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Zakarian Management Group, Inc. v. Lax

Supreme Court of New York, New York County

July 3, 2013

ZAKARIAN MANAGEMENT GROUP, INC., Plaintiff,
v.
Moshe LAX, Defendant. Moshe Lax and CML Restaurant Fund, LLC, Individually and derivatively on behalf of Country in New York, LLC, Plaintiffs,
v.
Zakarian Management Group, Inc. and Geoffrey Zakarian, Defendants. No. 600789/2010.

Editorial Note:

This decision has been referenced in a table in the New York Supplement.

Porzio, Bromberg & Newman, P.C., for Moshe Lax.

Eisenberg & Carton and the Law Offices of Henry E. Rakowski, for the Zakarian parties.

SHIRLEY WERNER KORNREICH, J.

The two above captioned actions arise from the failure of a restaurant business. The motions before the court (Seq. No. 004 in the First Action and Seq. Nos. 004 & 005 in the Second Action) are consolidated for disposition. The issues presented by the instant motions are (1) confirmation or vacatur of an arbitration award that was issued in favor of Zakarian Management Group, Inc. (ZMG) and Geoffrey Zakarian (collectively, the Zakarian Parties); (2) reargument of the court's order directing arbitration; and (3) continuation of a stay of judgment in the First Action. For the reasons discussed below, the court confirms the arbitration award, denies reargument, and vacates the stay without prejudice to a further stay application should an appeal be noticed.

Procedural and Factual Background

The court assumes familiarity with the background of this case, which is set forth at length in the court's decision on the motion to dismiss and the arbitration award. However, for the sake of context, the court recites the following undisputed facts.

In 2005, Moshe Lax and a number of other parties invested in Country, a restaurant opened in the Carlton Hotel in Manhattan by celebrity chef Geoffrey Zakarian. Pursuant to County's Operating Agreement, which was executed on December 8, 2005, Zakarian, through his wholly owned company, ZMG, was granted 40% of the equity in Country and given the authority to manage the business of the company and run the restaurant. Lax and the other investors were effectively silent partners.

In 2007, the restaurant was struggling financially. Zakarian's co-investors accused him of bringing about the demise of the restaurant though his " despotic" management style and general incompetence. After attempts to improve matters proved unsuccessful, Zakarian and the other investors agreed to sever ties. To that end, on April 16, 2008, Country's investors entered into an Agreement (the Separation Agreement), whereby Zakarian ceded control of the restaurant but allowed it to continue using his intellectual property in exchange for $363,945.48. Lax signed a personal guarantee (the Guarantee) of Country's obligation to pay Zakarian the $363,945.48. The Separation Agreement also contains a general release in which the parties released all claims against each other arising from the operation of Country, except claims of " fraud, criminal action, or willful misconduct." The Separation Agreement further provides for mandatory arbitration of all disputes arising under it, including disputes over interpretation of its terms, but carves out the calculation of damages, if liability is found, for the court.

In July 2008, shortly after the Separation Agreement was executed, former Country employees commenced a class action lawsuit against Zakarain, Country, Lax, and others in the United States District Court for the Southern District of New York. The former employees alleged that their rights under federal and New York labor law had been violated because they were not paid overtime due to Zakarian's insistence on the use of shift pay instead of hourly pay. Zakarain had been explicitly warned by a co-investor that the practice of using shift pay " is susceptible to abuse and would prove a headache to manage and could result in liability for wage and hour violations." In March 2011, Lax paid out $200,00 in a settlement and more than $250,000 in legal fees. In November 2011, Zakarian agreed to settle the class action claims against him for $200,000.

The instant actions were commenced in May 2010. ZMG commenced the First Action by filing a motion for summary judgment in lieu of complaint against Lax for the enforcement of the Guarantee. Lax and CML Restaurant Fund, LLC (CML) commenced the Second Action against Zakarian and ZMG for myriad improprieties that Zakarian allegedly committed in his management and operation of Country. Among Lax's complaints was the fact that he had paid $75,000 to the New York State Department of Taxation and Finance in July 2010 for taxes Zakarian had failed to pay, as well as the labor law violations.

The Zakarian Parties moved to dismiss the Complaint in the Second Action. That motion to dismiss was consolidated for disposition with ZMG's CPLR 3213 motion in the First Action. Those motions were decided in an order dated March 22, 2011 (the March 2011 Order), which: (1) granted summary judgment to ZMG in the First Action in the amount of $363,945.48 plus interest and attorneys' fees based on the release; and (2) ordered the parties in the Second Action to arbitration.

On April 6, 2011, Zakarian filed for bankruptcy. On July 28, 2011, the Clerk entered judgment in the First Action in favor of ZMG and against Lax in the amount of $457,374.77. In an order dated October 5, 2011, the court stayed that judgment pending the adjudication of Lax's claims against the Zakarian Parties in the Second Action. The court issued the stay to avoid the injustice of forcing Lax to pay Zakarian his judgment even though Lax might not be able to recover on his claims in light of Zakarian's bankruptcy. See 10/5/11 Transcript. The stay provided Lax the opportunity to set off his judgment with a possible future recovery on his claims in the Second Action.

The arbitration of those claims was held before William H. Crosby (the Arbitrator) of the American Arbitration Association over nine days, between December 19, 2011 and April 24, 2012. In an Award of Arbitrator dated August 3, 2012 (the Award), the Arbitrator held that Lax's claims against Zakarian did not fall within the Separation Agreement's release, carve-out language because Zakarian did not commit " willful misconduct." The Arbitrator considered the six categories of allegations that Lax pled in the Second Action: (1) Zakarian's improper collection of Management Fees from Country in contravention of the Operating Agreement; (2) Zakarian's illegal decision to pay employees by shift instead of hourly (which led to the federal class action lawsuit); [1] (3) Zakarian's failure to comply with a Managers' Consent that he entered into in May 2007; (4) Zakarian's failure to pay New York State sales taxes and failure to disclose this fact to the other investors; (5) Zakarian's failure to comply with New York City health regulations; and (6) Zakarian's failure to promptly reopen the restaurant after it was shut down for violating those regulations. Before determining that these categories of wrongdoing did not constitute " willful misconduct," the Arbitrator noted the following:

Claimants have not argued in these proceedings that [Zakarian] should be found to have engaged in fraud or criminal action. Since fraud and criminal action would fall within any reasonable definition of " willful misconduct," I need not make any specific determination of whether [Zakarian] engaged in fraud or criminal action.

Award p. 2. The Arbitrator's contention that " fraud and criminal action would fall within any reasonable definition of willful misconduct" ' is the primary basis upon which Lax challenges the Award.

Discussion

Since the public policy of New York favors arbitration, the scope of review of an arbitration is extremely limited. Frankel v. Sardis, 76 A.D.3d 136, 139 (1st Dept 2010); see Falzone v. N.Y. Cent. Mut. Fire Ins. Co., 15 N.Y.3d 530, 534 (2010) (arbitrator's ruling largely unreviewable). Thus, a court may vacate an arbitration award only if it violates a strong public policy, is irrational, or clearly exceeds a specifically enumerated limitation on the arbitrator's power [ see N.Y.C. Trans. Auth. v. Transport Workers' Union of Am., Local 100, AFL-CIO, 6 N.Y.3d 332, 336 (2005); United Fed. of Teachers, Local 2, AFT, AFL-CIO v. Bd. of Ed. of City School Dist. of City of NY, 1 N.Y.3d 72, 79 (2003); CPLR 7511(b)(1)(iii) ]. Even where an arbitrator has made an error of law or fact, courts generally may not disturb the arbitrator's decision [ see Transport Workers' Union of Am., 6 N.Y.3d at 336 (citations omitted) ]. Falzone, supra.

" An arbitration award may be vacated on public policy grounds only where it is clear on its face that public policy precludes its enforcement." ' Transparent Value, L.L.C. v. Johnson, 93 A.D.3d 599, 600 (1st Dept 2012), quoting Jaidan Indus., Inc. v. M.A. Angeliades, Inc., 97 N.Y.2d 659, 661 (2001); NY State Correctional Officers & Police Benevolent Assn., Inc. v. State of New York, 94 N.Y.2d 321, 327 (2001). In deciding the matter, the focus is on the award itself. NY State Correctional Officers, supra. Moreover, " [a]n award is irrational if there is no proof whatever to justify the award or the award gave a completely irrational construction to the provisions in dispute and, in effect, made a new contract for the parties." Rockland County Bd. of Co-op. Ed. Servs. v. BOCES Staff Ass'n, 308 A.D.2d 452, 453-54 (2d Dept 2003) (internal citations and quotation marks omitted). " [T]he mere fact that a different construction could have been accorded the provisions concerned and a different conclusion reached does not mean that the arbitrators so misread those provisions as to empower a court to set aside the award." Id.

Here, the arbitration award does not violate strong public policy; nor is it irrational.

Additionally, under New York law, an arbitration award " may be vacated only if (1) the rights of a party were prejudiced by corruption, fraud or misconduct in procuring the award, or by the partiality of the arbitrator; (2) the arbitrator exceeded his or her power or failed to make a final and definite award; or (3) the arbitration suffered from a procedural defect which was not waived." Hackett v. Milbank, Tweed, Hadley & McCloy, 86 N.Y.2d 146, 154-55 (1995), quoting Maross Const., Inc. v. Central N.Y. Regional Transp. Auth., 66 N.Y.2d 341, 346 (1985). " In short, an arbitration award cannot be vacated if there exists any plausible basis for it." Campbell v. NYC Transit Auth., 32 A.D.3d 350, 352 (1st Dept 2006) (emphasis added).

In the instant case, the Separation Agreement contains a broad release of all claims between the parties arising from their troubled restaurant venture. On its face, the Separation Agreement clearly evidences a desire by the parties to put that failed venture behind them. The carve-out for further liability is limited to serious wrongs: " fraud, criminal action, or willful misconduct." As discussed supra, the interpretation of these terms and the determination of what conduct may give rise to further claims between the parties is within the exclusive province of the Arbitrator. See Remco Maintenance, LLC v. CC Mgt. & Consulting, Inc., 85 A.D.3d 477, 480 (1st Dept 2001) (once arbitration ordered, court's inquiry ended and penetrating definitive analysis of scope of agreement left to arbitrators). Consequently, the court's capacity to second guess the Arbitrator's determination of this issue is extremely limited.

That being said, there is no doubt that Zakarian's alleged conduct was quite serious, ranging from labor law violations, tax delinquencies, and faithless self-dealing. Neither this court nor the Arbitrator has ever ruled that Zakarian's conduct is legal, let alone ethical. Nonetheless, the Arbitrator held that Zakarian's action did not amount to " willful misconduct" within the meaning of the Separation Agreement, which he interpreted to mean " intentional misconduct." See Award, p. 3.

Although this court may well have decided otherwise, this court's opinion of the Arbitrator's interpretation is irrelevant. All that matters is that " there exists [a] plausible basis" for his interpretation, which there is. See Campbell, 32 A.D.3d at 352. The Arbitrator read the word " willful" in conjunction with the broad managerial discretion that Zakarian was granted under the Operating Agreement. See Award, p. 2-3. Though it may be fairly argued that it does not make sense to divine the parties' intent to inform what future suits may be brought based on the nature of their previous duties under the Operating Agreement, such an interpretation, while somewhat strained, is not wholly implausible. The court, therefore, cannot second guess this interpretation.

Lax, however, argues that the Arbitrator's conflation of the requisite scienter for " willful misconduct" and " criminal action" constitutes a manifest disregard of the law, a further exception to the reviewability of arbitration awards. Specifically, with respect to Zakarian's alleged labor law violations, Lax contends, the Arbitrator ignored the fact that federal law provides for criminal liability for labor law violations with a mens rea of knowledge or recklessness. See DeSilva v. N. Shore-Long Island Jewish Health Sys., Inc., 770 F.Supp.2d 497, 513 (E.D.N.Y.2011), citing 29 USC § 216 (providing for fines and imprisonment for willful violations of Fair Labor Standards Act (the FLSA)); Brock v. Superior Care, Inc., 840 F.2d 1054, 1061-62 (2d Cir1988) (holding that employer willfully violates FLSA if he knows or recklessly disregards fact that his conduct is illegal). It follows, Lax claims, that the Arbitrator erred because he (1) failed to recognize that willful does not mean intentional with respect to criminal labor law violations; and (2) irrationally concluded that Zakarian's actions were not willful. This argument might prevail if this court applied a de novo or clear error standard of review. But, under New York law, it is well settled that mistake of law is not a ground to vacate an arbitration award. See Hackett, 86 N.Y.2d at 154-55.

Federal law, on the other hand— namely, the Federal Arbitration Act (the FAA)— provides for an additional basis for vacating an arbitration award— " manifest disregard of the law." Wien & Malkin LLP v. Helmsley-Spear, Inc., 6 N.Y.3d 471, 480 (2006), citing Goldman v. Architectural Iron Co., 306 F.3d 1214, 1216 (2d Cir2002); but see Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008)(casting uncertainty on viability of manifest disregard of law as grounds for vacatur under the FAA).[2] Pursuant to 9 USC § 2, the FAA only applies to contracts " evidencing a transaction" that affects interstate commerce. Diamond Waterproofing Sys., Inc. v. 55 Liberty Owners Corp., 4 N.Y.3d 247, 252 (2005). Here, the subject contract, the Separation Agreement, does not affect interstate commerce because it merely governed the change of ownership of a New York restaurant, and the FAA does not apply. See Siegel v. Landy, 95 A.D.3d 989, 992 (2d Dept 2012) (" where, as here, an agreement with an arbitration clause does not affect interstate commerce, [it is not] subject to the [FAA]." )

Even if the FAA applied, there would still be no ground to vacate the Award. As the Court of Appeals has explained:

[M]anifest disregard of law is a " severely limited doctrine." It is a doctrine of last resort limited to the rare occurrences of apparent " egregious impropriety" on the part of the arbitrators, " where none of the provisions of the FAA apply." The doctrine of manifest disregard, therefore, " gives extreme deference to arbitrators." The Second Circuit has also indicated that the doctrine requires " more than a simple error in law or a failure by the arbitrators to understand or apply it; and, it is more than an erroneous interpretation of the law." To modify or vacate an award on the ground of manifest disregard of the law, a court must find " both that (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case."

Wien & Malkin, 6 N.Y.3d at 480-81 (internal citations omitted).

Here, at most, the Arbitrator made mistakes of law or findings of fact that strain credulity. Yet, there is no basis to vacate the Award under the FAA because the Arbitrator did not commit an egregious impropriety and did not manifestly disregard the law. The instant actions and the federal class action involve civil, not criminal liability. While the criminal provisions of the FLSA might reasonably inform the interpretation of the Separation Agreement, such criminal statutes are not " clearly applicable to this case." That Zakarian's mens rea with respect to his decision to illegally cheat employees out of overtime hypothetically might give rise to criminal liability is an insufficient basis to elevate the Arbitrator's arguable mistake of law into manifest disregard.

It also should be noted that, according to the Arbitrator, Lax did not argue that Zakarian engaged in criminal action. See Award, p. 2. Consequently, the inquiry before this court is limited to whether to uphold the Arbitrator's interpretation of " willful misconduct," not to determine if he should have independently considered if a criminal act was committed. As discussed supra, there is no basis under New York law to overrule the Arbitrator's interpretation. Likewise, the FAA, even if it applied, would call for the same result. Hence, the Award is confirmed.

Finally, the court denies Lax's motion to reargue the March 2011 Order. The court did not overlook any law or fact in determining the scope of the arbitration. As noted supra, arbitration is favored in New York as a means of resolving disputes. Where parties agree to arbitrate, the court " should be very hesitant, therefore, to impinge upon the rights and obligations derived from commitments to integrated, relatively speedier and less costly alternative dispute resolution modalities." Smith Barney Shearson Inc. v. Sacharow, 91 N.Y.2d 39, 50 (1997).

Given that the Separation Agreement limited this court's jurisdiction to deciding damages and that the Arbitrator held that the Zakarian Parties have no liability for the claims asserted against them in the Second Action, there is nothing left for this court to adjudicate. For these reasons, the stay is vacated and the undertaking released without prejudice to the defendant making a further motion for a stay should a Notice of Appeal be filed. Accordingly, it is

ORDERED that parties' motions and cross-motions with respect to William H. Crosby's Award of Arbitrator dated August 3, 2012 (the Award) are decided as follows: (1) the Award is confirmed and vacatur is denied; and (2) the motion to reargue this court's order dated March 22, 2011 is denied; and it is further

ORDERED that the motion to vacate the stay is granted.


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