the arbitration provision. "MTC has not paid any of the repurchase price to Zhao, and has anticipatorily repudiated any obligation to pay any of the repurchase price to Zhao." The Seventh, Eighth, Ninth, and Tenth Causes of Action seek to enforce MTC’s payment obligations to Zhao by undoing fraudulent and bad faith transactions effected with the purpose of evading those payment obligations. "MTC owed millions of dollars to Plaintiffs pursuant to each Plaintiff’s Dividend Promissory Note, the Stockholders Agreement and the Repurchase Agreement ... MTC transferred to the other Defendants, and other persons and entities, virtually all of its assets with the intent of avoiding MTC’s debts to Plaintiffs or of hindering the collection of those debts." "MTC owed millions of dollars to Plaintiffs pursuant to . each Plaintiff’s Dividend Promissory Note, the Stockholders Agreement and the Repurchase Agreement ... With full knowledge of MTC’s debts to Plaintiffs, Defendants conveyed away MTC’s property, with intent to prevent it from being taken by legal process." "Defendants prevented Plaintiffs from obtaining the benefits to which they were contractually entitled, and thereby breached the covenant of good faith and fair dealing implied in all contracts:" "MTC owed millions of dollars to Plaintiffs pursuant to each Plaintiff’s Dividend Promissory Note, the Stockholders Agreement and the Repurchase Agreement ... With full knowledge of MTC’s debt to Plaintiffs, Defendants conveyed away MTC’s property, with intent to prevent it from being taken by legal process." It is not necessary or proper for the court to determine at this stage whether the plaintiffs will ultimately prevail on any or all of the above allegations. The court has determined however, that all of Zhao’s claims fall within the plain terms of the provision expressly permitting "suit in court with respect to any claim(s) ... to enforce payment obligations owed to it," and Zhao cannot be held to have agreed to arbitrate these disputes.
In addition to denial of the motion based on a plain reading of the agreement, denial is further justified under the longstanding principle of New York law that "a party cannot be compelled to submit to arbitration unless the agreement to arbitrate ‘expressly and unequivocally encompasses the subject matter of the particular dispute.’" Trump v. Refco Props., Inc., 194 A.D.2d 70, 74, 605 N.Y.S.2d 248 (1st Dep’t 1993) (quoting Bowmer v. Bowmer, 50 N.Y.2d 288, 293-94, 406 N.E.2d 760, 428 N.Y.S.2d 902 (1980)), leave denied, 83 N.Y.2d 754, 634 N.E.2d 604, 612 N.Y.S.2d 108 (1994). In the case relied upon heavily by MTC, Curtis, Mallet-Prevost, Colt & Mosle, LLP v. Garza-Morales, 308 A.D.2d 261, 762 N.Y.S.2d 607 (1st Dep’t 2003) (cited and quoted in MTC Br. at 10, 12-13), the New York Appellate Division, First Department, specifically confirmed that, in reviewing the breadth of an arbitration provision, "a specifically enumerated restriction upon arbitral authority will be upheld by the courts." 308 A.D.2d at 267 (quoting Maross Constr. v. Central N.Y. Regional Transp. Auth., 66 N.Y.2d 341, 346, 497 N.Y.S.2d 321, 488 N.E.2d 67 (1985)).
Although the court does not find any ambiguity in the subject agreement, it is a standard principle of contract law that to the extent there is any doubt or ambiguity about the scope or meaning of the exception for enforcement of "payment obligations," it should be resolved in Zhao’s favor. "[A]n arbitration clause must be read conservatively if it is subject to an equivocal reading." Gangel v. DeGroot, 41 N.Y.2d 840, 841, 362 N.E.2d 249, 393 N.Y.S.2d 698 (1977). "This principle is particularly applicable here, where MTC drafted the agreement, such that as a matter of ordinary contract construction, any ambiguities should be construed against it. See, e.g., Cowen & Co. v. Anderson, 76 N.Y.2d 318, 323, 558 N.E.2d 27, 559 N.Y.S.2d 225 (1990) ("We prefer to rest our decision upon settled rules of contract law and read the language according to its clear meaning. Indeed, even if the language of petitioners’ [arbitration] agreements could be considered ambiguous we would construe it most strongly against petitioners and favorably to respondent because petitioners drafted the agreements"); Poma v. Ariel, 162 A.D.3d 599, 600, 75 N.Y.S.3d 910 (1st Dep’t 2018).
B. Whether Calia’s Claims Should Be Stayed
As the plaintiff notes, it is undisputed that Calia did not sign any agreement containing a reference to arbitration and therefore, his claims are not subject to arbitration. Nonetheless, MTC asserts that the entire litigation should be stayed and Calia forced to await the future resolution of an arbitration between Zhao and MTC. While such a stay would undoubtedly be convenient for all of the defendants, there is no basis in law for such an extraordinary request. It is unfair to Calia who is not a party to the agreement. MTC has not cited any authority for this position and the court finds none as well. There is no authority for the argument in which a party who did not sign an arbitration agreement was involuntarily compelled to stay his claims pending an arbitration involving other parties.
Calia had an independent contractual relationship with MTC, and his claims are, therefore, independent of Zhao’s. For example, the Second Cause of Action in the Complaint alleges, on behalf of Calia alone, a claim for breach of contract based on MTC’s failure to pay under the Dividend Promissory Note that MTC executed in favor of Calia, to which Zhao is not a party. That Dividend Promissory Note does not contain an arbitration provision, and it expressly contemplates litigation in court of any claims to enforce it. The Third and Sixth Causes of Action in the Complaint allege, on behalf of Calia alone, claims for breach of contract against MTC for its breaches of its obligations under the MTC Stockholders Agreement which also does not contain an arbitration provision.
MTC’s effort to stay Calia’s claims in favor of arbitration of Zhao’s claim risks inconsistent factual conclusions, unfair delay and deprivation of Calia’s day in court and will result in unnecessary waste of resources of the parties and the adjudicating bodies. Although there will be factual difference between their claims, Zhao and Calia have joined their claims in a single complaint as a matter of efficiency as allowed by Connecticut Practice Book § 9-4 which states, "All persons may be joined in one action as plaintiffs in whom any right of relief in respect to or arising out of the same transaction or series of transactions is alleged to exist either jointly or severally when, if such persons brought separate actions, any common question of law or fact would arise" Recognizing Calia’s right to join Zhao’s claim as a plaintiff against the defendants, there is no basis for a stay of Calia’s claims in this action.
MTC argues that a stay "is necessary to prevent conflicting rulings on overlapping issues and common questions of fact and to preclude the very real probability of inconsistent rulings on ... core issues of fact and law. However, a stay would do no such thing. Because Calia did not sign any arbitration agreement and would not be a party to the arbitration, he would not be bound by any decision in a putative arbitration involving Zhao’s claims. State v. Moeller, 178 Conn. 67, 74 n.6, 420 A.2d 1153, 1157 n.6 (1979) ("The application of collateral estoppel thus requires an identity of parties in the prior and subsequent litigation"). As such, Calia could still prosecute a subsequent court case, exposing MTC to precisely the risk of "conflicting rulings" as well as considerable litigation expense that it purports to seek to avoid. The court agrees with the plaintiffs that adjudication of all claims together in this court is the best way to avoid inconsistency in the record and rulings. See generally TNS Holdings v. MKI Sec. Corp., 92 N.Y.2d 335, 340, 703 N.E.2d 749, 680 N.Y.S.2d 891 (1998) ("Although arbitration is favored as a matter of public policy, equally important is the policy that seeks to avoid the unintentional waiver of the benefits and safeguards which a court of law may provide in resolving disputes.") (Citation omitted) (granting non-signatory’s motion to stay arbitration).
Calia’s position as a non-signatory to the agreement preempts the defendants’ argument of "inextricably interwoven facts." See, e.g., TNS Holdings, 92 N.Y.2d at 340 ("As to the Appellate Division’s alternative theory of ‘inextricably interwoven’ agreements, we hold, that interrelatedness, standing alone, is not enough to subject a non-signatory to arbitration"); Mionis, 301 A.D.2d at 111 (reversing order staying action and compelling mediation, and noting that non-arbitrable claims and non-signatories should not be subject to arbitration even if claims were "inextricably interwoven" with arbitrable claims) (citing TNS Holdings, 92 N.Y.2d at 340).
The court agrees that the cases cited by the defendants are not controlling under the facts of this case as presented. Each is, in fact, distinguishable on its facts with many involving prior or ongoing arbitration proceedings. None of the cases cited by the defendant involve a stay sought against a non-signatory to an arbitration agreement.
In summary, the court concludes that is no authority for the relief sought by MTC against Calia and that it would violate fundamental principles of fairness to staying claims of a party who did not agree to arbitration pending arbitration between unrelated parties. Even if such a stay against an unwilling non-party to an arbitration agreement were appropriate in other circumstances, despite MTC’s failure to cite any authority for such a stay, there would be no basis for such a stay here, as it would not advance MTC’s stated goal of avoiding inconsistent rulings.
III. Conclusion
For the foregoing reasons, the motion to compel arbitration and to stay proceedings pending arbitration is hereby denied.