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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 ...


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